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G10 Macro Rates Blog – Where is the bid?

Tuesday, October 30, 2018

Latest G10 Macro Rates Blog
With Shayne Dunlap, Co-Portfolio Manager 

In the dark days of WW2, Churchill was presented with the proposal of cutting funding for the arts. His reply was, “Then what are we fighting for?” That was about the Arts, but what about education? For some decades now, we have been effectively taxing education. Is Education meant to be capitalist? Or is it meant to be about what we are as a society - striving for a constantly better future? Leaving this debate hanging, let’s look at the economic effect and ask. 

How does the ex-student of today participate in the economy? Looking at the recently published chart below, student debt in the US has now topped $1.5 tn. From an economic standpoint, we are hollowing out the future demand potential from these younger generations in any growth cycle. Ex-students cannot be expected to follow the reaction function built into many existing economic models. If they are burdened with so much student debt, then the ability to proceed up the asset ladder and buy an apartment or house is almost farcical. They are also disincentivised to push their earnings into a bracket whereby a large chunk will be reaped by loan repayments. No wonder they rent accommodation and use Uber and Deliveroo. They would rather enjoy life, than try and attempt to succumb to one of misery under an even larger yolk of debt.

Applying the profit motive to education is crippling the future not only of the younger generation but also the asset fat baby boomers - who will soon want a handsome bidder for their properties and equity portfolios to pay for their encroaching care-home costs. They have sown the seeds of their own demise. I call them the “bully generation”, who by simple majority voting, have warped government policy to suit them at each stage of their lives. They have left younger generations not only with student debt but also huge unfunded state pension liabilities.

I’m ranting a little, I know, however I do worry that the financial markets are grossly underestimating the lack of opportunity and lack of buying power that exists in not only the 20 somethings, but now the 30 somethings. Where is the bid?

US student debt pile swells past $1.5tn mark (Quarterly, $tn)

Sources: S&P Global, FT.  

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IMPORTANT INFORMATION: Issued and approved by Pacific Capital Partners Limited, a limited company registered in England and Wales, authorised and regulated by the Financial Conduct Authority . The information contained herein is not approved for use by the public and is only intended for recipients who would be generally classified as investment professionals. Information or opinions contained in this article do not constitute an offer to sell or a solicitation, or offer to buy, any securities or financial instruments or investment advice or any advice or recommendation in respect of such securities or other financial instruments. Where past performance is shown it refers to the past and should not be seen as an indication of future performance.

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