Student Loan Repayments Are Coming Back

The WSJ estimates that student loan repayments will pull $100bn away from consumers in the coming years [The Daily Peel... ]() September 18, 2023 | Peel #544 In this issue of the Peel: - Markets are betting their lives that the central bank will hold the Fed Funds Rate in its current range of 5.25% - 5.5%, assigning a 98% likelihood to that outcome - Southwest Airlines and Crude Oil had a ripe day, while shares of Planet Fitness and Nucor struggled - The WSJ estimates that student loan repayments will pull $100bn away from consumers in the coming years Market Snapshot Happy Monday, apes. Hope your fantasy teams and your liver performed well this weekend. It’s Monday morning, and much like football season, markets are officially BACK in just a few hours. Let’s have a day. Speaking of having a day, we did, in fact, do the exact opposite of that close last week. Equities sold off for the most part, led by giants like Microsoft, Nvidia, Amazon, Meta, and others, all falling more than 2.5% (which I promise is a lot for the big guys). The Nasdaq saw the steepest fall, losing 1.56%, as fears have officially mounted in anticipation of facing the wrath of JPow this Wednesday. With those fears keeping them up at night as well, bond traders sold off as well, leading yields to spike. Almost every tenor is approaching multi-year highs, and don’t worry, the treasury curve is still wildly inverted. The dollar was mostly flat in the meantime, perhaps a combination of looking for safety and running for the hills. We’ll see who’s right. Let’s get into it. Financial Modeling Skills Get You Paid [image](=) Attention all financial wizards and career climbers, are you ready to take your modeling skills to the next level? 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So don't miss out on this opportunity to boost your career and invest in [WSO's Elite Modeling Package](=) now! #ModelOn #FinancialGains #CareerGoals Macro Monkey Says JPow vs. The World Despite all the haters on Twitter (X?), CNBC, Bloomberg, and from his own staff, Fed Chair Jerome Powell has managed to avoid the economic disasters these watchers swear are “right around the corner!” But, as time goes on, it only gets harder. On Wednesday, JPow and the rest of the FOMC gang will conclude their 2-day monetary policy meeting. Powell will come out and spit some game at the press conference afterward, a new Summary of Economic Projections will be released, and most importantly (for your portfolio), we’ll get an update on rates. As of now, markets are betting their lives that the central bank will hold the Fed Funds Rate in its current range of 5.25% - 5.5%, assigning a [98% likelihood]() to that outcome. "On Wednesday, JPow and the rest of the FOMC gang will conclude their 2-day monetary policy meeting." Any deviation from that game plan will be sure to stir up stocks and, using Murphy’s Law as a guide, probably won’t be in the direction that we want. But, while the jury is far from being out on this one, JPow and the Fed’s move at the October/November meeting is currently about as predictable as the weather on January 11th, 2086. And there’s good reason for it. Now that summer has all but passed and we think we got our last little bit of pent-up demand for things like travel and experiences out of the way, economists largely expect pandemic-related impacts - everything from labor markets to fiscal policy - to wear off. Unfortunately, looks like we’re heading back to reality. And this is the primary factor that makes JPow’s rate decisions so damn hard. In the context of a booming economy and solidly performing financial markets, other factors throwing the Fed for a loop include: - Slowing consumer spending and student loan repayments - A 1% consumer inflation if we strip out housing - Declining investment by businesses - Volatile commodity prices - A gradually re-balancing labor market And that’s just to name a few. So basically, we can confirm that JPow does, in fact, still have the least enviable job in the entire world. "... your portfolio would probably love a decline in base rates ..." Moreover, the way those factors play out between Wednesday and Halloween Day - the next time an FOMC meeting begins - is anyone’s guess. Some brave souls out there are even calling for the FOMC to be forced into cutting rates at this meeting if the [see above] factors underperform. Needless to say, your portfolio would probably love a decline in base rates, but what does that say about the economy if we are cutting? Don’t get too excited yet because if that is what the next meeting comes to, your portfolio might be fine, but your job security, salary, and all that other slightly important stuff could be way out of whack. Basically, despite the market’s certainty about this next meeting, there is plenty of uncertainty to go around. With a VIX of 13.79, that suggests we are not in the least bit prepared for that uncertainty as well. Complacency + Surprise = …oh no. What's Ripe Southwest Airlines (LUV) ↑ 2.59% ↑ - Winter is Coming, and much like Ned Stark, Southwest Airlines knows it. - Compared to the other players in the industry with equally uncomfortable seats, Southwest is a much more nimble operation. They don’t operate out of large hubs but prefer a “point-to-point” system that gives customers more flexibility. - As a result, that makes planning for things like weather that will impact the entire company nationwide more challenging. So, when CEO Robert Jordan came out on Friday and assured investors that the necessary investments had been made to avoid the horrors of last year, that was music to Mr. Market’s ears. Crude Oil (WTI) ↑ 0.68% ↑ - I hope you like being where you are because the cost of changing locations is ripping right back up. Fuel costs, as measured by good ol’ oil prices, are ripping back towards highs not seen in almost a year. - On Friday, U.S. crude oil closed at $90.77/bbl, levels last reached in November of 2022. The usual suspects are to thank here, with Russia, Saudi Arabia, and other OPEC+ members agreeing to production cuts to raise prices per barrel artificially. - How rude, right? Considering the supply cuts and increased demand from the U.S. and China, as their economies aren’t doing as badly as expected, we wouldn’t expect your gas costs to decrease anytime soon. What's Rotten Planet Fitness (PLNT) ↓ 15.87% ↓ - In a very loving goodbye message to (former) Planet Fitness CEO Chris Rondeau, markets tried to tear the company apart. At least he knows he was loved (I wonder what that’s like). - Anyway, the apparently idolized Rondeau announced on Friday he was stepping down from his position as the head of the gym that always produces the funniest videos of gym rookies “working out.” - In the meantime, interim CEO Craig Benson is facing just as much hate as Chris is getting love. And it’s understandable. Not only did Rondeau manage to keep this thing alive when many governments made it legitimately illegal to go there, but shares are up nearly 200% in his tenure overall. Not bad, Chris. Nucor (NUE) ↓ 6.11% ↓ - For a company whose products are made out of steel, their share price sure isn’t. Weak earnings and guidance have come for this industrial steel producer, leading the +6% fall on Friday. - EPS of $5.81/sh for this past quarter was solid; no problems there. However, analysts had already been anticipating a decline in earnings as steel prices fall, expecting next quarter’s EPS to be ~$4.61/sh. On Thursday, management pooped on that party, lowering guidance to $4.10/sh - $4.20/sh. - Who knows, maybe if EPS actually hits $4.20/sh Elon will buy the thing just for the memes. Regardless, he’d be facing a difficult environment as steelmakers face flailing commodity prices along with lower volumes as customers pull back amid a cost-cutting spree. Thought Banana Guess Who’s Back Student loan repayments, that’s who. Don’t freak out - you don’t have to make a payment today. But, starting on October 1st, you’re gonna have to pony up that cash once a month once again. Mazel tov! As we discussed recently, student loan repayments have been on pause since March 2020, when the entire world fell into a spiral of misery and despair and had us all wondering, “Am I ever going to get to sit next to a crying baby on an airplane ever again??” "Those payments, according to Census Bureau and Education Department data, will average between $200 - $300/month." Now that we’re all happy and rich again (obviously), it’s time to start acting like it and pay off our loans. Those payments, according to Census Bureau and Education Department data, will average between $200 - $300/month. It’s not a bank-breaking, homelessness-inducing amount, but it sure isn’t fun either. With that, the [WSJ estimates]() that these repayments will pull $100bn away from consumers in the “coming years.” Basically, that cash that got spent on things like an additional streaming service, a new laptop, or a nice tip for some service worker doing the bare minimum but still demanding it will now be going to the Department of Education and student loan providers. But, at the same time, indebted Americans really don’t like to pay off their education, whether they graduated or not. Student loan repayments are at the absolute rock bottom of repayment priorities. Already, delinquencies in credit cards, cars, mortgages, and other nonsense are rising fast, largely thanks to JPow’s rate hikes. But that is the exact opposite of a good sign for student loan repayments. "… student loan repayments are at the absolute rock bottom of repayment priorities." $100bn of consumer spending over a few years would be a lot to lose, in case that wasn’t obvious enough. But if borrowers simply aren’t going to repay those loans - whether delinquencies go back to their normal range or (as expected) even higher than historical averages - will that really have a material impact? Either way, good luck getting that sh*t paid off. I’m sure you’re excited! The big question: What kind of impact will student loan repayments have on the U.S. economy? What kind of delinquency rates can we expect? How will the federal government respond? Banana Brain Teaser Friday — What is a liquid at room temperature in its original state but solidifies when heated? Answer An Egg Today — You can see me in water, but I never get wet. What am I? Shoot us your guesses at vyomesh@wallstreetoasis.com. Wise Investor Says “We have a bubble in education, like we had a bubble in housing.” — Peter Thiel How would you rate today’s Peel? [All the bananas]() [Decent]() [Rotten AF](=) Happy Investing, Patrick & The Daily Peel Team Was this email forwarded to you? 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