America’s most prominent public universities were founded to help residents receive a good, inexpensive education. Today they are enrolling record numbers of students from out-of-state to maximize their tuition revenue.
This shift has changed the admissions process and reshaped the profile of state universities across the country. According to the most recent federal data from 2014 (feds are notoriously late with IPEDS statistics), forty-three of the 50 state schools known as “flagship universities” enrolled a smaller amount of freshmen from within their states in 2014 than they had a decade earlier. Ten of those fifty schools had less than 50% state residents in their freshman class.
Nowhere is the trend more pronounced than at the University of Alabama. In 2004, 72 percent of new freshmen were state residents from Alabama. By 2014, the share was 36 percent.
Colleges will tell you they need to do this to create a diverse student body. Don’t be fooled by that sales pitch; this shift is all about money. These institutions look to nonresident students for additional revenue.
Public institutions have been experiencing declining state funding for decades. A study by the Chronicle Of Higher Education found that state funds accounted for 52.8 percent of operating expenditures at the University of Illinois at Chicago in 1987, but only 16.9 percent by 2012. That’s a severe cutback.
According to the College Board, tuition and fees for out-of-state students at four-year public universities average $25,620 for the 2017-2018 school year. In-state students pay an average of $9,970. This average out-of-state premium of $15,650 allows to make up this lack of state-provided funds.
Furthermore, these institutions have become increasingly focused on improving their bottom line and competing against other universities. They contend by providing "country club" campuses and investing in luxury dorms and other amenities that attract the best students. These extras cost considerable money, and one way to cover these costs is to recruit nonresident students who pay a high tuition premium.
Enter The Enrollment Manager
"College" is a multi-billion-dollar business. Every college wants to maximize the amount of money they get from each student. At each college, the Enrollment Management Office is responsible for this goal. Few families will ever hear the term “enrollment management,” but to get the best deal from each college, a smart consumer must understand how the enrollment management system works.
Wikipedia describes "enrollment management" as: "Well-planned strategies and tactics by colleges to exert more influence over their student enrollments using marketing, admission policies, retention programs, and financial aid awarding."
One of the best articles about enrollment management was written in 2005 by Matthew Quirk for the Atlantic Monthly, called "The Best Class Money Can Buy". Although this is an older article, it is still very relevant today! And financial advisors should have every client with a college-bound, high school student read this article before starting the college process.
In the article, Matthew discusses the way colleges have changed financial aid from a tool to help low-income students to a strategic lure to entice wealthy families and high-scoring students. The article states:
"By adopting data-mining and pricing techniques from the airline and marketing industries, colleges have developed a practice called ‘financial-aid leveraging'; which allows a school to discount the price, within certain limits, to certain students class it wants to recruit. Often under orders from a president and trustees, enrollment managers direct financial aid to students who will increase a school's revenues and their U.S. News rankings. They have a host of ugly tactics to extract as much money as possible from each entering class."
Make no mistakes; enrollment management is an essential tool that most colleges use to increase their bottom line and even their U.S. News & World Report rankings.
Over the years this competition for revenue has helped to drive the price of tuition up. According to the College Board, the average net-price for in-state tuition at public four-year colleges increased by 190 percent between 1997 to 2017.
Ron Them, President of ACCFS has written a very good article about students becoming a “resident” of a particular state where they plan to attend college and one about “regional exchange programs” that allow residents of participating states to attend member colleges at the school’s in-state rate. However, these options are formidable and have many restrictions and stipulations.
Nothing seems fair when it comes to college. Colleges will NEVER make families aware of the fact that, to stay competitive, they must enroll a high proportion of nonresident students in their freshman class.
You need to understand that hiring a CCFS® is your only option for lowering college costs. A Certified College Funding Specialist (CCFS®) can provide middle-income families with strategies to increase grant and scholarship offers, and help high net worth clients, that would never qualify for financial aid, negotiate discounts from their tuition price.
Give us a call at 708-771-7777
There are many misconceptions about “college scholarships” in the market today. I’ve dealt with this issue every single year for over 20 years. Part of the problem is there is a new batch of students every year, and the other part is the continuous rise in college costs.
Each year parents are led to believe that their college-bound student can pay for college by applying for enough scholarships. Private scholarship search companies do not help with the misconception. They inundate the market with offers to access their website for free monies. Their plea is:
"There are scholarship and grant monies that go unused each year because people do not know how to access them. We can help!"
This statement is NOT TRUE. These private scholarship search companies are only looking to get emails so they can sell the address to other companies. Only 1% of scholarships are available through these private, outside sources.
The truth about scholarships for college is that most students would be better off analyzing which college can offer them the most money before they even apply for admissions or financial aid. Why? Because the colleges themselves control most of the available college scholarships, grants, and tuition discounts.
However, there is a methodology that can be used by families to increase the odds of their student qualifying for a private sector scholarships. Scholarships and grants from local organizations are more likely to fit the student's profile, and his or her odds of success will increase dramatically by applying for these opportunities.
Besides the internet, here are other places to begin searching:
· High School Guidance Department
· Chamber of Commerce
· Local Libraries
· Local Community/Technical College
· Trade Associations
· Fraternal Organizations
· American Legion Post
· Local Pageants
The student's high school guidance department is #1 on the list, and they can help the student identify those scholarships that match the student's qualifications.
THE TOP TEN DO's & DON'T"s REGARDING PRIVATE SCHOLARSHIPS
Private sector scholarships are very competitive. Scholarship committees may only spend a few minutes reviewing each student's scholarship application. With such a finite amount of time to make a lasting impression, it's crucial the student make the most of the opportunity. If the student does not, the application may be on the fast track to the trash.
Here are the Top 10 Scholarship Do's & Don'ts, which can help the student increase his or her chance of winning a private sector scholarship.
Search in your community first because it is a primary source of scholarships. Find out about these kinds of awards by contacting your local chamber of commerce, community chest, Rotary club and other community organizations; reading your community newspaper, and searching the Yellow Pages under "Foundations."
Choose quality over quantity. Prioritize the scholarships for which you wish to apply. Instead of submitting applications for numerous awards, request those that best fit your strengths, interests, and qualifications.
Understand the purpose of the scholarship. Scholarships may be designed to encourage students to enter a specific career field.
Follow directions. Make sure you take the time to ensure every "i" is dotted and "t" is crossed. Be sure to include all requested information.
Write an essay demonstrating why you should win. The scholarship application gives the scholarship committee a sense of who you are and what's important to you. Think about what skills and qualities the scholarship judges seek and then describe how you match them.
Get feedback from editors. Editors are the best people to help you write your scholarship essay. Who are your editors? Friends, teachers and parents, and the people who know you best can be great editors!
Proofread. No matter how strong an applicant you are, it would be difficult for a scholarship committee to overlook spelling or grammatical errors. Proofread your application and essays carefully, and have your editors do the same.
Practice for interviews. Ask a friend or parent to do a mock interview with you to help you prepare for the real thing.
Ask your parents for help. Parents are capable of much more than writing the tuition check. They can help you find scholarships, keep track of deadlines and give you feedback on your applications and essays.
Brag a little about yourself. Let your personality shine through in your scholarship applications. Don't be bashful about discussing your accomplishments.
Don't overlook your high school guidance counselor. Take advantage of the knowledge your counselor has accumulated over the years.
Don't ignore the internet. Use the many free scholarship searches available on the internet to find scholarships that fit you.
Don't ignore small awards. Some scholarships are worth tens of thousands of dollars. You might think you shouldn't bother with the "small potato" awards. However, a $1,000 scholarship $1,000 less than the amount you first needed to come up with to pay for college.
Don't think that you have to be an academic or athletic superstar to win. There are many private scholarships based on leadership, art, music, theatre, community service and more.
Don't be a victim of a scholarship scam. Never pay for a private scholarship search. You can find these scholarships on your own for free.
Don't use the shotgun approach. All scholarship-awarding organizations have different selection criteria. Therefore, the same application won't work for all of them.
Don't forget to answer the question(s) when writing your essay. Scholarship-awarding organizations ask essay questions because they want to know your answer to each. Your work may be well written, but if it doesn't answer each item asked, it's not going to win an award.
Don't wait until the last minute. You may think you do your best work on the day before the deadline. However, if you take the time to review your work, you'll probably see room for improvement. Take the pressure off yourself, and allow yourself adequate time to complete an application.
Don't turn in an incomplete application. Scholarship-awarding organizations receive far more applicants than they can support. Don't give them a reason to take you out of the running by turning in an incomplete application.
Don't think it's impossible for you to win. Every student who ever won a scholarship felt it would be difficult to win. And guess what? They won anyway, and you can, too!
HOW TO INCREASE YOUR ODDS OF GETTING A PRIVATE SCHOLARSHIP
The student’s high school junior year is the best time to apply for private sector scholarships. Waiting until the senior year could disqualify the student.
Furthermore, sending out a massive number of hastily written scholarship applications is the wrong way to apply for private scholarships. This approach will most likely result in a pile of rejections.
To win a scholarship, you must be selective in the application process. For every ten awards you find, only one may be applicable.
How can you find the right scholarships? How do you avoid missing deadlines? The following tips can help with your search for private sector scholarships:
Begin your scholarship search during the summer before your junior year, if not earlier. The number one reason most seniors miss the fall scholarship deadline is that they did not start their scholarship search until the following spring. Create a list of the awards for which you want to apply, along with their respective deadlines.
Start preparing in advance. If a scholarship application is due in the fall, make it a part of your homework routine. Work on scholarship applications a little every day. Doing this will prevent you from becoming overwhelmed, as well as ensure you don't turn in hastily completed, last minute applications. Getting the edge on scholarship essays can also increase your chances of winning. Most scholarship essays are only 200-500 words, so you don't need to take a lot of time preparing.
Re-use your college application essays for scholarship applications. You can save yourself time by using sections from your college admission essays when writing your scholarship essays.
Throw your scholarship net far and wide. Search the internet, scour scholarship books, talk to your school counselor and look in your community. Your job is to find as many potential scholarships as possible.
Look for scholarships related to your interests. Examine your interests to decide where to look for scholarships. For instance, if you're interested in computer graphics, check out all of the makers of the software and hardware that you use. Those companies may offer college scholarships.
Focus on your community, one of the best places to discover college scholarships. Many of these scholarships are specifically designed to help students within your community, itself. Therefore, as a resident, you may already be pre-qualified.
Read your local newspaper. Community newspapers often announce scholarship winners. Use this information to learn about local scholarship opportunities and to research the qualifications of past winners.
Ask for help from your high school counselor. Guidance counselors receive abundant information on various private scholarships. Take advantage of their knowledge.
Start eliminating scholarships that don't fit you. Once you have compiled a list of potential awards, eliminate those that don't match your experiences and talents. Each mismatched scholarship you remove means less time wasted and more time spent applying for scholarships you can win.
Prioritize your scholarships. After you have eliminated the mismatched awards, prioritize the scholarships that do fit your experiences and talents. Become familiar with each award, as well as the reasons why the scholarship committee grants the award. The more you know about a scholarship and its sponsor, the better job you can do on the application. It's also important to consider the deadlines of each of your potential awards when deciding for which to apply.
Before you begin your scholarship application, be sure to consider:
What is the mission statement of the sponsoring organization?
What type of candidate is selected?
Who will be judging the applications?
The answers to these three questions can help you to determine how to best approach the application because you will have a clearer picture as to what type of candidate the sponsor may be looking for and how they are determined.
Don't despair if you do miss a deadline. Although it is essential to apply for scholarships during high school, there are opportunities to apply for scholarships during college, as well. Apply for the those with application deadlines you haven't missed, and get ready for next year, when, as a college student, a whole new set of scholarship opportunities will be available to you.
ADDITIONAL QUESTIONS YOU MAY HAVE ABOUT PRIVATE SCHOLARSHIPS
Q: How can I find out what scholarships are out there?
A: Your best scholarship research sources include: The internet (try the free scholarship search engine located at http://www.fastweb.com); your local community (contact your local chamber of commerce); and your high school guidance counselor.
Q: Can I apply for a scholarship if I don't know which college I'm going to attend?
A: Yes. You can start applying for scholarships as early as your freshman year in high school. If you win an award before you know which college you'll attend, the scholarship organization either will write you a check with the understanding you are to use the money for college or will give you the money once you decide where to attend.
Q: Should I have to pay a fee to apply for a scholarship?
A: In most cases, no. Since scholarships are meant to support students who need funds to pay for college, they usually do not require those same students to shell out money to apply. In most cases, scholarship applications requiring a fee are scams.
Q: If I didn't win a scholarship, can I apply again next year?
A: Yes. Unless you no longer qualify, you can apply for a scholarship again. However, consider whether your application will be dramatically stronger the second time around. If you submit the same form as before, you may be better off spending your time applying for a different scholarship.
Q: Can I lose my scholarship once awarded?
A: Yes. Renewable scholarships are usually contingent on specific requirements being met for the student to keep the award. For instance, a scholarship may require you to continue to attend the same college, maintain a certain GPA, or maintain the same major to get renewed each year.
Q: Can I apply for scholarships while I'm a college student?
A: Yes. One of the biggest mistakes many students make is ceasing to apply for scholarships after high school graduation. Thousands of scholarships for college and graduate students are available. Many students that receive these awards are already in college.
Q: If I win a scholarship, will my college take away some of my other financial aid?
A: Perhaps. Many colleges require you to report the scholarships you win and then adjust your financial aid package. For example, if you win a $1,000 award, the college may decrease your financial aid package by $1,000. If your college has this kind of policy, you may ask them to lower your eligible loan amount, instead of your grants. It's better to receive more in scholarships that you don't have to pay back than in loans that you do.
Q: Can I transfer my scholarship if I go to another school?
A: Perhaps. When a college awards a scholarship, it may only be used at that specific college. If the award is from an organization, you may be able to transfer it to another school. It's important to contact the awarding organization to ask before making plans to relocate to another school.
Q: Should I bother applying for scholarships even if I don't have perfect grades?
A: Yes. Scholarships are available for achievements in leadership, public service, art, athletics, theatre, and dance. Even if the award takes student's grades into account, often they are not the only factor. Scholarship committees seek students who best fit their selection criteria, which may include other factors, such as character, motivation, leadership or involvement in activities.
Q: Do all scholarships require an essay?
A: No, but most do. Essays are the best way for scholarship judges to get to know you on a more personal level that your grades and test scores alone allow. Some scholarship applications don't require essays, however. For instance, many art and music scholarships request a portfolio, project or composition, instead.
Q: Can I win a scholarship if my parents have a high income?
A: Yes. There are two types of scholarships: need-based and merit-based. As the name suggests, need-based awards are contingent on your financial need and your parents' income. Merit-based scholarships require academic or extracurricular achievements.
Q: What is a renewable scholarship?
A: Renewable scholarships can be won for one year and renewed for subsequent years, usually after the completion of another application process. Renewable scholarships are the best kind of award because you can win the money for more than one year
In over thirty years of watching the economy we’ve seen recessions, recoveries (both slow and fast), panics, lulls, and boomlets. But we’ve rarely seen a job market this strong.
Everything is hyper-politicized these days, and we get accused of playing politics all the time.
But what we care about deeply, what drives our focus, is the growth that creates opportunities for individual skills to shine in service to others. The development of assets – both physical and intellectual - to build for the future. But it all starts with work, and there are now more Americans working than ever before – over 148 million, to be precise.
Non-farm payrolls grew 223,000 in May and are up 2.4 million in the past year. Civilian employment, an alternative gauge of jobs that better measures small business start-ups, grew 293,000 in May and is up 2.3 million in the past year.
And, importantly, it’s the private sector driving growth, not government. Government jobs are up a total of 21,000 in the past year. Meanwhile, manufacturing payrolls are up 259,000 in the past year, the fastest twelve-month increase since 1998.
If technology is supposed to be killing employment in manufacturing, I guess they didn’t get the memo.
No matter how you slice it, things look good. But we’re not done.
The unemployment rate dropped to 3.8% in May, tying the lowest reading since 1969. We think we’re headed lower, forecasting a 3.2% rate by the end of 2019 with a chance for a 2-handle on the unemployment rate sometime in 2020.
May also saw the black unemployment rate fall to 5.9%, the lowest reading since record keeping started in the early 1970s. Black employment is up 3.5% per year in the past two years, versus a 0.9% per year gain for whites. As a result, the gap between the black and white unemployment rates is now only 2.4 percentage points, the smallest gap on record. Let’s keep it going.
In the past twelve months, the average jobless rate among those without a high school degree is 6.0%, also the lowest on record (going back to the early 1990s). Still, people bemoan wage growth. We’ve never thought average hourly earnings (which do not include irregular bonuses, commissions, or tips) are a good measure of living standards.
“Real” (inflation-adjusted) average hourly earnings are up just 0.2% from a year ago and up 7.2% from the start of the last recession. But, again, this does not include the onetime bonuses many companies paid after the tax cut was enacted late last year.
In addition, there’s evidence that the Labor Department’s measure of wage growth is being held down by the retirement of older, more highly paid Baby Boomers, while new-hire Millennials are just beginning to climb the compensation ladder.
So while average hourly earnings for all workers are up 2.7% (not adjusted for inflation), if you take out new entrants and retirees, wage gains are up 3.3% in the past year. We expect this to accelerate, pushing overall wages higher as well.
It’s a tight labor market, with initial claims at the lowest level ever as a percent of total employment and wages rising fast enough to pull people off the disability rolls and back into the job market. This will help improve the low labor force participation rate. Participation among prime-age workers – those 25-54, who are either working or looking for work – was 81.8% in May, the same as the average for the past year. To put that in perspective, that’s higher than it ever was before 1986. The averages by decade are 67.4% in the 1950s, 70.0% in the 1960s, 74.2% in the 1970s, 81.1% in the 1980s, 83.7% in the 1990s, and 83.1% in the first decade of the 21st Century. Even the all-time high for any twelve-month period, back in 1998-99, was 84.2%, not substantially higher than it is today.
So, while participation is down from when the U.S. population was younger on average, it’s way up compared to the 1950s-60s, which many view as a strong period for the labor market. Back in the 1950s and 60s, redistribution of income was well below today’s levels.
If the U.S. really wants more people in the labor force it must either reduce government benefits for not working or wait for the private sector to raise wages enough to pull people off government programs. With the recent strength in the labor market, the latter seems more probable. Tax cuts and deregulation will keep the job market strong.
When the report on international trade came out earlier this month, protectionists were up in arms. Through February, the US’ merchandise (goods only, not services) trade deficit with the rest of the world was the largest for any two-month period on record. “Economic nationalists” from both sides of the political aisle, think this situation is unsustainable.
Meanwhile, some investors ran for the hills when President Trump started announcing tariffs on steel, aluminum, and other goods, thinking this was the reincarnation of the Smoot-Hawley tariffs that were a key ingredient of the Great Depression.
We think the hyperventilating on both sides needs to stop.
In general, nothing is wrong with running a trade deficit. Many states run large and persistent trade imbalances with other states and, rightly, no one cares. We, the authors, run persistent trade deficits with Chipotle and Chick-fil-A, and we’re confident these deficits are never going away.
Running a trade deficit means the US gets to buy more than it produces. In turn, we have this ability because investors from around the world think the US is a good place to put their savings, leading to a net capital inflow that offsets our trade deficit. Notably, foreign investors are willing to invest here even when the assets they buy generate a low rate of return. As a result, this process can continue indefinitely.
It’s important to recognize that free trade enhances our standard of living even if other countries don’t practice free trade. Let’s say China invents a cure for cancer and America invents a cure for Alzheimer’s. If China refuses to give their people access to our cure, are we better off letting our people die of cancer? Of course not!
Imposing or raising tariffs broadly would not help the US economy. Nor would imposing tariffs on specific goods, like steel or aluminum. Giving some industries special favors will only create demand for more special favors from others. It’ll grow the swamp, not drain it.
All that said, we understand the frustration policymakers have with China, in particular, which has been levering access to its huge market to essentially steal foreign companies’ trade secrets and intellectual property. It has a long-term track record of not respecting patents or trademarks.
In theory, letting China into the World Trade Organization was supposed to stop this behavior. But no company wants to bring a WTO case against China when it thinks China would respond by ending its access to their markets and letting in competitors who are more willing to be exploited.
In addition – and this is very important – China is unlike any of our other trading partners in that it is a potential major military rival in the future. There is a national security case to be made - even if one takes a libertarian position on free trade in general - that the US could accept a slightly lower standard of living by limiting trade with China, if the result is a lower standard of living for China as well.
And China doesn’t have much room to fire back at recent US proposals (none of which have yet to be implemented, by the way). Last year, China exported $506 billion in goods to the US, while we only sent them $130 billion.
That gives our policymakers room to raise tariffs on China much more than they can raise them on us. If so, China would generate fewer earnings to turn into purchases of US Treasury debt. Yet another reason for fear among bond investors. However, don’t expect China to outright dump Treasury securities in any large amount. They own our debt because it helps them back up their currency, not as a favor to the US.
We’re certainly not advocating a trade war. But an approach that focuses narrowly on China’s abusive behavior could pay dividends if it moves the world toward freer trade.
Some of you may find this a bit of a technical post from Sean Brodrick at Banyan Hill. But if you read it anyway, it may give you dome perspective.
Global Financial Capitol
Thought for the Week
- Consumer debts have risen dramatically over the last six years, and many fear mongers consider this to be the next bubble to burst and take down our economy.
- Although consumer debt has been rising, it’s not the amount of debt that matters but rather if one can afford his/her debts.
- Student loans have created a headwind for those saddled with too much debt, but for the most part, consumers and the economy are doing fine.
CONSUMER DEBTS ARE RISING
One of the big fears circulating the internet and financial news networks is an impending consumer debt crisis supported by two theories:
- Borrowing has fueled most of the economic growth since the financial crisis. Consumer credit is up $1.1 trillion since mid-2010 through May 2016 (the largest increase in such a period), which cannot be explained as anything other than a “credit binge.”
- Student loans are the next “bubble,” as the amount of debt has exploded by 275% since mid-2010, which accounts for two-thirds of the $1.1 trillion. Consumers will never pay these loans off, let alone afford to buy a house, car, or any other goods on credit.
The chart below shows a rather dramatic visualizations of the rise in tuition costs.
The gray shaded area in the chart represents the rise in the Consumer Price Index (CPI), which is one of the most closely-followed measures of inflation. This index tracks a basket of prices of specific goods in specific quantities, and the overall price rise/fall is what economists use to determine inflation levels over time.
Excessive debt is one of the most powerful ways to derail a country, company, or even an individual’s finances.
Inflation has risen 283% since 1978, but the rise in college tuition and fees has risen 1,272%, which is 4.5 times larger. For Baby Boomers, paying for college was similar to buying a car. Today, it’s more like buying a house!
Excessive debt is one of the most effective ways to derail a country, company, or even an individual’s finances. Therefore, debt accumulation must be closely watched to ensure that its use is kept under control.
However, one of the most important rules in debt analysis is that the total amount of debt on its own is utterly meaningless. Some of the most successful companies in the world carry billions in debt, and they continue to operate for decades with little risk of default.
NOTE: This week, Microsoft sold close to $20 billion in debt to fund its purchase of LinkedIn, and investors showed no signs of concern that this amount would adversely affect their financials. In fact, there was over $50 billion in orders, which allowed Microsoft to secure an even lower interest rate than initially expected.
Debt must be put in context by using some tool of comparison, which is effectively what a bank does when a buyer applies for a mortgage. Banks compare the monthly mortgage against a salary to see just how much the mortgage will constitute of the total income.
For example, if two consumers apply for the same $1 million mortgage, but one makes $500,000 a year and the other $50,000, then the consumer with the higher income should be far better off. When it comes to consumer loans, we need to conduct a similar analysis by determining if consumers can afford their new debts.
Brian Westbury is a well-respected economist at First Trust, and according to his research, total personal income is up $3.2 trillion over the same time period stated above, which is well above the $1.1 trillion in debt accumulation.
In fact, consumers’ monthly mortgage, rent, car, and credit card payments today have been hovering at the lowest share of income since the early 1980s. This phenomenon is a result of (1) incomes growing faster than debt and (2) low interest rates.
Simply put, most consumers can afford their debts even though they have risen precipitously over the last six years.
IMPLICATIONS FOR INVESTORS
Allow me to be crystal clear on where I stand on the issue of consumer debt. Just because the data indicates that the recent surge in consumer credit poses little risk to our economy from a financial perspective, doesn’t mean I like it.
I do not condone the use of excessive debt. I hate watching our government spend like drunken sailors, and I certainly don’t think that an 18- year old with zero credit history should be given $200k to study something that could almost never generate a return on investment.
There is also no question that there are some being held back because their income has not kept pace with their debt. Millenials in their late twenties and early thirties are still living at home with their parents, and many recent college grads will carry much of this debt to their graves.
However, these concerns on their own are isolated to a small percentage of the country and certainly cannot cause an $18 trillion economy to fall apart.
The bottom line is that student loans have created a headwind for those saddled with too much debt, but for the most part, consumers and the economy are doing fine.
Global Financial Private Capital, is an SEC registered investment adviser principally located in Sarasota, Florida. Investment Advisory Services offered on a fee basis through Global Financial Private Capital, LLC. Securities offered through GF Investment Services, LLC, Member FINRA/SIPC.
Labor Market Dynamics
The lack of an increase in average hourly wages has led many to work additional hours, if not multiple jobs. Workers’ demand for higher wages has also translated into higher hours worked. More income is also needed for some to make ends meet, an indicator of tight circumstances for a portion of the working population.
Data released by the U.S. Labor Department reveals that 20-24 year olds were the age group holding the most amount of multiple jobs, while 65 + year olds saw an increase in multiple jobs as well.
Economists believe that as younger workers expand their families, a lack of rising wages leads to both partners working with one partner having to work a second job in order meet rising expenses at home.
U.S. workers haven't experienced a wage hike in years, as the average household wage has essentially gone nowhere, from $57,423 in 2007 to $56,516 in 2015, the most recent data release.
Source: U.S. Department of Labor
Domestic Equity Overview
A weakening dollar is expected to boost corporate earnings for U.S. multi-national companies as products sold overseas become less expensive and more competitive due to a cheaper dollar.
Earnings for the banking sector reported in July came in better than expected as banks benefited from a rising rate environment. Profitability for banks tend to increase as rising rates allow them to charge higher interest rates on loans.
It is expected that large technology companies may face regulatory scrutiny involving taxes, data privacy, and competition following a multi-billion dollar fine imposed by European regulators on Alphabet (Google).
Industrial sector stocks saw stronger earnings in their most recent release, leading analysts to conclude that economic growth is expanding slowly throughout the U.S. Industrial companies provide the infrastructure and materials essential for physical expansion.
Data from the NYSE shows that current margin debt levels, $540 billion at May end, are nearly double of what they were at the market peak in 2000.
Sources: Bloomberg, Reuters, S&P, NYSE
Not so long ago college was not only a place to continue a youth’s education, it was a time for growth, maturity and to simply experience and enjoy life with a little more freedom. The rising costs of college coupled with the challenging economic times has, for most, completely changed the emphasis on what is most important about sending a child to college.
Job security and economic independence are what families are now looking for from their tuition dollars. Mom and Dad are simply hoping that their kids can obtain education and/or training that will allow them to obtain a job that will provide them an income and standard of living that justifies the expense of college.
Because of these changes the college selection process needs to change also, and so does the approach that Mom and Dad take to pay for college. It boils down to an investment decision. In other words, the school and major selection are components of the “return” that one will receive on their tuition dollars.
School selection should take into account the percentage of students that graduate, the percentage of students that graduate within 4 years, the placement ratio of graduates into jobs of their field, and the net cost of college after factoring in financial aid and scholarships. Certainly, a proper fit for the student based on size, distance from home and geographical location are all also very important non-financial components that should be included.
Career or major selection shouldbe a good fit for the student’s “hard wiring” or said another way, what suits his/her personality. Future job outlook and earning potential for a prospective career should also be taken into account. Considering these factors will increase the likelihood of providing the student a future that they are looking for.
School costs should be weighed against income potential from the desired education from that institution. Furthermore, consideration should be given as to whether or not the prestige of the school that one may be paying a premium for is justified based on the income potential. For example, a private school that has an annual cost of $50,000 per year that will likely provide a student a similar job opportunity from a public school that costs $25,000 might not be a wise financial decision.
Mom and Dad need to also determine how much of their income and how many of their assets they can pledge toward college before it impacts their own financial future. Once that determination has been made the residual costs of college will likely be financed by the student through loans. Parents should make sure that their student completely understands the financial impact of taking on student loans. Based on the horrendous state of the student loan industry it is quite clear that individuals are obligating themselves to debts that they will have no ability to pay back without serious impact on their future.
College is big business and should be approached that way. All parents want their students to enjoy their college years however the emphasis needs to be on preparing for economic success after college.
EWS is in the business of helping families through the major life transition of sending their children to college. For many, it will be the most expensive time of their lives and, if not handled properly, could cost them their retirement. If you or someone you know needs the help and guidance of a trained financial professional, don’t hesitate to contact us at 708-771-777. Remember, you shouldn’t have to choose between your child’s college and your retirement.
Markets seemed undeterred by political indecisiveness in Washington surrounding healthcare reform, which could affect upcoming tax reform in the fall that is hinged on the ability of passage by Congress. Even though lawmakers are coming under escalating pressure to demonstrate legislative progress, the inability of the House to pass healthcare legislation didn’t hold equity markets back from achieving higher levels.
A political debate has begun behind mundane media noise, the debate to raise the federal debt ceiling in order to continue funding government expenses and operations. The debt ceiling, formally known as the statutory debt limit, is the country’s credit limit, which is a legislative restriction on the amount of national debt that can be issued by the Treasury.
The Fed said that it would start paring its $4.4 trillion balance sheet “relatively soon”, language interpreted by Fed watchers to mean possibly beginning in September. This continues to be a critical focal point for government bond traders gauging how markets will absorb the vast amounts of debt efficiently and without disturbing volatility. The Fed also reiterated that future rate hikes would be gradual, thus stemming the probability of erratic rate increases.
Global central bank chiefs and various market analysts believe that current low volatility may be hiding risk in the form of asset inflation engulfed within a low inflation environment. The concern is that investors and central bankers may be viewing circumstances from different perspectives. Low interest rates and international central bank asset purchases have greatly reduced volatility in the global markets.
The synchronized global increase in interest rates is elevating from unprecedented low levels, meaning that it may take some time before rates reach so-called normalized levels.
Oil prices rose after Saudi Arabia cut oil exports and OPEC said it would enforce production cuts among OPEC members. Higher oil prices, as tracked by the West Texas Intermediate Index (WTI), enhance economic activity in various oil related regions of the United States.
The Department of Labor reported that there were 222,000 new jobs in June, but more people were actually looking for work in June, lifting the unemployment rate to 4.4%.
Sources: Federal Reserve, OPEC, DOL, house.gov
The low interest rate environment spanning the global markets has been fueled by the accommodative monetary policies of central banks worldwide, creating a concern among many economists. The concern is that rather than central bank policies igniting global growth, asset prices have instead been stoked by the decline in global rates.
Asset price levels including stocks, bonds, homes, art, and collector cars have all been rising steadily since broad accommodations began nearly 10 years ago. Some believe that this may have led to demographical imbalances where those having the ability to borrow at low rates have benefited as their financed asset purchases have grown more than global GDP. The question is as to whether asset prices will continue to grow even as global GDP growth languishes.
It is believed that the Fed could alter this distortion by raising rates thus limiting the cheap financing of assets across all sectors. Inflation has also been below the Fed’s 2% target for some time, with the CPI core index annualizing an increase of 1.7% as of June.
Some see risk masked by elevated asset prices that could become susceptible to an increase in rates. As the cost of financing assets rises in the form of higher rates, asset prices tend to fall.
Source: Federal Reserve, BLS
Workers who were either poor savers or who perhaps experienced a dramatic life crisis are finding themselves short on funds in their retirement years. Some workers who did plan accordingly, didn't plan to live as long and be as healthy as they are, thus creating revisions to retirement plans late in their careers. As health and medical science have advanced over the past few decades, so has the lifespan of American workers.
Many Americans that retired with the notion that Social Security would suffice in their elder years, came to the realization that Social Security benefits alone weren't enough. A part-time job and even full-time menial jobs at minimum wage levels have become supplemental income for many retired Social Security recipients.
Almost 19% of people 65 and older were working at least part-time in the second quarter of 2017, the highest in 55 years. The share of older people in the workforce is higher than any point since before the creation of Medicare.
Baby boomers are increasingly ignoring the traditional retirement age of 65, with 32% of Americans age 65 to 69 still employed. The Bureau of Labor Statistics also found that a growing number of seniors are unable to retire even past 70 years of age. The most recent data shows that 19% of 70 to74-year olds were still working, up from 11% in 1994.
The irony of the data released shows that seniors who find it easier to continue working are the ones that are healthy, well educated, and highly skilled, tend to be the ones that are least likely to need the money.
Sources: Bureau of Labor Statistics, Social Security Administration
Just as the U.S. auto industry mushroomed after WW II and during the 1950s, the same is occurring in China. It’s not just Chinese branded automobiles that are being made in China, but well known foreign brands as well. As the demand for cars has skyrocketed in China over the past two decades, foreign manufacturers recognized an expanding market and started producing their own brands within the country in order to sell directly to Chinese drivers.
Foreign manufacturers have found it more profitable and feasible to manufacture cars in China in order to meet exploding demand. German, American, and Japanese automakers now populate the manufacturing lines in China.
Chinese brands such as SAIC Motor, Dongfeng, BYD, Geely, and FAW have become household names throughout China, helping to popularize them and compete against well known foreign brands. Several joint ventures forged between foreign auto-makers and Chinese manufacturers have ramped up production as demand has increased. The history of China’s auto industry began with the involvement of the former Soviet Union in the 1950’s when the two countries collaborated on manufacturing and economic ideals.
The world’s current largest auto producers span four continents with auto exports heading to multiple countries. Following the second world war, industry in Japan and Germany grew with automobiles becoming key exports. Ironically, several foreign manufacturers have various models produced in the United States, while some U.S. auto companies produce models directly in China and Mexico.
Sources: U.S. Department of Transportation; World Motor Vehicle Production
If you’re struggling under a load of student loans, you already know how hard it is to make ends meet. So it’s important for borrowers, especially recent grads, to think about the best places to live — the cities in which they’re not only likely to find a well-paying job, but also where rents and other living expenses aren’t so exorbitant so as to add to their pile of debt.
To figure out which cities student loan borrowers struggled the most in, we took a look at the top 23 most populous cities in the U.S. based on U.S. Census data. We then compared the average income of our borrowers in each of those cities with the average monthly housing payment and their average monthly student loan payment, to see how affordable student loan payments actually are for borrowers across the country.
5 cities where student loans borrowers struggle the most with debt:
- San Jose, California
- Fort Worth, Texas
- Boston, Massachusetts
- Los Angeles, California
- Denver, Colorado
5 cities where student loans borrowers struggle the least with debt:
- Dallas, TX
- Jacksonville, FL
- Houston, TX
- Columbus, OH
- Austin, TX
The key indicator for affordability was how much of a borrower’s monthly income would go towards their student loan payments and monthly housing costs.
In the cities that topped our ranking for the most affordable cities for recent grads — Dallas, Jacksonville, and Houston — borrowers have more of their income left over after paying their monthly loan and housing bills as compared to the other cities on the list.
But even in these cities, nearly 27 percent of borrowers’ average monthly income is eaten up by their monthly housing payment and their monthly loan payment alone. That doesn’t even take into account other expenses such as taxes, food, or transportation.
That’s not all that different from the cities at the very bottom of our list — San Jose, Fort Worth, and Boston — where more than 30 percent of borrowers’ average monthly income is dedicated to loan and housing payments.
The following are the average monthly loan payment, monthly housing payment, and annual income for the nearly 9,000 borrowers in the cities we analyzed:
Where borrowers struggle the most – compare all cities
The charts below visualize the differences among all 23 cities we analyzed. Browse through the metrics to see each city's average borrower monthly payment, average monthly housing payment, average annual income, and average student loan and housing costs as a percentage of income.
The average student loan debt load among those who borrow is $37,173.
Among the cities that are the least affordable, monthly housing costs do tend to be slightly higher as compared to the other cities, but not by much. This makes sense — while affordability might be one factor that grads take into account when choosing where to live, a lack of affordability doesn’t necessarily prevent people from flocking to cities like San Jose, Fort Worth and Boston, where jobs are plentiful.
Additionally, recent grads are likely to take into account a variety of other factors when moving to a new city. Smaller cities like Columbus or Jacksonville are less likely to be (or be near) hotbeds of industry or cultural attractions.
Seventy percent of college grads borrow to obtain their degree, and the average debt load among those who borrow is $37,173, according to Cappex.com publisher Mark Kantrowitz.
Cities with highest student loan debt burden
To conduct the analysis above, we used actual (but anonymized) data submitted by 8,981 applicants living in the 25 largest U.S. cities seeking to refinance student loan debt through the Credible platform.
This study only considered borrowers with a monthly student loan payment of between $50 and $10,000, a monthly housing payment of less than $10,000, and those with an annual income between $1,000 and $300,000.
The study limited the analysis to the 25 largest cities in the U.S. El Paso, Texas and Detroit, Michigan were omitted from our analysis due to insufficient student loan borrower data.
Source: Credible Labs https://www.credible.com/blog/cities-student-loan-borrowers-struggle-debt/
Known as the primary source of stock information for nearly 100 years, the ticker tape was the earliest electronic device to transmit stock price information over telegraph lines. In use from around 1870 through 1970, the ticker printed abbreviated company names as alphabetic symbols followed by numeric stock transaction price and volume information. The term “ticker” came from the sound made by the machine as it printed. Ticker tape machines started to become obsolete in the 1960s, as television and computers were increasingly used to transmit financial information.
The ticker tape was invented in 1867 by Edward A. Calahan, an employee of the American Telegraph Company, which was followed by numerous machines all performing the same basic function. Thomas Edison himself invented and patented a ticker tape machine, which he initially sold for $40,000 when he was 22 years old. He used the money, which would be closer to $1,000,000 in today’s dollars, to start a research facility at Menlo Park, and his career as a professional inventor was launched.
Sources: Library of Congress. NYSE, U.S. Patent Office
Fixed Income Overview
The slope of the yield curve has been flattening in recent weeks, with short-term rates rising faster than longer bond yields. This typically occurs when monetary policy is tightening. The difference between five-year Treasury notes and 30-year Treasury bonds flattened to 96 basis points in June, the narrowest since December 2007. Five-year note yields, which are highly sensitive to rate policy, rose to a four-week high of 1.80%.
Thirty-year bond yields, which are largely driven by future expectations of growth and inflation, meanwhile dropped to 2.72% in mid-June, the lowest since Nov. 9. A key market dynamic are long-term bond prices that are set by the markets, while short-term rates are dictated by the Fed in the form of the Federal Funds rate.
Global government bonds sold off in late June as language from various central banks alluded to the end of monetary stimulus and a start to rate increases. In reaction, government bonds in Europe, the U.S., and Asia fell in price in anticipation of rising yields.
Source: U.S. Treasury, Fed, Bloomberg
Several investors have voiced the concern that higher rates are the beginning of the end for this bull market.
A rising interest rate, on its own, is not enough to estimate the future direction of stock prices.
The decision to sell stocks simply because rates are rising could risk leaving an investor out of attractive returns for quite some time.
THE IMPACT OF RISING RATES
The U.S. has not experienced a rising interest rate regime for over a decade, and several investors have voiced the concern that higher rates signify the beginning of the end for this equity bull market.
Consumer and business spending fuel the majority of economic growth, and since most major purchases are done on credit, interest rates are vital to the health of the economy. For example, if the interest rate on a car loan doubled from 4% to 8%, then fewer consumers will buy cars because the interest payment would eat up more of their monthly income.
High interest rates have historically led to recessions for this very reason, and we all know what recessions do to the stock market, so let’s see if history can offer any insight into the impact of rising rates on the stock market. The chart below is a good starting point.
The horizontal axis is the 10-year Treasury yield, which represents long-term interest rates, and the vertical axis measures the relationship between the S&P 500 and interest rate movements.
A dot below the 0.0 level indicates a negative relationship between the S&P 500 and interest rate movements. Meaning, when interest rates have been at 10% and moved higher, the S&P 500 has gone down. This behavior confirms the notion that rising interest rates can hurt stocks.
At 10%, consumers are mostly likely not spending much already, and to move them even higher is going to choke off the economy that much more. Less spending equates to lower profits for companies and ultimately sends stock prices down.
A dot above the 0.0 level indicates a positive relationship between the S&P 500 and interest rate movements. Meaning, when interest rates are at 2% and move higher, the S&P 500 goes up. This behavior contradicts the notion that rising rates hurts stocks.
At 2%, consumers are still spending because rates this low tend to equate to early stages in an economic recovery. This point in the cycle is very good for stocks because the economy is growing faster but not overheating to where the Fed feels they need to intervene.
“...a rising interest rate, on its own, is not enough to estimate the future direction of stock prices.”
Therefore, the only conclusion that can be derived from historical data is that a rising interest rate, on its own, is not enough to estimate the future direction of stock prices. We must also consider the current interest rate level because this is a critical factor in determining the health of the economy.
WHEN TO WORRY
The orange-dotted line at 5% indicates the threshold where an interest rate hike has gone from helping stocks to hurting them. Currently, the 10-year Treasury yield is around 2.2%, so we are far away from this line in the sand.
Unfortunately, it’s not as easy as owning stocks until the 10-year Treasury yield hits 5% and then selling. This threshold is based on historical averages, and there was nothing average about the aftermath of the financial crisis.
The last time the Fed moved short-term interest rates this low was during the Great Depression, and repeating these extreme measures most likely shifted the goalpost to where a 5% threshold may no longer apply.
This uncharted territory forces investors to consider other factors before estimating when stocks may start to feel the pressure from rising interest rates. The most important of all is inflation because this has become the Fed’s main focal point now that unemployment has reached all-time lows.
Currently, the Fed’s favored measure of inflation is below their target, and this has historically been a very good time to own stocks. Until inflation creeps higher and stays there for more than a few months, the Fed has little incentive to push our economy to the point where future rate hikes become a headwind for stocks.
IMPLICATIONS FOR INVESTORS
I enjoy traveling to meet with investors, and as a result, I spend a lot of nights in hotels. One thing I have learned during my time on the road is that hot water in most hotels is very dangerous. I will never understand why property managers allow the temperature to get to the point where it can melt aluminum, but it’s nearly universal across the country.
Therefore, every time I shower in a hotel, I follow an iterative process to ensure I don’t end up in the hospital. I turn the hot water knob ever so slightly, checking the temperature along the way before I move it higher.
The Fed follows a similar process when raising interest rates. They know that if they ramp up interest rates too far too fast, the economy will get scolded. This is why they have only been raising by 0.25% each time since December 2015. They want to see how the economy reacts before continuing, but this is incredibly difficult to get right.
When I test the water temperature in my shower, I get near immediate feedback, so I know exactly when to stop. The U.S. economy is too large and has too many moving parts for anything to be immediate, so a change to interest rates, no matter how big or small, can take up to a year to feel the effects.
This lack of timely feedback is the precise reason why the Fed continually screws up and drives our economy into a recession. At some point down the road, this will happen again, and stocks will fall into a bear market. But it is highly unlikely that this will happen anytime soon.
The bottom line is that stocks have experienced tremendous gains in the early innings of rising interest rates, and the decision to sell stocks simply because rates are rising could risk leaving an investor out of attractive returns for quite some time.
As rates have gyrated over the past 1-3 years, mortgagees have ramped up refinancing more often.
A significant contributor to the financial crisis of 2008 was the onslaught of lower quality mortgages, or otherwise known as sub-prime loans, which were “packaged” and sold as complicated products deemed as high quality.
The dramatic drop in mortgage debt from its height in the second quarter of 2008, to its low in the 1st quarter of 2013, was a drop of over 10.5%. Data collected by the Fed since 1951 has never seen such an elimination of mortgage debt of this magnitude.
The growth of the mortgage market has been compromised ever since the financial debacle of 2008, when new lending regulations limited loans. Growth in mortgages actually didn’t start again until the second quarter of 2013.
Economists see an improving housing market as a result of an improving job environment and stronger household finances. Such dynamics lend themselves well to the overall health of the economy.
Source: Federal Reserve
Global Equity Overview
The equity markets started to experience what stock analysts call a sector rotation, when one or several sectors fall out of favor leading to funds flowing to other sectors. This past month technology stocks fell as markets perceived that the sector may have become overvalued. As this occurred, banking and financial sector stocks rose, as favorable regulatory related news lifted the overall sector.
The S&P 500 index posted its strongest first half of the year since 2013. The Dow Jones industrial average index rose 8% in the first half of 2017, its best performance since 2013, while the S&P 500 was up 8.2% the first half of 2017. The NASDAQ’s strong performance for the first six months of 2017 was predominantly led by the technology sector, its best first half since 2009.
Global equity markets had the best first annual half since 2009. Overall improving sentiment in the euro zone as well as increasing international growth prospects helped propel global markets the first half of 2017.
Sources: S&P, Reuters, Bloomberg, Dow Jones, Nasdaq