Stocks are lower this morning on fears over Brexit (The 6/23 vote to decide whether the UK leaves the EU). Bonds and MBS are up small.
No economic data today. The big event this week will be the FOMC meeting Tuesday and Wednesday. The markets are expecting no changes to interest rates, so any bond rally on the news of no changes will probably be limited.
Interesting chart about the Federal government’s percent of ownership of consumer debt. This is money that US citizens owe Uncle Sam. Ever since Obama nationalized the student loan sector, they have taken their percentage of consumer debt from 5% to 28%. The student loan market is a $1.3 trillion market – not exactly chump change. Expect some sort of write-down of student loan debt in the future: many graduates have degrees that will never pay enough to work this down. As a side note, more young adults aged 18-34 live at home with Mom and Dad than in any other arrangement.
Speaking of Millennials, the high student loan debt is causing lower credit scores. The average credit score for the 18-34 age cohort is 625, compared to the national average of 667. Almost a third of that age cohort have sub-600 scores. Good luck getting a loan with that. Finally, all of the new post-2008 regulations have added anywhere form 50k-100k to the cost of building a starter home, making it difficult for builders to make homes that are affordable for the first-time homebuyer.
There is now $10 trillion worth of global sovereign debt trading at negative yields. Bill Gross of Janus Capital calls that a “supernova” that will explode one day. All of the worlds’ central banks are on a mission to create inflation: one day they will succeed. What has been the best trade for bond investors lately? The Japanese 30 year bond, which now yields 28 basis points. Bill says that bond yields today are the lowest in 500 years. Not sure where he comes up with that number.
Speaking of Central Bank jiggery-pokery, ECB corporate bond buying now makes up for 1 in 5 trades. We are truly in uncharted waters with global central banking.
As a general rule, buy stocks in an election year. Election years tend to be optimistic times, and the Fed is usually on your side. That might not be the case this year.