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Futures Rise, Europe And China Bounce With US Closed For Holiday

Futures Rise, Europe And China Bounce With US Closed For Holiday

It may be a holiday in the US, but US equity futures are once again levitating and on the verge of new all time highs, while global shares posted their longest winning streak…



Futures Rise, Europe And China Bounce With US Closed For Holiday

It may be a holiday in the US, but US equity futures are once again levitating and on the verge of new all time highs, while global shares posted their longest winning streak in three months on Monday, aided by fading odds of an imminent taper coupled with talk of more stimulus in Japan and China, while oil slid as the Saudis cut prices for Asian customers by more than twice the expected amount in a sign the world’s largest crude exporter wants to entice buyers to take more of its barrels.

The labor day holiday in the US means trading conditions will be extremely thin, which helped MSCI’s all-country world index gain 0.2%, touching a new record level and on course for its seventh consecutive closing high. Meanwhile in the US, S&P futs rose 0.2% to 4,544 while Nasdaq futures inched up 0.3%.

In Europe the STOXX index of 600 European companies was 0.7% higher, inching closer to August record peaks, while the Euro Stoxx 50 rose as much as 0.9%. Other majors added ~0.6% with tech, household & personal goods and insurance doing much of the heavy lifting. Real estate is the only sector in the red. S&P futures follow Europe, rising 0.2%. Luxury firms LVMH, Kering and Hermes led gains on France’s CAC 40 Index, with Bryan Garnier noting that China’s “common prosperity” goal won’t hurt all luxury companies the same way while helping expand the country’s middle class -- a positive overall for the sector; LVMH shares were up 2% as of 12:20pm in Paris while Kering, the owner of Gucci, gains 1.6%; Hermes gained 1.8%. LVMH shares had shed 7% in August, as investors jumped out of the expensive luxury sector amid worries about the new policy in China, a crucial growth engine for the industry. “Common prosperity” policy “does not mean ‘killing’ rich people,” Bryan Garnier analyst Loic Morvan writes in a note. Elsewhere, here are some of the biggest European movers today:

  • Norsk Hydro shares jump as much as 5% to the highest level since July 2008 after the aluminum price climbed because of political unrest in Guinea.
  • Scor shares gain as much as 3.4% after JPMorgan raised its recommendation on the stock to overweight from neutral.
  • Leonardo shares rise as much as 2.3% after the group’s CEO said on Friday that the company plans to proceed with the IPO of its U.S. unit DRS “as soon as conditions allow.”
  • Dechra Pharmaceuticals shares fall as much as 9.5% after the company posted results that met estimates. Stifel cuts its rating to hold, noting little upside in the stock.
  • EQT AB shares drop as much as 6.4%, seeing $2 billion wiped off the company’s market value after analysts at Nordea Bank cut their recommendation on the stock to sell.
  • Spie shares lose as much as 4.7% after the company said it’s submitting an offer to buy Engie’s Equans unit and plans to use a combination of debt and equity to fund the transaction.

Investors were also still assessing the fallout from the September payrolls report, which showed a much smaller increase in jobs than expected, at just 235,000, but also a sharp pickup in wages, hinting at stagflation. The latter was enough to nudge longer-dated Treasury yields higher and steepen the yield curve, even as markets speculated over whether the Federal Reserve might not start tapering until later than previously thought.

“Expectations of a delay in Fed tapering as well as a new administration in Japan is supporting equity markets and we expect this to continue,” said Sebastien Galy, senior macro strategist at Nordea Investment Funds. “Buy-on-dip is as robust as ever, taking negative news such as U.S. nonfarm payrolls as good news which is typical of an advanced carry trade.”

Investors “are now already betting on the Fed delaying tapering,” Pierre Veyret, a technical analyst at ActivTrades, wrote in emailed comments. “Even if the prospect of sustained monetary support is helping to lift market sentiment, today’s session is likely to stay muted but technical,” especially given the holiday in the U.S. and lack of macro data releases, he said.

“Employment decelerated sharply in August, with little indication of a pickup in labour supply,” said Barclays economist Jonathan Millar. “This puts the Fed in a quandary as it balances risks of a sharp demand slowdown against those of tight supply and inflation...We still expect the Fed to signal tapering in September, but now expect it to begin in December not November. QE will likely end by the middle of 2022.

Earlier in the session, Asian stocks rose, boosted by a rally in Japan on prospects of better economic and pandemic policies under a new leader. Chinese shares also jumped. MSCI’s broadest index of Asia-Pacific shares outside Japan rose about 0.6% overnight to the highest since late July, while the broader MSCI Asia Pacific Index climbed as much as 0.8%, on track to close at a two-month high, as communication services and technology shares led the advance.  Gains in Asia were led by Japan, where the equity benchmark rose to a 31-year high on wagers for new economic policies once Prime Minister Yoshihide Suga steps down. Japan’s Nikkei gained 1.8% to a five-month top, extending a rally on hopes a new prime minister there would bring added fiscal spending (and thus even more debt-monetizing QE).  Hopes of fresh stimulus from Beijing through fiscal and monetary policy lifted Chinese blue chips 1.9%.

Japan’s Nikkei 225 gauge was among top-performing benchmarks, while the Topix extended gains from a more than 30-year high after Japan’s prime minister’s exit was announced Friday. “As Suga’s rising unpopularity partly stems from a perceived inability on his part to manage the Covid-19 pandemic, the new leadership will have to address this issue,” Jun Rong Yeap, a market strategist at IG Asia, wrote in a note. “This seems to bring high hopes of further economic stimulus to aid businesses and also bolstering of healthcare systems to tackle rising Covid-19 cases.”

Chinese stocks rose overall, with the Hang Seng Tech Index ending the day higher. China’s technology majors committing funds to social initiatives “could potentially turn out to be the critical ‘circuit breaker’ that eases negative sentiment towards the sector,” Nomura strategists Chetan Seth and Amit Phillips wrote in a note, effectively saying that CHinese tech giants can bribe their way to stock upside. Tencent shares were among the top contributors to the Asian benchmark’s rise as Citigroup said its to-be-launched League of Legends Mobile game could buoy sentiment about China’s gaming industry. Taiwan Semiconductor Manufacturing also jumped as Goldman Sachs raised its price target on expectations of a price hike for wafers. Sentiment toward Asian stocks has improved since late August on optimism of gradual tapering by the Federal Reserve. Disappointing U.S. payroll growth data on Friday reinforced that view, as the economy added 235,000 jobs in August - the smallest increase in seven months

In rates, the rise in U.S. 10-year yields to 1.33% limited some of the pressure on the dollar from the poor payrolls print, though its index still touched a one-month low before steadying at 92.207. Cash Treasurys were closed on Monday. Fixed income was also quiet in Europe ahead of this week’s risk events. Bunds bear flatten a touch, gilts bull steepen; both settling off extremes of the morning’s trade. Italy leads a modest tightening in peripheral spreads. Long-end Spain lags after reports the sovereign intends to raise 5 billion euros from a debut green debt deal.

In FX, the dollar was changing hands versus the yen at 109.90, while the euro stood at $1.1868 after hitting a five-week top of $1.1908 on Friday. currencies traded in a tight range with a hint of USD outperformance. AUD, SEK and NZD are at the bottom of the G-10 scoreboard. Indonesia’s rupiah and the Thai baht led most emerging Asian currencies higher as gains in regional equities boosted risk appetite. The Taiwan dollar climbed, touching the strongest level since early June. Indonesia’s rupiah advances for a third day, aided by foreign fund inflows into the nation’s bonds and equities.

The European Central Bank holds its policy meeting this week and a number of policy hawks have been calling for a step back in the bank’s huge asset-buying programme, though President Christine Lagarde has sounded more dovish. Euro zone sovereign bond yields barely budged on Monday. In early trade, Germany’s benchmark 10-year Bund yield was steady at -0.36%. “We expect the ECB to announce a reduced pace of Q4 PEPP (pandemic emergency purchase programme) at its September meeting on the back of easier financial conditions,” said analysts at TD Securities. “All other policy levers are likely to be left on hold, with inflation forecasts revised sharply up this year and next. Communication risks are high, and Lagarde will want to avoid sounding overly hawkish, instead emphasising ‘persistence’.”

In commodities, oil slid after Saudi Arabia slashed prices of all crude grades to Asian customers, while leaving prices to northwestern Europe and the United States steady. While futures rebounded from Asia’s lows, WTI remains ~0.9% lower but recovers above $68.50; Brent returns back below $72 after a short-lived bounce.

The prospect of a later start to Fed tapering proved only fleetingly positive for non-yielding gold, which stood at $1,825 an ounce, having reached its highest since mid-June at $1,833.80. L

Aluminum hit the highest in over a decade on the LME as political unrest in Guinea fueled concerns over supply of the raw material needed to make the metal. A unit of the military seized power and suspended the constitution, raising the possibility of disruption to bauxite shipment from the key global supplier. LME lead and nickel lag peers, dropping over 1%.

Bitcoin was up for a sixth day, trading around $51,700 apiece, while Ethereum continued to coil just under $4,000 waiting for the next major short squeeze that will take it to new record highs and $10,000 thereafter.

There is nothing on the US calendar today due to Labor day. In Germany, we got the July factory orders (3.4% vs -1.0 Exp.), August construction PMI (49.5, Last 49.5) and UK August construction PMI (55.2, exp. 56.9).

* * *

DB's Jim Reid concludes the overnight wrap

All of a sudden after 18 months at home I’m going to a DB conference this week and I’ll also be back in the office for a day. My wife is hosting a “he’s finally gone back to the office” party at home. Talking of parties we hosted a huge children’s party for the twins 4th birthday on Saturday. Given the lockdowns of the last year we wanted to do something special but boy was it stressful. Indeed I’m still recovering from having 70 screaming kids running loose and shouting in my ears. Good preparation for my first “live” team meeting back.

The champagne corks might be about to go off in the offices of the more hawkish European member states’ central banks this week as an important ECB meeting (Thursday) will be the main highlight. They could use it to announce the start of the end of the PEPP (more later). Before that though, today is a US holiday (Labor Day) with tomorrow and Wednesday Rosh Hashanah (Jewish New Year). So the week will likely get off to a slow start.

Elsewhere we’ll get monetary policy decisions from Australia (tomorrow), Canada (Wednesday), and Russia (Friday), and prior reports from Bloomberg have suggested that President Biden could decide who the next Fed Chair is from around this week. In terms of other data, it’ll be worth keeping an eye on the German ZEW (tomorrow), US JOLTS (Wednesday), China CPI/PPI (Thursday) and US PPI (Friday).

The ECB meeting on Thursday is likely the most important event though. At this meeting, the Governing Council are due to conduct a joint assessment of financing conditions and the outlook for inflation, which will be the basis for a recalibration of the pace of PEPP net purchases. The big question for investors will be whether the ECB slows down these purchases, and recent comments by Chief Economist Lane implied that the hurdle to decelerating purchases might be lower than the market had assumed, as he played down the broader significance of a deceleration. Furthermore, we’ve also had the flash CPI estimate that’s showed inflation was running at +3.0% in August, the highest level in nearly a decade. In their preview (link here), our European economists are of the view that an announcement of slower purchases is slightly more likely at this meeting than in December. So it could be a taper week.

Elsewhere it’ll be interesting to see what the Fed speakers make of Friday’s payrolls report. NY President Williams' (dove) has a speech on the economic outlook on Wednesday. Dallas' Kaplan (hawk / non-voter) talks on Wednesday and he has been a proponent of a September taper so will he wobble? Elsewhere Cleveland's Mester (hawk / non-voter) also talks on Friday.

Friday's jobs report had something for everyone. Weak payrolls but signs of supply constraints in the details. The headline (235k vs. 1053k last month including revisions) and private (243k vs. 798k) payrolls were below the consensus of 733k and 610k, respectively. It seems the Fed are disproportionately focused on this headline number but there was strength elsewhere. Both the headline U-3 (5.2% vs. 5.4%) and U-6 (8.8% vs. 9.2%) rates improved amidst a 509k gain in employment and 318k decline in unemployment. In addition, the prime-age (25-54) employment-to-population ratio improved a couple of tenths to 78% and prime-age participation held steady at 81.8%. Average earnings were at +4.3% against +3.9% expected. Perhaps this explains why 10 year yields ended the day around +4bps higher even with the substantial payrolls miss. It may also tell us a bit more about the positioning of the market now. We had many days of strong data in the early summer while rates rallied hard. The technicals back then were phenomenal and the market short. The technicals are now far less strong.

We’ll get an early chance to see an alternative view of the labour market with Wednesday's JOLTS report even if it refers to July. This report has shown great tightness in labour markets of late with quits rates around record highs and vacancy yields at records low. Elsewhere on employment, Thursday's jobless claims will be interesting with Federal UI benefits ending this week for all states. As such we could see a bigger decline in initial claims, though such a fall may wait for another week. As of mid-August, there were still 9.2mn people collecting either PUA or PEUC, most of whom will lose all income support in the coming weeks. While this may provide some relief with respect to the labor shortage it could also leave some light on income which may impact consumption.

Back to central banks the most interesting outside of the ECB will be the RBA tomorrow where our economist (link here) is expecting that they will reverse their taper decision, and announce that they’ll continue to purchase government bonds at the current average pace of A$5bn per week, rather than tapering to A$4bn per week.

Asian markets have started the week on the front foot with the Nikkei (+1.80%), Hang Seng (+0.51%), Shanghai Comp (+1.02%) and India’s Nifty (+0.47%) all gaining ground. The Kospi (-0.04%) is flattish. US and Euro Futures are pretty flat. Elsewhere, Brent crude oil prices are down -1.12% after Saudi Arabia slashed crude prices for Asian buyers, raising the prospect of competition between OPEC+ producers to gain/maintain market share.

Turning to the latest on the pandemic, Italy’s Public Administration Minister Renato Brunetta said that the country will decide by the end of September whether vaccines will become mandatory for all people aged 12 and over. The law will be passed if the country hasn’t reached a vaccination level between 80% and 90%. Here in the UK, the government will decide by the end of September on whether to make it mandatory to provide vaccine certification for entry to large venues where infection risk may be higher. The UK Vaccines Minister Nadhim Zahawi further said that the government hasn’t yet decided on whether to roll out vaccines to healthy 12- to 15-year-olds, but if the move does go ahead, then parental consent would be needed.

Recapping last week now and global markets saw some divergence as ECB members grew more hawkish and Fed officials stuck to their more dovish tones, with economic data partially reinforcing both views. US equities finished the week just off their highs with the S&P 500 just worse than unchanged (-0.03%) on Friday but finishing up +0.58% over the course of the week. There was a shift to defensives and growth stocks with the NASDAQ gaining +1.55% last week (+0.21% Friday) while cyclicals, such as US banks (-3.69%), were on the back foot. European equities, which are more cyclically focused, underperformed as the STOXX 600 ended the week marginally (-0.09%) lower after Friday’s -0.56% loss.

The divergent central bank tones was most apparent in sovereign debt performance. US 10yr Treasury yields ended the week up +1.5bps, most of that coming on Friday’s +3.9bp gain despite a weaker-than-expected employment report as markets looked at other aspects of the report and ahead to the upcoming supply outlook after the holiday weekend. On the other hand, hawkish comment ahead of the ECB meeting saw bond yields in Europe move higher across much of the continent, with those on 10yr bunds (+6.2bps) reaching their highest level in over 6 weeks. Peripheral bonds in southern Europe sold off similarly, with 10yr Italian (+7.4bps), Spanish (+4.2bps), Portuguese (+5.0bps), and Greek (+8.9bps) yields all climbing.

Outside of the employment report on Friday, global composite PMIs for August slowed from the previous reading, but remained in strong expansionary territory in Europe and the US. The final Euro area composite PMI was down 0.5pts from the initial reading at 59.0, while Germany’s figure fell 0.6pts to 60.0. Meanwhile the US saw the composite PMI stay at 55.4, which is the lowest reading in eight months as the pace of growth seems to have definitively peaked back in May. The US ISM services PMI fell 2.4pts to 61.7 last month while the commentary continues to highlight supply chain disturbances and labour shortages. Finally, Euro Area retail sales for July showed a -2.3% slowdown (0.0% expected), after the previous month was revised up 0.3pp to 1.8%. The drop is reflective of the surge in cases at that time due to the delta variant.

Tyler Durden Mon, 09/06/2021 - 08:14

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Spread & Containment

IFM’s Hat Trick and Reflections On Option-To-Buy M&A

Today IFM Therapeutics announced the acquisition of IFM Due, one of its subsidiaries, by Novartis. Back in Sept 2019, IFM granted Novartis the right to…




Today IFM Therapeutics announced the acquisition of IFM Due, one of its subsidiaries, by Novartis. Back in Sept 2019, IFM granted Novartis the right to acquire IFM Due as part of an “option to buy” collaboration around cGAS-STING antagonists for autoimmune disease.

This secures for IFM what is a rarity for a single biotech company: a liquidity hat trick, as this milestone represents the third successful exit of an IFM Therapeutics subsidiary since its inception in 2015.

Back in 2017, BMS purchased IFM’s  NLRP3 and STING agonists for cancer.  In early 2019, Novartis acquired IFM Tre for NLRP3 antagonists for autoimmune disease, which are now being studied in multiple Phase 2 studies. Then, later in 2019, Novartis secured the right to acquire IFM Due after their lead program entered clinical development. Since inception, across the three exits, IFM has secured over $700M in upfront cash payments and north of $3B in biobucks.

Kudos to the team, led by CEO Martin Seidel since 2019, for their impressive and continued R&D and BD success.

Option-to-Acquire Deals

These days option-based M&A deals aren’t in vogue: in large part because capital generally remains abundant despite the contraction, and there’s still a focus on “going big” for most startup companies.  That said, lean capital efficiency around asset-centric product development with a partner can still drive great returns. In different settings or stages of the market cycle, different deal configurations can make sense.

During the pandemic boom, when the world was awash in capital chasing deals, “going long” as independent company was an easy choice for most teams. But in tighter markets, taking painful levels of equity dilution may be less compelling than securing a lucrative option-based M&A deal.

For historical context, these option-based M&A deals were largely borne out of necessity in far more challenging capital markets (2010-2012) on the venture front, when both the paucity of private financing and the tepid exit environment for early stage deals posed real risks to biotech investment theses. Pharma was willing to engage on early clinical or even preclinical assets with these risk-sharing structures as a way to secure optionality for their emerging pipelines.

As a comparison, in 2012, total venture capital funding into biotech was less than quarter of what it is now, even post bubble contraction, and back then we had witnessed only a couple dozen IPOs in the prior 3 years combined. And most of those IPOs were later stage assets in 2010-2012.  Times were tough for biotech venture capital.  Option-based deals and capital efficient business models were part of ecosystem’s need for experimentation and external R&D innovation.

Many flavors of these option-based deals continued to get done for the rest of the decade, and indeed some are still getting done, albeit at a much less frequent cadence.  Today, the availability of capital on the supply side, and the reduced appetite for preclinical or early stage acquisitions on the demand side, have limited the role of these option to buy transactions in the current ecosystem.

But if the circumstances are right, these deals can still make some sense: a constructive combination of corporate strategy, funding needs, risk mitigation, and collaborative expertise must come together. In fact, Arkuda Therapeutics, one of our neuroscience companies, just announced a new option deal with Janssen.

Stepping back, it’ s worth asking what has been the industry’s success rate with these “option to buy” deals.

Positive anecdotes of acquisition options being exercised over the past few years are easy to find. We’ve seen Takeda exercise its right to acquire Maverick for T-cell engagers and GammaDelta for its cellular immunotherapy, among other deals. AbbVie recently did the same with Mitokinin for a Parkinson’s drug. On the negative side, in a high profile story last month, Gilead bailed on purchasing Tizona after securing that expensive $300M option a few years ago.

But these are indeed just a few anecdotes; what about data since these deal structures emerged circa 2010? Unfortunately, as these are mostly private deals with undisclosed terms, often small enough to be less material to the large Pharma buyer, there’s really no great source of comprehensive data on the subject. But a reasonable guess is that the proportion of these deals where the acquisition right is exercised is likely 30%.

This estimate comes from triangulating from a few sources. A quick and dirty dataset from DealForma, courtesy of Tim Opler at Stifel, suggests 30% or so for deals 2010-2020.  Talking to lawyers from Goodwin and Cooley, they also suggest ballpark of 30-50% in their experience.  The shareholder representatives at SRS Acquiom (who manage post-M&A milestones and escrows) also shared with me that about 33%+ of the option deals they tracked had converted positively to an acquisition.  As you might expect, this number is not that different than milestone payouts after an outright acquisition, or future payments in licensing deals. R&D failure rates and aggregate PoS will frequently dictate that within a few years, only a third of programs will remain alive and well.

Atlas’ experience with Option-based M&A deals

Looking back, we’ve done nearly a dozen of these option-to-buy deals since 2010. These took many flavors, from strategic venture co-creation where the option was granted at inception (e.g., built-to-buy deals like Arteaus and Annovation) to other deals where the option was sold as part of BD transaction for a maturing company (e.g., Lysosomal Therapeutics for GBA-PD).

Our hit rate with the initial option holder has been about 40%; these are cases where the initial Pharma that bought the option moves ahead and exercises that right to purchase the company. Most of these initial deals were done around pre- or peri-clinical stage assets.  But equally interesting, if not more so, is that in situations where the option expired without being exercised, but the asset continued forward into development, all of these were subsequently acquired by other Pharma buyers – and all eight of these investments generated positive returns for Atlas funds. For example, Rodin and Ataxion had option deals with Biogen (here, here) that weren’t exercised, and went on to be acquired by Alkermes and Novartis (here, here). And Nimbus Lakshmi for TYK2 was originally an option deal with Celgene, and went on to be purchased by Takeda.

For the two that weren’t acquired via the option or later, science was the driving factor. Spero was originally an LLC holding company model, and Roche had a right to purchase a subsidiary with a quorum-sensing antibacterial program (MvfR).  And Quartet had a non-opioid pain program where Merck had acquired an option.  Both of these latter programs were terminated for failing to advance in R&D.

Option deals are often criticized for “capping the upside” or creating “captive companies” – and there’s certainly some truth to that. These deals are structured, typically with pre-specified return curves, so there is a dollar value that one is locked into and the presence of the option right typically precludes a frothy IPO scenario. But in aggregate across milestones and royalties, these deals can still secure significant “Top 1%” venture upside though if negotiated properly and when the asset reaches the market: for example, based only on public disclosures, Arteaus generated north of $300M in payments across the upfront, milestones, and royalties, after spending less than $18M in equity capital. The key is to make sure the right-side of the return tail are included in the deal configuration – so if the drug progresses to the market, everyone wins.

Importantly, once in place, these deals largely protect both the founders and early stage investors from further equity dilution. While management teams that are getting reloaded with new stock with every financing may be indifferent to dilution, existing shareholders (founders and investors alike) often aren’t – so they may find these deals, when negotiated favorably, to be attractive relative to the alternative of being washed out of the cap table. This is obviously less of a risk in a world where the cost of capital is low and funding widely available.

These deal structures also have some other meaningful benefits worth considering though: they reduce financing risk in challenging equity capital markets, as the buyer often funds the entity with an option payment through the M&A trigger event, and they reduce exit risk, as they have a pre-specified path to realizing liquidity. Further, the idea that the assets are “tainted” if the buyer walks hasn’t been borne out in our experience, where all of the entities with active assets after the original option deal expired were subsequently acquired by other players, as noted above.

In addition, an outright sale often puts our prized programs in the hands of large and plodding bureaucracies before they’ve been brought to patients or later points in development. This can obviously frustrate development progress. For many capable teams, keeping the asset in their stewardship even while being “captive”, so they can move it quickly down the R&D path themselves, is an appealing alternative to an outright sale – especially if there’s greater appreciation of value with that option point.

Option-based M&A deals aren’t right for every company or every situation, and in recent years have been used only sparingly across the sector. They obviously only work in practice for private companies, often as alternative to larger dilutive financings on the road to an IPO. But for asset-centric stories with clear development paths and known capital requirements, they can still be a useful tool in the BD toolbox – and can generate attractive venture-like returns for shareholders.

Like others in the biotech ecosystem, Atlas hasn’t done many of these deals in recent funds. And it’s unlikely these deals will come back in vogue with what appears to be 2024’s more constructive fundraising environment (one that’s willing to fund early stage stories), but if things get tighter or Pharma re-engages earlier in the asset continuum, these could return to being important BD tools. It will be interesting to see what role they may play in the broader external R&D landscape over the next few years.

Most importantly, circling back to point of the blog, kudos to the team at IFM and our partners at Novartis!

The post IFM’s Hat Trick and Reflections On Option-To-Buy M&A appeared first on LifeSciVC.

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Student Loan Forgiveness Is Robbing Peter To Pay Paul

Student Loan Forgiveness Is Robbing Peter To Pay Paul


With President Biden’s Saving on a Valuable Education (SAVE)…



Student Loan Forgiveness Is Robbing Peter To Pay Paul


With President Biden’s Saving on a Valuable Education (SAVE) plan set to extend more student loan relief to borrowers this summer, the federal government is pretending it can wave a magic wand to make debts disappear. But the truth of student debt “relief” is that they’re simply shifting the burden to everyone else, robbing Peter to pay Paul and funneling more steam into an inflation pressure cooker that’s already set to burst.

Starting July 1st, new rules go into effect that change the discretionary income requirements for their payment plans from 10% to only 5% for undergraduates, leading to lower payments for millions. Some borrowers will even have their owed balances revert to zero.

What the plan doesn’t describe, predictably, is how that burden will be shifted to the rest of the country by stealing value out of their pockets via new taxes or increased inflation, which still simmering well above levels seen in early 2020 before the Fed printed trillions in Covid “stimulus” money. They’re rewarding students who took out loans they can’t afford and punishing those who paid their way or repaid their loans, attending school while living within their means. And they’re stealing from the entire country to finance it.

Biden actually claims that a continuing Covid “emergency” is what gives him the authority to offer student loan forgiveness to begin with. As with any “temporary” measure that gives state power a pretense to grow, or gives them an excuse to collect more revenue (I’m looking at you, federal income tax), COVID-19 continues to be the gift that keeps on giving for power and revenue-hungry politicians even as the CDC reclassifies the virus as a threat similar to the seasonal flu.

The SAVE plan takes the burden of billions of dollars in owed payments away from students and adds it to a national debt that’s already ballooning to the tune of a mind-boggling trillion dollars every 3 months. If all student loan debt were forgiven, according to the Brookings Institution, it would surpass the cumulative totals for the past 20 years for multiple existing tax credits and welfare programs:

“Forgiving all student debt would be a transfer larger than the amounts the nation has spent over the past 20 years on unemployment insurance, larger than the amount it has spent on the Earned Income Tax Credit, and larger than the amount it has spent on food stamps.”

Ironically enough, adding hundreds of billions to the national debt from Biden’s program is likely to cause the most pain to the very demographics the Biden administration claims to be helping with its plan: poor people, anyone who skipped college entirely or paid their loans back, and other already overly-indebted young adults, whose purchasing power is being rapidly eroded by out-of-control government spending and central bank monetary shenanigans. It effectively transfers even more wealth from the poor to the wealthy, a trend that Covid-era measures have taken to new extremes.

As Ron Paul pointed out in a recent op-ed for the Eurasia Review:

“…these loans will be paid off in part by taxpayers who did not go to college, paid their own way through school, or have already paid off their student loans. Since those with college degrees tend to earn more over time than those without them, this program redistributes wealth from lower to higher income Americans.”

Even some progressives are taking aim at the plan, not because it shifts the debt burden to other Americans, but because it will require cutting welfare or sacrificing other expensive social programs promised by Biden such as universal pre-K. For these critics, the issue isn’t so much that spending and debt are totally out of control, but that they’re being funneled into the wrong issues.

Progressive “solutions” always seem to take the form of slogans like “tax the wealthy,” a feel-good bromide that for lawmakers always seems to translate into increased taxes for the middle and lower-upper class. Meanwhile, the .01% continue to avoid taxes through offshore accounts, money laundering trickery dressed up as philanthropy, and general de facto ownership of the system through channels like political donations and aggressive lobbying.

If new waves of college applicants expect loan forgiveness plans to continue, it also encourages schools to continue raising tuition and motivates prospective students to continue with even more irresponsible borrowing.

This puts pressure on the Fed to keep interest rates lower to help accommodate waves of new student loan applicants from sparkly-eyed young borrowers who figure they’ll never really have to pay the money back.

With the Fed already expected to cut rates this year despite inflation not being properly under control, the loan forgiveness scheme is just one of many factors conspiring to cause inflation to start running hotter again, spiraling out of control, as the entire country is forced to pay the hidden tax of price increases for all their basic needs.

Tyler Durden Wed, 03/13/2024 - 06:30

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Bougie Broke The Financial Reality Behind The Facade

Social media users claiming to be Bougie Broke share pictures of their fancy cars, high-fashion clothing, and selfies in exotic locations and expensive…



Social media users claiming to be Bougie Broke share pictures of their fancy cars, high-fashion clothing, and selfies in exotic locations and expensive restaurants. Yet they complain about living paycheck to paycheck and lacking the means to support their lifestyle.

Bougie broke is like “keeping up with the Joneses,” spending beyond one’s means to impress others.

Bougie Broke gives us a glimpse into the financial condition of a growing number of consumers. Since personal consumption represents about two-thirds of economic activity, it’s worth diving into the Bougie Broke fad to appreciate if a large subset of the population can continue to consume at current rates.

The Wealth Divide Disclaimer

Forecasting personal consumption is always tricky, but it has become even more challenging in the post-pandemic era. To appreciate why we share a joke told by Mike Green.

Bill Gates and I walk into the bar…

Bartender: “Wow… a couple of billionaires on average!”

Bill Gates, Jeff Bezos, Elon Musk, Mark Zuckerberg, and other billionaires make us all much richer, on average. Unfortunately, we can’t use the average to pay our bills.

According to Wikipedia, Bill Gates is one of 756 billionaires living in the United States. Many of these billionaires became much wealthier due to the pandemic as their investment fortunes proliferated.

To appreciate the wealth divide, consider the graph below courtesy of Statista. 1% of the U.S. population holds 30% of the wealth. The wealthiest 10% of households have two-thirds of the wealth. The bottom half of the population accounts for less than 3% of the wealth.

The uber-wealthy grossly distorts consumption and savings data. And, with the sharp increase in their wealth over the past few years, the consumption and savings data are more distorted.

Furthermore, and critical to appreciate, the spending by the wealthy doesn’t fluctuate with the economy. Therefore, the spending of the lower wealth classes drives marginal changes in consumption. As such, the condition of the not-so-wealthy is most important for forecasting changes in consumption. 

Revenge Spending

Deciphering personal data has also become more difficult because our spending habits have changed due to the pandemic.

A great example is revenge spending. Per the New York Times:

Ola Majekodunmi, the founder of All Things Money, a finance site for young adults, explained revenge spending as expenditures meant to make up for “lost time” after an event like the pandemic.

So, between the growing wealth divide and irregular spending habits, let’s quantify personal savings, debt usage, and real wages to appreciate better if Bougie Broke is a mass movement or a silly meme.

The Means To Consume 

Savings, debt, and wages are the three primary sources that give consumers the ability to consume.


The graph below shows the rollercoaster on which personal savings have been since the pandemic. The savings rate is hovering at the lowest rate since those seen before the 2008 recession. The total amount of personal savings is back to 2017 levels. But, on an inflation-adjusted basis, it’s at 10-year lows. On average, most consumers are drawing down their savings or less. Given that wages are increasing and unemployment is historically low, they must be consuming more.

Now, strip out the savings of the uber-wealthy, and it’s probable that the amount of personal savings for much of the population is negligible. A survey by estimates that 78% of Americans live paycheck to paycheck.

personal savings

More on Insufficient Savings

The Fed’s latest, albeit old, Report on the Economic Well-Being of U.S. Households from June 2023 claims that over a third of households do not have enough savings to cover an unexpected $400 expense. We venture to guess that number has grown since then. To wit, the number of households with essentially no savings rose 5% from their prior report a year earlier.  

Relatively small, unexpected expenses, such as a car repair or a modest medical bill, can be a hardship for many families. When faced with a hypothetical expense of $400, 63 percent of all adults in 2022 said they would have covered it exclusively using cash, savings, or a credit card paid off at the next statement (referred to, altogether, as “cash or its equivalent”). The remainder said they would have paid by borrowing or selling something or said they would not have been able to cover the expense.


After periods where consumers drained their existing savings and/or devoted less of their paychecks to savings, they either slowed their consumption patterns or borrowed to keep them up. Currently, it seems like many are choosing the latter option. Consumer borrowing is accelerating at a quicker pace than it was before the pandemic. 

The first graph below shows outstanding credit card debt fell during the pandemic as the economy cratered. However, after multiple stimulus checks and broad-based economic recovery, consumer confidence rose, and with it, credit card balances surged.

The current trend is steeper than the pre-pandemic trend. Some may be a catch-up, but the current rate is unsustainable. Consequently, borrowing will likely slow down to its pre-pandemic trend or even below it as consumers deal with higher credit card balances and 20+% interest rates on the debt.

credit card debt

The second graph shows that since 2022, credit card balances have grown faster than our incomes. Like the first graph, the credit usage versus income trend is unsustainable, especially with current interest rates.

consumer loans credit cards and wages

With many consumers maxing out their credit cards, is it any wonder buy-now-pay-later loans (BNPL) are increasing rapidly?

Insider Intelligence believes that 79 million Americans, or a quarter of those over 18 years old, use BNPL. Lending Tree claims that “nearly 1 in 3 consumers (31%) say they’re at least considering using a buy now, pay later (BNPL) loan this month.”More telling, according to their survey, only 52% of those asked are confident they can pay off their BNPL loan without missing a payment!

Wage Growth

Wages have been growing above trend since the pandemic. Since 2022, the average annual growth in compensation has been 6.28%. Higher incomes support more consumption, but higher prices reduce the amount of goods or services one can buy. Over the same period, real compensation has grown by less than half a percent annually. The average real compensation growth was 2.30% during the three years before the pandemic.

In other words, compensation is just keeping up with inflation instead of outpacing it and providing consumers with the ability to consume, save, or pay down debt.

It’s All About Employment

The unemployment rate is 3.9%, up slightly from recent lows but still among the lowest rates in the last seventy-five years.

the unemployment rate

The uptick in credit card usage, decline in savings, and the savings rate argue that consumers are slowly running out of room to keep consuming at their current pace.

However, the most significant means by which we consume is income. If the unemployment rate stays low, consumption may moderate. But, if the recent uptick in unemployment continues, a recession is extremely likely, as we have seen every time it turned higher.

It’s not just those losing jobs that consume less. Of greater impact is a loss of confidence by those employed when they see friends or neighbors being laid off.   

Accordingly, the labor market is probably the most important leading indicator of consumption and of the ability of the Bougie Broke to continue to be Bougie instead of flat-out broke!


There are always consumers living above their means. This is often harmless until their means decline or disappear. The Bougie Broke meme and the ability social media gives consumers to flaunt their “wealth” is a new medium for an age-old message.

Diving into the data, it argues that consumption will likely slow in the coming months. Such would allow some consumers to save and whittle down their debt. That situation would be healthy and unlikely to cause a recession.

The potential for the unemployment rate to continue higher is of much greater concern. The combination of a higher unemployment rate and strapped consumers could accentuate a recession.

The post Bougie Broke The Financial Reality Behind The Facade appeared first on RIA.

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