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This Won’t End Well – Gen Z’ers Take On Debt To Invest

Young investors are taking on personal debt to invest in stocks. I have not personally witnessed such a thing since late 1999. At that time, "day traders" tapped credit cards and home equity loans to leverage their investment portfolios.

For anyone…

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Young investors are taking on personal debt to invest in stocks. I have not personally witnessed such a thing since late 1999. At that time, “day traders” tapped credit cards and home equity loans to leverage their investment portfolios.

For anyone who has lived through two “real” bear markets, the imagery of people trying to  “daytrade” their way to riches is familiar. The recent surge in “Meme” stocks like AMC and Gamestop as the “retail trader sticks it to Wall Street” is not new.

It wasn’t long after the turn of the century that “day traders” learned the harsh lessons of valuation and bullish extremes. The bull market of the 90s sucked in retail and professionals alike. It was then Jim Cramer published his famous list of “winners” for the decade in March of 2000.

Experience, Knowledge Vs. Experience: Why Most Investors Wind Up Losing

A recent study by Magnify Money shows that while “this time seems different,” some things remain the same.

Takes Money To Make Money

“It takes money to make money, or so the saying goes. But if you don’t have money to invest, should you take on debt to try to make more?” – Magnify Money

Since the “Pandemic Shutdown,” investors piled into equities. In fact, equity inflows through the first half of 2020 are a record. However, this was not a record by a little, but rather magnitudes above anything seen in the previous history.

Of course, given that discretionary incomes haven’t risen much since the pandemic lows, the money came from successive rounds of “stimulus” payments and, not surprisingly, leverage. As shown, margin debt is near the highest level on record, and “free cash balances” are the lowest.

Of course, the problem with margin debt is that you can only borrow ~50% of the account’s value (depending on the underlying collateral.) 

So, when individuals run out of the ability to margin their account, where do they pull from next?

Gen Z’ers Lead The Charge

According to Magnify Money’s survey, out of the 40% of investors that took on debt to invest, Gen Z’ers led the charge. Here are the survey findings:

  • Many consumers have taken on debt to invest, with Gen Zers leading the charge. 40% of investors said they have taken on debt to invest. This includes 80% of Gen Zers, 60% of millennials, 28% of Gen Xers, and 9% of baby boomer investors.
  • Personal loans were the most popular choice for those who took on debt to invest. Borrowing from friends or family came next. 38% of those who went into debt to invest took out a personal loan, while 23% borrowed from friends or family.
  • When it comes to taking on debt to invest, many went big. Of those who took on debt to invest, nearly half (46%) borrowed $5,000 or more.
  • Saving for the future was the biggest motivator among indebted investors. 37% went into debt to beef up their retirement plan. Others wanted to buy a specific stock (32%) or participate in day trading (31%).
  • Should you invest when you have debt? Americans were split almost down the middle. 49% said yes, because it’s important to build wealth for the future, while 51% said no because people should pay off debt before investing.
  • Most said taking on debt to invest won’t be a one-time occasion. Of those who previously took on debt to invest, 61% would do it again and 33% would consider it.

As we have stated before, one of the significant benefits of a “bull market” is that it “forgives” investing mistakes. Investors have taken on personal debt, and according to the survey, would do it again because the result has been profitable.

The problem comes when it isn’t.

All Debt Is Not Equal

When you dig down into the survey, you find that investors taking on debt to invest has long-term consequences.

While I don’t condone speculating “on margin” in an investment account, the debt gets collateralized by the underlying holdings of the account. During a “bear market,” investors are forced to cover their margin debt by selling the underlying securities in the account. If a liquidation event occurs, the WORSE thing that happens to the investor is they lose everything in that account. In most cases, the liability to the individual ends there.

However, individuals are now taking on debt that can have life-altering consequences. As shown in the survey, many took out personal loans or went into credit card debt.

The disadvantage of personal loans and credit card debt is that when the portfolio loses a substantial chunk of its value, it does not get forgiven. Unlike margin debt, that gets tied to the investment account, personal debt, home equity lines, and credit card are with you “forever.”

Therefore, when the crash eventually comes, the individual loses their capital but gets left with payments plus interest for the term of those loans. For a credit card, that payment could well impact an individual for 40-years or more if only paying the minimum amount.

Such an outcome can alter the course of a young person not only in the near term but for most of his productive years.

Lot’s Of Confidence

As we discussed in “Long On Confidence:”

“It should not be surprising we see such rampant ‘speculative’ behavior in the markets. After a decade of monetary injections, investors believe there is an ‘insurance’ policy against losses. This insurance policy is most commonly known as the ‘Fed Put.’

Since the ‘Fed Put’ began following the ‘Financial Crisis,’ it is primarily young investors lulled into that complacency. Armed with only a couple of years of investing experience and a fresh ‘stimulus’ check, the ‘casino’ is open.”

Long confidence short experience, Retail Investors Are Long Confidence And Short Experience

One of the most troubling aspects of where individuals are getting their investing guidance. The youngest and least experienced investors use social media as the “most important” source of information. Considering most social media users are the younger generation, this is the very definition of the “blind leading the blind.”

Long confidence short experience, Retail Investors Are Long Confidence And Short Experience

Jason Zweig summed up the problem with this very well:

“As surely as the sun rises in the east, promoters will be touting these returns. A small-stock fund manager who’s up 40% over the past year can hype that gain in ads and on social media; 40% is a big, beautiful number! Only by reading the fine print would you be reminded that a 40% return underperformed the average by more than 10 percentage points.

You knew I would tell you this but I’m saying it anyway. These returns won’t last indefinitely. Enjoy them while they last, but you’d be crazy to count on such giant gains becoming common.”

The biggest problem for most young investors is the lack of research on the stocks they buy. They are only buying them “because they were going up.” However, when the “season does change,” the “fundamentals” will matter, and they matter a lot.

Such is something most won’t learn from “social media” influencers.

The Most Stupid Of Reasons

“Many people taking on debt to invest have their eye on the future. More than a third reporting they did to invest in a retirement plan. The stock market is the other major motivator, with buying a particular stock and day trading following closely behind as reasons for taking on debt. One in 10 investors said they took on debt to buy cryptocurrency.”

Going into debt to “save” is a terrible idea.

In 2000 and 2001, I spent most of my time working with individuals as a debt counselor more than a financial advisor. Not surprisingly, the crash in the stock market left many individuals with a lot of personal debt and no assets with which to pay it off.

While creditors are more forgiving today of bankruptcies and poor credit, such will still keep younger individuals from advancing in life as expected.

After more than a decade of a strong bull market, investors are once again lured into the financial markets, believing it is a “can’t lose” opportunity.

As Ray Dalio once quipped:

“The biggest mistake investors make is to believe that what happened in the recent past is likely to persist. They assume that something that was a good investment in the recent past is still a good investment. Typically, high past returns simply imply that an asset has become more expensive and is a poorer, not better, investment.”

Investing is a game of “risk.” It is often gets stated that the more “risk” you take, the more money one can make. However, the actual definition of risk is “how much you will lose when something goes wrong.” 

Following the “Dot.com crash,” many individuals learned the perils of “risk” and “leverage.”  

Unfortunately, for Gen-Z’ers, such is a lesson that is still waiting to get learned.

The post This Won’t End Well – Gen Z’ers Take On Debt To Invest appeared first on RIA.

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There will soon be one million seats on this popular Amtrak route

“More people are taking the train than ever before,” says Amtrak’s Executive Vice President.

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While the size of the United States makes it hard for it to compete with the inter-city train access available in places like Japan and many European countries, Amtrak trains are a very popular transportation option in certain pockets of the country — so much so that the country’s national railway company is expanding its Northeast Corridor by more than one million seats.

Related: This is what it's like to take a 19-hour train from New York to Chicago

Running from Boston all the way south to Washington, D.C., the route is one of the most popular as it passes through the most densely populated part of the country and serves as a commuter train for those who need to go between East Coast cities such as New York and Philadelphia for business.

Veronika Bondarenko captured this photo of New York’s Moynihan Train Hall. 

Veronika Bondarenko

Amtrak launches new routes, promises travelers ‘additional travel options’

Earlier this month, Amtrak announced that it was adding four additional Northeastern routes to its schedule — two more routes between New York’s Penn Station and Union Station in Washington, D.C. on the weekend, a new early-morning weekday route between New York and Philadelphia’s William H. Gray III 30th Street Station and a weekend route between Philadelphia and Boston’s South Station.

More Travel:

According to Amtrak, these additions will increase Northeast Corridor’s service by 20% on the weekdays and 10% on the weekends for a total of one million additional seats when counted by how many will ride the corridor over the year.

“More people are taking the train than ever before and we’re proud to offer our customers additional travel options when they ride with us on the Northeast Regional,” Amtrak Executive Vice President and Chief Commercial Officer Eliot Hamlisch said in a statement on the new routes. “The Northeast Regional gets you where you want to go comfortably, conveniently and sustainably as you breeze past traffic on I-95 for a more enjoyable travel experience.”

Here are some of the other Amtrak changes you can expect to see

Amtrak also said that, in the 2023 financial year, the Northeast Corridor had nearly 9.2 million riders — 8% more than it had pre-pandemic and a 29% increase from 2022. The higher demand, particularly during both off-peak hours and the time when many business travelers use to get to work, is pushing Amtrak to invest into this corridor in particular.

To reach more customers, Amtrak has also made several changes to both its routes and pricing system. In the fall of 2023, it introduced a type of new “Night Owl Fare” — if traveling during very late or very early hours, one can go between cities like New York and Philadelphia or Philadelphia and Washington. D.C. for $5 to $15.

As travel on the same routes during peak hours can reach as much as $300, this was a deliberate move to reach those who have the flexibility of time and might have otherwise preferred more affordable methods of transportation such as the bus. After seeing strong uptake, Amtrak added this type of fare to more Boston routes.

The largest distances, such as the ones between Boston and New York or New York and Washington, are available at the lowest rate for $20.

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International

The next pandemic? It’s already here for Earth’s wildlife

Bird flu is decimating species already threatened by climate change and habitat loss.

I am a conservation biologist who studies emerging infectious diseases. When people ask me what I think the next pandemic will be I often say that we are in the midst of one – it’s just afflicting a great many species more than ours.

I am referring to the highly pathogenic strain of avian influenza H5N1 (HPAI H5N1), otherwise known as bird flu, which has killed millions of birds and unknown numbers of mammals, particularly during the past three years.

This is the strain that emerged in domestic geese in China in 1997 and quickly jumped to humans in south-east Asia with a mortality rate of around 40-50%. My research group encountered the virus when it killed a mammal, an endangered Owston’s palm civet, in a captive breeding programme in Cuc Phuong National Park Vietnam in 2005.

How these animals caught bird flu was never confirmed. Their diet is mainly earthworms, so they had not been infected by eating diseased poultry like many captive tigers in the region.

This discovery prompted us to collate all confirmed reports of fatal infection with bird flu to assess just how broad a threat to wildlife this virus might pose.

This is how a newly discovered virus in Chinese poultry came to threaten so much of the world’s biodiversity.

H5N1 originated on a Chinese poultry farm in 1997. ChameleonsEye/Shutterstock

The first signs

Until December 2005, most confirmed infections had been found in a few zoos and rescue centres in Thailand and Cambodia. Our analysis in 2006 showed that nearly half (48%) of all the different groups of birds (known to taxonomists as “orders”) contained a species in which a fatal infection of bird flu had been reported. These 13 orders comprised 84% of all bird species.

We reasoned 20 years ago that the strains of H5N1 circulating were probably highly pathogenic to all bird orders. We also showed that the list of confirmed infected species included those that were globally threatened and that important habitats, such as Vietnam’s Mekong delta, lay close to reported poultry outbreaks.

Mammals known to be susceptible to bird flu during the early 2000s included primates, rodents, pigs and rabbits. Large carnivores such as Bengal tigers and clouded leopards were reported to have been killed, as well as domestic cats.

Our 2006 paper showed the ease with which this virus crossed species barriers and suggested it might one day produce a pandemic-scale threat to global biodiversity.

Unfortunately, our warnings were correct.

A roving sickness

Two decades on, bird flu is killing species from the high Arctic to mainland Antarctica.

In the past couple of years, bird flu has spread rapidly across Europe and infiltrated North and South America, killing millions of poultry and a variety of bird and mammal species. A recent paper found that 26 countries have reported at least 48 mammal species that have died from the virus since 2020, when the latest increase in reported infections started.

Not even the ocean is safe. Since 2020, 13 species of aquatic mammal have succumbed, including American sea lions, porpoises and dolphins, often dying in their thousands in South America. A wide range of scavenging and predatory mammals that live on land are now also confirmed to be susceptible, including mountain lions, lynx, brown, black and polar bears.

The UK alone has lost over 75% of its great skuas and seen a 25% decline in northern gannets. Recent declines in sandwich terns (35%) and common terns (42%) were also largely driven by the virus.

Scientists haven’t managed to completely sequence the virus in all affected species. Research and continuous surveillance could tell us how adaptable it ultimately becomes, and whether it can jump to even more species. We know it can already infect humans – one or more genetic mutations may make it more infectious.

At the crossroads

Between January 1 2003 and December 21 2023, 882 cases of human infection with the H5N1 virus were reported from 23 countries, of which 461 (52%) were fatal.

Of these fatal cases, more than half were in Vietnam, China, Cambodia and Laos. Poultry-to-human infections were first recorded in Cambodia in December 2003. Intermittent cases were reported until 2014, followed by a gap until 2023, yielding 41 deaths from 64 cases. The subtype of H5N1 virus responsible has been detected in poultry in Cambodia since 2014. In the early 2000s, the H5N1 virus circulating had a high human mortality rate, so it is worrying that we are now starting to see people dying after contact with poultry again.

It’s not just H5 subtypes of bird flu that concern humans. The H10N1 virus was originally isolated from wild birds in South Korea, but has also been reported in samples from China and Mongolia.

Recent research found that these particular virus subtypes may be able to jump to humans after they were found to be pathogenic in laboratory mice and ferrets. The first person who was confirmed to be infected with H10N5 died in China on January 27 2024, but this patient was also suffering from seasonal flu (H3N2). They had been exposed to live poultry which also tested positive for H10N5.

Species already threatened with extinction are among those which have died due to bird flu in the past three years. The first deaths from the virus in mainland Antarctica have just been confirmed in skuas, highlighting a looming threat to penguin colonies whose eggs and chicks skuas prey on. Humboldt penguins have already been killed by the virus in Chile.

A colony of king penguins.
Remote penguin colonies are already threatened by climate change. AndreAnita/Shutterstock

How can we stem this tsunami of H5N1 and other avian influenzas? Completely overhaul poultry production on a global scale. Make farms self-sufficient in rearing eggs and chicks instead of exporting them internationally. The trend towards megafarms containing over a million birds must be stopped in its tracks.

To prevent the worst outcomes for this virus, we must revisit its primary source: the incubator of intensive poultry farms.

Diana Bell does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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NY Fed Finds Medium, Long-Term Inflation Expectations Jump Amid Surge In Stock Market Optimism

NY Fed Finds Medium, Long-Term Inflation Expectations Jump Amid Surge In Stock Market Optimism

One month after the inflation outlook tracked…

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NY Fed Finds Medium, Long-Term Inflation Expectations Jump Amid Surge In Stock Market Optimism

One month after the inflation outlook tracked by the NY Fed Consumer Survey extended their late 2023 slide, with 3Y inflation expectations in January sliding to a record low 2.4% (from 2.6% in December), even as 1 and 5Y inflation forecasts remained flat, moments ago the NY Fed reported that in February there was a sharp rebound in longer-term inflation expectations, rising to 2.7% from 2.4% at the three-year ahead horizon, and jumping to 2.9% from 2.5% at the five-year ahead horizon, while the 1Y inflation outlook was flat for the 3rd month in a row, stuck at 3.0%. 

The increases in both the three-year ahead and five-year ahead measures were most pronounced for respondents with at most high school degrees (in other words, the "really smart folks" are expecting deflation soon). The survey’s measure of disagreement across respondents (the difference between the 75th and 25th percentile of inflation expectations) decreased at all horizons, while the median inflation uncertainty—or the uncertainty expressed regarding future inflation outcomes—declined at the one- and three-year ahead horizons and remained unchanged at the five-year ahead horizon.

Going down the survey, we find that the median year-ahead expected price changes increased by 0.1 percentage point to 4.3% for gas; decreased by 1.8 percentage points to 6.8% for the cost of medical care (its lowest reading since September 2020); decreased by 0.1 percentage point to 5.8% for the cost of a college education; and surprisingly decreased by 0.3 percentage point for rent to 6.1% (its lowest reading since December 2020), and remained flat for food at 4.9%.

We find the rent expectations surprising because it is happening just asking rents are rising across the country.

At the same time as consumers erroneously saw sharply lower rents, median home price growth expectations remained unchanged for the fifth consecutive month at 3.0%.

Turning to the labor market, the survey found that the average perceived likelihood of voluntary and involuntary job separations increased, while the perceived likelihood of finding a job (in the event of a job loss) declined. "The mean probability of leaving one’s job voluntarily in the next 12 months also increased, by 1.8 percentage points to 19.5%."

Mean unemployment expectations - or the mean probability that the U.S. unemployment rate will be higher one year from now - decreased by 1.1 percentage points to 36.1%, the lowest reading since February 2022. Additionally, the median one-year-ahead expected earnings growth was unchanged at 2.8%, remaining slightly below its 12-month trailing average of 2.9%.

Turning to household finance, we find the following:

  • The median expected growth in household income remained unchanged at 3.1%. The series has been moving within a narrow range of 2.9% to 3.3% since January 2023, and remains above the February 2020 pre-pandemic level of 2.7%.
  • Median household spending growth expectations increased by 0.2 percentage point to 5.2%. The increase was driven by respondents with a high school degree or less.
  • Median year-ahead expected growth in government debt increased to 9.3% from 8.9%.
  • The mean perceived probability that the average interest rate on saving accounts will be higher in 12 months increased by 0.6 percentage point to 26.1%, remaining below its 12-month trailing average of 30%.
  • Perceptions about households’ current financial situations deteriorated somewhat with fewer respondents reporting being better off than a year ago. Year-ahead expectations also deteriorated marginally with a smaller share of respondents expecting to be better off and a slightly larger share of respondents expecting to be worse off a year from now.
  • The mean perceived probability that U.S. stock prices will be higher 12 months from now increased by 1.4 percentage point to 38.9%.
  • At the same time, perceptions and expectations about credit access turned less optimistic: "Perceptions of credit access compared to a year ago deteriorated with a larger share of respondents reporting tighter conditions and a smaller share reporting looser conditions compared to a year ago."

Also, a smaller percentage of consumers, 11.45% vs 12.14% in prior month, expect to not be able to make minimum debt payment over the next three months

Last, and perhaps most humorous, is the now traditional cognitive dissonance one observes with these polls, because at a time when long-term inflation expectations jumped, which clearly suggests that financial conditions will need to be tightened, the number of respondents expecting higher stock prices one year from today jumped to the highest since November 2021... which incidentally is just when the market topped out during the last cycle before suffering a painful bear market.

Tyler Durden Mon, 03/11/2024 - 12:40

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