Crypto News: Millennials bear the brunt of this generational rise in rates

When we think about interest rates going up as a way of slowing the economy, the only way they bite is by hurting debtors more than they help lenders and savers. We are right at that tipping point now, with the economy beginning to slow. And all evidence suggests the Millennial cohort is bearing a disproportionate share of adjustment.

Last week was a pretty big move toward a new regime that favors bond investors. We're not quite there yet, since we still have to get all the way through this hiking and easing cycle by the Federal Reserve. But once the dust settles, it seems likely that the unusually low rates that we saw for so long will look like an anomaly. And that's going to deliver a significant setback to the generation now just hitting its adult stride.

In the meantime, with the economy softening, there will be a lot of volatility before we get to a new normalized monetary policy. What makes it hard to gauge how soft the landing — both for the economy and asset prices — will be is the dance playing out between Fed policy, bond and stock prices, and the real economy. If the Fed signals an easing is coming and markets rally too hard, they may have to jam on the breaks again. If they signal tightening, the market may sell off so aggressively it could jeopardize economic growth. So right now, it's lather, rinse and repeat until we get a clear landing from which to start the next business cycle.

One thing is fairly certain, though. In the US, it's the Millennial generation that is going to bear the brunt of the pain as the Fed tightens. The same goes for the higher-for-longer interest-rate world that many foresee. That will stymie home buying and make student loans more costly. Distress is already popping up in credit-card and auto loans as the entire Millennial generation deals with its first tightening cycle.

Let's go back to September in order to think about this. Back then, the question was "how high can long-term interest rates go?" My answer then was that long-term Treasury rates could go as high as 5.25%, maybe even higher if the economy didn't slow. We got to 5% and are still over 4.50% as I write this. That's bad for people who need credit the most because so many households and companies locked in low interest rates during the pandemic. Which means the Fed is in many ways meting out its rate pain on a small minority of households and businesses.

If you had to pinpoint which households are feeling it most, you'd have to look at Millennials. Why? They're the ones who still have large student loan balances while still trying to get onto the property ladder. Gen Z, born in 1996 and after, may have a lot of student debt to pay back but most people that age are not yet in the home-buying stage of life quite yet. Most in Gen X, the cohort born before 1980 and after 1964, have paid off all or most of their student loans and likely locked in low rate mortgages during the pandemic. Now rate-insensitive and locked into their 3, 4, and 5% mortgages, they want rates to go higher in order to pad their savings accounts. And Baby Boomers, the people born after World War 2 and up until 1964, they're mostly thinking about paying off mortgages if they haven't done so already. And they're now retiring in droves, with the help of higher rates to pad their investment income as they pile into fixed-income investments for their Golden Years.

Millennials are the ones who want and need rates to be lower. And unfortunately for them, this is the most aggressive rate hike wave since the early 1980s, putting them at a disadvantage even most Baby Boomers never experienced.

3.7%

- The share of credit card borrowers who are newly delinquent for those with auto and student loan debt. That's over three times the level for those with only mortgage debt and credit card payments

Just yesterday, the New York Fed broke down its Q3 Quarterly Report on Household Debt and Credit, pointing out that the rise in credit-card delinquencies and overall credit distress in the US has been concentrated with Millennials and poorer households. This tells you the debt stress has already begun but is being masked by the financial wherewithal of wealthier households and older generational cohorts. Here are a couple of highlights from the part on credit cards:

Credit card distress for Millennials: "The series shows that 2 percent of credit card users moved from current status in the second quarter of 2023 to thirty or more days past due on at least one account in the third quarter. This is up from roughly 1.7 percent in the first and second quarters of 2023, and higher than the third quarter average between 2015-19 of 1.7 percent."
Credit card distress for lower-income households: "The chart below shows how credit card delinquencies have evolved by zip median income. We categorize all zip codes into four groups ranked by area income with the first quartile representing the lowest and the fourth quartile representing the highest income. The lowest-income areas persistently have the highest delinquency rates, but all four quartiles are now above their pre-pandemic levels."

You see the same patterns in auto loan and student debt as well. The NY Fed concludes:

Even though the increase in delinquency appears to be broad based across income groups and regions, it is disproportionately driven by Millennials, those with auto or student loans, and those with relatively higher credit card balances.

I've lamented before how the Fed's interest-rate medicine isn't very targeted. In effect, what you're seeing here is an economy divided into higher-rate haves and have-nots based on household income and the age of the borrowers. Rates during the pandemic were epically low. And those who could, took advantage of that to lock in the lowest borrowing costs of a lifetime. Insulated from rate shock on loans, they like rising rates because it bolsters their interest income.

Those who couldn't get low borrowing rates — because of poor credit or low income or whose needs have changed because they are only now forming a separate household — are bearing a considerable cost. In fact, because the Fed's policy works mostly through credit channels to slow the economy, they are the main conduit through which the economy-wide slowing from higher rates is channeled — and, thus, must disproportionately feel pain. Looking at the New York Fed's charts, you can see this debt distress already started rising in the second quarter of 2021 but has only recently hit levels higher than the pre-pandemic averages.

Where we go next depends a lot on the back and forth between market expectations and the economy. The Atlanta Fed's economic tracker GDPNow suggests the economy is now growing at about a 2% pace, decent but down from nearly 5% last quarter. The combination of this slowdown and guidance from Fed officials has meant a real climbdown in long-term interest rates from levels Federal reserve Governor Christopher Waller just called an "earthquake" for the economy.

The lower 10-year Treasury rate has meant a massive easing in financial conditions, helping the S&P 500 to the most number of consecutive day gains in two years. It has also meant lower mortgage rates, with 30-year mortgages falling the most in more than a year. All of which is to say, it has eased the pressure on the economy. And if that easing subsequently turns out to be too much, we'll see another bout of tightening until we settle on a landing — hard or soft — for this economy.

When the dust settles, the Millennial generation will have seen a wrenching transition to a new normal, the likes of which no generational cohort has ever seen. The interest rate hikes in the early 1980s were higher, but the youngest Baby Boomers were just 16 to 18 when it happened and the oldest were 34 to 36. The full weight of that cycle did not fall on them. What's more, they benefitted from the subsequent fall in interest rates during the 1980s and 1990s that produced a long run-up in stock, bond and house prices.

If I'm right that the days of zero rates are well and truly over, then after this business cycle ends, the rate relief will be much less than back in the 1980s. And so, any kick higher in real estate, bond and equity asset prices will be much less than what Boomers saw. It will be a rough transition to the new higher for longer regime. And unfortunately, one generation will bear much of the burden. That's bound to change their outlook on life and politics as they become the dominant social and political force for years to come.

"It's not going to be a short period of difficulty. It will be an existential crisis, one in which society's strongest institutions collapse (or are severely challenged and stressed) and national survival is in serious doubt. The Crisis can be economic, cultural, religious, military, or all the above."

John Mauldin

President of Mauldin Economics

- In 2016, summarizing Neil Howe's prediction on what was to come and has come for this Millennial generation, a term Howe coined in 1991 ( link here)

One thing to look forward to is investment in electrical vehicles. It's a $57 trillion land-grab.
Lacy Hunt has had a terrible 3 years as bonds have been killed by the Fed. But he's hanging on. He thinks the bond rally has just started.
Still, did you know that we've seen the bond market rally as if to call the top in rates seven times in this cycle?

MLIV Pulse: Is it time to buck the market and buy high yield bonds, regional bank debt or commercial real estate loans? Which US data release has been the most overhyped by investors this year? Share your views in the latest MLIV Pulse survey.

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