Student & Car Loans Expand Again in 2016
Car and student debt have expanded since 2010, continuing their growth trend into 2017
The Index
Car and student loans are interesting because they represent substantial family balance sheet debts that aside from mortgages and credit card debt. A home mortgage can actually be a leveraged investment in an asset that appreciates, so it can give an imperfect picture of real financial health of American families in isolation. Credit card and other consumer debt is a vital tool for looking at consumer financial health, but when much credit card debt is used on goods that are not durable in the way an education or car is. 1
Credit expansion is critical to understand for long term investors, because it is part long term liquidity and market cycles. As investors, our concern here at Investment Annuity is always on very long term growth. We look at Free Cash Flow growth, dividend growth, demographic trends, etc. as well as investigating shorter term signals. We’re particularly excited about topics like Car and Student debt because they are moving trends that we can look as both an interesting economic news item and a deeply informative long term credit cycle indicator. We strongly encourage the reader to research relationships between bull markets and credit cycles.
The data at hand comes from the Federal Reserve. They track and present an expansive range of information on credit, debt, and money supply on their website that is excellent for long term investors (in particular, our audience- the annuity investor). 2
By the Numbers
Student and car loans have both expanded at a steady pace since 2010. Since the 3rd Quarter of 2010, student loans have grown 66% according to the Federal Reserve. In the same period, car loans have grown 59%. That represents a substantial growth in securitized debt in these sectors. This has slightly outpaced the growth of Monetary Quantity- how much money exists in the economy- which has grown at roughly 52% according to the St. Louis Federal Reserve. 3
There is commonly a relationship between the growth of money stock in an economy and the growth of debt. This is partially because when a loan is created, some amount of new money is often created. As long as debt- such as car and student loans- expands at the steady rate it has in the last 6 years, the amount of money will likely grow in a similar fashion.
Student Loans Vs. Car Loans
Meet the Author & Portfolio Manager
Victor Schramm is a Certified Fund Specialist (CFS®), with expertise in Mutual Funds & Variable Annuity Separate Accounts. He focuses on long term investing geared toward our annuity clients as a Fee Only Investment Advisor. He lives in Portland, OR.
Victor Schramm, CFS®Analyst & Portfolio Manager
Disclaimer
This information is solely a representation of publicly available facts intended for educational use only. This is not a solicitation to buy or sell any public or private Security, in any city named in the article or elsewhere. Student, car, or any consumer credit data is not to be used as a market timing tool for buying or selling any security.