3 Things 8-29

Thing One Raymond Devoe’s Colorful And Instructive Description Financial literature can be quite dry reading at times but there are some words and phrases that bring the writing to life - if only briefly. One such phrase, dead cat bounce, was first referenced by Raymond Devoe in the San Jose Mercury all the way back in 1986. Here’s the relevant paragraph: “…This applies to stocks or commodities that have gone into free fall-descent and then rallied briefly. If you threw a dead cat off a 50-story building, it might bounce when it hit the sidewalk. But don’t confuse that bounce with renewed life. It’s still a dead cat.” Another term meant to convey the same general idea (we don’t have the original attribution for this one) is bear trap, which is observed during a bear market (a period of time during which a stock market is down 20% or more from a previous peak). A bear trap “is a trend that occurs when a stock price (or stock market in general) incorrectly switches from a downward spiral to an upward swing”. (Fortune) The recent stock market rally has the major indexes around 17% higher than the June 16th lows. Interestingly enough, analysts at Glenmeade Wealth Management have done research that is worth considering. They say that, “Rallies happened on average 6.5 times during each bear period, and to the average tune of 17.8%, but in each instance, bounces proved to be short lived and markets quickly regressed to plunge even deeper than their previous low.” So is what we’re experiencing a dead cat bounce? A bear trap? We certainly don’t know for sure. What we do know is that if you’re in it for the long run you don’t have to be as concerned with answering short run questions.

Thing Two Student Loan Debt Is Only A Symptom Of The Problem I don’t often wade into political areas and I’m not really doing so here. Instead, I am just sharing some facts on a topic that has become political in light of the decision this week by President Biden to forgive $10,000 in student loans for every person who has them and is not making over $125,000 per year. Before I get into that though, I'd like to share a funny story about a friend who lived with his elderly mother. She was a constant complainer and he was a bit of an amateur comedian so he would often tell funny, real-life, and often even real-time jokes about her. One day I was having a conversation in front of his house with him about nothing in particular and his mother was standing in the distance, just inside the doorway, with the door flung wide open. She was just kind of looking around, not really focusing on anything in particular. It seemed a bit odd so I asked him what she was doing. He replied, “Man she’s just letting in flies so she can kill them all later." Now to the student loan thing. The chart below is instructive in that it details the cumulative inflation that has occurred in tuition costs versus overall consumer prices (excluding healthcare) since 1979. Inflation between the two was similar in the beginning. By the mid-eighties, there was a noticeable spread and by the early to mid-nineties, tuition inflation relative to overall price inflation had really taken off. As to why, inflationdata.com, which produced the chart, puts it quite succinctly below: “This chart shows cumulative CPI inflation vs. cumulative tuition inflation from 1979 through 2021. As you can see CPI-U inflation increased just over 300% from 1979 through 2021. This is bad enough. A 300% increase means that something that cost $1 in 1979, now costs $4. But College Tuitions increased by a whopping 1000% MORE THAN THE CPI! In other words, for every $100 of tuition in 1979 it will now cost $1,423! …The main reason tuition continues to rise is a dramatic change that took place regarding the Federal Stafford Loan more than a decade ago. When Uncle Sam opened the floodgates to government-backed student loans without parent income restrictions in 1992, colleges welcomed the news with open arms. The sudden injection of millions of additional aid dollars only furthered tuition increases. Add to that the government’s continued promotion of the Stafford Loan as a low-cost program, and you have the formula for hyperinflationary costs. When the government made it exceptionally easy for students to borrow massive amounts of money, the colleges followed the lead by increasing their tuition rates.” In other words, the government opened the door and let in all the flies. Now they’re swatting at a few with loan forgiveness. In the meantime, they’ve left the door wide open so the flies are still flooding in. Next time they’ll need a bigger fly swatter. Guess who'll pay for it.

Thing Three Just A Thought "Strive not to be a success, but rather to be of value." - Albert Einstein