Quick: which BRIC nation has the highest consumer loan default rate?
If you said China, India or Russia, you are wrong. Actually, if you said China you are probably right, but since absolutely all economic "data" in China is worthless, manipulated propaganda, only a retrospective post-mortem after the Chinese credit, housing, commodity, consumption bubbles have all burst will we know the answer. So excluding China, which country's consumers after a multi-year shopping spree funded entirely on credit, are suddenly suffering the epic hangover of soaring non-performing loans as they suddenly find themselves unable to even pay the interest on the debt? Just ask former billionaire Eike Batista whose OGX oil corporation is days away from filing bankruptcy. The answer, with 5.6% of all loans in default, above Russia, South Africa, Mexico, Turkey and India, is Brazil.
The cost of protecting against a default on US Treasuries for one-year has surged to 60bps this morning. This is the highest since the Debt-ceiling debacle in 2011 and worse than Lehman. The 1Y cost is the highest relative to the 5Y cost ever. However, many people look at the 60bps and shrug it off as de minimus, after-all, JCPenney trades at 1200bps and is still alive. This is a mistake. The price of protection for US sovereign debt depends on recovery expectations and the EURUSD exchange rate expectations. Based on current levels, USA CDS imply a 5.9% probability of default - the same as JCPenney in July.
Why are young people in America so frustrated these days?
You are about to find out...
The system is failing, and young people are going to become even angrier and even more frustrated.
Next "Subprime Crisis" Expands As Student Loan Defaults Hit $146 Billion, Highest Default Rate Level Since 1995Submitted by Tyler Durden on 10/01/2013 08:22 -0500
Almost exactly one year ago we wrote "The Next Subprime Crisis Is Here: Over $120 Billion In Federal Student Loans In Default" in which we took the latest (2009 three year cohort) loan default data on Federal Student Loans released by the Department of Education and applied it to the total amount of student loans outstanding, which back then was $914 billion. Yesterday, ED.gov provided its annual update - this time to the 2010 three year and 2011 two year cohorts - and to nobody's major surprise, learned that things just got even worse. To wit: "The national two-year cohort default rate rose from 9.1 percent for FY 2010 to 10 percent for FY 2011. The three-year cohort default rate rose from 13.4 percent for FY 2009 to 14.7 percent for FY 2010." Putting this in context, according to Bloomberg defaults have risen to the highest level since 1995. The irony that this is happening in the aftermath of Bernanke's disastrous ZIRP policy is not lost on anyone.
Two weeks ago we first pointed out that as a result of the quiet creep in high grade leverage to fresh record high levels, the resurgence in PIK Toggle debt for LBOs and otherwise, means that the credit bubble is now worse than ever and that the next credit crisis will make 2007 seem like one big joke. Recall that nearly 80% of PIK issuers made a PIK election during the last downturn, "paying" by incurring even more debt and in the process resulting in huge impairments to those yield chasing "investors" who knew they were going to lose money but had no choice - after all, the "career risk." Subsequently, we quantified the explosion in covenant-lite loans - another indicator of a peak credit bubble market - as nearly double when compared to the last credit bubble of 2007 (whose aftermath the Fed, with a $3 trillion larger balance sheet, is still struggling to contain).
As the Greek Prime Minister, Antonis Samaras, visits the US to promote his nation as a "bastion of stability" in the eastern Mediterranean, things appear to be going from worst to worster in his nation. While 65% youth unemployment is a large and scary enough data point, and Greeks are in open revolt against tax collectors, the uproar over Troika's current demands to lift a ban prohibiting banks from confiscating homes is growing. From the people to the politicians, anger is brewing over the lifting of the ban but the banks (already mired in 27% default rates) are behind the decision to help recapitalize themselves (and are refusing to restructure loans). However, given that Greece has already used 75% of its bank bailout fund and that repossessing and auctioning homes (potentially based on 'social criteria') could cut home prices 12 to 21%... not exactly going to help bank balance sheets; and it would seem Greece will need more caves.
Detroit will be followed by many cities, and this was not hard to see coming, not at all - as exemplified by the ample warnings given not just by me but by at least one other pundit who was derided for her candidness.
Former Goldman Sachs trader Fabrice Tourre goes on trial this week, accused by the Securities and Exchange Commission of willingly misleading investors while he was vice-president of the bank.
When you get into too much debt, eventually really bad things start to happen. This is a very painful lesson that southern Europe is learning right now, and it is a lesson that the United States will soon learn as well. It simply is not possible to live way beyond your means forever. You can do it for a while though, and politicians in the U.S. and in Europe keep trying to kick the can down the road and extend the party, but the truth is that debt is a very cruel master and at some point it inevitably catches up with you. And when it catches up with you, the results can be absolutely devastating. Greece, Italy, Spain and Portugal all tried to just slow down the rate at which their government debts were increasing, and look at what happened to their economies. I have always said that the next wave of the economic collapse would start in Europe and that is exactly what is happening. So keep watching Europe. What is happening to them will eventually happen to us.
We Could Offset the Need for the “Sequestration” Budget Cuts By Stopping Nuclear Subsidies
It is common knowledge by now that the US has a student loan problem. Specifically, a subprime-sized, student loan default problem, which as was reported last year, has now surpassed a 23% default rate at "for profit" institutions. Yet as all statistical measures, this one too deals in means and medians: very boring, impersonal metrics. Where the truly stunning data emerge is when one performs a granular college by college analysis of the US higher learning system, which is precisely what the WSJ has done, breaking down some 3500 colleges and universities by annual cost, graduation rate, median amount borrowed and most importantly, student-loan default rate. In this context we feel quite bad for the students who graduate from ICPR Junior College of Puerto Rico (or rather the 52% of them who graduate), with a modest $2,250 in student loans to cover the otherwise manageable tuition of $7,158, as a mindboggling 62% of them end up defaulting on their loans!
"The delinquency rate today on student loans that were originated from 2005-2007 is 12.4 percent. The comparable figure for student loans that were originated from 2010-2012 is 15.1 percent, representing an increase in the delinquency rate by nearly 22 percent....This situation is simply unsustainable and we’re already suffering the consequences,” said Dr. Andrew Jennings, FICO’s chief analytics officer and head of FICO Labs. “When wage growth is slow and jobs are not as plentiful as they once were, it is impossible for individuals to continue taking out ever-larger student loans without greatly increasing the risk of default. There is no way around that harsh reality.”
While the world and their cat believes that Mario Draghi saved the world last year - and continues to do so with his open-ended promise to do "whatever it takes" whatever that means (and the market's "positive contagion"). However, the reality, away from a sovereign-bond implied view of the world - with short-dated Spanish bonds now at 26-month low yields (whereby these bonds are sucked up wholesale by an ever more concentrated and self-satisfying group of European banks) is far different. As these two charts show, not only does Draghi's decision not to lower rates (when inflation and unemployment - both more 'real-world economy'-impacting items) indicate Taylor-Rule-esque that rates need cutting; but while banks get all they want (and more) from his over-flowing cup or collateralization and repo, credit extension in Europe continues to slide ever more negatively. Yes, Draghi saved the banks (for now) but, just as the scariest chart shows, Europe is very far from saved; and for those looking at TARGET-2 imbalances, the risk remains, it has merely shifted to the core.
The credit markets this week already look very different to how they ended last year. As BofAML's Barnaby Martin notes, beta-compression, flatter curves and credit outperformance versus equity have all been abundant themes of late. Relative value is still there, when one looks closely, but is unfortunately not what it used to be. He adds that "things in credit have started to feel a lot like 2007 again," and while he believes the trend is set to continue (though slower) and the liquidity-flooded fundamentals in the high-yield bond market have been holding up well, it is trends in the leveraged loan market, that continue to deteriorate, that are perhaps the only canary in the coal-mine worth watching as global central bank liquidity merely slooshes to the highest spread product in developed markets (until that is exhausted). The rolling 12m bond default rate among European high-yield issuers fell to 1.8% in December, whereas loan default rates rose to 8.5%. With leverage rising, the hope for ever more greater fools continues, even as everyone is forced into the risky assets.
How To Profit From The Impending Bursting Of The Education Bubble, pt 1 - A Bubble Bigger Than SubprimeSubmitted by Reggie Middleton on 01/03/2013 13:55 -0500
Truly ironic - anyone receiving a REAL business/finance education would be able to run these rudimentary calculations themselves, thereby invalidating the very diploma they are seeking