Student Loans

Don't think the Status Quo will save you, or make good on its vast multitude of promises. Naive faith in promises and fantasies isn't helpful in the real world.

Americans in their 20s and 30s are facing a retirement crisis that could plunge them back into the Great Depression, Blackstone President and COO Tony James said Wednesday. Appearing on CNBC's Squawk Box, James exclaimed "Social Security alone cannot provide enough for these people to retain their standard of living in retirement, and if we don't do something, we're going to have tens of millions of poor people and poverty rates not seen since the Great Depression." According to James, the solution is simple - government-imposed mandatory savings through a Guaranteed Retirement Account which employers are mandated to match (whose assets would be managed by?).

Now that mortgage rates are sliding back to 2015 lows, any sense of urgency from the demand side of the pricing equation has been removed. So what is the alternative? Pushing the supply into overdrive of course, and doing more of precisely what got the US financial system (and the bailed out GSEs) in trouble in the first place: today Freddie Mac, together with Quicken Loans, announced a new lending program, one which would enable "eligible borrowers" and focusing on millennials, to finance a house with a "down payment of as little as three percent."

Forgiving skyrocketing student debt won't solve the real problem which is the soaring costs imposed by a cartel that is failing to prepare students for the economy of tomorrow.

One of the main reasons why the BLS has been massively overstimating job creation ever since great financial crisis, is due to the well-known birth-death adjustment, aka the CES Net Birth/Death Model, which quantitatively is shown on the chart below, has resulted in the "addition" of some 5.3 million jobs, that don't actually exist, but are merely modelled by the BLS which continues to assume the same new business creation/destruction dynamics that existed before the crisis. The is a big problem with this fundamental assumption: it is dead wrong. Here's why...

"We believe that the path of least resistance would be to effectively ban capitalism and by-pass banking and capital markets altogether. We gave this policy change several names (such as “Cuba alternative”, “British Leyland”) but the essence of the new form of QE would be using central banks and public instrumentalities to directly inject “heroin into blood stream” rather than relying on system of incentives to drive investor behaviour."

As the following chart shows, after langushing between $70 and $800 billion in the second half of the last decade, since Q2 2010 US auto loans have been on an absolute tear, and have increased by over 40% in the past five years alone, to just shy of $1 trillion as of June 30!

"When you look at recent graduates with student loans it gets really ugly, really fast. If alumni don’t feel they’re getting their money’s worth, we risk this tidal wave of demand for higher education crashing down."

When risk sold off last week in the wake of the Fed’s so-called “clean relent,” it signalled at best a policy mistake and at worst the loss of any and all credibility. Tonight, Yellen gets a do-over.

The consequences of all this are grim, but the timing is hard to predict. Perhaps the government can somehow borrow amounts that no one previously thought possible. But its creditors will look for repayment. Either the creditors are going to walk away unhappy (in the case of default), or the holders of all dollars are going to be stuck with worthless paper (in the case of hyperinflation), or the taxpayers’ pockets will be looted (the longer things muddle along), or most likely a combination of all three will happen. This will not be a happy story for all but a few of us.

The world is becoming increasingly chaotic and the American people are seeking a leader who can bring order, make tough decisions, and capture the zeitgeist of this moment in history. They are in search of a prophet generation (Boomer) Grey Champion, whose arrival marks the moment of darkness, adversity and peril as the Fourth Turning careens towards its climax. The Grey Champion doesn’t necessarily have to be a good person, but they must lead and display tremendous confidence in their cause and path. Franklin, Lincoln, and FDR have many detractors, but during their Fourth Turnings, they most certainly led, casting aside obstacles (sometimes illegally) and enduring dark days and bleak prospects for success. Is there someone of that stature ready to lead the American people now?

The 2008 global financial crisis was centered on mortgage debt. There was too much of it that couldn’t be repaid. When the value of the collateral – homes – headed down, the bubble popped. Today, consumers have about the same amount of debt. But now the excesses are in auto loans and student debt... and again, the collateral is falling in value.

As we have noted numerous times in the past, there is a Bull market in serfdom. America's Renter Nation has never spent more of its paycheck on rent and as Zumper notes, with rent prices in San Francisco and New York at the highest in the nation, affordability does not seem to exist in these two metropolitan areas. For some idea of the scale, there are actually castles in France and Italy that can be rented for about the same price as average apartments in these cities...

The chart below warrants the question: if an even modest slowdown in Europe's pace of credit creation resulted in unprecedented economic and social upheavals for the "southern" part of the continent, what happens when deleveraging finally hits one of the other places around the globe, be it the BRICs in particular, the EMs in general, or - heaven forbid - the US itself.

With every passing week that money markets rates remain pinned to the zero bound by the Fed, the magnitude of the financial catastrophe hurtling toward main street America intensifies. When the next financial bubble crashes it can only be hoped that this time the people will grab their torches and pitchforks. Stanley Fischer ought to be among the first tarred and feathered for the calamity that he has so arrogantly helped enable.