Rosenberg Takes On The Student Loan Bubble, And The 1937-38 Collape; Summarizes The Big Picture

Tyler Durden's picture

Few have been as steadfast in their correct call that the US economy sugar high of the first quarter was nothing but a liquidity-driven, hot weather-facilitated uptick in the economy, which has now ended with a thud, as seen by the recent epic collapse in all high-frequency economic indicators, which have not translated into a market crash simply because the market is absolutely convinced that the worse things get, the more likely the Fed is to come in with another round of nominal value dilution. Perhaps: it is unclear if the Fed will risk a spike in inflation in Q2 especially since as one of the respondents in today's Chicago PMI warned very prudently that Chinese inflation is about to hit America in the next 60 days. That said, here are some of today's must read observations on where we stand currently, on why 1937-38 may be the next imminent calendar period deja vu, and most importantly, the fact that Rosie now too has realized that the next credit bubble is student debt as we have been warning since last summer.

First, Rosie on the big picture:

An Accounting Of The Macro Risks


We have been on the receiving end of endless analysis suggesting that double- dip recession risks in the U.S. are either zero or completely trivial. The primary reasons given for this view are: the positively sloped yield curve, negative real short-term rates, no sign of inventory excess and no sign of a flattening in the trend in the leading indicators (aside from the Economic Cycle Research Institute's weekly leading index).


Not too long ago, we were sent one particular Street report that began with a comment on how the analysis incorporated data from the last eight recessions in the United States. But why are these eight recessions in the post-WWII era relevant? This past recession was not just a blip or correction in GDP due to a manufacturing inventory-led recession, it was a traumatic asset price deflation and credit contraction of historic proportions.


Take us at our word, if Ben Bernanke is worried, it is not about what drives a post-WWII cycle. He has the 1937-38 brutal downturn in mind and this is actually a much more appropriate template, notwithstanding the changed structure of the economy.


Heading into both the 1937-38 and the recent downturn, there was no sign of inventory excess (prior to the '37-'38 recession, inventories contributed 20% to the economic expansion; in 2009, it was over 60%). And, going into the 1937-38 meltdown in the economy and the stock market, the U.S. yield curve was positively sloped to the tune of 240bps. But why do so many cling to the "yield curve" in a credit cycle in any event?


Just as the flattening yield curve and tightening Fed (the funds rate did rise 425bps) were no match for the parabolic credit expansion from 2003 to 2007, it would seem foolhardy to revert to the yield curve's steepness today as some bellwether leading indicator when we are on the other (darker) side of the credit cycle. At best it gives the banks another way to generate low-multiple trading profits, and that's about it.


Moreover, where were "real" short-term interest rates heading into the unexpected 1937-38 collapse? How about minus 200bps? What was at play in that recession was not inventories, the curve or real rates — it was the sudden withdrawal of fiscal support after years of massive New Deal stimulus.


Let's look at the situation from a top-down view. During this statistical recovery from the 2009 bottom, real U.S. GDP growth averaged 2.4% at an annual rate, and of that, 0.7 percentage points came from inventories. Excluding inventories, otherwise known as "real final sales" average annual real GDP growth was 1.7%, on average — is the weakest post-recession recovery on record. This despite a 10% deficit-to-GDP ratio, a government debt-to-GDP ratio rapidly heading to 100%, a near zero Fed funds rate, record low mortgage rates, an unprecedented tripling in the size of the Fed balance sheet, shifting accounting rules to help rejuvenate profit growth in the financial sector, cheap and easy FHA financing to virtually anyone who wants to buy a home, relentless government pressure on banks to modify defaulted loans and bailout stimulus galore.


Well, what's past is past. Where are we going? It's pretty clear from the manufacturing components of the last payroll report and the latest ISM index that the inventory cycle is either reaching its peak or it already has.


We can see from the latest auto sales report and auto buying plans in the confidence surveys that the bolstering economic impact from the revival in the motor vehicle sector has run its course.


As for housing, sales and mortgage purchase applications are still languishing despite mortgage rates at record low levels and this also attests to the degree of excessive demand from the prior bubble that is still being worked off. Moreover, commercial construction is beset by high and still-rising vacancy rates in the office and shopping centre space.


It would be nice to see an export boom but the overseas economies, to varying extents, are feeling the effects of last year's tightening in monetary policy (emerging Asia) or the current tightening in fiscal policy (submerging Europe). And, although the U.S. consumer is not exactly rolling over, spending fatigue seems to be setting in, along with a natural rise in the personal savings rate.


Perhaps U.S. capital spending will be a lynchpin, but at only 7% of GDP, it will contribute a handful of basis points to headline growth.


Then we come to the near-20% chunk of the U.S. economy, the government sector. Two-thirds of that comes from the beleaguered state and local government sectors, which are in a full-fledged retrenchment mode as it cuts services, raises taxes, and lays off civil servants to the tune of 10,000 month in and month out, to reverse the flow of red budgetary ink.


After contributing about one percentage point annually to OECD growth over the past three years, fiscal policy in the industrialized world is set to subtract the same amount in the coming year. In a world of small numbers, that's pretty big.


In the U.S., the fiscal withdrawal will be closer to four percentage points of GDP next year, unless more cans are kicked down the road after the November election. So, if the peak of inventory contribution is behind us, and all we have left is a baseline growth trend in real final sales of less than 2%, then economic contraction next year becomes a very distinct possibility. Besides, for any president, new or incumbent, it makes perfect sense to get the bad news out of the way in year-one of the election cycle than year four.

How the Gluskin Sheff strategist makes sense of it all:

What we have on our hands right now is a recovery built of straw instead of bricks. An economic expansion and bull market built on rampant expansion of the Fed and Federal governments' balance sheet is neither sustainable nor desirable. I am convinced that we will, before long, be replaying something along the lines of the reversal of the tech mania and the reversal of the housing mania, which were equally unsustainable.

Most importantly, Rosie's take on the student debt bubble.

The Next Credit Bubble


Could well be in student debt, where outstanding loans surged $117 billion last year to over $1 trillion. More than 80% of 18-24 year olds that have taken out college loans still have a balance and 30% have more than 20% owing. This overhang has far-reaching implications beyond Sallie Mae's balance sheet — it is also a reason why the young first-time homebuyer is notably absent from the real estate market and why this may well remain the case for some time to come as this key demand group works off the mountain of student debt before applying for a mortgage loan. For a sense of how this student loan saga is unfolding, also have a look at Trying to Shed Student Debt on page A3 of the weekend WSJ — as the deleveraging cycle is about to take on an entirely new deflationary dimension.


The lack of demand from the traditional first-time homebuyer group (the U.S. real estate market is really getting most of its underpinnings from investors buying up distressed units to then rent out) is compounding the inventory overhang that is, in turn, maintaining downward pressure on home prices in the vast majority of markets.


Take a look at page A2 of today's WSJ (Housing Ends Slide but Faces a Long Bottom): banks still own 450,000 foreclosed properties, there are another 2 million units right now in the foreclosure process and there are an additional 1.7 million homes in some form of delinquency. This means total supply (actual and potential) of over 4 million units and that does not include the near-record 3.6 million vacant units being held off the market for "unspecified reasons". This means a total vacancy rate in the owner-occupied sector of between 5% and 10% which is huge excess supply and likely a dead-weight drag on housing values for some to come, even if demand does manage to soon outstrip depleted rates of new construction.

Source: Gluskin Sheff

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Alcoholic Native American's picture

Remember kids,  You gotta have money to make money.


JamesBond's picture

student loan forgiveness is the new political football 

A Lunatic's picture

Exactly, and largely manufactured by scumbag politicians and snot nosed socialist brats. Those who can, do. Those who can't, vote for a living.

SemperFord's picture

No loan forgiveness for homeowners who actaully vote so I doubt it but you never know!!!

dark pools of soros's picture

they'll just lower the interest and tell everyone it's a big win so the sheep goes and works it off for 30 years and rents a shithole

or just lives with grandparents on SS and helps them carry the groceries in..  you would think this could all lead to some real positive change in social behavior with so many people having free time to be creative and inspiring but nah..  they'll just be glued to the tv and internet

Sudden Debt's picture

But but... Krugman said inflation creates jobs right?

Caviar Emptor's picture

I know! I'm as confused as you are.....

Antifaschistische's picture

Remember, some will argue that there is no such a thing as inflation...but only currency devaluation.   If a currency is being devalued, it is lowering the real cost of labor when mega corps are fixing labor costs or keeping labor costs below currency counterfeiting/devaluation/inverse inflation rates.   So, if you can lower the real cost of labor, in some cases it will stimulate hiring, but only because all workers are losing real income collectively as real prices are increasing.

Winners:  First spenders of counterfeit monies (Fed, Banking Industry, Government, Mega Corps)

Losers: Everyone else.

yogibear's picture

How would Krugman know? Has he ever had a real job?

TheSilverJournal's picture

There's nowhere for the money to go. All of the bad economic data and no market sell off. Why sell euqities and commodities to go into bonds when bonds yields are this rediculously low?

Hansel's picture

Truth.  A 1.9% yield translates to a P/E of 52.

Sudden Debt's picture

People who took out the loans must repay them.
Spending it while binchdrinking and 4 years later wondering how to repay it is just a bummer.

Why not go to work for 4 years, save AND THAN GO TO COLLEGE?

Caviar Emptor's picture

In our budding fascist/neo-feudal state, we should send all indebted students to work 4 years in the Alberta tar sands or fracking in North Dakota. There. FIxed it. 

RoadKill's picture

How is that facist? They borrowed money and now are unwillimg to take a job to repay it. Their are great jobs in the Bakken, Tar Sands, Marcellus, offshore, in the Middle East and in Truck Driving. If we had a populace WILLIMG TO DO REAL WORK FOR REAL PAY we wouldnt have a lot of the problems we do? Go work a job thats not your dream job because you want to pay your way and pay what you owe. Sounds like the great pre- Great Society work ethis that built this nation.

Im not saying we round them up and force them to go at gun point, but with out 99 weeks of unemployment paymrnts, food stamps, unearned income tax rebates and debt forgiveness - youd be surprised how much more mobile labor will become. We are paying people not to work and wonder why unemployment is so high.

Himt it started coming down the minite we reduced the number of weeks you could collect unemployment checks

Caviar Emptor's picture

Oh I was saying force them. We would provide food and rent stamps, redeemable at the company store of course. But not for underarm deodorant or hemorrhoid cream 

YC2's picture

Or their parents holding the debt pretending they are hard working and rich could just take the haircut, since they fed their young into the slaughterhouse in the first place.

lotsoffun's picture

and friday, big bad bama will announce the unemployment rate, and lie after lie, it will be DOWN!

because all the people that fell off will be 'early retirement'.  without benefits of course.


lotsoffun's picture

or do as the EU countries do - contribute.  either join the army free, or drive an ambulance or ride along with the police or do something else constructive to society.


Shazam342's picture

By the time one does aas you suggest, SD, the cost  has moved faster than one can save for it, so the inclination is to get in now for a degree.  After all, the non degree jobs have gone overseas, and one's purchasing power from the jobs that remain is yick, so why not get a degree?

garypaul's picture

Yes I'm starting to fall into the anti-college camp myself. What convinced me is the story of TAYLOR WILSON. At the age of 14 he built a nuclear fusion reactor in his garage and then used that to build a medical isotope machine that will save the lives of cancer patients. What were the college people doing during this time? What did the billion-dollar labs produce?

Absinthe Minded's picture

You can't cure cancer, they make too much money from treating it.

kekekekekekeke's picture

that makes so much more sense and I think everyone would be happier and better-adjusted


docj's picture

Sadly, I'm having trouble reading anything at ZH these days as I'm starting to get banner ads for "", which is perhaps ironically juxtaposed against ads on the same page screaming "DATE 50+ SINGLES!". Sigh.

Jendrzejczyk's picture

Time to make that appointment with the eye doctor? The AARP can find you a local one at a great discount. ;)

Sudden Debt's picture

Mine says 18 year old Asian chicks...
I guess our profiles are a bit different...

lotsoffun's picture

you live in heaven and consenting is legal. we live in disney land and minnie mouse doesn't exist.


headless blogger's picture

I keep getting the Michelle Obama ad selling Barak Obama for President :(

And a woman with a white blood stained t-shirt saying "I'm OK". It's almost comical to see what you get...kind of like forturne cookies

owensdrillin's picture

I'd like to get one of Michelle in the white T-shirt and it says "I'm not OK"

docj's picture

Forgot all about that! Works like a charm.

Done and done. Thanks, rack.

TheFourthStooge-ing's picture

Do direct contributions to such sites mitigate the devastation?

I would think that a direct donation of twenty bucks each year would exceed the potential ad revenue from my visits, although I concede that I don't know enough about online advertising rates to be sure.

I'd much rather support the site with direct contributions, as I find advertisements with any kind of motion, animation, or "active content" exceptionally distracting and annoying.


docj's picture

Well, that's a good point.

Got a tip-jar I can hit instead? I'd happily contirbute.

EDIT: Oh, never mind. That "donate" link at the top of the page seems to work just fine. Kicked-in $25 - that should be good for a month or two!

kridkrid's picture

Now they are really watching you.

BigJim's picture

Why Ad Blocking is devastating to the sites you love

Tyler: maybe... you could block access to Zerohedge if people are blocking ads, unless they pay a subscription fee?

ie, one either pays for access by allowing ads, or one pays directly. No free lunches - I mean, isn't that pretty much our philosophy 'round here?

Dr. Kenneth Noisewater's picture

<-- Mo money

<-- Mo problems

flyonmywall's picture

The student loan disbursement process is yet another transfer of money from the government to fund personal consumption. I see it all the time. Student takes out the maximum amount of money for the year, shows up to 3 classes, then dissappears.

8 weeks later, the student drops all classes, and is allowed to withdraw, thus keeping the money, and not affecting their grade point average.

Rinse and repeat the next semester. This money isn't being used for college expenses. It's being used to pay rent, gas, and to buy a stinkin' iPad.

Welcome to ponzinomics 101. A University's financial aid office's job is to keep the ponzi scheme going, getting the student to sign on the dotted line, with a wink and nod from the Registrar's office.

It's a total ponzi scheme.

cossack55's picture

It may be of much more educational benefit for the "students" to learn fraud and manipulation at the earliest age possible, thus, making them more ready for the US non-labor force.

dick cheneys ghost's picture

"Citibank, Discover Bank and The Student Loan Corporation are tricking former students into believing that their monthly payments have been cut when in fact only the payment toward principal has been lowered, generating greater interest income for the banks over the longer life of the loan, according to a federal class action."

Diogenes's picture

So when they graduate they are not only deeply in debt but they are still stupid. Double rip off.

CaptainObvious's picture

+1 for the belly laugh

I don't think people who don't understand every clause of the contract for student loans should be given student loans.  But then, the bankers wouldn't have any clients because they don't like to lend to people who understand the documents.

Antifaschistische's picture

Financial Aid Eligibility should, in all cases be tied directly to a schools performance rating in placing graduate into jobs, within their "field of study" or "degree/major".   All degrees not achieving performance minimums for placement become ineligible for student loan dollars for excluded degree programs.  No more loans for Home Economic majors or photography or hospitality if these schools are not placing students in jobs in their degree field.

This will shut down 80% of the student loan business...which is exactly why it will never happen.

lotsoffun's picture

and big bad bama got their vote.  it's pretty funny.  so, here look at this.  apple pays no corporate taxes.  google pays no corporate taxes.  i'm old.  i wish apple and google would go away.  i pay taxes.  big bad bama lends students money.  lots of it.  they get the cash, cash out, buy toys, play google, play apple.  loan goes bad.  who pays.  me.  nice.  i like it.  who get the vote?  big bad bama.  who loves paying no taxes and getting big bad bama to go after them? apple, google.   anybody seen jon corzine lately?


disabledvet's picture

the "second leg down" will be "for Europe, Japan and China." The "evil Chairsatan" has called this one just response to Zero Hedge criticism i might add. And "i hear they were watching in addition to listening" as well.

Rainman's picture

US home ownership is back to the 1997 level.

It will be lower by 2017. It will be lower by 2020 ".......says PIMCO's mortgage bond boss.

urbanelf's picture

I'm scared that the bursting of the Student Loan Bubble will mean a future exodus of our brightest young minds out of the US.

seek's picture

The bright ones may leave because they're bright, but not due to financing -- they're capable of working or getting non-gov't grants because of being bright. The bursting of the loan bubble is going to take the party kids out of school and put them on the street, though. Their job prospects weren't great to begin with, and will just get worse.

I'm far more concerned with young people having no upward options -- no school, no job -- getting disaffected and either turning to crime or getting pissed off and doing something about it. This is the exact time you'd start seeing drafts for internal security forces and/or another very large manufactured war. I can't help but wonder if the US and China wouldn't mind burning off a chunk of their younger male population for a few years fighting each other.

Jendrzejczyk's picture

It won't be just the "party" animals that are going to get pepper sprayed by the new reality. Only the genetically superior are going to dodge this, and even a few of them are going to get caught up in this tsunami.