Student Loans

Curious how the student loan bubble, just shy of $1 trillion, and now the largest debt portion of the US household non-mortgage wallet,  bigger than credit card and auto loan debt - affects your state? Then the following three charts just out from the NY Fed are for you. What the data shows is that less than 12% of the population in Hawaii has student loans, while the record is in D.C. at over 25%. All those "students" in the nation's capital. Really? But that's not all. While the average loan balance is under $21,000 in Wyoming, it is once again highest in D.C., with the average loan balance over $40,000. It is almost as if D.C. "students" have learned how to game the system.

It is not immediately clear how much of the net drop in mortgage balances from $8.033 trillion to $7.932 trillion was due to defaults as opposed to actual pay downs and non-credit rating impairing deleveraging. We do know that a whopping $577 billion in new mortgages were opened in Q1, the highest since Q3 of 2007.  Which means that some $680 billion in mortgages should have been extinguished in one quarter. If this happened primarily via defaults and discharges, one can only wonder just how the bank balance sheets were not decimated in Q1. As a reminder, half a year ago we observed that the bulk of US mortgage debt reduction has come from defaults not from actual deleveraging.

A panel of bankers warned the Fed in February that their extreme monetary policy is forcing institutions to "accept greater credit-risk" than "makes sense" and student debt and farmland prices are in a bubble. We first started to explain the bubble in student debt over two years ago and since then the bubble has become larger (and the underlying structure much more fragile as delinquencies soar). Farmland rose in price over 16% last year (according to the Chicago Fed) and has surged 8% per annum over the past decade. Credit risk is now at levels associated with the CDO-driven liquidity excess of 2006. "Further accommodation is not warranted," the minutes of this meeting show - uncovered by Bloomberg via the FOIA. The comments should cause Bernanke and his merry men to pause for breath but of course it is likely what he wanted all along. "Growth in student debt... has parallels to the housing crisis," and "agricultural land prices are veering further from what makes sense," are just two of the bankers' comments, adding that this "will ultimately result in higher loan losses," which is odd since every bank is adjusting down its loan-loss-reserves and juicing earnings.

The March consumer credit headline was a disappointment, increasing by just $7.97 billion, on expectations of a $15.6 billion increase, with the February total revised lower to $18.14 billion. So far so bad. It gets worse when one peeks beneath the surface and finds that discretionary consumer credit in the form of credit card and other revolving loans posted its first decline of 2013, dropping by $1.7 billion, the biggest decline since December's 2.1 billion. So what rose: why debt for purchases of Government Motors and student loans of course, which increased by $9.676 billion in March. In other words: the student bubble keeps getting bigger, more and more GM cars are being bought on subprime credit, while the vast majority of Americans can't even afford to charge toilet paper purchases as the discretionary deleveraging continues.

On the surface, the Status Quo appears stable, if not quite healthy. This stability is illusory, however, for the Status Quo has a fatal disease: diminishing return. The basic idea of diminishing return is closely related to marginal utility and marginal return: the more capital, energy and labor committed to a project, the lower the return/yield/output. The input needed to keep the Status Quo stable must be taken from other potentially more productive investments. Taxes notch higher as the state scoops ever greater sums into its maw to fund its failing fiefdoms and diminishing-return cartels, and it borrows trillions of dollars to fill the gap between tax revenues and ever-rising input costs. All that borrowed money has a cost, too, of course--interest. The costs of maintaining a sclerotic, cartel-state Status Quo infected with incurable diminishing returns eventually exceed the carrying capacity of the real economy and the Status Quo collapses in a heap.

Yesterday we showed the good side of college by presenting those majors that result in the best starting salaries fresh out of college. Now the bad side.

In 2007 a small number of French hedge funds imploded over sudden losses stemming from highly leveraged bets made on the unstoppable subprime mortgage market. At the time, a few saw the writing on the wall; but many simply wrote it off as just another over-levered hedge fund and the subprime mortgage market was 'fine'. Fast forward six years and as we have discussed numerous times (most recently here and here) there is a bubble, potentially far bigger than subprime, in student loan debt. As one of the last remaining outlets for state-sanction credit creation, this is a big deal; but, of course, the popping of the bubble (or even a slight leak) is eschewed since there is so much 'reach for yield' and the Fed's got your back. That is until this week. As WSJ reports, Sallie Mae (SLM), the nation's largest non-government student lender just cancelled a $225 million debt offering as investors  decided they simply were not getting paid enough for risk - amid rising student loan defaults. Simply put, there's a limit to what investors will tolerate.

Bulls are still in charge of markets despite the shallow 2 to 3% correction the previous week. The conundrum for most investors remains, where else are you to put your money despite obvious risks and deceptive conditions? The Fed is forcing people into stocks, period.

Add retail sales to the ongoing economic US crunch, which, just as predicted here in February, would start taking place once the regular seasonal adjustment rotation out of the "strong" winter season into spring started and once the now annual European swoon in the spring spread to the US, as it always does. Sure enough, March retail sales missed across the board, with headline down -0.4% (exp. 0.0%, Feb revised lower to 1.0%), ex autos down -0.4% as well (exp. 0.0%, last 1.0%), and ex autos and gas -0.1, on expectations of a +0.3%. This was the biggest miss ex autos since June and the biggest drop since June as well. More troubling perhaps for the true strength of the US consumer, electronics sales dumped -3.2% Y/Y (confirms the collapse in PC sales reported yesterday), while general merchandise sales declined by 4.9% year over year. As we have said all along, the US consumer - that very levered driver of 70% of US GDP - even when factoring in the trillion + in student loans, is getting very much tapped out. But at least car sales, funded by the still very generous Federal Reserve and Uncle Sam, of course, are merrily chugging along at a +6.5% Y/Y pace.

Debt-serfdom and the dominance of Financial Power are two sides of the same coin. Let's be clear about three things: 1. Too Big to Fail financialization is the metastasizing cancer that has crippled democracy and capitalism; 2. Financialization feeds on expanding debt and cannot survive without it; and 3. Debt is serfdom. Debt is the mechanism of the Financial Powers' dominance and the chains of our serfdom. Eliminate debt and you eliminate the foundation of banks' power and the financial bondage of serfdom. Though it would dearly love to, the State cannot force anyone to take on debt except as taxpayers. We do not have to remain debt-serfs, nor accept our servitude as unavoidable or fated. Debt = serfdom. There is another way to live, frugally, with only short-term debts that are paid off in a few short years. We either accept the consumerist-narcissist debt-serf programming or reject it. We are neither victims nor bystanders. The choice is ours.

It is clear now that we must have been wrong about the economy. No more proof is needed than the fact the Dow has gone up 1,500 points. Everyone knows the stock market reflects the true health of the nation – multi-millionaire Jim Cramer and his millionaire CNBC talking head cohorts tell us so. Ignore the fact that the bottom 80% only own 5% of the financial assets in this country and are not benefitted by the stock market in any way. It is time to open your eyes and arise from your stupor. Observe what is happening around you. Look closely. Does the storyline match what you see in your ever day reality? It is them versus us. Whether you call them the invisible government, ruling class, financial overlords, oligarchs, the powers that be, ruling elite, or owners; there are powerful wealthy men who call the shots in this global criminal enterprise. No amount of propaganda can cover up the physical, economic, social, and psychological descent afflicting our world. There’s a bad moon rising and trouble is on the way.

The short answer, despite the pleadings of an over-stuffed body of ex-students facing inexorable debt loads, is "no". However, as Professor Daniel Lin notes in this brief clip, debt forgiveness does not resolve the underlying causes of rising student debt, and therefore cannot prevent future debt problems. Instead of debt forgiveness, he suggests making student loans like other types of loans: dischargeable in bankruptcy. This places the burden on lenders to ensure that students are not taking on more debt than they can handle. While it would lead to a reduction in the amount of loan dollars awarded and theoretically increase interest rates (as 'risk' is priced in from the current no collateral, no underwriting, no credit check idiocy currently), these are good things - naturally incentivizing borrowers to be more careful right now, and in the future, which puts pressure on colleges and universities to control their costs.

Here's a Cheat Sheet to Read While You're Listening to JP Morgan's "Whale" of a Tale Testimony to Congress

With the marked shift in "coolness" surrounding smartphones away from Apple and toward Samsung (one of the primary reasons why AAPL is trading at or near its 52 week low and at the price target set for it by Jeffrey Gundlach back when the Smart Money crowd was advising their soon to be broke viewers to sell AAPL puts day after day), many wonder if this is merely a drop in innovation by Apple under it new, less visionary and far more Wall Street-friendly CEO, or is it something else? A possible answer is that is may be something as trivial as marketing. As the WSJ reports, in 2012 Samsung for the first time outspent AAPL in advertising dollars, handing out $401 million to raise brand awareness compared to Apple's $333 million.