Student Loans

The big story this past week, besides the annual State of the Delusion speech by Barack “It won’t add a cent to the deficit” Obama, was the fate of the passengers on the Carnival Triumph as their skyscraper sized ship was left adrift at sea for days without power. The ordeal at sea of the Carnival Triumph and the leadership displayed by the Carnival management and executive officers is a microcosm of our declining empire. Rather than deal with our reality, Obama chose the Carnival Cruise Line method of public relations - misinformation, denial and delusion. He has embraced the Big Lie concept as if he had created it. Our cruise of illusions and delusions is headed for troubled water. The math challenged citizens on this ship have been enjoying the 24 hour pizza buffet without the labor required to pay for the bounty. This voyage is reaching an end and the bill is coming due. The engine is on fire but the captain is telling us all is well. Eventually, everyone will know the captain lied.

At some point, absorbing more information about the unsustainability of modern society yields diminishing returns. It becomes emotionally draining and thus counterproductive. Part of this exhaustion results from recognizing our powerlessness within the Status Quo, where independent thinking and structural innovation are intentionally winnowed out as threats to existing institutions and industries. Another part arises from the burden of knowing that the supposedly permanent Status Quo is far more vulnerable than generally believed. This is the psychology of knowing what lies ahead in The Burden of Knowing. These 'burdens of knowing' can diminish the small but real joys of the present - anti-thesised by an attitude such as “don’t worry; be happy.” And it certainly makes sense when life is still comfortable and enjoyable. But the philosophy of “thinking about the future is a downer, so I live in the present” ultimately rests on a false confidence that the future will take care of itself. Though Keynesian economists argue that nations are not like households, in truth debt/financial fragility is scale-invariant, meaning that rising debt, a high cost basis, and zero savings/investment lead to fragility in households, enterprises, communities, and nations alike.

If anyone was hoping that in the peak holiday month of December the US consumer would finally open up the purse strings and "charge" everything, we have bad news: in the last month of 2012 revolving consumer credit dipped by some $3.6 billion, a reversion of the modest increases seen in November and October, and the biggest decline in credit card debt since July of 2012. Yet overall consumer credit rose by some $14.6 billion and beat expectations of a $14 billion increase. Why? Because as we have been warning for quite a while, everyone is now piling into student debt (and NINJA Uncle Sam subprime car loans). Sure enough, non-revolving credit soared by $18.2 billion in December - a monthly record for this time series since its revision several months back - and shows that when it comes to levering up, few are using their credit cards, as increasingly more opt to rotate proceeds from their "student loans" into everyday purchases.

“Facts do not cease to exist because they are ignored.” – Aldous Huxley

The entire system is corrupt to its core. Both political parties, regulatory agencies, Wall Street, the Federal Reserve, and mainstream media are participants in this enormous fraud. They grow more desperate and bold by the day. The lies, misinformation and propaganda being spewed on a daily basis become more outrageous and audacious. They are using the Big Lie method on a grand scale. They frantically need to lure the muppets into the stock market and the housing market to keep the game going a little longer. You can sense we are reaching a tipping point. The system they have created is mathematically unsustainable. Therefore, it will not be sustained.

Back in 2007, at the peak of the credit and housing bubble, Wall Street knew very well the securitization (and every other) party was ending, which is why the internal names used for most of the Collateralized Debt Obligations - securitized products designed to provide a last dash trace of yield in a market in which all the upside had already been taken out - sold to less sophisticated, primarily European, investors were as follows: "Subprime Meltdown," "Hitman," "Nuclear Holocaust," "Mike Tyson's Punchout," and, naturally, "Shitbag." Yet even in the last days of the bubble, Wall Street had a certain integrity - it sold securitized products collateralized by houses, which as S&P, and certainly Moody's, will attest were expected to never drop in price again. But one thing that was hardly ever sold even in the peak days of the 2007 credit bubble were securitizations based on personal-loans, the reason being even back then everyone's memory was still fresh with the recollection that it was precisely personal-loan securitization that was at the core of the previous, and in some ways worse, credit bubble - that of the late 1990s, which resulted with the bankruptcy of Conseco Finance. Well, in a few short days, those stalwarts of suicidal financial innovation Fortress and AIG, are about to unleash on the market (or at least those who invest other people's money in the absolutely worst possible trash to preserve their Wall Street careers while chasing a few basis points of yield) the second coming of the very worst of the last two credit bubbles.

We have not been shy about exposing the massive (and unsustainable) bubble of credit being blown into the economy via Student Loans from the government. We have not been afraid to note the dramatic rise in delinquencies among these loans - and the implications for the government. However, as Bloomberg reports, it appears the impact of this exuberance has come back to bite the colleges themselves. In what can only be described as a vendor-financing model, the so-called Perkins loans (for students with extraordinary financial hardships) have seen defaults surging more than 20%. The vicious circle, though, has begun as the ponzi of using these revolving loan funds to 'fund' the next round of students is collapsing thanks to the rise in delinquencies. Schools such as Yale, Penn, and George Washington are becoming very aggressive at going after delinquent student borrowers. While financially hard-up graduates complain of no jobs, the schools are not impressed: "You could take a job at Subway or wherever to pay the bills ... It seems like basic responsibility to me," but perhaps that is the point - avoiding responsibility is seemingly rewarded in the new normal.

The last time prices reached only $95 a barrel WTI the Whitehouse started talking up the SPR release only six months ago.  Now that gas prices are higher than ever for this time of year and set to go higher, and we haven`t heard a single mention of the SPRs? 

• 'London Whale' Sounded an Alarm on Risky Bets (WSJ)
• Deadly Blast Strikes U.S. Embassy in Turkey (WSJ)
• Abe Shortens List for BOJ Chief as Japan Faces Monetary Overhaul (BBG)
• Endowment Returns Fail to Keep Pace with College Spending (BBG) - More student loans
• Mexico rescue workers search for survivors after Pemex blast kills 25 (Reuters)
• Lingering Bad Debts Stifle Europe Recovery (WSJ)
• Peregrine Founder Hit With 50 Years (WSJ) - there is hope Corzine will get pardoned yet
• Deutsche Bank to Limit Immediate Bonuses to 300,000 Euros
• France's Hollande to visit Mali Saturday (Reuters)
• France, Africa face tough Sahara phase of Mali war (Reuters)
• Barclays CEO refuses bonus (Barclays)
• Edward Koch, Brash New York Mayor During 1980s Boom, Dies at 88 (BBG)
• Samsung Doubles Tablet PC Market Share Amid Apple’s Lead (BBG)

As I noted in an article published Thursday morning, the government bought three quarters of a percentage point worth of growth in the third quarter leading several hapless commentators to opine on national television that the U.S. economy was not only on solid footing but was in fact experiencing "above trend" growth. Of course if you're the mainstream financial media what is good for the Q3 goose is not necessarily good for the Q4 gander and so when fourth quarter GDP printed in contraction territory Wednesday, viewers were encouraged (much to the chagrin of a predictably irate Rick Santelli) to discount "volatile" government consumption expenditures and focus only on the components that made a positive contribution.

"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.”

Hope is dying in the US. The performance of financial markets affects everyone. For savers and investors, these markets represent the means to an improved life, at least as they define it. We are twelve years into this new century and Americans are losing their hopes, dreams and aspirations. Twelve years in, the S&P 500 has returned a total of 14%. That puny return has not come close to covering the decline in purchasing power of the dollar during the same period. The country's financial condition is deplorable and cannot continue much longer. So, too is virtually everything else the government has touched whether it be education, Amtrak, the post office, Social Security, Medicare, ad nauseum. Nothing government has done has not been a Ponzi scheme dependent upon additional theft from taxpayers to keep going. The system is now broken. There is no one to blame for this other than government. Despite this obvious conclusion, government is still seen to be a savior by a large proportion of the country.

One of the first axioms of analysis is: "Garbage In, Garbage Out"! If your data is flawed, everything you do with it and the decisions stemming from it are flawed and dangerous to your financial health. Experienced analysts will often be found relentlessly checking, rechecking and validating their inputs and assumptions. If only our economists and the sell side analyst community were this diligent. But then it isn't their money. Only a year-end bonus for the 'extras' in their life is at risk. If economic practitioners were held to higher standards of accountability, they simply wouldn't accept the raft of fundamental data points that are the pillars of most economic assessment. Markets have become so dysfunctional with so much cheap money chasing so few real opportunities, that collateral values within the rehypothecation process are now in jeopardy and exposed to collateral contagion. The question is - what would things look like if the Fed wasn't engaged in Monetary Malpractice?

Smarmy is gone.

Ours is a dysfunctional debt-based Empire that buys the complicity of its debt-serfs with entitlement bread and circuses. The road to debt-serfdom is paved by the banks and enforced by the Central State. If there is any point that is lost on ideologues, Progressive and Conservative alike, it is this: the first-order servitude and second-order tyranny of debt-serfdom can only occur if the banks' power is extended and protected by an expansive Central State.

After digesting the opinions of the shills, shysters and scam artists, I am ready to predict that I have no clue what will happen during 2013. The fog of uncertainty is engulfing the nation, making consumers hesitant to spend and businesses reluctant to hire or invest. Virtually all of the mainstream media, Wall Street banks and paid shill economists are in agreement that 2013 will see improvement in employment, housing, retail spending and, of course the only thing that matters to the ruling class, the stock market. Even among the alternative media, there seems to be a consensus that we will continue to muddle through and the day of reckoning is still a few years off. Those who are predicting improvements are either ignorant of history or are being paid to predict improvement, despite the overwhelming evidence of a worsening economic climate. The mainstream media pundits, fulfilling their assigned task of purveying feel good propaganda, use the 10% stock market gain in 2012 as proof of economic recovery. The facts prove otherwise... Every day more people are realizing the con-job being perpetuated by the owners of this country. Will the tipping point be reached in 2013? I don’t know. But the era of decisiveness and confrontation has arrived. The existing social order will be swept away. Are you prepared?