The Student Loan Bubble Cont’d…

One of the best personalities in the financial world is consistently humorous Josh Brown, otherwise known as The Reformed Broker. Unfortunately, though, sometimes he blogs about more serious or sad subjects, such as his most recent entry titled “The Student Loan Bubble Illustrated.” The article is viewable here. It’s “grotesque,” he says, what the higher education system has become here in America. Tuition has nearly doubled in a decade, 2011 student debt more than encompasses 2001 student debt and for the first time in history, student loan debt is larger than credit card debt. It’s disturbing to think of the trouble one must go through, nowadays, to receive an education that is almost mandatory in today’s workplace to get hired at a respectable job. But what makes it sad, is that nobody really understands WHY! Are tuitions higher because the supply of schools are down? Nope. Can schools charge more because the average household income is higher? Nope. Can schools charge more because students can pay back the tuition easily once graduated thanks to lofty incomes in a prosperous job market? Hellllll no. It’s quite simple, really, a matter of supply and demand; schools charge more because the demand for an education (that is, there are more students) is higher.

In an efficient market, there would be more students for various number of reasons. There is a plethora of jobs all paying desirable salaries, perhaps. Or, secondary education is of higher quality making university and graduate level education easier to comprehend. Whatever the reason, in an efficient market equilibrium would be satisfied at some intersection of supply of schools and demand of schools that is best for all. So why the increasing rate of students? Certainly America isn’t getting smarter at the secondary level, citing this article as a perfect example. And as we all know, the jobs market is a trainwreck right now.

The answer, unfortunately, is government intervention.

A scenario: A bank in the business of making student loan’s is approached by two individuals with aspirations of attending university. Student A comes from a well-off household, capable of paying 70% of the tuition costs and Student B from a broken home that will need 70% of the tuition costs paid for by the bank. Student A can clearly pay back the 30% loan whether he immediately finds a job post graduation or not. Student B, on the other hand, will absolutely have to find not just a job, but a very good paying job, in order to satisfy the repayment demands of the loan. A bank, interested in making money and not going out of business, as a bank should be, is only going to give the loan to student A. And, rightfully so.

But if government enters the situation and starts skewing the market’s equilibrium by subsidizing loans (that is, paying them back should the students default), then BOTH students will get the loan. Unfortunately, this extra demand of schools from students receiving loans that don’t deserve them allows schools to consistently increase costs, because there is an ever-increasing population of students looking for loans AND getting them, thanks to government subsidies. 

I know what you’re saying… “So you’re telling me that two students both capable of handling university will see one succeed and one fail because of costs!?!?”

Well, no. For one, if government subsidies were removed from the equation, school costs would have to come down. Because demand would shift, price would drop in an effort by schools to find equilibrium again. Further, we’d be able to return to an era similar to that of about 40 years ago, where those who had to work their way through school, did it. For example, if student B knew he had demanding loan payments looming over his head, he could work and pay back some of the loan while in school, rather than waiting until graduation. Also, a student coming from a lesser funded household can apply for grants/scholarships, etc., available to only those households that fall underneath a specific umbrella. Lastly, some students would be denied a university level education. These students, though, would be the ones undeserving of such education, having performed unsatisfactorily in secondary school. If you want it, you have to earn it.

In the end, this dilemma of government intervention via subsidies is the same that drove speculation in housing that eventually led to a devastating crash and by the looks of it, the student debt market is going down the same path.

This is my first foray into Austrian Economics on this blog. Austrian Economics is rooted in laissez-faire economic thought. That is, don’t mess with the market, for it shall work itself out exactly how it should be.

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A blog I wrote a while back brought up the subject of the success of QE2 becauuse of abstract thought rather than real returns. For instance, does anyone argue that QE2 turned the economy around? Yet here we are, only a few months departed from a monstrous equity rally equipped with buyers in abundance. Only after QE2 ended did the selling really enter high speed, as if QE2 was saving the economy in a real way. Rather, the abstract thought of central bankers and politicians saving the world was enough to cause a ferocious rally that lasted 9 months, give or take.

After the news this A.M. I started thinking along the same lines. Whether or not the dollar infusions solve the crisis in the EU, the motivation of CB’s world-wide may be enough to start a frenzy for risk-based assets all over again. For that reason, I bought starters in ENTR and ARUN; two attractively priced tech stocks with high short interests.

However, I’ll openly admit that the world’s financial worries are far more obvious now, after the recent economic data has failed to excite investors and companies are starting to slash EPS estimates. It’s as if central bankers expected life support stricken companies newly awakened by caseloads of free cash to turn around and spend that cash for the betterment of society, rather than keep it for their own survival…IN A CAPITALIST WORLD. Yeah, right. As long as the money is literally handed over for free, we’re going to be plagued by high unemployment. If people don’t have jobs, they don’t have income. If they don’t have income, they won’t spend money. If they don’t spend money, companies can’t sell anything and it’s a huge deflationary spiral. Especially here in the western world, where we haven’t saved a dime for decades and can’t really depend on savings like the Chinese could.

I’m still at 50% cash.

UPDATE: Sorry for the late update, but I sold SKF this morning on the news. Also, I bought some DECK for the $100 Roll!!

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Bulls are out of the gate and stampeding on news that FIVE banks will be opening up their dollar outlets to the EU in an attempt to shore up their financials.

This is QE3, bottom line.

Off to the races….

UPDATE: That said, do not hop right into this market. Wait to see how the rally is digested. Remember, we sold off 150 points yesterday and we can do it again, from the same level.
UPDATE II: A little bit back Cain authored a post that proposed QE3 in the form of Dollar help for the EU, citing three main reasons. I expanded upon such brilliance by adding a pinch of salt, in complete agreement with Mr. 9th Floor. Hat tip to Cain, nice call!

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As I sit here encumbered with a 50% cash position and a hedge, I’m woefully disappointed that I was juked out of TNA & CF, and my VXX short and missed out on such a wonderful day. However, I know the counterbalance to that emotion is the feeling of joy I would have had, knowing I was protected by such decisions, had the market sold off in equal ferocity on some stupid EU news. This battle is really at the core of what makes a good trader, a good trader. The best can sociopathically ignore these emotions, and are thus able to approach the market from a completely objective standpoint. On the other hand, the worst succumb to the transfer from one emotion to the other as quickly as the market transfers from green to red each day.

I sold out of AEC at the end of the day because I don’t have the patience of Cain, but rather the patience of a child. I like to see my positions win, and win quickly.

This leaves me with MU, WNR, GSVC, SCHN, CENX and a SKF hedge; a portfolio that underperformed today. However, while I missed out on today, a key issue still remains: in all likelihood, we will trade at this level or lower at least one more time.

Here’s where I stand right now: conflicted by two major issues. On the one hand, the market could see earnings take a severe hit, buried by the burden of a collapsing Europe/Euro and rush to the USD and avoidance of risk. On the other, I still see fundamental reasons for us to trade higher. Mainly, earnings projections north of $90 and rates incredibly low that would put the S&P500, on a typical P/E, north of 1400. Moreover, as we come to the end of summer “fuck you” trading and halfway through a historically scary month, I see tech and trannies starting to lead the way. Tell me: Are we in a recession if tech and trannies are leading the way? NOPE.

If we don’t immediately trade lower, in follow-through of this afternoon’s selloff, then I see us consolidating some very bullish action and I believe we’ll trade higher. If the market plays out like this, I’ll be back to low cash, no hedge in no time.

Take it easy.

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I made three trades early this morning:

1) I sold out of CF because it wasn’t responding to The PPT o/s like statistics say it has in the past
2) I bought SKF with 10% of book as a hedge
3) I bought a starter in SCHN. This is my steel play. It has solid fundamentals and a good debt situation despite 8 acquisitions in the past 9 months. It also has a short interest of 8% which will be extra fuel to the fire should the shorts who piled in rush for the exits. Technically, on the weekly it just got the “roll” on the wilder’s and on the daily it’s possibly completing a reverse h&s. Truthfully, above 42 is the go-point for SCHN, but I wanted a piece here.

I’m now 46% long and 10% SKF.

The market is still exceptionally shaky, ready to be thrown off a cliff at a moment’s notice. (specifically the notice of EU chopping their own cocks off over and over again) That said, I don’t think shorts feel very safe here either, since the closer we get to falling off the cliff, the closer we get to a government parachute. (do you like my metaphors?) A political solution or temporary fix to the world’s economic problems will put short sellers into a vice and squeeze their little brains out. Don’t play games and remember to go outside.

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As if this market wasn’t complicated enough, with the various cross currents battling it out, now we’re laden with an entire industry spiking on account of a major company within the industry REDUCING estimates by 30% or some shit. I’ve been a little busy today, affected by LOLitis and now forced to attend prior engagements, but I plan on sitting down and looking at the steel & iron names later today. Bottom line is, if a company says we’re going to suck more than analysts think, and then spikes, then speculators have beaten the name to a pulp in preparation for something horrific. These names should definitely provide healthy risk/reward scenarios, should a name operate efficiently and/or the horrific speculation not come to fruition.

I’m outta here, again. Talk to ya later.

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