By Michael Lombardi, MBA for Profit Confidential
Last week I wrote about how auto loans have reached their highest level since the third quarter of 2007 and how easy access to these loans was pushing car sales higher. (See “Scary Story on the Booming Auto Sales No One is Talking About.”)
Yes, ballooning auto loans are a problem, but there is a bigger ticking debt time bomb…
Student debt in the U.S. economy is taking the shape of a bubble.
The U.S. government has effectively become the biggest creditor to students. It has gotten to a point where it is forcing the big banks to move away from issuing student debt.
Take JPMorgan Chase & Company (NYSE/JPM), for example. This bank has decided that it will stop accepting student loans applications on October 21of this year. Richard Hunt, President of the Consumer Bankers Association, said that the government giving student debt is creating “less competition in the marketplace.” (Source: “JPMorgan to stop making student loans: company memo,” Reuters, September 5, 2013.)
Sure, on the surface it’s a good idea. The government issuing student debt promotes education. But there’s a problem. Student debt in the U.S. economy has increased significantly. It currently sits around the $1.0-trillion mark—with a majority of that student debt guaranteed by the U.S. government. If we see defaults on this student debt, we will see the U.S. government rapidly increasing its national debt as it deals with the student debt fiasco.
We are already seeing a sharp increase in the delinquency rate on student debt. According to the Federal Reserve Bank of New York, in the second quarter of 2013, the 90-day-plus delinquency rate on student debt was almost 11%. (Source: Federal Reserve Bank of New York, August 2013.)
We all know the jobs market in the U.S. economy is dismal. Considering this, I ask one question: will graduates from colleges be able to pay off the debt they have incurred if they will most likely only be able to find a job in a low-wage-paying sector?
I can see the delinquency rate on student debt skyrocketing.
Too few are concerned about the student debt crisis in the U.S. Sure, politicians think it’s a great idea—students getting an education with the government’s help—just like the politicians thought making mortgage lending easier was a great idea during the early to mid-2000s.
As it stands now, our national debt is just under $17.0 trillion, and the government is expected to use the entire line of credit available to it by October.
We are going through the same motions again: the Secretary of the Treasury has asked Congress to increase the national debt limit or the U.S. government will face default.
The student debt crisis is only one of many “costs” the government will need to make good on. What to do about the cities and states in the U.S. economy facing bankruptcy has not been dealt with. Nor do we know the real costs of “Obamacare.”
With U.S. gross domestic product (GDP) running at $16.6 trillion and the U.S. national debt headed towards $20.0 trillion over the next five years, we are already projecting a debt-to-GDP multiple of 120% for the U.S. economy—that is if nothing goes wrong, like the student debt time bomb blowing up in our faces, an unexpected war, or a natural catastrophe.
But have no fear, the price of gold is telling us all is well… Yah, right.
Michael’s Personal Notes:
It has been very well documented in these pages how the demand from India and China for gold bullion is increasing. We have also seen central banks buying the precious metal to protect their reserves.
But when I look at other side of the equation, the supply side, the case for higher gold bullion prices becomes even stronger.
The biggest sources of gold bullion are obviously the gold producers—the companies that actually do the “dirty work,” digging the ground and extracting gold bullion. When the price of gold bullion declines, it gives them less incentive to produce at higher-cost mines as profitability is at stake.
In April of this year, and then later in June, we saw gold bullion prices decline significantly in value in the face of strong demand for the precious metal. That price action caused a new trend to start among gold producers—they’ve started to cut their exploration budgets.
Graham Ehm, Executive Vice President of South African-based AngloGold Ashanti Limited (NYSE/AU), one of the biggest gold producers in the global economy, stated the company is looking to save $500 million over the next 18 months, as capital expenditures will only be going towards their highest-quality assets. (Source: Mining Weekly, August 5, 2013.)
In its second-quarter corporate earnings report, Newmont Mining Corporation (NYSE/NEM), another massive gold producer, said the company reduced its exploration spending by $362 million from the same period in 2012. (Source: Newmont Mining Corporation, July 25, 2013.)
How does this all come into play with the gold bullion prices?
When gold producers invest less in exploring for new projects, the overarching effect is less future production, which leads to less supply. We’ve heard from senior gold producers about cutting costs; just imagine how severe the pain is for gold producers who have significantly higher costs!
If the prices of gold bullion remain suppressed, we could potentially see many gold producers shut down mines that produce the precious metal above the spot price, the end result of which will be an even smaller supply of gold bullion.
Where do I think gold bullion prices are going next? The “technical” damage done to gold bullion price charts in April and June was very significant. It can take some time for gold bullion prices to recover, especially as price manipulation continues, but if we continue to see supply decrease and demand increase, “regression to the mean” may happen a lot quicker than most expect.
What He Said:
“Over the past few weeks I’ve written about subprime lenders and how their demise will hurt the U.S. housing market, the economy and the stock market. There’s no escaping the carnage headed our way because the housing market and subprime business are falling apart. The worst of our problems, because of the easy money made available to borrowers, which fueled the housing boom that peaked in 2005, have yet to arrive.” Michael Lombardi in Profit Confidential, March 22, 2007. At the same time Michael wrote this, former Fed Chief Alan Greenspan was quoted as saying “the worst is over for the U.S. housing market and there will be no economic spillover effects from the poor housing market.”