Economics

Subprime Lending Part II

From Stansberry Digest 4/28/2017:

Loans for education and cars contributed to 90% of the growth in consumer debt since 2012. By 2015, roughly 25% of car loans were made to subprime borrowers.

But why should the banks care? These auto loans are securitized, just like the bad mortgages were. In the last five full years, $455 billion in auto loans were securitized. Remember, one out of every three cars that are traded in for a new car have negative equity (meaning the unpaid portion of the old loan is “rolled” into a new loan). And the durations of auto loans have been extended. (The average auto loan is now 68 months)… Given those facts, it’s a safe bet that something like half (or more) of these securitized auto loans have zero equity.

You might recall a major factor in the mortgage crisis of 2008 was that most subprime mortgage holders (and even a lot of prime mortgage holders) had zero equity in their homes. Walking away from those mortgages was a rational (if not ethical) financial decision.

Today, with used-car prices plummeting… how many subprime borrowers are going to keep paying 20% a year to drive a car with zero equity?

And then there’s the elephant in the room…

Student loans. Today, a record number (42 million) Americans have a student loan. This debt is virtually impossible to extinguish in bankruptcy. It’s not going away. And the total debt outstanding has doubled in the last 10 years to $1.3 trillion. That’s bigger than auto loans. Bigger than credit cards.

And the problems in student lending are nightmarish. Currently, 8 million people, who collectively owe $137 billion, are seriously delinquent. That means they’re more than 360 days late. That’s 19% of all borrowers. Another 3 million (owing $88 billion) are at least a month behind on their payments and likely to default. So more than 25% of all student loans are essentially in default.

That’s bad enough. But it doesn’t tell the whole story.

People have all different kinds of ways to defer paying these loans. So if you include all the loans that aren’t being serviced, you find that more than 40% of these loans aren’t being serviced and are likely to default.

And here’s the “good” news… It’s not just “kids” who borrow for college. About 3.5 million adults have borrowed $77 billion on behalf of their children.

We’ve never seen figures like these before in the U.S. economy.

Currently, U.S. consumer debt, not including mortgages, equals 20% of gross domestic product (GDP) – an all-time high amount. The culprit is ballooning auto loans and soaring student loans. We already know that a shocking number of these loans aren’t being serviced and will not be repaid.

The bad car loans will be repo’d and sold. (That’s why used car prices are plummeting right now.) But how will the student loans be cleared? Nobody knows.”

In China alone, over 70 million manufacturing jobs were created during the twenty-first century, far exceeding the 42 million working in manufacturing in 2012 in the United States and Europe combined. The pool of labor supplying the world trading system more than trebled in size. Advanced economies benefited from an influx of cheap consumer goods at the expense of employment in the manufacturing sector. … [China’s] share in world exports rose from 2 per cent to 12 percent between 1990 and 2013

— The End of Alchemy p. 27

In China alone, over 70 million manufacturing jobs were created during the twenty-first century, far exceeding the 42 million working in manufacturing in 2012 in the United States and Europe combined. The pool of labor supplying the world trading system more than trebled in size. Advanced economies benefited from an influx of cheap consumer goods at the expense of employment in the manufacturing sector. … [China’s] share in world exports rose from 2 per cent to 12 percent between 1990 and 2013.”

Capitalism, as I use the term here, is an economic system in which private owners of capital hire wage-earners to work in their businesses and pay for investment by raising finance from banks and financial markets

— The End of Alchemy p. 17

Capitalism, as I use the term here, is an economic system in which private owners of capital hire wage-earners to work in their businesses and pay for investment by raising finance from banks and financial markets.”

More people are going to want money paid out for a lot longer… from an account that has no money in it. No amount of financial smoke and mirrors will prevent the system from collapsing under its own weight

Palm Beach Letter April 2016

There are no real assets in the Social Security trust fund.

Now, add a couple of more problems to the mix. Social Security has had two problems from the start.

The first is retirement age. When the government designed the program in 1935, it set the retirement age at 65. At that time, the average life expectancy of a newborn was just 59 years. Most people wouldn’t live long enough to collect benefits.

But the framers of Social Security didn’t address the possibility that life expectancies would increase. Today, life expectancy in the United States is 79.9 years.

The second major problem is demographics. When Social Security began, there were 41.9 workers for every retiree. It isn’t too difficult to fund a program where more than 40 workers support a single retiree.

But now, in 2015, there are just 2.8 workers supporting every person collecting Social Security benefits.

By 2030, the ratio will be 2:1.

There you have it. Zero dollars in the trust fund, higher life expectancies, and a big wave of people claiming more benefits.

Takeaway: More people are going to want money paid out for a lot longer… from an account that has no money in it.

No amount of financial smoke and mirrors will prevent the system from collapsing under its own weight.”

All wage and inflation numbers are a little fishy. So, let’s keep it simple …

Bill Bonner Diary 4/5/2016

All wage and inflation numbers are a little fishy. So, let’s keep it simple.

The basic transportation for a working man 40 years ago was the Ford F-150 pickup truck.

In 1976, that truck, the SuperCab model, had a manufacturer’s suggested retail price (MSRP) of $4,600. That was when the average working stiff earned $9,300 a year. So, it took 25 weeks of work to pay for the truck.

Today, the F-150 is still the preferred working man’s wheels. And today, it has a MSRP of $26,600 – or 5.7 times as much. But the average person doesn’t earn 5.7 times as much. The median wage today is $43,600. So now, a prole earning the median wage has to work 30 weeks to pay for the truck.

This man is not better off. He’s worse off. And he’s been made worse off by advanced American crony capitalism.

Yes, most people live better than they did in the 1970s. Technological and commercial progress has improved the quality of the things we live with. There are more choices in the supermarkets… in Walmart… and online.

Today’s F-150 is better, in many ways, than the F-150 from 40 years ago. Houses are bigger and more comfortable. Air conditioning is more widespread. Communication channels and entertainment are better than ever.

But though life is easier and more agreeable for most people, few people have more real money.

They have more things. And more credit. But they are deeper in debt… more vulnerable to a downturn… and more dependent on the government and the credit industries.”

Effort and reward were cut off from one another. The working man still had to labor. But it was the banker, gambler, speculator, lender, financier, investor, politician, or inside operator who made the money …

The Old Testament tells us that God chased Adam and Eve from the Garden of Eden with this curse: “By the sweat of your brow, you will earn your food until you return to the ground.”

From then on, you worked… you earned money… you could buy bread. Or lend it out. Or invest it.

Money is compensation… for work, for risk-taking, for accumulating knowledge and capital.
Money is information. It tells us how much reward we’ve earned… how much things cost… how much profit, how much loss, how much something is worth… how much we’ve saved or spent… how much we need… and how much we’ve got.

Money doesn’t have to be “hard” or “soft” or expensive or cheap. But it has to be honest. Otherwise, the whole system runs into a ditch.

But the new money was phony. It put the cart ahead of the horse. This was money that no one ever had to break a sweat to get. It was based on credit. It no longer represented wealth; it now represented anti-wealth, debt. And so, the economy – which worked for money – stopped producing real wealth.

The Fed could create this strange new money at will. It was no longer the real thing but a counterfeit. In this way, effort and reward were cut off from one another. The working man still had to labor. But it was the banker, gambler, speculator, lender, nancier, investor, politician, or inside operator who made the money.

And the nature of the economy changed. Instead of rewarding the productive Main Street economy, it rewarded insiders… and the financial sector. The penthouses of Manhattan and the summer houses of the Hamptons changed owners. Gone were the scions of Detroit factories and the titans of New York commerce. Gone were the people who had actually added to the wealth of the nation.

In their place were the Wall Street hustlers… the people who moved money around… taking it from the people who made it and giving it to the financial industry, the money lenders, the insiders, and the Deep State.

This process is misunderstood. It is thought that Wall Street greed and deregulation caused the shift. But Wall Street was just as greedy as it always was… and financial regulations actually increased dramatically throughout the entire period.

It was not human nature that had changed; it was the money. And it gradually changed everything. Debt increased. But it was not normal debt. Just as the money was new, so was the debt. It was a funny kind of “elastic” debt that could stretch almost infinitely… but could snap back quickly, too.”

The Bill Bonner Letter February 2016