#8 – Framing is everything.

Framing is everything. The way an issue is presented, can dramatically influence how someone perceives what follows. We often (even sometimes unconsciously) have a bias towards how we approach issues. It begins with what we learned in school, what we watched as we grew up and the culture all around us. Recently, over the holidays through the generosity of my wife’s grandmother, inherited Goodrich’s “History of the United States” – published in 1852, and “The Centennial History of the United States” published in 1872 by J.D McCabe. Leafing through these books, I wanted to take an example of something that children in America were taught, and compare to what we know today. This is not just a US phenomenon, we know history books in other cultures often reflect the bias of that nation.

 I believe that it is in incumbent on us to challenge bias, bottom out facts and understand the full perspective. A healthy dose of skepticism is needed. Often time’s racism and prejudice are embedded deeply in these issues. And as we know history often repeats itself, so understanding how these biases are rooted can be useful to prevent them from happening again in the future.

The Trail of Tears.

Let’s take an example and juxtapose against these old US history books that I recently obtained. We know how awful the trail of tears was during Andrew Jackson’s tenure as President of the United States in the 1830s. At the beginning of the 1830s, nearly 125,000 Native Americans lived on millions of acres of land in Georgia, Tennessee, Alabama, North Carolina and Florida–land their ancestors had occupied and cultivated for generations. By the end of the decade, very few natives remained anywhere in the southeastern United States. Thousands more were killed.[1]

White Americans, particularly those who lived on the western frontier, often feared and resented the Native Americans they encountered: To them, American Indians seemed to be an unfamiliar, alien people who occupied land that white settlers wanted (and believed they deserved).

Working on behalf of white settlers who wanted to grow cotton on the Indians’ land, the federal government forced them to leave their homelands and walk thousands of miles to a specially designated “Indian territory” across the Mississippi River. This difficult and sometimes deadly journey is known as the Trail of Tears.

State governments joined in this effort to drive Native Americans out of the South. Several states passed laws limiting Native American sovereignty and rights and encroaching on their territory. In a few cases, such as Cherokee Nation v. Georgia (1831) and Worcester v. Georgia (1832), the U.S. Supreme Court objected to these practices and affirmed that native nations were sovereign nations “in which the laws of Georgia [and other states] can have no force.” Even so, the maltreatment continued. As President Andrew Jackson noted in 1832, if no one intended to enforce the Supreme Court’s rulings (which he certainly did not), then the decisions would “[fall]…still born.” Southern states were determined to take ownership of Indian lands and would go to great lengths to secure this territory.

Andrew Jackson largely ignored the US Supreme Court, and instead work with congress to pass the Indian Removal Act. The Indian Removal Act, gave the federal government the power to exchange Native-held land in the cotton kingdom east of the Mississippi for land to the west, in the “Indian colonization zone” that the United States had acquired as part of the Louisiana Purchase. (This “Indian territory” was located in present-day Oklahoma.)

The law required the government to negotiate removal treaties fairly, voluntarily and peacefully: It did not permit the president or anyone else to coerce Native nations into giving up their land. However, President Jackson and his government frequently ignored the letter of the law and forced Native Americans to vacate lands they had lived on for generations

So what happened?

The Choctaw: In 1831, the Choctaw, became the first nation to be expelled from its land altogether. They made the journey to Indian Territory on foot (some “bound in chains and marched double file,” one historian writes) and without any food, supplies or other help from the government. Thousands of people died along the way. It was, one Choctaw leader told an Alabama newspaper, a “trail of tears and death.”

The Creeks: In 1836, the federal government drove the Creeks from their land for the last time: 3,500 of the 15,000 Creeks who set out for Oklahoma did not survive the trip.

The Cherokees: By 1838, only about 2,000 Cherokees had left their Georgia homeland for Indian Territory. President Martin Van Buren sent General Winfield Scott and 7,000 soldiers to expedite the removal process. Scott and his troops forced the Cherokee into stockades at bayonet point while whites looted their homes and belongings. Then, they marched the Indians more than 1,200 miles to Indian Territory. Whooping cough, typhus, dysentery, cholera and starvation were epidemic along the way, and historians estimate that more than 5,000 Cherokee died as a result of the journey.

What did our history books teach kids growing up in 1850s-1890s (Goodrich – a History of the United States 1852)

So what then did our history books note to students growing up in the US around this time? (in 1852 and 1972) 20 years and 40 years after these events took place?

Charles A. Goodrich begins with some background in the early chapters on US History and Native Americans and notes the following:

“War was the favorite employment of the savages of North America. It roused from the lethargy into which they fell when they ceased from the chase, and furnished them an opportunity to distinguish themselves, and to achieve deeds of glory and taste the sweets of revenge” (Goodrich, pg. 22)

Note the usage of “savages” and the sweeping generalizations and assumptions “roused from the lethargy”

Further as he describes the Trail of Tears, notes the following:

“We shall only add that in May 1938 a military force of several thousand men under the command of General Scott was assembled on the Cherokee territory, for the purpose of removing the nation to the territory assigned theme, in accordance with the policy recommended by General Jackson, to remove all Indian tribes”.

Goodrich makes no mention of the losses that the Cherokee suffered. He spends very little time covering the range of forced removals and there impacts on the Native Americans.  Or that the US Supreme Court had ruled  that Georgia’s removal of Cherokees was unconstitutional, and that Jackson’s policy was not well supported by the US constitution or recent Supreme Court rulings. Goodrich also seems to paint this episode in US history as a rather small after-though “we shall only add”, and spends very little time on examining what happened to the Native Americans.  Goodrich, largely reflects Jackson’s years as triumphant and a resume of his accomplishments.

In JD McCabes “Centennial history of the United States” more time is spent examining the policies of Andrew Jackson, yet still frames the issue as

“The first important act of the new president was to recommend to Congress the removal of all the Indian tribes remaining east of the Mississippi to new homes west of that stream. Such a measure he contended would give to them a broader range, and one more suited to their wants” Yet it makes no mention of the Supreme Court decision, or perspective on why Jackson was recommending the policy. After reading much of these chapters, it would often seem logical that the Native Americans should be removed?

Challenge the status quo and ensure your understanding of what is factual is actually the full set of facts.


[1] The following summary of the trail of tears is leveraged from http://www.history.com/topics/native-american-history/trail-of-tears


#7 – how bad can it get with Trump?

The last few blogs have focused on some of the upside that might come to our personal finances as a result of Trump’s economic plan to spend and cut taxes. Much less time in this blog has been spent on the unintended consequences of his trade policies (if pursued). You all probably have seen one of his controversial tweets, shooting off the hip in response to the day’s developments (whether it his tweet regarding the China capture of a US drone, or the most recent horrific terrorist act in Germany). Trump’s discussion of his proposed tariff’s and his trade approach with China might even be scarier.

A recent article by Tim Worstall in Forbes sum’s it up well.

“The Chinese government is a despicable, parasitic, brutal, brass-knuckled, crass, callous, amoral, ruthless and totally totalitarian imperialist power that reigns over the world’s leading cancer factory, its most prolific propaganda mill and the biggest police state and prison on the face of the earth”

That is the view of Peter Navarro, the man chosen by Donald Trump to lead a new presidential office for US trade and industrial policy. This same guy has put forward policy proposals which run counter to all modern views of economics. That trade is a zero sum game, and that VAT (Value added Tax) favors  export economies.  Both of these notions are incorrect. Trade is a voluntary exchange in which both parties partake in; if it was a zero sum game – would anyone participate? A VAT system is entirely neutral upon the source of goods and services–it is a tax upon the place of consumption and thus has no effect upon place of supply at all.

The reason these ideas are scary, is this could be the basis for which Trump and other support tariffs and taxes to protect US made goods (the rationale for pursuing a protectionist agenda). This in the end could hurt overall growth and GDP – as consumer prices will be driven up as a result of US consumers being forced to buy US goods (which are not competitive on a global basis)

 I have been looking closely at previous presidencies who have echoed much of the same rhetoric as Trump.

Let’s unpack the Make America  Great theme – cut taxes? spend? and protect American made goods? Let’s take a look at Reagan and Hoover. Two presidents that campaigned on aspects of this same message.

Are we on the cusp of Hoover like outcome? or could it be more positive…. such as the Reagan years?


Following  Calvin Coolidge’s 1922 Fordney-McCumber Tariff act. Tariffs were increased on foreign imports.  Hoover  in the first 90 days in offices, passed the Smoot-Hawley Tariff which protected American agricultural goods. Hoover believed it was essential to balance the budget despite falling tax revenue, so he raised the tax rates.

At first, the tariff seemed to be a success. According to historian Robert Sobel, “Factory payrolls, construction contracts, and industrial production all increased sharply.” However, larger economic problems loomed in the guise of weak banks. When the Creditanstalt of Austria failed in 1931, the global deficiencies of the Smoot-Hawley Tariff became apparent. U.S. imports decreased 66% from $4.4 billion (1929) to $1.5 billion (1933), and exports decreased 61% from $5.4 billion to $2.1 billion. GNP fell from $103.1

And yet  the economy kept falling and unemployment rates rose to about 25%. We know that Hoover was likely dealt a tough hand with the Stock Market Crashed in October 1929, and the Great Depression that followed. Yet, the Smoot-Hawley Tariff clearly did not help.  This downward spiral, plus his support for prohibition policies that had lost favor, set the stage for Hoover’s overwhelming defeat in 1932 by Democrat  Franklin D. Roosevelt who promised a New Deal.

Figure 1 – Timeline and Key Economic Indicators from Hoover’s Years



Entering the presidency in 1981, Reagan implemented sweeping new political and economic initiatives. His policies, dubbed “Reaganomics” advocated tax rate reduction to spur economic growth, control of the money supply to curb inflation, economic deregulation, and reduction in government spending.

Over his two terms, the economy saw a reduction of inflation from 12.5% to 4.4%,

While Reagan did enact cuts in domestic discretionary spending, increased military spending contributed to increased federal outlays overall, even after adjustment for inflation

Figure 2 – Timeline and Key Economic Indicators from Hoover’s Years


This sums it up well, over the first two years, while Hoover was successful in reducing the trade balance (closed it by 68 %), GDP tanked (with the economy shrinking by more than 20%). While in Reagan’s case it took a bit longer for the S&P to grow yet, GDP maintained a steady upward track.

Figure 3 – Comparison of Performance (Hoover and Reagan first two years)

Change over first 2 years in office Change in S&P Change in P/E Ratio Change in GDP Change in Trade Balance
Hoover -24% 19% -21% 68%
Reagan 8% 27% 13% -139%

Figure 4 – so what is going to be?

Trump is off to a better start than Reagan and Hoover, but anything can happen!










#6 – Monitoring for Inflation and Trump Economic Indicators

After analyzing and monitoring a couple key indicators (e.g., oil, mortgage rates) that we laid out in the previous post on what a Trump presidency will mean for your personal finances, I am further of the belief, that many of these impacts will be fairly pronounced. To recap some of the biggest near term considerations that may impact your personal finances.

  • Interest rates will rise (and are rising), which will impact the demand for housing prices, which should normalize the  housing market and likely mitigate a housing bubble (less buyers willing to spend $$ on higher interest rates), but challenge’s the overall timing of whether to buy or rent.
  • Money will be spent, and a lot of it. Monitor where these infrastructure projects will be undertaken, and where an additional impact on the real estate market will occur (as a result of new railroads and infrastructure projects)
  • Rising tide of equity prices – driven by infrastructure spending, tax cuts and Trump’s de-regulation agenda (get into equities! and have some exposure)
  • Rising yield curve and impact on Fixed Income investments (reduce allocation in Fixed Income)
  • Monitor appetite of US debt securities (from foreign holders of US debt – e.g., China) (keep an eye on this)
  • Monitor Tax deduction / credit changes and how you can optimize to meet these potential changes

Below is a brief update of those indicators and some analysis to support the above observations.

Figure 1: Update of Inflation Indicators

Reviewing the last year (and namely in the last month) of Inflation Indicators, since Trump was elected we can see a marked increase in the yield curve and change in mortgage rates (3% increase month over month) and the ten year treasury yield curve (up 14%)


Figure 2: Correlation of Indicators

As Treasury Yield Curves have increased or decreased, Gold has moved in the opposite direction (-.90 strength)

As the Baltic Index has decreased or increased – Crude Oil has followed a similar path (.87 strength)

As you would expect as mortgage rates  increase they are highly correlated with the same direction moves from the Treasury Yield Curve (.92 strength), and a decline in


Figure 3: Summary of Foreign Holdings of US Debt



Figure 4: Top Holders of US Debt

China and other countries including Japan continue to trim there US Debt Holdings. Will be key to watching as Trump spends more, whether appetite for US treasuries will change.


Source for above data is US Treasury Reporting and Bloomberg.



#5 – Financial Recommendations to Navigate a Trump Presidency

Like many Americans, I am disappointed in the outcome of the election, and have spent a few days soul searching on how  deeply divided our country is, and how we even got here.  I have spent some time analyzing the rural and urban divide, and the anger that many Americans feel as they are either left behind in the new modern economy, or  feel misrepresented by our status quo government (see blog #1 below). Leaving the social, foreign policy and numerous other challenges we will face aside (brought on by a  Republican Senate, House, Supreme Court and Presidency). I will focus on some pragmatic considerations that we can personally prepare for (from a financial perspective), which I hope you will find useful.

I as many of you know, am a history aficionado, and have spent some researching and thinking about the future uncertain path we are headed down and reflecting on when we have seen this before from previous experiences. Drawing upon US history (e.g., Nixon – inflation of 9% in 1972), and learning’s from the author of intelligent investor (Benjamin Graham, and even as far back as Roman History (e.g., Caesar), we can start to build a understanding of what may happen, and what we can do to prepare for what’s next.

What do we know so far on Trump’s economic policies?

He will cut taxes for businesses (likely a flat rate 15% rate give or take), incentivizing corporations to repatriate cash to the US.
– He will simply the tax code and likely introduce tax breaks for many (including a new child care tax credit)
– He will spend, and spend more – likely on infrastructure projects to stimulate growth
– He loves debt financing, and will more or less ignore the debt limits (subject to moderate/budget hawk Republicans in Congress)
– He will pursue an agenda of deregulation, putting less pressure on banks (from a supervisory and regulatory perspective)
– He will put a great deal of pressure on Federal Reserve Monetary policy – to support the above growth agenda

So what could happen?

– Trump could actually spark some additional near term growth
– Bond prices/yields will jump (reflecting a decline in there value)
– Likely leading to significant deficit growth in the US debt borrowing
– Banks will make more money and will have less supervisory/regulatory pressure and will have more money to lend to consumers and companies
– Inflation becomes more likely, as more money is pumped into the US system, and as consumers expectations rise, so will prices.
– Monetary policy  will try to address these increases (through interest rates raises)
– Leading to a scenario where mortgage rates increase, and the rates the US pays on it’s debt to increases…
– And… the potential for creditors and counterparties that own US debt to not believe that it can be paid back (this will be one to watch, the change in US growth vs. the change in the US deficit and what will win)

So what can you do?

– REITs, Real Estate Investments and TIPs (treasury Inflation Protected Securities) offer natural choices to combat inflation (some may prefer Gold here as another alternative)
– Avoid a heavy weighting of non-inflation protected fixed income investments, increase your exposure to equities, and avoid staying in CASH (as it will devalue relative to the increase in inflation)
– Understand tax deductions and changes to the tax codes in detail. Align your business and personal expense strategies relative to the above changes
– Monitor the 10 year treasury yield curve, oil and gold to monitor inflation / and potential changes to these leading indicators
– Monitor how rating agencies, and creditors are viewing US debt (and whether it still be viewed as credible as time)

A few charts I will leave you with that will frame already what’s happened in the last few weeks.

Source: US treasury as of 11/1/2016 and Nasdaq Crude and Gold Prices

A review of inflation forward looking indicators (Treasuries, oil and gold), yields the following insights (somewhat mixed)

  • 10 year treasury yields have just reached 2015 highs (at 2.15%)  in nearly 7 days!
  • Yet Oil and Gold are dropping likely reflecting a “risk on” trade as investors seek equities







#4 – Will Amazon take over the world?

Over the past 15 years – investors, small business owners and consumers heavily debated the positive and negative impacts of Walmart. How much was Walmart impacting local small towns?  How important was Walmart for the US economy?  And the debate made sense (given the negative press on how Walmart paid and treated it’s employees), and the sheer size of Walmart (~450bn of revenue in 2012) more than many  International Countries total GDP (larger than Poland’s total GDP!)

But as we all know, and use… Amazon has emerged, and the dominance, growth and potential Amazon has been incredible. Via smart infrastructure investments distribution, warehousing and shipping logistics – Amazon has been able to amass online delivery capabilities second to none. Complimented by a ingeniously designed Amazon Prime loyalty program and a significant set of product offerings (e.g., Kindle, Cloud, Echo etc.)

Demonstrated in simple summary of total Revenue and YoY growth (from 2012 to 2016)  as compared to retail distributors in various sectors of the economy Amazon competes in, the story is striking.

  • On average no competitor has had an average growth rate of above 10% revenue growth in a period where Amazon has averaged well above 20%
  • Amazon’s total revenue has doubled from 48bn in 2012 to more than 107bn in 2016
  • Many of Amazon’s competitors are flat and are down in revenue from 2012-2016 (Staples, Sears, Best Buy, Barnes and Nobles)
  • What’s even more amazing it is likely that much of Walmart and Target’s stagnation in revenue growth is solely due to Amazon!!
  • Amazon is now almost the size of Costco and likely be the #2 retailer by the end of 2017 (in terms of total revenue)
  • Not pictured below are the companies already feeling the pain of the consolidation and dominance of the Walmarts and Amazons (Sports Authority, Borders, Radio Shack)


You might say – shouldn’t we be looking at net income, or the bottom line? and in some respects, it is important to look at how much Amazon is making (which was nearly 1.3bn a record high in 2016) but then we would lose sight of the massive investments Amazon is making in it’s infrastructure capabilities (to deliver and penetrate new markets e.g., supermakets/fresh direct) which impact the overall picture of net income.

My view is you will continue to see massive pressure on the likes of Staples, Best Buy, Bed Bath and Beyond, Barnes and Nobles – etc. really forcing them to become the only destination for that segment (for when a customer wants to try something out in person) otherwise why do you need them?


#3 – Student debt and the next bubble in the US

Wild and crazy times. A failed coup in Turkey. Weakening of the EU project – through systemic and targeted terrorism across France, Germany… Trump and Hillary (need I say more). What is going on!! Simply put these are scary times.

We will take a moment and unpack one of the headlines that sometimes goes under the radar. A deeper focus on student debt, and the scary economics that are heading for a crash…

The next bubble will be student loans (or perhaps the impacts we will be subtly felt and we wont even realize it!). The student debt market has many of the same characteristics as the mortgage meltdown and in some cases is even worse (i.e., no collateral, credit scores present a misleading picture, and credit underwriting standards are not calibrated to the type of schools students are applying to/what their trajectory is).

The problem is we don’t really know it’s a bubble, because the government guarantees most of the outstanding student debt. Bank’s who own the securitized assets of these student loans don’t mark to mark the values of this (due to the guarantees)… and in the end the crazy amounts of interest that are accrued on these un-sustainable loans are enough to keep the government whole on their outstanding loans.

Why is it only getting worse?

The government guarantees many of these loans through a program (Federal Family Education Loan Program) in which, the US Treasury backed private loans to college students. This meant that even if facing massive amounts defaults, the government would bail them out. In 2010 President Obama ended the Federal Family Education Loan Program, after it had grown to a $ 60 billion per year program.

This has all the underpinnings of a bubble, the belief that all Americans should get a college degree coupled with a market in which no collateral is posted, limited credit analysis is performed, no bankruptcy protection for borrowers – means no losses? And no one really feels skin in the game (e.g., schools continue to raise prices) with the expectation that regardless of default rates it’s not their problem.

Despite the growing costs, Americans believe deeply in the importance of higher education. A survey of parents released this month by Discover Student Loans found that 95 percent believe college is somewhat or very important to their child’s future. They have reason: In 2012, full-time workers with bachelor’s degrees earned 60 percent more than workers with just a high school diploma.

Policymakers also encourage college attendance. In a speech earlier this year, President Obama called higher education “one of the crown jewels of this country” and said it was “the single most important way to get ahead.”[1]

There is also the matter of “credentialism,” the trend in many professions to screen for ever higher qualifications for jobs that may not require them. A 2014 study by Burning Glass, a labor analytics firm, found that 42 percent of management job holders had bachelor’s degrees, but 68 percent of job postings required them. In computer and mathematical jobs, 39 percent of employees had bachelor’s degrees, but 60 percent of job listings called for them.

“Many middle- career pathways are becoming closed off to those without a bachelor’s degree,” the report concluded. The confluence of those trends has led to a nearly unbroken increase in college attendance for almost 30 years. At the same time, though, the cost of college has risen for decades, far outstripping inflation.

As a 2012 economic analysis by The Hamilton Project, a policy research group, concluded: “The cost of college is growing, but the benefits of college—and, by extension, the cost of not going to college—are growing even faster.”

Whatever the reason,  the cost of both a private and a public college degree has skyrocketed. Average tuition, fees, and room and board at a private, non-profit, four-year college were $42,419 for 2014-2015, up from $30,664 in real dollars in 2000-01. At public, four-year schools, costs for the 2014-15 school year, at $18,943, were up sharply from the $11,635 price tag in 2000-01, according to the College Board.

Due to the economic crisis in 2008, more students went back to school and tried to get another degree to blunt the effects of not having a job. What they are finding is the value of the degree does not line up to the economic reality of how much they are paying in debt (average 7% interest rate and higher) with the variable rate in many cases tied to the prime rate (which interest rates are going up!). The default rate of the 2009 cohort has surpassed that of the earlier cohorts much more quickly., and that early delinquencies are worse among lower-balance borrowers, and that’s true for default rates, too.

The results for the 2008 Cohort (or those that went to school during the economic crisis are striking)


Impact on Home Ownership?

The Federal Reserve has been researching the impacts of student debt on other parts of the economy – including does this impact the timing / or when a home is purchased by a individual? Further, can the record low home ownership %’s be explained

“Taken together, our results suggest that for those with college education student loan debt more likely affects the timing of home ownership than people’s eventual attainment of it”

Their analysis showed that home ownership by those with debt plunged from over 30% in 2008 to just over 20% by 2012, two percentage points below the rate among non-student debtors. (Typically student debt holders have higher ownership rates because more education tends to equal higher incomes.)



What’s Next?

The large and sustained increase in student loan balances over the past decade or so has raised concerns that student loan borrowers are incurring debt burdens that will be difficult to repay and will hinder their ability to achieve life goals such as purchasing homes, starting families, investing in small businesses, or retiring from the workforce. “Student loan debt is the only form of consumer debt that has grown since the peak of consumer debt in 2008. Balances of student loans have eclipsed both auto loans and credit cards, making student loan debt the largest form of consumer debt outside of mortgages” (FRBNY 2012). Since 2004, student loan balances have more than tripled, at an average annualized growth rate of about 13 percent per year, to nearly $1.2 trillion, in 2014. As interest rates go up (increasing the payments required), the price of a College Degree continues to goes up, and the intrinsic value of education goes down – the default rates and delinquency rates will continue to go up. Putting further pressure on private companies that have student loans on their balance sheet, and or companies that securitize and issue private student loan debt; private companies want no part of issuing student debt – which will further challenge student loan pricing (e.g,. JP Morgan leaving the business of issuing student loans). Banks who are facing increased capital requirements and pressure on returns, will continue to look to rid the often illiquid student loan debt (e.g., US Bancorp unsuccessfully tried to sell 4bn of student loans at a 30% discount).

You are starting to see the deterioration from the market/students in colleges that the degree is not panning out to be worth the debt burden (e.g., University of Phoenix). Enrollment at America’s largest for-profit university was about 460,000 students five years ago. Now it’s 213,000.The University of Phoenix’s parent company, Apollo Education Group (APOL), announced more losses Wednesday. Its revenues and enrollment both sank roughly 14% in its latest quarter compared to a year ago.[2] The US government also has a fair amount of exposure, as many of these losses are directly guaranteed by the government (up until 2010). A further worsening of the US credit rating may further deteriorate prices and economics of student debt – leading to a ripple on many other aspects of economic stability. There is no viable solution on the table and the problem continues to worsen – so what do we do?

Is the end going to be tied to the US credit rating, i.e. this crisis will only hit a breaking point when creditors demand the exposure of student loans to the US balance sheet be reduced?? How does this play out for the real estate market??




Figure 1 and 2: Rise of Student Debt[3]

Data indicate that both increased numbers of borrowers and larger balances per borrower are contributing to the rapid expansion in student loans. Between 2004 and 2014, a 74 percent increase in average balances and a 92 percent increase in the number of borrowers. Now there are 43 million borrowers, up from 42 million borrowers at the end of 2013, with an average balance per borrower of about $27,000


Figure 3: Default Rates by Cohort by Q4 2014

The denominator is the number of borrowers who entered repayment during a specific cohort year and the numerator is the number of borrowers from that cohort who have ever defaulted on their loan since they entered repayment. The chart below shows our calculations for the 2005, 2007, and 2009 cohorts. Roughly one quarter of each of the cohorts has defaulted as of the fourth quarter of 2014. Note that the default rate of the 2009 cohort has surpassed that of the earlier cohorts much more quickly. In fact, the chart shows a pronounced worsening of the cohort default rate schedules over time. CDRs at all durations are higher for more recent cohorts, with only one exception being the two-year default rate of the 2009 cohort.  CCP data show that early delinquencies are worse among lower-balance borrowers, and that’s true for default rates, too. The results for the 2009 cohort, presented in the chart below, are striking: the highest default rates, at nearly 34 percent, are among the borrowers who owe less than $5,000. These borrowers made up 21 percent of the 2009 cohort. The default rate among the borrowers who leave school with more than $100,000 in debt is almost 50 percent lower, at 18 percent.



In Summary… 

The economics and drivers of the student debt crisis are further outlined below[4]


  • It’s something along the lines of “I have to get a college degree, regardless of the cost, because a college degree is the only path to prosperity, and I won’t be able to succeed without it.”

The Value of a Degree is decreasing:

  • The gap between wages that someone with a degree earns and someone without a degree is narrowing, therefore lowering the intrinsic value of the degree. In 1940, only one in 20 Americans held a college degree. By 1977, that number had soared to one in four. The increase in supply of labor with college degrees, lowers the value of the degree.
  • If the price of higher education increase further, or potentially if it simply doesn’t decrease, people might see higher education as a less attractive investment opportunity.
  • Schools have minimal “skin in the game.” They face little or no negative consequences when defaults are extremely high, and don’t have much incentive to make sure that people can get jobs after graduating. Raising Prices Because most student loans are guaranteed by the government, schools face minimal consequences if the student defaults. Schools get their payment regardless. Schools know people virtually “need” them, and they know that students may be insensitive to price increases because they’re paying with the government’s money.

The Economics of Student Loans are frightening:

  • Students do not have to pay any down payment, and do not have much history of employment. The lack of down payment leaves lenders with even more risk on the table.
  • Student loans are often based on credit score. However, evaluating the credit score of someone who hasn’t entered the workforce, won’t for at least four more years, and with unemployment as high as it, may not make for the best assessment. Many student loans have parent co-signers who have higher credit scores than their children. Therefore the credit score may not properly reflect the ability of the actual borrower to repay the debt.
  • Students don’t have either of these options for student loans. It’s illegal to absolve student loan debt through bankruptcy, and you can’t re-sell an education. Students in default on a federal student loan might have their tax refund taken and/ or their wages garnished [thus much of this debt is not properly mark to market on lenders books / and is not reflected in the value of SLABS (Securitized Student Loan Trusts)
  • At some point, the rising price of education offsets the increased earnings potential, especially if earnings potential declines because of an increased supply in the number of graduates.
  • Many student loans seem to have been made without proper consideration for a student’s ability to pay them back. For example, it is harder for someone majoring in philosophy at mid-tier school that costs forty thousand dollars per year to be able to earn enough to pay off those loans, than it is for someone majoring in software engineers at MIT.
  • By issuing student loans at below market rates, demand for student loans is stimulated. By stimulating demand, the government is essentially funding the production of labor that there’s not enough demand for.
  • Decrease in Supply If more lenders, like JP Morgan, decreased or stopped supplying student loans, it could make it more difficult for prospective students to obtain loans. JP Morgan cited competition as reasons for discontinuing their student loan business and it seems plausible that others could do the same.


[1] http://www.cnbc.com/2015/06/15/the-high-economic-and-social-costs-of-student-loan-debt.html

[2] http://finance.yahoo.com/q;_ylt=AwrSbm5bFHhWS8IAYrNXNyoA;_ylu=X3oDMTExM2Jia211BGNvbG8DZ3ExBHBvcwMxBHZ0aWQDREZENl8xBHNlYwNzYw–?s=APOL

[3] http://www.federalreserve.gov/econresdata/notes/feds-notes/2015/how-much-student-debt-is-out-there-20150807.html

 [4] http://higheredbubble.com/

#2 – An uncertain way forward, Brexit and what’s next

As I wrote in my first post in May of 2016, I predicted a major transformative economic/political event was on the horizon for Europe; whether it was Grexit, Brexit or some other crisis – the foundation of the European Union would be tested in the near future. While Brexit surprised many – it was only a matter of time for one of these make or break moments to actually occur. For those that are in shock or still mired in a state of disbelief, are still likely underestimating the rising swell of discontent amongst the “have nots” and those that are not participating in the new economy. Political parties and citizens are becoming increasingly polarized and extreme.  This is the start and not the end,  the fear of immigration and outsiders is on the rise. The Trump vote is a real global phenomenon that should not be underestimated.

While analysts and scholars debate what’s the most likely outcome for the UK (e.g., whether the UK will pursue a Norway/Swiss solution to working with the EU – or be treated as a third party country), and as such the damage and next steps will becoming clearer; I think we should be a lot more focused on what’s happening in Italy. As I think the EU actually is worse off as a result of this than the UK, and the underlying question of the EU will survive – is going to come into focus a lot sooner than people think. The UK will eventually sort through the mess they made, and although London will be diminished in it’s standing as a business friendly financial hub, it will survive.

The Financial Times reported on Sunday July 3rd, that Italy was prepared to unilaterally pump billions of euros into its troubled banking system if it comes under severe systematic distress. As we discussed in the first blog post, many of the factors for the previous Euro zone crisis have not been addressed; namely the feedback loop between sovereign risk and bank risk. Further exacerbating the situation in Italy is:

  • Low growth Eurozone wide (many countries still not back to GDP levels seen pre-crisis), impacting bank’s growth prospects
  • Negative interest rates, compressing bank return’s on core banking products
  • Total of 400 billion euros of Non-Performing Loans across large Italian banks
  • Rising political instability – due to referendum on constitutional reform (if Renzi – the current PM loses the vote and resigns- significant instability will introduce )
  • Confidence in the Italian banking system is wavering, and the capitalization levels lag large US and EU peers
  • Brexit only hurts these banks further

Let’s look at what’s developed – this is as of July 1st (source: Yahoo Finance / Bloomberg)


Large Italian banks are getting hammered, when we take a closer look at what’s changed from April to July. Stock prices are on average across the top 5 Italian banks are down 32%, and CDS has risen 13%. Take a closer look at Unicredit, which is the only Italian large globally systemically important banks (G-SIBs). Down more than 42% (at a price of 1.92 a share).

While the news cycle will be focused on next steps of Brexit. Look deeper at some of the other dark clouds on the horizon..