89% of Federal student loans ARE NOT being paid back right now

 According to this CNBC article, from October 7th, only 11% of people with federal student loans are paying those loans back, on time, right now.  Due to the forebearance offer, 89% of people are not paying back their federal student loans.  So what happens to the SLABS investments being funded by the payments of those millions of student loans (see previous post)?  Good question.

Where student loans go... SLABS explained

When you ask most people what SLABS are, they tend to reply, "That's the big concrete thing under my house, right?"  Yeah.  That concrete slab (if you don't have a basement), is one kind of slab.  But the SLABS explained in this short, and very well explained video, are Student Loan Asset Back Securities.  

These are the investments that are created from a whole bunch of student loans.  If nearly everyone is paying their student loans back on time, they're quite safe.  But we're in weird times, and not everyone's paying their student loans back on time.  The problem I see with SLABS is that they're nearly identical to the subprime Mortgage Backed Securities that crashed, and brought the banking system to its knees in 2008.  Except that there are over $1.6 trillion in student loans, as opposed to $1.3 trillion in subprime mortgages in 2008.  $1.3 trillion of those student loans are through the federal government, the rest are from private lenders. 

The Bubbles still left to pop- With Robert Kiyosaki, Harvey Dent, Stan Harley

Robert Kiyosaki, best known as author of Rich Dad, Poor Dad, does a regular (weekly, I think) radio show/podcast about different aspects of money, investing, and the economy.  He gets some really good, really smart people on this show.  This is a scary, but very good show, with Harry Dent and Stan Harley talking about the current bubbles in stocks and real estate.  These guys are seeing historically economic BIG bubbles that are getting close to popping.

"The greater the bubble, the greater the burst." 

- Harry Dent, in the interview above

It's late August 2020, as I'm writing this.  In my opinion, we are now 11 months into what I'm calling The Phoenix Great Depression.  That's my own term, but I see this as the beginning of a 5 to 7 year (minimum) economic downturn.  There are a couple of long term trends and cycles, and several shorter term ones, that have brought me to my conclusion.  This current crisis started with the seizing up of the Repo Market, in the banking industry, in September of 2019.  The Federal Reserve (aka The Fed), had to begin injecting billions of dollars, weekly, then daily, into the financial system, to simply keep the banking system from collapsing.  That slipped under most people's radar.

Then, the Covid-19 coronavirus (aka Sars Cov-2), hit U.S. shores, which was the "black swan" event that tipped the U.S. stock markets into collapse.  As we all know, the shutdowns have led to all kinds of problems, millions have lost their jobs, mandatory business shutdowns, and tens of millions of people now struggling to simply pay rent.  I saw a huge economic collapse coming, and have been blogging about it for three years.  

The two guys in the interview above, Harry Dent and Stan Harley, have come so very similar conclusions, using completely different cycles and models.  One of the things that is amazing to me about our current economic mess, is that several, really smart economic thinkers, investors, and forecasters, have come to the same conclusion about a huge peak and then crash, right now, in this 2019-2022 period.  But all of these thinkers (myself included), have come to very similar conclusions, from very different forecasting directions.  We're all looking at different data sets, different cycles and theories, but coming to the conclusion that this is going to be a historically huge economic downturn.  You can easily discredit me, I'm a bum, but it's hard to deny the thinking of Robert, Harry, and Stan above, as well as Ray Dalio, Jim Rogers, and several others.  Even internet marketing expert and entrepreneur Gary Vaynerchuk has been waiting for this collapse, and has talked about it.

That said, this interview above is one of the most intelligent looks at what's happening in the economy these days.  If you're interested in running a business in the next few years, and/or investing, watch/listen to this interview above.  It's a lot to take in, so maybe watch it a couple times, or until it begins to make sense.  

Yesterday, I predicted that the Nasdaq would drop before 8,000, before the November 3rd U.S. presidential election, and I predicted really low numbers for the Dow and the S&P 500 as well.  All conventional wisdom, all common sense right now, says it's completely INSANE to think that The Fed would let the stock markets drop before the election.  The Fed's main job right now (in many people's eyes), is to get Donald Trump re-elected.  I know my prediction seems completely nuts.  My January 26th prediction that the Dow would drop below 19,000, was also completely nuts, according to conventional wisdom then.  Yet, it happened.  

My reasoning for yesterday's crazy prediction is that we are now sitting on several financial bubbles, any of which could collapse at any time, triggering the collapse of the rest.  When one really begins to go, it will start to topple the others.  That toppling will lead to a world financial system wide crisis, and that will bring down the currently over-inflated stock markets.  Here's a quick list of businesses and markets that will hit crisis point, could reach a collapse point, and trigger a mess that would bring down stocks, and everything else.

-SLABS (Student Loan Asset Backed Securities) market- There's no good data, but probably 50%-70% of student loans are being paid right now.  When this market goes, everything topples.

-CMBS (Commercial Mortgage Backed Securities) market- Commercial real estate?  Yeah, not good these days.  When this market collapses, like subprime MBS and CDO's in 2008, other things start collapsing as well.

-CLO (Collateralized Loan Obligations) market- CDO-type investments made from business loans.  Business loans in 2020?  Yeah, not a good bet after the Covid-19 shutdowns.  Smaller than the two above, but if this collapses, it will start the other two above toppling.

-Deutsche Bank- It's been struggling for many years.  If it goes bankrupt, it will send shock waves through the worldwide financial system.  That will start other houses of cards falling.

-A major banking/corporate bankruptcy in the U.S.-  Boeing is known to be struggling.  GE is known to be struggling.  Capital One is known to be struggling.  Many other major corporations are loaded with debt and struggling under the crazy conditions the pandemic and 2020 has thrown at us.  If one MAJOR corporation goes bankrupt, especially one tied to banking, it will send shock waves through the financial system, and these other things begin to topple.

-Serious evidence of a likely Joe Biden presidential win-  If the polls turn dramatically in Biden's favor, Wall Street will react, believing much less money will be thrown at them in the future, sending markets down.  The stock markets are completely detached from the real world economy, and from reality, at this point.  We're at a Tulip Mania level, and there WILL be a huge correction sometime.  Personally, I think a Democrat presidential victory is likely, and is basically our only hope of survival as a nation and democracy.  Just for the record, I'm an independent, and not a fan of Joe Biden.  But we need a semi-functional government, and less money thrown at Wall Street, and more at the American Public, to get through the current, and the coming crises.  Short term, the markets will throw a temper tantrum, and drop significantly, giving us the much needed correction.  In the long term, this will help the economy, bringing all types of assets down to real world values.  This alone could drop the stock markets before the election.  My personal thinking right now is that one of the things above, not a big Biden lead in the polls, will be the cause of the drop, but huge poll numbers for Biden COULD send markets down pre-election.

-There are many other things that could send all these houses of cards tumbling before the election.  Bad Q3 earnings for major businesses, major commercial real estate numbers dropping significantly, national residential real estate numbers dropping significantly, a large virus surge in a major city, causing another short term shutdown.  Lots of things COULD happen, any one of which would send all these houses of cards toppling down.  My bet is that one of these will happen before the election, and will cause massive chaos in other areas, which will ultimately bring down the hyper-inflated stock prices.  There are just too many possible triggers of potential collapse for The Fed to continue to prop everything up for two more months.  This is very similar to my thinking in January.  

I know this is a very controversial call, we'll see how things play out.

Let's play Jenga.... again... 12 years later

The classic "Jenga block" scene from the movie The Big Short, describing how the 2008 financial meltdown happened.  This scene is the best visual explanation of how debt, loans of one kind or another, are repackaged and sold, as "new" investments.  This simple metaphor of the Jenga block tower gets the basic idea across.  Since the Great Recession,mortgage backed securities and CDO's have been frowned upon.  So other forms of debt have been repackaged and sold in a very similar fashion.  Now lots of people aren't paying those loans back.  That's what makes the "Jenga tower" investments collapse.

In 2008, it was $1.3 trillion in subprime mortgage debt collapsing that brought the financial world to its knees, and sent something like 6 million homeowners running from their houses.  It's worse now.  MUCH WORSE.  According to this Forbes article from 6 days ago, more than 106 million different loans in the United States are not being paid back at the moment.  When people stop paying their loans, whether they just skip payments, or get into a deferment or forbearance program, money stops flowing into the bank or holder of the loans.  So the bank has less money to make their payments, and all these "assets," bundles of loans, aren't worth as much.  So the bank's financial position is less stable.  When enough people don't pay their loans, the investments made up of hundreds or thousands of loans, lose value, and that's when the Jenga towers collapse.

Right now, because of most people's paycheck to paycheck lifestyles, combined with 45 million people laid off and the Covid-19 shutdown, we have more people not paying their debts than at any time in history.  But it's not just one Jenga tower of subprime mortgages (which were home loans to sketchy people), like in 2007-2009.  We have several Jenga towers, with millions of people not paying their loans, that make up those Jenga towers.  That's what's on the verge of collapsing right now, a whole table full of Jenga towers.  And those towers are propping up the whole world's economy.

SLABS- Student Loan Asset Backed Securities- are basically the student loan version of the subprime mortgage bonds and CDO's in the clip above.  $1.3 trillion in subprime loans going bad triggered the financial collapse of 2008. There are roughly $1.6 trillion in student loans, making up the SLABS market right now.  A year ago, 40% of those loans weren't being paid on time, according to Nerdwallet.  It's safe to say a lot more student loans, making up those SLABS, aren't being paid now.  Why is there so much student loan debt these days?  Because investment banks have been making huge fees selling SLABS for 12 years.  They needed tons of loans to create them, so student loan money was easy to get.

To be fair, $1.3 trillion of these loans are "secured" by the U.S. government.  So what happens if those loans don't get paid.  Does the U.S. just eat that $1.3 trillion and write it off?  No one knows.  Yet.  One major difference between SLABS today, and the subprime bonds and CDO's in 2008, is that for every CDO and bond then, for every mortgage, there was a house that loan was for.  So the bank had a house to sell when the loan was foreclosed.  With student loans, the only collateral is the student's brain.  You can't foreclose a brain. 

CLO's- Collateralized Loan Obligations- This market is very similar to SLABS and CDO's, but it's made of of commercial (business) loans.  There are only about $700 billion ($.7 trillion) of these CLO's out there.  We all know how well America's businesses are doing right now, and how solid they are, to pay back all of these loans.  Another Jenga Tower.  Banks and insurance companies in the U.S. hold most of these investments, as far as anyone can tell.  So when these collapse, banks and insurance companies will be in in trouble.  Which ones?  We don't know.

CMBS- Commercial Mortgage Backed Securities- These are commercial (business) mortgages for commercial properties, repackaged, and sold as investments.  This is a little bitty Jenga tower, was a mere $96.7 billion last year (2019).  Who pays these mortgages?  Retail stores, mostly.  Ever hear of the Retail Apocalypse?  Yeah, those retail stores struggling and going belly up month after month, that's what this Jenga tower is based on.  Sounds solid to me.

And then there's the corporate bond market, another way that huge businesses raise money.  These days, companies that are damn near insolvent, like Boeing in March, sell billions of dollars in bonds, and then the Federal Reserve creates money from thin air, and buys those bonds, that Boeing knows it will never be able to pay off.  All the money The Fed creates out of thin air makes the dollars in your wallet or bank account worth less, which will lead to high inflation, at some point.  Maybe hyper-inflation.  This is how "zombie companies" are created, and that's a whole 'nother debt mess to be dealt with.

In any case, we have the three major Jenga Towers above, totaling somewhere around $2.4 trillion, and people and businesses not paying over 100 million different loans in the last two months.  That's nearly double the amount of debt that triggered the 2008 economic collapse, and a much greater number of people and businesses not paying that debt.  What could possibly go wrong?

Yeah, this is one reason I'm calling this a Great Depression when we're only a few months in.  After these bubbles pop, and they WILL pop, it will take years to sort the underlying mess out.  Things are going to get much crazier financially before they improve to any large degree.