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Steve's note: Today, you'll find our final entry in the latest series from my friend and colleague Porter Stansberry. You'll see Porter and I don't agree on everything. But his research always gives me plenty to think about...
One of the Most Obvious Frauds Ever Foisted on the American PeopleBy
Saturday, July 2, 2011
Yesterday, I left you with a question...
Over the past few days, I've described what I call New American Socialism. As I've shown you, it's a kind of legal corruption whereby the risks of doing business are assumed by the taxpayers... but the profits still accrue to private enterprise.
The corruption has infected one industry after another. And it's weighing down our economy... But I've actually preferred having it in many of the stocks I've recommended over the years. It tends to be good for investors.
So the question now is, am I still interested in buying into New American Socialism? It's a difficult question... and the answer is complicated. So bear with me...
In yesterday's essay, I described a tragedy unfolding in the education sector. If you missed the essay, I suggest you go back and give it a read. You'll find the numbers disturbing.
Essentially, the for-profit education industry is selling a product its customers cannot afford.
This industry games the rules of the government and spends a fortune on lobbying – more than $12 million in the last year. This industry would literally not exist without government-guarantees standing behind 90% of its revenues.
And Wall Street experts estimate this industry will rack up around $250 billion in credit losses over the next decade – an amount of money that exceeds the losses from Fannie Mae and Freddie Mac so far.
All these risks will eventually cost the U.S. Treasury billions of dollars. You see, this industry overwhelmingly targets women and minorities – people who are often up against a wall financially. These students will never be able to repay these debts.
While these students have no financial skin in the game (many borrow 100% of their tuition), they face enormous consequences down the road from this scheme... Student loans are notoriously difficult to discharge, and many borrowers will be crippled financially by the obligations they cannot afford.
The facts of this situation are incontrovertible and well known – even inside the current president's administration. And yet... even when all of these facts were studied and reviewed... what did the president do?
Critics had demanded so-called "gainful employment" regulations that would limit how much a student could borrow to an amount of money he would likely be able to repay based on the current employment and income track record of other alumni. Obviously, such sensible regulation was never likely to be implemented by Washington... especially not by a minority president when the funding in question goes overwhelmingly to poor, minority students.
Instead, in early June, Obama's administration promulgated a new set of rules that were supposed to address the abuses and the risks of the government's generous funding rules for for-profit education.
The new rules actually loosen the funding requirements – substantially.
Colleges will be eligible for federal support as long as at least 35% of their students are repaying their loans over the first three years. Now, up to 65% of the students can default. And what about limiting loan amounts to ability to repay? Loan amounts may not exceed 30% of anticipated discretionary income.
How will students pay for food, housing, transportation, insurance, etc. if they're spending 30% of their incomes on student loans?
Rather than tightening the standards, the new rules actually loosen the standards. They also go further in guaranteeing continued federal support. Under the new rules, no schools will lose funding until 2015 at the soonest, to give them time to adapt to the new "standards," which were trumpeted as a major reform.
Only in Washington D.C.
The for-profit education "business" is one of the most obvious frauds ever foisted on the American people. The industry has been structured to take advantage of the least sophisticated members of society. It promises benefits the average student is unlikely to achieve: a better job and a better life. Instead, these students are saddled with unpayable debts and enjoy no corresponding increase in wages.
Assuming the government should not do anything to protect the students from this fraud, shouldn't the risks of perpetrating this fraud be left with the companies themselves? Let for-profit education companies guarantee these loans. Let them take the risk that these debts will never be repaid.
But that's not how New American Socialism works. What happens is, all the profits of this scam go to the executives and the shareholders. The risk goes to the government.
Our leaders are now so corrupted by New American Socialism they can't even stop the for-profit education scheme I describe above.
The facts, by the way, aren't even in dispute. This is the obvious stuff – the stuff no one can really dispute. If our leaders let this industry rack up $250 billion in bad debts over the next decade, how can we expect them to do anything to stop our massive annual deficits and our runaway federal debt?
If the administration can't stop the for-profit education industry from getting its hands into the U.S. Treasury, whom will it stop? Nobody.
So the only real question is: Do I want to be buying stocks – any stocks – right now?
When I consider the unsustainable debts and unfunded liabilities the government has taken on... and the upcoming credit crisis New American Socialism has created... I arrive at the answer: "No."
Regards,
Porter Stansberry
Further Reading:
For the past few days, we've talked about what Porter calls "New American Socialism." It's a system fueled by paper money, the constant expansion of debt, and a kind of corruption that's hard to police because it occurs within the boundaries of the law.
Learn how it began... and how far it's spread... in the first three parts of Porter's series: New American Socialism, Why a Full-Scale Economic Collapse Is Inevitable, and An American Tragedy Brewing.
Market NotesCHART OF THE WEEK: A NEW WAY TO LOOK AT "RISK ON, RISK OFF" You can call the idea behind this week's chart "fun with correlations."
In the past year or so, we've highlighted a huge trend you don't hear about from your broker or the mainstream media: The extraordinary correlation of various assets, like crude oil, gold, stocks, and commodities in general.
You see, sprinkling your wealth into various assets like these often gets you a diversified portfolio. But nowadays, most assets have become joined at the hip in one huge "risk on, risk off" trade. A statistician would say they exhibit "high correlation."
As you can see from this week's chart, this idea is turning up in places you wouldn't expect. Our chart plots the performance of the tech-stock heavy Nasdaq Composite Index (blue line), the benchmark commodity index (black line), and a big commercial real estate fund (red line). As you can see, these three "diversified" assets are advancing at the same rate, with the same "up and down" movements.
So... should you buy tech? Commodities? Real estate? The answer isn't all that important. It's just "risk on, risk off" these days...
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Stat of the week
275%
Gain in share price of super-successful fast food restaurant chain Chipotle Mexican Grill in the past two years.
In The Daily Crux
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