Whose (de)Fault Is It? Cars, students, and countries.

As I was looking for a topic to write about, I was struck by the articles I’ve read over the last few weeks pertaining to debt. In many ways, debt is good. We buy houses using mortgages and for many it is the equity they build over the years that helps fund retirement later in life. Student loans are there to help us have a more educated workforce. Auto loans move inventory, and in the years of shorter vehicle life spans, kept us all on the roads. Countries borrow, of course. Our own bond market is one of the largest trading markets in the world.

Debt is good. But only if managed properly. The mortgage crisis is beginning to fade into our memories a bit. The pain endured by so many is no longer at the forefront. When the crisis hit, we all thought about that pain. Now only the people still left with underwater home values or other continuing negative circumstances directly attributable to that crisis think about it regularly. And what happened to cause that crisis. Everyone got loans, the money flowed easily. Rates were not high by historic standards. Builders built. And built. And built.

Good thing that’s a distant memory. Won’t make that mistake again, right? Hmmmm…Car sales figures come out this week. We’ll start there. I hope the numbers are good. We need continuing signs of economic strength. We have a record breaking rally underway that no matter your opinion of the causes, none of us is wishing for a crash. Well, a few maybe, but they’re just talking their positions, so to speak.

But the auto industry may not be so healthy no matter the sales figures. The level of car debt has been getting a great deal of press. That press is not positive. And a look at the chart shows no “Record Breaking Rally” going on in that industry.

Auto stocks v SPX with commentThe number of people delinquent on car loans is at a high. Subprime auto loans have exploded, and delinquency rates on those loans as calculated by Morgan Stanley Research is over 4.5%, and close to the level reached during the financial crisis. While not near the cost of a home loan default on the economy, cars are one of the larger purchases most people make.

When we look at the impact of debt on our economy, both directly and indirectly, we can’t discount student debt in the equation. In fact, I believe we should be paying much more attention. Remember unlike car loans, most student debt is government backed. Some people are paying attention. Like those betting against our expansion of home debt a decade ago, there are fund managers betting against the student loan levels (dare I use the word “bubble?”).

Michael Burry was featured in the Michael Lewis book “The Big Short.” John Paulson also made billions from that mortgage move. But like the mortgage crisis, there are not a lot of people outside of a few fund managers that are going to see a big benefit if this is a bubble that bursts. And how does it get handled? How much more money can the government print for bailouts? The housing crisis bailout was pegged at $700 billion. We were in the Trillions with a “T” if you count emergency lending. That’s a lot of bailout. We could have bailed out virtually all student debt at the time with the same amount. But it was the banks, not the students that were too big to fail.

Like housing debt, there are large implications of student debt. The effect of these loans built from educations that can easily cost $250 thousand, yes a quarter of a million dollars for college(!) is something that weighs on an entire generation. And while we have not seen much inflation to speak of the last few years, the cost of college education has not stopped going up. Since the financial crisis, student loan debt in the government portfolio has increased over 100% since 2008, from under $600 million to almost $1.3 trillion, per the US Department of Education. We are at well over a trillion dollars. And delinquency rates are over 10%. This is not a pretty picture. We’ve already forgotten we started the blog with car loans…

So let’s move on to the last part of the title…countries. Makes you cringe just thinking about it. Venezuela’s economy is collapsing, but we don’t pay too much attention it seems. We watched the Greek economy pretty much do the same. The Pound has taken a bit of a pounding to say the least, based on Brexit. Now there’s talk in France by the far-right National Front Party of exiting the Euro. This is not simply like Great Britain exiting the European Union and whatever downstream effects that will have. This is exiting the Euro, the currency. And while not probable, we’ve seen some improbable stuff lately.

This would have far reaching impact and could easily disrupt the stability of the EU overall. France’s exit and its exiting the Euro currency would be viewed as a default on the country’s debt, according to Moritz Kraemer, head of S&P’s sovereign ratings. With or without that Frexit, France is at the top of many lists for the next economy to watch for possible collapse. The last couple of years have brought a number of impossible events into the world of possible.

I have little worry about the US economy collapsing. We’ve already dealt with “Too big to fail,” and seem to be coming out the other side intact. We’ve started raising rates. A good sign in a couple of ways. It signals expansion has seemingly taken hold. It also ‘should’ help curb some of that borrowing. But there is a lot of debt already in existence. And much of the larger debt, including education and cars, is in shaky shape. Debt is a double edge sword of the sharpest kind. Again, the US dollar and economy collapsing? Not anytime soon. Impossible? I for one have stopped saying anything is impossible. From easy space travel becoming a reality, to first world countries collapsing, it’s all possible.

And we are all to blame. We love debt. It’s addictive. Especially at low rates as we’ve enjoyed for more than just a few years now. Remember, debt is like a trading position. Properly managed debt is good. Improperly managed debt will break you. So keep an eye on the numbers. Keep an ear out for the possible solutions. But all the while, don’t ignore macro factors that you don’t think will affect your micro investing. We’ve created a world of economic influence where all of this matters. A Lot.

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