One of the World's Best Bond Investors Is Buying... Gold Miners?
An 'alarming' admission about student loans... Obama 'forgives' 400,000 borrowers... More big names speak out on negative interest rates... One of the world's best bond investors is buying... gold miners?...
The growing bubble in student loans is one of the biggest threats to the U.S. today.
To put the size of this problem in perspective, consider this: At almost $1.3 trillion in loans outstanding, student-loan debt is almost three times bigger than all the debts of Greece. And it's still growing at 17% a year... more than seven times the official rate of inflation.
More than 40% of the federal government's outstanding loans are not being paid today... and nearly one in six borrowers is already in default. But according to the latest report from the Federal Reserve, even those frightening numbers may not tell the whole story.
In its Quarterly Debt Monitor, the Federal Reserve Bank of St. Louis noted current delinquency rates are concerning, but said the true rates could actually be even higher. From the report...
These delinquency rates likely understate the effective delinquency rates, because many student loans are in deferment, grace periods or forbearance and are temporarily not in the repayment cycle.
The implications of these alarmingly high rates is not immediately clear, especially given that many student loans cannot be shed in personal bankruptcy. However, a large share of young borrowers saddled with severely delinquent loans may inhibit aggregate economic growth as this group is unable to participate in other economic activities, such as buying a home or saving for retirement.
As a colleague noted in a private e-mail this morning, when the Federal Reserve – whose officials played no small role in creating this problem – is using phrases like "alarmingly high," you know it's getting bad.
Unfortunately, if a recent survey of the youngest borrowers is any indication, it could get even worse from here...
A survey by research agency TNS found "millennials" – defined here as those between the ages of 18 and 35 – have average student-loan debt of more than $41,000. That is 40% higher than the national average.
But that's not all...
Most young students already regretted taking out these loans, and one in three said he wishes he hadn't gone to college at all.
Nearly two out of every three students had "no idea" when they would be able to pay back their debt... 8% said they have no plan to pay their debts back... and another 8% percent said they planned to delay payment by going back to school (and taking on even more debt).
Clearly, this trend is unsustainable. Huge numbers of young people are borrowing huge sums of money they have no hope (or intention) of ever paying back.
As we've discussed, student loans can't easily be canceled through bankruptcy, like other forms of debt. But there are signs that could change...
Yesterday, the Obama administration announced it was forgiving the student loans of hundreds of thousands of borrowers. According to reports, the Department of Education will send forgiveness letters to 387,000 people identified as "eligible for a total and permanent disability discharge."
Unlike the normal process for receiving federal disability – which requires documented proof of a disability – these borrowers will simply have to sign and return an application letter. As Under Secretary of Education Ted Mitchell said in a statement, "Americans with disabilities have a right to student loan relief... And we need to make it easier, not harder, for them to receive the benefits they are due."
If all 387,000 people identified participate, the government will "discharge" nearly $8 billion in loans. It's a small step, but it's likely just the first of many more to come.
Much like the Greek debt crisis, many of these loans have virtually no chance of ever being paid back. Sooner or later, the government will have no choice but to forgive these debts or allow them to default.
Of course, debts don't simply disappear. In either case, creditors (read: U.S. taxpayers) will be left with the tab.
On Monday, we shared "Bond God" Jeffrey Gundlach's recent warning about negative interest-rate policies (or "NIRP" for short).
But he isn't the only prominent investor who's concerned...
In a weekend interview with financial newspaper Barron's, Bill Gross – the former "Bond King" who previously managed the world's largest mutual fund at PIMCO – explained how low (and now negative) interest rates are destroying our economy from the inside out...
The best examples of this include the business models of insurance companies and pension funds. Insurers have long-term liabilities and base their death benefits, and even health benefits, on earning a certain rate of interest on their premium dollars. When that rate is zero or close to it, their model is destroyed.
To use another example, California bases its current and future pension payments to civil workers on an estimated future return of 8% or so from bonds and stocks. But when bonds return 1% or 2%, or nothing in Germany's case, what happens? We've seen the difficulties that Puerto Rico, Detroit, and Illinois have faced paying their debts.
Now consider mom and pop and other people who read Barron's. They are saving for retirement and to put their kids through college. They might have depended on a historic 8%-like return from stocks and bonds. Well, sorry. When interest rates get to zero – and that isn't the endpoint; they could go negative – savers are destroyed. And savers are the bedrock of capitalism. Savers allow investment, and investment produces growth.
Larry Fink, CEO of asset-management giant BlackRock, agrees. In his latest annual letter to shareholders published Sunday, he also singled out how negative rates could crush investors who are already struggling to save enough for retirement. From the letter...
Not nearly enough attention has been paid to the toll these low rates – and now negative rates – are taking on the ability of investors to save and plan for the future. People need to invest more today to achieve their desired annual retirement income in the future.
For example, a 35-year-old looking to generate $48,000 per year in retirement income beginning at age 65 would need to invest $178,000 today in a 5% interest rate environment. In a 2% interest rate environment, however, that individual would need to invest $563,000 (or 3.2 times as much) to achieve the same outcome in retirement.
This reality has profound implications for economic growth: consumers saving for retirement need to reduce spending if they are going to reach their retirement income goals and retirees with lower incomes will need to cut consumption as well. A monetary policy intended to spark growth, then, in fact, risks reducing consumer spending.
Speaking of Gundlach, he held his latest monthly webcast for DoubleLine Capital investors last night.
While the talk was focused primarily on proper asset allocation, he not only reiterated his bullish stance on gold, but also noted he has been buying gold-mining stocks as well.
It's unusual to hear someone like Gundlach – a brilliant guy who built his career analyzing the credit markets – admit to owning speculative gold stocks. But it's a testament to just how serious our monetary problems have become... and just how great the opportunity is.
As regular readers know, we're confident gold and gold stocks will be much higher in years to come... But it's always reassuring to hear that one of the world's most successful investors agrees.
To learn more about our new Stansberry Gold Investor service – without having to watch a long promotional video – click here.
New 52-week highs (as of 4/11/16): Franco-Nevada (FNV), Market Vectors Junior Gold Miners Fund (GDXJ), Invesco Value Municipal Income Trust (IIM), Kaminak Gold (KAM.V), Nuveen AMT-Free Municipal Income Fund (NEA), Newmont Mining (NEM), NovaGold Resources (NG), New Gold (NGD), Nuveen Premium Income Municipal Fund 2 (NPM), Nuveen Municipal Value Fund (NUV), OceanaGold (OGC.TO), Prestige Brands Holdings (PBH), Seabridge Gold (SA), SEMAFO (SMF.TO), and Wells Fargo – Series W (WFC-PW).
In the mailbag, three subscribers explain how they're using our gold advice to protect their portfolios. Have you taken our suggestions yet? Let us know at feedback@stansberryresearch.com.
"Thank you for this confirmation of my feeling for the past 15 years. I have been listening to and preparing for this event since 2000 sometimes to my cost. In preparation my portfolio now is 30% physical gold and silver, with about one third of that in goldmoney and bitgold. The rest is in high quality precious metal miners, explorers and royalty companies. (Also about 20% cash) I also have a 3 month supply of food. As I live in Canada I have not felt the necessity to own a gun but it crosses my mind.
"The amazing thing to me is that if you indicate your ideas even to your wife and family they think you are a bit mad and these are intelligent people whom I greatly respect. As to telling friends on the golf course etc., well, do I need to go on? I'm sure you have had similar reactions. So thanks again for more confirmation of my feelings. I am great admirer of Jim Rickards, James Grant and Stansberry." – Paid-up subscriber Mike S.
"Dear Porter and Colleagues, like a 'Texas Hold 'Em' tournament, I'm ALL IN. Except the major difference is that what you have recommended is not gambling!!
"Buy gold bullion and junk silver – CHECK
Buy large producers/royalty companies – CHECK
Buy gold in the ground/small producers – CHECK
Buy select explorers – CHECK
"I own 14 of the 15 so far. Just waiting for the last one to come into 'buy' range. Plus I opened a Global account to be able to buy on the Canadian exchanges. You and your team conducted a very professional and exciting webinar. Personally I'm not able to thank you enough. I've told friends to listen to the taped presentation. Hopefully they get the 'message.'" – Paid-up subscriber Frank S.
"Yes, the Metropolitan Plan is scary! I would like to think it would never happen in my lifetime, but I don't think I can. I've read many of the suggested offerings from people you have talked to and shared with us, but I still have many questions. However, even with those questions I have visited a local jeweler and purchased gold. My purchase was in accordance with the daily price of gold and the salesman was very helpful. I will be going back with more funds soon! Thanks for all the input from Stansberry, I never would have known or begun to plan anything about gold without my subscription to your service." – Paid-up subscriber J.M.
Regards,
Justin Brill
Baltimore, Maryland
April 13, 2016
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