The Student Loan Crisis Is Even Worse Than We Knew

Don't miss the Report Card... Will the 'Trump Trade' resume?... Trump takes office... The student loan crisis is even worse than we knew... Sjug warns of another historic extreme...

It's Report Card time...

As longtime Stansberry Research subscribers know, we're among the few financial publishers anywhere who provide an honest and transparent review of our results each year.

Porter revealed the first installment of this year's Report Card in Friday's Digest. If you missed it, you can read it for yourself right here. And please let us know what you think at feedback@stansberryresearch.com.

Will the "Trump Trade" resume?

Regular readers know Donald Trump's policy proposals have led to expectations of higher economic growth and inflation. This in turn has pushed the U.S. dollar, stocks, and interest rates higher, while pushing bonds lower.

But will the new Trump administration successfully do all it has promised? Or will reality fall short of the market's expectations?

We're about to find out...

Trump kicked off his first official week in office meeting with some of the country's largest technology and manufacturing companies...

And he immediately doubled down on a few of his biggest proposals.

In the meeting that included executives from Dell, Dow Chemical, Ford Motor, International Paper, Lockheed Martin, Tesla, Under Armour, U.S. Steel, and Whirlpool, among others, Trump promised "massive" cuts to taxes and regulations.

He again said he would seek to cut the top corporate tax rate from 35% to 15%. And he said he intends to slash regulations – which he said is even more important to business leaders than tax cuts – by "75%, maybe more."

He also promised his administration would speed up approval of major business investment projects. "When you want to expand your plant, or when [Ford Motor] wants to come in and build a big massive plant, or when Dell wants to come in and do something monstrous and special – you're going to have your approvals really fast," he said.

Trump also repeated earlier warnings that companies trying to move jobs overseas would face stiff penalties...

As news service Reuters reported this morning...

The new president told companies that they were welcome to negotiate with governors to move production between states, but said those businesses that choose to move factories outside the country would pay a price.

"We are going to be imposing a very major border tax on the product when it comes in," Trump said. "A company that wants to fire all of its people in the United States, and build some factory someplace else, and then thinks that that product is going to just flow across the border into the United States – that's not going to happen," he said.

Again, it remains to be seen whether the Trump administration will be able to do all it has promised...

But it appears these three proposals in particular – cutting corporate taxes, slashing regulations, and protecting U.S. trade – are clear priorities for the new administration.

We're all for cutting taxes and red tape for businesses and individuals alike. But the benefits of Trump's trade proposals are less clear... particularly if China and other trading partners retaliate with trade barriers of their own.

We'll be taking a closer look at these proposals – and the potential winners and losers they could create – in future Digests.

The burgeoning student loan crisis is far worse than we knew...

Regular Digest readers know the growing bubble in student loans is one of the biggest long-term threats in the U.S. today.

At more than $1.4 trillion in loans outstanding, student loan debt is nearly four times bigger than all the debts of Greece. And it's still growing at nearly 20% a year... multiple times faster than the official rate of inflation.

Worse, the government's own data has showed as much as 30% of this debt – nearly one out of every three loans – isn't being paid or is already in default.

Unfortunately, it now appears even these numbers were far too rosy...

Earlier this month, the government quietly released a memo saying it had overstated student loan repayment rates due to a "technical programming error." As the Wall Street Journal reported last week (emphasis added)...

The student loan repayment rates were originally released in 2015 as part of the Obama administration's College Scorecard, which followed an aborted attempt to rate colleges and tie federal funds to those ratings.

At the time, the Journal reported that at 347 colleges and vocational schools, more than half of students had defaulted or failed to pay down their debt within seven years. Those figures were based on students who were supposed to start repaying loans in 2006 and 2007.

In September, the Department released data tracking students who should have begun repayment in 2007 and 2008, and that number rose to 477. But with the updated number released last week, that number grew to 1,029.

Yes, you read that correctly... At more than 1,000 schools – representing about one-quarter of all U.S. colleges and trade schools – more than half of students have already defaulted or failed to pay even one dollar toward these loans within seven years of leaving school.

Across all schools, the data show as many as 40% of borrowers haven't paid a single dollar toward these loans within seven years. Looking at just the past three years, this number jumps to more than half – 54% – suggesting this problem is only getting worse, not better.

In other words, according to the government's own data, at least 40% of this debt – representing more than $500 BILLION that has been packaged up, "securitized," and sold to investors as "money good" – will likely never be paid back at all.

What could possibly go wrong?

Finally, we note our colleague Steve Sjuggerud is warning of another extreme...

Last week, we highlighted Steve's recent success trading the sentiment extremes in U.S. Treasury bonds.

Today, he says a similar extreme in the crude oil market suggests oil and oil stocks could be headed for a significant decline. As he explained in this morning's edition of our free DailyWealth e-letter...

In 2014, oil prices crashed. They fell a staggering 58% in seven months, from $107 a barrel all the way to $45. Was there a warning sign? Yes!

One indicator we track predicted the crash in oil prices. And now, for the first time since 2014, this warning sign is flashing again...

Of course, regular readers know the indicator Steve is referring to is the behavior of futures traders tracked by the government's Commitment of Traders report... the same measure that alerted him to the recent extremes in Treasury bond market. More from Steve...

Take a look at the chart below. In 2014, large speculators were betting on higher oil prices. It was an all-time record in optimism – by far. So in hindsight, it's no surprise that the price of oil crashed dramatically after such a huge extreme...

Notice that I said it "was" an all-time record. I said "was" because the oil warning sign hit a NEW all-time record near the end of 2016. Large speculators have literally never been this optimistic about oil prices.

You can see what happened next... Oil hit a new 12-month high at the same time. And the price of oil has since turned down.

As Steve noted, this is just one indicator... But it was nearly perfect in predicting the last big top in oil prices. Regardless of your stance on the oil markets today, Steve recommends caution in the near term...

Large speculators are literally more optimistic about the price of oil than they have been – EVER. Based on this fact alone, I would not speculate on a higher price of oil.

You may feel strongly that oil prices will go higher in the long run. That's fine. However, you should trade carefully, based on this warning sign.

Until these large speculators get washed out – which might only take a couple months – I strongly recommend limiting your bets on rising oil prices.

New 52-week highs (as of 1/20/17): Auryn Resources (AUG.TO), Boeing (BA), CONE Midstream Partners (CNNX), Huntington Ingalls Industries (HII), PureFunds ISE Mobile Payments Fund (IPAY), Altria (MO), and Northern Dynasty Minerals (NAK).

The mailbag is overflowing... Several Stansberry's Credit Opportunities subscribers respond to Porter's request for feedback... two others share their thoughts on the first installment of our annual Report Card... and several more weigh in on paid-up subscriber Anselmo's Flex Alliance complaint. Send your notes to feedback@stansberryresearch.com.

"Hi Porter, you asked for feedback on the SCO newsletter in the Digest today and, well, here it is. It has been outstanding! And I really enjoy the historical background you provide as the lead in to the details. In particular, I have done very well with the 'synthetic convertible' recommendations that pairs the bond and the stock but all the bonds I have purchased are winners thus far since they were bought at or below the buy-up-to price. I learned from your many teachings not to chase prices so am still waiting for a few to pull back.

"I had never purchased a bond before and it was very simple with the broker I use; type in the CUSIP and up pops the bond. It was as easy as buying a stock. There were a few that my broker didn't trade (mostly convertibles) so I have made it into about half your recommendations. I plan to keep following SCO and will be happy to see the credit cycle roll over so we have more frequent and profitable opportunities to pursue. Thanks for the great work." – Paid-up subscriber Brian P.

"I am a Stansberry's Credit Opportunities charter member and I couldn't be happier with the service. I appreciate that you don't make recommendations every month if nothing is worth buying. Furthermore, you explained very clearly even before opening the service that there are good and bad seasons for investing in distressed bonds and that's why you require a lifetime membership in the service. We're not in an optimal season but we all know it will come eventually. I can now be patient knowing that when corporate debt sells off in concert with the stock market rolling over, I'll have excellent opportunities to purchase distressed debt. I am happy with the bonds that I'm holding right now, I never check the prices because I'm holding them to maturity. I have written to you previously to say thank you, but know that I continue to be appreciative of the work you do." – Paid-up subscriber Brian D.

"Well done, very well done. I hope we are just getting started. I started trading Gov't. and Federal Agency bonds for a large midwestern bank in 1968. I finished as head of the Corporate Bond Desk at a major midwestern investment bank. In between I also managed the north central region of Paine Weber's municipal bond underwriting and trading. I worked through a lot of different market conditions. In retirement it has become increasingly difficult to follow individual bonds. Research for individual investors, especially anything with a little hair on it is impossible to get. Largely because of regulatory issues. Your work is as good or better than any I have encountered in all the years I have observed the markets. Stay diligent and keep it up. We are counting on you." – Paid-up subscriber Richard E.

"I had never purchased a bond before trying [Stansberry's Credit Opportunities]. It took me a couple of months to get my account ready to go. I ended up going with Vanguard and was ready to begin buying in April 2016. Unfortunately, I wasn't able to get into most of the recommendations before they moved above the buy-up-to price. I was able to get a stake in [four of these] bonds for below your recommended price. So far so good with no losing positions. Just sitting back now and collecting interest until others fall back into range. The whole process was easy. Vanguard does allow you to buy w/o talking to a person but to get the best price, you have to call, which was not bad at all. The only part I don't like is that you can't set your price and then walk away with a 'good until cancelled' order but that certainly isn't enough to make me not recommend getting into bonds. Thanks and keep up the great work." – Paid-up subscriber Scott

"Porter: As an Alliance member, I believe that the initial annual Report Card was fair. I particularly agree with the ratings accorded to Stansberry's Credit Opportunities and Extreme Value. As for the former, I had never before purchased a corporate bond, but I did not hesitate after reading the persuasive analyses that were provided, and I neither anticipated nor experienced any difficulty dealing with the bond desk at my well known online broker.

"Sadly, I was not able to establish a position in all of the recommendations, but those I was able to purchase below the 'buy up to' price did (and continue to do) exceptionally well. This service was really a continuation of True Income (albeit in a more challenging environment) which was also well conceived and executed. Stansberry's Credit Opportunities does teach subscribers that, as you say, if they realized how well they could do with bonds, they might never buy another common stock.

"As for Extreme Value, your F grade was deserved, and I respect your organization for its realistic assessment. Extreme Value's untimely shift from long to short on IBM compounded an error and was embarrassing. Regardless, the value Stansberry delivers to its subscribers at all levels is, in my opinion, extraordinary. I speak from experience. Readers who are considering upgrading their subscriptions or joining the Alliance should not hesitate. Many thanks." – Paid-up Stansberry Alliance member Richard

"Dear Mr. Stansberry, I admire your honesty and integrity in owning up to your own culpability in not beating the S&P. While, by your own admission, you were overly bearish, again, by your own admission, you were doing what you felt was best given the information in hand at the time. Hindsight is 20/20 and it's easy for subscribers to throw brickbats using such hindsight, I'm not one of them. I remember how scary it was back then. It was much easier to be a bear than a bull. It also made a lot of sense to hedge in case the wheels came off the wagon and it looked like it very well could. Also remember we were in what looked like the end of the longest bull market in history. It couldn't keep like this forever, could it? Apparently it could and it can and it will. Anyway, great report card. I'm a fan of you and your service. It has more than paid for itself. I have never regretted my Alliance membership for a moment." – Paid-up Stansberry Alliance member Steven F.

"Anselmo, I admit to being curious during the webinar how things might shake out for us Flex members, but wasn't too surprised how it turned out... To Porter's point, though – I don't know of another company that treats their clients as well as Stansberry. They are willing to apply everything you've ever paid and apply it towards an Alliance membership?! Let that sink in. You and I may not be able to take advantage of that, but it is a very generous offer... AND, the Flex membership IS an incredible value!! I don't seem to do as well as everyone else, but there is an extraordinary amount of actionable advice there. And who knows what new products may be lurking on the horizon?

"After some soul searching and number crunching, I did decide to upgrade to The Total Portfolio. And Stansberry did apply money I invested into the Flex Alliance towards the cost. You make some good points, Anselmo, but maybe you are too close to it. Take a step back and really see the value of what you do have. It's good – really good! I think this new service covers a lot more ground than we were promised with the Flex Alliance. Cheers." – Paid-up subscriber B.T.

"Hi Porter, when all the smoke clears some subscribers want to have their cake and eat it too. You spoiled us rotten and now you have to deal with the consequences (i.e. subscription entitlement program)." – Paid-up subscriber Paul M.

"You have always been more than fair... The only mistake you have made is starting the Flex membership to begin with. Should have stayed with only Alliance." – Paid-up subscriber A.E.

"Porter – I have a feeling whenever you address complaints in the Digest about Flex policies another bottle of Bordeaux winds up missing from your stash... no good deed (or generous subscription) goes unpunished! Enjoy the wine!" – Paid-up subscriber Kelly L.

"I have been monitoring these discussions for some time, and your position toward Flex members does not seem at all unreasonable to me. Most of my career was spent in insurance, and something that is always critical is the intent of coverage. I believe you clarified your original intent with Flex and have offered generous solutions. By the way, my major at UCLA was Economics, and I have found your references to the Fed, et al, refreshing and illuminating, as well as your introduction of Stansberry's Credit Opportunities and [True Wealth China Opportunities]. I jumped right into both as soon as they were offered. Keep up the good work!" – Paid-up subscriber Glenn G.

"Just wanted to put in my comments regarding the Friday, the 20th comments by a FLEX Alliance subscriber. I am an Alliance member for what appears to be an 'orphan' Alliance, that being the Permanent Wealth Alliance. This program put forth certain parameters part of that being Lifetime subscribers to the publications specified. I have been very happy with this program as it gives me access to the right amount of information for me with the folks I think are the best analysts at Stansberry.

"I am a retired business owner and recognize among your subscribers the handful of people who patronize any business who want everything for nothing or at least at half price. My experience is that if the situation were reversed they would cut you NO SLACK. I have experienced a high level of service from your organization and felt that I received value far beyond what I have paid. Some of your recommendations didn't seem right for me and I didn't buy them. In some cases they turned out better than I expected and others I was glad not to have bought them. You haven't offered your service as a replacement for our brain but just as generally well researched information for our consideration but apparently some don't understand that. Thank you for giving me excellent information and value for what I paid that has greatly assisted me in my investing.

"I will also say that I highly respect Dan Ferris' work and was an Extreme Value subscriber at one point but found that the recommendations didn't work well for me. Nevertheless I feel badly that he received a low grade on the current report card because, in my mind, he is one of your top guys!! Thanks again for doing business in an above and beyond fair manner as I always tried to do in my businesses." – Paid-up subscriber Bob E.

"Please tell Flex customers to stop whining – they got the best deal you offer. I spent plenty on a lifetime subscription to [Stansberry] Venture only to hear you're including it with future Alliance purchases. But I'm sure not complaining. I've made a ton with you guys over the past ten years. People often mistake true value for prima facie cost. There must a good name for that?" – Paid-up Stansberry Alliance member Stacey M.

Regards,

Justin Brill
Baltimore, Maryland
January 23, 2017