Target Date for a Bubble Bursting

August 9, 2012
  • Latest in a long line of stellar predictions: Ben Bernanke inadvertently guarantees the bursting of a bubble
  • Why student loans are set to blow up less than a year from now… and steps to take in your portfolio now
  • A rerun of previous food riots? Not yet, but one chart gives us pause…
  • Misplaced hopes for the next Alzheimer’s breakthrough… and a study that could change everything for early investors
  • Taking the pulse of China… A proposed ban on Tic Tacs… A concerned father saves scores of kids from being stabbed (or so he thinks)… and more!

  We have a new entry to stick into the file labeled, “Famous Predictions of Ben Bernanke.”

The file is already fairly bulging, the metal supports on the hanging folder about to buckle…

  • “It’s a pretty unlikely possibility. We’ve never had a decline in house prices on a nationwide basis.” (July 2005)
  • “We see no serious broad spillover to banks or thrift institutions from the problems in the subprime market.” (May 2007)
  • “The Federal Reserve is not currently forecasting a recession.” (January 2008, a month after the recession began)
  • “Currently, we don’t think [the unemployment rate] will get to 10%.” (May 2009, six months before it hit 10.2%).

  Which brings us to yesterday, when he addressed the $1 trillion in outstanding student loans.

We perked up at the sight of this, seeing how the higher-education bubble has been on our radar for more than a year. Without any further ado, here goes:

“I don’t think it’s a financial stability issue to the same extent that, say, mortgage debt was in the last crisis because most of it is held not by financial institutions, but by the federal government.”

We can perhaps credit Ron Paul for this new gem; it came during a “town hall” meeting with teachers. Were it not for the good doctor’s tireless audit-the-Fed efforts, such an event — part of the Fed’s faux efforts at “transparency” — might have never happened. (Real transparency would entail C-SPAN cameras carrying the Federal Open Market Committee meetings live, no?)

Further, Mr. Bernanke’s latest declaration stands in a league of its own.

After all, it was no less than Alan Greenspan who said it is “very difficult to definitively identify a bubble until after the fact — that is, when its bursting confirmed its existence.” Here’s Greenspan’s successor, denying the existence of a bubble in the first place. Will wonders never cease…

  Once again, the gods of comedic timing have come through in a big way for The 5… in the form of a front-page, above-the-fold article in today’s Wall Street Journal…

The Journal picked apart data from the very institution Mr. Bernanke oversees and found that higher-ed debt is swamping upper-middle income families, classified as making $94,535-205,335.

The percentage of families carrying student loan debt grew faster among this income group than any other from 2007-2010.

“The surge is leading many such families to look closer at cost and value when choosing colleges,” says the once photo-free rag. “If the new frugality continues, experts say, it could make it difficult for all but the most-selective schools to keep pushing through large tuition increases.”

What? No more exponential growth? Say it ain’t so!

The paper profiles a parent from Albany, N.Y., whose son was accepted to Notre Dame: “She says she feels trapped in financial purgatory, between ‘people with lower incomes who have a lot of subsidy, and the truly affluent, for whom this isn’t a problem.'”

A financial aid person from Notre Dame said people at the $125,000-250,000 income level are a big challenge for private institutions like hers because “the contributions expected from them are probably higher than what the family is prepared to do.”

In the past, these families were cash cows for colleges and universities: There aren’t enough super-rich paying out of pocket, while lower-income families soak up grant money.

  “The real fallout from the student loan crisis will hit in mid-2013,” suggests our macro strategist Dan Amoss in a special alert this morning that Addison ordered up specifically for readers of Apogee Advisory.

Mid-2013 will mark four years after the volume of government-funded student loans surged.

“Like the infamous option ARMs (adjustable-rate mortgages) during the housing bubble, these loans have precisely timed fuses: Four years after the loans are made, borrowers must start making payments.”

130  “The U.S. Department of Education has become the Countrywide of student lending,” says Dan, extending the analogy.

“After a lending binge started in 2009, it now holds a massive $452 billion portfolio of student loan receivables, according to Federal Reserve data. This so-called ‘asset’ will become a liability by next year. Thanks to the punk job market, a huge percentage of these loans will go bad or have to be restructured.”

Dan estimates these bad loans will blow a minimum $100 billion hole in the federal budget. “Right now, even professional investors aren’t talking about the ticking time bomb of off-balance sheet student loan defaults. This, along with other unreformed entitlement programs, will swell the deficit far beyond even the biggest projections.”

  “The exploding deficit,” Dan goes on, “will force the Federal Reserve to not only keep rates at zero for the rest of the decade, but also to print trillions more dollars in order to buy the Treasury bonds floated to fund these deficits.

“This scenario argues in favor of a portfolio anchored by conservative cash and near-cash instruments, but with a key advantage over most other portfolios: a healthy allocation to tangible stores of value, including precious metals and stocks of companies with pricing power.

“You must be picky in this sideways, grinding bear market, but not go all to cash, in which you’ll lose purchasing power over time. The younger you are, the higher your allocation to noncash investments should be.”

With that guidance, you can steer clear of the higher-ed bubble bursting. But you still need to protect yourself against an even bigger bubble — one that Agora Inc. founder Bill Bonner warns about in this rare video appearance.

  Stocks remain stuck in neutral this morning. The Dow is down a bit, the S&P up a bit.

“So far this week,” wrote Options Hotline editor Steve Sarnoff last night, “money has moved out of the perceived safety of Treasury bonds, back to the risk of stocks and commodities.

“As the euro rebounded and the U.S. dollar dropped, stocks moved up for a run to resistance. How the week closes may provide an important clue as to which side (buyers or sellers) has the advantage.”

[Ed. Note: Year to date, Steve has delivered 10 plays that could double readers’ money… or better. “My first trade,” writes a satisfied reader named Robert, “made me $6,540 profits! You are the first newsletter that I have tried out of hundreds that actually delivers what it promises.”

Robert’s story could be yours… Learn how you could win on your first trade at this link.]

  Worldwide food prices spiked 6% in July, according to the United Nations Food and Agriculture Organization.

Driven in large part by the U.S. drought, the FAO’s food price index leaped from 201 to 213 last month. Assuming the move isn’t a one-off and is the start of something big, “there is potential for a situation to develop like we had back in 2007/08,” the FAO’s senior economist and grain analyst Abdolreza Abbassian tells Reuters.

Corn goes for $8.245 a bushel this morning on the Chicago Board of Trade. According to research from Deutsche Bank, corn is the best-performing asset among a group of nearly 40 over the last five years — up nearly 140%. Gold and silver are the only others to come close.

 Precious metals are showing as much movement as yesterday — which is to say next to none. Gold sits at $1,613, silver at $28.13.

 Key numbers from China overnight were… shall we say, anti-Goldilocks.

Inflation in July registered 1.8% year over year, down from 2.2% the month before. Meanwhile retail sales grew 14.2%.

Both numbers were in a muddled middle — too weak to indicate a “healthy” economy (by recent standards), too strong to guarantee another interest rate cut by the People’s Bank of China.

“All these economic data did,” writes EverBank’s Chuck Butler, “were put the rate cut on the back burner, in my opinion. I still believe that at least one if not more rate cut(s) are coming in China. And that won’t help the global growth picture, according to the markets.”

time And then there were two: Only two drugs remain in the near-term pipeline for the treatment of Alzheimer’s disease.

As we mentioned on Tuesday, Pfizer and Johnson & Johnson have pulled the plug on a joint effort to develop an Alzheimer’s drug.

Now attention turns toward Eli Lilly, with a drug described in a Bloomberg story today as the “last hope for treatment” of the 5.4 million Americans diagnosed with Alzheimer’s. “Still,” says Bloomberg, “company executives have warned that a successful outcome for the drug, solanezumab, is a long shot.”

Indeed: The Lilly drug, like the failures that came before it, targets “amyloid plaque”… the stuff that scientists theorize scrambles the brain in the same way plaque can block your arteries. Lilly will likely release its findings by the end of September.

The other possibility is Gammagard, a Baxter Intl. product already on the market for treating diseases caused by immune disorders. It’s expensive and scarce, because it’s derived from donated blood plasma.

The most recent research results were mixed at best: “The participants did not show improvement in most of the symptoms of Alzheimer’s they already had,” USA Today reported last month, “but nor did they show any further decline on measures of cognition, memory, daily functioning or mood over the three years.” More definitive results are due by mid-2013.

Long before then, however… we’ll know the results of a study on a dietary supplement already on the market. It might well confirm a wealth of anecdotal evidence — people with Alzheimer’s disease who’ve experienced benefits from taking this supplement.

The study is under way at one of the most-prestigious Alzheimer’s research centers in the world… and it could prove a powerful catalyst beneath the stock of the company that makes the product. Patrick Cox has followed the story avidly for the last 18 months. You can follow the newest chapter here.

time “Tic Tacs appear to be about the same size as Buckyballs,” a reader writes in reply to Tuesday’s episode.

“Maybe the gov’t needs to outlaw them too, or make the manufacturer put another claim on the Tic Tac box to put no more than five pieces in your mouth at the same time.

“Please, U.S. gov’t, stay the hell out of my soup!!!!!!!!!!!

“Love The 5. Keep up the great work.”

The 5: Too late, Mr. Soup Lover… at least in California and Oregon, where effective this year, shark fins are now banned and shark-fin soup is no longer possible.

But on the subject of products that supposedly pose hazards to children… we see a do-gooder dad in England swept into action at a youth sports tournament when the school gave out medals made of… metal… with a point at one end.

Thank God for this guy! How many lives must he have saved in one day?

Lawrence Connolly snatched the medals from the 10-year-old son of a friend before he could (hypothetically) hurt himself: “It does make you wonder how in these health-and-safety days, these slipped through the net… I can’t believe someone’s allowed these to be given out.”

“Let’s hope,” writes Lenore Skenazy of the website Free-Range Kids, “no one ever hands any kids he knows a cross or a Star of David! The horror!”


Dave Gonigam
The 5 Min. Forecast

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