by Lawrence Meyers | June 8, 2012 6:00 am
Following my apparently controversial article on making money off the student loan bubble — which included one blogger calling me a “disgraceful pig,” and another calling me a “disgusting reprehensible pig-person” (complete with cartoon!) — it’s obvious that I didn’t find enough opportunity to profit. Instead, I discovered a lot of people with a swine fetish. I’ll know I’ve mined enough moolah when the loonies start using four-letter words and insulting my ancestors. So, with that in mind…
For starters, all this nonsense about the average student carrying a hundred grand in debt is just that — nonsense. The Federal Reserve Bank of New York’s March 2012 study shows an average balance of only $23,300. That amount is only 50% higher than it was in 2001, while the 10 years previous to that had seen a doubling in the average student loan balance. So the rate of increase isn’t even what it used to be.
Now while some people crow about the terrible burden this debt poses to its holders, and setting aside that borrowers took out these loans of their own free will, the question I ask today is how will this $870 billion in debt affect the overall economy, and the stock market.
This issue ties into a bigger economic problem — namely, that economies grew globally as the result of significant leverage. Now, the world is deleveraging. People are using income to pay back lenders instead of spending it. Thus, those people with student loans — assuming they don’t become deadbeats and default on their obligations — are going to have to pay back that $870 billion over time instead of spending it on a new car, a house or other large discretionary purchases.
When you combine this debt with the $640 billion in credit card debt and $730 billion in existing auto debt, you may start to see why people need to deleverage.
The debt itself is not necessarily bad. If you have a good job, then it’s just another piece you need to pay out of a healthy salary. However, when combined with the high unemployment rate and historic low labor force participation rate delivered to us by President Obama, it means any income that folks do make is going first to pay down that debt — and they’ll run out before being able to buy new stuff.
That probably will keep a damper on the housing market for some time to come. Combine that with tighter lending restrictions, and I don’t see why anyone should be bullish about housing. Still, some people are judging by the resilience in the homebuilders. But I think you could short the iShares Dow Jones U.S. Home Construction Index Fund (NYSE:ITB).
A safer bet is to assume that the 21- to 40-year-old demographic will be renting apartments rather than the buying homes. In that case, buy apartment REITs, which also pay nice dividends. I think the three strongest are Essex Property Trust (NYSE:ESS), Avalon Bay Communities (NYSE:AVB), and Mid-America Apartment Communities (NYSE:MAA), which pay respective yields of 3%, 2.9%, and 4%.
Car sales have been going strong this year, but again focusing on people with student debt, I’d expect more volume from used-car sales than new ones. You could go with an actual used-car dealer that also provides high-margin in-house financing by buying America’s Car-Mart (NASDAQ:CRMT) or CarMax (NYSE:KMX). I also like the aftermarket part suppliers, since cars always needs parts. Take a look at AutoZone (NYSE:AZO).
Finally, sad to say, but some of these debtors may end up defaulting on any number of loans they may hold. That means debt collectors like Portfolio Recovery Associates (NASDAQ:PRAA) will continue to see solid growth in their business.
While some clueless people hand-wring over the student debt bubble, capitalism is about taking advantage of opportunity. If nobody ever did that, distressed assets would forever remain distressed, and wealth would never be created by entrepreneurs willing to risk their own hard-earned capital. There’s no reason why investors shouldn’t do the same.
Lawrence Meyers does not own any stocks mentioned. However, he has been known to use capitalism to his advantage, make fun of whiny socialists who think education should be free and believes that if you took out a loan you couldn’t afford to repay then that’s your problem, and not the government’s. He also kicks puppies.
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