patrick.net

I mentioned this awhile ago and some folks dismissed it out of hand. Not a told you so I'm pleased with, but it is what it is.

Meltdown contagion. Higher education collapse, at least the weaker institutions.

US banks abandoning student loans

One of America’s leading banking associations has given warning that the United States faces a growing educational apartheid as some lenders withdraw from student loans amid new evidence that the credit crisis has spread across all types of borrowing.

That's no good news, unemployed, frustrated high school students with a dim financial future but uninhibited libido will quickly find themselves in organized or disorganized crime.

NVR,

We'd heard several weeks back that Michigan and other states were having difficulty getting loans placed and kids couldn't get loans. I really don't get it. This was "free" money for the banks b/c it's all gov. guaranteed.

So they were willing to do it as long as they didn't really loan the money and were able to just collect the interest?

It should go without saying, but please nobody endeavor to *smuggle* out any PM up your ass. Metal detector will surely go off, and you will certainly run into some problems.

*NOT SMUGGLING ADVICE*

What about BullionVault.com?

The biggest payoff of buying gold is a financial Armageddon, and as we approach the increasing shades of Armageddon, only physical will benefit the most.

So it seems offshore allocated gold is the only real option, huh?

When the next batch of orders from China come over, expect at least 20% jump in price.
OO, There was a discussion over on CR yesterday about new employment laws going into effect in China. Some folks were citing a 30% increase in COGs from manufacturers. Have you seen these new laws mentioned in the "foreign" press?

"expect at least a 20% jump in price"

The Horror.

So I should go down to Wallyworld today and buy up all the junk I need for the next year or so?

IF US is not buying, China has no pricing power regardless of costs.

DinOr,

So they were willing to do it as long as they didn’t really loan the money and were able to just collect the interest?

The scale of the debt crisis here is much smaller magnitude the USD amounts in Real Estate, but as RE pulls out the tide it is leaving that market standing naked.

Sorry about the italics, darn endtags...

DennisN,

LOL! Yeah, why are we wasting our time here blogging when we should be loading up the Chevy Subdivision w/ plastic do-dads that work one time and then need to be thrown away?

Well, we can kid around but the avg. family just starting their consumption curve (and already paying $4 gas) it can be impactful.

EBGuy,

The new law was just the last straw on the camel's back. Due to the soft peg nature of Yuan to the crashing USD, China faces tremendous pricing pressure on imported materials from oil to food. With or without the new labor law, Chinese manufacturers face only two choices: increase price drastically to reflect their COGS, or shut down. The new labor law just hastened the move.

Another nail on the coffin is the abolishment of export subsidy by the Chinese government, which started in 2007. Without export subsidy in the form of rebate, many low-tech, labor-intensive Chinese factories are running at marginal loss already.

China eventually reaches the stage that it HAS TO export inflation, or the communist government will face serious social repercussions.

The wage of assembly workers in China went up about 15-18% per annum for the last two years, or you can't recruit enough workers.

The driver of wages for these workers is food cost. They are migrant farmers from the countryside. If your wage doesn't catch up with soaring food cost (going up way more than 30% in China per annum), they would rather stay on the farm and grow what they need to consume.

NVR,

Excellent post. It leaves me wondering if Ed. loans are really in all that much peril? Banks describe it as lack of investor appetite but I tend to think it's a solvency issue. That and the holding of "TAD" hostage?

"Get off our @$$ or your kid is going to S-outh H-armon I-nstitute of T-echnology!"

"F'd Student"

Good Lord. Yeah, the two were hopelessly entwined. If you were lucky, you got "someone else" to buy your McCr@pshack to pay off your kids college loans. If not, you wound up with HELOC Debt you can't unload (or tap further) AND college loans. If you were REALLY unlucky your kid is only a sophmore.

The wage of assembly workers in China went up about 15-18% per annum for the last two years, or you can’t recruit enough workers.

15-18% is too optimistic.

China eventually reaches the stage that it HAS TO export inflation, or the communist government will face serious social repercussions.

Can inflation be exported in a stagflationary environment? I thought inflation can be exported only if you have the pricing power.

China does have the pricing power for low-end daily necessities, until the whole value chain relocates elsewhere, which takes time.

Do you know all Notebooks are made in China now? To be exact, they are all made in a place called Kunshan which is just outside of Shanghai. I am not saying this is a defensible pricing power, but for the time being, it is pricing power indeed.

oo,

Thanks for the insightful, albeit depressing comments re: market rallies on thin volume. What I don't understand is why this PPT-like phenomenon would be orchestrated on a day with such bearish news. All that does is make it seem fake (which it is).

DinOR

I think it is fair to surmise that the ratings of education loan backed securities are an utter sham, that the risks of said securities have been grossly underestimated, and that souless salespeople have gotten rich peddling this crap to savvy and unsuspecting alike.

Investor confidence is deteriorating, and the suckers have all left the table. Bagholders of this debt will soon be looking in their stocking to how much of what santa left for them is turd and how much is gold.

And of course the largest bagholder will again be the US taxpayer as these losses are socialized.

Same game DinOR, simply a slightly different product.

oo,

Speaking of China, what are your thoughts about the Shanghai stock market this year so far? Boy, it seems to be in a major correction. Is this merely "getting back to fundamental P:E ratios", or is this a prelude to the inevitable let down post-Olympics, or is this a reflection of how "coupled" China still is to the US? I'd appreciate your thoughts.

until the whole value chain relocates elsewhere, which takes time.

If it's obvious to the brand owners that China will no longer be able to offer such low prices, they'll likely stampede for the exits. I'm told only final assembly is done in China anyway. Most of the value is added elsewhere in Asia.

But where would assembly be relocated? Indiana?

What I don’t understand is why this PPT-like phenomenon would be orchestrated on a day with such bearish news.

Maybe there is no PPT. Markets respond to greater natural forces.

"savvy and unsuspecting alike"

Sounds like an institutional account to ME!

Most of those kids will continue to pay and pay on time. I don't believe the basic under pinnings have changed all that much. But it is true, there were a TON of Stafford Loans out there at like... 2%? What could possibly be priced right @ 2%?

One of the fellows at the Portland blog noted that his loan servicer is no longer giving him a "pays on time break". More knee-jerk stuff.

skibum,

the Shanghai stock market crash has several underlying reasons behind
1) everybody expects a crash post-O, because of the power of built-in expectation, the crash happens earlier
2) the P/E is too unreasonable. It is not only about the P/E ratio, but about how E comes about. Over 80% of companies on the stock exchange derive their E from trading profit of cross holding and stock speculation, so the real P/E in the sense of operating E is much higher.
3) the lack of direction provided by the government

Chinese just emerged from the planned economy mentality about somewhat 10 years ago, people over 30 are still very much ingrained with fear and worship for the government, which is supposed to set the tone for everything. As the market went down, investors were expecting signals from the government (either lower stamp duty tax or disallowing companies to issue new stocks) to provide support, however, so far the government has done nothing, and as a result, the market went into a free fall.

But I have heard an interesting theory from a friend who has some connections within the Chinese government. He told me that there was this thought within the Chinese powers that the stock market crash would be a good way to wipe out inflation, because stock market and housing bubble were feeding into each other, and it was very hard to tackle the housing bubble due to local intervention (local government dependent on sale of land to obtain operating revenue). Therefore, if you take down the stock market, you take down the purchasing power of real estate.

DennisN Says:
Is there anyway to chemically compound AU into a non-metallic substance?

Convert it to USD. :-)

[not good advice]

BAI,

it is not that easy. Sourcing relationship takes years to build. I interacted extensively with sourcing businesses when I was working over there. You can't just go to another factory and have them ramp up order. You don't know whether they are consistent with their quality, they don't know if their new suppliers are consistent with quality, and it takes time to groom a base of experienced workers. Then there is the infrastructure problem of roads, electricity, telecom, and people who are familiar with local import export procedures or even bribing processes. These knowhow takes at least a few years to accumulate.

Many brands already started migration about 1-2 years ago, but such migration involves many ancillary industries, and these factory owners of such ancillary industries need to move along as well.

Even if they complete the migration successfully, if food inflation takes hold, which I think it will, you will see the same pressure on labor cost which will translate into more expensive goods for us anyway. Food cost is particularly vital in developing countries because it takes up a much much bigger share of their monthly income, so their demand on wage hike is much more sensitive to increase in food cost than us.

Perhaps the Chinese government is more willing to let Free Market reign. I bet they are less commie than Kalifornia.

skibum Says:
What I don’t understand is why this PPT-like phenomenon would be orchestrated on a day with such bearish news.

Because it is April 1...???

OO

thanks. I understand you analysis. That's why I wondered where the assembly line would move to next. If everyone's has inflation, perhaps (some elements) need to move back to the US?

Regardless, if China is abandoned, what happens to it? What's your insight there?

BAI,

honestly if I were the Chinese government, I would just use the massive USD reserve they have to establish a nationwide health insurance plan (which they don't have), and a heavily subsidized tertiary education program (which they don't have either). These are the two main reasons why Chinese domestic demand remains suppressed, because Chinese have to obsessively aggressively save for the rainy days. One hospital bill can wipe out the entirely family.

They are stuck in some kind of a conceptual block, thinking that only tapped out American consumer (now European consumers) can consume the vast quantity of stuff they produce.

China will not be abandoned unless it abandons itself. It is a shame that 1.3B warm bodies cannot become the largest consumer market in the world. They are just grossly misguided in their plans and visions.

People are liabilities... Having 1.3B warm bodies is a gift or a curse?

It is easy to remove the obsession to save... massive inflation should do the job.

What I don’t understand is why this PPT-like phenomenon would be orchestrated on a day with such bearish news.
Better than losing all confidence in the market. This was the "kitchen sink" quarter for UBS. Next quarter it will be the stainless steel fridge, next the Viking range...

It is easy to remove the obsession to save… massive inflation should do the job.

I don't think so, people would buy food and speculate on real estate and commodities.

I think consumption could increase if people feel more secure about their future, that would be stable growth and less inflation.

OO says

Chinese have to obsessively aggressively save for the rainy days. One hospital bill can wipe out the entirely family.

I don't mean to be facetious with a serious issue affecting so many. But that second sentence above holds true for many Americans as well. Strangely (?) it doesn't induce the same savings oriented behavior. Why is that I wonder...

What's really tragic is for poor parents to do a HELOC to fund tuition so their son can attend Stanford to study a highly-paid specialty like .... sociology.

www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/03/31/BAIMVHBG9.DTL&hw=stanford&sn=004&sc=762

By the way I believe you are correct that China is too big to be abandoned by anybody. The potential upside is so gigantic, China will have to "abandon itself" first, as you correctly point out.

Of course if any black swans are lurking.....who knows?

But that second sentence above holds true for many Americans as well.

It is not the same...

Here, even illegal aliens cannot be denied treatment. So NINJA people effectively have free health care. This actually discourages saving.