Monday, October 17, 2011

What Do The Protests Mean?

Here are a few of the judgmental comments we observed directed at the protesters over the weekend:

  • "They are dirty"

  • "They should get a permit to protest"

  • "What are they even doing"

  • "Arrest them"

  • "This is stupid"
Is it stupid? A better use of your mental energy would be to observe what is happening and ask what it means.

Student Loan Debt:
Several protesters have been seen on television ranting about the massive burden placed on them by educational expenses. The natural reaction is to respond with a libertarian statement like, "You chose to borrow." That is true and is our ultimate stance on the issue. While we feel confident in that judgement we should examine the conditions that students are facing today.

Over the past two decades small, private, typically online colleges were created to meet the growing demand for education. But was this all organic demand? The federal government created policies designed to make voters feel that everyone would be educated but was that the case? Deeper analysis shows that the private online college business has been very profitable.

The basic scam was designed like this. Private universities must finance a certain percentage of enrollment, say 10%. They must issue and back those loans to students. Then, the federal government would give them access to a myriad of programs which issued or guaranteed other student debt originating from that institution.

In the analysis of the student loan condition, we see clearly that the incentive to enroll was high because the downside was limited to a small percentage of sales. Paradoxically, the massive increase in degree-seeking students has diminished the value of the average education while saddling the society with debt.

The protesters represent people who previously assumed they were middle class dreamers but are now waking to the reality that they live at the poverty line. Their degrees are worthless and they are unwilling to accept available occupations in the service industry because they are below the standards to which they cling.

There Are No Jobs:
This is another common rant heard from the protesters. Well, there are jobs available; most protesters are just above taking them. And really, who can blame them? For a young graduate with a business & marketing degree from University of Phoenix having just incurred $72,200 (Actual cost) in expenses the prospects are bleak. A change in attitude is going to be required. This will not be easy for a society that has been sold a dream.

The first reason that there are no jobs is simple. The federal government is borrowing an estimated 10% of GDP simply to fund its annual deficit. This does not account for the spending of 100% of treasury revenues in addition to the borrowing. This is crowding out most private sector activity. There is a finite amount of real capital available and when something is borrowed it creates a drain on that capital.

This leads to the second reason why there are no jobs. We remain in a long term serious deflation. This condition has actually been building for nearly 25 years but vigilant intervention in financial markets has postponed our acceptance of reality. What makes this more complex is that some well-connected private sector operators have been able to force their losses onto the public sector in order to incur no pain from their excessive risk taking. They did not however share any of their profit with the society as savvy tax lawyers and lobbyists were employed to produce paper results akin to a start-up operation.

There is limited economic activity on the margin. This condition will not change in the near term and all entrepreneurs should consider this reality before risking precious capital in a hyper-regulated environment void of growth.

If you are a new reader here we should repeat the mission of this site. We aim to help you understand that in order to survive it is critical to develop the ability to think for yourself. Unfortunately the more educated you are the harder this can be. You should be aware that we are not in the solutions business. Attempting to tell the world what to do is narcissistic at best and punished by missing opportunities to profit while expending energy in arguments. We will however predict the likely paths forward and relay our observations of possible consequences.

At this time we find it interesting that the US president, the labor movement and China are all coming out in support of this leaderless movement. One possible outcome is that the mass is used as a catalyst for more spending to include entitlements and job programs. Neither will work but will trigger further increases in federal outlays while temporarily defusing the crowds. This will be viewed as cover fire for us and allow more time to prepare for the junkie to reappear broke, violent and still unaware.

If an entity that is perceived as a threat to Washington leadership gains a foothold in the movement we expect the massive army of mid-level government mules to be deployed in an effort to suppress the protests. Google facial recognition in partnership with Facebook and Twitter can be utilized to quickly identify anyone involved. Expect news stories about how dangerous the protesters are and how they are making it hard to protect the citizens from terror threats based on their distracting behavior. Some readers are uncomfortable with this suggestion but should stop blaming us for being crazy and begin studying the history of how leaders behave while their societies are collapsing.

The outlook for investment capital is bleak. The federal, state and local governments are all starving for cash, but it has been earmarked for debt service. Unfortunately, hard assets and tangible stores of value are still the most attractive investments. Volatility is likely to increase over the next 12 months. Government debt has begun behaving as an asset bubble but retains the authority to force more capital into the sector. This is a concept that investors should spend time studying.

Try to objectively study current conditions and avoid demanding the conditions you were promised.

No comments: