“Reconciling” The Student Loan Debt Problem
New ruling, new hurdle for investors
This week we explore:
How the Dems’ free pass to rewrite the rules could have sweeping implications for investors
Why this new power could be the key to Democrats seizing more power and holding onto it in spite of historical precedent
Janet Yellen calling for a global corporate tax conglomerate
The potential end of student loan debt
The “everything” bubble we’re witnessing today has seen valuations skyrocket over the last year. But financial assets have been propped up for more than a decade by the Federal Reserve since the 2008 recession. However, one business in particular was seeing revenues soar before the recession, and that boom continued despite market conditions, economic landscapes, or political parties. Student loans.
Student loan debt in the U.S. has exploded from $33 billion in 2000 to around $1.7 trillion today. That’s a mind-boggling 5,150% increase. For reference, during this same timespan the Dow Jones, S&P 500, and Nasdaq are up a total of 735% combined.
Currently, about 16.5% of U.S. adults over the age of 18 (one-third of all adults ages 25 to 34) have student loan debt. That’s 43 million Americans, totaling $1.7 trillion, or an average of $39,534 in federal student loan debt per loan holder. And that’s not counting an additional $119 billion in private loans.
That makes student loans the second largest amount of debt for households in the United States behind mortgages.
Additionally, 15 unions, representing more than 10 million public service workers, including teachers and police officers, are calling for a 90-day review of the Public Service Loan Forgiveness program claiming that since public service workers first became eligible for debt cancellation under the program in 2017, 98% of those who applied have been rejected.
We believe these are just a few of the reasons why, in February of this year, Senator Elizabeth Warren, Bernie Sanders, and Senate Majority Leader Charles Schumer pushed President Biden to forgive up to $50,000 in student loan debt per individual.
Now, this may sound impossible to some of our readers – nothing more than a liberal, progressive pipe dream, right?
Except that wiping out student loan debt is the ultimate stimulus. It instantly removes massive debt, interest, and monthly payments from tens of millions of Americans, and frees up those funds to go straight into the economy – or the stock market.
And it may very well be happening in the very near future.
We have a blue House, a blue Senate, and, most important of all, we still have an ongoing crisis that helps that blue administration pass extreme measures, giving our government the perfect recipe for cooking up another massive stimulus cake.
The one question that nobody seems interested in asking is, who is going to pay for all of this?
Remember this: “What seems crazy in normal times becomes necessary in a crisis.” Would you eat bread out of a gutter? No. Unless you were starving. The crisis is the catalyst for extreme action. The bigger the crisis, the bigger the government reaction. The Democrats need the crisis to be bad in order to push through the progressive agenda, and right now we’re dealing with the worst crisis our country has experienced since the Great Depression 90 years ago.
We’ve already seen:
And now there are calls to eliminate $50,000 in student debt per loan holder.
So again, who is going to pay for this? We are.
The only way all of this gets passed is in a crisis. These programs can be pushed through with Reconciliation bills and zero bi-partisan support all in the name of the crisis. We can expect progressive measures to increase because the crisis demands action.
Plus, let’s not forget that we have a new Federal Reserve regime that wants stimulus so that it can eliminate the wealth gap and redistribute wealth.
And now, as of yesterday, this blue wave has the means to pass that student loan forgiveness program (or anything else they want) after the Senate parliamentarian determined that Democrats would be able to do a third budget Reconciliation bill this year.
This is a massive development for Democrats, giving them free rein to pass sweeping legislation without Republican support.
The ruling may very well be the single biggest catalyst yet for The Great Devaluation, which is already underway.
It lets Democrats change the rules altogether. Michael Eisner said, “You either play by the rules, change the rules, or get out altogether.”
With another Reconciliation bill available to Democrat lawmakers, it may be time to get out of risk assets altogether.
This proposal comes in anticipation of President Biden raising corporate tax rates in the U.S. in an effort to remove safe havens for corporations, like Ireland was for Apple in recent years.
But I believe that the move is more a monetary reset that could control corporations in general. If Yellen were to create this global corporate tax conglomerate, anyone who doesn’t join could be branded as “evil.” And any corporation attempting to take their business to any countries who sit out could be hit with additional tax burdens. And these newly labeled “evil” countries could face additional sanctions and tariffs for opting out of the effort.
So with Yellen already focused on corporate taxation, what will Democrats do with their hall pass?
The US tax code is currently a utopia for corporations and the wealthy, but that is likely to change in the very near future to benefit the little guy.
And if that happens, what does that mean for the utopian stock market? Higher tax rates generally mean a tightening of the purse strings – especially at the corporate level.
But we don’t know that Dems plan on passing a tax bill at all. Well, not at the moment at least.
Who knows what they’ll pass? But we do know that it’s going to be impactful. It has to be, the midterm election results depend on it.
For the last 100 years, the party in power has lost on average 22 seats in the House during midterm elections. During Trump’s midterms, Democrats defeated 29 Republican incumbents and picked up 14 open seats.
Currently, Democrats have a 7 seat House majority to Republicans. If we hit that historical average, Democrats will no longer have the advantage in 2022.
This is math that they are aware of, and this is why they will pass anything and everything they can THIS year.
It’s worth noting that 90 years ago, during FDR’s midterms, the Democrats gained nine seats, winning a supermajority. This marked the first time since the Civil War that an incumbent president's party gained seats in a midterm election.
Those results were based on sweeping progressive measures intended to help the little guy. FDR’s New Deal brought extreme systemic changes that helped his party maintain control of the House and Senate. Biden’s “new” New Deal is set to do the same.
Prior to today, Reconciliation had to be tied to a budget year, so the earliest we could’ve gotten stimulus passed would’ve been Q4 2021 tied to the 2022 budget. Now, with this loophole, Democrats can print more stimulus than the law previously allowed well before Q4 by tying it to an already passed bill for the fiscal year 2021.
How much will it be?
Who knows.
How will it impact the market?
Who knows?
What we do know is that we are likely to see more pressure on interest rates because more stimulus means more inflation, and more inflation means higher interest rates, which become a problem for the market as the dollar devalues.
Passing another bill is very inflationary. We can’t be sure which assets it will hit, but we’ll find out soon when the bill gets passed. And it will get passed, because Democrats want to continue their progressive sweep.
The Federal Reserve encourages this because it leads to their ultimate goal: a monetary reset.
But… isn’t a monetary reset already underway?
If Janet Yellen can pass a new minimum global tax requirement, isn’t that a monetary reset?
If Congress can add trillions to the deficit repeatedly, isn’t that also a reset?
The point is that we’ve all become desensitized. During normal times, any one of these actions would cause hysteria, but this is all happening and no one is batting an eye.
Midterms are next year, but Democrats face a time delay. What they do now, in this year, is what people will notice when they vote next November. The Democrats know they will be graded on the economy. That’s the most important thing to voters right now. So if:
And if that occurs, it’s not hard to see what will come next:
And a number of other progressive sweeps...
But this can only work by passing as much stimulus as possible, which is highly inflationary and continues to devalue the dollar even if the market stays overvalued.
As investors we must pay close attention to this because it completely changes our real profit value.
Say we invested $100,000 into the S&P 500 on Valentine’s Day 2020. Simple math tells us this is a gain of 20% during that span.
That puts us at $120,000. Not bad.
But let’s not forget capital gains tax. The good news is that because our investment was held for more than a year, we only have to pay 20% (as opposed to 37% for short term capital gains).
After 20% tax on our profits, that puts us at $116,000 net.
Except that’s not actually net...
We still need to account for the dollar’s devaluation.
On Valentine's Day of last year, the Dollar Index was at 99.26. Today it’s at 92.57 — a 7% drop in currency value.
So, factoring in that devaluation, our $100,000 investment is now actually worth $107,880.
So our net gain wasn’t really 20%, but actually under 8%. This still equates to a really good return on investment.
However, this past year has been a year in which everything is soaring because of the bottomless monetary well that is the Fed’s printer.
The truth is that during a normal year, the S&P’s average gain is closer to 7%.
Now let’s look at our $100,000 investment. Under normal conditions, we could hope that our $100,000 becomes $107,000. After deducting our 20% capital gains, that net number drops to $105,600. When we factor the dollar’s devaluation into this equation, our net $105,600 is really only worth just $98,208.
In this example, we didn’t make 7%, we lost 1.8%. This by the way is the exact math the Fed is looking to create.
This example is a textbook example of how we can lose sight by focusing on the “height” of the tree rather than the “depth” of the root. While we believe things are going up, they are eroding before our very eyes, We just don’t see it.
This is why we call it The Great Devaluation.
Best,
Adam Baratta
CEO
Brentwood Research
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