There is a huge economic bubble brewing right now. This bubble could cause greater economic damage than both the internet and real estate bubble combined. I am talking about the bubble in student loan debt. While this bubble has been near impossible for the average investor to ride on the way higher, riding it on the way down is a very real possibility.
The sheer size, scope, and reach of the student debt bubble can make it the biggest financial nightmare in the history of the United States.
This article will explain exactly how to profit from this monster economic bubble!
First, let’s take a closer look at financial bubbles.
Every stock market investor harbors a dream deep inside. This dream is universal and I have not found an exception yet. The dream is to participate actively in a speculative financial bubble and get out before the bubble bursts.
Unfortunately, this dream remains just that for most investors. Catching a bubble while it is happening and having the foresight to get out before it bursts is very difficult to do deliberately. Certainly some investors get lucky and ride most of the bubble on the upside then close out their positions prior to the plunge.
The reason investors dream about catching bubbles is because fortunes can be made in a very short period of time during speculative bubbles.
The first dramatic example of fast money earned during speculative bubbles happened way back in the 1600’s. It was called Tulip Mania and it happened in the Netherlands.
Jessie Columbo of thebubblebubble.com website describes the tulip bubble this way:
Tulip prices steadily rose with their growing popularity and bulbs were purchased at higher and higher prices by speculators who planned to turn around and sell them for a profit, similar to modern-day house “flippers.” From 1634 to 1637, an index of Dutch tulip prices (see chart above) soared from approximately one guilder per bulb to a lofty sixty guilders per bulb. Traders who sold their bulbs for a profit began to reinvest all of their profit into new tulip bulb contracts or new bulbs to sell to other Dutch citizens or to take with them on trips around the world to sell alongside with spices from the Dutch East India Company.
Many merchants sold all of their belongings to purchase a few tulip bulbs for the purpose of cultivating and selling them for more profit than they could have ever made in a lifetime as a merchant. As the tulip bulb bubble crescendoed, already pricey tulip bulbs experienced a twentyfold price explosion in just a single month (Investopedia, 2012). By the peak of tulipmania in February of 1637, a single tulip bulb was worth about ten times a craftsman’s annual income.
Mr. Columbo goes on to describe the bursting of the bubble.
Like all bubbles, the Dutch tulip bulb bubble continued to inflate beyond people’s wildest expectations until it abruptly “popped” in the winter of 1636-37. A default on a tulip bulb contract by a buyer in Haarlem was the main bubble-popping catalyst and caused the tulip bulb market to violently implode as sellers overwhelmed the market and buyers virtually disappeared altogether. Some traders attempted to support prices, to no avail. Within just a few days, tulip bulbs were worth only a hundredth of their former prices, resulting in a full-blown panic throughout Holland. Dealers refused to honor contracts, further damaging confidence in the tulip bulb market. Eventually, the government attempted to stem the the tulip market meltdown by offering to honor contracts at 10% of their face value, which only caused the market to plunge even further. The brutal popping of the tulip bulb bubble ended the Dutch Golden Age and hurled the country into a mild economic depression that lasted for several years. The traumatic tulip bulb crash resulted in a suspicion toward speculative investments in Dutch culture for a very long time after. (One also has to wonder if this is how the Dutch reputation for frugality arose!)
Most of us remember the recent speculative bubbles of real estate and the dot com mania. More than a few of you rode these bubbles to wealth! Others were able to ride the bubble bursting back down.
Right now, a powerful opportunity exists in the the student loan bubble. This bubble is estimated to be worth $1.2 trillion and is getting near the breaking point!
Since 2003, student loan debt has climbed over 400% – soaring from $250 billion to well over $1 trillion. The bubble has ramped higher over $500 billion (a 75% increase) since the start of President Obama’s first term, when came in at $660 billion. In addition, at the end of 2008, the default rate was 7.9%, but now stands at 11.3% – an astounding increase that is most likely a gross underestimation.
Just like the government’s belief that everyone should be homeowners helped create the real estate bubble. Remember, everyone and anyone with a pulse was given a mortgage, the same thing is happening in the student loan world.
Right now, nearly anyone who can breath can get a student loan as the government believes in the benefits of higher education. This is regardless of SAT scores or even credit. This unfettered access to capital has supercharged this soon to burst bubble.
Let’s take a look at a few facts:
1. Student loan debt is set to reach over $3 trillion within the decade
2. The official default rate of over 11% skyrockets when loans in deference or forbearance are considered
3. Forecasted defaults of $750 billion is double the size of the sub prime crisis
Activist hedge fund manager Bill Ackman is on record as calling student loans the biggest risk in the credit market.
“If you think about the trillion dollars of student loans we have outstanding, there’s no way students are going to pay it back,” Ackman, who runs $20 billion Pershing Square Capital Management, stated recently at 13D Monitor’s Active-Passive Investor Summit in New York.
Now that we know the facts about the student loan crisis, just how can you profit?
The number one way is to short the company that originates these loans, Sallie Mae (Nasdaq:SLM), and its spinoff servicer Navient Corporation (Nasdaq:NAVI) Just like Fannie Mae got creamed with the mortgage crisis, Sallie Mae is in the process of getting WIPED OUT in the very possible student loan bubble burst.
SLM Corporation (commonly known as Sallie Mae; originally the Student Loan Marketing Association) is a publicly traded U.S. corporation that at present (2015) provides consumer banking. Its nature has changed dramatically since it was set up in 1973. At first, it was a government entity that serviced federal educational loans. It then became private and started offering private student loans, although at one point it had a contract to service federal loans.
The company’s primary business is originating, servicing, and collecting private education loans. The company also provides college savings tools such as its Upromise Rewards business and online planning for college tools and resources. Sallie Mae was previously originated federally guaranteed student loans originated under the Federal Family Education Loan Program (FFELP) and also worked as a servicer and collector of federal student loans on behalf of the Department of Education. The company now offers private education loans and manages more than $12.97 billion in assets. Sallie Mae employs 1,400 individuals at offices across the U.S.
On April 30, 2014, Sallie Mae spun off its loan servicing operation and most of its loan portfolio into a separate, publicly traded entity called Navient Corporation. Navient is the largest servicer of federal student loans and also acts as a collector on behalf of the Department of Education
Sallie Mae shares are down over 25% this year alone and should the bubble burst, this government backed entity could easily be a penny stock.
If the bubble doesn’t actually burst, the massive numbers of write-offs due to loan forgiveness may also push these shares into penny stock territory.
At the same time, the spinoff loan servicer Navient is down 50% from its 2015 highs and ripe for a short on any bounce higher.
Both of these stocks offer compelling short opportunities on any bounce higher. Time this one correctly and bubble bursting profits can be yours!!