software collage

Friday, the Wall Street Journal ran a piece that essentially channeled BoomBustBlog. It was quite controversial, Why spend six figures on a business degree? Students would do better to train and network on their own.

Imagine that you have been accepted to Harvard Business School. The ivy-covered buildings and high-powered faculty whisper that all you need to do is listen to your teachers, get good grades and work well with your peers. After two years, you'll emerge ready to take the business world by storm. Once you have that degree, you'll have it made.

But don't kid yourself. What matters exponentially more than that M.B.A. is the set of skills and accomplishments that got you into business school in the first place. What if those same students, instead of spending two years and $174,400 at Harvard Business School, took the same amount of money and invested it in themselves? How would they compare after two years?

If you want a business education, the odds aren't with you, unfortunately, in business school. Professors are rewarded for publishing journal articles, not for being good teachers. The other students are trying to get ahead of you. The development office is already assessing you for future donations. Administrators care about the metrics that will improve your school's national ranking. None of these things actually helps you learn about business.

Consider what you could do instead with that $174,400. The first step should be to move to a part of the country that supports your interests. If that's film, move to Los Angeles. Technology, San Francisco. Oil, Houston. You could live decently in these cities for $3,000 per month. Over the course of two years, that still leaves you $100,000 to invest in yourself.

Needless to say, I have addressed this in detail through many interviews, videos and articles over the last few months. Well, now, I offer the means to funamentally, arithmetically and convincingly prove the idealogy behind the assertion...

The Education Bubble Deflator & Valuation Software is now out of beta and available for purchase, download and use. See the end of this article for instructions on accessing the model. Here I will offer a brief overview of the model and the key findings from a hypothetical student funding his undergrad, grad and PhD studies with a 6% Sallie Mae loan. The application is designed to help individuals value their college/university education by calculating and valuing the real cash flows generated by diplomas/academic studies in addition to calculating the real world costs of obtaining said assets. 

We capture, quantify and illustrate the value of a diploma from higher education institutions across different disparate majors and give each a distinct eROI (Economic return on investment) figure for students pursuing these courses.  The app uses inputs of (1) expected salary of a student after completing a major, (2) the tuition payable for pursuing the major, (3) any loans that would be taken to finance the course fee, (4) a blended tax rate to compute disposable income, (4) interest rate for the loan, (5) household expenses that a person is likely to incur, (6) growth rates in salary, (7) Opportunity cost for pursuing a major full time, (8) and an adjustment for the unemployment rate to factor in the impact of unemployment.

The app also computes cash flows that a student is likely to earn over the life of his career after considering his installments for the loan repayment, household expenses, taxes and the opportunity cost for pursuing a course.

image002

 

Key Findings

The current weak economic environment has seriously dented the economic viability of pursuing a degree (Bachelors, Masters or a PhD) from some of the top universities in the US. The persistent decline in salaries being offered to graduates from these universities coupled with continued rise in cost of courses has resulted in a fall in economic return to students from these majors.

In the US, the trend of increasing duration of student loans and higher aggregate student loans outstanding are a matter of immediate attention. These trends have increased concern over higher student loan default in the near future, resultantly seriously raising the need for evaluation of value of securitized assets based on such loans. In essence, it’s the mortgage bubble all over again.

Return from Undergraduate Courses

Almost all universities (listed below) offer very low returns over a student’s career life if aggregated as an “all majors” category. The high cost of courses and lowering of salary being offered upon completion of courses are major drivers for lower returns.

NPV @6% p.a is negative for all schools on an aggregated basis and even on a specific, major by major basis.

 image008 copy copy 

Even when looked at on a more granular basis, we get the following...

image005 copy

As can be seen, the returns are middling at best, particularly when compared with other forms of investment over time. Resultantly the break-even year impractically far in most cases - after the year 2040 (assuming a start year of 2013).

image011 copy 

As a matter of fact, we have actually marked the cash flows from this person's education to market, benchmarking it against several other risk assets. From an undergraduate perspective, it's a dismal comparison for the most part. The returns are far lower compared with the 30-year average return on equities (5-6%) and 20-year return on commercial real estate (>7%) and 30-year return on Gold (4.5%). When taking individual majors into consideration, the numbers get even more interesting for diversity comes into play. The accompanying app shows the divergence in value not only between different majors within a school, but also the same majors between different schools, thereby actually valuing both the majors and the schools themselves!

 image014 copy

The model conveniently allows one to actually compare returns on a specific major between schools. This is invaluable in choosing schools. Most students and their parents select schools based on nominal affordabilty and/or repuation.

Now you can compare schools based on actual economic performance upon graduation - the way it should have been done from the beginning!!!

 image017

 

Things Generally Look Much Better For Graduate Degrees, But..... The Catch 22!!!

Return from Postgraduate Courses

Postgraduate degrees offer a much better return compared with other asset classes than do undergraduate degrees. The break-even year is achieved much earlier, in most cases within 12-16 years. NPV @6% is positive in all the cases. The problem is that in order to pursue a master's degree you first must obtain an undergraduate degree which has a very high probability of putting you in the hole!

Return from PhD Courses

Similar to undergraduate courses, return from PhD courses is lower compared to postgraduate courses. The returns are also lower compared to 30-year average return on equities (5-6%) and 20-year return on commercial real estate (>7%) and 30-year return on Gold (4.5%). The break-even year is achieved after a very long time, after almost 26-28 years.

Download Your Copy of the Education Bubble Deflator and Valuation Software Now! 

The cost is 29.99 for 30 days of use, but the first 100 users will get a 1 year subscription.

  1. Subscribe to BoomBustBlog
  2. Pay for the software here - $29.99.
  3. Download the software model here - File Icon College & University Education Valuation Model.
  4. Optionally, download the instructions if you're not comfortable with income and cash flows: File Icon Education Bubble Deflator & Valuation Model Instructions

This file must be opened in Libre Office Portable, a free lighteweight office suite that does not leave traces or changes on the client computer. You can download Libre Office Portable for free here: PortableApps 97 MB. A portable version of LibreOffice packaged in PortableApps.com Format, so you can take all your documents and everything you need to work from a USB, cloud or local drive. See PortableApps.com for more information.

Discuss this software, its findings and collaborate with othes on Facebook.

 

 More on this topic...

Published in BoomBustBlog

This is the 4th installment in the education bubble series. This piece gets down to the nitty gritty, and details the valuation software that we've built to actually value YOUR college education, that of those whom you care for, or assist you in selecting a path through the higher education process. The app is available online in beta form for all to peruse. I simply request that you report any bugs, usability issues or inconsistencies to me in exchange for its beta use. The simplified web version of the app for undergraduate studies only, is available here. The instruction  for said app can be downloaded here if you have a problem viewing the images in a browser.

Let me make a couple of things perfectly clear before we proceed:

  1. There really is no tool such as this commonly available to students, parents and families to assist in the education decision-making process.
  2. Despite what you make think, as an individual, about the merits of post secondary education, the actual empirical and economic value of said education should be one of the primary factors used in considering to pursue such.
  3. For those who are currently ensconced in the pursuit of a business, economics or accounting degree, the contents of said modeling software should be second nature and the results of said analysis should be of no surprise. If a negative ROI takes you aback, you should come to either one of two conclusions:
    1. There is an egregious error in the software (not very likely), or
    2.  The value of the education that you are currently pursuing is overstated and/or fictitiously inflated.

If you have not read the previous installments in this series, please do:

  1. How To Profit From The Impending Bursting Of The Education Bubble, pt 1 - A Bubble Bigger Than Subprime & More Dangerous Than Sovereign Debt!
  2. How To Profit From The Impending Bursting Of The Education Bubble, pt 2 - "Knowledge How", Replicating Grecian Insolvency & Why Most Diplomas Are Depreciating Assets In Real Terms
  3. How To Profit From The Impending Bursting Of The Education Bubble, pt 3: As Bad As Harvard Endowment Funds -0.05% ROI? The Levered Harvard Diploma!

About Knowledge How: College and University Education Valuation Software

This application captures, quantifies and illustrates the value of a diploma from higher education institutions across different disparate majors and gives each a distinct eROI (Economic return on investment) figure for students pursuing these courses.  The app uses inputs of (1) expected salary of a student after completing a major, (2) the tuition payable for pursuing the major, (3) any loans that would be taken to finance the course fee, (4) a blended tax rate to compute disposable income, (4) interest rate for the loan, (5) household expenses that a person is likely to incur, (6) growth rates in salary, (7) Opportunity cost for pursuing a major full time, (8) and an adjustment for the unemployment rate to factor in the impact of unemployment.

The app also computes cash flows that a student is likely to earn over the life of his career after considering his installments for student loan repayment, household expenses, taxes and the opportunity cost for pursuing a major.

The table below shows the computation of cash flows

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6*

Gross Expected Salary

Adjusted for Unemployment/Underemployment

Less:  Taxes

Net Disposable Salary

 

 

 

 

 

 

Less: Tuition Cost

Less: Lost Wages or Opportunity Cost

Less: Household expenses

Less: Loan installments

Net Cash Flows

 *The model runs over the expected career life a student after the completion of a course

The app comes pre-populated with data to compute the economic internal rate of return (IRR) and Net Present Value (NPV) @ 6% for the following universities across undergraduate, postgraduate and PhD courses

  1. Harvard
  2. Yale
  3. Princeton
  4. DeVry
  5. University of Pennsylvania
  6. City University of New York (CUNY)
  7. Capella
  8. Pheonix

 The undergraduate, postgraduate and PhD courses that have been considered in the model for computing & comparing returns are listed below.

Undergraduate Courses

Postgraduate courses

PhD Course

BA Economics

Masters of Business Administration

PhD Course

BA English

Master of Architecture

BA Political Science

Juris Doctor

BA Psychology

Master of Science

All undergraduate courses

The IRR and NPVs of above listed universities across undergraduate, postgraduate and PhD courses are also compared with return on equities, commercial real estate and precious metals.

image001

The pre-populated data is easily overwritten to allow the app user to use their own prospective/actual institutions, interest rates and assumptions.

Structure of the App’s Financial Model

 (How the model is structured in terms of information, inputs and results)

Input & Assumption Sheet: The model has one input & assumption sheet. It has all the inputs for assumptions that are linked to different sheets in the model. These assumptions can be changed to see different results if desired.

Visual Analysis Sheets: There are three sheets – one each for Undergraduate, Postgraduate and PhD. These sheets display graphical results for return on investment across different Majors and institutions.

Break-even Analysis Sheets:  There are five sheets – one each for Undergraduate, Postgraduate, PhD, Bachelors + Post Graduate, and Bachelors + Post Graduate + PhD. Each sheet shows the cumulative cash flows for majors/courses & universities for all years in a student’s career life cycle. It also displays total cash flows during the period and the year of break-even for a course from a university. The graphical representation of the information (in the same sheet) helps to quickly and visually compare cash flows and year of break-even across different courses and universities

Summary Analysis Sheets: There are five sheets - one each for Undergraduate, Postgraduate, PhD, Bachelors + Post Graduate, and Bachelors + Post Graduate + PhD. These sheets summarize & compare ROI and NPV @ 6% across courses from different universities

Market to Market Sheet: The sheet compares the return of equities, CRE, and precious metals to those of bachelors, postgraduate and PhD degrees from the universities.

Summary Return Analysis Sheet: There are five sheets –one each for Undergraduate, Postgraduate, PhD, Bachelors + Post Graduate, and Bachelors + Post Graduate + PhD. These sheets show detailed calculations on ROI and NPV for different courses across the number of universities.

Unpaid Internship: The sheet shows IRR and NPV computation in a scenario that a person works as an unpaid intern with a top or progressive company in the US instead of pursuing a bachelors’ degree

Data: The sheet has data on cost of courses from different universities as well as salaries for students graduating from them

Key Assumptions / Inputs

The model uses the following key inputs

Tuition/Course Fee: The fees for different courses have been sourced from the respective universities for the academic year 2013-14

Salaries: The current offered salaries for students graduating with different majors & universities has been sourced from www.payscale.com

Other Assumptions: Assumptions which have been applied consistently across different courses & universities are as follows:

Interest on loan

6% p.a

Income Tax Rate

30%

Loan Term after employment starts (in years)

10

Household expenses (monthly)

US$2,520

Opportunity cost (per annum)

-          Bachelors

-          Postgraduates

-          PHD

US$18,000

US$40,000

US$60,000

Salary Growth

3% p.a

Unemployment adjustment

-          Bachelors

-          Postgraduates

-          PHD

8.4%

3.9%

3.4%

image031

Key Findings

The current weak economic environment has seriously dented the economic viability of pursuing a degree (Bachelors, Masters or a PhD) from some of the top universities in the US. The persistent decline in salaries being offered to graduates from these universities coupled with continued rise in cost of courses has resulted in a fall in economic return to students from these majors.

In the US, the trend of increasing duration of student loans and higher aggregate student loans outstanding are a matter of immediate attention. These trends have increased concern over higher student loan default in the near future, resultantly seriously raising the need for evaluation of value of securitized assets based on such loans. In essence, it’s the mortgage bubble all over again.

Return from Undergraduate Courses

image006

Almost all universities (listed below) offer very low returns over a student’s career life if aggregated as an “all majors” category. The high cost of courses and lowering of salary being offered upon completion of courses are major drivers for lower returns.

NPV @6% p.a is negative for all schools on an aggregated basis.

Resultantly the break-even year impractically far in most cases - after the year 2040 (assuming a start year of 2013).

The returns are far lower compared with the 30-year average return on equities (5-6%) and 20-year return on commercial real estate (>7%) and 30-year return on Gold (4.5%). When taking individual majors into consideration, the numbers get even more interesting for diversity comes into play. The accompanying app shows the divergence in value not only between different majors within a school, but also the same majors between different schools, thereby actually valuing both the majors and the schools themselves!

Return from Postgraduate Courses

Postgraduate degrees offer a much better return compared with other asset classes than do undergraduate degrees.  

The break-even year is achieved much earlier, in most cases within 12-16 years.

NPV @6% is positive in all the cases.

Return from PhD Courses

Similar to undergraduate courses, return from PhD courses is lower compared to postgraduate courses. The returns are also lower compared to 30-year average return on equities (5-6%) and 20-year return on commercial real estate (>7%) and 30-year return on Gold (4.5%)

The break-even year is achieved after a very long time, after almost 26-28 years.

The Importance of the Variable, Inputs and Assumptions

The eROI of the degrees in question is highly sensitive to the inputs made to calculate it. The primary inputs with the largest influence are:

Opportunity costs – while in school, the money that you are not making simply adds up very, very quickly. Many take the money and experience gained in the actual workforce for granted when attempting evaluate a degree. From an mathematical perspective, that is a mistake.

Debt – the amount of loans taken, if any and the terms of said loans. Thus grant and scholarships make a big difference, as does (to a much lesser extent, of course) equity cash payments.

Salary upon graduation – this is the actual positive cash flows allegedly stemming from the education. A mediocre salary earned earlier actually has a strong chance of being more valuable via time value than a strong salary earned much later. This is particularly the case when debt is thrown into the equation. Again, math rules the day.

Living expenses – when calculating the eROI of a degree, one simply cannot ignore the net cash flows since that is the ONLY way to monetize one’s education. Living expense drastically reduce net cash flows, and they must be taken into consideration when calculating  eROI, as opposed to many more passive investments.

Unemployment rate and business climate upon graduation – with high unemployment, high underemployment (individuals who are employed, but considerable underpaid in proportion to their education and/or experience), sluggish economic environments and/or shifts in business cycles that favor one industry over another, it is quite likely that one will not materialize the expected average salary of the mean graduate (the inputs used for the [salary upon graduation] input, above) upon entering the workforce. Cyclical trends amongst and in between industries tend to have the same of similar effect. 

The Government's take?

In closing, I'd like to point out the government's attempt at proffering a quantitative tool to assist in selecting colleges. Of course, it focuses more on nominal cost than economic result (as does our model), but it's better than what any other administration has put out (read as nothing). Those who are interested can peruse the following links:

  1. High School Students Critique Obama's College Scorecard - High ...

    The Obama administration's proposed College Scorecard is all Greek to high school students, according to a report released Monday by the 

     
  2. Feb 6, 2012 – While all of those information sources may not be aligned to the extent necessary to populate the College Scorecard as currently proposed...
  3. Dec 3, 2012 – The College Scorecard, President Obama's proposed way to provide students with better data about their college options, leaves many of those ..[PDF] 
    File Format: PDF/Adobe Acrobat - Quick View
  4. The President has proposed providing this information to students and families. ABCCollege. ABC College  Institutions that enroll similar types of students ...
  5. Dec 5, 2012 – ... on the Obama administration's proposed college scorecard. The scorecard, a reference for students considering attending higher education, ...[PDF] 
  6. File Format: PDF/Adobe Acrobat - Quick View
    The White House will soon unveil a final version of its “college scorecard”—an online tool .... The President has proposed providing this information to students ...
  7. Feb 2, 2012 – Categories: Accountability, College Costs and Student Debt, Higher ...proposed “College Scorecard” and “Financial Aid Shopping Sheet”.
  8. Dec 3, 2012 – The college scorecard, a proposed online tool meant to help students make ... The proposed “college scorecard” that aims to give prospective ...
Published in BoomBustBlog
The college endowment investment results have rolled in, and if Harvard were to get a grade for the year it would probably receive an "F" as reported by the NY Times:

"Harvard reported a 0.05 percent loss and a drop in its endowment of over $1 billion in the same period, even as a simple Standard & Poor’s 500-stock index fund gained about 5.5 percent. Harvard’s endowment decline is more than the entire endowments of roughly 90 percent of all colleges and universities.

Ironically enough, if one were to calculate the ROI of a Harvard undergraduate diploma, the number is remarkably similar at about 0.05%. See the graph below...

thumb image006

These returns have been calculated by our proprietary College/University ROI Analysis Engine. At the bottom of this post you can find a link to a simplified beta of this engine, which will be freely available to blog subscribers, and will be available via smart phone app and over the web as well.  This app has morphed into an incredibly comprehensive and capable piece of knowledge kit - so much so that it had to be materially simplified just to post a portion of it on the web! 

There are many concepts used in the model that may be new to the Sheeple type. For instance...

Economic Return on Investment (eROI)

Introducing a reality-based method of valuing an education - the "Economic Return on Investment". You see, unlike many  other investments, the education is  a completely hands on, active experience. You cannot simply dump money into a fund and walk away. You must manage it, and  your labor (or how the market actually values your labor) is actually part and parcel of the return on investment .

Thus, it would be highly unrealistic to exclude the economic cash flows stemming from your attempts to pay debt service (assuming debt was used) in calculating  ROI. Since said debt is truly full recourse, its service must be factored in, and as such so should all of the practical variables that affect said servicing. Think of the net return on stock investments.

Click to expand...

thumb image031

This episode of the Keiser Report was one of the (if not the) most viral episodes ever. What was so interesting and controversial? A topic that damn sure hit home, that's what. Click here for the full episode.

When factoring in reality, many diplomas really don't look so appetizing considering the time, labor, effort, risk and expense in attaining them and fruitful employment related to the diploma afterward. Let's mark some top ivy league (remember, this is the so-called creme de la creme) diplomas to market, as well as the lowly disrespected for-profit online schools, trade schools and city universities. Oh yeah! I forgot to mention that I threw in an internship with a tech company for good measure. Let's add this quip in for the sake of argument (Yahoo Finance):

A few reports circulating this week have pointed to some fortunate Facebook software engineering interns who are set to bring home an average monthly salary of $6,225, according to Glassdoor.com, a careers site that provides data on salaries (based on employee generated content). That works out to a yearly salary of $74,700. For comparison, median household income from 2006 to 2010 was nearly $52,000, according to the latest Census data. (The average monthly pay for all Facebook interns, according to the site, is around $5,800.)

Jealous yet? There’s more. A few anonymous Facebook interns posted further details, with one second-year student saying he/she was offered $5,400 a month and a $1,000 housing stipend. Another computer science graduate student said they got $6,800 a month with a $1,000 housing stipend, negotiated up from $6,600. (Some Quora commenters noted intern salaries correspond to the number of years of college you’ve completed.) Facebook software engineers make an average of $111,452 a year, according to Glassdoor.

... So how do interns at the social-networking giant fare compared with their counterparts at other firms? Glassdoor released a report last month listing intern salaries at 20 top-rated companies (rated by current and former interns). Here are some highlights (figures are average monthly salary):

Software engineering intern, Google: $6,463 
Research intern, Microsoft: $6,746
Software development engineer intern, Microsoft: $5,539
Intern, Cisco: $4,017
Software development engineer intern, Amazon: $5,552
Graduate technical intern, Intel: $5,681
Intern, IBM: $3,935

As we know, majoring in computer science is a smart move. Finance and accounting offers lucrative job opportunities as well:

Tax intern, Ernst & Young: $4,136
Advisory intern, PricewaterhouseCoopers: $4,702
Audit intern, Deloitte: $3,822
Business analyst intern, Target: $2,785

Click to enlarge...

 thumb image034 

As you can see, a 2yr unpaid internship that yields a nominal salary growing at 3% per annum beats a levered ivy league diploma (salaries were sourced from the respective schools graduate statements and surveys). Debt can be a bitch, as can the time value of money and opportunity costs. For those who may not understand how this works, just think about starting school today with student loans and not breaking even until 2045 - that's right, the year 2045! Debt slaves - one and all!!!

Click to expand!!!

thumb image014

Of course, the major that you are pursuing has an awful lot to do with the value of the diploma, as does the current business environment and the point in the economic cycle. We will explore that in detail in my next post on this topic.

The YouTube videos that I have made on this topic are also of interest. Check out the comments left for this illustrative video titled "The (Mis)Education Bubble 101".
  • I have been far more successful and far more diversified in my skill set with out a degree. Companies take my physical real world experience of 15 years in the technology sector over a long list of graduates every time.. In the past 10 years, I've been without work for about 2 weeks, and that was due to a longer job transition. I transition jobs about every 3yrs to further broaden my experience in developing areas of technology.. Working without a degree has made me more competitive.

  • 2001lextalionis 10 hours ago

    I think to a certain degree it is relatively easy to access debt for purposes of education.

    Conversely if one is operating under the assumption that I have 90K saved up because I didn't go to school is somewhat flawed. Most folks have little or no savings so the math comparison of school versus stocks/internship is somewhat lacking in my view.

    Comparing debt free internship with zero capital to invest v 200K BA yields a far more interesting decision matrix

  • What about these for-profit online institutions like the Apollo Group? The founders of these companies barely made it past high school, yet are responsible for leeching billions of dollars each year in the form of FAFSA loans (our tax dollars). They specifically target the single mother demographic, and will admit them without even having so much as a valid GED. Have you ever heard of Ashford University? They just lost there accreditation, and over 100,000 of their graduates still owe thousands

  • justjacqueline2004 8 hours ago

    This type of education cost a huge amount of time and even worse,you start out by not knowing what you don't know,particularly in the sciences.

  • Qomowale 12 hours ago

    the current "(mis)education system" is a racket & a joke! ppl, think outside the box & educate urselves as much as possible, 'cuz the system intends 2 enslave all of us. what passes as education is really indoctrination & fiscal slavery based on a wicked interest-driven, fractional pimp game. go Reggie Middleton & Max Keiser! good luck trying 2 wake up the sheeple.

  • mrzack888 12 hours ago

    that's limited. real education like Reggie Middleton described has hands on and has pragmatical real world value.

 Click here to access the early beta version of the BoomBustBlog College/University ROI Analysis Engine. The next post on this topic will go through the model in illustrous detail and present the next iterative version of the beta for all to play with, as well as instructions on how to get the most out of it. It will enable you to value any diploma from any school, complete with ROI, NPV of funds invested, and time to break-even. 
Published in BoomBustBlog

Image 2 copy

This is part two of a multi-part series on how I plan to profit from the impending Burst of the Education Bubble in the US.  If you are easily offended, mired in academia, closed minded, or simply bad at simple math and critical thinking, this is not the article for you. There, I've proffered fair warning ahead of time. Thus far, we've covered the precursor to the series,  How Inferior American Education Caused The Credit/Real Estate/Sovereign Debt Bubbles and Why It's Preventing True Recovery, and part 1 - How To Profit From The Impending Bursting Of The Education Bubble, pt 1 - A Bubble Bigger Than Subprime & More Dangerous Than Sovereign Debt!
I urge all to review those articles for the verbose nature of this topic lends to rampant cross referencing. 

A Basic Illustration Of How The Blind Pursuit Of A Debt Funded Diploma Can Lead To Personal & Intellectual Insolvency

In the previous installment of this series, I walked through the math that basically invalidates the pursuit of a 4 year degree for nearly everyone that needed to finance it through school loans at 6% or higher. The basis of this invalidation was the poor quality of the asset backing the loan, the degree itself. This installment will walk through the logic that dictates the quality of said asset, but before I delve into said diatribe, I want to illustrate for the non-finance types the relationship between assets and liabilities and the path to insolvency that ensues when you use debt to purchase inferior and/or depreciating assets - basically the crux behind the Asset securitization (subprime mortgage) and Pan-European sovereign debt crises.
In the article How Greece Killed Its Own Banks!, I illustrated the danger and folly of Greece forcing its banks to use leverage to purchase rapidly depreciating assets with fictitious (allegedly "risk free") value. 

image001

The same hypothetical leveraged positions expressed as a percentage gain or loss...

image003

Many do not think of their education as an actual investment, but if you put time (opportunity costs) and capital (actual tuition) into the pursuit of a diploma, it is a pure investment, plain and simple. As you can see from the charts above, the losses taken on investments that use leverage to purchase assets that depreciate in price can be severe. Yes, the student loan/education crisis has many similarities to the current maladies facing Greece and the EU. It is not just balance sheet insolvency I'm referring too, either. Greece has a severely impaired ability to service its debt which is why this purveyor of cash "know how" insisted that Greece would default 3 years ago as the "know that" community openly declared other wise: Greek Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants on Fire! and The Ugly Truth About The Greek Situation That'sToo Difficult Broadcast Through Mainstream Media. As a matter of fact, I even went so far as to predict that Greece would default again before finishing defaulting the first time around, This Time Is Different As Icarus Blows Up & Burns The Birds Along The Way - Greece Is About To Default AGAIN! The reason why is the exact same malady that afflicts those who use leverage to pursue "knowledge that" (see term descriptions and definitions below).

Despite extensive, self-defeating, harsh and punitive austerity measures that have combined with a lack of true economic stimulus, Greece has (to date) failed to achieve Primary Balance. For the non-economists in the audience, primary balance is the elimination of a primary deficit, yet the absence of a primary surplus, ex. the midpoint between deficit and surplus before taking into consideration interest payments.

Greece_Primary_balance

The primary balance looks at the structural issues a country may have. Government expenditures have outstripped revenues ever since 2007 and have gotten worse nearly every year since, despite 3 bailouts a restructuring, austerity and a default!

Greece_Primary_deficit_copy

Part 1 of this series illustrated exactly how those who pursue levered "know that" can and likely will fall into the exact same structural insolvency by having their fixed expenses born from the pursuit of the diploma on a leveraged basis outstrip their income. Reference this excerpt from How To Profit From The Impending Bursting Of The Education Bubble, pt 1:

...assume a $40k per year tuition for a 4 year business management degree, purchased with money borrowed at 6% (from our dear government guaranteed lenders (SLM, et. al.), deferred for and average of 2 years. An oversimplified straight calculation puts you roughly $178,000 in debt upon graduation for a piece of paper that would fetch you roughly $43,000 per year. Reference ehow.com:

In July 2009, people who hold a bachelor's of science (BS) in business management averaged $39,551 during their first year of employment and $43,022 for the first one to four years. A professional with a BS in business management typically averaged $78,669 once they reached 20 years of employment.
Read more: Average Salaries for a Bachelor's Business Degree | eHow.com http://www.ehow.com/facts_5240719_average-salaries-bachelor_s-business-degree.html#ixzz2Gw6sriN5

Real wages have likely dropped since then, but even using the nominal assumptions above you would have been driven into the hole when factoring in real life expenses of:

  • Taxes: Yes, you'd have to subtract local, state and federal taxes from said monies... At roughly 35% (bound to go up after we finish this cliff nonsense), we're now talking $27,964 average over four years. That puts you in the hole to the tune of roughly $12,035 per year you spent on that degree.
  • Living expenses: Food, shelter (rent), clothing, transportation. In a NYC, even assuming the much less expensive outer boroughs,

Combined, we're talking roughly $3,000 per month or so, assuming you won't take in roommates. If you do, you can drop that figure to about $2,500 per month. Using the lower bound of this assumption, you are underwater (structural deficit) to the tune of about $2,000 per year. Please keep in mind that primary balance calculations and structural deficits don't take into consideration interest payments (for the sake of comparison). The underwater comment does not take into consideration the actual paying back of your loan yet, either. 

So, on the fifth year following your freshman orientation, assuming you studied well, you would have laid out $176,000 facing annual debt service of about $12,000 or so - offset by a net income stream of roughly $28,000 to cover roughly $30,000 of living expenses. The negative $2,000 per year cash flow would result in a chart that is very, very similar to the Greek charts featured above.

So, why do these numbers look so bad? Well, the answer to that question lies in the value of the asset that knowledge seekers encumber themselves to acquire. The levered purchase of depreciating assets or assets with fictitiously high values is bound to lead to insolvency. Enter... 

The Topic Of Knowledge

Knowledge is a familiarity with someone or something. That familiarity can include facts, information, descriptions, or skills acquired through education, which also includes experience. Knowledge refers to both the theoretical and practical understanding of a subject. Knowledge can be implicit (as with practical skill or expertise) or explicit (as with the theoretical understanding of a subject). I am here to sell implicit knowledge, better known to the old school as know how, or more formerly known as "Knowledge How"....

Knowledge that vs Knowledge How

In academia, the kind of knowledge usually proffered is propositional knowledge, more colloquially described as "knowledge that." "Knowledge that" or "know that" is distinct and should be discerned from "knowledge how" (know how). The best way to describe this concept is to use simple real life examples. In mathematics, it is commonly known that (hence knowledge that, or know that) 1 +1 = 2, but there is also knowing how to add the numbers one plus one together and understanding what their sum (two) is. 
In physics, we can take this concept even farther. It has been argued to by college age students of knowledge that (who are currently mired in academia) that a physics engineer cannot approach know how without being first well versed in know that. This is a mindset that is the result of today's modern academic group think.
This concept is also easily enough disproved by using a common example known to most of us, and that is riding a bicycle. The theoretical knowledge of the physics involved in maintaining a state of balance on a bicycle (knowledge that, or know that) cannot substitute for the practical knowledge of how to ride (knowledge how, or know how). The importance of understanding how to ride a bike is obvious, established and grounded - at least to those interested in bike riding. There is absolutely no prerequisite of having the theoretical knowledge of the physics involved in maintaining the state of balance of the bicycle to learn to ride the bicycle, nor to ride it proficiently, nor to pass this knowledge on to others. Thus, it is obvious and clear that an engineer does not need to be versed in "know that" to move on to "know how". Any failure to acknowledge the distinction between knowledge that and knowledge how can lead to vicious regresses.
 
 
In philosophy, an infinite regress in a series of propositions arises if the truth of proposition P1 requires the support of proposition P2, the truth of proposition P2 requires the support of proposition P3, ... , and the truth of proposition Pn-1 requires the support of proposition Pn and n approaches infinity. This is more commonly known as the circular argument, as explained in Greece Reports: "Circular Reasoning Works Because Circular Reasoning Works" - Or - Here Comes That Default!!!
 
A distinction must be made between infinite regresses that are truly "vicious" and those that are comparatively benign. A truly vicious regress is an attempt to solve a problem that by and large re-introduced the initial problem in the (or as the) proposed solution. Examples of this can be found in today's global Ponzi scheme of using more debt to solve the debt dilemma of Greece, thus the ease of my predicting serial re-default. This is not truly a practical (or doable) solution, and as one continues along these lines, the initial problem will recur infinitely and will never be solved. Not all regresses are vicious, however the truly circular argument is. This is the crux behind the article, "How Inferior American Education Caused The Credit/Real Estate/Sovereign Debt Bubbles and Why It's Preventing True Recovery" and the reason why the Pan-European sovereign debt crisis is nowhere near being solved (again reference  Greece Reports: "Circular Reasoning Works Because Circular Reasoning Works" - Or - Here Comes That Default!!!). Remember, failure to acknowledge the distinction between "know that" and "know how" leads to vicious regresses. With academia being a bastion of "know that" rooted in the rote memorization of facts and information bits, those well versed in know how can literally run circles around those immersed in said schools of thought once it comes to problems solving, value creation and getting things done (or undone) in the real world. 
 
It is the reason why the legion's of ivy league academics failed to foresee following while I clearly articulated the risks and consequences well beforehand: 
I have a rich history in seeing and benefiting from the things that the "know that" crowd cannot perceive. Reference Who is Reggie Middleton? for more about me.

What Is This Really About?

There is a very important and distinct difference between "knowing that" and "knowing how," with the crux of the distinction being the difference between this initiative and that vast swath of modern academia. "Know that" is a function of rote memorization of static information, passed down from the Prussian method of education implemented over 200 years ago and still common use today and "know how" is basically understanding of how to get things done...
"Know how" is what has separated the labor intensive low margin industries of the far east from the Intellectual Property rich industries found in the US, at least until now. After decades of toiling in an antiquated teaching system producing a legions of leveraged "know that" recipients who then seek "know how" in the work force (basically asking employers to pay to learn on the job what they should have learned from school) to pay off or compensate for hundreds of thousands of dollars of tuition bills and debt, the US is finally paying the piper for its lackadaisical approach to real education. Asian companies such as Samsung are actually outperforming their sterling US counterparts such as Apple in both product capability, product quality and even market share. In order to stem this tide, true "know[ledge] how" must become - once again - the aim, goal and accomplishment of the education system, similar to the apprenticeships of old.
 
The basis of doing things and solving real world problems by thinking through them and value creation (making things) by applying a real, true skill. Academia is primarily interested in the first, Reggie Middleton is deeply ensconced in the latter.
 
The next installment will focus on a sampling of individual schools that peddle and push leveraged "know that" to the masses, ranging from the gleaming ivy league towers to the workshop tutoring courses down the street. This pandering of leveraged "know that" is to the dismay of all who relied on the so-called scholars from said schools to actually know what they were talking about in predicting crises, managing assets and conducting policy through said crises, and coming up with solutions for the same. I have already laid my "know[ledge] how" track record for all to see (reference Who is Reggie Middleton?) and it would be interesting to perform an apples to apples comparison to those purveyors of "leveraged know that" to see if this blogger cum entrepreneurial investor is on to something or not. I don't possess a masters degree, not to mention one from the ivy league, yet I feel I have run circles around many, if not the vast majority of those that have. You can view the data and judge for yourself - Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best? It's not necessarily the raw intelligence, that has enabled this, but the ensconced approach to learning. 
 
I currently have my analysts working on explicit ROIs for degrees (both cash and levered) from the following schools: Harvard, Yale, Wharton, Princeton, NYU, Capella, University of Pheonix, DeVry, CUNY, SUNY with explicit comparisons to investing borrowed funds in the NASADAQ and S&P 500 over the same time period(s) and interning for free at various institutions who hire from said schools. This installment will also review the business models of said schools and the following installment will illustrate my answer to this mess.

In the mean time and in between time, subscribers can glean my view of one of the big private post secondary educators who is  having a problem with volatile earnings that are probably going to get worse.

file iconEducation Co. 1-3-2013

Follow me:

  • Follow us on Blogger
  • Follow us on Facebook
  • Follow us on LinkedIn
  • Follow us on Twitter
  • Follow us on Youtube

or see my social media stream.

Published in BoomBustBlog

What makes this truly ironic is that anyone who truly received a real business admin, management or finance education would be able to run these rudimentary calculations and thought processes themselves which would result in the invalidation of the actual degree to which they are seeking...

One of the most popular (although I feel not popular enough, considering the importance of the subject matter) articles of BoomBustBlog 2012 was my pieces on the near uselessness of the US education system - How Inferior American Education Caused The Credit/Real Estate/Sovereign Debt Bubbles and Why It's Preventing True Recovery. The accompanying graphic easily encapsulates a material portion of the piece, basically illustrating how the public school system serves as a mass indoctrination machine which has close to nothing in common with true education, knowledge dissemination, creativity or value creation. 

The post secondary and private school systems are simply continuations of the same, but worse yet, charge exorbitant fees for said injustice. Many poor victim either saves up a half lifetime of savings or worse yet goes into insolvency skirting debt to purchase a so-called education (which as described above is nothing of the sort) that is represented buy a piece of paper known as a diploma that is literally not worth the paper it is written on. 

For those who think that I'm exaggerating, assume a $40k per year tuition for a 4 year business management degree, purchased with money borrowed at 6% (from our dear government guaranteed lenders (SLM, et. al.), deferred for and average of 2 years. An oversimplified straight calculation puts you roughly $178,000 in debt upon graduation for a piece of paper that would fetch you roughly $43,000 per year. Reference ehow.com:

In July 2009, people who hold a bachelor's of science (BS) in business management averaged $39,551 during their first year of employment and $43,022 for the first one to four years. A professional with a BS in business management typically averaged $78,669 once they reached 20 years of employment.
Read more: Average Salaries for a Bachelor's Business Degree | eHow.com http://www.ehow.com/facts_5240719_average-salaries-bachelor_s-business-degree.html#ixzz2Gw6sriN5

If I'm not mistaken, wages have dropped on a inflation adjusted basis since then, but I digress. Using the figures above you would have just about broken even over an 8 year period, save a few common sense facts.

  • Taxes: Yes, you'd have to subtract local, state and federal taxes from said monies... At roughly 35% (bound to go up after we finish this cliff nonsense), we're now talking $27,964 average over four years. That puts you in the hole to the tune of roughly $12,035 per year you spent on that degree.
  • Debt service: Oh, yeah! Since you borrowed the money you'd probably would have to pay it back, but since you also have to work and pay rent (you can forget a mortgage at these income levels) you'd be paying back the minimum levels and scraping to do so. You'd better hope and pray you don't live in Manhattan or downtown Brooklyn too!
  • Oppurtunity costs: Yes, you could have used those four years and $176,000 to do something else maybe a tad bit more productive.

So, on the fifth year following your freshman orientation, assuming you studies well, you would have laid out $176,000 facing annual debt service of about $12,000 or so - offset by a net income stream of roughly $28,000. The $16,000 per year positive cash flow (assuming you didn't need food, shelter, clothing, transportation or anything else) would give you about 12 years or so to pay off the debt and break even. I'm not even goint to run the math on the ROI, so let's just pick something outrageously generous like 8% (remember, this is over a 16 year period).

To wit, let's compare some other basic investments  - that is assuming someone besides your school and your lender actually consider your academic mis-education an actual investment.

The NASDAQ composite returned 98% over the last for years. Dumping the money in the NAZ comp would have brought you close to doubling it - although you would not have had access to all of the funds at once for a lump sum investment, a roughly 50% gain looks likely. Now, you would have gained 4 years of simplistic (as in index watching) experience as compared to your competitor's fancy schmancy 4 year degree, yet you would had nearly a quarter million in cash, as well as roughly $70,000 in equity while he would have had $173,000 in debt, interest payments due immediately and the hope of finding a job with which his trusty diploma would surely help him, right? If you had a small financial business, who would you hire? The fool or the entrepreneurial investor???

Suppose you Interned for free with Apple, Google or Facebook while simply leaving the monies in the bank at .25% interest? You would have had a superior education and only been in the hole for $16,000, as well as having $160,000 in cash to play with. How about starting your own business? Invested in commercial real estae? Scalping Greek bonds post bailout? You see, there are so very few who compare getting a diploma or getting a loan for a diploma with other investments because they are brainwashed to believe this is the way to get ahead in life. It is not! It's the way to get educator entities and banks ahead in life, as you become a debt slave. 

What makes this truly ironic is that anyone who truly received a real business admin, management or finance education would be able to run these rudimentary calculations and thought processes themselves which would result in the invalidation of the actual degree to which they are seeking, alas... I digress...

Why the student loan bubble is worse than the subprime bubble 

Zerohedge has run an interesting series of the student loan bubble in the recent past, hence I will not rehash what has already been done in such exquisite detail. For those who have not been following, this is the case in a nutshell...

Student loan delinquencies break the 20% mark as total student debt tops a trillion dollars, rivaling and likely surpassing the subprime debt debacle.

This is how the Fed described this "anomaly": 

Outstanding student loan debt now stands at $956 billion, an increase of $42 billion since last quarter.  However, of the $42 billion, $23 billion is new debt while the remaining $19 billion is attributed to previously defaulted student loans that have been updated on credit reports this quarter. As a result, the percent of student loan balances 90+ days delinquent increased to 11 percent this quarter.

oh and this from footnote 2: 

As explained in a Liberty Street Economics blog post, these delinquency rates for student loans are likely to understate actual delinquency rates because almost half of these loans are currently in deferment, in grace periods or in forbearance and therefore temporarily not in the repayment cycle. This implies that among loans in the repayment cycle delinquency rates are roughly twice as high.

And more from ZH:Over $120B in student loans currently in default. For private private  institutions lead the way with a 22% default rate.

Today's public school system diploma, post secondary diploma, and for the most part, many if not most graduate degrees and PhDs are a waste of good ink and (relatively) valuable paper. This paper is quite similar to the MBS and sovereign debt paper which I have written so presciently and accurately on over the last 6 years (see Asset securitization crisis and Pan-European Sovereign Debt Crisis). The crises from these essentially depreciating assets stemmed from the piling of excessive debt on top of assets with fictional value. Trust me, I can see these things clearly, as can anyone who takes an objective view. When have we had instances similar to this Student Loan Bubble (or Stubble)? When I made a small fortune shorting...

I can go on for a while (particularly on RE and sovereign debt), but I feel you've got the point. The pattern is inevitable. There is a  true business opportunity here, for many college graduates couldn't earn their way out of a wet paper bag, and many of those that could are squandered by toiling away in a system of derivatives of derivatives based upon synthetic products (think of mortgage CDO cubed traders) which are merely shadows of social constructs, versus the inception, design, production and sales of real, value creating, tangible (as well as intangible) assets, products and services.

My next article on this topic will show how I am positioning myself and others to capitalize on this education bubble burst on both the short side and the long side. In the mean time and in between time, subscribers can glean my view of one of the big private post secondary educators who is  having a problem with volatile earnings that are probably going to get worse.

file iconEducation Co. 1-3-2013

Follow me:

  • Follow us on Blogger
  • Follow us on Facebook
  • Follow us on LinkedIn
  • Follow us on Twitter
  • Follow us on Youtube

or see my social media stream.

Published in BoomBustBlog

The presidential elections are coming up again. The last 4 years went by very quickly, and as always, we are confronted with BS blown all over the mainstream media. This time (like last time) the focus is on the POTUS and the economy. I fear many lay persons and even some who should know better fail to realize that the president has very little willful control over the economy - at least to the upside. Now, it is possible for a president to wreck the economy. For instance, we had one not too long ago who took it upon himself to start several concurrent wars while cutting taxes at the apex of a cyclical economic peak (aka, bubble about to burst), but that rarely occurs, right?

Generally, the POTUS is either blamed or glorified for things that are largely out of his control. Prominent examples have been:

  • Reagan, whose policies actually sucked but rode a cyclical bull to acclaim...
  • Clinton, whose policies sucked less, but still rode a cyclical bull to acclaim.
  • Carter, the poor bastard... Wrong place at the wrong stagflationary time.
  • And last but not least, Obama - there was no way in hell anyone, regardless of who it was other than the almighty God/Buddha/Allah [fill in the blank] himself could have extricated the country from the mess that Bush contributed to.

To be fair, although I would like to say he (as in George Bush Jr.) made the mess, in all actuality he simply was in office when the bubble burst. His greatest crime (other than being the worst president this country has ever seen - and despite the fact that he was re-elected [or re-appointed if you followed that whole hanging chad thing]) was that he exacerbated the effects of the downfall by squandering our resource cushion in unnecessary wars and tax breaks and failed to invest in the entrepreneurial spirit of American small and medium sized businesses, where ALL of the big business (his constituency) actually came from. 

As an aside, see How Inferior American Education Caused The Credit/Real Estate/Sovereign Debt Bubbles and Why It's Preventing True Recovery for my views on education in America. This video tells a tale as well. Please take note of the comments in the video - here's a tell tale burb, "I'm sure Reggie is well aware why this video only has 3667 views, when it should easily be in the millions...........sad........­.sad...sad...sad.....pray for your children"..

See also:

Is this a brother from another mother???

My highly entrepreneurial and uber-cognitive 11 year old son (my older son is and artistic genius wrapped around a true scientist and my young daughter is a legitimate powerhouse and leader - yes, all three of my children are special and yes I am biased :-)) asked me to sit in on his homework assignment of critiquing the presidential candidate speeches. I explained to my boy that a tertiary (if not primary) labor of the POTUS is to pump BS to the masses. Jobs... Schmobs... As clearly articulated in BS At The BLS Leads To Profitable Short Opportunities As Hopium Smokers Get High Off Of Depreciated Dime Bags Of Manipulated Euphoria! Following up on the premise of that article is our next release in the follow of overpriced and over valued retailers. This time around, we get wet... Subscribers, download - Retailer_Final (801.03 kB 2012-09-11 01:30:21)

Now, back to the original premise - Guess what my 11 year old uncovered in the process...

Reggie Middleton on Obama vs Romney Acceptance Speeches

'Nuff said!

Published in BoomBustBlog

Below are excerpts from Capital Account's interview with moi (click here for the entire, original interview) featuring my views on education, class struggle and the dumbing down of America. I used my 5 year old daughter as an example of someone who was labeled as unable to read at advanced kindergarten level, yet somehow can parse emails from PhDs, MBAs and other clients of BoomBustBlog. Even if you have seen this popular interview with Lauren Lyster already, this remix is well worth your time. The first 3 and a half minutes are quite telling. Take note of how my daughter actually tries to sound out the words she is reading versus using memorized bits and bites to form the words. In addition, take note of the zeal and pride that she has in tackling a tough problem (at least for her, and probably many kindegarteners) instead of giving up when confronted with a problem. I try my best to push creativity and knowledge of how the world works, vs memorization of propaganda and proficiency in following rules. As a matter of fact, I push all of my kids to actively seek to break the rules for their benefit and attempt to rewrite the rules to their advantage. If you don't like the way that sounds, you can assume that you and/or your children may be working for the 5 year old in this video that was labeled as unable to read by the NYC school system in September.

20120103_145351My two youngest children after an interview at CNBC wherein Daddy goes against the grain yet again by warning on the FIRE sector, a week before Wall Street jumps on board

My two youngest children, like my oldest (19 yrs) accompany their dad to work to see how the entrepeneur side looks. Notice, like their dad, the keep computers and tech in hand...My two youngest children, like my oldest (19 yrs) accompany their dad to work to see how the entrepreneur side looks. Notice, like their dad, the keep computers and tech in hand...

Watching Daddy spread his message in the CNBC studios. I regularly and happily pull my kids out of school so they can see what I do, how I do it, and how successful (or not) it may be. This is true education. My children (all three, 5, 11 & 19) are well versed in class struggle, geo political power struggles, economics and finance. They all know what Money is, and  no, they will not tell you it is to buy things!!!Watching Daddy spread his message in the CNBC studios. I regularly and happily pull my kids out of school so they can see what I do, how I do it, and how successful (or not) it may be. This is true education. My children (all three, 5, 11 & 19) are well versed in class struggle, geo-political power struggles, economics and finance. They all know what Money is, and no, they will not tell you it is to buy things!!! I would like to see an entier school filled with teachers of a mindset similar to mine, and I will have that - even if I have to start the school myself!!!!

The articles (recommeneded reading, of course) that led up to this are... 

How Inferior American Education Caused The Credit/Real Estate/Sovereign Debt Bubbles and Why It's Preventing True Recovery

 

The Biggest Threat To The 2012 Economy Is??? Not What Wall Street Is Telling You...

The American Education System Exposed For What It Truly Is - A Worker Drone Factory For The Socio-Economic Elite!

 
 
 
Published in BoomBustBlog

This is the 3rd installment of my controversial rant against the American education system - this time in video. If you haven't been following me, it is recommended that you read through the first two (admittedly lengthy, yet well worth the time) posts:

  1. How Inferior American Education Caused The Credit/Real Estate/Sovereign Debt Bubbles and Why It's Preventing True Recovery
  2. The Biggest Threat To The 2012 Economy Is??? Not What Wall Street Is Telling You...

I fully expect plenty of comments on this one! I come in at 3:40 in the video, but the first three and a half minutes may be worth viewing as well for those in the education industry.

laurynlister_Reggie_on_RT

Published in BoomBustBlog

Earlier this week I published a controversial rant on the US education system - How Inferior American Education Caused The Credit/Real Estate/Sovereign Debt Bubbles and Why It's Preventing True Recovery. This was a lengthy piece, but apparently caught the interest of many as it went semi-viral. This is part of the conclusion, attempting to show how US indoctrinated "GroupThink" prevents many (if not most) from seeing what empirically should be obvious. 

Subscribers, please reference the following documents analyzing the FIRE companies we see at risk as a result of the following circumstances.

We have reviewed the finance portion extensively throughout 2011. See Commercial & Investment Banks section of the subscription content area. This is the latest bank who we feel will suffere significant if the feces hits the fan blades  Bank Haircuts, Derivative Risks and Valuation.

The last forensic report was centered around an insurer - see You Can Rest Assured That The Insurance Industry Is In For Guaranteed Losses! and Our Next Forensic Analysis Subject Is In The Insurance Industry. The actual report is available here:

I have also detailed the risks in commercial real estate in the Dutch markets, see

Now available for download to all paying subscribers is a US REIT headed for distress -  US Commercial REIT Distress Overview
(Commercial Real Estate)
. Professional and institutional subscribers will have an addendum published with additional companies that just missed the shortlist, but may see problems in the near to medium term.

There are many analysts and pundits who outline their predictions for the new year. I don't believe in "predicting" personally, but it is very important to form an outlook for the future and back said outlook up with objective observation and prudent analysis. Several big bank analysts have outlined what they perceive to be the biggest threat to stability for 2012, and material amount of them chose the same threat...

shah_of_iran

Iran

Former CIA Chief: Iran 'Single Greatest Destabilizing' Force in 2012

Tehran will be the top threat in 2012, former CIA Director Michael Hayden predicted Wednesday as Iran dominates foreign policy debate even while national security officials appeared to dismiss the Islamic Republic's latest threat to close the Strait of Hormuz.

"It is the single greatest destabilizing element right now with regards to global security," Hayden told Fox News, adding that the outlook is not encouraging.

Don't get me wrong, I fully appreciate and agree with the assertion that Iran is a serious threat to global stability - and I'm not the only one...

Whle PIMCO didn't actually label Iran as the biggest threat, they did do a superb job of outlining the potential fallout from an Iranian oil event....

"Pimco's 4 "Iran Invasion" Oil Price Scenarios: From $140 To "Doomsday"",

 "Whenever the global economy is in a fragile state, as it is today, geopolitical concerns such as the possibility of a strike on Iran’s nuclear facilities become much more exaggerated. Although we cannot (and will not) predict whether an attack is imminent, or even likely, our experience and research tells us that any major disruption in the supply of oil from Iran could have either subtle or profound global repercussions – especially as excess capacity is virtually exhausted and we doubt that other OPEC nations would be able to compensate for a reduction in Iranian oil production."

The 4 scenarios presented by PIMCO here they are: "i)Scenario 1Exports minimally effected. Concerns would drive initial price response; Oil could spike initially to $130 to $140 per barrel and then settle in a higher range, around $120 to $125; ii) Scenario 2Iranian exports cut off for one month. In this case, we would expectprices could reach previous all-time highs of $145/bbl or even higher depending on issues with shipping; iii) Scenario 3: Iranian exports are lost for half a year. We think oil prices could probably rally and average $150 for the six months, with notable spikes above that level; iv)Scenario 4Greater loss of production from around the region, either through subsequent Iranian response or due to lack of ability to move oil through Straits of Hormuz. This is the Armageddon scenario in which oil prices could soar, significantly constraining global growth. Forecasting prices in the prior scenarios is dangerous enough. So, we won’t even begin to forecast a cap or target price in this final Doomsday scenario."

Now, SocGen weighs in...

SocGen Lays It Out: "EU Iran Embargo: Brent $125-150. Straits Of Hormuz Shut: $150-200"

1) "Scenario 1: EU enacts a full ban on 0.6 Mb/d of imports of Iranian crude. In this scenario, we would expect Brent crude prices to surge into the $125-150 range." 2) "Scenario 2: Iran shuts down the Straits of Hormuz, disrupting 15 Mb/d of crude flows. In this scenario, we would expect Brent prices to spike into the $150-200 range for a limited time period."

Now, the last thing an already crippled Europe needs is a doubling of its primary transportation energy source. Alas, methinks Europe has bigger problems to with which to cause goose bumps on its booty - namely.... It's banking AND insurance system is still one step from absolute implosion! It's gotten so bad that the borrowers are actually lending to the lenders because the lenders have no effective credit in the markets!!!

European Banks Now Get Loans From Cash-Rich Firms

Blue-chip names like Johnson & Johnson, Pfizer, and Peugeot are among firms bailing out Europe's ailing banks in a reversal of the established roles of clients and lenders.
Euro bills and U.S. dollars being exchanged. One source with knowledge of the so-called repo deals, or short-term secured lending, said the two U.S. pharmaceutical groups and French car maker were the latest to sign up for them. Europe's banks are struggling to secure the cash to fund their day-to-day business and have largely stopped lending to each other for fear Europe's sovereign debt [cnbc explains] crisis could land any of their peers in trouble.

As a result a group of well-known, cash-rich companies with solid cash flows has stepped in the repo market, which provides a form of lending so far almost exclusively in use between banks, and between banks and central banks. One market participant said in one key area of lending companies now accounted for 25 percent of these deals. Repos provide the new financiers with the strict guarantees they need before parting with their cash, answering worries that the crisis has weakened Europe's banks to the extent that they might not be able to pay the money back.
"Companies in the past were ... happy to deposit cash on an unsecured basis to a bank for an interest payment," said Frank Reiss, who oversees some of the repo business at Euroclear, the Brussels-based settlement house owned by a group of banks. "Now following the crisis, we have seen that companies are engaging in repos secured with collateral against the cash they are lending," said Reiss. Euroclear is the largest administrator of repo trades in Europe. At the moment the European Central Bank provides the main lifeline for banks and has pumped hundreds of billions of euros of cash into the market. But the banks are parking most of the money they borrow back at the ECB [cnbc explains] rather than trusting to lend to each other.

Yes, this appears to be the fact... Deposits at ECB Hit New High

Commercial banks' overnight deposits at the European Central Bank hit a new record high of 464 billion euros, data showed on Monday, and traders said they could hit half a trillion euros by next week. High deposits indicate banks prefer the safety of the central bank for their funds to higher rates they could get by lending to each other.

Banks are awash with cash after taking an unprecedented 489 billion euros in the ECB's [cnbc explains] first-ever three-year liquidity operation late last month, and are mulling what to do with the money in the longer term. The liquidity operation was designed to underpin banks' finances and hopefully repair some confidence in the sector, but the sovereign debt crisis means many institutions still lack enough trust to lend to each other and prefer to stash their money at the ECB.

"The market is more or less closed, all the over-liquidity is going back to ECB," the trader said. "Slowly people are getting some longer funding, but there is no easing in the short end."

Now, Germany has acted as stalwart stopgap in the sovereign debt carnage of the EU nations. It's perceived as the strongest, most stable and most disciplined economy. As such, there has been a massive flight to quality trade that has pushed German bunds to negative yields. That's right! As in the US, you literally have to pay Germany for the privilege of lending it your hard earned money.

Right here and now, the more astute should see there's something wrong here, but we shall move on. Wait a minute! This net export nation (that means its livlihood is based on selling goods to others) whose major trading partners suffer from a myriad of maladies ranging from hard landing to near depression is in economic recession, yet there's enough demand to lend it money that lenders have to pay for the privilege???

  1. Latest Numbers from Germany Confirm Recession The New American -The announcement from the German Economy Ministry over the weekend confirmed that the long-awaited European recession has officially begun: German factory ...
  2. Germany in recession - The Daily Economist - Entering the new year, we can now add Germany to the growing list of countries in recession, as noted by more than a dozen economists who have come to this ...
  3. Economists: Germany in a recession now - The Local - As European leaders struggle to stave off a looming recession this year,Germany – the continent's biggest and healthiest economy – is probably already in one,...

  4. Survey shows Germany already in recession: report - MarketWatch - BERLIN -The German economy is already in recession, Die Welt newspaper reported Monday, citing its survey of 14 bank economists.

I believe Germany poses the biggest threat to global harmony for 2012. Here's why...

European banks are (in addition to borrowing on a secured basis from those customers they usually lend to) also paying insurers and pension funds to take their illiquid bonds in exchange for better quality ones, in a desperate bid to secure much-needed cash from the ECB, which only provides cash against collateral. This may not be as safe a measure as it sounds. Below is a sensitivity analysis of Generali's (a highly leveraged Italian insurer, subscribers see File Icon Exposure of European insurers to PIIGS) sovereign debt holdings.

image004

As you can see, Generali is highly leveraged into PIIGS debt, with 400% of its tangible equity exposed. Despite such leveraged exposure, I calculate (off the cuff, not an in depth analysis) that it took a 10% hit to Tangible Equity. Now, that's a lot, but one would assume that it would have been much worse. What saved it? Diversification into Geman bunds, whose yield went negative, thus throwing off a 14% return. Not bad for alleged AAA fixed income. But let's face it, Germany lives in the same roach motel as the rest of the profligate EU, they just rent the penthouse suite! Remember, Germany is not in recession after a rip roaring bull run in its bonds, and I presume the recession should get much deeper since as a net exporter it has to faces its trading partners going broke. Below you see what happens if the bund returns were simply run along the historical trend line (with not extreme bullishness of the last year).

image005

Companies such as Generali would instantly lose a third of their tangible equity. This is quite conservative, since the profligate states bonds would probably collapse unless the spreads shrink, which is highly doubtful. Below you see what would happen if bunds were to take a 10% loss.

image006

That's right, a 10% loss in bunds translates into a near 50% loss in tangible equity to this insurer, which would realistically be 60% plus as the rest of the EU portfolio will compress in solidarity. Combine this with the fact that insurers operating results are facing historically unprecedented stress (see You Can Rest Assured That The Insurance Industry Is In For Guaranteed Losses!) and it's not hard to imagine marginal insurers seeing equity totally wiped out. The same situation is evident in banks and pension funds as well as real estate entities dependent on financing in the near to medium term - basically, the entire FIRE sector in both European and US markets (that's right, don't believe those who say the US banks have decoupled from Europe).

thumb_Reggie_Middleton_on_Street_Signs_Fire

The damage to banks will probably be worse due to the higher level of leverage in European institutions. This is saying a lot since Italy's Generali is truly levered up the ASS! As excerpted from our professional series File Icon Bank Run Liquidity Candidate Forensic Opinion:

BNP_Paribus_First_Thoughts_4_Page_01

This is how that document started off. Even if we were to disregard BNP's most serious liquidity and ALM mismatch issues, we still need to address the topic above. Now, if you were to employ the free BNP bank run models that I made available in the post "The BoomBustBlog BNP Paribas "Run On The Bank" Model Available for Download"" (click the link to download your own copy of the bank run model, whether your a simple BoomBustBlog follower or a paid subscriber) you would know that the odds are that BNP's bond portfolio would probably take a much bigger hit than that conservatively quoted above.  Here I demonstrated what more realistic numbers would look like in said model... image008

Be aware that Greece, et. al. currently trade at a very fat spread to the bund. Said spread should actually widen as reality starts to set in. Remember, these are spreads, not static yields! If German bunds reflect the fact that Germany, as a net export nation that derives its bread and butter from exporting to economies that currently range from facing hard landings to recession to down right borderline depression (China/US/EU), then Bund prices may feel the effects of fundamentals over the flight to (alleged) quality trade that has pushed yields negative. When you have to pay somebody to lend them money, the wrting should be written very clearly on the wall. If only American Group think indoctrination style education taught us to read (the writing on the wall, that is). See for How Inferior American Education Caused The Credit/Real Estate/Sovereign Debt Bubbles and Why It's Preventing True Recovery more on this.

To note page 9 of that very same document addresses how this train of thought can not only be accelerated, but taken much further...

BNP_Paribus_First_Thoughts_4_Page_09

So, how bad could this faux accounting thing be? You know, there were two American banks that abused this FAS 157 cum Topic 820 loophole as well. There names were Bear Stearns and Lehman Brothers. I warned my readers well ahead of time with them as well - well before anybody else apparently had a clue (Is this the Breaking of the Bear? and Is Lehman really a lemming in disguise?). Well, at least in the case of BNP, it's a potential tangible equity wipeout, or is it? On to page 10 of said subscription document...

BNP_Paribus_First_Thoughts_4_Page_10

Yo, watch those level 2s! Of course there is more to BNP besides overpriced, over leveraged sovereign debt, liquidity issues and ALM mismatch, andlying about stretching Topic 820 rules, but I think that's enough for right now. Is all of this already priced into the free falling stock? Are these the ingredients for a European bank run? I'll let you decide, but BoomBustBloggers Saw this coming midsummer when this stock was at $50. Those who wish to subscribe to my research and services should click here. Those who don't subscribe can still benefit from the chronology that led up to the BIG BNP short (at least those who have come across my research for the first time)...

Thursday, 28 July 2011  The Mechanics Behind Setting Up A Potential European Bank Run Trastde and European Bank Run Trading Supplement

I identify specific bank run candidates and offer illustrative trade setups to capture alpha from such an event. The options quoted were unfortunately unavailable to American investors, and enjoyed a literal explosion in gamma and implied volatility. Not to fear, fruits of those juicy premiums were able to be tasted elsewhere as plain vanilla shorts and even single stock futures threw off insane profits.

Wednesday, 03 August 2011 France, As Most Susceptble To Contagion, Will See Its Banks Suffer

In case the hint was strong enough, I explicitly state that although the sell side and the media are looking at Greece sparking Italy, it is France and french banks in particular that risk bringing the Franco-Italia make-believe capitalism session, aka the French leveraged Italian sector of the Euro ponzi scheme down, on its head. As clearly predicted in the last quarter of 2009, Another Banking Crisis Is Inevitable? There will be several bank runs, although they may be cleveraly concealed by central banks and governmental authorities. Reference The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs! These bank runs will not be confined to the annals of the EU either, reference Yes, The BoomBustBlog Forecast Pan-European Bank Run Has Breached American Soil!!! The US has a greater than 50% chance of seeing additional bank runs, albeit most likely cloaked. Remember, Lehman Brothers, WaMu and Bear Stearns were victims of bank runs, as was MF Global - which many people fail to realize, and it was a highly leveraged bank run to boot - On MF Global, Hyper-Hypothecation That Creates $6b Out $2B And A Central Bank That Couldn't See A Bankruptcy Staring It In The Face. The big name brand banks whom many thought were infallible, actually have many similarities to that of the now bankrupt MF Global, to wit - Goldman, et. al. Suffer From The Same Malady That Collapsed Lehman and MF Global, Worlds 1st and 8th Largest Bankruptcies!

I then provide a deep dive of the French bank we feel is most at risk. Let it be known that every banked remotely referenced by this research has been halved (at a mininal) in share price! Most are down ~10% of more today, alone!

So, What's the Next Shoe To Drop? Read on...

For those who claim I may be Euro bashing, rest assured - I am not. Just a week or two later, I released research on a big US bank that will quite possibly catch Franco-Italiano Ponzi Collapse fever, with the pro document containing all types of juicy details. This is the next big thing, for when (not if, but when) European banks blow up, it WILL affect us stateside! Subscribers, be sure to be prepared. Puts are already quite costly, but there are other methods if you haven't taken your positions when the research was first released. For those who wish to subscribe, click here.

I would like my subscribers to remain cognizant of the face that equity prices probably will detach from fundamentals this quarter as the inevitable wave of global QE is once again instituted via version 3.5x, but this can kicking has pushed the party's participant into a virtual dead end. Yes, it can continue, but I don't foresee many years of this. Although this is merely speculation on my part, but methinks 2012 may very well be the year of reckoning.

Those who wish to subscribe to BoomBustBlog research, analysis and opinion should click here! You can follow my public comments via the following avenues....

Relevant subscriber documents:

 

As is  customary, you can reach me via the following avenues...

Reggie Middleton Boom Bust Blog

Follow us on Blogger

Follow us on Facebook

Follow us on LinkedIn

Follow us on Twitter

Follow us on Youtube

Published in BoomBustBlog

cgasmediatvdrama.blogspot.comThis is a lengthy, highly provovative article illustrating in explicit detail my thoughts on how America's inferior education system made the Great Recession not only a foregone conclusion of indoctrinated GroupThink, but prevents a true recovery from recovery due to the abject fear of price clearing. You may need to put your thinking caps on and exercise some patience and restraint with this one. I am going to follow it up with an explcit example of said groupthink by going against the conventional grain (yet again) and pointing out what many in the mainstream consider to be the most likely threat to economic prosperity in 2012 (and no, Iran is not even in the running on this one). I blame indoctrinated GroupThink for the inability of Wall Street to see the excessive coniferous expanse due to treebark blindness! Until the next post, though...

Dubois Speaks Through Me

The problem is plain before you. Here is a situation transplanted through the criminal foolishness of those gifted and/or empowered with the productive assets created and cultivated by our fathers. Whether you like it or not this country constitutes hundreds of millions of the diverse plethora that is America. They are already here, and here they will remain. If you do not enable the mechanisms that allow them to lift themselves up (versus the socialistic path of trying to lift all up), they will simply pull you down. Access to (and not the socialistic gifting of) productive assets (wealth) and knowledge, combined with the teaching of individuals to build strength of character are the means to which accomplish this.

Physical and/or mental labor (the staple of the working class) alone will not do it unless inspired by the right ideals and guided by intelligence and knowledge. Academic education alone will do little, for look at many of our brothers and sisters who are highly degreed, yet have a lower standard of living, lower general level of happiness and less inflation adjusted net wealth than their parents despite living in a age that fosters greater access to technology and resources. Successful education must not simply teach work, or instruct one on how to labor for the capitalist oligarchy — it must teach Life.

The Truly Talented of this country who are not extant members of the oligarchy must be made leaders of thought and missionaries of culture. No others can (or will honestly) do this work. We must train agents for in the education system – for the existing oligarchy not only benefits from the teaching of labor/work as the embodiment of success, but cannot truly exist without such for it is cheap labor that enables the oligarchy to amass disproportionate wealth at the expense of the working class - literally profiting off of the backs of others. To be honest, this is the way of capitalism. It is understandable and acceptable, but only to the point to which those laborers willingly accept their position. Once it comes to the point of attempting to force said laborers into their laborious positions through duplicity and guile, we not only foster the misallocation of valuable American resources (human, social and economic) but we squander what could be sown and fostered to make America a better and more competitive country, thus putting the great empire at risk of collapse for the betterment of the very few. America, like all great establishments, was created, and is going to be saved by its exceptional heroes – or collapsed due to the lack thereof!

W.E.B. Du Bois, 1903 channeled through Reggie Middleton 2012


The Hole

The Challenge to Our Schools, Educators, and Parents

What America needs now is a system of education that does not simply teach academics and create a slave army of rule followers. We need to teach rule breakers and rule makers. We need to teach charisma. This is how leaders are made, while a focus on pure academics is how followers are groomed. We have to teach our children about life, and the world around us. We need to teach them how the world actually works, and test these teachings in the real world regularly in order to “mark our curriculum to market”. In this fashion, if any of our teachings are false or too theoretical, their failings in the world marketplace will allow us to correct course before our students are ruined by a pile of irrelevant academia, or even worse – flat out erroneous information and false knowledge.

Unfortunately, from pre-school to the higher echelons of ivory tower academia, I fear this is where we are right now - our students are being ruined by a pile of irrelevant academia, or even worse – flat out erroneous information and false knowledge.

These precepts may appear somewhat applicable to children of all socio-economic stratification levels (social classes), though they are particularly endemic to those in the lower rungs, which prevents the social mobility that is needed to keep this country fresh, alive, vibrant and competitive.

I envision an educational system that articulates a clear philosophy on the proper behavior of American children: "to teach them delicately a code of honor and action in their relation with other children and adults of different backgrounds; to turn their hurts and resentments into emulations, ambition and love of their own environments and companions; to point out the best amusements and joys and worth-while things of life; to inspire them to prepare for definite pursuits of wealth AND social accomplishment, not merely jobs, occupations, or careers, and to conduct these duties with a broad spirit of philanthropic sacrifice".

I pray you, tell me, is this what you were taught in school? Is this what your children are being taught in school?

At the very least, have as the base of every academic curriculum:

  1. The current application of popular and nascent technologies
  2. The definition, meaning, and pursuit of wealth
  3. Class consciousness
  4. Philanthropy – what it is, and how it furthers one’s cause
  5. Legacy building and the 100 Year Plan – the creation of immortality: perpetuating one’s family, family ideology, wealth, and knowledge through a minimum of 5 generations.
  6. Modern Politics and Power Structure – what is powerful, who is powerful, and why? How did they get their? How to replace them?
  7. Geo-political structures and power flows – What is the world, who’s in it, and where you stand in the grand scheme of things.

In DuBois’ missive claiming that the advancement of Blacks depended on the training of exceptional men who would lead the masses, (academic) education was prioritized. I’m confident that he erred in this assessment, although in his time it appeared as if he came to a logical, if erroneous conclusion. DuBois assumed that (academic) education was the primary cause of wealth and power in the US. I have found this to be less than accurate. There is a link between education and socio-economic success, but that link is less defined and more tenuous than DuBois realized. If academic education (as was and currently is consumed by the masses) was the primary goal to pursue, it is painfully obvious today that it is but a tertiary goal. Wealth, followed by motivated class consciousness are the two goals that, if achieved will uplift those captured in the lower rungs of the socio-economic ladder of success.


So, What is the Single Biggest Failing of Today’s Education System Curriculum???

This article assumes that parents send their children to school to better themselves through education. If that is truly the case, then please heed what follows.

The Power Elite documented the social backgrounds and career trajectories of the people who occupied the highest posts in what the sociologist, C. Wright Mills saw as the institutional hubs of power in postwar America: the corporations, the executive branch of the federal government, and the military. While many of his contemporaries were busy singing the praises of pluralism in what they perceived to be a relatively classless society, Mills, less sanguine, dismissed as absurd the idea that there was no elite. Those who believed otherwise were uninformed or deluding themselves (and others) typically for self-serving reasons.

Having confirmed the existence of a “ruling stratum,” Mills proceeded to describe the characteristics of the people involved in decisions of national consequence.

He found the members of the power elite had strikingly similar social origins. They fruitfully used vast resources and insular social ties to move across the three institutional hierarchies in both formal and informal capacities (references to the alumni of the Great Vampire Squid are nigh impossible to avoid).

 

Once again, the giant financial firm lives up to its reputation as “the vampire squid.” The Muckety database includes 697 once-removed connections from Goldman to other Fortune 1000 firms. The map above shows links of Goldman Sachs directors. Click the graphic to access the Muckety DB.

The result was (and in my oh so humble opinion, still is) a robust web of entitlement. Mills concluded that the high and mighty at mid-century were almost all Christian white males who mostly came from the “upper third of the income and occupational pyramids.” Their fathers were “at least of the professional and business strata, and very frequently higher than that.”

The circle remained exclusive because real influence, for Mills, was located not in individuals (where it should be for that would release true creative and productive energies from said individual into greater society), but in their access to the “command of major institutions…the necessary bases of power, of wealth, and of prestige.”

Simply put, the powerful can and do make use of their resources to set favorable terms by which to safeguard their position at the top. C. Wright Mills, The Power Elite (New York: Oxford University Press, 1956), 9.

On the uninformed: “In America today there are in fact tiers and ranges of wealth and power of which people in the middle and lower ranks know very little and may not even dream.” The Power Elite, 12. On the perspective of elites about their own motives: “American men of power tend, by convention, to deny that they are powerful. No American runs for office in order to rule or even govern, but only to serve….Nowadays, such postures have become standard features of the public-relations programs of all men of power.”  

The Talented Tenth and Class, 101

As a target for the definition of the Talented Tenth who are to be the true “new” educators of this country’s youth, I advocate a minimum of a higher “upper middle class” standing, ex. a score of 23 on Socialclass.org class model, available from www.socialclass.org. By definition, this transforms the Talented Tenth, in a mathematical sense, into something more like the Talented Three, due to the significantly increased rigor of the selection process resulting in the top three percent of society, in lieu of the top ten percent. It is very, very important to recognize the fact that this does not mean that only the wealthy can teach, for wealth is only one aspect of the socio-economic class structure, and there are many in the higher strata that are not necessarily wealthy, although there are none that are poor. It is actual accomplishment and influence that sets this strata apart.

Simply taking characteristics that the media has popularly attributed to success such as education, or income will easily mislead today’s youth (and their parents) into a false sense of both security and superiority. I personally know many highly educated people who have little in terms of productive (income producing and/or appreciating) assets other than the home that they live in and a small retirement account. I know many individuals and couples with high incomes, over $250,000 who are also devoid of productive assets and socio-political clout. Social class, the metric of membership into that club W.E.B. Dubois coined “the Talented Tenth”, and to a greater extent the metric from which Mill’s tome, “The Power Elite” is far too complex to be broken down into one or two variables such as education or income. The variables that we need to ascertain class are automatically calculated in the socialclass.org class model, but one must have a firm understanding of the meaning of the inputs in order to get a valid assessment:

1. Wealth – the pre-eminent factor, for in a capitalistic society, capital reigns supreme. Remember, what is being preached is far from materialism, and those who confuse the pursuit of capital as materialism are erring on the side of ignorance. I consistently remind my children what money is for. When you ask many people lower on the socio-economic ladder what money is for, you frequently get in response “to buy things”. This mentality and belief leads to a circular situation wherein the lack of understanding of the nature of money leads to an inherent lack of it. Capital in its purest essence - or to put it more simply, money - is used as a proxy for labor. As a result, the more capital that you have, the less you have to toil in your own labor. Once you have reached the point of equilibrium where your capital is equivalent to your labor, you no longer have to work to retain your current standard of living. All capital above this point of equilibrium can then be used to purchase the labor (hence the livelihoods) of others. The more capital you have, the more control you have over your own destiny, and then over the destiny of others. Capital is defined as property, eg. Cash, income producing assets (bonds, businesses, rental properties, mortgage notes, royalty generating intellectual property, etc.), appreciating assets (eg. Stocks, real estate, businesses, readily tradable antiquities, etc.), and to a much lesser extent in terms of value, depreciating assets (cars, jewelry, clothing, etc.). Wealth is defined as total assets (capital) minus all liabilities (debts and obligations). With these explicit definitions, we can now see the pursuit of wealth not as a material pursuit, but as a means of gaining control over the economy (notice I stated “the” economy not “our” economy), the political system, the social structure of the country and the futures of ourselves, our children, and others.

2. Income – provides the liquidity needed for day-to-day operations as well as long term planning. Income is often quoted as the primary determinant of class and is often mistaken as a proxy for wealth. This is patently false, for one can have high income and very little wealth, and this situation very, very prevalent. High income equates to social prestige, but is not nearly as accurate a determinate of power, influence or socio-economic standing as wealth is.

3. Income source – where income is derived dictates the autonomy, independence and reliability of that income. For instance, income derived from a salaried job is less secure and desirable (you can always get fired from your job, or become incapacitated due to illness) than income derived from one’s own business which is less secure and desirable (you ca become incapacitated due to illness in smaller companies, where the markets can move against you in larger businesses) then income from a broadly diversified portfolio of investments (which could easily include your own business) since it is virtually impossible to get fired, suffer financial distress from incapacitation, or have an adverse move in markets significantly damage your financial standing.

4. Occupation – while less important from an economic perspective, this factor is significant in the social purview. What you do often transcends how much you make or even how much you have in many social circles. For instance, a untenured college professor can easily make less then a prison corrections officer that works overtime, yet the college professor is deemed to be of higher social standing, even if he rents subsidized housing from his school/employer (aka social welfare, popularly thought to be only the province of the lower classes) while the corrections officer can not only own his own residence in the same neighborhood, but also own the one next to it for investment income.

5. Education – Academic education has traditionally been seen as the key to success in many circles. I have come to the conclusion that it is far from the key to ultimate success, but it is an important, if not necessary, component. This issue boils down to cause and effect. It is obvious that many successful people are well educated, but is that because successful families get educations or educations lead to successful families. Regardless of the chronological linkage of the occurrences, highly educated individuals are viewed with more prestige then lower educated individuals, and this prestige leads to a higher social standing. There is also significant evidence that academic education does have a connection to improved economic standing as well, but it is much more complex than popular opinion would have many to believe.

6. Dwelling area – basically, you are where you live. Very few powerful or wealthy people live in the ghetto unless their power is solely or derived from the economic underground (eg. Drugs, prostitution, etc.) that is forced to fly under the radar of mainstream social circles, which by default forces them into the lower classes. Conversely, very few powerless poor people live in the Gold Coast areas unless they are there as live in domestic help. People of like means tend to cluster together, so dwelling area has a high correlation to class.

7. Housing – highly correlated to class due to the fact that home ownership is a class marker. So is the value and size of the home. Most of those on the very low end of the SES scale do not own their own homes, while most on the very high end tend to own several homes.

Class consciousness (affiliations) – The ability to actually know where you stand and influence others in the group that you stand is a class marker, as well as the ability to know where others stand in relation to your standing and influence. Your affiliations help label your class strata. For instance, being a leader of local PTA, and being aware of that positions influence puts you in a higher standing than no group membership or just belonging to the local bowling team. The same goes to membership to a Fortune 500 or multinational not-for-profit board as compared to PTA membership. The more you know about class and class affiliation, chances are the higher you will be in the class standing.

As excerpted from Super Brokers form to push Super Broken products to make those with High Net Worth Super Broke

Social Mobility: Unlike the Jefferson's, We're moving on down!

Social class is defined (on this blog) as the amount of control one has over one's socio-economic environment. It is much more than money, although money is a large component. For instance, Barack Obama is in a higher class than Robert DeNiro or Michael Jackson, although Robert DeNiro and Michael Jackson are most likely wealthier (although that is quite debatable after taking into consideration the value of Obama's campaign contribution list and membership database from his social networking site!). Obama's higher class stems from his ability to exert more control over his socio-economic environment. The factors that this author uses to determine class combine (with the associated weights) to create a "socioeconomic index":

Socioeconomic Index=

(Occupation X 12) + (Income source X12) + (Income X 7) + (Wealth X 14) +

(Education X 7) + (Dwelling area X 15) + (Class Consciousness X 7) +

(Housing X 12)

There is a handy dandy BoomBustBlog class model (based loosely upon the Index of Status Charcteristics) available for download for anyone interested in delving  into this further. See boombustblog.com_social_class_model v.7.3 156.00 Kb.

As you can see, wealth is the largest contributor to the class standing, and coincidentally it is the factor
that is the most at risk in this current economic climate. I believe that there will be a significant entry into the upper middle class by those who were once firmly entrenched into the upper classes! While that may not seem like a big deal to many, it is damn big deal to those who are moving down the ladder. This also means, that there will be some space for others to move (relatively speaking) up the ladder. One man's (or woman's) misfortune is another's opportunity. I believe this blog can not only be used to insure and proof against downward mobility
for those in the upper strata, but can also be used by those in the lower, middle and lower upper strata to rise upward a notch or even two. Social Mobility is the name of the game in times of severe dislocation - times like we are experiencing now.

Lower Strata

Underclass/Poor

 
 

Working Poor

 

Middle Strata

Lower Middle Class

 
 

Upper Middle Class

 

Upper Strata

Lower Upper Class

<-- 20% to 30% ofBoomBustBloggers are here, roughly 1,000 of you!

 

Higher Upper Class

 

Now, in term of wealth (not social class and influence, just wealth) we can split the upper strata into three different categories (there are only two above because of the other factors that come into play when social class or socioeconomic standing is taken into consideration).
There is the poor wealthy, those guys and girls that are just a hair's breath from being pulled into the upper middle class strata due to marginal wealth. This would be the $1m to $10m net worth crowd, who rely on business profits, salary and investment returns for income. The next would be the middle strata of the wealthy, hailing between $10 to $100 million in Net Worth, and then there is the upper strata wealthy at above $100 million. Each of these three strata of wealth represent, in my opinion, distinct behavior tranches in terms of discretionary expenditures, investment, and politics and (what passes as, this is a story for another post) philanthropic activities.

 

Demographic

Source of wealth

Net Worth

Lower strata wealthy (High net worth)

Service professionals, corporate executives, entrepreneurs,
inheritors

Salaries, stock options, restricted stock, small business
profits, investment returns

$1 m to $10 m

Middle strata wealthy (Very High Net Worth)

Corporate executives, entrepreneurs, inheritors

Business ownership, investment returns, salaries, restricted
stock, stock options

$10 m to $100 m

Upper strata (the truly
Rich!)

Entrepreneurs, inheritors, very few CEOs

Business ownership, investment returns

$100 m to several $billion

A trip to practically any decent sized yacht club or recreational vehicle port reveals the relatively stark differences in discretionary spending behavior. The first strata can be found in the 36 ft. to 68 ft. yacht docks (where a captain is optional, but not mandatory and you really don't need a crew). The second strata can be found 50 ft to 120 ft docks, where captains, crews and semi-custom fiberglass boats abound. The third strata are almost exclusively in the super yacht category, where the carrying cost alone for these (basically waste of money) fully custom built hulls and vehicles are about million a year to start with. You can also see the other social economic strata as well, upper middle class in the 20 to 35 ft boats, the middle and working class in the considerably smaller fishing boats - as opposed to the ultra fast Viking and Hatteras deep sea fishers, etc. It is an interesting and instructional study in social studies and anthropology just walking along your local docks! Once you are aware of how these things break down, you will see many settings in a different light.

The dark purples, deep greens and reds are most likely the general demographic to get hit hardest.
Fortunately, those who follow this BoomBustBlog closely, either personally or through their advisor, should have seen a net increase in net worth rather than a net decrease. This has hurt non-BoomBustBloggers in this demographic tranche significantly, and will hurt them even farther. At the same time, let's hope that the opinion and research that I bring to the blog helps, because many will need it. Download The new BoomBustBlog.com Socio-economic stratification model

The problem of training today’s student is materially complicated by the fact that the whole question of the efficiency and appropriateness of our present systems of formal and academic education, for any kind of child, is a matter of active debate, in which final settlement seems still far off. Consequently it often happens that persons arguing for or against certain systems of education have these controversies in mind and miss the real question at issue. The main question, so far as the American student is concerned, is: What, under the present circumstance, must a system of education do in order to raise the young man/woman as quickly as possible up the rungs of the socio-economic ladder in order for him/her to compete as rigorously as possible for that prize which is at the top? The answer to this question seems to me clear: It must strengthen the privileged’s character, increase their knowledge and teach them to acquire the assets of power, production and influence. It is paramount that the aforementioned struggle take place, for without it (which is the situation that we currently face), those who hold the mantle easily become complacent and eventually lose said mantle to other nations who are hungry enough and competitive enough to allow the diverse juices within their own populaces to be set free. This is the REAL reason to fear China, et. al.!

Now it goes without saying that it is hard to do all these things simultaneously or suddenly and that at the same time it will not do to give all the attention to one and neglect the others.

We could give our young boys and girls the ideals, knowledge, and mindset to motivate them to acquire economic assets through entrepreneurship and the established corporate environment, but will that alone provide the socio-political influence necessary to counteract the pervasive subset of classism that is currently trapping immense stores of human capital, talent and creativity under the mantle of a globally unproductive oligarchic labor mill? Said labor mill mentality is being taught as core curriculum in our school systems and appears by design to prevent out boys and girls from capturing the helm of capitalism which is the ownership of valuable property?

We might simply increase their knowledge of the world, but this would not necessarily make them wish to use this knowledge to the betterment of their selves and families in lieu of the betterment of their socio-economic class masters.

We might seek to strengthen character and purpose, but to what end if the people have nothing to eat or to wear or be without the means to aggregate and exploit?

A system of education is not one thing, nor does it have a single definite object, nor is it a mere matter of schools. Education is that whole system of human training within and without the school house walls, which molds and develops leaders – not followers. The indoctrination of followers is actually the antithesis of education. It is the brainwashing, the encoding of a semi-caste system of servitude that does not need to be forced upon children for said children’s parents/caregivers/advisors actively seek out this programming designed to make others socio-economically successful upon the backs of proletariat labor as having finally arrived!!!

If then we start out to train an ignorant and unskilled people with a reflexively reinforcing cycle of self-limiting or self-destructive habits, our system of training must set before itself two great aims — the one dealing with motivational and inspirational character, the other part seeking to give the child the technical knowledge necessary for him to acquire and manipulate financial and social capital under the present circumstances.

These objects are accomplished in part by the opening the minds of the common schools to the precepts of socio-economic status, its true meaning and how to manipulate it to one’s own benefit. We must create productive asset gatherers, not workers. This is true, especially for those who are trained to teach these schools — men and women of knowledge and culture and technical skill who understand modern civilization, but most importantly Men and Women of Accomplishment, for only accomplishment can assuredly attest to the training and aptitude to impart accomplishment to the children under them.

There must be teachers, and teachers of teachers; but to attempt to establish any sort of a system of common and industrial school training, without first (and I say first advisedly) providing for the higher training of the very best teachers, is simply throwing your efforts to the winds. School houses do not teach themselves - piles of brick and mortar and machinery do not send out leaders. It is the trained, living human soul, cultivated and strengthened by long study and thought, that breathes the real breath of life into boys and girls and makes them human, whether they be Black or white, Greek, Russian, African or American, Jewish, Sikh, Buddhist, Christian or Muslim. 

My Personal Experience With the NYC School System 

Public and even private schools teach to the test. They teach students to pass and excel at written tests versus excelling at life and business skills. The results are obvious. You have students that can rock the SATs but can't think their way out of a wet paper bag. These children have no strategic creativity, and are the antithesis of individualism. These children have grown up to assume very strategic positions in the power centers of this country, many believing that they have risen to that level through their own volition - please reference the aforementioned C. Wright Mills excerpts from above, to wit: 

... members of the power elite had strikingly similar social origins. They fruitfully used vast resources and insular social ties to move across the three institutional hierarchies in both formal and informal capacities (references to the alumni of the Great Vampire Squid are nigh impossible to avoid). The result was (and in my oh so humble opinion, still is) a robust web of entitlement.... The circle remained exclusive because real influence, for Mills, was located not in individuals (where it should be for that would release true creative and productive energies from said individual into greater society), but in their access to the “command of major institutions…the necessary bases of power, of wealth, and of prestige.”

Simply put, the powerful can and do make use of their resources to set favorable terms by which to safeguard their position at the top. C. Wright Mills, The Power Elite (New York: Oxford University Press, 1956), 9.

Hence, out of one of the most heterogeneous pools of human capital in the world, a small homogeneous sliver of living Groupthink perpetuates the status quo, not only failing to benefit from, but actually squelching the vibrant, diverse, adaptive and evolutionary energy that springs forth from heterogeneity. This is done not for the betterment of society, but to protect the extant oligarchy. This my friends, is the antithesis of the raw tenets of capitalism, which is in my uneducated opinion an economic extension of Charles Darwins "survival of the fittest" theory. When the same children who are taught the same things from the same schools ran by the same professors graduate to the same jobs from which they use the same techniques gleaned from the same life experiences often gathered from the same families to face the same problems.... Then GroupThink rules the day. The problem is.... What happens when the new problems are not the same. Fast forward to 2008 - 2012, the US credit and housing crisis as well as the Pan-European sovereign debt crisis. Now you know how we got into this mess, and now you know why it will be so difficult for us to get out of it. No, it was not a failure of capitalism, but a failure to allow capitalism in its truest forms!!!

I have three children - ages 5, 11, and 19 (make that one child and two young men), hence I have been through all facets of the school system in NYC, both public and private. My kids have went from the most diverse school in the country (72 languages spoken) where the average family is poor enough to enable the entire school to receive free lunch, to the best school in the entire country (as indicated by the Wall Street Journal- reference "The Price of Admission", and click here to learn more about this school). After paying 3 times what I paid for college for my eldest to attend high school (all in after tax dollars) decided to take matters into my own hands at the aforementioned public school with the extreme diversity and low average family income. I obtained permission to teach my own "enrichment class" as an adjunct to what the school taught (which as how to pass city and state academic tests - may I add that I have never heard of anyone getting paid to pass these tests!), and hired my own staff to assist in doing so. My son was in first grade when this started (I actually skipped over kindergarten to increase the challenge), and I purposely avoided hiring "professional teachers". At first, I personally taught science and finance to the class - which encompassed earth science, biology, zoology, animal husbandry, math , entrepreneurial studies, dramatic reading/speech and social studies (socio-economic stratification - the subject of this article). I then managed to hire a thespian for English/language arts, an Australian mathematician to tutor in math, and a PhD in neuroscience to head up biology. These hires took the pressure off of me and allowed me to focus on my core competencies/interest - dramatic presentation, finance and entrepreneurial studies.

Due to my willingness to dip into a very diverse pool of potential and lift up whatever it was that was both willing and capable to come with me, I led a bunch of 1st grades to learn (and I mean enthusiastically learn) high school curriculum! That's right! You heard correctly, these were 1st graders in a NYC public school that had free lunch. The class size was limited to 5 members, who were picked by the teacher as being able to benefit most from the enrichment (code word for not getting anything out of the NYC school's curriculum - which described(s) all of my children). The same teacher also had about 5 students removed for ESL (English as a 2nd language) and a few removed for behavioral issues, and by and of the day she had a very manageable class size of about 15 or so kids - and more importantly, these kids had a homogeneous skill set, meaning that they could all be taught a single lesson in unison.

The result of this intellectual experiment was interesting. The kids WANTED to attend class and some would actually cry when they couldn't make it. The first grades dissected sheep brains, cow eyes, built a REAL human skeleton (and memorized every single bone by its scientific name - a feat I dare any adult reading this to try) and read and wrote at a level that was literally multiples of the city standard. 

The kids started their own for profit business selling fresh, organic berry juice (an actually made money) - delegating sales staff, bookeepers and preparers - all according to the kids natural abilities. I then made them swap roles ot get an appreciation for developing other talents and overcoming their inner fears. You would be surprised at how many kids have a fear of speaking to strangers, asking for what they want, or being responsible for counting and keeping money.

The dramatic reading created a true love for reading, writing and public speaking! We read comic books (Marvel, Image and DC) and Dr. Suess (ex. Green and Ham) and the students and I literally brought the house down -  You know, the On Broadway-style William Shatner used when he channeled James T. Kirk in the original Star Trek series???!!! 

The science class dissections actually caused parents to take off from work, and teacher and admin to come in on their lunch breaks to take notes, observe and learn during our large mammal dissections. That's right, teachers, parents and admin actually took time off to come back to the first grade they never had.

I'm sure this would sound like a marvel to many reading this, but the "create a slave" mentality of this countries' oligarchical influence got in the way. Other teachers bitched and complained that I did not create similar progras for their classes (despite the fact that my son was not in their class). Parents bitched and complained because I did not include their kids in the program, although I was the only one dedicating my own time and money to the initiative, on top of the fact that it was the teacher that chose the kids and not me. Even a few of the parents whose kids were in the program bitched and complained for they thought the program was elitist, and didn't want their children participating in such. Yeah...

Eventually, the principal bitched and complained because she felt the program was becoming too successful and the kids were learning too much outside of the city's core curriculum - in other words they were learning how to be successful instead of learning to a) slave for someone else or b) perpetuate the groupthink of the status quo oligarchs until said groupthink can no longer support the current oligarchical regime and the whole thing comes tumbling down (this was 2007, fastforward to 2012 and this is where we are now).

I have interviewed all of the top public and private schools in the city and many on Long Island. I think I can say I know my way around the block here.

Are Colleges and Universities Any Better?

Exactly how many of those bankers, traders and analysts from the Wall Street "creme de la creme" actually set themselves apart from the crowd? Is such a feat actually doable? After all, despite the undeserved (look here and here for plenty of proof), whiz bang aura that surrounds Goldman Sachs, their bankers traders and analysts went to the same schools, studied under the same professors teaching the same curriculum as everybody else on the street. So, when groupthink loads (leverages) everybody up on one side of a trade... say real estate or MBS derivative products in 2007 or European sovereign debt in 2009... Boom! 'Know what I'm sayin'? That's just my 66 cents (it was just my two cents, but I've been hanging around a lot of European bankers lately, so I levered up 33x!!!)

 

Published in BoomBustBlog
Page 1 of 2