The Deep Roots Of The College Debt Crisis - FOX21- Entertaining Delmarva One Click at a Time

The Deep Roots Of The College Debt Crisis

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Executive Summary

1. The deep roots of the college debt crisis. As presidential candidates promote various solutions to the troubles of the U.S. college finance system, investors should note that those troubles have been brewing for a long time. For decades, student loan programs, while well-intentioned, have created perverse incentives and collateral damage, leading to skyrocketing costs, subpar educational outcomes, and heavily indebted students. We see hope particularly in shifts happening outside the established system of higher education, including online courses, practical certification programs, and alliances between high schools and corporations that parallel some of the apprenticeship programs which have been successful in many European economies. The most effective solutions are more likely to come from here than from government fiat.

2. Benefit corporations and the next generation of socially responsible investing. Many entrepreneurs and investors (including Guild) have long incorporated a concern for non-financial values in their strategies and analyses. Over the past several decades, those non-financial concerns crystallized in the movement for “triple bottom line” business practices (“people, planet, and profits”) and for the use of ESG metrics (environment, social, and governance). Disappointed with the their perception that large businesses were manipulating ESG metrics to their benefit, activists and idealistic entrepreneurs have more recently pushed the establishment of benefit corporations (or “certified B corps”) -- where companies who opt for these new structures are held to more stringent standards of evaluation and accountability around their wider social and environmental impacts. So far, companies opting for B corp status are primarily privately held small and mid-sized businesses. While we believe that Millennial and Gen Z idealism around these issues will mellow as these cohorts age, we also believe that their opinions will represent a real shift of public sentiment, and that B corps will become more common in coming years. Investors should be aware of the trend, and be attentive to how these new corporate structures perform in their self-declared goals of benefitting other stakeholders, and not just their shareholders.

3. Market summary. We’re now on the cusp of earnings season, which will begin in about two weeks. U.S. and global data such as PMI reports have recently been signaling possible slowdowns in industrial production and decelerating economic growth (not unlike periods in the economic expansion of the 1990s, which experienced similar episodes of tepid growth). Earnings estimates have correspondingly been lowered considerably; investors will be watching closely to see what corporate profit dynamics have to say about whether and how these incoming data are being transmitted to the bottom line. Given the positive fundamental backdrop of an ongoing expansion, accommodative monetary policy, the likelihood of easing from the Federal Reserve, easier monetary policies from many central banks, good overall credit conditions in the United States, and a lack of any signs suggesting imminent recession risk, we continue to be fundamentally bullish on U.S. stocks. Christine Lagarde, currently the head of the International Monetary Fund, will be replacing Mario Draghi at the helm of the European Central Bank. This choice signals that the ECB will likely not be fundamentally changing course, but may indeed deepen its efforts to support the European economy with unconventional monetary policy. This is likely to be a positive for gold. Recent comments from Goldman Sachs CEO David Solomon suggest to us that digital asset adoption is accelerating, and that Facebook, who have thus far not secured any banks as partners in governing association for their new digital currency initiative, will be facing fierce competition.

America’s College Funding Debacle Has Deep Roots

From tuition-free college to student loan forgiveness, the Democratic contenders to challenge President Trump are floating many proposals to address the troubled U.S. higher education system.

Those troubles are legion -- essentially, education costs that have been rising at several times the rate of inflation for decades; increasingly onerous debt burdens taken on by students (now totaling $1.5 trillion); and increasingly poor outcomes for many in terms of degree completion and job placement (40% of recent college graduates are working jobs that do not require a college degree).

College Costs Have Far Outstripped Other Consumer Goods

Source: Federal Reserve Bank of St Louis

Many Millennials and members of Gen Z have experienced the worst of these dysfunctions, and are the most enthusiastic supporters of the radical policies being offered as solutions by the newly invigorated progressive wing of the Democratic Party. While we have doubts about some of the proposed solutions, we certainly understand these young voters’ frustrations. They feel that the relentless inculcation of “college as a path to success for all” was a con game, and in many ways, it is hard to argue with them.

We note, however, that the current crisis has been brewing for a long time. It is really a set of unanticipated consequences of policy decisions stretching back to the Johnson administration of the mid-1960s. Essentially, Federal student loan guarantees, though created with the noble intention of making college more accessible for more students, ended up creating perverse incentives, as institutions boosted enrollment, relaxed admissions standards, and raised tuitions. Those trends were exacerbated when the Federal government began loaning money directly, and also when income-based repayment programs were introduced -- which encourages students to take on debt irrespective of likely future salary, schools to raise tuition still further, and ultimately leaves taxpayers on the hook.

In these pages we have often commented on the coming transformation of education. The following organic developments are some of the emerging solutions for more effective and efficient higher education:

  • The replacement of one-size-fits-all degrees with more practical micro-degrees focused on specific competencies;
  • The advent of massive, open, online courses (MOOCs) with an option for certificates of completion; and
  • Partnering between high schools and corporates to train young workers and bring them into the workforce in a more direct and practical way -- a paradigm modelled in part on the very successful and effective vocational and apprenticeship programs that are common in Europe.

The political battle over education, like that over healthcare, will continue to play out. Our perspective on both is that the policies most likely to be successful will be those which rely on incentivizing sound behavior by individuals and institutions, and those which clear the way for new and innovative solutions, rather than those which double down on the centralized policies of the past which helped create the present debacle.

Investment implications: Many investors use a portion of their savings to fund educational expenses for children or grandchildren. Being aware of trends in education expenses and outcomes can provide valuable insight for decision-making as increasing numbers of high school graduates explore other options for their education and career than a traditional college trajectory. Major tech firms, including Alphabet [NASDAQ: GOOGL] have dropped requirements for new hires to have college degrees, a sign to us that aspirants to some technical fields may already be served better by alternative educational venues.

B Corporations Feeding Millennial Appetite For Social Responsibility

There has never been a watertight separation between business activities and the ethical concerns of those who run businesses and those who invest in them. Over the past several decades, however, there has been a growing interest on the part of many investors and entrepreneurs in an explicit incorporation of non-financial elements into business strategy and investment decisions -- resulting in the rise of fields analyzing businesses’ “sustainability,” “social responsibility,” “values-based investing,” “social impact,” ESG [environmental, social, and governance] characteristics, and so on. Many popular entrepreneurial spokespeople, such as Whole Foods’ John Mackey, Virgin’s Sir Richard Branson, Ben & Jerry’s Ben Cohen and Jerry Greenfield, and Wharton professor Jeremy Rifkin have spearheaded the push to encourage the adoption of a “triple bottom line” (“people, planet, and profits”). This methodology evaluates businesses’ impact not just on financial returns for shareholders, but their impacts on other stakeholders as well, including employees, the broader human community in which companies operate, and the environment.

As a business serving many clients with ethical convictions which they wish to see reflected in their investment strategies, and as a business with a strong commitment to impeccable fiduciary behavior, Guild Investment Management has taken such considerations into account in portfolio construction since the firm’s inception. Provided that ESG considerations don’t cloud a clear-eyed and realistic financial analysis of an investment’s risk and return profile, we applaud an appetite on the part of investors and an ambition on the part of entrepreneurs to create a better world. (Indeed, we think that the desire to create a better world has usually fueled the ambitions of great entrepreneurs, innovators, and investors.)

Recently, though, there has been some skepticism on the part of ESG activists that the ESG efforts -- especially of large corporate entities -- amount to anything more than cosmetic attempts to assuage critics. This perceived manipulation of ESG for public relations gain has been given the pejorative description of “greenwashing.” Indeed, our own review of many ESG metrics, and of many ESG-focused funds and investment strategies, suggests that these funds end up differing relatively little in composition from a big-cap index of developed-world equities, and that the largest companies are the most capable of adapting to ESG requirements so that their scoring comes out high. Many idealistic investors are ending up holding “ESG” portfolios whose contents might surprise them, and which don’t differ greatly from a typical big-cap growth fund.

As a consequence, advocates and activists are now pushing the explicit adoption of more stringent and explicit corporate structures and certifications for companies that want to commit to an incorporation of ESG criteria into their business and governance models. 37 U.S. states have created frameworks for the incorporation of businesses as “benefit corporations” -- that is, for-profit enterprises whose governing documents are amended to require the consideration of non-financial stakeholder interests in business decisions. Most states require that the benefit corporation provide a “general public benefit” defined by a “material positive impact.” Benefit corporations are required to self-report their performance on a set of key impact metrics and provide the results to the public. (Note, however, that in the case of benefit corporations, there are no disqualifying performance levels on these metrics, and the assessment and reporting is conducted by the company itself.)

A more stringent structure is that of “certified B corporations.” Here, a third-party certification -- similar to a LEED, organic, or fair trade certification -- is provided to a company after a rigorous “B impact assessment” by a certifier. The assessment must reach a certain threshold on the relevant ESG metrics; company governance documents must be amended; and the company must submit to regular reviews and re-certifications to evaluate performance and compliance.

Source: Yale Center for Business and the Environment

There is significant overlap between these categories; in states that have benefit corporation laws, companies sometimes opt for third-party certification as well. Currently, there are about 4,750 benefit corporations, and 2,400 certified B corporations worldwide. Most of them are small- to mid-sized businesses; some are smaller subsidiaries of larger, publicly traded companies. Often, companies which opt for these formal classification and certification processes are small firms who resent the perceived “public relations” character of ESG efforts by their larger, public peers, and want to underline their more genuine and stringent accountability and adherence to ESG standards. Consequently, the opportunity for retail investors to invest in such companies is still quite limited.

Investment implications: We note the rise of these concerns and these new corporate structures because we believe that a generational shift is underway that will accelerate as Millennials continue to take leadership roles in business and government and as Gen Z voters rise in the workforce and in political and economic influence. To some extent, the idealism of these youthful generations will moderate as they age -- an eventuality which history suggests is inevitable. However, there may well be a more enduring shift in these generations’ financial and entrepreneurial values and expectations. For that reason, we think that B corp structures, and other structures like them, will become more common in the future, and investors would be well-served to watch how these structures develop, and how B corps perform against all their objectives -- for profit, as well as for positive social and environmental impacts.

Market Summary

The U.S.

With a truce in the U.S.-China trade war, the U.S. stock market has risen to new all-time highs. We’re now on the cusp of earnings season, which will begin in about two weeks. U.S. and global data such as PMI reports have recently been signaling possible slowdowns in industrial production and decelerating economic growth (not unlike periods in the economic expansion of the 1990s, which experienced similar episodes of tepid growth). Earnings estimates have correspondingly been lowered considerably; investors will be watching closely to see what corporate profit dynamics have to say about whether and how these incoming data are being transmitted to the bottom line.

Friday’s jobs report will be closely watched by the Federal Reserve as it evaluates what the Treasury bond market is now pricing in as the certainty of interest rate cuts at the end of July.

Given the positive fundamental backdrop of an ongoing expansion, accommodative monetary policy, the likelihood of easing from the Federal Reserve, easier monetary policies from many central banks, good overall credit conditions in the United States, and a lack of any signs suggesting imminent recession risk, we continue to be fundamentally bullish on U.S. stocks, especially the stocks of companies with favorable growth and valuation characteristics in the areas of the economy being shaped and transformed by the Third Industrial Revolution -- hardware, software, the cloud, artificial intelligence, networking, defense electronics, financial technology, and cybersecurity.

Europe

Christine Lagarde, currently the head of the International Monetary Fund, will be replacing Mario Draghi at the helm of the European Central Bank when he leaves the position at the end of October. This choice signals that the ECB will likely not be fundamentally changing course, but may indeed deepen its efforts to support the European economy with unconventional monetary policy. “Lower rates for longer” is certainly, at first blush, our assessment of the outcome of this appointment.

A turn of the ECB in an even more dovish direction would also have consequences for the U.S. dollar -- a critical variable which we monitor constantly.

Gold and Cryptocurrencies

Certainly, an ECB president who has a dovish reputation, and who has recently been described in media as having “aggressive” and “imaginative” monetary policy ideas, is likely to be a positive for gold. Gold’s recent action may be suggesting that it is, after years, coming back onto the radar of asset allocators as an “uncertainty proxy” for global markets.

With typical volatility, bitcoin led other digital currencies in a rapid pop following the announcement of Facebook’s [NASDAQ: FB] Libra digital currency initiative, and then fell back again just as rapidly. We read some comments from Goldman Sachs [NYSE: GS] CEO David Solomon about that firm’s likely future forays into the digital currency space. Notably, Solomon expressed interest in “tokenization, stablecoins, and frictionless payments” -- more or less exactly the types of digital vehicles that FB is targeting with their initiative. He also expressed skepticism that other tech giants would wade into the banking industry themselves, but would probably team with established industry insiders in their digital asset initiatives. Our takeaway? Digital asset adoption is accelerating, and FB, who has thus far not secured any banks as partners in the Libra Association, will be facing fierce competition.

Thanks for listening; we welcome your calls and questions.

Disclosure: The article makes general observations about markets and business and financial trends and may provide advice about specific companies and specific investments. It does not give personal investment advice tailored to the needs, objectives, and circumstances of individual readers. Whether investment ideas and recommendations are suitable for individual readers depends substantially on the personal and financial situation of that reader, which GIM, as the author of the article, makes no effort to investigate.

GIM attempts to provide accurate content in its articles to the extent such content is factual rather than analysis and opinion, but GIM relies primarily on information compiled or reported by third parties and does not generally attempt to independently verify or investigate such information. Moreover, some content and some of the assumptions, formulas, algorithms and other data that affect the content may be inaccurate, outdated, or otherwise flawed. GIM does not guarantee or take responsibility for the accuracy of such information. Please note that investing in stocks, other securities, and commodities is inherently risky, and you should rely on your personal financial advisors and conduct your own due diligence in connection with any investment decision.

Equities Contributor: Guild Investment Management

Source: Equities News

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