Here's What Can Cause Another 2008-Like Recession

2016 has been a rough year, but the market has started to show some signs of ‘recovery’. With oil price climbing back to over $30 per barrel, the market ended the last week in green. Although the market is up considerably from the intra-day lows of last week, investors shouldn’t mistake it for a turnaround.

There are numerous reasons why I think the market correction will continue, which is why I have been in favor of a long/short strategy over the last few months. Increasing strength of dollar, overvalued Chinese economy and grim outlook of oil prices can all continue to weigh down on the market.
However, as discussed below, there is another reason why investors should be worried about a recession.

Student Loans

According to White House, roughly 70% of bachelor’s degree recipients leave school with debt. As a result, nearly 40 million Americans are buried in student debts which accounts for over $1.2 trillion in outstanding payments. Huge debt burden may be preventing people from making the kinds of purchases that drive an economic growth.

However, the problem is much bigger than it appears. Not only does the debt burden slow down the economic growth, it can also lead to a recession in the long-term. The recession of 2008 was primarily caused by the burden of home mortgages that were issued to people who simply could not pay them back and bundled into securities called collateralized debt obligations (CDO) and sold to investors with an illusory 'A'-credit rating.

Today’s student loan crisis looks a lot like the previous ones. The U.S. government sanctions almost all student loans, so ratings agencies assign a high credit rating to these debts, despite the fact that some students may not have the ability to repay. As a result, one in four student loan borrowers are either in delinquency or default on their student loans. Hence,


The debt loan crisis is a threat that investors tend to ignore. Huge debt burdens prevent people from making purchases that drive the economy, which is probably why sales across various sectors are down despite cheaper oil prices. With the outstanding payments currently standing at over $1.2 trillion, investors should be worried about it. The list of defaulters is growing consistently and can cause a recession in the foreseeable future. Hence, investors who think the market has bottomed should reevaluate as I think the future holds more downside potential.
Published on Jan 26, 2016
By Ayush Singh

Copyrighted 2016. Content published with author's permission.

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