Dear Reader,
Vedran Vuk here, back at the helm filling in for David Galland. I've been away for a few weeks, visiting my grandparents in Croatia and spending a little bit of time on the Croatian coast. From the trip, it was apparent that the economic crisis was having a toll on the local tourism industry. It's not absolutely dismal, but I would hardly call the Adriatic coast packed for this time of year.
In the US, we seem to live in a strange dimension separate from our economic realities. The headlines report weak economic conditions, yet the restaurants and shopping malls are nearly always packed. In Croatia, this was not the case. The restaurants weren't completely empty, but it was certainly difficult to find one more than half full, even during the busiest hours.
The picture above is one of the worse-case scenarios. Here I am visiting the Roman coliseum in Pula, Croatia. It's one of the only completely intact Roman coliseums from around the time of Christ. Besides myself, there is only one couple sitting all the way in the back to my right. When there are more people sipping cappuccinos at the local café than tourists visiting the 2,000-year old coliseum, you could say that tourism is slightly off.
From what I gathered from the locals on the coast, the main problem seems to be the meltdown in Italy. With Italy so nearby, many of the wealthy regularly take their yachts over to Croatia. During my visit, I made one trip to Italy via boat; from Porec in Croatia to Venice was about a 2.5-hour boat ride. Due to Italy's proximity, the large difference in prices between the two countries, and crystal-clear waters (such as those on the island Cres shown above, which I visited), Croatia is quite a hot spot for Italians.
It wasn't so much other nationalities toning down the tourism; the locals specifically pointed out the lack of Italians. Perhaps things are worse in Italy than the media has revealed with its gaze focused on Spain and Greece. Then again, you don't want to read too much into the stories of locals, but you certainly don't want to ignore them altogether either.
First up today, I'll have an article explaining who wins and who loses when inflation hits. I'll give you a hint: you and I are usually not among the winners. Then I'll discuss some tables sent by David Walker, the former Comptroller General of the United States. And finally, I'll touch on the subject of finance degrees. Is it really the worst possible major to study in this economic environment? As someone who just finished a master's in finance, I suppose that I should know.
By Vedran Vuk, Senior Analyst
Wall Street and Main Street often have extremely divergent views on inflation. Talk to the average Joe about inflation and he's very concerned, even when inflation is low. Listen to a Wall-Street guru, and they're almost certain to downplay inflation. Why is there such a difference of views?
What most people don't understand is that inflation is all about timing. Prices don't rise simultaneously across the economy. Consider this analogy. Imagine that there's a printing press giving away a wheelbarrow of cash to whomever wants it. Naturally, printing a pile of money will lead to inflation; however, all the money doesn't enter the economy at the same time. The first guy to get his wheelbarrow of cash is pretty well off. He can go to the market and purchase items for normal prices. As more and more people show up with their wheelbarrows of cash, prices will rise. Hence, the last guy in line for his wheelbarrow of cash is not in the same position as the first person was. By the time the printing press gets to the last person, that wheelbarrow of cash won't be worth very much – but to the first person, it can be a fortune.
In real life, the person earning a regular salary is way at the back of the line, while the banks, big corporations, and folks on Wall Street are toward the front of the line. Naturally, those toward the front of the line have no problem with this state of affairs.
Let's look at two ways this works. First, suppose the Fed lowers interest rates, which pulls down borrowing rates across the board. Ultimately, low rates will lead to higher inflation, which is bad for you and me. But if you're a big corporation like General Motors and you're looking to finance building a new plant, it sounds great. General Motors can borrow the money at a cheaper rate today, and it can use the borrowed money to build a plant before inflation filters through the economy. Essentially, it can get in the front of the line with its wheelbarrow.
The second way Wall Street benefits is through the adjustment of interest rates to inflation. If the market is expecting higher inflation, bond rates must rise to compensate investors for the expected inflation. So if inflation is expected to be 5% next year, bond rates will adjust higher for the anticipated inflation.
Bond traders and banks – earning their profits through interest rates – immediately adjust for inflation. Unfortunately, our paychecks don't adjust anywhere close to immediately. Our wheelbarrows are way down the line. If inflation is expected to be 5% next year, how much will your paycheck change today? For the vast majority of us, the answer is 0%. Our employer is not going to change our wages simply because Wall Street analysts have anticipated higher inflation the following year.
For the average Joe, it's going to take a long time for the paycheck to catch up to inflation – if it ever does. First, prices and your employer's revenues have to rise before things filter down to your paycheck. The average worker only gets a higher paycheck after inflation has already kicked in. Banks dealing in interest rates get their adjustments before inflation ever kicks in. Is there any wonder now why Wall Street isn't particularly concerned about inflation and low interest rates?
But are the banks always the winners, while we're always the losers? No, not necessarily. Sometimes we can jump to front of the line as well... or at least, the banks can let us cut in. If the Federal Reserve just lowered rates and you managed to borrow money to purchase a sizable home, then you're in the same position as General Motors in the previous example. You're getting some money prior to everyone else. That's pretty much what happened with people purchasing homes at the beginning of the last decade. It's hard to argue that those early buyers didn't benefit from the Fed's policy – many of them are still above water on their homes.
So, while we think about inflation as something affecting all prices, we have to remember that price changes don't happen all at once. A few people are at the front of the line for new cash, while the vast majority of us are toward the end. Where you're standing in that line more often than not forms your opinion on the process... but you may not recognize where you were in the line until several months have passed.
By Vedran Vuk
David M. Walker, the former Comptroller General of the United States and CEO/founder of the Comeback America Initiative (CAI), sent over some interesting tables. The first is the Sovereign Fiscal Responsibility Index (SFRI), the result of a six-month-long master's thesis project completed under Walker's guidance by a team of students from the International Policy Studies (IPS) and Masters in Public Policy (MPP) programs at Stanford University. The SFRI ranks countries by fiscal responsibility through quantitative and qualitative measures. The three major components are:
(Click on image to enlarge)
There are a few interesting points to take away here. First of all, notice some of the "bedfellows" near the US in the rankings: Greece, Portugal, Ireland, and Italy. Hungary is down there also; it's another troubled country, but it isn't getting as much press since it lacks a tie to the euro. Japan is down there with us too. Certainly, this is not good company to keep.
What's even more intriguing is some of the unexpected countries at the top of the list. For example, Sweden and Estonia are in the top five, but are likely not places that immediately come to mind for fiscal responsibility. China is all the way up at fifth place, a particularly interesting position. When most people think of spending in China, thoughts of the infamous empty cities immediately come to mind. However, this doesn't necessarily mean China is completely out of control. When we see an empty city, we can obviously see the waste. However, when a country pays federal government employees six-figure salaries and drops millions of dollars' worth of bombs on several countries every single day, the spending can be considered just as wasteful, but perhaps less obvious.
The next table is from the Institute for Truth in Accounting, whose mission is to present nonpartisan analysis and information, and to induce the federal government to produce financial reports that are understandable, reliable, transparent, and accurate. The rankings below represent the portion of each state's debt and unfunded obligations that belong to each taxpayer:
(Click on image to enlarge)
Once again, there are a few surprises worth thinking about here. I'm not shocked to see New Jersey, Illinois, and California in the bottom ten. But who thought Kentucky would be 46th on the list? Some other areas of concern are West Virginia at 44th place and Mississippi at 37th. Considering that those latter two states are among the poorest in the country, their debt burdens might be even harder to carry than for other states with more total debt. This is definitely interesting data worth thinking about deeply.
Once again, I thank David Walker for these tables. David will be one of our keynote speakers at the upcoming Casey Research conference in Carlsbad, California. Its theme is "Navigating the Politicized Economy," and it will run September 7-9. I'm sure that with his background and experience as the Comptroller General of the United States for a decade, he will have more than a few things to say about our exploding debt situation and politicized economy.
Along with Doug Casey and others from the Casey Research team, we'll have a number of thought-provoking speakers. They include Lacy Hunt, executive vice president of Hoisington Investment Management Company, a bond fund firm managing over $5.8 billion (he was voted our most popular presenter at the last Casey summit). G. Edward Griffin, the author of the famous Fed-bashing book The Creature from Jekyll Island, will also be there, as well as many others on our expanding faculty list.
Right now you can secure a spot and enjoy our early-bird pricing – but you only have until July 31, so don't hesitate to grab your early-bird seat today.
By Vedran Vuk
Many commenters have pointed out that it's a horrible time to get a degree in finance. Some, like Jim Rogers, have even suggested that it's better to go into farming than finance. Well, there's some truth to this, but it's not all gloom and doom for the sector.
In many ways, the finance degree has become the new English degree – and I do specifically mean English, rather something such as art history, music performance, or political science. Unlike those degrees, English isn't really a useless degree at all. In fact, it's very useful. Being a company that produces several investment newsletters, you can imagine Casey Research's need for someone who understands the ins and outs of sentence structure and grammar. But every corporation needs the same type of people. Whether it involves creating websites, writing technical manuals, or constructing annual reports, every firm needs an English major at some point in its production process. The same can't be said of the art historian or the sociologists.
So why do English majors get so much hatred from people, and why are they often grouped with truly useless degrees? Though an English major is useful, it is probably the most disappointing degree out there. Think about the problem here. During college, students of English take creative-writing classes and read dozens, if not hundreds, of books by the greats, including Hemingway, Faulkner, Shakespeare, etc. Students train to become the next literary giant, but the realities of the world force them into much different roles. More often than not, their opus is the 2012 company annual report rather than next "great American novel."
Almost every English major enters college wanting to be a writer, but only a handful ever make become household names at it. Very few individuals enter an English program wanting to write and edit technical papers. So, while there are jobs available for English majors, it's hardly what most had in mind. In fact, I have many friends with English degrees who simply refuse to even look for certain sorts of jobs. They would rather be waiters or serve coffee than be well-paid editors at major corporations. I guess the former professions are romantic in their eyes, giving them the kind of life experience that feeds the muse.
Today, finance degrees have essentially the same problem. Students are trained in mergers & acquisitions, equity valuations, and the pricing of exotic derivatives – much like English majors are trained in creative writing and analyzing the greats of literature. Similar to the English majors, the finance students won't use any of this training in mergers, derivatives, etc. The jobs in investment banking, equity research departments, trading floors, and mutual funds are long gone. Even students at the top of their classes would be lucky to get one of these positions.
Does this mean that the finance degree is useless? No, not at all. If you're willing to be the accounts receivable guy at the local widget factory, there's plenty of work. Furthermore, it's not difficult to find jobs in the boring sectors of a bank, such as operations or compliance. Just like every firm needs something written, everyone needs people to look after the accounting books or to perform the menial tasks of a large financial institution. But most finance students can just forget about the sort of high-powered "lord of finance" positions that they spent their B-school years drooling over. One's chances of writing the next great American novel are often better than getting one of those positions. Finance has not fallen to the level of the art history degree, but it's certainly not what it used to be.
Would I discourage someone from getting a finance degree today? Not necessarily. As long as they realize that their future likely involves working in a dry accounting department rather than making big moves in a trading pit, then it's still a viable option. In the long run, this could be a very good change for the whole financial sector. The glamour of working in high finance attracted all the wrong people to the field. We could certainly use some number-crunchers who want nothing more than a decent paycheck and steady job. The need for financial professionals isn't going away anytime soon, but the field is about to get a whole lot less exciting than it has been in the past few decades.
Here's a few funny cartoons from Shaaark!
And one cartoon on Spain that pretty much says it all…
One more thing before I go: there are a few new Casey Phyles forming around the country, including ones in central Connecticut; Orange County, CA; and Sonoma County, CA. Looking at the list above of taxpayer burden with Connecticut dead last and California only nine slots higher, I imagine these Phyles will have plenty to talk about. If you're interested in getting in touch with any local Casey Phyle, send an email to phyle@caseyresearch.com.
That's it for today. Thank you for reading and subscribing to Casey Daily Dispatch.