It is now over 20 years since I made two recommendations to Noel Coward’s legendary Mrs. Worthington about her daughter’s career options: that she avoid finance (October 2002) and avoid engineering also (July 2005). Those predictions had mixed results, but nevertheless I would venture today to repeat the 2002 one, that she avoid finance, although my reasons today are rather different.
The previous finance “gipsy’s warning” was made close to the nadir of the 2002 bear market and so failed to see how much money could be made in the brief liquidity-fueled upturn that followed. However, it looked altogether more sensible after 2006, when almost all the major investment banks went bankrupt or had to be bailed out by a stronger partner. In the still longer term, if young Ms. Worthington after losing her job in 2008, had caught on somewhere else in 2009, she would have done very well in the next decade, probably with enough money to retire early by 2021. That’s what artificially low interest rates can do for the finance sector!
My crystal ball was especially clouded in that 2002 piece by its total failure to mention private equity or hedge funds. Both were still fairly modest in size and at a nadir then; private equity had invested in innumerable dopey dot-coms, all of which had failed, while hedge funds were still rightly tarnished by the failure of the non-genius Long-Term Capital Management only four years before. In another piece, I had been critical of that operation. In this one, I criticized the quality of big bank managements that had bought investment banking operations at the top of the 1999-2000 bull market and watched their value melt into nothingness. As I remarked to young Ms. Worthington: “Nobody wants to work for idiots” – a problem perpetually present in financial services, where greed and aggression are thought an adequate substitute for intelligence.
My second experiment in career advice was largely correct. Written in 2005, it told Mrs. Worthington to avoid putting her daughter in engineering school, because manufacturing and many IT jobs were being rapidly outsourced. With the feeble governments of 2005-24, that prediction was largely justified, as more and more U.S. manufacturing disappeared offshore. Only recently, with the advent of AI and protectionism, has manufacturing begun to move back within the United States. One mistake the column made, however, through relying on a McKinsey Global Institute study (yes, I was young and gullible in those days) was to forecast that sectors such as insurance would be invulnerable to outsourcing because of regulation. As we have discovered from all the Indian call centers, those sectors can be outsourced just as well as anything else, and AI claims processing is an additional threat to the remaining U.S. jobs done by humans.
Turning to today’s job market, there are some clear pointers for young Ms. Worthington to follow. First, she should avoid at all costs heading for one of the behemoth consultancy firms. Even 20 years ago, their judgements were suspect, and their strategy of using low-level consultants to generate massive billable hours of grunt work to justify their partner-salesmen’s salaries is in the process of disappearing. AI will be able to do the grunt 200-page report full of charts and drivel without the use of junior consultants at all. This will empower smaller, more nimble consultants who can use AI to replace the grunts, but it will hollow out the biggest “Russian Army” consultants in a very few years.
The opposite is true in software creation. AI will be able to create routine software fast and cheaply, but by reducing the cost of software this will massively increase the range of applications where it can be used. With the cost of creating software reduced to a tenth of its previous level or less, the ability to use AI to create software to solve problems or manage machinery has already become more valuable – the market for good programmers, which had been weak in the previous couple of years, partly because of the infinite supply of H1B drones from the Indian subcontinent, has now turned around, and programmers who truly know what they are doing and can manage AI to help them do it are in huge demand. Young Ms. Worthington would do very well to acquire this set of skills, if she is capable of it.
As for banking, it must inevitably suffer a lengthy period of recession and job losses, probably more severe than in 2007-09, because asset prices have once again run far ahead of reality, and banks and other credit and investment institutions have poured capital into the fantasy. The current market assumption is that financial markets will be bailed out by yet more money-printing and subsidies, but the new Fed chairman Kevin Warsh is not Ben Bernanke; indeed during his term as Fed Governor in 2006-11, he was the most prominent opponent of Bernanke’s shenanigans.
With inflation having resurged, and likely to continue doing so as long as the idiotic “Iran War” remains unsettled, there is no chance of interest rate reductions; indeed it is likely that rates will be forced to rise to get a handle on the inflation surge. Further, if Warsh follows through on his promise to reduce the Fed balance sheet, as he should, the gigantic subsidized banking system deposits with the Fed that have distorted financial markets for nearly two decades will be forced to shrink. Indeed, Warsh has already suggested that a sharp reduction in the interest rate paid by the Fed on those deposits would be thoroughly beneficial. With the banks, grossly over-regulated since the 2010 Dodd-Frank Act, being forced to lend to small business, as they should, the private credit system will be deprived of its funding, and the inevitable collapse of its poorly thought-out lending will be swift and destructive.
All over the global economy, there are assets whose values will collapse in the necessary period of tight money that Warsh is likely to institute. Private equity has suffered low returns for over a decade, and no amount of “pass the parcel” flipping the investments from one fund to another will solve the problem. Indeed, the “fast buck” approach of most private equity managers will almost certainly have left their investee companies as hollow shells, with their capability wrecked by destructive maintenance-deferring and research-ignoring management.
Private debt is likely to be in an even worse condition; the decades of “funny money” since 2008 have caused far too much investment to be allocated to these sectors. University endowments have also been abominably managed, with the “Yale model” forcing them into funds that dissipate the endowment in grotesque fees, while “woke” decisions such as Harvard’s “divestment” from fossil fuels in 2021, at the bottom of the market, have devastated their long term returns, which have been far below a simple investment in the S&P 500 Index. Finally, derivatives businesses have done well because investors like to speculate, but a period of tighter money should cure this irrational urge.
If the next decade is likely to resemble the 1930s, then young Ms. Worthington should steer clear of financial services – Merrill Lynch, the largest brokerage house, made a loss over that decade and was only kept alive by Charles Merrill’s mother’s trust fund. But contrary to legend, the 1930s even in the United States were overall an economically successful decade, with high productivity growth – unemployment only remained high because of incompetent government policy. The Hollywood film industry did famously well, so young Ms. Worthington, if she has the talent, should perhaps consider some version of the screen, or even the stage – with AI ubiquitous, audiences will want more humanity in their entertainment. Other successful industries in the 1930s were oil and chemicals, electrical machinery, and distribution/retailing, so updating that list to today’s technology gives her a wide range of options to consider.
Noel Coward’s advice to Mrs. Worthington was based on her daughter’s unsuitability for a theatrical career. My advice herein is rather different; young Ms. Worthington may be a walking Black-Scholes Equation with the sales ability of Phineas T. Barnum; nevertheless, the path to success in finance today is a stony and unprofitable one, and she should avoid it.
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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)