Happy Friday!

Since the market was closed yesterday for Jimmy Carter - I don’t make the rules, obviously - I thought it’d be a good day to dive into the mailbag.

Let’s get right to it…

H-1B Visa

Hi Sean.

I graduated in 1965 from a 5-year Engineering Program at the University of Minnesota at the top of my class. I am a Registered Professional Engineer. I worked for a Consulting Engineering company as Chief Mechanical Engineer for 25 years and am now retired.

We designed and installed projects worldwide for the US Government and top industrial companies. My senior colleagues and I earned between $120 and $200k yearly. Our young graduate engineers earned $60k to start.

One of our clients (a household name in the US) decided they could save money by hiring Indian H1Bs and training them to design and install their projects. The training process took 3 years because the H1Bs, though young and smart, knew nothing about designing and installing to world standards. They were paid $40k because that was the minimum salary for new USA engineering graduates. At the end of about 3 years, they took their training and left to work at higher-paying H1B jobs. After 5 years, the frustrated former client went back to US-based talent at small engineering firms that did not have unlimited liability protection and employed only young engineers.

The H1B program is supposed to relieve critical talent shortages. But the first sign of a talent shortage is spiraling wages. However, average engineering wages have been going down since 1900. At my first engineering job, my boss made 14 times the starting wage. At my last job, I made 3 times the starting wage.

There is no shortage of engineers in this country. There is only a shortage of cheap engineers. Only about half of US graduate engineers are still working as engineers 5 years after graduation--they go on to better-paying jobs.

For example, my daughter is your age. She graduated magna cum laude from the University of Wisconsin. Instead of working as an engineer, she chose higher pay and accepted a Wall Street offer that used her math skills to create the nascent Derivatives programs. Today, she works for Merrill Lynch and makes 4 times my former maximum salary (12 times what a starting engineer makes).

H1Bs hold wages down. Full stop.

Hug your beautiful family!

Gary H.

Hi Gary! Thanks for taking the time to write this genuinely “inside baseball” look. I’m grateful. When I worked on Wall Street and in the City of London, I was surrounded by engineers, physicists, and mathematicians. I always thought it was crazy. Hugs to you and yours, as well!

Zeroing In

Sean,

Harry Dent claims that once a collapse in the stock market occurs long US T-bills will be the only thing to actually go up. I absolutely do not understand the bond market. But he claimed that ZROZ, if I remember correctly, would be one way to play this.

Can you provide me with some commentary in monkey language form (i.e., layman's terms) regarding this? My thoughts are real estate could drop during this time as well. What do you think?

Thanks,

Stewart S.

Hi Stewart! Thanks for writing in. I’ll explain this, but I disagree with Harry’s assessment. That’s only because I think demographers like Harry see “too far” out.

Here goes:

The first thing you need to know is that when rates (also called yields) rise, bond prices fall. This is what people are talking about regarding the “inverse relationship” between yields and prices.

Next, if the stock market collapses, Harry is right to think there will be a “flight to quality.” That is, people will pile into US Treasuries. Furthermore, he’s right that T-bills will increase in price. (Bills mature in less than a year. Notes mature between two and ten years upon issue. Bonds have a maturity of 20 years or more.)

But I wouldn’t buy ZROZ for this! That’s the ETF for zero coupon bonds (the principal strips of T-bonds), which are very different than T-bills. Zeros only give you the principal payment at the end of a bond’s life, and there are no coupons. If you’re wondering, primary dealers can “strip” a T-bond into its coupon and principal components. STRIPS stands for “Separate Trading of Registered Interest and Principal of Securities.”

As a result, the ZROZ ETF has a duration (weighted average time to maturity) of nearly 27 years. That’s too far out on the curve for me, as I think inflation will be a problem and not deflation.

As you can see from the above ten-year chart, ZROZ is anything but safe. Only if you think long-term yields have peaked would you buy this.

BIL, GBIL, or SGOV are better choices for what I think - and I could be wrong! - you’re looking for. All those hold only 3-month bills. They’re better if safety and liquidity are high on your priority list.

Please explore this further and do your own research before buying anything. Also, please don’t take this as financial advice, as I don’t know what else is in your portfolio.

Vocabulary!

Sean,

Great article today. I sort of knew how those loans worked, but now I understand them better. However, on an unrelated note, I want to point out a word you misused. Right at the end of your column today you wrote, "They're more inflationary at very low interest rates because they multiply the money in circulation without a commiserate amount of selling." "Commiserate" is a verb meaning to sympathize with someone who is going through a hard situation. The word you meant to use is "commensurate." You are not the only (or first) I have seen confuse the two words, but I really don't want to let general usage redefine the use of commiserate, which is also a useful word and concept.

Gordon F.

Sean,

I hang on your every word. The education I am gleaning from your Rude articles is second to none. However, you/your editor made one little wrong-word choice in your Margin Loan article on 17 December. That is, you used the word commiserate rather than commensurate in your wrap up paragraph. Thank you again for your awesome articles.

Alan O.

Gordon and Alan, thank you for writing in and pointing that out. I may be a primadonna, but not when it comes to spelling and grammar. Your help is much appreciated!

Wrap Up

One last thing: thanks to Brian H. for writing in about old Billy Wigglestick and re-reading my piece. You never waste my time!

I’ll try to follow up next week with another mailbag. I’m catching up!

Have a wonderful weekend.