Anyone who has recently attended college or who has children who have recently attended college probably experienced “sticker shock” when they found out how much it cost.  It’s no secret that the price inflation in university tuition has far outstripped virtually every other sector of the economy over the past decade.

HS Dent has explained this phenomenon with demographics.  As you can see in the chart below, the number of 18-year-olds fell throughout the 1980s as the small Generation X came of age.  But in the early 1990s, the number of 18-year-olds began to rise again…and rise it did.

This massive surge of 18-year-olds is, of course, the Echo Boomer generation.  Assuming no increase in the percentage of kids that go to college, demand for college education still would have exploded throughout the 1990s and 2000s due to the fact that there are simply a lot more kids of college age.   When demand rises substantially while supply remains more or less unchanged, basic Economics 101 would tell you that prices have to rise.  And that is exactly what has happened.

Interestingly, an explosion in school loans have been both a cause and an effect of the price increases.  

According to the Wall Street Journal, two-thirds of college students borrow for college with an average balance of $23,186.  Unfortunately, this debt appears to be contributing to a bubble.  The Journal writes,

…the rising levels of borrowing may ironically be contributing to the accelerating cost of college, say some college-finance experts.  Loans can give colleges an artificial sense of a family’s ability to pay tuition.  To some extent, that false sense of security gets built into the assumptions schools make when setting prices, say experts.  The idea is that as prices rise, families borrow more and more, spurring prices to rise further, which in turn requires more borrowing.

This has all the markings of a classic bubble.  So, the question now becomes, “how does this end?”  

Our answer would be that it will end as all bubbles do, in a deflationary bust.  The number of 18-year-olds will begin to fall this year and will continue to fall for about seven years.  This means that, barring a sudden surge in the percentage of kids applying to school, demand for education will fall.  And with falling demand should come falling prices, or at least moderating prices.

An outright drop in the price of tuition seems somewhat unlikely to us, because lowering the price could be viewed as damaging to a school’s prestige.   But prices can fall in “hedonic’ terms.  In other words, while the quoted price remains unchanged, you might get a lot more for that price, with added sweeteners thrown in.    Free or discounted books, room, or board?  It’s hard to say.  Regardless, for the first time in well over a decade, university education is about to become a “buyer’s market” again.

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

Continuing our ongoing discussion of inflation and deflation, we read in Barron’s today that Paul McCulley, managing director at PIMCO — the largest private money manager in the world –has some thoughts on the subject:

“Serious inflation is of no concern now, with all the excess labor and industrial capacity that exists and the speed with which wage cuts are occurring in this cycle”  (from ”Cataclysm Averted, Expectations Diminished“).

Of all market participants, bond investors have the most to fear from inflation.  A prolonged surge of inflation is bad for stocks, but it is absolute destruction for bonds.  So, the fact that one of the chief decision makers at the largest bond fund manager in the world sees no real risk of inflation certainly strengthens our case that deflation — not inflation — remains the threat. 

That’s our story, and we’re sticking to it.

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

We periodically read David Rosenberg’s “Breakfast With Dave” economic report, which he publishes daily.   It’s good research, but we find we can’t read it everyday because it’s just too depressing. (The analytical Mr. Rosenberg can really put the “dismal” in the dismal science when he wants to.)

We commented on the deflationary effects of oversupply and sluggish capacity utilization two days ago in “One Step Forward, Several Steps Back.”  Now, let’s take a look at what Mr. Rosenberg has to say about deflation in his June 18 comments.  

The CPI rose a negligible 0.1% in May, and the PPI actually fell by a full percent.  Mr. Rosenberg believes headline consumer inflation falling to -2.0% by the end of the summer — meaning significant outright deflation. Read the rest of this entry »

With all the talk of “green shoots” sprouting up in the world economy, it should be pointed out that the fight against deflation is far from over.  In the United States, there appears to be a mild lull in the storm.  But in Europe, the situation continues to worsen.  Consider the following Wall Street Journal headline:
“Irish Consumer Prices Slid 4.7% in May”

The Journal writes,

Ireland’s consumer-price index fell 4.7% in May from a year ago, by far the sharpest of price drops across Europe and the worst here since 1933…. Read the rest of this entry »