Wealth Building Strategies
Machines are worshipped because they are beautiful and valued because they confer power; they are hated because they are hideous and loathed because they impose slavery. Bertrand Russell
Manufacturing output continues to improve, even though the number of manufacturing jobs in the U.S. continues to decline and this trend will not stop. While some Jobs have gone overseas, the new trend suggests that automation has eliminated and will continue to eliminate a plethora of jobs. As this trend is in the early phase, the momentum will continue to build in the years to come.
Machines are faster, cheaper and don’t complain; at least not yet. So from a cost cutting and efficiency perspective, there is no reason to stick with humans. This, in turn, will continue to fuel the wage deflation trend. Sal Guatieri an Economist at the Bank of Montreal in a report titled “Wage Against the Machine,” states that automation is responsible for weak wage growth.
“It’s unlikely that insecurities from the Great Recession are still weighing, given high levels of consumer confidence,” he wrote. “However, automation could be a longer-lasting influence on worker anxieties and wages. If so, wages could remain low for a while, restraining inflation and interest rates.”
Guatieri goes on to state that “The defining feature of a job at risk from automation is repetition”. This puts a lot of jobs at risk, many of which fall under the so-called highly skilled category today; for example, Accountants, Lawyers, Radiologists, X-Ray technician, etc.
North American business order record number of robots
In 2016, they order 35,000 robots, 10% more than in 2015. But that is nothing compared to China, which ordered 69,000 robots in 2016, South Korea ordered 38,000 and Japan for its small size ordered 35,000 robots. This proves that jobs are not going overseas but are being taken over by machines. Nothing will stop this trend; a trend in motion is unstoppable.
The largest user of robots is the automotive sector; in North America, over 20,000 of the 35,000 robots went to the automotive sector. Once upon a time, over 80% of the work done in this sector was done by humans, but robots perform today over 80%.
The total amount spent on robots in 2015 was $71 billion; experts project that this amount will surge to almost $135 billion by 2019. The trend continues to gain traction. Amazons purchase of whole foods and Lidl’s entry into the US market has triggered a grocery war, and automation is going to be one of the main ways to remain competitive in this industry. Amazon already has a massive robot workforce; they use over 45,000 robots. Sales of robots will triple from current levels by 2019
The number of robots sold in the US will jump by 300% over the next nine years, according to the ABI research. It’s simple math; more automation equates to fewer jobs. One industrial robot replaces about six jobs. For now, the automotive industry continues to lead the way, but as companies are pushed to become more competitive, we expect companies in every sector to embrace automation.
Source: Robotics industries Association
Costs are plunging
In 2010 the average cost of a robot was $150,000; today the price has dropped to below $25,000, a drop of over 80%. As prices drop more companies will seek the efficiencies that come with using robots. A day is fast approaching where the price could drop below $5,000 suddenly making them affordable for almost any small sized business.
The death of Unions
Unions continue to push for higher minimum wages while the purchasing price of robots continues to decline; this is not a conducive environment for most unions. In the era, where raising prices is not an option, the only leeway most businesses have is to cut costs. The human factor is the most expensive factor in any business, and that is where the focus will be going forward.
Robots are becoming more biquitous across a multitude of industries
The image below speaks a thousand words.
Source: Robotics Industries Association
Conclusion
The introduction of machines and tools created a significant demand for unskilled labor (it rose from 20% of the workforce to 39% from 1700 to 1850). Machines either pushed craftsmen out of the labor market completely, or encouraged employers to decrease their workers’ wages. The Economist cites this exact situation in which wages fell drastically in the early 1800s, not recovering until 1960.
GE’s recently introduced vision inspection system, as my colleague Chris Matthews, reported. In theory, machines can help workers become more productive, and productivity leads to higher wages — but that’s not the case. Machines like this one at GE actually reduce the need for workers — especially those who are typically paid between $20 and $40 per hour in this field. Full Story
As machines replace humans, the cost of producing goods will drop, and as more people will be competing for the remaining jobs, wages will trend downwards. Wages will rise in some specialised sectors, but these jobs will demand a specialised set of skills, for example, robotics. It appears that AI will only exacerbate the current situation in the years to come. Therefore, deflation and not inflation is what we might have to deal with for years to come.
Man will never be enslaved by machinery if the man tending the machine be paid enough.
Karel Capek
Sometimes I like to trot these lumbering monthlies out so we can quiet everything down and see where various markets are slowly heading.
First of all, as I go down with my ‘strengthening US dollar’ ship*, I also mal-projected copper’s upside. I’d felt that $3/lb. would cap Doctor Copper because it is very clear lateral resistance at a handy 38% Fib retrace.**
Here’s the least original statement of 2017: There are a lot of different ETFs. There are:
- Equity ETFs
- International ETFs
- Fixed income ETFs
- Currency ETFs
- Commodity ETFs
- Volatility ETFs
There are a few others I forgot, plus leveraged and inverse versions of most of these.
As you know, macro investing is where you take a top-down view of economic trends. You then take long or short positions in: equities, international equities, fixed income, currencies, commodities, volatility… with or without leverage.
WAIT A MINUTE.
ETFs have made it possible for everyday investors to invest like George Soros.
Except most everyday investors inevitably do a much worse job than George Soros!
Still, it is lots of fun. It is just probably not in the best interests of your retirement savings.
Just Because You Can, Doesn’t Mean You Should
ETFs give people the ability to do lots of different things. ETF innovators have managed to securitize just about anything.
I think we reached the last frontier in August when a LIBOR ETF was announced (it is leveraged, naturally). So you can trade LIBOR, you can trade a basket of junior silver miners, you can trade double inverse volatility, you can trade the shape of the yield curve, and you can trade Indonesia.
But I’ll bet you that the people who are investing in Indonesia have not done a lot of work on Indonesia. And I’ll bet you there are people speculating on the yield curve who have not done a lot of work on the yield curve.
Moral of the story: Just because you can do these things, doesn’t mean you should.
One thing a lot of investors don’t realize is that professional investors put an awful amount of time and effort into research.
I do a fair amount of research in the course of writing newsletters. And sometimes, I will meet with a portfolio manager who is working on the same trade.
That portfolio manager will have had a team of analysts working on it for months. So when he ends up buying that Indonesia ETF, he has done all the work, and he is pretty freakin’ sure.
Many investors haven’t done the work. They don’t have the time (they work day jobs) and they don’t have the scale (they don’t have a team of analysts working with them, with access to all the market data in the world).
Nobody likes to think of themselves as the patsy at the poker table. But you can’t compete with the pros.
Intermission
There’s a reason I opened this 10th Man with “the least original statement of 2017.” And that’s because ETFs are breaking all kinds of records this year: record numbers of ETFs, record inflows, record assets under management, record low fees. We live in The Age of the ETF.
It’s making me pretty curious about the “state of The 10th Man nation” when it comes to ETFs. What are you guys investing in? Why? How?
Normally I’d say “answers on a postcard,” but I’d appreciate it if you could take a few minutes to answer some questions on ETFs through this link:
There are ten questions, but seven are multiple choice, so it really won’t take you long.
Oh, and there’s a free copy of my latest report in it for you. It’s called Investing in the Age of the Everything Bubble and I can promise it’s a great (and useful) read.
Despite What I’ve Said, ETFs Are Your Friend
I am no financial Luddite. I think the ETF is one of the top five financial innovations of the last 100 years! Giving people access to stuff they never had access to before is a great development.
Thirty years ago, you couldn’t buy Indonesia at all. OK—maybe there was a closed-end fund, but that has its own issues. Aside from that, the only way to buy Indonesia was to be Mr. Big Time Portfolio Manager and access foreign markets through a big broker like Goldman Sachs.
So I would never be so paternalistic as to suggest that people should be prevented from trading this stuff for their own good. No. What I am saying is:
- Macro trading is a lot of work.
- You probably don’t have time to do the work.
- So you should be realistic about your expectations.
If you accept that and still really want to be a dedicated ETF investor (survey is this way), then here’s what you need to do.
Determine your asset allocation, and pick some broad-based, low cost ETFs, keeping concentration and correlation in mind. Try to avoid making radical changes to the portfolio unless absolutely necessary. And think long-term: 5-10 years, not 1-2 years.
Sound simple? If it does, it kind of shouldn’t.
One final personal note—it is possible that I will be affected by the very powerful Hurricane Irma (I live in South Carolina). If I am forced to evacuate, publication of The 10th Man may be interrupted. I’ll keep you posted.
Jared Dillian
“There are folks that are saying you know what, I don’t care, I’m going to lock in my retirement now and get out while I can and fight it as a retiree if they go and change the retiree benefits,” he said. – Executive Director for the Kentucky Association of State Employees, Proposed Pension Changes Bring Fears Of State Worker Exodus
The public awareness of the degree to which State pension funds are underfunded has risen considerably over the past year. It’s a problem that’s easy to hide as long as the economy is growing and State tax receipts grow. It’s a catastrophe when the economic conditions deteriorate and tax revenue flattens or declines, as is occurring now.
The quote above references a report of a 20% jump in Kentucky State worker retirements in August after it was reported that a consulting group recommended that the State restructure its State pension system. I personally know a teacher who left her job in order to cash completely out of her State employee pension account in Colorado (Colorado PERA). She knows the truth.
But the problem with under-funding is significantly worse than reported. Pensions are run like Ponzi schemes. As long as the amount of cash coming in to the fund is equal to or exceeds beneficiary payouts, the scheme can continue. But for years, due to poor investment decisions and Fed monetary policies, beneficiary payouts have been swamping investment returns and fund contributions.
Pension funds have notoriously over-marked their illiquid risky investments and understated their projected actuarial investment returns in order to hide the degree to which they are over-funded. Most funds currently assume 7% to 8% future rates of return. Unfortunately, the ability to generate returns like that have been impossible with interest rates near zero.
In the quest to compensate for low fixed income returns, pension funds have plowed money into stocks, private equity funds and illiquid and very risky investments, like subprime auto loan securities and commercial real estate. Some pension funds have as much as 20% of their assets in private equity. When the stock market inevitably cracks, it will wipe pensions out.
As an example of pensions over-estimating their future return calculations, the State of Minnesota adjusted the net present value of its future liabilities from 8% down to 4.6% (note: this is the same as lowering its projected ROR from 8% to 4.6%). The rate of under-funding went from 20% to 47%.
I can guarantee you with my life that if an independent auditor spent the time required to implement a bona fide market value mark-to-market on that fund’s illiquid assets, the amount of under-funding would likely jump up to at least 70%. “Bona fide mark-to-market” means, “at what price will you buy this from me now with cash upfront?”
For instance, what is the true market price at which the fund could sell its private equity fund investments? Harvard is trying to sell $2.5 billion in real estate and private equity investments. The move was announced in May and there have not been any material updates since then other than a quick press release in early July that an investment fund was looking at the assets offered. I would suggest that the bid for these assets is either lower than expected or non-existent other than a pennies on the dollar “option value” bid.
At some point current pension fund beneficiaries are going to seek an upfront cash-out. If enough beneficiaries begin to inquire about this, it could trigger a run on pensions and drastic measures will be implemented to prevent this.
Similarly, per the sleuthing of Wolf Richter, ECB is seeking from the European Commission the authority to implement a moratorium on cash withdrawals from banks at its discretion. The only reason for this is concern over the precarious financial condition of the European banking system. And it’s not just some cavalier Italian and Spanish banks. I would suggest that Deutsche Bank, at any given moment, is on the ropes.
But make no mistake. The U.S. banks are in no better condition than their European counter-parts. If Europe is moving toward enabling the ECB to close the bank windows ahead of an impending financial crisis, the Fed is likely already working on a similar proposal.
All it will take is an extended 10-20% draw-down in the stock market to trigger a massive run on custodial assets – pensions, banks and brokerages. This includes the IRA’s. I would suggest that one of the primary motivations behind the Fed/PPT’s no-longer-invisible hand propping up the stock and fixed income markets is the knowledge of the pandemonium that will ensue if the stock market were allowed to embark on a true price discovery mission.
Like every other attempt throughout history to control the laws of economics and perpetuate Ponzi schemes, the current attempt by Central Banks globally will end with a spectacular collapse. I would suggest that this is one of the driving forces underlying the repeated failure by the western Central Banks to drive the price of gold lower since mid-December 2015. I would also suggest that it would be a good idea to keep as little of your wealth as possible tied up in banks and other financial “custodians.” The financial system is one giant “Roach Motel” – you check your money in but eventually you’ll never get it out.
From Jason Goepfert at SentimenTrader: “Looking at the flows for August, a few things stood out. Most notably, the continued big inflow into Technology and corporate bond funds. Over the past 12 months, both have seen record inflows.
also from King World News:
The Brutal War In Gold – Is A $10,000, $15,000, $20,000 Gold Price Really Possible?
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