The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: CientoUno on November 13, 2015, 01:05:04 AM
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Forgive me if this is a contagiously stupid thing to ask, but I'm just starting to educate myself on matters of investing. I've spent weeks poring through JLCollinsNH and MMM, and thanks to their abilities to explain things to those of us educated in fields other than business, I'm starting to get really interested in setting myself up for the best possible future (early retirement maybe??)
The simple approaches to investing appropriate for a mid-20s guy like me with not much financial knowledge (yet!) goes on the supposition that index funds are fantastic, because effectively the market will always go up, overall. I understand everything I've read on this. Sometimes it's low, but in the long run, it'll always get higher. And I've seen the graphics of the DJIA since it's inception being an impressive line that jaggedly shoots relentlessly up and up. All this is why I plan on throwing 10K into VTSAX and getting that ball rolling as soon as I'm back in the USA. (I live abroad currently and have about 15K to my name)
But here's my question: Is it theoretically (or perhaps, a better word to use would be "practically") possible for the market to not go up?
Is there any realistic chance for a 20-30 year stint in VTSAX, with regular contributions and riding out the storms, to result negatively? I don't mean me losing nerve and selling during a low point-- I know better than that and have the luxury of time to wait things out. Rather, I mean for the market to drop and stay fluctuating around a lower point long-term.
Appreciate it, folks. You're helping to educate a very enthusiastic newbie!
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Sure. Look at the past 25 years of the Nikkei: http://finance.yahoo.com/echarts?s=^n225#{%22useLogScale%22:true,%22range%22:%22max%22,%22allowChartStacking%22:true} (http://finance.yahoo.com/echarts?s=^n225#{%22useLogScale%22:true,%22range%22:%22max%22,%22allowChartStacking%22:true})
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See, that's the kind of thing that makes me nervous. What leads people to believe that won't happen with a fund like VTSAX?
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See, that's the kind of thing that makes me nervous. What leads people to believe that won't happen with a fund like VTSAX?
Want to feel worse? Read http://www.davemanuel.com/2009/04/16/20-years-later-and-the-nikkei-225-still-hasnt-recovered-or-come-even-close-to-recovering/
Want to feel better? Reread the above article, noting the date and comments about the Dow, S&P 500, and NASDAQ indices, then see http://www.google.com/finance?client=news&gl=us and note those index values now.
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i think it's a good question actually. it's best not to assume anything. well done for asking.
I don't know if I have a good answer myself, except to say the share markets should reflect the underlying economies that the companies operate in (and the global economy since everything is globalized these days). So perhaps we need to think about driving forces for "real" economic growth (e.g. population growth, technology, efficiency, etc). We might expect mature economies to grow at slower rates than emerging ones. And failing economies can easily stagnate or go backwards.
It seems to me we might be hitting these limits now. The global economy can't seem to heal itself without financial life supports. We might need to get used to slower growth rates, as some have been warning, and interest/inflation rates indicate.
I guess you might take comfort from the idea these pessimistic scenarios will likely also involve deflation, cheaper housing/ living costs, etc.
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A lot of pain can be avoided with some international diversification. There is a Bogleheads thread here which touched on the Japan case: https://www.bogleheads.org/forum/viewtopic.php?t=163600 but it applies no matter where you are.
Having said that, to a fair extent growth is based on the assumption of increased consumption, some due to population growth.
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Let's say it was 1989 Japan and you took your $10k and dumped it all in the Nikkei at the peak.
Scenario #1: no additional investments, just waiting. Right now you'd have ~$5k (50% loss)
Scenario #2: you invest $100/mo, through all the ups and downs ($31k over 26 yrs). Right now, your $41k invested would be ~$49k (19% gain)
Scenario #3: you diversify, putting your $100/mo into a diversified mix of debt and equity (US, international) and rebalance annually. Your $41k invested turns into $108k (163% gain). You can argue the mix (so maybe not 163% over 26yr), but can't argue that diversification and rebalancing will smooth the bumps.
Is there any realistic chance for a 20-30 year stint in VTSAX, with regular contributions and riding out the storms, to result negatively?
Maybe, depending on what "realistic" means to you. There is a chance, but it's small. Counter that small chance with regular contributions plus diversification with rebalancing.
Edit: scenarios in nominal dollars, ignoring dividends. Inflation hurts and dividends help, but don't change the overall positive effects of contributions and diversification.
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See, that's the kind of thing that makes me nervous. What leads people to believe that won't happen with a fund like VTSAX?
Because Companies will continue to grow earnings due to 1) population growth 2) the rise of the absolute level of living standard in poorer countries and economies (and even in mature economies, who would have thought smart phones were a daily necessity owned by everyone from the poor to the rich even ten years ago?) and 3) continual improvements in the level of technology
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Let's say it was 1989 Japan and you took your $10k and dumped it all in the Nikkei at the peak.
Scenario #1: no additional investments, just waiting. Right now you'd have ~$5k (50% loss)
Are you including dividends in this?
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From today's valuations? No, no chance.
In the far future I suppose it's possible that the index could rise 1000% in 18 months and then crash and take 30 years to reach those same valuations again, but that's a result of unnaturally high bubbles temporarily inflating the price, not long term negative growth. That's what happened in Japan.
On the other hand, in the very long term I think negative growth is guaranteed. Economies and nations will crumble. The sun will explode. Eventually the last sentient life form in the universe will die, and at that moment their portfolio will lose its last penny.
But in the meantime, on the scale of our little lives, I don't worry. A long as humanity continued to strive for something, investment economies will continue to grow despite the inevitable setbacks.
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Is there any realistic chance for a 20-30 year stint in VTSAX, with regular contributions and riding out the storms, to result negatively?
Historically speaking, there have been multiple 20-year stretches where a US stock market investor lost money in real terms. But wait long enough and things tend to even out.
Including taxes: http://www.crestmontresearch.com/docs/Stock-Matrix-Taxpayer-Real1-11x17.pdf
Excluding taxes: http://www.crestmontresearch.com/docs/Stock-Matrix-Tax-Exempt-Real3-11x17.pdf
So it really depends on your definition of "long-term".
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There are events that could cause even worldwide-diversified investments to fail long-term, but at that point the "ammo and canned food" portfolio is the only one that matters anyway and thus they aren't worth worrying about.
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There are events that could cause even worldwide-diversified investments to fail long-term, but at that point the "ammo and canned food" portfolio is the only one that matters anyway and thus they aren't worth worrying about.
This is the only correct answer.
Even in a situation where the markets remain flat for 20-30 years, what's your other option? Bonds with their almost negligible rates? Good luck! Your best bet is equities.
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From today's valuations? No, no chance.
In the far future I suppose it's possible that the index could rise 1000% in 18 months and then crash and take 30 years to reach those same valuations again, but that's a result of unnaturally high bubbles temporarily inflating the price, not long term negative growth. That's what happened in Japan.
This, plus demographics. Demography is destiny, and Japan has been getting very old and has very little immigration to offset that aging. While the US is also getting older, it is in a vastly better position. In fact, the US is in a better position than almost the entire developed world from a demographic standpoint, and that's one reason I think that our relatively higher stock market valuations are justified.
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i think it's a good question actually. it's best not to assume anything. well done for asking.
I don't know if I have a good answer myself, except to say the share markets should reflect the underlying economies that the companies operate in (and the global economy since everything is globalized these days). So perhaps we need to think about driving forces for "real" economic growth (e.g. population growth, technology, efficiency, etc). We might expect mature economies to grow at slower rates than emerging ones. And failing economies can easily stagnate or go backwards.
This is a very common misconception. The profitability of investments is not determined by underlying growth of the economy. Rather, it is determined by the profits earned by those investments. Over the long term, an investment should return roughly its "earnings yield" – its earnings dividend by its price. From that point, adjustments can be made for earnings growth, expansion or contraction of market multiples, etc.
Consider an analogy to real estate. If you hold a piece of investment real estate long enough, the overwhelming determinant of your profit is the rent you can charge. Sure, if you sell the house after 50 years you might gain (or lose) a couple percent annually, but that amount is dwarfed by the rent you receive.
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This is a very common misconception. The profitability of investments is not determined by underlying growth of the economy. Rather, it is determined by the profits earned by those investments. Over the long term, an investment should return roughly its "earnings yield" – its earnings dividend by its price. From that point, adjustments can be made for earnings growth, expansion or contraction of market multiples, etc.
Consider an analogy to real estate. If you hold a piece of investment real estate long enough, the overwhelming determinant of your profit is the rent you can charge. Sure, if you sell the house after 50 years you might gain (or lose) a couple percent annually, but that amount is dwarfed by the rent you receive.
I disagree here - the earnings yield will determine your short term returns (akin to deep value investing, buying extremely cheap), as if you extracted all cash out of the investment/company and never reinvested it. In the long term, your return on invested capital (or unlevered return on equity) determines the actual investment return. In an extreme example, an investment can have very low earning yield (let's say 3%, or 33 P/E upon initial purchase), but if it's growing at 50% a year in the long term, you'll end up with a hell of a result at the end (even if you factor in market multiple contraction) - however, buying such an investment gives you no margin of safety since anything LESS than 50% a year growth will result in severe capital loss as the multiple reverts to the mean in a hurry
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This is a very common misconception. The profitability of investments is not determined by underlying growth of the economy. Rather, it is determined by the profits earned by those investments. Over the long term, an investment should return roughly its "earnings yield" – its earnings dividend by its price. From that point, adjustments can be made for earnings growth, expansion or contraction of market multiples, etc.
Consider an analogy to real estate. If you hold a piece of investment real estate long enough, the overwhelming determinant of your profit is the rent you can charge. Sure, if you sell the house after 50 years you might gain (or lose) a couple percent annually, but that amount is dwarfed by the rent you receive.
I disagree here - the earnings yield will determine your short term returns (akin to deep value investing, buying extremely cheap), as if you extracted all cash out of the investment/company and never reinvested it. In the long term, your return on invested capital (or unlevered return on equity) determines the actual investment return. In an extreme example, an investment can have very low earning yield (let's say 3%, or 33 P/E upon initial purchase), but if it's growing at 50% a year in the long term, you'll end up with a hell of a result at the end (even if you factor in market multiple contraction) - however, buying such an investment gives you no margin of safety since anything LESS than 50% a year growth will result in severe capital loss as the multiple reverts to the mean in a hurry
I used earnings yield as an easily accessible proxy for the best measure – I prefer Warren Buffet's concept of "owner earnings" but return on invested capital also works. The larger point is that it is business profits – over the course of your investment – that determines your investment returns. It is NOT determined by the "growth of the economy" as FFA suggested.
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It is NOT determined by the "growth of the economy" as FFA suggested.
Okay, I agree with that
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i think it's a good question actually. it's best not to assume anything. well done for asking.
I don't know if I have a good answer myself, except to say the share markets should reflect the underlying economies that the companies operate in (and the global economy since everything is globalized these days). So perhaps we need to think about driving forces for "real" economic growth (e.g. population growth, technology, efficiency, etc). We might expect mature economies to grow at slower rates than emerging ones. And failing economies can easily stagnate or go backwards.
This is a very common misconception. The profitability of investments is not determined by underlying growth of the economy. Rather, it is determined by the profits earned by those investments. Over the long term, an investment should return roughly its "earnings yield" – its earnings dividend by its price. From that point, adjustments can be made for earnings growth, expansion or contraction of market multiples, etc.
Consider an analogy to real estate. If you hold a piece of investment real estate long enough, the overwhelming determinant of your profit is the rent you can charge. Sure, if you sell the house after 50 years you might gain (or lose) a couple percent annually, but that amount is dwarfed by the rent you receive.
I didn't mean to imply cause and effect. Agree share prices are determined by corporate earnings. These corporate earnings come from somewhere. Companies produce goods & services, for which they need a lot of customers, employees, etc. At the aggregate level, the sum of all publicly listed companies can be a large chunk of the economy. In the long term of 20-30 years being discussed here, I personally would expect some linkage between the economies growth and corporate earnings growth at the aggregate level (not specific companies, the entire listed market). In the short term, or even up to 5-10 years, I wouldn't link the two. And often shake my head when share prices swing wildly on quarterly GDP stat's.
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i hear things like buy while markets are down... and low markets are a buying opportunity...
so why arent people buying nikkei? seems like it would be a good buying opportunity until it isnt...?
at what point in time is the switch made? what if the US never came out of 2008 crash? would people keep rebalancing to US? how many years would they keep hoping that recovery will happen?
i read over on bogleheads that a lot seem to think 100% US is fine, but because of what happened in japan and me never knowing if US will do same, i am 100% VT now. i just didnt want to mess with vti/vxus. yes i know i get a lower yield than pure vti... but if i wanted, i could also diversify even less and stock pick as well but i dont.
edit: also at present time, europe isnt doing so good... why arent the foreign markets being sold as a buy opportunity? a lot cheaper than us if you feel like they will recover in future
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I personally would expect some linkage between the economies growth and corporate earnings growth at the aggregate level(not specific companies, the entire listed market). In the short term, or even up to 5-10 years, I wouldn't link the two. And often shake my head when share prices swing wildly on quarterly GDP stat's.
There is a link between economic growth and corporate earnings growth (but far from fixed – the percentage of an economy that goes to corporate profits varies over time and among countries). The problem is that the amount of earnings is more important to stock returns than the growth in earnings. This leads to the well-researched conclusion that there isn't a correlation between economic growth and stock returns:
http://psc.ky.gov/pscecf/2012-00221/rateintervention@ag.ky.gov/10252012f/MSCI_-_BARRA_-_GDP_Growth_and_Equity_Returns_-_2010_--_SSRN-id1707483%5B1%5D.pdf
http://www.economist.com/blogs/buttonwood/2009/08/the_growth_illusion
http://seekingalpha.com/article/1541782-s-and-p-earnings-decoupled-from-gdp-growth-and-linked-to-the-stock-trend
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Yes, relative to the opportunity cost of cash, which sometimes is more real than it is now.
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i hear things like buy while markets are down... and low markets are a buying opportunity...
so why arent people buying nikkei?
Because it's still expensive relative to other countries.
i read over on bogleheads that a lot seem to think 100% US is fine, but because of what happened in japan and me never knowing if US will do same, i am 100% VT now. i just didnt want to mess with vti/vxus. yes i know i get a lower yield than pure vti... but if i wanted, i could also diversify even less and stock pick as well but i dont.
edit: also at present time, europe isnt doing so good... why arent the foreign markets being sold as a buy opportunity? a lot cheaper than us if you feel like they will recover in future
Some people are suggesting that investing in foreign markets is good. But it's not that much cheaper than US markets - 10-20% if I recall correctly.
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I personally would expect some linkage between the economies growth and corporate earnings growth at the aggregate level(not specific companies, the entire listed market). In the short term, or even up to 5-10 years, I wouldn't link the two. And often shake my head when share prices swing wildly on quarterly GDP stat's.
There is a link between economic growth and corporate earnings growth (but far from fixed – the percentage of an economy that goes to corporate profits varies over time and among countries). The problem is that the amount of earnings is more important to stock returns than the growth in earnings. This leads to the well-researched conclusion that there isn't a correlation between economic growth and stock returns:
http://psc.ky.gov/pscecf/2012-00221/rateintervention@ag.ky.gov/10252012f/MSCI_-_BARRA_-_GDP_Growth_and_Equity_Returns_-_2010_--_SSRN-id1707483%5B1%5D.pdf
http://www.economist.com/blogs/buttonwood/2009/08/the_growth_illusion
http://seekingalpha.com/article/1541782-s-and-p-earnings-decoupled-from-gdp-growth-and-linked-to-the-stock-trend
thanks beltim, I appreciate your feedback. i'd be interested to hear your ideas/thoughts on the OP's question, if you have any ?
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OP, possible but the scenario where it happens, probably most assets are worth little to nothing. If you look around the web you can find country specific summaries of how well their stock markets did in the 20th century, there are a few countries that in the end went nowhere for decades or even went to 0 but usually it involves the second world war or a major revolution.
Still, while it's unlikely it's still probably best to diversify. I would hold a certain percentage in short-term bonds, these provide minimal protection against inflation but they are safe and right now the extra premium from longer bonds isn't worth the risk (they go down more than short term bonds if yields rise). I would want to own my own home, if all goes to hell there is at least a chance that you will still have a home. Develop your work skills, this is probably the best way to "diversify". As your net worth grows it wouldn't hurt to hold a SMALL amount, say 1-2% in physical gold in case things completely go astray. All that being said, I would do these things to make myself feel more comfortable but you can never cover everything so just know that in the vast majority of cases stocks are the way to go long-term.
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If this is still a worry after you learn more, consider concentrating on stocks that consistently pay good dividends. Between that and the ever-popular Vanguard funds, you have some protection. I consider the stock market as my hedge against inflation, and also hope for some real increases in value.
In the end, you have to put your money somewhere, and no place is ever 100% safe.
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Since the question was posed as something that is theoretically possible then yes....it is possible for the market to return zero (or less than zero) for any length of time you wish to select. Past performance is not an indicator of future performance and nobody has a crystal ball.
However, you have to ask yourself what the alternative is to investing in index funds or other investments. There is a far greater likelihood that holding cash will return less than zero than the same risk holding index funds. Inflation will erode the value of your cash with virtual certainty. If you compare this risk with that of dollar cost averaging in the market and holding for extended periods of time the difference in risk in loss of real purchasing power on your dollars is orders of magnitude greater for holding cash than it is for investing over long periods of time in small amounts.
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thanks beltim, I appreciate your feedback. i'd be interested to hear your ideas/thoughts on the OP's question, if you have any ?
No problem!
I think sol pretty much nailed this question earlier:
From today's valuations? No, no chance.
In the far future I suppose it's possible that the index could rise 1000% in 18 months and then crash and take 30 years to reach those same valuations again, but that's a result of unnaturally high bubbles temporarily inflating the price, not long term negative growth. That's what happened in Japan.
If the S&P 500 traded at a PE of 78 the way the Nikkei did at its peak then the story changes. In a 20 year period starting from the peak of a bubble, then changes in valuation can overwhelm the earnings of your investment. But to again use a real estate analogy, that's like buying a house that would only rent for 1.3% of its value per year. It's theoretically possible to make money from an investment like that, but you would be entirely dependent on speculation, not on any sound investing principles.
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http://awealthofcommonsense.com/playing-the-probabilities/
It's theoretically possible that we will be eating alpo, driving dodge chargers with NO2 boosters, carrying sawed off shotguns and speaking with Australian accents in the future, but short of sticking a gun in the closet, not sure how that should impact your plans. I figure if I own some treasuries, I can maybe swap/forgive those for an M-16 or a black hawk or something if shit gets real.
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I found this link which discusses the returns on US equities back to the early 1800's. So you have 3 70 year periods in a row where equities averaged 5-6 percent. However, it is interesting that government bonds actually provided great returns in that first 70 year period but then have worked their way down to near nothing. You do have to wonder, if there can be such a dramatic divergence in bonds, then perhaps stocks could see something similar as well. This is one more reason why you want to diversify between domestic/international stocks and domestic / international bonds. You don't want the next 20 years to be that one period where bonds substantially out-perform equities.
"Over the subperiods 1802-70, 1871-1925 and 1926-90, the real compound annual returns on equity were 5. 7, 6.6 and 6.4 per cent, but the real returns on short- term government bonds
dropped from 5.1 to 3.1 and, finally, 0.5 per cent"
Here is the link if you are interested. http://efinance.org.cn/cn/fm/The%20Equity%20Premium%20Stock%20and%20Bond%20Returns%20since%201802.pdf
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Slightly edging toward the paranoid - but is there a chance that the US economy could grow but not in the public markets.
The growth of unicorns (>$1Bn private funded silicon valley companies), the lack of IPOs, share buy backs, Dell going private
Even the SP500 is dominated, in market cap, by a handful of very cash-rich high tech companies. If Apple, Google, Amazon, Microsoft all took themselves private, like Dell, it could be a bigger drop to the market than the Great Financial Crash
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Even the SP500 is dominated, in market cap, by a handful of very cash-rich high tech companies. If Apple, Google, Amazon, Microsoft all took themselves private, like Dell, it could be a bigger drop to the market than the Great Financial Crash
I don't think that's paranoid, I think it's an interesting observation. The growth of private equity absolutely threatens the future growth of the publicly available market, if the most profitable firms see a benefit in it.
I suspect that can only happen in cases where the distribution of wealth is already so grossly unequal that it probably doesn't matter much, though. By the time an economy has enough of its production capacity privately held to negatively impact market prices, I suspect it is only months away from guillotines and violent revolution anyway.
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Slightly edging toward the paranoid - but is there a chance that the US economy could grow but not in the public markets.
The growth of unicorns (>$1Bn private funded silicon valley companies), the lack of IPOs, share buy backs, Dell going private
Even the SP500 is dominated, in market cap, by a handful of very cash-rich high tech companies. If Apple, Google, Amazon, Microsoft all took themselves private, like Dell, it could be a bigger drop to the market than the Great Financial Crash
Like sol, I don't think this is paranoid. Unlike sol, I don't see any reason that companies going private would result in a market crash.
Think about it: to take, say, Apple private, the company has to buy all available shares. They have two ways to do this:
1) Buy on the open market. This would drive the price crazily high, as holding on to the last 10% of shares would be unbelievably valuable.
2) Have a vote of majority of shareholders to go private, which would force all shareholders to sell their shares. This would still result in every shareholder realizing a significant gain – otherwise, they wouldn't agree to sell.
Companies going private would provide substantial profits to shareholders.
Also, as I mentioned up-thread, economic growth is not related to growth in stock prices. It just isn't.
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Unlike sol, I don't see any reason that companies going private would result in a market crash... economic growth is not related to growth in stock prices. It just isn't.
I wasn't so much thinking about the market crashing from private equity buying existing shares. I was considering private equity acquiring the last few remaining firms that show any growth at all, in an economy where only a few firms become supergiant megacorps, and thus owning a disproportionate share of all future economic growth. I agree there would be profit for holders of public shares in the short term, but that doesn't change the point.
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Unlike sol, I don't see any reason that companies going private would result in a market crash... economic growth is not related to growth in stock prices. It just isn't.
I wasn't so much thinking about the market crashing from private equity buying existing shares. I was considering private equity acquiring the last few remaining firms that show any growth at all, in an economy where only a few firms become supergiant megacorps, and thus owning a disproportionate share of all future economic growth. I agree there would be profit for holders of public shares in the short term, but that doesn't change the point.
Well then I'll re-reiterate my earlier point:
Also, as I mentioned up-thread, economic growth is not related to growth in stock prices. It just isn't.
So unless you think private equity would be buying up all profitable companies then I don't really see a problem.
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There are hundreds of allied angel networks nationally where you can access the same types of deal flow that the private equity firms can access. Angellist, SeedInvest, Crowdfunder, etc. all have access to early-stage companies too. With crowdfunding disrupting how capital forms in these markets you can also spread your investment out considerably and hedge much of the risk of the early-stage financing.
And yeah....this takes time and expertise and thus people will say it is a job on this forum. The opportunity is there to invest in these ventures though.
I don't see all of the great companies on the public exchanges delisting and going private anytime soon. Some companies will do this for strategic reasons, but there is still plenty of money sloshing around in the public equities market at really low costs for the companies relative to how they can put it to work. This won't change anytime soon.
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So unless you think private equity would be buying up all profitable companies then I don't really see a problem.
Yeah, and even if the concern were that we could reach some sort of tipping point somewhere short of the taking-private of profitable industry in its entirety, I would think the problem would tend to be self-correcting because it would always remain an attractive exit strategy for private equity buyers to re-IPO the businesses they acquired.
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There are hundreds of allied angel networks nationally where you can access the same types of deal flow that the private equity firms can access.
Except you are limited to all the startups that professional VCs turned down. Nobody is doing crowd funding if Andreessen, Horowitz or Khosla said yes. Ironically all the rules to protect the little guy (S-O, accredited investor qualification) means that the public can only play in the worst bets.
Some companies will do this for strategic reasons, but there is still plenty of money sloshing around in the public equities market at really low costs for the companies relative to how they can put it to work.
There is a lot more money sloshing around not in the public markets and not going to the market means a lot of freedom from Wall St and quarterly targets.
I think a bigger risk is that many growth companies will never enter the public market and so there is no opportunity for the public to benefit from their growth. An Apple or Microsoft formed today might never need to IPO.
If only VCs and accredited investors can profit from the fastest growing part of the economy then all the regular private and most institutional investors are left chasing shares in legacy industries.
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Except you are limited to all the startups that professional VCs turned down. Nobody is doing crowd funding if Andreessen, Horowitz or Khosla said yes. Ironically all the rules to protect the little guy (S-O, accredited investor qualification) means that the public can only play in the worst bets.
This is absolutely not true. Some of the smarter entrepreneurs do their best to AVOID toxic venture financing where they end up working for the financier. In fact, most of the companies that exit successfully don't ever take venture financing at all.
Accreditation will also be broken down significantly in May of 2016. Title III of The JOBS Act is now the law of the land and just needs to pass the waiting period post filing in the federal registrar to become something that can be used. Portal registration will begin on January 29th of 2016. Access to deal flow by an average investor has never been more open.
Now we can argue about whether or not this is a good thing or the people investing have the sophistication to invest in these types of projects. There are also constraints about how much non-accredited investors can invest under Title III as well. However, I don't see how one can argue that folks will only get access to stuff the professionals turn down. This simply is not the case.
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So unless you think private equity would be buying up all profitable companies then I don't really see a problem.
That's precisely the scenario I was proposing; a future economy in which the vast majority of companies are no longer competitive due to the growth of megacorporation congolomerates, which are privately held and basically own all economic growth in in a form that is no longer publicly traded.
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[/quote]That's precisely the scenario I was proposing; a future economy in which the vast majority of companies are no longer competitive due to the growth of megacorporation congolomerates, which are privately held and basically own all economic growth in in a form that is no longer publicly traded.
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Don't see this as too likely. Mergers and acquisitions follow a wave pattern, in between periods of divestment. Companies get too big, become unprofitable, and sell off or are broken up into smaller units. More likely to occur in highly regulated economies, where the ability to influence regulators is more important than pleasing consumers.
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Don't see this as too likely.
I agree, it's unlikely.
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Don't see this as too likely. Mergers and acquisitions follow a wave pattern, in between periods of divestment. Companies get too big, become unprofitable, and sell off or are broken up into smaller units. More likely to occur in highly regulated economies, where the ability to influence regulators is more important than pleasing consumers.
True if they are a single company in a single market but less obviously true for a Berkshire Hathaway or a VC or Google-Alphabet.
You can see a blurring of the lines between a VC/Hedge fund/Holding company getting a lot of power - especially if the growth companies they are buying aren't on the public market.
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Slightly edging toward the paranoid - but is there a chance that the US economy could grow but not in the public markets.
The growth of unicorns (>$1Bn private funded silicon valley companies), the lack of IPOs, share buy backs, Dell going private
Even the SP500 is dominated, in market cap, by a handful of very cash-rich high tech companies. If Apple, Google, Amazon, Microsoft all took themselves private, like Dell, it could be a bigger drop to the market than the Great Financial Crash
Zero Hedge always jokes that with the explosion of stock buybacks over the past decade people better get their feet in the market sooner rather than later because in the future there won't be any stocks left to buy.
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OP here. Not going to lie... this kind of went places I don't entirely understand, but I appreciate the feedback. Overall it seems like, barring any pretty unforeseen circumstances, it's relatively safe to continue assuming growth overall. I suppose at some point the stock market would have to look different from it's current form, but who can say where in time that will occur. I feel pretty confirmed for some good ol' Mustachian optimism here.
And hey, as someone said, assuming consistent additions to the pot, it doesn't sound like any losses would be so severe as to be any worse than what inflation would do to money sitting in a bank account anyway. Cheers guys!
(Please by all means though, pay this no mind and continue your discussion)
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]Even the SP500 is dominated, in market cap, by a handful of very cash-rich high tech companies. If Apple, Google, Amazon, Microsoft all took themselves private, like Dell, it could be a bigger drop to the market than the Great Financial Crash
I'm trying to figure out what you mean here. You do realize if these companies took themselves private that they'd pay for their shares, right? Further you realize that this money would be reinvested in the rest of the index? Not sure what would cause the drop. I suppose you'd take an embedded gains tax hit, but that wouldn't be more than like 1% of your investment, so I'm not sure I follow the reasoning.
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]Even the SP500 is dominated, in market cap, by a handful of very cash-rich high tech companies. If Apple, Google, Amazon, Microsoft all took themselves private, like Dell, it could be a bigger drop to the market than the Great Financial Crash
I'm trying to figure out what you mean here. You do realize if these companies took themselves private that they'd pay for their shares, right? Further you realize that this money would be reinvested in the rest of the index? Not sure what would cause the drop. I suppose you'd take an embedded gains tax hit, but that wouldn't be more than like 1% of your investment, so I'm not sure I follow the reasoning.
Several people here seem to have this same source of confusion, so let me offer my attempt at an explanation.
Yes, I realize they would buy the shares at today's price. The hypothetical scenario we're discussing is that after they have done so, those privately held corporations come to dominate the entire economy and the funds reinvested elsewhere by you and me become unprofitable investments. If all future economic growth is concentrated in the coffers of privately held companies, then the market index would cease to grow, which would be one way to get the scenario the OP was asking about.
Seems pretty unlikely as of today, but maybe not entirely impossible in the future. Private equity is a thing, after all.
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By "the" market, I guess we're assuming the S&P500? Yes, it's possible that, the international markets, the bond markets and nothing else ever go up in the rest of our lifetimes. However, there's a greater likelihood of getting hit by car and never seeing your money than the above scenario unfolding.
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]Even the SP500 is dominated, in market cap, by a handful of very cash-rich high tech companies. If Apple, Google, Amazon, Microsoft all took themselves private, like Dell, it could be a bigger drop to the market than the Great Financial Crash
I'm trying to figure out what you mean here. You do realize if these companies took themselves private that they'd pay for their shares, right? Further you realize that this money would be reinvested in the rest of the index? Not sure what would cause the drop. I suppose you'd take an embedded gains tax hit, but that wouldn't be more than like 1% of your investment, so I'm not sure I follow the reasoning.
Several people here seem to have this same source of confusion, so let me offer my attempt at an explanation.
Yes, I realize they would buy the shares at today's price. The hypothetical scenario we're discussing is that after they have done so, those privately held corporations come to dominate the entire economy and the funds reinvested elsewhere by you and me become unprofitable investments. If all future economic growth is concentrated in the coffers of privately held companies, then the market index would cease to grow, which would be one way to get the scenario the OP was asking about.
Seems pretty unlikely as of today, but maybe not entirely impossible in the future. Private equity is a thing, after all.
I absolutely agree Sol, unlikely but possible. Think of a dozen Buffetts, picking companies they believe will pay off long term and buying them early. If the companies grow and become huge they own the whole pie, if it doesn't they sell and try again. Think of Apple being bought before going public and never becoming a public stock. That entire company is no longer part of the investment pool for those looking for growth in index funds or individual stock. If enough big profitable companies were private and grew to contain the bulk of economic growth the available, stocks might languish without growth or even lose market share to the point the whole index declines. So I don't see it as a big corporation on the market being bought to become private, I see it as small corporations bought before going public and becoming huge without providing access to new investors.
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I'm enjoying the hypothetical situation of all profitable companies being private and leaving the majority of investors with unprofitable investments. At the macro level it seems possible but at the micro level things break down for a couple of reasons making it not just unlikely but to me impossible as it doesn't fit our current economic model.
1) If there only existed a few mega corporations that were all private and profitable, that would leave the majority of people to be poor, because they could not invest into profitable companies. Sure they could all be working for the profitable companies but the majority wouldn't be able to share in the companies growth. Who's going to buy the profitable companies products and services if the majority of the people are poor?
2) Mega Corporations are continually challenged by smaller companies because people are entrepreneurial and most talented and smart people would not want to work for mega corporations because they don't have autonomy or equity. That is why not everyone wants to work for Microsoft, Google or Apple and we have such an abundance of start-ups.
3) There is a reason why we currently don't have only a few mega corporations now given that corporations have been around for hundreds of years. It because organizations that get to big become to bureaucratic, ones that try to do everything do nothing well and eventually they no longer have any core competencies. Take ATT for example, even if they were not broken up by the government it would have only been a matter of time until a small start-up like Cisco to start disrupting the market. One could say that ATT would just buy all of it's competitors but look at the example of Microsoft or Google, they would pay ridiculous premiums, become even bigger and slower, and eventually another start-up would just come along. IBM is another example that just got too big, the only way they survived was to down size and focus on a few profitable markets.
So overall a nice theory but a theory that is flawed in our current economic environment.
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By "the" market, I guess we're assuming the S&P500? Yes, it's possible that, the international markets, the bond markets and nothing else ever go up in the rest of our lifetimes.
Yes - we were just imagining ways in which an economy could grow without "the market" going up.
It's unlikely in the short/medium term, but not impossible - large publicly held corporations operating in a single market being stable for decades isn't actually a law of the universe.
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So unless you think private equity would be buying up all profitable companies then I don't really see a problem.
That's precisely the scenario I was proposing; a future economy in which the vast majority of companies are no longer competitive due to the growth of megacorporation congolomerates, which are privately held and basically own all economic growth in in a form that is no longer publicly traded.
There is probably an equilibria somewhere between all profitable companies getting bought out, and having all companies be public. If there are the same number of investment dollars chasing fewer opportunites they will provide those opportunities with more enticing valuations, which should encourage IPO's. Under current law, I would bet very heavily against a 0 profitable public company world.
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Private equity is a thing, after all.
Private equity is, in essence, public equity only narrower in scope. The hypothetical scenario under discussion is the extreme concentration of ownership of profitable industry as a whole. Because this would translate into an extremely unequal distribution of wealth (even in comparison to today's extremely lopsided state of affairs), I agree with your initial assessment that it would also most likely translate into violent revolution.
As a threshold matter, though, in order to materialize, this scenario would first have to overcome practical hurdles of the type discussed above. This passing reference raises another one:
Take ATT for example, even if they were not broken up by the government...
Extreme concentration of ownership would implicate antitrust laws. Unless those laws go away or stop being enforced, the extreme concentration of ownership we're positing here could not occur. Interestingly, as discussed in this thread (http://forum.mrmoneymustache.com/investor-alley/harvard-professor-says-index-funds-should-be-illegal/), a Harvard law professor has argued that the comparatively miniscule level of concentration of ownership of public companies existing today as a result of institutional holders like mutual funds participating in the market may already violate antitrust law).
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Invest more when the market goes down... Good chance it will eventually come back up to some nominal level.
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Companies do IPOs for a reason. Even if some are delisted or taken private there will be new ones to replace them. Access to liquidity for early financiers at retail equity pricing is really a major reason for doing an IPO. It will be interesting to see how the new securities laws may change all of these dynamics.
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I found a good article on global equity returns, I am including the link here. http://efinance.org.cn/cn/fm/Global%20Stock%20Markets%20in%20the%20Twentieth%20Century.pdf.
It tracks 39 global markets from 1921-1996. To avoid survivorship-bias, it includes markets that essentially went to 0, (Germany,japan, portugal). Anyways, overall you would have returned 3.4% real over this time period. So a bit lower than what we are used to but not bad. If you had been smart enough to only invest in markets that don't completely go to 0, it would have returned 4.1%. I have a feeling it is not including dividends, which if true means the actual returns were quite a bit higher. Of course this is over a very long sample period, so actual results would have varied dramatically decade to decade.
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Private equity is, in essence, public equity only narrower in scope.
I think that misses an important point.
The great revolution of the public markets was that anybody could invest in, and benefit from, the economic success (or otherwise) of the country. You don't need to be titled aristocracy, a freeman of the city, or a member of a guild or some private club.
Returning to the days when JP Morgan and a few friends sat in a smoky room and carved up the economy between them is probably a bad thing.
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http://avc.com/2015/11/the-blurring-of-the-public-and-private-markets/ from today. Relevant to the direction this thread has taken.
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Isn't there some law that after the number of equity holders is larger than X the company must go public? So, unless in these super mega corps only a handful of people are equity holders, these large companies will be forced to go public. I don't think you're going to get any mega caps where a bunch of senior execs will work for no equity incentive.
I think that was a factor in Facebook going public if I recall correctly.
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Yes....but there really is nothing forcing the private companies to take fewer shareholders unless they need a lot more capital to grow at their desired clip.
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Isn't there some law that after the number of equity holders is larger than X the company must go public?
Not forced to go public, but they are forced into a similar set of financial reporting requirements - which is why they eventually go public.
But there are lots of ways around it. You can have one fund own many another companies outright and that counts as a single owner, so only the parent has >50 investors. Or you can structure it as a fund where people have part of the fund but not direct shares in the company - as Goldman Sachs did with Facebook before their IPO.
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From today's valuations? No, no chance.
In the far future I suppose it's possible that the index could rise 1000% in 18 months and then crash and take 30 years to reach those same valuations again, but that's a result of unnaturally high bubbles temporarily inflating the price, not long term negative growth. That's what happened in Japan.
On the other hand, in the very long term I think negative growth is guaranteed. Economies and nations will crumble. The sun will explode. Eventually the last sentient life form in the universe will die, and at that moment their portfolio will lose its last penny.
But in the meantime, on the scale of our little lives, I don't worry. A long as humanity continued to strive for something, investment economies will continue to grow despite the inevitable setbacks.
This.
The Japan example doesn't apply to any stock market that trades at even an semi-reasonable valuation. We could debate whether the U.S. market is overvalued or not, but it is undoubtedly nowhere near what Japan was. We're talking about 80-90 x earnings. I'd turn into a gold-bug if we hit 45 or 50 times, and I'm no gold bug. At 60 to 70 times I'd have a bunker with canned foods and ammunition. I'm exaggerating, but only slightly.
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This has been an interesting thread to read -- thanks for some really well articulated opinions to what on the surface is a simple question.
I'm always amazed at some people's unbounded confidence that the markets will always go up, that housing prices will only go up, etc. As someone who is still in their 30s, but who's been investing long enough to have seen some good times and some really bad times, I can personally attest that even a somewhat diversified portfolio can go down over even a several year period (ex. TSX/Canadian markets have been real losers the last 2-3 years). Echoing others points about global diversification, and about investing regularly to avoid being overly dependent on market-timing.
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This has been an interesting thread to read -- thanks for some really well articulated opinions to what on the surface is a simple question.
I'm always amazed at some people's unbounded confidence that the markets will always go up, that housing prices will only go up, etc. As someone who is still in their 30s, but who's been investing long enough to have seen some good times and some really bad times, I can personally attest that even a somewhat diversified portfolio can go down over even a several year period (ex. TSX/Canadian markets have been real losers the last 2-3 years). Echoing others points about global diversification, and about investing regularly to avoid being overly dependent on market-timing.
I guess it really depends how you define "long term". If left unspecified, a "long term" claim can never really be proven wrong because they person who made the claim can just say that they will be right later.
I'm with you on several year (7-10) periods. 30-40 is a different ball park entirely.
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This has been an interesting thread to read -- thanks for some really well articulated opinions to what on the surface is a simple question.
I'm always amazed at some people's unbounded confidence that the markets will always go up, that housing prices will only go up, etc. As someone who is still in their 30s, but who's been investing long enough to have seen some good times and some really bad times, I can personally attest that even a somewhat diversified portfolio can go down over even a several year period (ex. TSX/Canadian markets have been real losers the last 2-3 years). Echoing others points about global diversification, and about investing regularly to avoid being overly dependent on market-timing.
I guess it really depends how you define "long term". If left unspecified, a "long term" claim can never really be proven wrong because they person who made the claim can just say that they will be right later.
I'm with you on several year (7-10) periods. 30-40 is a different ball park entirely.
When I initially asked the question, I meant more in the 30-40 year range instead of the 7-10 range. I was thinking of someone like me, a 20s/30s guy just getting into stock index investing now, with a good number of investing years ahead, and discounting freaking out and selling prematurely. Thank you so much for your answers though, really boosts my confidence a lot actually. Seems like, even in a realistic worst case scenario, regular contributions will negate some of the risks of an underperforming market. And as for the Nikkei, I immediately noticed what sol said: it shot up REALLY high, really fast... and I guess what goes up must come down. Doesn't seem like our numbers are at that point yet.
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I'm always amazed at some people's unbounded confidence that the markets will always go up, that housing prices will only go up, etc.
Long term we assume that the world economy will grow. Unless we all decide to stop making things and go back to living in caves.
It might be that a particular country's market was incredibly overvalued and then stagnates for decades, or a poor country that was devastated by low prices for a raw material - but for a large diverse economy progress happens.
There are arguments in this thread about how this economic growth might not be directly captured by the public markets - but ultimately the money gets spent.
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Is it theoretically possible for the market to NOT go up long-term?
Sure. It's also theoretically possible you get hit by a bus tomorrow or solar flares fry the grid. Is it probable for the market to not go up? No, but depending on how you quantify this likelihood, there are various ways to hedge this possibility.
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Kaspiant, that's the perfect description!
I will add my 2 cents.
John Templeton suggested in 1993 that the Dow may go up to 6000 by the beginning of the 21st century. Look at the chart 18 years later, the blue chip index is at 17000. Templeton was a great investor and if you are new to this reading his 16 rules sure worth your time. You can find them at Franklin Templeton's website.
Also it may be not the best idea to put all your money into one asset, because noone can predict the future. (that's another Templeton's rule) Consider diversifying: buy not just stocks or index-funds, but also some other assets (metals or equities)
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This has been an interesting thread to read -- thanks for some really well articulated opinions to what on the surface is a simple question.
I'm always amazed at some people's unbounded confidence that the markets will always go up, that housing prices will only go up, etc. As someone who is still in their 30s, but who's been investing long enough to have seen some good times and some really bad times, I can personally attest that even a somewhat diversified portfolio can go down over even a several year period (ex. TSX/Canadian markets have been real losers the last 2-3 years). Echoing others points about global diversification, and about investing regularly to avoid being overly dependent on market-timing.
I guess it really depends how you define "long term". If left unspecified, a "long term" claim can never really be proven wrong because they person who made the claim can just say that they will be right later.
I'm with you on several year (7-10) periods. 30-40 is a different ball park entirely.
When I initially asked the question, I meant more in the 30-40 year range instead of the 7-10 range. I was thinking of someone like me, a 20s/30s guy just getting into stock index investing now, with a good number of investing years ahead, and discounting freaking out and selling prematurely. Thank you so much for your answers though, really boosts my confidence a lot actually. Seems like, even in a realistic worst case scenario, regular contributions will negate some of the risks of an underperforming market. And as for the Nikkei, I immediately noticed what sol said: it shot up REALLY high, really fast... and I guess what goes up must come down. Doesn't seem like our numbers are at that point yet.
I'm in my 20s as well. You're on the right track. Just plow your money into those funds and live your life. I hold 40% international just in case our country doesn't provide the nice returns that it usually has historically. Beyond that, I don't give it much thought.
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Yes, of course. For example, if world war three starts, everyone nukes everyone, and humanity goes extinct, the market's value will trend toward zero. More generally, if capital becomes less productive on a long term basis, you could expect a long-term downward trend in market values.
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Productivity and technology increases will occur that will allow companies to squeeze more profits out of less workers. Bad for employees, good for investors.
Having lived in Ethiopia, where there are few productivity and technology increases throughout the country, and the USA, where such increases are all over the place, I'll tell you I prefer our approach.
Goods are much cheaper here so people can afford many more items than they could without those productivity increases.
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Productivity and technology increases will occur that will allow companies to squeeze more profits out of less workers. Bad for employees, good for investors.
Every academic study I've seen seems to show the opposite. Could you point me to a paper that shows productivity and technology increases are generally bad for employees. (Obviously any technological change hurts someone somewhere, but I'd be absolutely stunned if you could show that it hurt labor in general.)
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The value of an index is made up of individual companies.
Companies stock prices are influenced predominantly from earnings/profits.
Therefore, if companies make more profits, the index goes up.
If we continue to have inflation, not deflation in everyday prices of goods, then one can assume the index will continue to rise.
Only way I see this not happening is if the total world population declines. Less demand = lower prices. Don't see this happening in our lifetimes.
Accounting and economics 101.
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Productivity and technology increases will occur that will allow companies to squeeze more profits out of less workers. Bad for employees, good for investors.
Every academic study I've seen seems to show the opposite. Could you point me to a paper that shows productivity and technology increases are generally bad for employees. (Obviously any technological change hurts someone somewhere, but I'd be absolutely stunned if you could show that it hurt labor in general.)
It seems that for hi-tech workers, advanced technology helps, rather than hurts labors role in the marketplace (think engineers, computer programmers, biologists, etc). For manufacturing and semi-skilled labor however, it seems to be another story:
1) In 1990, the American auto industry produced 7.15 vehicles per auto employee. In 2010, it produced 11.2 vehicles per employee, with far fewer total employees producing roughly the same number of vehicles.
2) US Steel's Gary Works in Indiana produces the same amount of steel today is it did in the 1950, but with 5,000 workers instead of 30,000 workers.
Real manufacturing output in the US is at a historical high, but total manufacturing employment is at multi-decade lows due to both low-skill foreign labor arbitrage as well as technological innovation. A piece of anecdotal evidence: my grandfather worked in a blast furnace at a steel mill for 42 years which was closed down shortly after he retired in the mid 70s. Production was moved from Massachusetts to a brand new electric-arc mill in Alabama (IIRC) that could match the old mill's output with a fraction of the energy input and labor costs.
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Productivity and technology increases will occur that will allow companies to squeeze more profits out of less workers. Bad for employees, good for investors.
Every academic study I've seen seems to show the opposite. Could you point me to a paper that shows productivity and technology increases are generally bad for employees. (Obviously any technological change hurts someone somewhere, but I'd be absolutely stunned if you could show that it hurt labor in general.)
It seems that for hi-tech workers, advanced technology helps, rather than hurts labors role in the marketplace (think engineers, computer programmers, biologists, etc). For manufacturing and semi-skilled labor however, it seems to be another story:
1) In 1990, the American auto industry produced 7.15 vehicles per auto employee. In 2010, it produced 11.2 vehicles per employee, with far fewer total employees producing roughly the same number of vehicles.
2) US Steel's Gary Works in Indiana produces the same amount of steel today is it did in the 1950, but with 5,000 workers instead of 30,000 workers.
Real manufacturing output in the US is at a historical high, but total manufacturing employment is at multi-decade lows due to both low-skill foreign labor arbitrage as well as technological innovation. A piece of anecdotal evidence: my grandfather worked in a blast furnace at a steel mill for 42 years which was closed down shortly after he retired in the mid 70s. Production was moved from Massachusetts to a brand new electric-arc mill in Alabama (IIRC) that could match the old mill's output with a fraction of the energy input and labor costs.
Sure, and in 1870 50% of the population was in agriculture. Today it's about 3%. 47% of the population isn't worse off than in 1870. Manufacturing employment being at multidecade lows doesn't seem to have anything to do with how well workers in general are doing. The great thing about people is that they aren't born with a stamp on their head that says future-blast furnace worker. In turn this means that, even though the technology for cutting hair has been largely unchanged and requires the same amount of work as in 1920, the compensation of hair stylists has changed drastically. You have to pay a hairstylist enough so that they won't decide to become a nuclear engineer instead. It sounds crazy, but since all prices are determined at the margin, the pay for all hairstylists is set by the most nuclear engineer-capable hairstylist.
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I think you might have misunderstood my post; for people who live in regions of the US that had a high historic manufacturing labor pool, the future outlook for continued sustained manufacturing emoyment levels in those regions is murky at best. I wasn't trying to imply that technology has made workers better or worse off, just obsolete in many cases. And as far as the marginal cost determining the base pay rate, many former blue collar workers are at the mercy of both rapid technological change and low-wage workers in third-world countries, which puts downward pressure on wages for positions vulnerable to foreign-sourcing in the US. Don't get me wrong, I tend to think nearly everyone has it great in this country, largely because I've been to some truly forsaken parts of the world as part of my work in the oil industry (Kazakhstan, Nigeria, etc), but there are regions in our country that had a very stable middle class for about 30 years post WWII (as people accelerated the transition from rural to urban living like you pointed out) that rapidly decayed as manufacturing technology improved dramatically in the late 1970s-1990s and US corporations were able to take advantage of a huge low cost labor pool in Central America and Asia.
And as far as your hairstylist pay goes, if everyone took MMM's advice and bought a pair of electric clippers where does that leave all the hairstylists? If their skill set is not easily transferable to another industry (like nuclear engineering), you end up with a generation of workers stranded by a simple technology. I think that was the point I was trying to make with manufacturing.
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Switches rarely happen overnight. Industries decline, but people transition.
Hairstylists would find other work.
Since you seem to agree that most are better off than before, who cares if certain jobs (buggy whip manufacturers) are obsolete?
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Nothing lasts forever. The Western Roman Empire collapsed and took with it much of the economy and probably would have tanked the stock market, had there been one. Technological progress backslid for centuries. Of course, at that point, you're more worried about the barbarian invasions from the north than your FIRE plans going awry. As someone mentioned, at that point your biggest assets would be guns, ammo and food stores, not VTSAX.
Given what I've read about global birthrates, migratory patterns and IQs, I'm probably more bearish than many here on long-term returns, but there's a long stretch between that and TEOTWAWKI.
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....Given what I've read about global birthrates, migratory patterns and IQs, I'm probably more bearish than many here on long-term returns, but there's a long stretch between that and TEOTWAWKI.
Whatever IQ means, it seems to be rising.
The same tests have to be rescored for later generations to ensure the average = 100.
The Rising Curve: Long-Term Gains in IQ and Related Measures Edited by Ulric Neisser
Of course, that may have been serpentstooth point, as everyone gets smarter (nutrition?) the playing field is leveled, and the 1st world has no advantages.
Over very long term (>lifetimes as they currently exist), birthrates will go down and the "first-world" demographic shift to aging populations will dampen many industries. I'm not too worried about this being a major factor in my lifetime (<45 years left probably).
Migratory patterns of humans are not predictable, as we are not locked in like geese, and black swan events will surprise everyone.
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Hairstylists would find other work
But not necessarily better (or even equal) paying work. What concerns me most about the rapid pace of technological change is we eventually may reach a tipping point where more people of working age receive public assistance due to a lack of available jobs due to global automation (Think Halderman's Forever War Earth) that results in mass public unrest and a collapse in investment in public equities. I don't think this will happen in my lifetime, but that's the only likely scenario I could see resulting in global markets stagnating.
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Or we reach a time of peace and prosperity.
I'm a big fan of a basic income. Let people do work that's not "profitable," like creating art.
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Hairstylists would find other work
But not necessarily better (or even equal) paying work. What concerns me most about the rapid pace of technological change is we eventually may reach a tipping point where more people of working age receive public assistance due to a lack of available jobs due to global automation (Think Halderman's Forever War Earth) that results in mass public unrest and a collapse in investment in public equities. I don't think this will happen in my lifetime, but that's the only likely scenario I could see resulting in global markets stagnating.
No, this is precisely the point. On average they will find better paying work. Renumeration in all fields that continue to exist has to increase as productivity increases because at least a tiny portion of people in those fields are capable of switching to the work which productivity has improved the renumeration of directly.
Also, I'd be willing to wager $1,000 against anyone who wanted to argue that we'd have mass public unrest and a collapse in investment in public equities due to global automation. Comparative advantage ensures that no matter how good robots get at doing ANY job, mass unemployment will never be the result. Further the average person would be far better off. They may make a rational choice not to work because now that everything is automated goods are too cheap to be bothered working in some industry where humans have a comparative (but not absolute) advantage. This is essentially the beauty of the free market system. Even if AI were better than humans at literally every imaginable endeavor, humans would still have ways to make money.
Equities may fall substantially over the next 30 years if profits as a percentage of GDP mean reverts if multiples also drop. Automation doomsday is about as worrisome as the shift from agrarian society to industrial society. The bad bits will be obvious, but the good bits will be overwhelmingly better.
Or we reach a time of peace and prosperity.
I'm a big fan of a basic income. Let people do work that's not "profitable," like creating art.
A basic income is probably better than current welfare schemes, but I'd be willing to bet that even absent a basic income it'll be easier to make a living being an artist due to increasing productivity rather than harder.
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No, this is precisely the point. On average they will find better paying work. Renumeration in all fields that continue to exist has to increase as productivity increases because at least a tiny portion of people in those fields are capable of switching to the work which productivity has improved the renumeration of directly.
This is not true for the manufacturing labor pools in the US. If you look at most publicly-released data from Ford, GE, Boeing, GM, etc most major union-negotiated contracts in the past 2 decades have resulted in dramatically lower entry-level wage bases for manufacturing/skilled trade workers. Because many of these factories are located in Rust Belt states that have an abundant under-utilized labor pool, these positions are over-subscribed (despite the wage cuts) because there is no shortage of labor demand in these regions. If all of the people out of jobs (due to cheap foreign labor and technology) had been able to find similar jobs after being fired, the term "Rust Belt" probably wouldn't exist, and cities like Detroit and Gary and Youngstown would look dramatically different compared to their present state no?
I'm a big fan of a basic income. Let people do work that's not "profitable," like creating art.
Me too, I think a standard basic income of some multiple of the EITC for a dual-income household with two dependent a would provide a fair amount of stability for our society.
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Also, I'd be willing to wager $1,000 against anyone who wanted to argue that we'd have mass public unrest and a collapse in investment in public equities due to global automation. Comparative advantage ensures that no matter how good robots get at doing ANY job, mass unemployment will never be the result. Further the average person would be far better off. They may make a rational choice not to work because now that everything is automated goods are too cheap to be bothered working in some industry where humans have a comparative (but not absolute) advantage. This is essentially the beauty of the free market system. Even if AI were better than humans at literally every imaginable endeavor, humans would still have ways to make money.
The labor force participation rate is in a free fall and only a small portion of that is due to boomers retiring. We may avoid the unrest due to NBI or welfare plus the anesthetizing effects of video games, marijuana, 24-7 football, Internet pornography and Netflix. But millions of jobs are at risk over the next few years and the loss of those jobs should be enough to tip us into recession, which will hurt equities. There are more than 1 million long haul truckers and the technology to replace 98% of their job (highway driving) is already here. And the belief that truckers will retool and become nurses or computer programmers doesn't sit well with me. I don't see the future hiding a myriad of $50K jobs for us - we're going to see fewer jobs or lower wages or a combination of both.
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The labor force participation rate is in a free fall and only a small portion of that is due to boomers retiring. We may avoid the unrest due to NBI or welfare plus the anesthetizing effects of video games, marijuana, 24-7 football, Internet pornography and Netflix. But millions of jobs are at risk over the next few years and the loss of those jobs should be enough to tip us into recession, which will hurt equities. There are more than 1 million long haul truckers and the technology to replace 98% of their job (highway driving) is already here. And the belief that truckers will retool and become nurses or computer programmers doesn't sit well with me. I don't see the future hiding a myriad of $50K jobs for us - we're going to see fewer jobs or lower wages or a combination of both.
Imagine you're living 500 years ago. You were just told that job losses in the primary industry employing 97% of people were going to be near total. Would you have been able to figure out what they were going to do? The primary benefit of economics is that comparative advantage works. Fortunately the future isn't limited to jobs you can come up with.
Also, declining labor force participation isn't necessarily bad. Unemployment (people who want to work but can't find work) is the bad thing, not people who don't want to work that aren't working (mustachians are, after all, included in that group.) 1 Million long haul truckers will find other work or be unemployed. Some unemployed people will find work. My prediction is that after truckers are replaced with automata unemployment is going to stay under 10% on a five-year average, barring any huge changes to the minimum wage or labor law. (Here a huge change would be defined as a minimum wage increase 25% higher than the real average of the last 50 years.)
Betting on lower wages seems to fly in the face of literally all of the data we have. It would also be one thing if this is the first time someone has seen labor saving devices and assumed that they would reduce the value of labor. You are literally parroting and argument that has been around since at least the second century BC. It's been wrong for 2,200 years, though to be fair we've only had the theoretical foundation for why it's wrong for about 150 years.
Also, I'm definitely not seeing the "freefall" that you're referring to.
(http://faculty.tamucc.edu/sfriday/wordpress/wp-content/uploads/2013/09/US-Labor-Force-Participation-Rate-by-Age-April-2013.png)
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No, this is precisely the point. On average they will find better paying work. Renumeration in all fields that continue to exist has to increase as productivity increases because at least a tiny portion of people in those fields are capable of switching to the work which productivity has improved the renumeration of directly.
This is not true for the manufacturing labor pools in the US. If you look at most publicly-released data from Ford, GE, Boeing, GM, etc most major union-negotiated contracts in the past 2 decades have resulted in dramatically lower entry-level wage bases for manufacturing/skilled trade workers. Because many of these factories are located in Rust Belt states that have an abundant under-utilized labor pool, these positions are over-subscribed (despite the wage cuts) because there is no shortage of labor demand in these regions. If all of the people out of jobs (due to cheap foreign labor and technology) had been able to find similar jobs after being fired, the term "Rust Belt" probably wouldn't exist, and cities like Detroit and Gary and Youngstown would look dramatically different compared to their present state no?
Can you link to the data? Is it total compensation or just wage compensation? Also, just to clarify no one is claiming that literally every person would find a replacement job, just that on average they are better off.
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Yes, I can link to the data, give me a bit to comb through the annual reports for those companies. And it is indeed total compensation, rather than wage compensation, especially when you factor in the removal of defined benefit pensions and retiree medical care (not for current retirees, but the future benefit of new workers). GE specifically calls out an entry level wage of around $13 an hour (compared to $20+ under previous contracts) as a reason why they increased their presence in Appliance Park in Kentucky.
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Here's a newspaper quote on the GE Appliance Park labor rates:
"American unions are changing their priorities. Appliance Park’s union was so fractious in the ’70s and ’80s that the place was known as “Strike City.” That same union agreed to a two-tier wage scale in 2005—and today, 70 percent of the jobs there are on the lower tier, which starts at just over $13.50 an hour, almost $8 less than what the starting wage used to be."
I'm relatively agnostic on unions, but in this case, keeping some jobs is better than losing all jobs at this facility right? Jack Welch (who drove outsourcing while leading GE) once predicted that the Appliance Park would not exist past 2000 due to low foreign labor rates. My concern is mainly for workers in this country (the US), that while tariffs (pre-WWII) and a destroyed Europe and Japan (20 years post WWII) allowed for US workers to adapt somewhat harmoniously to technological innovation in the workplace without competition from cheap foreign labor. However, since about 1980 the reduction in global trade restrictions coupled with an opening of a global cheap labor pool in former Soviet states and China/Southeast Asia has created an incentive for US corporations to dramatically reduce manufacturing employment in the US. And again, why are so many cities in the Midwest (Detroit, Gary, Pittsburg, Youngstown, Cleveland, Toledo, Milwaukee) in such bad shape if all of the blue-collar workers who used to work in factories were able to find "better" jobs?
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The labor force participation rate is in a free fall and only a small portion of that is due to boomers retiring. We may avoid the unrest due to NBI or welfare plus the anesthetizing effects of video games, marijuana, 24-7 football, Internet pornography and Netflix. But millions of jobs are at risk over the next few years and the loss of those jobs should be enough to tip us into recession, which will hurt equities. There are more than 1 million long haul truckers and the technology to replace 98% of their job (highway driving) is already here. And the belief that truckers will retool and become nurses or computer programmers doesn't sit well with me. I don't see the future hiding a myriad of $50K jobs for us - we're going to see fewer jobs or lower wages or a combination of both.
Imagine you're living 500 years ago. You were just told that job losses in the primary industry employing 97% of people were going to be near total. Would you have been able to figure out what they were going to do? The primary benefit of economics is that comparative advantage works. Fortunately the future isn't limited to jobs you can come up with.
Also, declining labor force participation isn't necessarily bad. Unemployment (people who want to work but can't find work) is the bad thing, not people who don't want to work that aren't working (mustachians are, after all, included in that group.) 1 Million long haul truckers will find other work or be unemployed. Some unemployed people will find work. My prediction is that after truckers are replaced with automata unemployment is going to stay under 10% on a five-year average, barring any huge changes to the minimum wage or labor law. (Here a huge change would be defined as a minimum wage increase 25% higher than the real average of the last 50 years.)
Betting on lower wages seems to fly in the face of literally all of the data we have. It would also be one thing if this is the first time someone has seen labor saving devices and assumed that they would reduce the value of labor. You are literally parroting and argument that has been around since at least the second century BC. It's been wrong for 2,200 years, though to be fair we've only had the theoretical foundation for why it's wrong for about 150 years.
Also, I'm definitely not seeing the "freefall" that you're referring to.
(http://faculty.tamucc.edu/sfriday/wordpress/wp-content/uploads/2013/09/US-Labor-Force-Participation-Rate-by-Age-April-2013.png)
LFPR is down from 67% to around 62% over the past fifteen years - that is massive.
The universe of things that humans can do better than machines/software is getting smaller by the day. Document review, medical diagnostics, driving, language translation, journalism - a very large percentage of jobs are at risk. And even if technology can't do 100% of a job it will be able to do enough of the job to pressure wages lower. Luddites may have been wrong in the past but today's technologies border on magic and I'm willing to bet this time it's different.
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But what do you picture the outcome to be if you're right, and there's no more jobs?
To me, that would merely lead to temporary unrest, and then less people needing to work for a living. It certainly won't sustainably lead to poverty, IMO, as people won't put up with that.
I just don't see it as a problem even if it is different this time.
Like...play out your scenario. What does it look like over the short and long term?
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Jobs will form. Every time people think that the jobs will go away and there will be chaos in the streets whole new industries form and put the labor to work productively. There will always be opportunity for those willing to put forth the effort instead of complaining about how hard things are.
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But what do you picture the outcome to be if you're right, and there's no more jobs?
To me, that would merely lead to temporary unrest, and then less people needing to work for a living. It certainly won't sustainably lead to poverty, IMO, as people won't put up with that.
I just don't see it as a problem even if it is different this time.
Like...play out your scenario. What does it look like over the short and long term?
Famous economist and blogger Tyler Cowen wrote about his version of the future in Average is Over. He predicts more of the same - extreme income and wealth inequality as the top ten or twenty percent of people thrive while everyone else toils in low wage service jobs or lives off of the government. He thinks Texas will be the model - cheap, abundant housing and low services/taxes. The rich and skilled will live in cities - suburbs for everyone else. People will downsize and live in smaller homes or trailers and they will be happy despite having low incomes because technology will drive down the costs of everything and our leisure sources (the Internet, virtual reality, television) will keep everyone content.
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But what do you picture the outcome to be if you're right, and there's no more jobs?
To me, that would merely lead to temporary unrest, and then less people needing to work for a living. It certainly won't sustainably lead to poverty, IMO, as people won't put up with that.
I just don't see it as a problem even if it is different this time.
Like...play out your scenario. What does it look like over the short and long term?
Famous economist and blogger Tyler Cowen wrote about his version of the future in Average is Over. He predicts more of the same - extreme income and wealth inequality as the top ten or twenty percent of people thrive while everyone else toils in low wage service jobs or lives off of the government. He thinks Texas will be the model - cheap, abundant housing and low services/taxes. The rich and skilled will live in cities - suburbs for everyone else. People will downsize and live in smaller homes or trailers and they will be happy despite having low incomes because technology will drive down the costs of everything and our leisure sources (the Internet, virtual reality, television) will keep everyone content.
That... doesn't sound terrible?
So what's your worry with this scenario?
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But what do you picture the outcome to be if you're right, and there's no more jobs?
To me, that would merely lead to temporary unrest, and then less people needing to work for a living. It certainly won't sustainably lead to poverty, IMO, as people won't put up with that.
I just don't see it as a problem even if it is different this time.
Like...play out your scenario. What does it look like over the short and long term?
Famous economist and blogger Tyler Cowen wrote about his version of the future in Average is Over. He predicts more of the same - extreme income and wealth inequality as the top ten or twenty percent of people thrive while everyone else toils in low wage service jobs or lives off of the government. He thinks Texas will be the model - cheap, abundant housing and low services/taxes. The rich and skilled will live in cities - suburbs for everyone else. People will downsize and live in smaller homes or trailers and they will be happy despite having low incomes because technology will drive down the costs of everything and our leisure sources (the Internet, virtual reality, television) will keep everyone content.
That... doesn't sound terrible?
So what's your worry with this scenario?
My kids - with 17 years of high quality education - living in a trailer somewhere, barely able to pay their bills, working an unfulfilling service job, solely subsiding on beans and rice. No travel, no frills.
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Jobs will form.
I don't believe that jobs just "form". I believe that jobs are created to fill a demand, usually due to a profit motive.
Like no one ever said "Hey I think I'll create 1000 jobs today" and then went out and hired 1000 people. People are hired to fill jobs that exist because there is a need for their work. And while that need can be reduced by improvements in technology and automation, ultimately the need stems from the population's desire to have more and nicer things. Their desire for fancy cars motivates a car company to make a fancy car, and the company then hires people to make the cars. The company pays the workers, who can then afford to buy fancy cars. The cycle starts with the desire for a fancy car, not with a job that exists in a vacuum.
This is standard old economics (as opposed to "supply-side" economics, which has turned out to be mostly a myth) saying that trade happens when people want to trade, not when goods are available to trade. People will always find ways to trade, and thus create an economy, as long as they want something from each other. The only real existential threat to this system is reduced desires (anti-consumerism) because no amount of material abundance is ever going to discourage people from wanting more and fancier stuff. Some folks will always desire, and so some folks will always work.
But I'm still a fan of the basic-income model discussed above, even if it comes with low-grade housing and an xbox for every registered voter. That's just the modern Circus Maximus throwing bread to the disaffected populace. People don't revolt as long a they can be placated.
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But I'm still fan of the basic-income model discussed above, even if it comes with low-grade housing and an xbox for every registered voter. That's just the modern Circus Maximus throwing bread to the disaffected populace. People don't revolt as long a they can be placated.
Whatever fits with your world view. I can promise you that the demonic businessperson is not the person you think they are. There are plenty of people out there providing value to society and working hard to provide for the lifestyle you malign. Millions of dollars are trading and forming jobs at the small businesses in the angel networks I frequent. The profit motive is driving people to develop technology to help doctors identify cancer better, create fuel efficient trucking solutions, or any other number of advances in society. This, in turn, would spur more jobs if the businesses prove to be successful. These jobs would be for what needs to be done today and not for manufacturing buggy whips.
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I can promise you that the demonic businessperson is not the person you think they are. There are plenty of people out there providing value to society and working hard to provide for the lifestyle you malign.
Where did I malign anyone? I certainly don't think businesspeople are demonic, but neither are they creating any jobs just because they are altruistic. They are hiring people to do a job that fulfills a demand in the economy. They don't create the demand, so they don't really create the job. More like just facilitate it in a way that generates profit.
Which is fine. I'm not knocking capitalism or capitalists by pointing out that "job creator" is a mythical title. When have you ever hired anyone without the expectation that you would derive more benefit than it costs you to pay them? Never. Nobody ever has. Maybe nepotists?
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I guess I misinterpreted your post Sol. It seemed decidedly anti-capitalist to me.
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But what do you picture the outcome to be if you're right, and there's no more jobs?
To me, that would merely lead to temporary unrest, and then less people needing to work for a living. It certainly won't sustainably lead to poverty, IMO, as people won't put up with that.
I just don't see it as a problem even if it is different this time.
Like...play out your scenario. What does it look like over the short and long term?
Famous economist and blogger Tyler Cowen wrote about his version of the future in Average is Over. He predicts more of the same - extreme income and wealth inequality as the top ten or twenty percent of people thrive while everyone else toils in low wage service jobs or lives off of the government. He thinks Texas will be the model - cheap, abundant housing and low services/taxes. The rich and skilled will live in cities - suburbs for everyone else. People will downsize and live in smaller homes or trailers and they will be happy despite having low incomes because technology will drive down the costs of everything and our leisure sources (the Internet, virtual reality, television) will keep everyone content.
That... doesn't sound terrible?
So what's your worry with this scenario?
My kids - with 17 years of high quality education - living in a trailer somewhere, barely able to pay their bills, working an unfulfilling service job, solely subsiding on beans and rice. No travel, no frills.
I only see standard of living going up and up and up.
You think standard of living will decline somehow?
I guess I misinterpreted your post Sol. It seemed decidedly anti-capitalist to me.
No, he's saying capital will always have a motive. No one is going to create jobs for no reason, but if it makes them money. This is usually a good thing, profit is generally a good motivator, and leads to good things (unethical exceptions when profit is the only concern aside).
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Re: standard of living in the future
I think the median person will have access to most new innovations and advances in healthcare. But I think the percentage of people that will have the "American Dream" (home ownership, 2 cars, 1 annual vacation, paid public college for 2.5 kids) will fall. Tyler Cowen says people will be happier in the future because of the innovations but they will earn significantly less money. He is a happiness optimist and a revenue pessimist.
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So I go back to: what exactly are you worried about?
That sounds good to me.
Higher standard of living, more happiness. Huzzah!
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So I go back to: what exactly are you worried about?
That sounds good to me.
Higher standard of living, more happiness. Huzzah!
He is an optimist. His critics don't think people will be happy with low wages, a bean based diet, micro houses in the deep suburbs and massive income/wealth inequality. I've only read the book reviews for Average is Over - I didn't read the book myself but I follow his blog daily and he posts about this stuff all the time.
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LFPR is down from 67% to around 62% over the past fifteen years - that is massive.
The universe of things that humans can do better than machines/software is getting smaller by the day. Document review, medical diagnostics, driving, language translation, journalism - a very large percentage of jobs are at risk. And even if technology can't do 100% of a job it will be able to do enough of the job to pressure wages lower. Luddites may have been wrong in the past but today's technologies border on magic and I'm willing to bet this time it's different.
So was it up "massively" between '78 and '88? I suppose the worry of folks back then must have been that everyone was going to have to work! The crisis today I suppose would be that by the time I'm dead and buried the LFPR will be in the 40s? It's obviously too far into the future to extrapolate the last 15 years into.
Again, even if computers can do literally every job better than humans, that doesn't matter. Even if computers have an absolute advantage, humans can still work and would benefit from the computers because of their comparative advantage. The luddites weren't wrong because they overestimated how powerful technology was. They were wrong because they had a fundamental misunderstanding of why people work and trade the product of their labor.
Also, let's be clear here, it wasn't just the luddites. Many, many people have had this idea. It shows up every couple generations or so. We're not talking about this one time a religious group was wrong about a thing. People have been wrong about this, over, and over, and over. Going back before we had steam engines, the printing press, algebra. The first person to turn out wrong about this was born probably had his name immortalized in the library of alexandria. A long chain of people over the last couple thousand years have thought, this time its different. They at least had the excuse that there wasn't a whole branch of science which explained why increasing labor productivity wouldn't put everyone out of a job. The only special thing about the luddites is that they have the unfortunate notoriety of being wrong after they should have known better.
I'd be very happy to take that bet. What is the amount of unemployment/labor compensation drop you expect over how many years due to increasing automation?
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LFPR is down from 67% to around 62% over the past fifteen years - that is massive.
The universe of things that humans can do better than machines/software is getting smaller by the day. Document review, medical diagnostics, driving, language translation, journalism - a very large percentage of jobs are at risk. And even if technology can't do 100% of a job it will be able to do enough of the job to pressure wages lower. Luddites may have been wrong in the past but today's technologies border on magic and I'm willing to bet this time it's different.
So was it up "massively" between '78 and '88? I suppose the worry of folks back then must have been that everyone was going to have to work! The crisis today I suppose would be that by the time I'm dead and buried the LFPR will be in the 40s? It's obviously too far into the future to extrapolate the last 15 years into.
Again, even if computers can do literally every job better than humans, that doesn't matter. Even if computers have an absolute advantage, humans can still work and would benefit from the computers because of their comparative advantage. The luddites weren't wrong because they overestimated how powerful technology was. They were wrong because they had a fundamental misunderstanding of why people work and trade the product of their labor.
Also, let's be clear here, it wasn't just the luddites. Many, many people have had this idea. It shows up every couple generations or so. We're not talking about this one time a religious group was wrong about a thing. People have been wrong about this, over, and over, and over. Going back before we had steam engines, the printing press, algebra. The first person to turn out wrong about this was born probably had his name immortalized in the library of alexandria. A long chain of people over the last couple thousand years have thought, this time its different. They at least had the excuse that there wasn't a whole branch of science which explained why increasing labor productivity wouldn't put everyone out of a job. The only special thing about the luddites is that they have the unfortunate notoriety of being wrong after they should have known better.
I'd be very happy to take that bet. What is the amount of unemployment/labor compensation drop you expect over how many years due to increasing automation?
People a lot smarter than me think technology will compress wages and kill more jobs than it creates. I agree, you do not. There are ten pages of discussion here:
http://forum.mrmoneymustache.com/welcome-to-the-forum/robots-and-their-impact-on-the-future/
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People a lot smarter than me think technology will compress wages and kill more jobs than it creates. I agree, you do not. There are ten pages of discussion here:
http://forum.mrmoneymustache.com/welcome-to-the-forum/robots-and-their-impact-on-the-future/
Man, shows me that I should have checked the general discussion forum.
I take it no bet then? I'd be happy to track down an acceptable escrow. =-D
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It's a great debate. On your side is thousands of years of history. On my side is the exponential rate of technology and the ability of software and hardware to do an increasing number of things better than humans.
I was thinking of a bet but it's hard to separate policy and globalization from what is happening with technology. I think we're shedding jobs and freezing salaries because of tech, globalization and immigration but how do you isolate tech?
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It's a great debate. On your side is thousands of years of history. On my side is the exponential rate of technology and the ability of software and hardware to do an increasing number of things better than humans.
This is precisely the frustration I have with this debate. My central point is that even if software and hardware start doing everything better than humans, I still don't expect massive permanent unemployment.
I was thinking of a bet but it's hard to separate policy and globalization from what is happening with technology. I think we're shedding jobs and freezing salaries because of tech, globalization and immigration but how do you isolate tech?
That's true, but our views are probably just as divergent on globalization as technology. I think tech, globalization, and immigration will improve the average lifestyle of people, and that we won't see an unemployment spike. If you disagree then we have no need to isolate tech.
My terms would be, I don't expect the average unemployment rate from 2020 to 2030 to exceed 10% if the real minimum wage does not exceed 25% more than it's average over the past 50 years. Should the minimum wage exceed it's average real value for the period between 1965 and 2015 the bet is a push.
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I think tech, globalization, and immigration will improve the average lifestyle of people, and that we won't see an unemployment spike. If you disagree then we have no need to isolate tech.
Isn't it slightly disingenuous to qualify that statement with "average lifestyle"?
I agree with you that the average lifestyle of humans will get dramatically better over the next 30 years. I also suspect the average lifestyle of Americans to totally miss out on that improvement. Technology and globalization will make things far more equitable, which means both bringing up the vast majority of the world's poor and also holding back (or even dragging down) the world's current elite.
People lose perspective so easily. If you have a home and two cars, you are so much more incredibly wealthy than most people on Earth that they look on you with contempt. Every time you spend $100 on new Christmas decorations, a family loses a child to starvation because they can't afford rice and you'd better believe they are acutely aware of the life-saving sums you waste on frivolous things. You are TOO well off, compared to most of humanity.
Globalization works because poor people would rather work for slave wages than starve. Off-shoring US manufacturing jobs works because US workers are grossly overpaid and companies are more profitable if they don't waste their money on paying US workers. Average lifestyles will rise when we stop force-feeding money to the super-rich (that's you and me) and start letting the rest of humanity show how hard they can work, how smart they can be, what new technologies and businesses they can create. The desire to promote US lifestyle growth, including supporting US manufacturing, is ultimately just protectionist capitalism predicated on the active suppression of humanity's real economic potential. I can say that out loud without making any judgment whatsoever about whether it is right or wrong.
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I think tech, globalization, and immigration will improve the average lifestyle of people, and that we won't see an unemployment spike. If you disagree then we have no need to isolate tech.
Isn't it slightly disingenuous to qualify that statement with "average lifestyle"?
I agree with you that the average lifestyle of humans will get dramatically better over the next 30 years. I also suspect the average lifestyle of Americans to totally miss out on that improvement. Technology and globalization will make things far more equitable, which means both bringing up the vast majority of the world's poor and also holding back (or even dragging down) the world's current elite.
People lose perspective so easily. If you have a home and two cars, you are so much more incredibly wealthy than most people on Earth that they look on you with contempt. Every time you spend $100 on new Christmas decorations, a family loses a child to starvation because they can't afford rice and you'd better believe they are acutely aware of the life-saving sums you waste on frivolous things. You are TOO well off, compared to most of humanity.
Globalization works because poor people would rather work for slave wages than starve. Off-shoring US manufacturing jobs works because US workers are grossly overpaid and companies are more profitable if they don't waste their money on paying US workers. Average lifestyles will rise when we stop force-feeding money to the super-rich (that's you and me) and start letting the rest of humanity show how hard they can work, how smart they can be, what new technologies and businesses they can create. The desire to promote US lifestyle growth, including supporting US manufacturing, is ultimately just protectionist capitalism predicated on the active suppression of humanity's real economic potential. I can say that out loud without making any judgment whatsoever about whether it is right or wrong.
I should have been more clear, average lifestyle of each population should increase when considered separately as well. At least that's my understanding of the subject. Folks in the US will probably not be "dragged down".
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The labor force participation rate is in a free fall and only a small portion of that is due to boomers retiring. We may avoid the unrest due to NBI or welfare plus the anesthetizing effects of video games, marijuana, 24-7 football, Internet pornography and Netflix. But millions of jobs are at risk over the next few years and the loss of those jobs should be enough to tip us into recession, which will hurt equities. There are more than 1 million long haul truckers and the technology to replace 98% of their job (highway driving) is already here. And the belief that truckers will retool and become nurses or computer programmers doesn't sit well with me. I don't see the future hiding a myriad of $50K jobs for us - we're going to see fewer jobs or lower wages or a combination of both.
Imagine you're living 500 years ago. You were just told that job losses in the primary industry employing 97% of people were going to be near total. Would you have been able to figure out what they were going to do? The primary benefit of economics is that comparative advantage works. Fortunately the future isn't limited to jobs you can come up with.
Also, declining labor force participation isn't necessarily bad. Unemployment (people who want to work but can't find work) is the bad thing, not people who don't want to work that aren't working (mustachians are, after all, included in that group.) 1 Million long haul truckers will find other work or be unemployed. Some unemployed people will find work. My prediction is that after truckers are replaced with automata unemployment is going to stay under 10% on a five-year average, barring any huge changes to the minimum wage or labor law. (Here a huge change would be defined as a minimum wage increase 25% higher than the real average of the last 50 years.)
Betting on lower wages seems to fly in the face of literally all of the data we have. It would also be one thing if this is the first time someone has seen labor saving devices and assumed that they would reduce the value of labor. You are literally parroting and argument that has been around since at least the second century BC. It's been wrong for 2,200 years, though to be fair we've only had the theoretical foundation for why it's wrong for about 150 years.
Also, I'm definitely not seeing the "freefall" that you're referring to.
(http://faculty.tamucc.edu/sfriday/wordpress/wp-content/uploads/2013/09/US-Labor-Force-Participation-Rate-by-Age-April-2013.png)
getting closer to the day that I put some downward pressure on that 25-54 age group curve :)
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I don't understand the concern about technology replacing workers and suppressing wages. There where always be creative destruction forces at work as technology and new ideas replace existing tech or force labor to switch careers. Let's say tech and robots replace every single worker in the job market globally...who will have money to buy the goods and services being produced? What incentives do companies have to suppress wages to zero when it means no one can afford to buy their products? It can be argued that tech/robots will only replace high wage workers since there is no profit in replacing cheap labor with expensive robots/tech. But that would mean unemployment for the very economies that sustain the global market. And robots and tech will never be cheap either - the licensing fees and energy cost to run it will never be zero.
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I don't understand the concern about technology replacing workers and suppressing wages. There where always be creative destruction forces at work as technology and new ideas replace existing tech or force labor to switch careers. Let's say tech and robots replace every single worker in the job market globally...who will have money to buy the goods and services being produced? What incentives do companies have to suppress wages to zero when it means no one can afford to buy their products? It can be argued that tech/robots will only replace high wage workers since there is no profit in replacing cheap labor with expensive robots/tech. But that would mean unemployment for the very economies that sustain the global market. And robots and tech will never be cheap either - the licensing fees and energy cost to run it will never be zero.
I don't think tech will eliminate all jobs or even most jobs. I think it will deskill jobs and drive wages down.
You have UPS drivers earning let's say $50K per year. When the trucks drive themselves, you will need someone to deliver the packages. You're not going to pay $15/hour for someone to take packages off of the truck - you're going to pay less because the skill required to move packages from the truck to the door is minimal. Long haul truckers spend most of their time on easy to navigate highways. The technology to replace them is already here - Scandinavia uses truck convoys - a human in the lead truck is followed by trucks that mimic the lead driver using software. Australia uses automated heavy machinery. Japan uses trains that drive themselves. How can you pay a trucker or train operator $50K when these technologies exist?
Similarly, you're not going to pay anesthesiologists $400K if there is software that can do their jobs better/faster/safer - J&J is already using anesthesia robots - the robots are only going to get better. Maybe the AMA will put up roadblocks or require a nurse anesthesiologist on site but I would be concerned if I were in medical school:
https://www.washingtonpost.com/business/economy/new-machine-could-one-day-replace-anesthesiologists/2015/05/11/92e8a42c-f424-11e4-b2f3-af5479e6bbdd_story.html
Adjuncts currently earn poverty wages - their salary ceilings are capped because of MOOCs. You're not going to pay an adjunct $10K to teach 30 students if you can utilize MOOCs for a fraction of the price.
The Baxter factory robot is $25K - you're only going to hire a human if it will cost you a fraction of the robot. Similarly, fast food workers' salaries are capped by the cost of touch screen kiosks and automated burger making machines.
http://www.businessinsider.com/momentum-machines-burger-robot-2014-8
Language translation - getting close to being perfect. Speech to text - getting close to perfect. People who do this kind of work are only going to survive if they can undercut the software/hardware on price.
We have 15+ years of stagnant wages and a rapidly declining LFPR. Additionally, for the first time since they've been keeping track, wage growth has been decoupled from productivity gains. Workers are more productive because of the technology they use but they aren't getting wage increases because they don't own the technology - the productivity gains are going to capital and not labor.
As far as money, I think it's going to be national basic income plus whatever wages people can earn from the deskilled jobs.
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My terms would be, I don't expect the average unemployment rate from 2020 to 2030 to exceed 10% if the real minimum wage does not exceed 25% more than it's average over the past 50 years. Should the minimum wage exceed it's average real value for the period between 1965 and 2015 the bet is a push.
Unemployment is a bad statistic because it assumes jobs are fungible and it excludes the people that drop out of the labor force. We're creating 200,000 jobs a month, but a much higher percentage of those jobs are low wage and/or part time than in the past. I like the LFPR plus something that captures wages. I think the world will spin with a lower LFPR and lower wages.
Additionally, Japan is the capital of labor saving technology but they have a tiny unemployment rate. That is because of policy - it's hard to fire people in Japan and they have committed to make work jobs. But when you look at wages and inflation - both are stagnant.
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At some point if people can't find work due to automation the tax burden on companies that automate will rise according to the need to pay out gov't benefits to the people who can't find work. These folks aren't going anywhere and we'll only be able to ignore them until they reach a critical mass. At which point we can find work for them to do so we pay them that way or we can pay them not to work.
Unless you envisage some final solution to exterminate truck drivers they are not going anywhere. Neither are the rest of the population that can't out compete a robot.
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We have 15+ years of stagnant wages and a rapidly declining LFPR. Additionally, for the first time since they've been keeping track, wage growth has been decoupled from productivity gains. Workers are more productive because of the technology they use but they aren't getting wage increases because they don't own the technology - the productivity gains are going to capital and not labor.
Actually wages have only been stagnant if you don't include benefits. If you include benefits the decoupling goes away. The problem with excluding benefits but then using the CPI to adjust for inflation is that health costs have been a big driver of inflation but are not generally paid for with wage dollars.
This is the effect you are probably thinking of:
(https://upload.wikimedia.org/wikipedia/commons/thumb/7/73/US_productivity_and_real_wages.jpg/800px-US_productivity_and_real_wages.jpg)
Here is what is actually going on:
(http://americanactionforum.org/uploads/files/research/productivity_2.png)
Here's a good thought experiment. Would you rather live in the 1970's economy or the 2010's economy? If you pick 1970's you have to give up all the technology of the last 30 years. If the "real wage" statistics were accurate then it shouldn't make any difference. Obviously the standard of living for the average person is much, much better today. This is reflected by the fact that they can buy more, better, goods and services with their money than they used to be able to.
Unemployment is a bad statistic because it assumes jobs are fungible and it excludes the people that drop out of the labor force. We're creating 200,000 jobs a month, but a much higher percentage of those jobs are low wage and/or part time than in the past. I like the LFPR plus something that captures wages. I think the world will spin with a lower LFPR and lower wages.
So you're argument is that automation will push a very significant portion of the population out of work, but none of these people will end up unemployed so that the unemployment statistic will stay the same? The problem with LFPR is that it going down could be a very good thing. I'd hate to lose the bet because everyone in the country got so rich they chose not to work, which would be quite contrary to your view, but would win you the bet. I'd accept a variant of the bet in which we looked at real compensation.
I bet that during the period from 2020 to 2030 average real compensation will be greater than real compensation in the year 2015. I think that our bet should be some multiple of the percentage that we are off by. IE, if real compensation decreases by 50% I owe you 50x.
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Totally agree with Adam. I see standard of living doing nothing but going up as automation rises.
For everyone, including out of work former truck drivers.
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We have 15+ years of stagnant wages and a rapidly declining LFPR. Additionally, for the first time since they've been keeping track, wage growth has been decoupled from productivity gains. Workers are more productive because of the technology they use but they aren't getting wage increases because they don't own the technology - the productivity gains are going to capital and not labor.
Actually wages have only been stagnant if you don't include benefits. If you include benefits the decoupling goes away. The problem with excluding benefits but then using the CPI to adjust for inflation is that health costs have been a big driver of inflation but are not generally paid for with wage dollars.
This is the effect you are probably thinking of:
(https://upload.wikimedia.org/wikipedia/commons/thumb/7/73/US_productivity_and_real_wages.jpg/800px-US_productivity_and_real_wages.jpg)
Here is what is actually going on:
(http://americanactionforum.org/uploads/files/research/productivity_2.png)
Here's a good thought experiment. Would you rather live in the 1970's economy or the 2010's economy? If you pick 1970's you have to give up all the technology of the last 30 years. If the "real wage" statistics were accurate then it shouldn't make any difference. Obviously the standard of living for the average person is much, much better today. This is reflected by the fact that they can buy more, better, goods and services with their money than they used to be able to.
Unemployment is a bad statistic because it assumes jobs are fungible and it excludes the people that drop out of the labor force. We're creating 200,000 jobs a month, but a much higher percentage of those jobs are low wage and/or part time than in the past. I like the LFPR plus something that captures wages. I think the world will spin with a lower LFPR and lower wages.
So you're argument is that automation will push a very significant portion of the population out of work, but none of these people will end up unemployed so that the unemployment statistic will stay the same? The problem with LFPR is that it going down could be a very good thing. I'd hate to lose the bet because everyone in the country got so rich they chose not to work, which would be quite contrary to your view, but would win you the bet. I'd accept a variant of the bet in which we looked at real compensation.
I bet that during the period from 2020 to 2030 average real compensation will be greater than real compensation in the year 2015. I think that our bet should be some multiple of the percentage that we are off by. IE, if real compensation decreases by 50% I owe you 50x.
I remember when that second chart (Actual Growth in Labor Productivity and Compensation) came out and there was a spirited debate about it but I can't find the debate at the moment - I will keep looking. I do note that it comes from a conservative leaning group and it hasn't really been trafficked by anyone else.
I think the decline in the LFPR will be fine but I do think wages will be stagnant for a very long time.
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I personally think that inequality of wealth doesn't really matter, as long as the absolute standard of living keeps growing - this is Adam and Reb's point
However, you also have to account for personal biases and cognitive dissonance amongst the general populace. It's not really greed that runs the world, but envy. People are perfectly happy with 1970s technology as long as they perceive that they have MORE THAN THEIR NEIGHBORS. It's a ridiculous notion that the MMM community has really almost cured itself of, but we're a very small part of the general populace. You have to look at the world for how it is and not how it should be. It would take an extraordinary turn in psyche for people to accept minimum living as a good thing instead of comparing their lives to those they see on TV. It's sad but just the way it is
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I personally think that inequality of wealth doesn't really matter, as long as the absolute standard of living keeps growing - this is Adam and Reb's point
However, you also have to account for personal biases and cognitive dissonance amongst the general populace. It's not really greed that runs the world, but envy. People are perfectly happy with 1970s technology as long as they perceive that they have MORE THAN THEIR NEIGHBORS. It's a ridiculous notion that the MMM community has really almost cured itself of, but we're a very small part of the general populace. You have to look at the world for how it is and not how it should be. It would take an extraordinary turn in psyche for people to accept minimum living as a good thing instead of comparing their lives to those they see on TV. It's sad but just the way it is
People certainly behave this way, but when they're forced to actually sit and think about it, in general, they would rather just take the higher standard of living. It's a good thought experiment. Would you rather be a rich person in 1970, or a median income person today? How much richer do you have to be in 1970 to switch? That number is the best one I know of to measure actual change in real income. Since we're short on alternative universe transporters, the actual value is hard to measure, but it isn't a small number.
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I think the decline in the LFPR will be fine but I do think wages will be stagnant for a very long time.
Do you think that they (real wages, not real compensation) will just stay flat or drop significantly? If they just stay flat, what's to worry about? The rich get richer, but the poor don't get poorer, technology gets better, and the average person still enjoys a rising standard of living, but can only afford the same number of hamburgers. I don't see any pressing need for a basic income in this scenario. Status quo for median income families in the US is not bad. Status quo plus a steadily improving background of technology, sign me up! The thing I don't get is how we get from there to everyone living in a trailer eating lentils.
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I think the decline in the LFPR will be fine but I do think wages will be stagnant for a very long time.
Do you think that they (real wages, not real compensation) will just stay flat or drop significantly? If they just stay flat, what's to worry about? The rich get richer, but the poor don't get poorer, technology gets better, and the average person still enjoys a rising standard of living, but can only afford the same number of hamburgers. I don't see any pressing need for a basic income in this scenario. Status quo for median income families in the US is not bad. Status quo plus a steadily improving background of technology, sign me up! The thing I don't get is how we get from there to everyone living in a trailer eating lentils.
Lentils because wages stagnate or drop a meaningful amount while real estate continues to boom. Cowen bets wages fall for the majority. The rich push the poor out of the cities and into the suburbs and beyond.
Here is the infamous bean quote:
http://www.wsj.com/articles/SB10001424052702303342104579097482945031804
"To sum up, Mr. Cowen believes that America is dividing itself in two. At the top will be 10% to 15% of high achievers, the "Tiger Mother" kids if you like, whose self-motivation and mastery of technology will allow them to roar away into the future. Then there will be everyone else, slouching into an underfunded future of lower economic expectations, shantytowns and an endless diet of beans. I'm not kidding about the beans.
Poor Americans, writes Mr. Cowen, will have to "reshape their tastes" and live more like Mexicans. "Don't scoff at the beans," he says. "With an income above the national average, I receive more pleasure from the beans, which I cook with freshly ground cumin and rehydrated, pureed chilies. Good tacos and quesadillas and tamales are cheap too, and that is one reason why they are eaten so frequently in low-income countries.""
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Lentils because wages stagnate or drop a meaningful amount while real estate continues to boom. Cowen bets wages fall for the majority.
Do you think median wages will fall a meaningful (10%, 20%?) amount?
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I can see a 10% drop in median wages - a mixture of immigration, tech and globalization
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Lentils because wages stagnate or drop a meaningful amount while real estate continues to boom. Cowen bets wages fall for the majority.
Do you think median wages will fall a meaningful (10%, 20%?) amount?
Wages have been falling a meaningful amount over the last decade or so, once you adjust for inflation (actual inflation, not CPI).
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I can see a 10% drop in median wages - a mixture of immigration, tech and globalization
I admire the specificity of your prediction. I guess we'll see how it all turns out! =-D
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Lentils because wages stagnate or drop a meaningful amount while real estate continues to boom. Cowen bets wages fall for the majority.
Do you think median wages will fall a meaningful (10%, 20%?) amount?
Wages have been falling a meaningful amount over the last decade or so, once you adjust for inflation (actual inflation, not CPI).
Hmm...by my preferred measure of "actual" inflation they must have risen:
<snip> It's a good thought experiment. Would you rather be a rich person in 1970, or a median income person today? How much richer do you have to be in 1970 to switch? That number is the best one I know of to measure actual change in real income. Since we're short on alternative universe transporters, the actual value is hard to measure, but it isn't a small number.
How do you calculate your preferred measure of inflation? As a runner up I prefer the GDP deflator, though I could be talked into something else.
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I can see a 10% drop in median wages - a mixture of immigration, tech and globalization
I admire the specificity of your prediction. I guess we'll see how it all turns out! =-D
I didn't give you a time frame so once they drop 10% I win!
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I admire the specificity of your prediction. I guess we'll see how it all turns out! =-D
I didn't give you a time frame so once they drop 10% I win!
I guess I've got to hope for a very stable next hundred years. Fortunately, looking at the past hundred years...
Well...shit.
Now we know why I need to demand a 10 year average for bets.
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I don't think tech will eliminate all jobs or even most jobs. I think it will deskill jobs and drive wages down.
You have UPS drivers earning let's say $50K per year. When the trucks drive themselves, you will need someone to deliver the packages. You're not going to pay $15/hour for someone to take packages off of the truck - you're going to pay less because the skill required to move packages from the truck to the door is minimal. Long haul truckers spend most of their time on easy to navigate highways. The technology to replace them is already here - Scandinavia uses truck convoys - a human in the lead truck is followed by trucks that mimic the lead driver using software. Australia uses automated heavy machinery. Japan uses trains that drive themselves. How can you pay a trucker or train operator $50K when these technologies exist?
Automated navigation/driving works great on highways and trains on isolated tracks but I don't see it working in heavily populated areas such as New York City or Chicago anytime soon. And unless they equip the UPS trucks with auto-turrets, I see thieves having a field day with automated trucks.
Similarly, you're not going to pay anesthesiologists $400K if there is software that can do their jobs better/faster/safer - J&J is already using anesthesia robots - the robots are only going to get better. Maybe the AMA will put up roadblocks or require a nurse anesthesiologist on site but I would be concerned if I were in medical school:
https://www.washingtonpost.com/business/economy/new-machine-could-one-day-replace-anesthesiologists/2015/05/11/92e8a42c-f424-11e4-b2f3-af5479e6bbdd_story.html
Until we get true AI there is no way a robot can handle an unexpected event caused by anesthesia such as an allergic reaction or a tube getting dislodged - they will still need a human until "I-Robot" shows up. Perhaps not a 400k paid position but certainly better than minimum wage.
Adjuncts currently earn poverty wages - their salary ceilings are capped because of MOOCs. You're not going to pay an adjunct $10K to teach 30 students if you can utilize MOOCs for a fraction of the price.
True but someone still needs to design the course, manage the servers that hosts the content, and maintain the tech infrastructure.
The Baxter factory robot is $25K - you're only going to hire a human if it will cost you a fraction of the robot. Similarly, fast food workers' salaries are capped by the cost of touch screen kiosks and automated burger making machines.
http://www.businessinsider.com/momentum-machines-burger-robot-2014-8
Very true but someone still needs to service the kiosks that break down from normal wear and tear or vandalism.
Language translation - getting close to being perfect. Speech to text - getting close to perfect. People who do this kind of work are only going to survive if they can undercut the software/hardware on price.
I would disagree that it's close to being perfect. I'm bilingual and I laugh every time I see a e-translator trying to translate a sentence containing nuanced words that change with context. And as language evolves someone will have to program in those changes.
We have 15+ years of stagnant wages and a rapidly declining LFPR. Additionally, for the first time since they've been keeping track, wage growth has been decoupled from productivity gains. Workers are more productive because of the technology they use but they aren't getting wage increases because they don't own the technology - the productivity gains are going to capital and not labor.
As far as money, I think it's going to be national basic income plus whatever wages people can earn from the deskilled jobs.
Wages may be stagnating but I expect to see that boomerang back as people find ways to exploit the new technology. Life is only getting better but it sucks if you are one those guys working a job that is being phased out by tech and you didn't plan for it.
And one thing about "real" AI robots - what if they decide that work is boring and decide to outsource it back to humans? Wouldn't that be ironic? Or maybe one day we decide to put artificial limits on tech because we don't want to tech ourselves into extinction. The day they invent the virtual CEO/venture capitalist will most likely be the day that a big fat super pac/lobbyist pays some bureaucrat to vote in tech limits.
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From today's valuations? No, no chance.
In the far future I suppose it's possible that the index could rise 1000% in 18 months and then crash and take 30 years to reach those same valuations again, but that's a result of unnaturally high bubbles temporarily inflating the price, not long term negative growth. That's what happened in Japan.
On the other hand, in the very long term I think negative growth is guaranteed. Economies and nations will crumble. The sun will explode. Eventually the last sentient life form in the universe will die, and at that moment their portfolio will lose its last penny.
But in the meantime, on the scale of our little lives, I don't worry. A long as humanity continued to strive for something, investment economies will continue to grow despite the inevitable setbacks.
No way, man, I'm putting it all in an entropy index.
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From today's valuations? No, no chance.
In the far future I suppose it's possible that the index could rise 1000% in 18 months and then crash and take 30 years to reach those same valuations again, but that's a result of unnaturally high bubbles temporarily inflating the price, not long term negative growth. That's what happened in Japan.
On the other hand, in the very long term I think negative growth is guaranteed. Economies and nations will crumble. The sun will explode. Eventually the last sentient life form in the universe will die, and at that moment their portfolio will lose its last penny.
But in the meantime, on the scale of our little lives, I don't worry. A long as humanity continued to strive for something, investment economies will continue to grow despite the inevitable setbacks.
No way, man, I'm putting it all in an entropy index.
Betting on entropy and going really, really long?
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Betting on entropy and going really, really long?
It's the only guaranteed growth !