Author Topic: The Earnings Mirage  (Read 5658 times)

AdrianC

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The Earnings Mirage
« on: July 16, 2019, 06:04:09 AM »
There's a new Philosophical Economics piece out:

The Earnings Mirage: Why Corporate Profits are Overstated and What It Means for Investors
https://osam.com/Commentary/the-earnings-mirage

Under "Estimating Future 10-Year Returns":
With the S&P 500 at 2830, the metric is currently predicting a future 10-year nominal return of between 3% and 4% per year. The metric is therefore telling us what every other popular metric has been telling usóstocks are historically expensive, priced for low future returns.
Ö
The 3% to 4% estimate shown above should therefore be interpreted as a highly uncertain estimate. It could easily turn out to be wrongóand probably will turn out to be wrong. All that any valuation metric can deliver is a rough range of future return estimates. The estimated range in this case is: ďlower than normal.Ē

Under "Adjusting the P/IE Ratio for Earnings Overstatement":
Projecting out the correlation, we end up with at an estimated future 10-year nominal return of just under 6%

CorpRaider

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Re: The Earnings Mirage
« Reply #1 on: July 16, 2019, 06:21:13 AM »
Man, I don't know I was kind of "meh" about this one.  Maybe too much anticipation/build up by the shop. 

J Boogie

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Re: The Earnings Mirage
« Reply #2 on: July 16, 2019, 10:23:22 AM »
I feel like I'm missing something. Maybe someone can fill me in.

The two things pointed 2 in this thinkpiece seem to be:

1)Depreciation is not calculated accurately.

2)Expenses are being shoehorned into the depreciable capital investment category.

I fail to see how either of these could cause a sustained earnings mirage. Sure, these tactics could potentially buy a company a few quarters or maybe even a few years of earnings that look better than they should. If a company's invested capital should have been called an expense, then won't it simply fail to generate the future revenue needed to keep their earnings mirage alive for the next decade?

I mean, I don't doubt that companies do this - I just doubt that creative accounting can bail a company out year after year after year.


TheAnonOne

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Re: The Earnings Mirage
« Reply #3 on: July 18, 2019, 02:31:56 PM »
A decade full of years returning 20%(2017), 30%(2013), 20%(2018) and the like is a bit 'rich'? How did that happen ? :)

vand

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Re: The Earnings Mirage
« Reply #4 on: July 19, 2019, 07:11:35 AM »
You always get these variations to justify expensive prices towards the tail end of a major bull market. PE is just one measure on relative value.. looking at PB or price to sales will frighten the life out of you.

NorCal

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Re: The Earnings Mirage
« Reply #5 on: July 19, 2019, 10:17:18 AM »
While I agree with the conclusion (stocks are generally overvalued), I don't buy into the premise.

1. The idea that equity is not inflation adjusted is not entirely true.  While Additional Paid in Capital is not inflation adjusted, earnings are impacted by inflation over time.  With both revenue and expenses being impacted by inflation, this amount flows through Retained Earnings.  For big companies that are major parts of an index, Retained Earnings is a much bigger part of Equity than Paid In Capital.

2. I get that assets aren't adjusted for inflation.  But this would only be relevant to companies that are purchasing appreciating assets instead of depreciation assets.  While this certainly does happen, I'd be surprised if this was a material part of owned assets out there (excluding financial services, which has some nuance).

Trevor Reznik

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Re: The Earnings Mirage
« Reply #6 on: July 20, 2019, 04:23:12 PM »
Just because stocks are overvalued doesn't mean the bull market is over, stocks could become a whole lot more overvalued.

NorCal

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Re: The Earnings Mirage
« Reply #7 on: July 20, 2019, 05:10:21 PM »
Just because stocks are overvalued doesn't mean the bull market is over, stocks could become a whole lot more overvalued.

True.  But it is still reasonable to have some framework for estimating future returns.  If you believe that the long term average return from stocks will be ~7% (or thereabouts), mathematically, you should expect future returns from today to be lower than 7%.  No one knows what it will be, but I feel comfortable saying the market will return less than 7% annualized over the next decade.

I personally assume something in the 3-4% range, but I have zero confidence my estimate will be any more accurate than any of the other talking heads.

aceyou

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Re: The Earnings Mirage
« Reply #8 on: July 20, 2019, 08:05:47 PM »

If market goes down, the stocks I'm about to buy go on sale...I win.

If market goes up, the stocks I already own become worth more...I win.

And whether true or not, it just isn't actionable. 

Suppose you know with 100% certainty that it was going to yield 3-4%.  After you take into account dividends, that gets you to about 5-6%, how can you say with certainty what asset class will beat that anyway? 


PDXTabs

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Re: The Earnings Mirage
« Reply #9 on: July 20, 2019, 10:26:32 PM »
And whether true or not, it just isn't actionable. 

I disagree. Assuming that you knew that future returns would be lower than historical returns you could choose to work longer and save more.

vand

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Re: The Earnings Mirage
« Reply #10 on: July 22, 2019, 04:45:51 AM »
Just because stocks are overvalued doesn't mean the bull market is over, stocks could become a whole lot more overvalued.

This is true.

If you are buying because you think the expected future return justifies the risk of holding the investment then that is rational buying.

But if you are buying just because you think someone else will pay more then you are exercising the greater fool principle which typifies a developing bubble, and history shows that more people get hurt on the wrong of of the market when the bubbles bursts than manage to get out and make the bubble work for them.


NorCal

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Re: The Earnings Mirage
« Reply #11 on: July 22, 2019, 06:38:06 AM »
Just because stocks are overvalued doesn't mean the bull market is over, stocks could become a whole lot more overvalued.

This is true.

If you are buying because you think the expected future return justifies the risk of holding the investment then that is rational buying.

But if you are buying just because you think someone else will pay more then you are exercising the greater fool principle which typifies a developing bubble, and history shows that more people get hurt on the wrong of of the market when the bubbles bursts than manage to get out and make the bubble work for them.

Well said.  It's helpful to understand what an estimate of future returns will tell you and what it won't tell you.

An estimate of future returns won't tell you what the market is going to do this year or next year.  Not a single person in history has been able to reliably do this.

An estimate of future returns will give you a rough approximation of whether the market will return above or below average over the next decade. 

My personal FI goals included $X in savings and paying off the mortgage (and we don't need to turn this into another mortgage thread).  I chose to prioritize paying down the mortgage due to my view of future returns.  I would have had a different conclusion if valuations were near their 2010 levels. 

freedomfightergal

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Re: The Earnings Mirage
« Reply #12 on: July 26, 2019, 06:40:39 AM »
I'm wondering why I'm not seeing any discussion of the impact of the accelerating automation of jobs on industry and the subsequent impact of high unemployment.  In Andrew Yang's book, "The War on Normal People", he lays out a compelling picture of unemployment reaching up to 50%, without serious changes.  Initially companies would do well as they enjoy huge savings from automation eg 3.5 Million truck drivers will be out of work when the self driving trucks gets fully under way (already started), it will save the trucking industry Billions every year, but the knock on effects to the economy in the current setup I think are dire for all businesses as unemployed people won't have money to spend. Less money flowing will cause a Recession/Depression.  For that reason I'm reducing my equities exposure.

http://evonomics.com/what-will-happen-to-truck-drivers-ask-factory-workers-andrew-yang/

"Morgan Stanley estimated the savings of automated freight delivery to be a staggering $168 billion per year in saved fuel ($35 billion), reduced labor costs ($70 billion), fewer accidents ($36 billion) and increased productivity and equipment utilization ($27 billion). Thatís an enormously high incentive to show drivers to the door Ė it would actually be enough to pay the drivers their $40,000 a year salary to stay home and still save almost $100 billion per year."

MrDelane

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Re: The Earnings Mirage
« Reply #13 on: July 26, 2019, 07:16:32 AM »
...For that reason I'm reducing my equities exposure.

And increasing your exposure to what? I'm asking that sincerely... not trying to sound combative.  This is the part I always find tricky in these discussions, because our money has to go somewhere.

The risks of overvalued equities always reminds me a bit of the line about democracy usually attributed to Churchill ...

"Democracy is the worst form of government, except for all the others."


NorCal

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Re: The Earnings Mirage
« Reply #14 on: July 26, 2019, 09:23:24 AM »
...For that reason I'm reducing my equities exposure.

And increasing your exposure to what? I'm asking that sincerely... not trying to sound combative.  This is the part I always find tricky in these discussions, because our money has to go somewhere.

The risks of overvalued equities always reminds me a bit of the line about democracy usually attributed to Churchill ...

"Democracy is the worst form of government, except for all the others."

I can't speak for others, but my comfort level on asset allocation is much more conservative than most around here.

I keep 65% equities (2/3 US, 1/3 International), 25% Fixed Income (this includes some high yield and long-dated bonds), and 10% alternatives.

I'm also considering investing in real estate using much less leverage than is typical.

This is in no way a "right" answer, but it works for me.  I believe there are a lot of people in the FI community whose risk tolerance isn't as big as they think it is.  This is a group who will sell at the absolute worst time. 

No one thinks this applies to them until they get a brokerage statement showing how many tens or hundreds of thousands of dollar's they've lost.

Tyson

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Re: The Earnings Mirage
« Reply #15 on: July 26, 2019, 09:49:39 AM »
...For that reason I'm reducing my equities exposure.

And increasing your exposure to what? I'm asking that sincerely... not trying to sound combative.  This is the part I always find tricky in these discussions, because our money has to go somewhere.

The risks of overvalued equities always reminds me a bit of the line about democracy usually attributed to Churchill ...

"Democracy is the worst form of government, except for all the others."

I can't speak for others, but my comfort level on asset allocation is much more conservative than most around here.

I keep 65% equities (2/3 US, 1/3 International), 25% Fixed Income (this includes some high yield and long-dated bonds), and 10% alternatives.

I'm also considering investing in real estate using much less leverage than is typical.

This is in no way a "right" answer, but it works for me.  I believe there are a lot of people in the FI community whose risk tolerance isn't as big as they think it is.  This is a group who will sell at the absolute worst time. 

No one thinks this applies to them until they get a brokerage statement showing how many tens or hundreds of thousands of dollar's they've lost.

Well, hopefully being part of this forum is a type of inoculation against that particular disease.

Buffalo Chip

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Re: The Earnings Mirage
« Reply #16 on: July 26, 2019, 10:22:43 AM »

No one thinks this applies to them until they get a brokerage statement showing how many tens or hundreds of thousands of dollar's they've lost.

Ainít that the truth. When we have a crash, not ďifĒ, there will be a whole lot of puckering going on. And I suspect a lot less talk of FI/RE in general.

FWIW, your asset allocations are far less conservative than mine.

Buffalo Chip

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Re: The Earnings Mirage
« Reply #17 on: July 26, 2019, 10:46:57 AM »

ďNo one thinks this applies to them until they get a brokerage statement showing how many tens or hundreds of thousands of dollar's they've lost.Ē

Well, hopefully being part of this forum is a type of inoculation against that particular disease.

I guess the immunizations failed in my case. 🤭

Or maybe Iím just exceptionally thick and difficult? I read the stock series, I read the blogs, I look at the videos, I listen to the podcasts. And I still keep coming back to a simple proposition: stocks in the US are unusually expensive by historic standards. The CAPE for the S+P 500 is just shy of 31. None of us know when the next crash is coming, but we do have a pretty good idea that returns going forward are going to be rather poor.  So I should be willing to accept stock market volatility for crummy returns?  OK, maybe a bit, but I recall that old adage of not investing more than youíre  willing to lose. Seems pretty apt. 

And donít even get me started on bond yields.

NorCal

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Re: The Earnings Mirage
« Reply #18 on: July 26, 2019, 10:47:43 AM »

No one thinks this applies to them until they get a brokerage statement showing how many tens or hundreds of thousands of dollar's they've lost.

Ainít that the truth. When we have a crash, not ďifĒ, there will be a whole lot of puckering going on. And I suspect a lot less talk of FI/RE in general.

FWIW, your asset allocations are far less conservative than mine.

I freely admit that I parroted the line of "buy and hold" when I first started investing, and swore I would never sell.

I first got comfortable investing in 2007, and initially thought I was pretty good at it.

My faith didn't last through the downturn. 

Asset allocation in a personal thing, and I generally don't tell people what they should do.

My one piece of advice is to cut your equity allocation by 10-20 percentage points if you've never invested through a downturn.  You can add back to your equity allocation if you go through the crash without selling.

Buffalo Chip

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Re: The Earnings Mirage
« Reply #19 on: July 26, 2019, 11:15:46 AM »

No one thinks this applies to them until they get a brokerage statement showing how many tens or hundreds of thousands of dollar's they've lost.

Ainít that the truth. When we have a crash, not ďifĒ, there will be a whole lot of puckering going on. And I suspect a lot less talk of FI/RE in general.

FWIW, your asset allocations are far less conservative than mine.

I freely admit that I parroted the line of "buy and hold" when I first started investing, and swore I would never sell.

I first got comfortable investing in 2007, and initially thought I was pretty good at it.

My faith didn't last through the downturn. 

Asset allocation in a personal thing, and I generally don't tell people what they should do.

My one piece of advice is to cut your equity allocation by 10-20 percentage points if you've never invested through a downturn.  You can add back to your equity allocation if you go through the crash without selling.

Thatís good advice. People have a lot less risk tolerance than they think they do.

Tyson

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Re: The Earnings Mirage
« Reply #20 on: July 26, 2019, 12:35:20 PM »

ďNo one thinks this applies to them until they get a brokerage statement showing how many tens or hundreds of thousands of dollar's they've lost.Ē

Well, hopefully being part of this forum is a type of inoculation against that particular disease.

I guess the immunizations failed in my case. 🤭

Or maybe Iím just exceptionally thick and difficult? I read the stock series, I read the blogs, I look at the videos, I listen to the podcasts. And I still keep coming back to a simple proposition: stocks in the US are unusually expensive by historic standards. The CAPE for the S+P 500 is just shy of 31. None of us know when the next crash is coming, but we do have a pretty good idea that returns going forward are going to be rather poor.  So I should be willing to accept stock market volatility for crummy returns?  OK, maybe a bit, but I recall that old adage of not investing more than youíre  willing to lose. Seems pretty apt. 

And donít even get me started on bond yields.

Based on your post, you're into analyzing your investments to a fairly high degree.  I'd guess that sort of mentality and approach does make you more vulnerable to making poor decisions during a downturn, in the hopes that you can somehow optimize the outcome or mitigate the damage. 

For me, it's the opposite - I don't really look at any of it as 'real' until it's time to start drawing down.  I have a stable job and a good income, and I'm still in the accumulation phase.  So a downturn in the market would not have much emotional effect on me one way or the other.  If there's a long, drawn out downturn, the only real consequence I see would be that I'd have to work a bit longer before pulling the plug.

Buffalo Chip

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Re: The Earnings Mirage
« Reply #21 on: July 26, 2019, 03:23:10 PM »

ďNo one thinks this applies to them until they get a brokerage statement showing how many tens or hundreds of thousands of dollar's they've lost.Ē

Well, hopefully being part of this forum is a type of inoculation against that particular disease.

I guess the immunizations failed in my case. 🤭

Or maybe Iím just exceptionally thick and difficult? I read the stock series, I read the blogs, I look at the videos, I listen to the podcasts. And I still keep coming back to a simple proposition: stocks in the US are unusually expensive by historic standards. The CAPE for the S+P 500 is just shy of 31. None of us know when the next crash is coming, but we do have a pretty good idea that returns going forward are going to be rather poor.  So I should be willing to accept stock market volatility for crummy returns?  OK, maybe a bit, but I recall that old adage of not investing more than youíre  willing to lose. Seems pretty apt. 

And donít even get me started on bond yields.

Based on your post, you're into analyzing your investments to a fairly high degree.  I'd guess that sort of mentality and approach does make you more vulnerable to making poor decisions during a downturn, in the hopes that you can somehow optimize the outcome or mitigate the damage. 

For me, it's the opposite - I don't really look at any of it as 'real' until it's time to start drawing down.  I have a stable job and a good income, and I'm still in the accumulation phase.  So a downturn in the market would not have much emotional effect on me one way or the other.  If there's a long, drawn out downturn, the only real consequence I see would be that I'd have to work a bit longer before pulling the plug.

Iím contrarian by nature. Guess that explains why I find FI so appealing. I also find risk attractive. Hereís the thing: I expect to be compensated for risk and I just donít see that the US equity or bond markets are compensating well right now. Also, Iím close to pulling the plug on work so I would like to avoid as much of the really rotten Sequence of Return Risk as I can. Unfortunately thatís probably going to mean sitting (mostly) in cash for a spell.

NorCal

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Re: The Earnings Mirage
« Reply #22 on: July 26, 2019, 03:44:45 PM »


Iím contrarian by nature. Guess that explains why I find FI so appealing. I also find risk attractive. Hereís the thing: I expect to be compensated for risk and I just donít see that the US equity or bond markets are compensating well right now. Also, Iím close to pulling the plug on work so I would like to avoid as much of the really rotten Sequence of Return Risk as I can. Unfortunately thatís probably going to mean sitting (mostly) in cash for a spell.

We have a pretty similar outlook on these things, although I'm not willing to go to cash.  I've learned that my ability to project both the upticks and downticks is entirely meaningless.  Back when I was a more active investor, I even went to cash in 2012 thinking the market was out of control. 

Things I've done to mitigate my current exposure:
1. Keep a conservative portfolio that will still give me some compensation for risk, but won't totally blow up in a downturn.  Yes, it will still suffer losses, but nothing I'd consider disastrous.
2. Stay diversified.  While the Global Financial Crisis was truly global, the next recession will (likely) be much more localized.  I'm geographically diversified, as well as having some holdings in negative-correlated assets like long-term treasuries and a small amount of gold.
3. When the market hit an all time-high last month, I sold a chunk of investments and paid off my mortgage (but PLEASE don't turn this into a mortgage payoff discussion.  We have enough of those elsewhere on the forum).

Other things I'm considering:
1. Purchasing Real Estate with okayish cash-flow, with at least 50% down.  Sure, it still has risk of losing value.  But it would still be moving the ball forward on FI plans as long as it cash-flows.
2. Putting more solar panels on my home.  I need to get a quote, but I'd put some money into it as long as I can get 4%+ real (6%+ nominal) returns.
3. Other energy or water savings investments in my home (although these aren't huge dollar investments).

Any other thoughts on your end?

shinn497

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Re: The Earnings Mirage
« Reply #23 on: July 26, 2019, 04:03:54 PM »
Oh look. Top is in . Yet again

NorCal

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Re: The Earnings Mirage
« Reply #24 on: July 26, 2019, 04:36:15 PM »
Oh look. Top is in . Yet again

Oh look, we can simply project 8% returns into infinity with zero expectations of volatility and zero considerations of valuation.

Buffalo Chip

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Re: The Earnings Mirage
« Reply #25 on: July 26, 2019, 05:28:04 PM »


Iím contrarian by nature. Guess that explains why I find FI so appealing. I also find risk attractive. Hereís the thing: I expect to be compensated for risk and I just donít see that the US equity or bond markets are compensating well right now. Also, Iím close to pulling the plug on work so I would like to avoid as much of the really rotten Sequence of Return Risk as I can. Unfortunately thatís probably going to mean sitting (mostly) in cash for a spell.

We have a pretty similar outlook on these things, although I'm not willing to go to cash.  I've learned that my ability to project both the upticks and downticks is entirely meaningless.  Back when I was a more active investor, I even went to cash in 2012 thinking the market was out of control. 

Things I've done to mitigate my current exposure:
1. Keep a conservative portfolio that will still give me some compensation for risk, but won't totally blow up in a downturn.  Yes, it will still suffer losses, but nothing I'd consider disastrous.
2. Stay diversified.  While the Global Financial Crisis was truly global, the next recession will (likely) be much more localized.  I'm geographically diversified, as well as having some holdings in negative-correlated assets like long-term treasuries and a small amount of gold.
3. When the market hit an all time-high last month, I sold a chunk of investments and paid off my mortgage (but PLEASE don't turn this into a mortgage payoff discussion.  We have enough of those elsewhere on the forum).

Other things I'm considering:
1. Purchasing Real Estate with okayish cash-flow, with at least 50% down.  Sure, it still has risk of losing value.  But it would still be moving the ball forward on FI plans as long as it cash-flows.
2. Putting more solar panels on my home.  I need to get a quote, but I'd put some money into it as long as I can get 4%+ real (6%+ nominal) returns.
3. Other energy or water savings investments in my home (although these aren't huge dollar investments).

Any other thoughts on your end?

Dang. Were we separated at birth? Iím of mostly the same mind, and I also got to note in retrospect that the market can remain insane far longer than I can stay in my position. Right at about 2012 too.

Iím also of a similar mind in that there are two sides of the equation. If projected returns are looking really wretched, and for me they do at least in the US, then we can work the expense side of the equation. Solar? Sure. It has a pretty good payback. Iíve refrained from paying down the mortgage as I see a mortgage as a de facto shorting of bonds. And I hope to need that leverage! Soon!

Iím thinking Real Estate as well, but I gotta say this sure feels a lot like 2006. Your 50% strategy I think is relatively good, but good luck in finding much that meets the 1% rental rule. Also, hating evil and wicked landlords seems to be the rage in some places right now. So rent control might be rearing itís ugly head in some localities. I like real estate, but I think itís more on the long term list for me.

Sometimes the best strategy is the tax one. A 22% or 24% tax advantage for Federal and 5 or 10% for state looks mighty nice compared to what weíre seeing in the investment world. Might be time to get that lasik if you have a flexible spending account. Side gigs look pretty nice as well.

One last thought for now. CAPE ratios in other countries are not nearly so high.

Buffalo Chip

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Re: The Earnings Mirage
« Reply #26 on: July 26, 2019, 05:42:49 PM »
Oh look. Top is in . Yet again

Oh look, we can simply project 8% returns into infinity with zero expectations of volatility and zero considerations of valuation.

Just BTFD.

Tyson

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Re: The Earnings Mirage
« Reply #27 on: July 26, 2019, 06:32:57 PM »


Iím contrarian by nature. Guess that explains why I find FI so appealing. I also find risk attractive. Hereís the thing: I expect to be compensated for risk and I just donít see that the US equity or bond markets are compensating well right now. Also, Iím close to pulling the plug on work so I would like to avoid as much of the really rotten Sequence of Return Risk as I can. Unfortunately thatís probably going to mean sitting (mostly) in cash for a spell.

We have a pretty similar outlook on these things, although I'm not willing to go to cash.  I've learned that my ability to project both the upticks and downticks is entirely meaningless.  Back when I was a more active investor, I even went to cash in 2012 thinking the market was out of control. 

Things I've done to mitigate my current exposure:
1. Keep a conservative portfolio that will still give me some compensation for risk, but won't totally blow up in a downturn.  Yes, it will still suffer losses, but nothing I'd consider disastrous.
2. Stay diversified.  While the Global Financial Crisis was truly global, the next recession will (likely) be much more localized.  I'm geographically diversified, as well as having some holdings in negative-correlated assets like long-term treasuries and a small amount of gold.
3. When the market hit an all time-high last month, I sold a chunk of investments and paid off my mortgage (but PLEASE don't turn this into a mortgage payoff discussion.  We have enough of those elsewhere on the forum).

Other things I'm considering:
1. Purchasing Real Estate with okayish cash-flow, with at least 50% down.  Sure, it still has risk of losing value.  But it would still be moving the ball forward on FI plans as long as it cash-flows.
2. Putting more solar panels on my home.  I need to get a quote, but I'd put some money into it as long as I can get 4%+ real (6%+ nominal) returns.
3. Other energy or water savings investments in my home (although these aren't huge dollar investments).

Any other thoughts on your end?

Dang. Were we separated at birth? Iím of mostly the same mind, and I also got to note in retrospect that the market can remain insane far longer than I can stay in my position. Right at about 2012 too.

Iím also of a similar mind in that there are two sides of the equation. If projected returns are looking really wretched, and for me they do at least in the US, then we can work the expense side of the equation. Solar? Sure. It has a pretty good payback. Iíve refrained from paying down the mortgage as I see a mortgage as a de facto shorting of bonds. And I hope to need that leverage! Soon!

Iím thinking Real Estate as well, but I gotta say this sure feels a lot like 2006. Your 50% strategy I think is relatively good, but good luck in finding much that meets the 1% rental rule. Also, hating evil and wicked landlords seems to be the rage in some places right now. So rent control might be rearing itís ugly head in some localities. I like real estate, but I think itís more on the long term list for me.

Sometimes the best strategy is the tax one. A 22% or 24% tax advantage for Federal and 5 or 10% for state looks mighty nice compared to what weíre seeing in the investment world. Might be time to get that lasik if you have a flexible spending account. Side gigs look pretty nice as well.

One last thought for now. CAPE ratios in other countries are not nearly so high.

If you're near the drawdown phase and you're concerned about sequence of return risk, why not just keep 2 to 4 years of expenses in cash or cash equivalents, then you have enough $$ on hand to ride out whatever dip/recession occurs and you don't have to worry about all this other crap....

Buffalo Chip

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Re: The Earnings Mirage
« Reply #28 on: July 26, 2019, 08:46:01 PM »


Iím contrarian by nature. Guess that explains why I find FI so appealing. I also find risk attractive. Hereís the thing: I expect to be compensated for risk and I just donít see that the US equity or bond markets are compensating well right now. Also, Iím close to pulling the plug on work so I would like to avoid as much of the really rotten Sequence of Return Risk as I can. Unfortunately thatís probably going to mean sitting (mostly) in cash for a spell.

We have a pretty similar outlook on these things, although I'm not willing to go to cash.  I've learned that my ability to project both the upticks and downticks is entirely meaningless.  Back when I was a more active investor, I even went to cash in 2012 thinking the market was out of control. 

Things I've done to mitigate my current exposure:
1. Keep a conservative portfolio that will still give me some compensation for risk, but won't totally blow up in a downturn.  Yes, it will still suffer losses, but nothing I'd consider disastrous.
2. Stay diversified.  While the Global Financial Crisis was truly global, the next recession will (likely) be much more localized.  I'm geographically diversified, as well as having some holdings in negative-correlated assets like long-term treasuries and a small amount of gold.
3. When the market hit an all time-high last month, I sold a chunk of investments and paid off my mortgage (but PLEASE don't turn this into a mortgage payoff discussion.  We have enough of those elsewhere on the forum).

Other things I'm considering:
1. Purchasing Real Estate with okayish cash-flow, with at least 50% down.  Sure, it still has risk of losing value.  But it would still be moving the ball forward on FI plans as long as it cash-flows.
2. Putting more solar panels on my home.  I need to get a quote, but I'd put some money into it as long as I can get 4%+ real (6%+ nominal) returns.
3. Other energy or water savings investments in my home (although these aren't huge dollar investments).

Any other thoughts on your end?

Dang. Were we separated at birth? Iím of mostly the same mind, and I also got to note in retrospect that the market can remain insane far longer than I can stay in my position. Right at about 2012 too.

Iím also of a similar mind in that there are two sides of the equation. If projected returns are looking really wretched, and for me they do at least in the US, then we can work the expense side of the equation. Solar? Sure. It has a pretty good payback. Iíve refrained from paying down the mortgage as I see a mortgage as a de facto shorting of bonds. And I hope to need that leverage! Soon!

Iím thinking Real Estate as well, but I gotta say this sure feels a lot like 2006. Your 50% strategy I think is relatively good, but good luck in finding much that meets the 1% rental rule. Also, hating evil and wicked landlords seems to be the rage in some places right now. So rent control might be rearing itís ugly head in some localities. I like real estate, but I think itís more on the long term list for me.

Sometimes the best strategy is the tax one. A 22% or 24% tax advantage for Federal and 5 or 10% for state looks mighty nice compared to what weíre seeing in the investment world. Might be time to get that lasik if you have a flexible spending account. Side gigs look pretty nice as well.

One last thought for now. CAPE ratios in other countries are not nearly so high.

If you're near the drawdown phase and you're concerned about sequence of return risk, why not just keep 2 to 4 years of expenses in cash or cash equivalents, then you have enough $$ on hand to ride out whatever dip/recession occurs and you don't have to worry about all this other crap....

Thatís a very good question, and my personal plan given that the market continues to move sideways for a couple more years is to be heavy cash and execute an equity glide path over time with a real estate component when the prices look more attractive.

As to why worry about it, Iím keen on the idea of being financially flexible in retirement by overshooting financial targets. That sort of flexibility seems much more fun to me than trying to decide whether to return to work or eat beans and rice. And Iím finding I enjoy this stuff so itíll be a fun hobby.

DavidAnnArbor

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Re: The Earnings Mirage
« Reply #29 on: July 26, 2019, 09:00:53 PM »
Get psychologically ready for the next downturn and understand the strategy and the implications.

When 2008 and 2009 rolled around, my asset strategy required me to unemotionally sell bonds and buy equities.

MMM has a few blog posts about this so reread them.

NorCal

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Re: The Earnings Mirage
« Reply #30 on: July 27, 2019, 07:25:05 AM »
Thatís a very good question, and my personal plan given that the market continues to move sideways for a couple more years is to be heavy cash and execute an equity glide path over time with a real estate component when the prices look more attractive.

As to why worry about it, Iím keen on the idea of being financially flexible in retirement by overshooting financial targets. That sort of flexibility seems much more fun to me than trying to decide whether to return to work or eat beans and rice. And Iím finding I enjoy this stuff so itíll be a fun hobby.

I recommend reading the book "Asset Dedication".  It was written by one of my MBA professors that I respect, and has a  thoughtful approach to reducing sequence of return risk.  It's a simple strategy similar to a bond ladder, just using it a a withdrawal strategy instead of a growth strategy.

vand

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Re: The Earnings Mirage
« Reply #31 on: July 28, 2019, 12:15:33 PM »
I'm wondering why I'm not seeing any discussion of the impact of the accelerating automation of jobs on industry and the subsequent impact of high unemployment.  In Andrew Yang's book, "The War on Normal People", he lays out a compelling picture of unemployment reaching up to 50%, without serious changes.  Initially companies would do well as they enjoy huge savings from automation eg 3.5 Million truck drivers will be out of work when the self driving trucks gets fully under way (already started), it will save the trucking industry Billions every year, but the knock on effects to the economy in the current setup I think are dire for all businesses as unemployed people won't have money to spend. Less money flowing will cause a Recession/Depression.  For that reason I'm reducing my equities exposure.

http://evonomics.com/what-will-happen-to-truck-drivers-ask-factory-workers-andrew-yang/

"Morgan Stanley estimated the savings of automated freight delivery to be a staggering $168 billion per year in saved fuel ($35 billion), reduced labor costs ($70 billion), fewer accidents ($36 billion) and increased productivity and equipment utilization ($27 billion). Thatís an enormously high incentive to show drivers to the door Ė it would actually be enough to pay the drivers their $40,000 a year salary to stay home and still save almost $100 billion per year."

this is just nonsense. Fear of job losses through technological advance is nothing new - it has been around forever, but the world just doesn't work that way. Technological advance creates new markets and the jobs to go with it. There is no conspiracy against normal working people.

Suggest as an antidote to the sort of Andrew Yang brainwashing you read "Economics In One Lesson" by Henry Hazlitt.

Indexer

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Re: The Earnings Mirage
« Reply #32 on: July 28, 2019, 05:23:35 PM »
Thanks for posting this!

It's been so long since Philosophical Economist posted any new material I stopped checking.

Some of their work is really amazing and gives way of looking at how markets work. This article however, is way too long just to come to a not so surprising conclusion.

freedomfightergal

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Re: The Earnings Mirage
« Reply #33 on: July 29, 2019, 08:59:35 AM »
...For that reason I'm reducing my equities exposure.

And increasing your exposure to what? I'm asking that sincerely... not trying to sound combative.  This is the part I always find tricky in these discussions, because our money has to go somewhere.

The risks of overvalued equities always reminds me a bit of the line about democracy usually attributed to Churchill ...

"Democracy is the worst form of government, except for all the others."

Buying more Vanguard Bond index and putting cash into high interest accounts eg 3%.  Reduced Equities from 80% to 60%.   I may be wrong of course, I understand that.  I realize my risk tolerance not as good as I thought so lowered my allocation.  I'm amazed the S&P500 still going up and up!  Top still not in!

freedomfightergal

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Re: The Earnings Mirage
« Reply #34 on: July 29, 2019, 09:22:59 AM »
I'm wondering why I'm not seeing any discussion of the impact of the accelerating automation of jobs on industry and the subsequent impact of high unemployment.  In Andrew Yang's book, "The War on Normal People", he lays out a compelling picture of unemployment reaching up to 50%, without serious changes.  Initially companies would do well as they enjoy huge savings from automation eg 3.5 Million truck drivers will be out of work when the self driving trucks gets fully under way (already started), it will save the trucking industry Billions every year, but the knock on effects to the economy in the current setup I think are dire for all businesses as unemployed people won't have money to spend. Less money flowing will cause a Recession/Depression.  For that reason I'm reducing my equities exposure.

http://evonomics.com/what-will-happen-to-truck-drivers-ask-factory-workers-andrew-yang/

"Morgan Stanley estimated the savings of automated freight delivery to be a staggering $168 billion per year in saved fuel ($35 billion), reduced labor costs ($70 billion), fewer accidents ($36 billion) and increased productivity and equipment utilization ($27 billion). Thatís an enormously high incentive to show drivers to the door Ė it would actually be enough to pay the drivers their $40,000 a year salary to stay home and still save almost $100 billion per year."

this is just nonsense. Fear of job losses through technological advance is nothing new - it has been around forever, but the world just doesn't work that way. Technological advance creates new markets and the jobs to go with it. There is no conspiracy against normal working people.

Suggest as an antidote to the sort of Andrew Yang brainwashing you read "Economics In One Lesson" by Henry Hazlitt.

I don't think it's fair to call it nonsense.  The automation of millions of jobs is real. The results of that are debatable.  Just saying it will sort itself out is kind of nonsense, it didn't work out for the Horses, when cars were invented.  The Great Depression was real, no reason it can't happen again.  I will check out the book you mention, but I think it's worth giving Andrew Yang a fair listen and not blindly call him a brainwasher or a conspiracist.

MustacheAndaHalf

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Re: The Earnings Mirage
« Reply #35 on: July 29, 2019, 10:39:03 AM »
I actually found the years before the dot-com bust much harder than the bust itself or even the 2008 financial crisis.  Friends formed investment clubs, and wanted to pick stocks.  It was very tough just holding a passive index fund, rather than stock picking .com stocks.  The difficulty lay in having everyone join a mania.  For me, I suppose reading "A Random Walk Down Wall Street" helped me through it.

If everyone is worried about a recession, can we really have one?  A market crash is a surprise, but this recession is something most of the news media expect.  I don't see the surprise.  In the 2008 crisis, nobody realized the insane levels of leverage in credit default swaps or synthetic derivatives.  In the dot-com bust, measuring "eyeballs" didn't correspond to profits, and it collapsed.  But right now, the financials are decent and everyone is worried about a recession.  Doesn't seem like the right ingredients for one...  not that I can predict them.

NorCal

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Re: The Earnings Mirage
« Reply #36 on: July 29, 2019, 10:55:44 AM »
I actually found the years before the dot-com bust much harder than the bust itself or even the 2008 financial crisis.  Friends formed investment clubs, and wanted to pick stocks.  It was very tough just holding a passive index fund, rather than stock picking .com stocks.  The difficulty lay in having everyone join a mania.  For me, I suppose reading "A Random Walk Down Wall Street" helped me through it.

If everyone is worried about a recession, can we really have one?  A market crash is a surprise, but this recession is something most of the news media expect.  I don't see the surprise.  In the 2008 crisis, nobody realized the insane levels of leverage in credit default swaps or synthetic derivatives.  In the dot-com bust, measuring "eyeballs" didn't correspond to profits, and it collapsed.  But right now, the financials are decent and everyone is worried about a recession.  Doesn't seem like the right ingredients for one...  not that I can predict them.

It's easy to forget that every recession is different.  The next one will likely look very different than the last one.

Remember that the Great Financial Crisis was the largest recession since the great depression, and it was focused on housing.  Not every recession involves the stock market losing ~50% of value, and housing losing ~50% of its value (in places). 

Many recessions or crisis (like the dot-com bust or savings & loan crisis) can be focused on a limited industry or a limited geography.  Maybe next time the recession will be focused on tech stocks, big exporters, or farming.

Heck, given the concentration of tech in the major indices, I could even see the possibility of a manufacturing centered recession with minimal impact to the equity markets.  I don't think it's likely, but it is possible.

While I'm not foolish enough to think I can accurately predict such things, I think there's a moderate chance of a recession (40-60% chance) within the next few years, but I also think it will be minor compared to the GFC.  I don't think the risk is worth going to cash over (because these things are impossible to predict), but I do think now is a good time to pay down debt and to keep a conservative asset allocation.

Tyson

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Re: The Earnings Mirage
« Reply #37 on: July 29, 2019, 11:01:42 AM »
I'm wondering why I'm not seeing any discussion of the impact of the accelerating automation of jobs on industry and the subsequent impact of high unemployment.  In Andrew Yang's book, "The War on Normal People", he lays out a compelling picture of unemployment reaching up to 50%, without serious changes.  Initially companies would do well as they enjoy huge savings from automation eg 3.5 Million truck drivers will be out of work when the self driving trucks gets fully under way (already started), it will save the trucking industry Billions every year, but the knock on effects to the economy in the current setup I think are dire for all businesses as unemployed people won't have money to spend. Less money flowing will cause a Recession/Depression.  For that reason I'm reducing my equities exposure.

http://evonomics.com/what-will-happen-to-truck-drivers-ask-factory-workers-andrew-yang/

"Morgan Stanley estimated the savings of automated freight delivery to be a staggering $168 billion per year in saved fuel ($35 billion), reduced labor costs ($70 billion), fewer accidents ($36 billion) and increased productivity and equipment utilization ($27 billion). Thatís an enormously high incentive to show drivers to the door Ė it would actually be enough to pay the drivers their $40,000 a year salary to stay home and still save almost $100 billion per year."

this is just nonsense. Fear of job losses through technological advance is nothing new - it has been around forever, but the world just doesn't work that way. Technological advance creates new markets and the jobs to go with it. There is no conspiracy against normal working people.

Suggest as an antidote to the sort of Andrew Yang brainwashing you read "Economics In One Lesson" by Henry Hazlitt.

I don't think it's fair to call it nonsense.  The automation of millions of jobs is real. The results of that are debatable.  Just saying it will sort itself out is kind of nonsense, it didn't work out for the Horses, when cars were invented.  The Great Depression was real, no reason it can't happen again.  I will check out the book you mention, but I think it's worth giving Andrew Yang a fair listen and not blindly call him a brainwasher or a conspiracist.

Due to the more global nature and reach of the US stock market, I think that it's possible that we end up with a situation where jobs are cut (hurting Main Street), but stocks do just fine, maybe even better (thus benefiting Wall Street).  The people that are invested in stocks will do fine (ie, the large majority of people on this forum), but other people that are not saving large percentages of their income and don't have a stash already built up could be hurt by these job shifts. 

PDXTabs

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Re: The Earnings Mirage
« Reply #38 on: July 29, 2019, 11:35:50 AM »
Due to the more global nature and reach of the US stock market, I think that it's possible that we end up with a situation where jobs are cut (hurting Main Street), but stocks do just fine, maybe even better (thus benefiting Wall Street).  The people that are invested in stocks will do fine (ie, the large majority of people on this forum), but other people that are not saving large percentages of their income and don't have a stash already built up could be hurt by these job shifts.

I agree with you up to a point. How many owner operated semi truck drivers are going to be put out of a job? Of those how many would be willing to park their trucks across an interstate in protest when they lose their jobs to self driving trucks? How many of those are combat veterans willing to show up with their rifle?

There is some limit where a disenchanted working class will take down a real amount of profit from wall street. Not because we won't eventually clean up all the trucks left in protest on the interstate, but because it could take a lot of time and energy ($$$) and bring commerce to a near standstill.
« Last Edit: July 29, 2019, 11:41:01 AM by PDXTabs »

Tyson

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Re: The Earnings Mirage
« Reply #39 on: July 29, 2019, 12:08:13 PM »
Due to the more global nature and reach of the US stock market, I think that it's possible that we end up with a situation where jobs are cut (hurting Main Street), but stocks do just fine, maybe even better (thus benefiting Wall Street).  The people that are invested in stocks will do fine (ie, the large majority of people on this forum), but other people that are not saving large percentages of their income and don't have a stash already built up could be hurt by these job shifts.

I agree with you up to a point. How many owner operated semi truck drivers are going to be put out of a job? Of those how many would be willing to park their trucks across an interstate in protest when they lose their jobs to self driving trucks? How many of those are combat veterans willing to show up with their rifle?

There is some limit where a disenchanted working class will take down a real amount of profit from wall street. Not because we won't eventually clean up all the trucks left in protest on the interstate, but because it could take a lot of time and energy ($$$) and bring commerce to a near standstill.

Well, they might have formed a union or engages in trade protection but the irony is that they are almost all conservative republicans, which don't believe in those "damn liberal" institutions of unions or government protections.  So freaking ironic.  I mean I think it would have happened anyway, regardless, but some protections and stronger unions would have delayed it a while.

ecchastang

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Re: The Earnings Mirage
« Reply #40 on: July 29, 2019, 04:54:25 PM »
Due to the more global nature and reach of the US stock market, I think that it's possible that we end up with a situation where jobs are cut (hurting Main Street), but stocks do just fine, maybe even better (thus benefiting Wall Street).  The people that are invested in stocks will do fine (ie, the large majority of people on this forum), but other people that are not saving large percentages of their income and don't have a stash already built up could be hurt by these job shifts.

I agree with you up to a point. How many owner operated semi truck drivers are going to be put out of a job? Of those how many would be willing to park their trucks across an interstate in protest when they lose their jobs to self driving trucks? How many of those are combat veterans willing to show up with their rifle?

There is some limit where a disenchanted working class will take down a real amount of profit from wall street. Not because we won't eventually clean up all the trucks left in protest on the interstate, but because it could take a lot of time and energy ($$$) and bring commerce to a near standstill.

Right now the trucking industry has a severe shortage of drivers.  And with older drivers retiring at a much faster rate than they are being replaced, self driving semis will be a good thing for the industry in general. 

PDXTabs

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Re: The Earnings Mirage
« Reply #41 on: July 29, 2019, 05:25:11 PM »
Well, they might have formed a union or engages in trade protection but the irony is that they are almost all conservative republicans, which don't believe in those "damn liberal" institutions of unions or government protections.  So freaking ironic.  I mean I think it would have happened anyway, regardless, but some protections and stronger unions would have delayed it a while.

There has been a lot of union busting and pushing drivers to become owner/operators over the last 70 years.

Right now the trucking industry has a severe shortage of drivers.  And with older drivers retiring at a much faster rate than they are being replaced, self driving semis will be a good thing for the industry in general.

And yet there are over 3 million people that will lose their good middle income jobs if they are all automated. But you are right about one thing: young people know it and very few want to jump in at this point.

vand

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Re: The Earnings Mirage
« Reply #42 on: July 30, 2019, 12:46:59 AM »
You are putting the cart before the horse. People don't want jobs per se. They want the purchasing power to buy goods and services that comes from getting paid for their time and labour. If technology and automation double real productivity then you should be able to maintain the same standard of living while cutting your hours by half and giving you more time doing whatever you do outside of work. That should be seen as a good thing.

Frederic Bastiat wrote that the bad economist only considers what is seen, while the good economist considers both what is seen and what unseen...

It's easy to observe job losses in car production and conclude that automation causes unemployment. It is less easy to observe that over time that frees resources in the wider economy to allow line-workers to become programmers and graphic artists to go work in Silicon Valley. I'm not saying that every production line worker can become a programmer or graphic artist overnight, but market forces are constantly at work to move resources to where they are most productive and therefore the economy as a whole will keep moving forward.
« Last Edit: July 30, 2019, 12:50:20 AM by vand »

ecchastang

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Re: The Earnings Mirage
« Reply #43 on: July 30, 2019, 07:33:01 AM »
Well, they might have formed a union or engages in trade protection but the irony is that they are almost all conservative republicans, which don't believe in those "damn liberal" institutions of unions or government protections.  So freaking ironic.  I mean I think it would have happened anyway, regardless, but some protections and stronger unions would have delayed it a while.

There has been a lot of union busting and pushing drivers to become owner/operators over the last 70 years.

Right now the trucking industry has a severe shortage of drivers.  And with older drivers retiring at a much faster rate than they are being replaced, self driving semis will be a good thing for the industry in general.

And yet there are over 3 million people that will lose their good middle income jobs if they are all automated. But you are right about one thing: young people know it and very few want to jump in at this point.

The manufacturing of automated trucks to supplant 3 million jobs will in itself create jobs. 

sherr

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Re: The Earnings Mirage
« Reply #44 on: July 30, 2019, 08:22:41 AM »
And yet there are over 3 million people that will lose their good middle income jobs if they are all automated. But you are right about one thing: young people know it and very few want to jump in at this point.

The manufacturing of automated trucks to supplant 3 million jobs will in itself create jobs.

Right, but not 3 million of them.

DadJokes

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Re: The Earnings Mirage
« Reply #45 on: July 30, 2019, 08:37:41 AM »
And yet there are over 3 million people that will lose their good middle income jobs if they are all automated. But you are right about one thing: young people know it and very few want to jump in at this point.

The manufacturing of automated trucks to supplant 3 million jobs will in itself create jobs.

Right, but not 3 million of them.

3 million jobs aren't just going to disappear overnight. It'll be a gradual process, as the upfront cost of implementing the technology will be very expensive.

Also, jobs have faded away and been replaced by new jobs throughout history. Automation of a job previously performed by people is nothing new. It didn't cause societal collapse in the past, and it won't now.

Telecaster

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Re: The Earnings Mirage
« Reply #46 on: July 30, 2019, 10:21:27 AM »
Also, jobs have faded away and been replaced by new jobs throughout history. Automation of a job previously performed by people is nothing new. It didn't cause societal collapse in the past, and it won't now.

It didn't cause societal collapse, but not far from it.  Let's look at the last big disruption caused by technology:  The Industrial Revolution.    The result was full-on riots across this country.  Which in some cases left dozens of people dead on both sides.  And this went on for decades.   In other countries, it was much more intense.  The Russian revolution for example, which was started off as a spontaneous worker's strike and ended up in a bloody civil war that lasted for years.   The reverberations of that are still felt today.

In this country, we had a major re-thinking of what labor is, and worker's rights are.  This lead to things like the guaranteed right to organize and collective bargaining, prevailing wage laws, minimum wage, unemployment insurance, worker protection laws, and Social Security.   

Yes, things worked out in the past.  But the manner in which they were worked out is exactly what we want to avoid going forward.  My crystal ball doesn't tell me how things will shape up in the future.   But if the past is any indicator, some of the scenarios involve blood in the streets.   Let's not do that this time. 

Tyson

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Re: The Earnings Mirage
« Reply #47 on: July 30, 2019, 10:58:41 AM »
You are putting the cart before the horse. People don't want jobs per se. They want the purchasing power to buy goods and services that comes from getting paid for their time and labour. If technology and automation double real productivity then you should be able to maintain the same standard of living while cutting your hours by half and giving you more time doing whatever you do outside of work. That should be seen as a good thing.

Frederic Bastiat wrote that the bad economist only considers what is seen, while the good economist considers both what is seen and what unseen...

It's easy to observe job losses in car production and conclude that automation causes unemployment. It is less easy to observe that over time that frees resources in the wider economy to allow line-workers to become programmers and graphic artists to go work in Silicon Valley. I'm not saying that every production line worker can become a programmer or graphic artist overnight, but market forces are constantly at work to move resources to where they are most productive and therefore the economy as a whole will keep moving forward.

This is why I'm not too worried about improvements to productivity through automation - as we've seen, people don't say "well I have everything I need for cheap, I'll just stop buying stuff".  No, what happens is that as the basic needs are met, then people almost immediately start to spend more and more money on nicer stuff, including luxuries.  And as we've seen from the super rich, there's almost no upper limit to what level can escalate their spending to. 

So I think as the basics are more and more automated and cheaper and cheaper, it'll just result in whole scale lifestyle escalation.  And that shift will dictate where the new jobs are. 

vand

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Re: The Earnings Mirage
« Reply #48 on: July 30, 2019, 11:38:30 AM »
You are putting the cart before the horse. People don't want jobs per se. They want the purchasing power to buy goods and services that comes from getting paid for their time and labour. If technology and automation double real productivity then you should be able to maintain the same standard of living while cutting your hours by half and giving you more time doing whatever you do outside of work. That should be seen as a good thing.

Frederic Bastiat wrote that the bad economist only considers what is seen, while the good economist considers both what is seen and what unseen...

It's easy to observe job losses in car production and conclude that automation causes unemployment. It is less easy to observe that over time that frees resources in the wider economy to allow line-workers to become programmers and graphic artists to go work in Silicon Valley. I'm not saying that every production line worker can become a programmer or graphic artist overnight, but market forces are constantly at work to move resources to where they are most productive and therefore the economy as a whole will keep moving forward.

This is why I'm not too worried about improvements to productivity through automation - as we've seen, people don't say "well I have everything I need for cheap, I'll just stop buying stuff".  No, what happens is that as the basic needs are met, then people almost immediately start to spend more and more money on nicer stuff, including luxuries.  And as we've seen from the super rich, there's almost no upper limit to what level can escalate their spending to. 

So I think as the basics are more and more automated and cheaper and cheaper, it'll just result in whole scale lifestyle escalation.  And that shift will dictate where the new jobs are.

Yeah, exactly. At its core, economics is about trying to satisfy infinite wants in a world of finite resources, and the big debates are about the system that gets the closest to meeting that impossibility.  The economy of tomorrow will have fewer people working in manufacturing, trucking, shipping & retail, and more working in technology, VR, biotech, space etc, and society will have a much higher standard of living as a result. The only limits are our imaginations. The world is always changing.. Remember that the Dow30 doesn't have a single survivor from its original members.. so if you want your VTSAX to double, triple, quintuple you should openly welcome these changes..

nice sort-of-related article: https://www.adamsmith.org/blog/game-changers
« Last Edit: July 30, 2019, 11:43:08 AM by vand »

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Re: The Earnings Mirage
« Reply #49 on: July 30, 2019, 01:50:12 PM »
This is why I'm not too worried about improvements to productivity through automation - as we've seen, people don't say "well I have everything I need for cheap, I'll just stop buying stuff".  No, what happens is that as the basic needs are met, then people almost immediately start to spend more and more money on nicer stuff, including luxuries.  And as we've seen from the super rich, there's almost no upper limit to what level can escalate their spending to. 

So I think as the basics are more and more automated and cheaper and cheaper, it'll just result in whole scale lifestyle escalation.  And that shift will dictate where the new jobs are.

Assuming, of course, that wages keep up.   We're all familiar with the Luddites, the English textile workers who attacked machines in a failed attempted to save their jobs.  The take home message is usually that instead of the job pie being finite, the lesson here is that by becoming more efficient the job pie actually expands.  Which is objectively true.
 And "Luddite" is usually a pejorative term today.   But the Luddites weren't entirely wrong.  While the job pie expanded, the wage pie didn't.  While GDP in England increased, wages for those displaced workers didn't recover for something like sixty years.   That's a long time to wait for lifestyle escalation.   It is not a smooth linear transition.   And as I mentioned above, a fair amount of violence was involved as well. 

Someone on this board (I forget who, sorry) pointed out that back in the day, when 90% of the population was doing manual labor, the Bill Gates, Albert Einsteins, and Pablo Picassos of the day were hoeing beets instead of creating great things.   As technology has freed people up from manual, repatitive tasks, that has allowed the Bill Gates, Albert Einsteins, and Pablo Picassos of our day to pursue their great endeavors.   That's surely a good thing. 

But we're also to a point where not everyone has the skill, talent, knowledge, and potential to pursue great endeavors.   If you are a truck driver today, you likely don't have many better job prospects.  You aren't going to get a second career as a programmer or graphic artist.   Maybe an Uber driver, or working for Rover.com, at a fraction of your former wage.