The current state of affairs in 2016

It’s been another year since my last round of economic predictions. I’ll comment on the status of various economic topics and give my thoughts on how I think they’ll end up. If any ideas seem incongruous you may have to read the previous year’s article to get the context.

Brexit: The fact that so few people even knew it was happening until it happened is likely what lead to much of the panic and exaggeration surrounding this still mostly unknown event. The people of the United Kingdom have voted that they feel their country will be better off not being under the thumb of the European Union. Except for those who voted for leaving in Britain, it seems the whole world assumes that this event will be terrible for everyone and lead to catastrophic events in the future. What I found comical in the aftermath of the event, was that every major stock market exchange fell much further than Britain’s! Maybe the Brits are on to something… Somehow Britain leaving the EU is more devastating to the United States and Japanese economies than it is to Britain’s, at least according to the recent movement of stock prices. Something seems fishy to me. These last few days have all the hallmarks of an irrational market full of irrational actors and I’m willing to bet that this event will have close to zero of an overall long-term economic effect on the world. Maybe it will spark some political and cultural changes, maybe the EU will be dissolved, maybe the Euro currency will be abandoned, maybe many more effects, but still: how will this stop the fact that every day the world needs more energy, more goods, more services, and that everyday Brits, and all other industrious peoples wake up and do what it takes to lead a happy life for them and their families?

China: Here is a good place to talk about the largest global macroeconomic shift I see taking place, which is the increase in manufacturing productivity versus demand.  Just like the shift 100 years ago from an agricultural society to a manufacturing one, we are in the midst of a shift from a manufacturing economic system to a servicing one. What this means is that just as was the case with food 100 years ago, it takes fewer and fewer workers every year to satisfy the global demand for goods. Over the course of this century, the amount of people employed in manufacturing jobs will continuously decrease even as the demand for the quantity and quality of goods will continuously increase. Robots, AI, and other innovations continue to make human employment obsolete in this area. The world can then be split into two types of economies, manufacturing-centric, and servicing-centric. With a few exceptions, the servicing-centric economies are starting to pull ahead of their counterparts. The U.S. dominates the world in the service sector and is hence leading the major economies in growth, despite it already being the largest economy in the world. Japan, China, and other manufacturing-heavy economies are struggling to keep pace and despite the writing on the wall, are struggling culturally come to terms with impeding changes, as evidenced by reluctant policy shifts. China remains in the news with various economic struggles as was discussed in the previous post, but this underlying issue seems to me to be what is truly at heart beneath all the layers of politics and controls.

A side-effect of this huge shift will be that capital owners (investors, capitalists, business owners, etc) will continue to capture an increasing portion of the overall economic wealth of the nation versus capital operators (workers, especially low-value added employees). At some point the government will be forced to step in to…”redistribute” the wealth, either in the form of Universal Basic Income, a huge Earned Income Tax Credit, or some other mechanism to artificially place wealth in the hands of non-value adding citizens. At some point in this century, there simply won’t be the need for that many workers: the basic needs of every citizen will be able to be provided by a relatively small portion of the labor force. The rest of the population simply won’t have any job opportunities. And yet the overall wealth of the nation won’t decrease, it will just simply be concentrated among a small subset of the population, that is, before the government forcibly redistributes it. If my tone doesn’t convey it, let me be clear: this is a highly desirable outcome to the average person. What I’m telling you is that by the end of this century or the next, you’re basic needs will be easily met by the state simply by right of birth, and you’re whole life will be about deciding what to do with all your free time.

Oil/Energy: World appetite for energy continues to increase, and oil as a source continues to dominate. Despite the slowdown in demand-growth for oil from China and the decreasing demand from Europe, overall world oil demand continues to grow at a decent clip. In the meantime the collapse of oil prices have caused a massive decrease in Capital Expenditure spending by oil companies. At least 50% of the total CapEx budget for oil exploration and development has been cut. Currently oil demand and supply are in near equilibrium, with the world producing just under one million barrels of excess oil per day, a fairly small excess by historical standards. However with such a dramatic decrease in projected oil production, the coming decade could be very volatile for oil, with the possibility of significant production shortages.

At the same time, renewable energy continues its meteoric growth, making up a now significant portion of new energy production capacity. Some countries, like Norway, are in the process of passing law to outlaw fossil fuel vehicles over the coming decade. The decrease in demand for fossil fuels for vehicles from switching to electric could offset the upcoming decrease in oil production. Or not at all. It’s impossible to guess. The only thing I’d be willing to say for certain is that the world will need more and more energy every day. How the energy is sourced will be a big jockeying between cultural, political, and economic forces. My guess is that fossil fuels will remain the most significant source for the next few decades and then begin to taper off and mostly disappear by the end of the century.

Bitcoins/cryptocurrencies: Since last year the price of a coin to USD has increased to ~$650 per coin from $250 (all-time high of ~$1,000). However my negative feelings on the cryptocurrency have increased greatly. The utility of the system as discussed in previous posts is still there, and more and more companies continue to adopt them as a potential form of payment, but the worthlessness of the coin is ever more apparent to me. It remains to be only as useful as a means of exchange, and an extremely dangerous one at that. Criminals are finding the anonymity and convenience of the coin increasingly more powerful as a weapon, as demonstrated in the recent massive Ransom-ware attacks plaguing the world right now. I still have yet to see a valid economic argument why the coin should hold any value passed the utility of an anonymous secure electronic payment (which I guess to criminals would indeed carry substantial value).

Social Media/ New Tech: It may be time to finish the Social Media aspect of this discussion, as most of these companies (with the huge exception of Facebook), have done extremely poorly. The likes of Twitter, LinkedIn, Groupon, etc. have had their stocks tank despite what remains strong brand names (LinkedIn just received a buyout offer from Microsoft at a large premium, but still at a permanent loss to most who purchased over the previous few years). Their ability to monetize their brand is where the issue lies and investors are growing weary of waiting around. The lone exception of Facebook has shown some ability to monetize their platform by massively growing ad presence. However I still do not see their platform as indefensible and despite some classical economic barriers to entry like ‘network externality’, it’s just too easy for me to vision a world where I log into FacePlace.com instead to get my daily fix of Keeping Up With The Joneses (or not at all since as of late I log in very infrequently only to find myself bombarded with ads and political declarations).

The New Tech side of this is still raging. Venture Capital is pouring into Silicon Valley start-ups and industry game-changers such as Uber and AirBnB.  I’m typically in favor of systemic shifts that reduce overall costs to the consumer but I’m not yet convinced that swapping regulated services (hotels and taxis) with an army of unregulated part-timers will be the final correct form to address the bloat and inefficiency of the transportation and hospitality industries. And even if it is, picking the winner (Uber vs Lyft, etc.) has historically proven very difficult, nearly to random status.

That’s all the predictive power I can muster! I’ll check back in with these next year and see how they’re playing out. Thanks for reading and feel free to comment or question!

-Shai

 

The Current State of Affairs 2015

A little over one year ago I wrote some economic predictions. First we’ll check up on those and then I’ll try some new ones!

Last year predictions on:

Bitcoins: I thought they were useful and would stick around and may even be the way of the future but that it didn’t seem logical that they would be worth so much, or anything at all. In other words, useful but not valuable, like a checkbook or credit card.  Now I look like a….Genius Keyboard Warrior.  Bitcoin proliferation and acceptibility continue to increase, Bitcoin price to the US Dollar has continued to crash, from around $1,200 to $250. We’ll check back next year.

Social Media/ New tech: I thought valuations were extremely optimistic and recommended to avoid the section in general. Now I look like a…Doomsday Sayer. Tech stock prices have bobbled around the same value over the year, some are down, some are up, many are still earning nothing and some are consolidating. My views haven’t really changed. It still seems weird to me that Facebook is worth as much as General Electric.

China:  A stock bubble quickly followed the real estate bubble, now it seems both have popped but it’s still not making big headlines. Now I look like a…worldly sage.  It’s strange: usually during a bubble no one knows it, but in this case lots of people were acknowledging bubblyness. Either we’re all getting smarter or something entirely strange is brewing.

World War III: Russia would continue its shenanigans but the world would keep on turning. Now I look like a…pro diplomat. Russia continued its shenanigans, our stock market is near all-time highs.

The End of Fed Stimulus: I was less worried than most about what would happen when the Fed ceased quantitative easing because everyone else seemed so worried about it, and when has anything unexpected ever happened when everyone was expecting it? Now I look like a…Nobel Economist. Interest rates dropped after the plug was pulled, markets continued higher, and growth is still stable. This one’s effects might not be felt for many years yet so I won’t call it a victory but so far it’s been a pretty gentle transition to a stand-alone economy.

None of my predictions are really concluded yet so I feel they all still stand and I’ll add only one new this year. I wrote a short article on oil and gas back in October so I’ll make an update and an official prediction. This one hits especially close to home because a large portion of my and my clients’ portfolios are invested in oil and gas related companies and it’s been a very tough year. The move toward renewable and alternative energy is substantial, both in terms of sentiment and investment, and I believe it’s the right move for the future of the world. However I still feel the dynamics of the oil industry are more favorable and will continue to be for decades. The short-term pain is strong while oil and gas companies, especially the smaller ones, have their stock prices crushed despite a modest recovery from $40 per barrel to $65. The rate of discovery of new oil is substantially below the rate of reserve decline, and the rate of energy demand growth will likely outpace energy creation despite the rapidly growing renewable energy sector. Despite the enormous volatility I feel more comfortable owning names in this industry than any other, probably because stock prices just seem so cheap relative to the rest of the market.

Next year we’ll check back in and see how the world looks!

On Bitcoins! (and timidly touching on Gold)

“…yeah but when do I get the coin?!”

Bitcoins and cryptocurrency as an investment.  There are plenty of articles you can find for or against Bitcoins, but I think few put their opinions in a broad, contextual, rational picture.  Most of them say things like, “well the currency is limited and highly desirable due to its anonymity so it will cause the price to continuously rise, so it will be a great investment.” But then that’s quickly countered with “well that means the currency is deflationary which is an undesirable property and will cause it to not be widely used and even possibly banned so it will go to zero.” But I’d like to try to think about what place Bitcoins (and gold) have in society over the long-term and if it can be monetized. Then I can determine if it will continue to have value or not.

Bitcoins, like gold, have to be converted into a major currency, e.g. the dollar, to be useful. They serve no purpose on their own. Their value is that they are rare, i.e. have a limited supply. However, unlike gold the supply of Bitcoin is arbitrary, it was designated by the creator. And it doesn’t have thousands of years of psychological branding like gold does. You can string together a decent chain of Bitcoin transactions but at some point it will have to be converted to dollars, either to pay entities that don’t accept them or, more unavoidably, to pay taxes.

This reduces Bitcoins to basically a digital, secure, anonymous money transfer system. You buy Bitcoins with dollars, use Bitcoins to purchase a good or service from an entity who then converts the Bitcoins back to dollars to pay taxes or employees. Should the value of this system, i.e. the price of a Bitcoin, continuously rise over time? The system does seem handy for certain transactions, (especially those seeking anonymous transfers of currency, i.e. money laundering), and I don’t doubt that in the future a global, digital, secure currency will facilitate transactions in this manner. But I still fail to see why the value of the coin should continue to rise. Since it relies on dollars to be of any use, it seems it should track the dollar as Gold does (whose long-term return approximates the average inflation rate).

All this aside, even if you could guarantee me that Bitcoin was going to become as prominent as Gold and that I’ll be using it for most of my transactions in the future (which seems possible, either with Bitcoin or some other new digital currency), it still wouldn’t qualify as a viable investment for me simply for the inherently useless quality of it on its own. Just as I would never call Gold an investment, because Gold itself doesn’t do anything productive.

My prediction: while Bitcoin or other digital currency may prove wildly useful and prominent, I don’t see the system itself being of any intrinsic value. In other words all of its value is in direct relation to the dollar. It is a money transfer system, and therefore my guess is that it will one day be as valuable as a checkbook.