Monday, August 29, 2016

Actually You Can't

Perhaps we hear it more during the Olympics, but it’s always out there. The great athlete “giving back” and telling wide-eyed youngsters, “You can be anything you want to be if you’re willing to work hard enough.” The award-winning entertainer, who after sharing their story of struggle and years of grinding away behind the scenes finally got their big break and made the most of it. “You can do it. Just work hard at your craft and don’t stop believin’”. (Cue up the classic Journey song now.) The politician out on the campaign trail preaching the gospel of greatness, not just for a few but for all of us. We can have it all and we can have it all right now. Dream Big.

So you may ask, what’s wrong with giving people encouragement? Why not tell the poor kid living in the projects that he or she can be anything they want to be? Why can’t the high school drop-out, single mother living in a trailer somewhere in Southeast Oklahoma eventually be discovered while singing Karaoke on Friday nights at the neighborhood bar? Well, I suppose anything is possible. It’s what keeps people buying lottery tickets. But there is also this little thing called Reality and it’s a bitch.

The kid in the projects who might not be quite big enough, or fast enough, or strong enough, or athletic enough to ever get paid to play a sport can want it badly. He might work extremely hard to get it. But just because he wants it and works hard to get it, doesn’t mean he will get it if he doesn’t have the talent. Same thing for that would be singer belting it out anywhere where they might let her on stage.

But what’s wrong with letting people believe they can climb that mountain? Nothing as long as they are realistic and have a plan B. Fact is, when you tell someone they CAN BE ANYTHING they want to be, that sometimes puts blinders on. Focus and commitment are good things. Blinders not so good.

The Army got it right with their recruiting slogan, “Be All That You Can Be”. That’s a different and better message than “You can be anything you want to be…”. Actually you can’t “be anything you want to be”.
But you can “be all that you can be.” Be the best basketball player you can be and maybe you’ll get a scholarship. If you’re really special, maybe you’ll make a lot of money someday playing basketball. But don’t put all your eggs in one basket (ball). Get an education, stay out of trouble. If you love basketball, maybe you end up coaching. But don’t be stupid and just expect to “get paid” because you’re can put the ball in the basket. And while you’re trying to become the next Nashville super star, it might not be a bad idea to get that GED and check out some alternative career options.

Dream Big? Absolutely. There is nothing wrong with grabbing for the gold. But, you need to keep reality in mind and know where you’re going to land if your arms are just not long enough.

“No man will be found in whose mind airy notions do not sometimes tyrannize, and force him to hope or fear beyond the limits of sober probability.” ~Samuel Johnson

Saturday, August 27, 2016

The Declining Return on Humans

As a follow up to my mini-rant about self-driving cars and trucks, I decided this article is post-worthy. Not to say that I agree with everything he's saying, but he does make you stop and think about the future.


Some very interesting comments are made by Viktor Shvets in this article published by Valentin Schmid over at the Epoch Times. Discussing the overall private sector Viktor points to the further advancement of machines replacing humans to increase productivity.

The Macquarie strategist’s brutal assessment of the world economy is fascinating, but not for the faint of heart
Do you feel something is wrong with the United States and the global economy? Despite a respectable recovery and low unemployment, many people aren’t happy with their current economic situation or their outlook for the future. From rising prices for basic necessities or schooling, to harsh competition and low pay for lower income jobs to negative interest rates—the poor and the middle class all have their problems to deal with. Experts in the government or central banks are trying to manage a suboptimal situation but cannot isolate the problem, let alone offer solutions. Or maybe they know what’s wrong but don’t want to talk about it because the truth is too shocking.

Enter Viktor Shvets, the global strategist of the investment bank Macquarie Group. He not only dares to think outside the box but also isn’t afraid to openly voice his opinions, which are fascinating and shocking at the same time.

“The private sector will never recover, it will never multiply money again,” he told Epoch Times in an interview. His main theme is the “declining return on humans,” which means that in today’s digital world, normal humans don’t grow productivity fast enough to justify more jobs and higher wages as the machines are taking over. It takes time to line up machines, and this time we are replacing humans altogether."
— Viktor Shvets, global strategist, Macquarie Group

“There is no productivity on a global basis. Secular stagnation, technological shifts, monetary policy, all are suppressing productivity growth rates,” he says. But what about technology making humans more productive? Shvets says this was true in the first and second industrial revolution where displaced jobs such as horse-cart drivers eventually morphed into higher tech and higher productivity ones like the taxi driver.

However, in this, the third industrial revolution, machines are not augmenting humans, they are replacing them. The self-driving car will completely eliminate the driver. And even in the previous more mechanical industrial revolutions, it often took decades for productivity growth to recover and for jobs to come back, only after higher productivity sectors dominated the majority of the economy.

“We are now on the sharp end of the technology S curve. It started in the late 1970s, it’s picked up in the last 5-10 years, productivity growth rates go down not up.” he said.

And not only lower skilled jobs like taxi drivers are concerned. Just look at the floor of the New York Stock Exchange, where you can barely see a human “specialist” trader anymore. The machines in New Jersey have taken over the trading.

Of course, there are companies and sectors where machines augment people’s productivity, but they are in the minority and also always tether on the edge of machines replacing humans completely. One example is Amazon, where one employee generated $1 million in sales in the second quarter of 2016.

“Parts of the economy become extremely competitive, the rest becomes far less competitive. Walmart’s two million employees are less productive than the few hundred thousand people working for Amazon,” said Shvets. Walmart’s revenue per employee was $220,000 at the end of the second quarter of 2016.

As a result, total productivity growth has been negative in the United States for at least a decade and according to the Federal Reserve Board of San Francisco. The so-called Total Factor Productivity fell almost 2 percent annualized in the second quarter of 2016.


In order to counter falling productivity, households, companies, as well as the government have taken on unsustainable amounts of debt to keep consumption going.

“When the economists say we can continue to leverage, as we have done in the last three decades, it lacks understanding of the balance sheet. Even at zero interest rates, at a certain level of debt, you go bankrupt because the private sector loses confidence in the system,” said Shvets.

"This is the phenomenon of a balance sheet recession, where you have to shrink the whole balance sheet of the economy in order to restore confidence in the system and return to private sector business cycles. Japan is the most famous case; its balance sheet recession is now 25 years old. But also the United States and Europe essentially have the same problem.
Since the beginning of 1980, total debt in the United States increased by a factor of 14 to $63.5 trillion, while GDP only increased by a factor of 6.2.
The debt is not spread evenly, we still live in a tribal world, and it’s easier to start a war than to forgive debt."
— Viktor Shvets, global strategist, Macquarie Group

Shvets says the world should have actually delevered or paid down the debt to return initiative to the private sector, but thinks people could not accept the levels of pain associated with it.

“You could eliminate the impact of the overcapacity through deflation. Nobody is prepared to accept that we might have to wipe out decades of growth just to eliminate leverage. Banks go, there are defaults, bankruptcies, layoffs,” he said.

He thinks the Biblical debt jubilee, where slaves would be freed and debt would be forgiven every 50 years is a nice idea that would also work today if it weren’t for entrenched special interests.

“The debt is not spread evenly, we still live in a tribal world, and it’s easier to start a war than to forgive debt,” Shvets said.

Global central banks with their easy money policies of negative interest rates and quantitative easing are working against a debt deflation scenario, with limited success, according to Shvets.

“That was the entire idea of aggressive monetary policies: Stimulate investment and consumption. None of that works, there is no evidence. It can impact asset prices, but they don’t flow into the real economy,” he said. “Remember, the people at the Fed and the Bank of England are not supermen, they are people with an above average IQ trying to do a very difficult job in a highly complex environment.”

Both overleveraging, easy money policies, and technological shifts are responsible for increasing levels of income inequality across the globe, another hallmark of the previous two industrial revolutions. Fewer people control more of the wealth. According to the World Bank, the U.S. GINI coefficient, which measures inequality, rose from 37.7 in 1986 to 41.1 in 2013. In China, it rose from 27.7 in 1984 to 42.1 in 2010. The higher the coefficient, the higher the concentration of income among a group of people.


So if the private sector won’t recover until most of the debt gets written off, which won’t happen because neither the people nor the √©lite want it to happen, who is left to pick up the slack?

“Nobody has visibility; private sector signals have died. The private sector has no idea what to do. The more aggressive the public sector becomes, the less visibility the private sector has. They don’t spend and invest the way they should,” said Shvets. According to him, the state will just take over, it’s only a question of how.
If you are dominated by the public sector, then investment in the traditional sense is no longer possible."
— Viktor Shvets, global strategist, Macquarie Group

“You are essentially in the world where public sector signals dominate,” he said, like the global central banks who are moving markets more than earnings or trade data. “If the private sector refuses to multiply the money, then the state will do that.”

This move toward the state has its own issues, however.

“The public sector doesn’t have cycles like the private sector. Investment theory evolved around cycles. If you are dominated by the public sector, then investment in the traditional sense is no longer possible.”

Business cycle theory centers around the expansion and contraction of money and credit as well as business activity, earnings, and stock valuations. If money and credit are abundant, businesses invest and expand, hire people, and consumption picks up so company profits improve. Stocks tend to rise in tandem with an expansionary cycle.

This is not true for the state, where public investment in infrastructure and central banks printing money create a super cycle with a huge bust at the end. The S&P 500 is trading at an all-time high despite the second most expensive valuations since the 1999 stock market bubble. And despite the fact total S&P 500 earnings fell during every reporting period since the third quarter of 2015. The market is banking on the Fed to turn on the money spigot again at any time.

“The public cycle is aligned with politics. People always avoid radical solutions, so they are doing a little bit here a little bit there to keep the Humpty Dumpty on the wall,” said Shvets.

"Eventually, if the private sector doesn’t recover and the state assumes more power, Shvets thinks countries will move toward fascism and communism again, just like in the 1920s and 1930s whose economic framework is comparable to today’s. The state will decide where capital goes."
— Viktor Shvets, global strategist, Macquarie Group

“Younger people like communism because it is inclusive, paints a bright picture of the future, nobody believes it, but it looks good and young people don’t have anything to lose. Older people tend to be more racist, less inclusive, protectionist, anti-immigration, rather than believing the bright future of everyone holding hands together in a sunny place,” says Shvets.
Either way, the outcome could be similar to the 1930s in Europe and the United States. Less globalization and more power to the state.

“The pendulum is definitely swinging towards the state and the state will decide where capital goes,” said Shvets. One way or another it will have to take on most of the private sector debt, maybe through the nationalization of banking and insurance industries. “It’s impossible to see how you can unwind the economy’s debt load any other way.”

None of the new trends can be described as inspirational or uplifting, but the Macquarie portfolio reflecting the themes has bested the MSCI World Index by almost 30 percent since the beginning of 2015.

“The biggest theme is declining return on humans, the replacement of humans, biotech, augmentation of humans, opium for the people, like computer games and gambling,” Shvets said.

Then there are themes catering to geopolitical risk and potential regional war or civil uprisings, like detention and prison centers, weapons, and drones. Another theme supports the aging demography in the West, so companies holding hospitals, funeral operators, and psychiatric institutions should do well.

On the positives, Shvets notes technological disruptors like Amazon and Google. All those companies should be independent of the government and long-term structural shifts. “They go on no matter what.”

Saturday, August 20, 2016

Uber This

“It is only when they go wrong that machines remind you how powerful they are.”– Clive James

They say we’ll have self-driving trucks within five years. Uber taxis are now available in San Francisco and are scheduled to start up in Pittsburgh. Drones will soon be delivering your pizza. I’m sure this is the future. But I’m not sold on it yet. It’s not that I have an issue with technology. I’d love to have an Uber robot or just about anyone who doesn’t talk, drive me around as long as they drive the way I think they should. And robot truck drivers are probably not inclined to be texting, while trying to eat a cheeseburger and pee in an Big Gulp cup while rolling down the highway at 78 mph. So that might be a good thing. And there is the whole driver shortage and hours of service stuff that pretty much goes away when you can just build a driver right into the vehicle.

So in theory the idea of robot driven cars and trucks would seem like a positive step forward for humankind. I have this one little problem though. I’m sort of a control freak. I mean I don’t even like to use cruise control. My wife on the other hand uses every technology she can get on a car. Cruise control, lane change warning, auto braking when she’s too close to the car in front of her, and those annoying directions (“turn left in .5 miles…turn left in .2 miles…turn left in .1 miles…turn left now…rerouting”…and on it goes. I hate that.). I like having certain information. Tell me about traffic problems, tell me about road construction, but then let me do my thing, my way. (Ok, so I may have issues).

To say that I am a defensive driver would be an understatement. I am all about 360 degree awareness. And I guess I should embrace any technology that expands and enhances my defensive driving ability. But part of my defensiveness comes from not being a very trusting person. And it’s nothing personal. I love people. Well, I might have exaggerated a bit there. Let’s just say, I like most people and with God’s help I try to love all people. But I’m not perfect and no one else is either. Including the folks who manufacture and program self-driving vehicles. So I am not ready to trust them yet.

I may end up being the last guy standing on a corner somewhere waiting for a taxi that actually has a human being behind the wheel. And while I’ve had some bad rides with some really bad taxi drivers, I’d still rather take my chances with a bad human taxi driver than an automaton.

Saturday, August 13, 2016

The Talent Pool

If you've been trying to find talented people for your organization you can appreciate the reality reflected in the above graphs. The first one is the unemployment rate for people over 25 years of age with a college degree (2006-2016). The second one is the number of private sector job openings over the same time period. In mid 2009 we bottomed out at 1.7 million job openings. We are now at 4 million and for most of 2016 have been slightly over that level. Now to be clear, that is all private sector jobs, not just those requiring a degree. But the point made is still valid. Despite a tepid economic recovery, there are a lot of jobs to be filled. And the 4 million level is higher than it was even before the Great Recession.

The unemployment rate for those with college degrees (first graph) peaked at 5% in September 2009 and pretty much stayed at or near that level through 2010. That number has been cut in half, down to 2.5% and has been at that level for the past 12 months.

These are average numbers covering a big map, a number of jobs and a lot of people. You may be an employer who is not yet feeling the squeeze. Or you may be an employee who is not yet feeling "the love". But the signs are clear. If we're seeing these trends in a flat economy, what happens if we start growing? And for that matter, how much can we grow without talent?
The companies that are going to win over the next 10 years will be the ones who attract, develop and retain talented people. If that's not your number one priority, you're already falling behind.

"The first rule is not to lose. The second rule is not to forget the first rule" - Warren Buffett

Tuesday, August 2, 2016

The Next President of The United States of America

In the aftermath of the Republican and Democratic conventions, one thing is clear…our two party system is FUBAR. If you don’t know what that means, look it up. This too shall pass and when it’s all said and done, more will be said than done. Which is probably a good thing. But the next four years will be interesting. If Trump keeps shooting himself in the foot or his tax returns reveal some bad stuff, Clinton will win in an epic landslide. If Trump can get his mouth and his campaign under control and there are no ugly skeletons in his financial disclosures, he’s got a puncher’s chance. If Clinton keeps getting hammered on the Clinton Foundation, emails and Benghazi; Trump has a chance. And if there are more negative revelations about Clinton shenanigans, Trump has more than a chance.

But, my money, not necessarily my vote, is on Clinton. Trump is starting to scare too many people. And Trump is starting to anger too many people. Clinton already has a lot of people mad at her and the idea of Hillary Clinton as President, scares some folks as well. But those columns are pretty much filled out. Trump is rapidly adding to his detractors. The negatives for him are going up faster than the positives. It’s not looking good for The Donald.

People mostly vote in their self-interest. And they usually base their political leanings on a very select and limited number of key issues. Once they’ve dialed in on the candidate or party that is most likely to support their position on their most important issues, then they are inclined to agree or at least not strongly disagree with their candidate or party’s position on all of “the other” issues. Trump and Clinton have their core supporters. The key to winning the election is the undecided “moderate middle”, those who’ve not yet decided who to vote for or whether to even vote at all.

If Trump is smart he will focus National Security, “Big government” and the Economy. He needs to be careful with immigration and trade. The undecided moderate middle isn’t as concerned about immigration as the far right. “Building The Wall” isn’t going to get Trump many new votes. To the extent that immigration is about protecting us from terrorism or violent felons, it’s a point worth discussing. Otherwise, drop it. Same with trade. Sure it plays well in certain pockets of America where folks think their jobs have been unfairly exported to other countries. But the reality is that we live in a global economy and a lot of people’s jobs depend on participation in the global economy. We probably do need tougher negotiating on trade deals and have given up too much in the past. But, I don’t think it’s an issue that’s going to move the “moderate middle” votes to the Trump side. Trade is an important part of the economic discussion, but the way it’s being discussed now is not very productive.

Instead talk about National Security, which really means dealing with terrorism, mainly Radical Islamic terrorism. Now you’ve got people’s attention. The Obama track record, and by association Clinton’s, is one that Trump should hammer on. This whole issue of what to do about terrorism is of major concern to most Americans and there is a strong sense that the Clinton/Obama approach has failed. This needs to be a part of every Trump message and he needs to stay on point with it. And he should be careful not to overplay the “you can’t trust Hillary” card. Let others beat her up over emails and Benghazi. Trump needs to move to higher ground and stay there for awhile.

Secondly, Big Government. Most folks NOT on “the left” tend to see government as NOT the answer to their problems. The idea of “tax and spend” , more regulations, more government programs and more “free stuff” for certain groups does not find much favor with hard-working, tax-paying citizens. Trump needs to go after the track record of Obama (Obamacare for example) and the Clinton proposals which include several planks from the Sanders “free stuff” platform.

Lastly, the Economy. Trump doesn’t have to say much here other than to point out the anemic economic recovery under Obama and that we are just keeping our heads above a recession. Over-regulation and failed programs such as Obamacare contribute to it. If you must talk about trade, do it here and in the appropriate context. This is also the place to talk about education, training and infrastructure. All keys to economic performance. Those hard-working, tax-paying citizens in the “moderate middle” will listen.

But, alas, I don’t see Trump getting “on message” and certainly not staying “on message”. The Donald has proven himself to be a loose cannon. And then there are the tax returns. If he doesn’t release them, it’s over. If he does release them, it’s probably over. No telling what sort of snakes and spiders are crawling around in those returns. We get the leaders we deserve and by the Republicans allowing Trump to become their presidential candidate, they have handed the crown to Hillary Clinton. The real question is can they recover by 2020?

(And as you may have guessed by now, I am in the undecided moderate middle, sort of. I will not vote for Clinton. So that part is decided. I probably won’t vote for Trump. I may vote for Gary Johnson as a protest or I may not vote at all.)