Ray Dalio, founder of Bridgewater Associates (which manages about $150 billion in assets), has released this 30 minute video explaining his vision of “How the Economic Machine Works.” It is well worth watching, particularly for his description of the potential for a “beautiful deleveraging.” Dalio concludes with three helpful rules of thumb for individuals and policy-makers: (1) Don’t have debt rise faster than income (because your debt burdens will eventually crush you); (2) Don’t have income rise faster than productivity (because you’ll eventually become uncompetitive): and (3) Do all that you can to raise your productivity (because, in the long run, that’s what matters most).
If nothing like the first and second industrial revolutions had ever happened before, what is to say that anything similar will happen again? Then, perhaps, the global economic slump that we have endured since 2008 might not merely be the consequence of the burst housing bubble, or financial entanglement and overreach, or the coming generational trauma of the retiring baby boomers, but instead a glimpse at a far broader change, the slow expiration of a historically singular event. Perhaps our fitful post-crisis recovery is no aberration.
Gordon’s research suggests as much. You can watch him summarize it in the video below.
MIT’s Erik Brynjolfsson offers a rebuttal below.
But as the New York piece makes clear, a deeper dive into the research suggests that Brynjolfsson’s view isn’t as far from Gordon’s as we might like. Don’t do any research into this if you’re already depressed. It’s very important but even more sobering.
Have a good week-end.
In his book The World in Six Songs, neuroscientist Daniel Levitan of McGill University seeks to outline and explain our emotional lives and heritage in a mere six songs – songs of friendship, joy, comfort, knowledge, religion and love. I am attempting a task no less daunting. I hope to condense and explain our current economic condition in just six songs.
So here goes.
“You know I work all day; to get you money to buy you things.”
For the economy, the “rubber meets the road” precisely at this point. We need more people working so that they can “buy you things” for the economic climate to improve. In other words, our primary economic problem is a lack of aggregate economic demand. As McKinsey points out, “the single greatest fear among executives everywhere is weak consumer demand for their companies’ products and services.”
The following chart shows velocity as the ratio of the money supply (M2) to nominal GDP. It rose from 1.85 in 2003 to 1.96 in 2006 but has since fallen to a current level of 1.572 as households reduced spending and increased saving while banks and businesses hoard cash.
Simply put, money needs to get moving again.
The Fed is practically giving money away in its attempts to juice the economy — essentially trying to force everyone into equities and giving capital away to try to spur growth. But it isn’t working. Meanwhile, savers, retirees and others on fixed incomes are being punished by the low interest rate environment in that no relatively safe yield-producing investment vehicles are available. Because of the crazy-low interest rates, interest income is down over 30 percent since August, 2008.
On the other hand, the plutocrat class continues to outperform. Republicans say they support equal opportunity and the entrepreneurial spirit while Democrats say they look out for the disaffected. But pretty much everyone in office forgets their alleged principles in order to get or stay close to those with the money — perhaps to finance the next campaign. Their principles don’t mean very much when it comes to sucking up to the rich and famous.
That’s takin’ care of business at its most crass.
The American economy (not to mention the American Dream) is predicated upon the idea that we all have the opportunity to get ahead. Sadly, it doesn’t seem to be working out that way today. Real wages have steadily declined and benefits continue to decline too.
It’s not supposed to be “all takin’ and no givin’.”
While corporate earnings and profits are very high, employees are not sharing in that success. Indeed, those workers with good jobs have to keep working harder and harder without being rewarded for it (see below) — even with job security.
That’s working very hard for the money indeed.
Even though the recession is said to have ended, the newly employed don’t seem often to have obtained very good jobs. For example, 20-something college degree holders here in California, where I live, are still finding professional jobs extremely hard to come by more than 3 years into the alleged recovery. At 15 percent, the U-3 unemployment rate for California’s college grads under 30 is nearly twice the national rate, and the most common jobs for those who find them are retail, clerical, and food service positions — hardly dream jobs. And according to the U.S. Census Bureau, more than half of California’s half-million degree holders in their 20’s are underemployed. In fact, the most popular job for the most populous state’s young professionals is retail store floor sales.
They may as well be workin’ at the car wash.
The National Intelligence Council is composed of the 17 U.S. government intelligence agencies. The Council’s Global Trends Report has, since 1997, worked with a variety of experts both in and out of government service to examine factors such as globalization, demography and the environment to produce a forward-looking document to aid policymakers in their long-term planning on key issues of worldwide importance.
“We are at a critical juncture in human history, which could lead to widely contrasting futures,” wrote Christopher Kojm, the Council’s Chair, in his introduction to the current Report, published just this week.
The Report is intended to stimulate thinking about the rapid and vast geopolitical changes characterizing the world today and possible global trajectories over the next 15 years. Significantly, it does not seek to predict the future – we have a dreadful track record in the regard – but instead it seeks to provide a framework for thinking about possible futures and their implications.
The Report argues that the breadth of global change we are facing today is comparable to that during and surrounding the French Revolution and the rise of the Industrial Age in the late 18th century, but it is being realized at a much faster rate. While it took Britain more than 150 years to double its per capita income, India and China are set to undergo the same level of growth in a tenth of the time, with 100 times more people.
I encourage all investors to read it carefully. Despite the vital importance of the “long cycle,” it isn’t likely to change your current portfolio outlook, but it will provide a helpful backdrop to your overall thinking and to your longer-term outlook and analysis.
Among the Report’s conclusions is that there are certain “megatrends” that are relative certainties and that we should prepare to deal with them. These include the following (and note that all have investment implications, some of them potentially enormous).
- For the first time in history, a majority of the world’s population will no longer live in poverty by 2030, leading to a healthier global population and a major expansion of the middle classes in most countries.
- Life expectancies will continue to expand rapidly. “Aging” countries (such as those in the West – particularly Europe – and Japan) face the possibility of a significant decline in economic growth.
- Asia is set to surpass North America and Europe in global economic power, but there will not be any hegemonic power.
- Demand for resources will increase owing to global population growth from 7.1 billion people today to about 8 billion by 2030.
- Demand for food is likely to rise by 35 percent and energy by 50 percent over the next 15-20 years.
- Nearly half of the world’s population will live in areas with severe water stress by 2030. Fragile states are most at risk, but China and India are vulnerable to volatility of key resources.
These megatrends will inevitably lead to a variety of vexing and potentially “game-changing” questions. Each has profound political, economic, market and human implications.
- Will divergences and increased economic volatility result in more global breakdown or will the development of multiple growth centers lead to increased resiliency? For much of the West, the challenges involve sustaining growth in the face of rapidly aging populations. For China and India, the main challenge will be to avoid “middle income traps.” In general, the global economy will be increasingly crisis-prone and won’t return to pre-2008 growth levels for “at least” the next decade.
- Will current governments and international institutions be able to adapt fast enough to harness and channel change instead of being overwhelmed by it? While this sounds generally like the investment challenge we face daily, there are a variety of major global issues in this regard. Potentially (more) serious government deficits driven by rapid political and social changes are likely to exist. Countries moving from autocracy to democracy are often unstable and about 50 emerging market countries fall into this major risk group. All of them could – at least potentially – grow out of their governance incongruities by 2030 if economic advances continue.
- Will rapid changes and shifts in power lead to conflicts? The general answer is surely duh, with uncertainty only as to the number, extent and nature of the conflicts. Limited natural resources—such as water and arable land—in many of the same countries that will have disproportionate levels of young men—particularly in Sub-Saharan Africa, South Asia, and parts of the Middle East—increase the risk of intrastate conflict. It is particularly troubling to note that any future wars in (at least) Asia and the Middle East may well include a nuclear element. Many of these conflicts, once begun, would not be easily containable and would (obviously) have global impacts.
- Will regional instability, especially in the Middle East and South Asia, spill over and create global insecurity? See the commentary re #3 above. Wash; rinse; repeat.
- Will technological breakthroughs occur in time to solve the problems caused by rapid urbanization, strains on natural resources, and climate change? The report identifies 16 key “disruptive” technologies with potential global significance out to 2030. They are generally grouped around potential energy breakthroughs, food- and water-related innovations, big data and the forecasting of human behavior, and the enhancement of human mental and physical capabilities, including anti-aging.
- Will the United States, as the leading actor on the world stage today, be able to reinvent the international system, carving out potential new roles in an expanded world order? The Report anticipates that the U.S. will likely remain primus inter pares (first among equals) among the other great powers in 2030 because of the multifaceted nature of its power and legacies of its leadership. But it also expects that the “unipolar moment” is over. Overall, power will likely shift to networks and coalitions in a multipolar world. The United States’ (and the West’s) relative decline is seen as inevitable but its future role in the international system is much harder to project. China is deemed unlikely to replace the U.S. as international leader by 2030. Non-state actors and even individuals, empowered by new media and technology, will be an increasing threat. A reinvigorated U.S. economy – spurred perhaps by U.S. energy independence – could increase the prospects that the growing global and regional challenges would be addressed. However, if the U.S. fails to rebound, a dangerous global power vacuum would be created.
From these building blocks and issues, the Report posits potential futures including a best-case scenario of increased cooperation between the U.S., China and Europe as economic and security interests increasingly align, a worst case scenario of conflict and fragmentation in a stalled global economy where political, social and economic inequalities work against integration and stability, and a scenario involving a “nonstate world,” where the nation-state does not disappear, but countries increasingly organize and orchestrate “hybrid” coalitions of state and nonstate actors which shift depending on the issue.
There is no earth-shaking news here. But it is helpful to take a step back and look at the bigger picture once in a while. Because change is so often incremental, it is easy to underestimate how quickly it can happen and how much impact it can have in the aggregate. In the markets as in life, caveat emptor.
In my 7th grade music class, every student was required by Miss Perkins to give a report on a piece of music. I picked a popular subject: Iron Butterfly‘s psychedelic hit, In-A-Gadda-Da-Vida. It was a 17 minute reflection of or on something-or-other. My “research” was straight off the album cover (for those of you who remember what album covers were). “Iron” signifies heavy, man, and so on. I worked hard to learn the drum solo too.
For those of you looking for a frame of reference, Kevin and Winnie Cooper of The Wonder Years are exactly my age and year in school and In-A-Gadda-Da-Vida was playing in the first kiss episode from the 8th grade where Kevin and Winnie are at their first couples party and they head to the make-out room. That episode also features The Turtles‘ terrific Happy Together. Anyway, here’s the song, which we thought sounded like the future, and a pretty exciting (if drug-induced) one at that.
I wanted very much to be groovy but wasn’t. It didn’t stop me from trying, however, as with my silly report. In-A-Gadda-Da-Vida indeed.
And my parents — founding members of the Establishment that I saw them to be — were anything but groovy and, in fact, were unalterably opposed to anything with even a whiff of groovy. They were even…Republicans.
To be clear, my parents were hardly of the “country club Republican” sort. We didn’t belong to a country club. In retrospect, there was nothing “establishment” about them either. Neither of them went to college. We didn’t own or run a business. My mom worked outside the home. We weren’t anything remotely close to rich.
But we were Republicans. Hard work was good. Entitlements were bad. Saving was good. Profligate spending was bad. Traditional values were sacred. The idea of turning on, tuning in and dropping out was anathema. Our leaders — all authority figures really — deserved and got our respect if not necessarily our support (Jacob Javits was pretty liberal, after all).
Vietnam was an unfortunate but necessary evil. Dick Nixon hadn’t been their first choice (or second or third), but he would deal with those hippies and the Soviets too. Watergate (waiting just over the horizon) was horrible and wrong, but it was also stupid and silly. Nobody was going to vote for McGovern anyway. And FDR had done stuff just as bad. We were sure of it.
Our government was a creeping socialism and politicians weren’t statesmen anymore.
The clothes worn by “the youth” were just plain bizarre. So was the hair. So was the lingo. And the music….
So whenever my school lessons featured FDR saving us from the Great Depression, my parents were quick to point out that it wasn’t FDR. It was World War II.
They weren’t wrong, of course. Producing and distributing what we needed to fight the Axis powers propelled the country out of the Depression and went a long ways toward making us the strongest and greatest economy in the world, not to mention the #1 (with a bullet, literally and figuratively) superpower.
To hear Paul Krugman tell it, the key was demand (it didn’t and doesn’t matter for what) and we can fix the current mess by spending our way out of it just like FDR did. As Keynes argued in the 1930s, the only solution in such circumstances is major fiscal stimulus to close the gap between actual and potential output. TARP wasn’t enough. QE1 wasn’t enough. QE2 wasn’t enough. Operation Twist wasn’t enough. QE3 won’t be enough.
I get his point, but he’s missing something crucial, I think, besides the reality that all the demand we spur will need to be paid for eventually and we have shown no willingness to do so even assuming we had the ability. It wasn’t just that WWII put people back to work. There was a fundamental change in the nature of the output.
A key problem during the Great Depression was that increased (and increasing) productivity meant that a largely rural and agrarian workforce didn’t have nearly enough work to do. The War, essentially by force, transitioned that work force to the cities and into industrial and manufacturing jobs. Once the war was over, heavy-duty military spending was still necessary to maintain our new-found status and the other stuff we produced was being used here and shipped abroad too as American hegemony was extended around the globe.
Today, increased (and increasing) productivity and cheaper labor overseas leaves our workforce underemployed again. Since the internet boom of the 1990s, we have recognized — if dimly — that our future is a digital one. But we haven’t yet figured out how to make the transition and there has been no great catalyst (the way the War was then) to force and complete the “creative destruction” needed to make the structural shift once-and-for-all. The process is a messy one. It is often unpleasant. Workers will be pushed out of their comfort zones or even displaced. Some individual results will be unfortunate, tragic even. Creative destruction is still destruction.
Even so, we piddle along, on a slow boat not-even-to China. Today’s employment numbers provide another series of data points reiterating the obvious. We have no idea (economically speaking) where we’re going and thus, of necessity, have no idea how to get there. We’re stuck between preserving a past that no longer works and attempting to forge a future that is unfocused and uncertain (Facebook, anyone?). The alleged “new economy” isn’t defined a whole lot better today than it was back when almost any kid with a computer and a dream could get a boat-load of start-up money.
The process of “making the future” (to use President Obama’s phrase) is an inductive one that progresses primarily by discovering what doesn’t work so as to ascertain, oh-so-tentatively, what might work.
As the expression goes, if you don’t know where you’re going, any road will take you there. Unfortunately, today we don’t even seem to be moving much at all. And while we have a pretty good idea what the future consists of, we don’t know what it ought to look like. Until we do, it’s going to be hard for us to put this Great Recession behind us, no matter how much demand we spur. As my friend Tom Brakke noted on Twitter when he read this piece, economy-wise, we’re not In-A-Gadda-Da-Vida.
Not by a long shot.
A new study conducted by Stanford University used census data to examine family income at the neighborhood level in the 117 biggest metropolitan areas in the U.S. The study — part of US2010, a research project financed by Russell Sage and Brown University — found that the portion of American families living in middle-income neighborhoods has declined significantly since 1970, as rising income inequality left a growing share of families in neighborhoods that are mostly low-income or mostly affluent. Today, there are thus larger patches of affluence and poverty and an ever-shrinking middle.
According to the most recent data, 44 percent of families live in neighborhoods the study defined as middle-income, down from 65 percent of families in 1970. At the same time, a third of American families live in areas of either affluence or poverty, up from just 15 percent of families in each of those categories in 1970. The study also found that upper income people are congregating in new exurbs and in gentrifying city areas that lower and middle-income families cannot afford. The study identified these patterns in about 90 percent of large and medium-size metropolitan areas.
Harvard economist Lawrence Katz says that the evidence for the presumed adverse effects of economic segregation is inconclusive. In a recent study of low-income families randomly assigned the opportunity to move out of concentrated poverty into mixed-income neighborhoods, Katz and his collaborators found large improvements in physical and mental health, but little change in the families’ economic and educational fortunes. However, an author of the Stanford study notes a growing gap in standardized test scores between rich and poor children, now 40 percent bigger than it was in 1970 and double the testing gap between black and white children.
The gap between rich and poor in college completion — one of the single most important predictors of economic success — has grown by more than 50 percent since the 1990s, says Martha J. Bailey, an economist at the University of Michigan. More than half of children from high-income families finish college, up from about a third 20 years ago while fewer than 10 percent of low-income children finish, although that is up from 5 percent.
Harvard sociologist William Julius Wilson argues that “rising inequality is beginning to produce a two-tiered society in America in which the more affluent citizens live lives fundamentally different from the middle and lower-income groups. This divide decreases a sense of community.”
This data has obvious implications for the Occupy Wall Street and related protests.
Truly organic protests (as opposed to those that are carefully orchestrated) are, by their nature, typically messy, noisy and confused. The fact that the Occupy Wall Street protestors still have no clear solutions to offer nor even a coherent vision of what exactly is wrong does not, in my view, damage their credibility nor mitigate the emotional clarity with which they have conveyed (and will likely continue to convey) that something really is wrong. The general sense that we have serious problems and that things don’t seem fair or right has a striking ring of truth.
Unfortunately, it is unlikely that we as a society will reach anything like consensus on issues like employment, taxation and equality. That said, all of us — whatever our views of politics, business and economics — ought to agree on the centrality of opportunity. The assumption that anyone can get ahead based on capability and effort is central to the idea of the American Dream. Equality of opportunity is crucial to the success of our society.
As stated by Nobel laureate Joseph Stiglitz, “growing inequality is the flip side of something else: shrinking opportunity. Whenever we diminish equality of opportunity, it means that we are not using some of our most valuable assets—our people—in the most productive way possible.”
One crucial way — perhaps the most important one — to spur upward mobility (and protect against downward mobility) is education. In today’s economy, a child’s educational attainment strongly influences his or her future earnings and is a strong determinant of economic mobility.Women with a high school diploma or less who are raised in middle-class homes are between 14 and 16 percentage points more likely to be downwardly mobile than women who get a college degree. Men with no more than a high school diploma are 7 to 15 percentage points more likely to be downwardly mobile than men with just some postsecondary education but no bachelor’s degree. College graduates have a much lower risk of experiencing a serious long-term income drop and are much more likely than others to recover therefrom.
As the father of a three California public school graduates, one of whom also graduated from the University of California (Berkeley) and another of whom is a Teach For America alum who worked in the Richmond, California school district, as well as the husband of a California public school teacher, I think I am pretty well positioned to offer some thoughts on ways we can improve the current system, at least in the Golden State. Indeed, let me suggest that all of the focus on ideology related to the protests misses some important points. Are we allocating the public resources we have wisely? Are we looking for creative solutions to difficult problems? Are we rewarding the behavior we want to see? I suspect not, pretty much across the board.
We must begin by getting more kids — and especially disadvantaged kids — to aspire to college. Obviously, that should start with parents and teachers. My wife is reinforcing the benefits (as well as the demands and the requirements) of the “next levels” — middle school, high school and college — with her 5th grade students every single day. We talked with our kids about college constantly. Here in California, the Pathways to College Network is an alliance of national organizations that provides leadership to advance college opportunity for underserved students and research into how best to accomplish that task. Reality Changers, a non-profit here in San Diego designed to build first generation college students, and groups like it are imperative in a process that can be alienating for students and parents who don’t understand and are afraid of it.
Once students aspire to college, that aspiration has be particularized so that the students prepare and then apply to college and apply wisely. A prominent University of Chicago study reported that “[a]cceptance is less of a barrier than might be expected,” noting that only 8% of lower-income students with four-year college aspirations applied and were not accepted. But many more students missed benchmarks in the application and enrollment process. Only 41% of these students who said they wanted four-year degrees even completed the senior year steps needed to apply and enroll.
Students often need help learning and managing the process, especially if their parents did not attend college. Economically disadvantaged students are also the most likely to “mismatch” their college choice, enrolling in colleges with selectivity levels well below those of colleges they probably could get into based on their academic qualifications. The College Board (among others) has some great free resources to help all students manage the college application and selection process. These students also tend to lack support during the planning process and even while in school.
We must do better.
Once students have aspired and applied to college and been admitted, we need to be sure that they can pay for college. A major piece of that puzzle is simply letting them know how much aid is available. Many students limit their college searches to schools they assume they can afford and thus neglect great (usually private) colleges that might be less expensive for them to attend on account of financial aid.
Private schools typically have more financial aid to offer and some even guaranty to meet all or more of a student’s determined need pursuant to the applicable formulae. Other schools are particularly generous with non-need based aid. These issues often have a very significant impact on a college’s actual cost and should be considered carefully by every aspiring freshman. Underserved students and communities will often need help in this regard.
Berkeley now costs $32,635 per year for in-state students, still well less than its rival Stanford’s $56,906. However, while Stanford meets 100% of each student’s financial need (as determined by FAFSA) and provides average financial aid packages of $40,298, Berkeley (on average) only meets 76% and provides average financial aid packages of $20,619.
According to the U.S. Department of Education, between 1.5 and 2 million low and moderate income students fail to apply for federal financial aid each year. Moreover, a majority of those who file a FAFSA only do so after important deadlines have passed, decreasing their likelihood of receiving state and institutional aid.
Yet financial aid isn’t the only necessary response to the need to make it possible for students to pay for college. I am absolutely in favor of providing “first chances” for those who have been disadvantaged and “second chances” for those who need them. I absolutely support the ideal of providing a place where high school graduates who may not be ready for a place like UC-Berkeley can get prepared to enroll there. Therefore, in my judgment, the mission of the California community college system is a noble one and one that ought to be continued. But any fair assessment of that system must also conclude that it’s a mess.
According to research performed under the auspices of the Institute for Higher Education Leadership and Policy at CSU Sacramento (link), only 24% of students entering a JC to seek a certificate, get a degree or transfer to a four-year school accomplish their goal within a six-year period (and it’s only 14.5% of total students). Thus California ranks near the top in terms of getting students in the door of higher education, but in terms of actual achievement -– either via a degree or by transferring to a four-year school -– California ranks near the bottom. That said, a community college education remains remarkably inexpensive — costs are the lowest in the nation and a small fraction of the average cost nationally. Thus we’re paying a very high price for surprisingly little return.
Moreover, and more importantly, many community colleges are replete with students of means who have always had tremendous opportunities available to them who are wasting their time (and taxpayer dollars) there. Roughly 50% of California community college students have annual family incomes in excess of $50,000 and roughly 25% have annual family incomes in excess of $80,000 (link). Why should taxpayers provide — essentially for free — second, third and more chances to students with means and opportunity galore who have consistently refused to make good academic and educational choices while, at the same time, charging students who have made the best choices higher and higher prices and prices that are, by far, the highest in the system? Is it too radical to suggest the our UCs (Berkeley, UCLA, UCSD, etc.) charge prices more like what community colleges charge (to reward student achievement, to keep more of our best students “home” and to ease the financial burden on these students and their families) and that community colleges charge prices more like what the UCs charge for those that can afford them? It seems to me that the same amount of money could be put to much better use.
We also need to encourage more foreign students who come to the U.S. to school to stay here when they graduate. What is intriguing is not just that the U.S. has won so many prizes, but that the a third of American Nobels have gone to immigrants to the U.S.:
“The United States has won more Nobel prizes for physics, chemistry, physiology or medicine, and economics since World War II than any other country, by a wide margin (it has been less dominant in literature and peace, two awards that are much more broadly distributed among nations). At least one American has won a prize each year since 1935 (excluding the years 1940 through 1942, when no prizes were given out). And the United States became dominant after a very slow start: no American won a science prize in the first six years of the prize’s existence.”
Sadly, it is now very difficult for foreign graduates to stay in this country when their educations are complete. It doesn’t make sense to me for the U.S. to train them and then send them back overseas to compete with us when they want to stay. Their skills and training could help the U.S. compete internationally and keep more high-tech jobs here.
The Occupy Wall Street movement has struck a nerve. I realize I am probably delusional in this regard, but we ought to at least be able to come together and provide better educational opportunities for everyone even though we are unlikely to find much in the way of consensus elsewhere with respect to the OWS agenda (such as it is).
The monthly jobless report came out this morning and was weaker than expected. Unemployment held steady at 9.1% and no net new jobs were created in August. Crucial questions going forward will include what President Obama’s jobs plan/speech will offer next week, what (if anything) the Fed might do now (or soon), and what (if anything) the Fed can do. Surely, the economic news remains lousy.
Courtesy of the BBC, this is the newest version of Hans Rosling’s famous presentation on economic growth and life expectancy. It provides a wonderful visual reminder of why longevity risk is so crucial to financial planning (and is becoming even more so). You may read more about it here.