Economics: Why We Need More Robots

(Drivebycuriosity) - Life expectancy is rising globally thanks to rapid advances in health care and medicine. A reason to cheer? Not for the media and many pundits. They lament about over-aging and claim that an "aging population"will lead to a "shrinking work force" (in some countries like Japan this is already happening bloomberg  washingtonpost). Will we really run out of things & services because there are too few people?

I don´t think so. There is a continuing process of automation since the 19th century at least. Automation has been rising productivity of labor, meaning we need less & less labor to produce things & services. Machines, including computers, have been replacing labor for a long time. It seems that this process is accelerating, just in time to fill the widening growing gap between the numbers of retired and the working.

A study by economists John G. Fernald and Charles I. Jones from Stanford & the Federal Reserve Bank of San Francisco claims that "it becomes possible to replace more and more of the labor tasks with capital" (robinhanson ). Fernald & Jones define capital as physical capital (machines including robots & computers), plus human capital (knowledge & skills) plus discovery of new ideas (inventions like computer, internet etc.). According to them "artificial intelligence and machine learning could allow computers and robots to increasingly replace labor in the production function for goods", meaning that the society can produce more things without increasing hours worked or even with a shrinking labor force. As a result the growth rate of income per person and the long-run growth rate (now around 2%) will rise as well: "The possibility that artificial intelligence will allow machines to replace workers to some extent could lead to higher growth in the future". Other researchers ( bloomberg) observe that automation allows companies to reduce costs and lower prices so that more people can buy what`s on sale.

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A glance on the US job market  - about 2  million new jobs in 2019, record low unemployment and climbing wages (charts above) - shows that automation is advancing slowly and the influence of robots and other machine is still weak. If the predictions of an aging population and a shrinking labor force are right we will need more robots!

History shows that robots and other machines create wealth by producing more goods & services with lower costs & prices. So a rising number of robots grows wealth and hikes company earnings & salaries. Governments participate with climbing tax revenues. Some day robots (and other machines ) will produce the majority of goods & services which will enable the governments (via high tax revenues) to pay everybody a sufficient minimum income (universal basic income). More robots please!

Contemporary Art: Johan Van Mullem`s Apnea @ GR Gallery New York

 

(Drivebycuriosity) - Contemporary art is full of discoveries. On my home from the gym I passed GR-Gallery on Manhattan´s Bowery. There I spotted interesting paintings by Johan Van Mullem (gr-gallery). The show is called: Apnea.

I like the the powerful brush strokes and the ghostly images. But let the images speak for themselves.

To be continued

Economics: Oil & Iran - Will History Repeat Itself?

 (Drivebycuriosity) - The conflict with Iran is escalating. A full fledged war may be around the corner. The situation reminds of 1991. Then the first Iraq war induced a spike of the oil price which caused a recession. In 2008 an escalating Iran conflict - and speculation that the country might shut down oil transports via the Strait of Hormuz - caused the oil price to triple and to jump to $148 (chart below). A study by Prof.  Hamilton, University of California, San Diego, shows that the oil price shock from 2008  turned the economic slowdown into a severe recession (econbrowser).: "The oil price increase over 2007:H2-2008:H1 should be regarded as a key development that turned the slowdown in growth into a recession" (archives).

"Rapid increases in the price of oil have preceded almost all U.S. recessions" writes Prof. Tabarrok ( marginalrevolution  ). You can see this in the chart below which shows oil price development & recession.

 ( source)

The causal connection between oil and recessions can easily explained. Americans depend on gasoline. Many live in suburbs and need to drive to go to work, to shop & to spend leisure time. High gas prices curb their available income. "Oil prices played a role in eventually bursting the US subprime bubble....In 2003, the average suburban household spent $1,422 a year on gasoline, which rose to $3,196 in 2008 (oilprice). "Rising household energy prices constrained household budgets and increased mortgage delinquency rates" (oilprice). Low income suburban homeowners suffered most from the rising gas prices. 

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Fortunately history does not not repeat itself, there is no Groundhog-Day-effect. There is a significant difference to the  1990s and 2000s: Opec and the unruly middle east region, which had caused a lot oil crisis in the past, lost their power. US oil production jumped in the 2010s, thanks to fracking (chart above). Today the US is much less dependent from Opec oil deliveries than in the 2000s.  Should the extreme case happen and Iran manages to block oil deliveries the US also could free their  oil reserves. An Iran war recession is unlikely.

Economics: How The 2010s Benefited From Cheap Oil

 

(Drivebycuriosity) - The 2010s were a decade without a recession, continuous economic growth, a record low jobless rate & strong stock market gains. The splendid performance is partly due to relatively cheap & stable oil. The price of oil ended the decade where it started (charts below).

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Apparently the 2010s were a revival of the period 1980-1999. Then cheap oil (except 1991 when the oil price hiked caused by the first Iraq war) fueled 2 decades of prosperity and the Dow Jones multiplied with the factor 10. It appears that decades with cheap oil are prosperous, decades with expensive & volatile oil (like the 1970s and the 2000s) are not.  "Rapid increases in the price of oil have preceded almost all U.S. recessions" ( marginalrevolution  the article has a link to a study by Prof. Hamilton). You can see this in the chart below which shows oil price development & recession.

 ( source)

The causal connection between oil and recessions can easily explained. Americans depend on gasoline. Many live in suburbs and need to drive to go to work, to shop & to spend leisure time. High gas prices curb their available income. It is not surprising that high gas prices constrains consumer spending. 

"Oil prices played a role in eventually bursting the US subprime bubble....In 2003, the average suburban household spent $1,422 a year on gasoline, which rose to $3,196 in 2008 (oilprice). 

"Rising household energy prices constrained household budgets and increased mortgage delinquency rates" (oilprice). Low income suburban homeowners suffered most from the rising gas prices. 

Why was oil cheap in the 2010s? Around the years 2012-14 Opec and the unruly middle east region, which had caused a lot oil crisis in the past, lost their power. Then US oil production started a steep rise, thanks to fracking (chart below). Today the US is much less dependent from the unreliable Opec oil deliveries than in the 2000s.  

( source )


I believe that fracking & the rise of electric cars will tame oil prices in the new decade and will allow prosperity to continue.

Stay tuned

China: Is the Stock Market Ripe For A Melt-Up?

(Drivebycuriosity) - We just finished a great decade. The global stock markets climbed to new all-time highs, lead by the US stock market, which tripled in the 2010s. But there is just one exception - China. The Shanghai Composite, which represents the country`s stock market, lagged badly and finished almost at the same level as it started (charts below)

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Chinese stocks suffered from a bad sentiment towards China - many pundits were calling for a hard landing -, a gradual decelerating economic growth rate (towards 6%), Trumps`s trade war and the government was curbing the economy to restrain inflation and debt levels. But the picture is brightening. The government is loosening the brakes. On New Year`s Day the central bank cut the bank ration reserves again in order to pump more liquidity into the economy. The trade war reached a truce and the latest economic numbers are solid:  Retail sales grew 8% and industrial production advanced 6%.

I think China´s stock market is ripe for a melt-up. There is too much pessimism priced in, which will be disappointed. China`s growth will continue - and might even re-accelerate - because the huge country is continuing her secular catching-up process. China`s growth is inspired by extreme income & wealth differences to the US and other Western nation values. Today China has about $9,800  income per capita, the US number is $62,600  (worldbank). China doesn`t have much commodities but it owns a huge amount of human capital: 1.4 billion people who are intelligent, who work hard and save a lot money to achieve a better life. Wikipedia counted in 2014 already "2,236 colleges and universities, with over 20 million students enrolled in mainland China" (wikipedia). The fast expanding knowledge is driving science & innovation, raising productivity and fostering economic growth (washingtonpost). Chinese corporations, think tanks & administrations can employ a large number of highly dedicated & educated people - a strong driver of economic growth (scottsumner).

China`s growth is fueled by a rapid transformation process.  The country is transforming from an industrial & export-focused economy into a modern system like the US, where most of the GNP is fueled by consumer spending. In the US consumer spending is the engine of the economy. China is on the way to became a modern economy. Many peasants are moving to the huge metropolitan centers which are spread all over the huge country to lift their standard of living. This creates a fast rising affluent middle class, giving consumer spending a boost as the strong retail sales demonstrate.  And Chinese firms -are leading in emerging technologies like artificial intelligence,  quantum computing, biotechnology & hypersonics which will define the new decade.

To be continued

Stock Market 2020: Will The Bull Market Continue?

(Drivebycuriosity) - The begin of a new year is the time to look back and ahead as well. 2019 was very encouraging. The S&P 500, the gauge for the US stock market, gained 29% last year and the bull market, which started in spring 2009, continued. A large part of last year`s gains were a correction of the panic from Christmas 2018, which brought temporarily a drop of almost 20%.  Arithmetic says if you lose 20% you have to win 25% to reach the former level (basis effect). Since begin 2018 the S&P rose about 18%, making around 9% annually (chart below).

( finance.yahoo )


The recession, which many had predicted and which was almost priced into the stock prices, did not happen and is not around the corner. The trade war against China did not escalate and it´s damages are constrained so far. The US economy is still sound, jobless rates & weekly jobless claims are close to all-time lows and consumer spending, the engine of the economy, is growing solidly. China avoided again the hard landing many pundits were calling for and is still growing 6% annually and the tailwinds from relatively cheap oil & extremely low interest rates continued.

I expect that the stock market gains will extend in 2020 and beyond. During the recessions of the years 2001/02 and in 2008 companies restructured and reduced costs significantly in order to survive. Now they are much fitter and more efficient than before. I believe that this learning process will continue and will translate into a long term trend of climbing company profits. Companies are also benefiting from a new industrial revolution: Advances in Internet, cloud- & mobile computing, 3-d-printing, robotics, nano- & biotechnology and other technologies are reducing costs, raising efficiency and creating new markets.

There are also continuing tailwinds from the emerging markets. The catching-up process in China, India, Indonesia and a lot of other countries translates into high growth in large parts of the global economy that creates continuously rising revenues & profits for global companies like Starbucks, IBM, Caterpillar, Apple, Microsoft, Google and other members of the S&P 500.

Happy New Year!

Stock Market: A Cheers To The Decade Of The Bull

 (Drivebycuriosity) - Tonight we will celebrate the end of an amazing decade - the decade of the bull. The bull market, which started in spring 2009, continued till today. The S&P, the gauge for the US stock market, tripled. The 2010s started on an irrational low base which explains that the annually total return (stock market gains plus dividend reinvested) was a bit above the long term trend (chart below). The sentiment was spoiled by the dismal 2000s and the recession panic from late 2008 lingered still in many minds, but eventually the positive fundamentals triumphed.

The table below shows that the annual returns where moderate compared to the 1978-1999 period. There is no bubble.

 ( source )


The positive performance has many explanations: The 2010s did not have a recession, even though many pundits were calling for it. The trade war against China did not escalate and it´s damages are constrained so far. The US economy is still sound, jobless rates & weekly jobless claims are close to all-time lows and consumer spending, the engine of the economy, have been growing solidly. China avoided the hard landing many pundits were calling for and is still growing 6% annually and  the  decades got tailwinds from relatively cheap oil & extremely low interest rates.

But the most important reason you can see in the table below. Company earning grew annually 10.5%, about as much as the stock prices. The gains on the stock market followed just the growth of the company earnings.

 (source )


I expect that the stock market gains will extend in the 2020s. During the recessions of the years 2001/02 and in 2008 companies restructured and reduced costs significantly in order to survive. Now they are much fitter and more efficient than before. I believe that this learning process will continue and will translate into a long term trend of rising company profits.

Companies are also benefiting from a new industrial revolution: Advances in Internet, mobile computing, 3-d-printing, robotics, nano- & biotechnology and other technologies are reducing costs, raising efficiency and creating new markets. The tailwinds from the emerging markets will continue. The catching-up process in China, India, Indonesia and a lot of other countries translates into high growth in large parts of the global economy that creates continuously rising revenues & profits for global companies like Starbucks, IBM, Caterpillar, Apple, Microsoft, Google and other members of the S&P 500. I assume that the global economy will re-accelerate in the coming years, generating more company earnings and stock market gains.


To be continued