Monday Muhsings: The Utopian Future

Markus Muhs - Oct 29, 2018

Ever notice how many sci-fi movies take place in or refer to some kind of dystopian future? To balance things out, I’m writing this post to hypothesize what I call the Utopian Future. Sunshine and lollipops and how we get there through technology!

Blade Runner, The Matrix, Terminator, Mad Max, Planet of the Apes, THX 1138, Hunger Games, A Clockwork Orange. Even the Star Trek continuity includes a World War III that nearly sent the planet back into the stone age before everyone united to venture out into space, and in the Star Wars continuity we only get treated to movies taking place during bad times, and not the 30 or so years of mostly calm between episodes VI and VII.

Obviously, Blade Runner wouldn't be the movie that it is if it was all sunshine and lollipops in future Los Angeles of 2019, and Star Wars without wars would be even more pointless than Episode I: The Phantom Menace.

I’m writing this post on the last weekend of October, after another tumultuous week on the markets, with the financial noise networks attributing the market correction to everything from slowing global growth to the words used in Amazon’s earnings release.

Are we humans predisposed to craving bad news? It’s not an interesting news day unless the markets are tanking, the President tweeted something obnoxious, and there was some kind of natural disaster or weather catastrophe somewhere. Is the only future we can envision one where everything goes wrong with the social order and the economy, or where the planet dies?

 

The Next Recession?

 

There seems to be a lot of prognosticating going on as to when and how the next recession will hit. It’s been nearly 10 years now since the last one, and we’re often questioning “which inning” of the economic cycle we’re in.

I remember hearing from a fund manager back in 2013 who stated (accurately, in hindsight) that we were only in the 3rd inning. Well, now that we’re almost 10 years in, are we in the 9th inning? Probably, BUT, as the Red Sox and Dodgers proved over a 7-hour span from October 26th to 27th, it doesn't necessarily have to end here. We have no idea how many innings there are in this game; could very well be 18.

Now, I’m no economist, but from my observations preceding the last recession, here are the things that I predict will probably cause the next recession. As the U.S. is the biggest and most important economy in the world, most of this pertains to the U.S. economy:

Low unemployment: In the U.S. the unemployment rate is sub-4% and jobless claims are at a 45 year low. Narrowminded thinkers see this as purely good for the economy, and it is good for consumer spending. For growth of the economy though it is a major headwind: it’s harder for growing companies to hire and retain qualified employees and scarcer labor leads to wage growth, which leads to inflation. This situation could get even worse as the baby boomer generation continues to retire en masse.

Commodity prices: commodities are the raw inputs for all manufacturing, as well as the stuff that makes the energy that keeps the economy going. Too-high iron, copper, timber prices, and – most importantly – oil prices, increase the costs of all goods and services, leading to inflation. Luckily, this isn’t a problem right now.

Interest rates: luckily, they’re still low relatively speaking, but moving upward. The two factors above both lead to inflation, and central banks raise interest rates in order to combat inflation, so all these things kind of go hand in hand. Eventually, a too-hot economy faces too-high inflation and central banks are forced to raise rates. High rates make the cost of capital too prohibitive for growing businesses, they make mortgage payments unaffordable, and entice consumers to save instead of spend, and to save in risk-free interest-bearing investments instead of stocks. All bad for the economy and the stock markets.

To summarize, inflation is what will eventually lead to the next recession, and the biggest threat currently on the horizon that causes inflation is a tight labor market. To a lesser extent, trade protectionism might also enter the equation, as tariffs cause an artificial increase in the cost of many goods for consumers. If interest rates were able to remain permanently low, with no threat of inflation, then we probably won't have to worry about recessions.

 

How Technology Will Save Us

 

Here’s how my sunshine and lollipops future utopia unfolds. What I’d like to explore here is how advances in technology in the near future can help neutralize some of the aforementioned economic headwinds, and possibly – if everything aligns perfectly – defer the next recession almost indefinitely.

Since the start of the information age (an industrial revolution in its own right, I think) technology has already made our lives a lot better and according to JP Morgan’s Guide to the Markets (page 22) more than 60% of all economic growth since 1998 has been driven by growth in real output per worker. Going forward a bigger and bigger share of economic growth will have to come from productivity growth, with stagnant growth in our workforce.

 


Source Max Pixel

 

Robots and Artificial Intelligence are the answer! Think factories where over 90% of all assembly is performed by robots, and customer service centers where sophisticated AI answers your phone calls and online messages. Restaurants and retail stores could operate with a fraction of the staff, rideshare and taxi drivers will be put out of work by self-driving cars, even a lot of the functions performed by medical, legal, educational, and financial professionals, could be replaced by AI and smarter automation.

The eternal pessimist envisions rampant unemployment from which we’ll never recover, but this is where I say it could be really beneficial if things line up correctly. Too quick of a transition to automation and, yes, it could cause such problems. Too slow a transition and we’ll still face labor shortages and a recession. Just right and it can nearly eliminate inflation and prolong a recession for who knows how long?

In the end, we humans will just focus more on tasks which require creativity and ingenuity, instead of mechanical tasks.

A typical investment brokerage office like the one I work in used to have quite a few more “brokers” who performed the mechanical task of brokering stocks in a time before investors could just do it cheaply online. People in my role today focus much more on human tasks like financial planning and behavioral investing than the nitty-gritty that’s now done by computers. Our support staff will be ever-shrinking as mechanical tasks (including, eventually, answering our phones) become more automated.

Downstairs from our office, a coffee shop generally has three people on staff, brewing/pouring coffee, exchanging it for money, and mixing those overpriced specialty coffee drinks. In future, they’ll have one human employee focusing exclusively on the true value-add (the fancy overpriced drinks) while everything else becomes self-serve and automated.

Increased automation in resource extraction can also benefit us through cheaper and cheaper commodity prices. Here in Alberta, the entire oil sands extraction process could be mostly automated, and if the cost of extraction per barrel of oil ends up being well under $10, who cares what WCS is trading at? In any case, we won’t face the kind of barriers to growth we faced around 2006, when labor shortages forced growing companies to pay 6-figure salaries and a ton of overtime to high school drop outs.

In mass transportation, buses and trains can become fully automated. In aviation, where advances 40-50 years ago already made the "Navigator" position in the cockpit obsolete, we may in the future see self-flying planes, where only one human "co-pilot" is necessary.

Automation could also make all manufacturing cheaper in the developed world than in the developing world, negating the potential inflationary effects of tariffs, and making protectionists/mercantilists like President Trump very happy. Manufacturing won’t go where labor is the cheapest; it’ll go where energy and capital is the cheapest.

 

Conclusion: Sunshine & Lollipops

 

All this technology is either already here or it’s not that far away. Imagine having no more of the traditional barriers to economic growth and just continued growth for the foreseeable future. Yes, it’s kind of a dream, and it’s not the likeliest of outcomes because so many other factors (politics, mostly) will probably sidetrack it.

Certainly, though, technology is a factor for good in our economic future and the fields of robotics and AI are probably going to once again revolutionize our economy the same way that personal computing and the internet did.

What do I know though… it could also all end badly…

 


Source: Wikimedia Commons

Markus Muhs, CFP, CIM