Investing for Japan-style future

[MichaelB]

Less than 15% of global population has average income above $8K per year (source here) and 70% is either low income or very poor. The global economy may stagnate, but it is more likely to grow.

 

[OldShooter]

Less than 15% of global population has average income above $8K per year (source here) and 70% is either low income or very poor. The global economy may stagnate, but it is more likely to grow.

+1

From UN Millennium Development Goals, status report:

• The target of reducing extreme poverty rates by half was met five years ahead of the 2015 deadline.
• More than 1 billion people have been lifted out of extreme poverty since 1990.
• In 1990, nearly half of the population in the developing regions lived on less than $1.25 a day. This rate dropped to 14 per cent in 2015.

But, regardless of this kind of data, what are we to do as investors? Expect the worst, so buy gold bars and black rifles, build safe rooms, and stock up on freeze-dried food? Or buy a highly diversified international portfolio and expect that the ride will be the best one available? I'm for the latter, even though my crystal ball is no better than anyone elses.

 

[Johanson]

I don't firmly believe that we will head that way. However, I do also think it is in the realm of possible futures. I simply want to at least partially hedge for for it.

Probably the only way we could reasonably end up in a full japan style situation is of immigration stops or is shut down. That will throw off our demo's and make our population age stats look very much like japan's. simultaneously, we would start having trouble maintaining rates and economic power as younger nations mature their capitalistic institutions. Remember, less than 100 years ago the US was an emerging market that heavily invested in education and infrastructure via capitalism to come to dominate the world. Now most of asia is doing just that and producing far more post grads than we are. Their tech ramps are much shorter than ours was.

We would have to have little to no immigration and a declining population, just like Japan has had for years. The idea that the US will have little to no immigration is pretty farfetched. Without getting into politics, even Trump just wants to limit immigration to 1 million people/year.

Another thing that will need to happen is the economy will need to shrink YoY, on average, as did the Japanese economy through most of their economic downturn. With fewer people, fewer products were consumed. If we have fewer people and increased consumption/production, the economy will probably still grow and US markets will still be in good shape. But, if you do start seeing the US population declining YoY and our economy shrinking, you might want to start changing your AA to more foreign investments.

 

[Gumby]

What I'm most concerned about is not a declining population per se, but rather a declining number of employed people. The labor force participation rate has been falling for the past 20 years. It is currently only 63%, down from a peak of about 67%. That missing 4% is what Marx called the reserve army of labor, and I think it is what is holding wage inflation down even though the U3 unemployment rate is less than 4.5%.

My fear is that increasing automation/robotics/AI will drive even more people from the labor force, starting with the lowest skill, most routine work and working upward through the food chain. Just consider how many jobs are in the transportation industry and threatened by self-driving technology. Vast numbers of non-working people, who were probably living paycheck to paycheck, are a substantial drag on aggregate demand. And there will be even less wage inflation.

In fact, we could see prolonged deflation in that scenario. And I'm not certain investing "the whole market" will help that much, since automation will spread around the globe to all but subsistence economies. Ultimately, as Brewer intimates, large numbers of unemployed people can result in substantial social unrest.

 

[ejman]

What I'm most concerned about is not a declining population per se, but rather a declining number of employed people. The labor force participation rate has been falling for the past 20 years. It is currently only 63%, down from a peak of about 67%. That missing 4% is what Marx called the reserve army of labor, and I think it is what is holding wage inflation down even though the U3 unemployment rate is less than 4.5%.

My fear is that increasing automation/robotics/AI will drive even more people from the labor force, starting with the lowest skill, most routine work and working upward through the food chain. Just consider how many jobs are in the transportation industry and threatened by self-driving technology. Vast numbers of non-working people, who were probably living paycheck to paycheck, are a substantial drag on aggregate demand. And there will be even less wage inflation.

In fact, we could see prolonged deflation in that scenario. And I'm not certain investing "the whole market" will help that much, since automation will spread around the globe to all but subsistence economies. Ultimately, as Brewer intimates, large numbers of unemployed people can result in substantial social unrest.

I think the scenario you describe is very likely. At the same time being an optimist I believe that mechanisms will be created such that demand can be maintained for what will basically be very low cost automated production of all manner of goods (both physical and intellectual). I have no clue whether the solution will be taxing the production and simply redistributing the proceeds to those not employed or some other mechanism not yet envisioned but a solution will be found...

 

[MichaelB]

Prolonged deflation in the US is possible. IMO less likely than Japan, but we too make the policy mistake of attempting to minimize or avoid economic "creative destruction".

Automation has many limits, and even low cost goods need to be sold. If too many people are out of the labor force, it doesn't matter how cheaply goods are produced when there is inadequate demand.

Developed country deflation or substandard growth is more likely than global deflation. Improving the standard of living for 2/3 of the world population means a potentially large and sustained growth in global demand. Low to middle income populations around the world have a very high propensity to consume, and still live in countries with inadequate infrastructures. The need for investment and opportunity for skilled labor is high.

 

[ejman]

Prolonged deflation in the US is possible. IMO less likely than Japan, but we too make the policy mistake of attempting to minimize or avoid economic "creative destruction".

Automation has many limits, and even low cost goods need to be sold. If too many people are out of the labor force, it doesn't matter how cheaply goods are produced when there is inadequate demand.

Developed country deflation or substandard growth is more likely than global deflation. Improving the standard of living for 2/3 of the world population means a potentially large and sustained growth in global demand. Low to middle income populations around the world have a very high propensity to consume, and still live in countries with inadequate infrastructures. The need for investment and opportunity for skilled labor is high.

I'm not so sure. This kind of reminds me of "Helicopter Ben's" argument that he would create demand no matter what happened re the 2008 unpleasantness . If the cost of production is minimal due to automation and AI advances what is to keep a future Helicopter Ben from acting to create demand?

 

[sengsational]

Thanks to the OP for the thread. Great topic. Interesting and insightful replies.

Probably the only way we could reasonably end up in a full japan style situation is of immigration stops or is shut down.

We had some contractors, programmers, from Mexico. When I told them I wished they and people like them would move to the US, their jaws hit the floor. I said "It's completely selfish. You're a highly productive person and you'd be paying taxes." They were under the impression that everyone here was against immigration.

I could be completely out in the weeds here but to me you bet against the US market at your own peril.
IMO Hedging against something like this is a bit like putting all your eggs in gold bullion.

But if you're trying to find an efficient frontier, "all" of your eggs are never in one basket; the practice means always having something to complain about.

What if Planet Earth is like a morbidly obese person who has begun to suffer the adverse health consequences of their obesity and is surrounded by doctors who argue vociferously among themselves about the best way to promote weight gain in their dear patient?

The solution to "grow your way out of it" has always bothered me, from a ecological perspective. But there seems to be no other way. With regards to this, the US is FAR different from Japan. I know, OP, we're supposed to pretend that somehow the US acts like the Japan investment scenario, but we have plenty of space and (it would seem to me - admittedly, no substantiation) one of the easier "melting pot" countries.

That missing 4% is what Marx called the reserve army of labor, and I think it is what is holding wage inflation down even though the U3 unemployment rate is less than 4.5%.
...
automation will spread around the globe to all but subsistence economies.

Thanks for that insightful post. I love the concept of a reserve army of labor which I kind of understood, but didn't have a name for. If the S hits the F, having this reserve could make things go south in an accelerated manner. I'll offer, in consolation, that the speed with which automation spreads is, thankfully, kind of slow.

 

[Gumby]

Prolonged deflation in the US is possible. IMO less likely than Japan, but we too make the policy mistake of attempting to minimize or avoid economic "creative destruction".

Automation has many limits, and even low cost goods need to be sold. If too many people are out of the labor force, it doesn't matter how cheaply goods are produced when there is inadequate demand.

Developed country deflation or substandard growth is more likely than global deflation. Improving the standard of living for 2/3 of the world population means a potentially large and sustained growth in global demand. Low to middle income populations around the world have a very high propensity to consume, and still live in countries with inadequate infrastructures. The need for investment and opportunity for skilled labor is high.

Sure, Botswana and Cambodia may continue to develop and grow, but how do I realistically invest in that growth?

 

[brewer12345]

Sure, Botswana and Cambodia may continue to develop and grow, but how do I realistically invest in that growth?

IEMG, SCHE, etc. Remember, 35 years ago Vietnam was a defoliated crater. Now it is a hot growth market.

 

[Hyper]

Ah heck. No worries! Mr. FB himself is thinking of 2020 and has already said he wants to give everyone an allowance. Why even invest.

 

[dallas27]

Ah heck. No worries! Mr. FB himself is thinking of 2020 and has already said he wants to give everyone an allowance. Why even invest.

I wasn't aware zuck supported it, but I assume you are alluding UBI, or some flavor of it. I think it is a wonderful idea, and the most efficient solution that is also fully supported by both liberal and libertarian(conservative) ideals. We could put a ton of social workers, regulators, et cetera out of work with a free market UBI that satisfies both Milton Friedman and Phillip Parijs.

 

[dallas27]

I could be completely out in the weeds here but to me you bet against the US market at your own peril.
IMO Hedging against something like this is a bit like putting all your eggs in gold bullion.
Yes, something might happen but you run a bigger risk of missing out on a nice bull run (my neighbor sold everything on the third week of Feb, 2009 and has been waiting for a jump-in point ever since)

While I get where you are coming from, I think you are way oversimplifying what diversifying into DM/EM is, and framing as just a "bet against US". If anything, these markets often end up being a levered play on america as the economies are more and more integrated. Plenty of evidence out there you can increase returns and reduce volatility with foreign exposure. If you aren't aware of this(and i hope you already are), then you may be missing out on superior risk adjusted performance.

 

[dallas27]

Thanks to the OP for the thread. Great topic. Interesting and insightful replies.

I would love to take all the credit, but I think the thoughtful responses deserve the real praise. On second thought, forget about them, this was all me.

 

[MichaelB]

I'm not so sure. This kind of reminds me of "Helicopter Ben's" argument that he would create demand no matter what happened re the 2008 unpleasantness . If the cost of production is minimal due to automation and AI advances what is to keep a future Helicopter Ben from acting to create demand?

Monetary policy can be used to pull demand in from the future to the present. It is a way to minimize or avoid unpleasant economic cycles, but is hard pressed to deal with secular stagnation. That was one of my points. The other: with the right policy mix, real demand elsewhere in the world may create investment opportunities. We may stagnate but the world may not.

Sure, Botswana and Cambodia may continue to develop and grow, but how do I realistically invest in that growth?

That reminds me so much of one of my grad school professors.

Even if Botswana and Cambodia don't grow, of the 15 most populous countries in the world, 13 (60% of global population) are still low or middle income. In all the time forum members have been alive, it has never been easier for those countries to access capital, technology, and expertise. Economic development policy knowledge and awareness is unequaled in history. In our lifetimes, it also has never been easier to invest in those markets, and Brewer gave a couple of very good examples. There are many others.

 

[Johanson]

My fear is that increasing automation/robotics/AI will drive even more people from the labor force, starting with the lowest skill, most routine work and working upward through the food chain. Just consider how many jobs are in the transportation industry and threatened by self-driving technology. Vast numbers of non-working people, who were probably living paycheck to paycheck, are a substantial drag on aggregate demand. And there will be even less wage inflation.

I don't see an issue with less labor participation as long as more people are invested in production. We could see an automated world where the majority of the people are stockholders of those automated companies.

 

[Gumby]

I have given some thought to what a country with a substantially reduced need for labor would look like. It will be swell, at least initially, for those of us who have financial capital. But if you are one of the unneeded laborers and your only asset is human capital, it won't be so good. Those laid-off workers, who were living paycheck to paycheck, are not magically going to become stockholders.

 

[dallas27]

I don't see an issue with less labor participation as long as more people are invested in production. We could see an automated world where the majority of the people are stockholders of those automated companies.

I have thought about this, more usually in the context of right leaning arguments that everyone is suppose to invest in stocks in a capitalistic society such as ours.

Imagine, if you will, a world where everyone is LBYM and invested in stocks. Imagine further that broad index passive investing is far and away the style of investing all citizens use. So where does that leave you? A society where all citizens have a partial ownership in the means of production, albeit some have more/less than others.

Have we not in this scenario ended in a state of socialism/communism, through a capitalist/free market structure? Maybe this is where robots will ironically take us?

 

[OldShooter]

I have given some thought to what a country with a substantially reduced need for labor would look like. It will be swell, at least initially, for those of us who have financial capital. But if you are one of the unneeded laborers and your only asset is human capital, it won't be so good. Those laid-off workers, who were living paycheck to paycheck, are not magically going to become stockholders.

I have no crystal ball with which to foretell the future, but the history of technological advances seems to say that they do not create permanent cadres of unemployed workers. The mechanical loom didn't do it. (Ned was wrong.) Electricity didn't do it. The railroads didn't do it. ... You get the idea.

To worry about it now is to say "This time it's different." That statement is usually found to be false. This time may be different, but I'm neither counting on that nor fearing it.

 

[NW-Bound]

I have been surfing youtube looking at some solar energy related videos, which lead me to other videos on manufacturing in China. I was impressed with some of their robot automation assembly lines. Even the Chinese will have problems finding work.

At the same time, automation means more being produced than ever. Perhaps in the end more low-paid workers will be employed in moving merchandise around, like Amazon does, instead of making them. That, plus hauling away all the trash people generate when they throw away perfectly working stuff to upgrade.

 

[ERD50]

I have given some thought to what a country with a substantially reduced need for labor would look like. It will be swell, at least initially, for those of us who have financial capital. But if you are one of the unneeded laborers and your only asset is human capital, it won't be so good. Those laid-off workers, who were living paycheck to paycheck, are not magically going to become stockholders.

But you are living it.

Farm Population Lowest Since 1850's - NYTimes.com (first link I found, it's old)

Officials said an average of 4,986,000 people lived on farms in 1987, or 2 percent of the United States population

The farm population in 1920, when the official Census data began, was nearly 32 million, or 30.2 percent of the population

We don't have 28% unemployment, do we? Those people adjust. Often to much better lives. Compare the standard of living in 1920 to today - no comparison. It's not all doom and gloom. It's called "change".

edit/add: I see OldShooter just posted a similar view.

-ERD50

 

[Gumby]

I'll grant that those farmers may have moved from growing vegetables to producing automobiles. But what we're talking about now is the elimination of the need for humans as factors of production anywhere, whether to grow food or make cars. It may be a failure of imagination, and I sure hope I'm wrong, but I can't think of what all those people will do for a living in the not too distant future.

 

[Johanson]

I'll grant that those farmers may have moved from growing vegetables to producing automobiles. But what we're talking about now is the elimination of the need for humans as factors of production anywhere, whether to grow food or make cars. It may be a failure of imagination, and I sure hope I'm wrong, but I can't think of what all those people will do for a living in the not too distant future.

Owning stock in companies that make, repair, sell, buy, and/or use robots? Instead of grandma and grandpa putting money into a grandkid's college fund, maybe they'll put shares in a robotic company fund or even an index fund.

Plus, there will still be drugs, prostitution, and gambling.

 

[ERD50]

I'll grant that those farmers may have moved from growing vegetables to producing automobiles. But what we're talking about now is the elimination of the need for humans as factors of production anywhere, whether to grow food or make cars. It may be a failure of imagination, and I sure hope I'm wrong, but I can't think of what all those people will do for a living in the not too distant future.

I do think it may be that 'lack of imagination' thing. And I'm not picking on you, in general humans are terrible at predicting the future.

In 1899, the most worrisome threat to cities was piles of horse manure in the streets and dead horses rotting by the curbside. No one envisioned that the work horse breeds would almost be extinct in another 30 years, and a whole new set of problems were around the corner (smog, what's smog?).

Well, OK, I might pick on you a little, considering your sig is "Living an analog life in the Digital Age."

Get with the times man! Imagine!

-ERD50

 

[Gumby]

Instead of grandma and grandpa putting money into a grandkid's college fund, maybe they'll put shares in a robotic company fund or even an index fund.

The problem is that this is not the lived reality for the vast majority of the people about to become unemployed. There is no "grandma and grandpa putting money into a grandkid's college fund". For a lot of these people, it will be a miracle if the kids graduate from high school, let alone attend college. Anyway, grandma and grandpa don't have a spare penny to their name.