If you spend any time watching CNBC, you know who “Downtown Josh Brown” is. He is a thoughtful analyst on the markets and someone I consider a friend. He writes a blog called The Reformed Broker that I think can properly be characterized as irreverent.
His latest letter is an Outside the Box way of thinking about the current bull market. I’m not sure whether he is offering this tongue in cheek or not, but he is speaking to the same thing that I’ve been talking about for quite some time: the growing gap between the Protected and the Unprotected. It’s about the angst of the middle class and all those who feel that the future is changing too fast and in ways that are hurtful to them personally. And frankly, many of the protected class recognize that they are increasingly vulnerable, too. For instance, it is clear that various aspects of legal work and medicine will be automated within the next few years. It’s not just self-driving cars that are threatening jobs.
I’m taking a morning flight back to Dallas from San Francisco, where I have spent the last two days immersed in all matters biotech and antiaging. The Buck Institute is at the center of the antiaging efforts, and they assembled a tour de force lineup of scientists to discuss the latest in research to not only turn back the clock on our aging bodies but also to figure out ways to heal the diseases of aging. Being around such creative and entrepreneurially driven people has been exhilarating.
And then I got to top it off with dinner with Mike West of BioTime, where we discussed his spinoff of AgeX. Mike is on the verge of actually doing something called induced tissue regeneration, which has a whole host of amazing implications. Curing diseases, replacing damaged body parts, and yes, even reversing the effects of old age.
I think I got Mike West close to swearing a blood oath to go with Patrick Cox and me to the Cleveland Clinic and run through Dr. Mike Roizen’s executive health program. Mike West is one of those doctors who doesn’t take care of himself or do the checkups that he would tell everybody else to do, and I think Patrick and I are just going to have to pick him up and march him over to Cleveland to make sure everything is okay. From my point of view, the work that he is doing and its potential for success make him the most important man in the world. And I’ve gotten him to agree to come to my conference along with Aubrey Du Grey, the antiaging maven, and Eric Verdin, the head of the Buck Institute. Patrick Cox will moderate that panel, and it should be absolutely fascinating.
And speaking of panels, I have finalized one session that I want to do on Bitcoin and other cryptocurrencies. Three experts (two extraordinarily successful hedge fund managers and George Gilder, who is of course writing another book on the whole subject), and I have my favorite skeptic in mind to moderate the panel. As the song goes, “There’s something happening here, and what it is ain’t exactly clear.” This year’s conference is shaping up nicely. I know, we’ve been reminding you to reserve the dates March 6-9 next year for San Diego, but you really do want to be in the room. It is going to be our most exciting conference yet.
And now it is time to hit the send button. Emails to answer; papers, books, and essays to read; and somewhere here I’ve got to start thinking about this week’s letter. Retirement? I don’t need no stinking retirement. You have a great week.
Your planning to live a long time analyst,
John Mauldin, Editor
Outside the Box
Just own the damn robots.
By Joshua Brown
October 16, 2017
Originally published here
…five ranks of ten machines each, swept their tools in unison across steel bars, kicked out finished shafts onto continuous belts…
Paul unlocked the box containing the tape recording that controlled them all. The tape was a small loop that fed continuously between magnetic pickups. On it were recorded the movements of a master machinist turning out a shaft for a fractional horsepower motor. He’d been in on the making of the tape, the master from which this one had been made.
He had been sent to one of the machine shops to make the recording. The foreman had pointed out the best man – what was his name? – and, joking with the puzzled machinist, had been hooked up to the recording apparatus. Hertz! That had been the machinist’s name – Rudy Hertz, an old timer, who had been about ready to retire.
And here, now, this little loop in the box before Paul, here was Rudy as Rudy had been to his machine that afternoon – Rudy, the turner-on of power, the setter of speeds, the controller of the cutting tool. This was the essence of Rudy as far as his machine was concerned.
Now, by switching in lathes on a master panel and feeding them signals from the tape, Paul could make the essence of Rudy Hertz produce one, ten, a hundred, or a thousand of the shafts.
There’s something insidious going on in the psyche of investors that deserves a lot of the credit for today’s bull market, and almost no one is talking about it. But I will.
The first American retirement system – available only for gun fighters – a colonist in Massachusetts picks up his arms and goes off to defend his settlement against the Indians. They chop off his arm, rendering him unable to participate in the only form of labor that existed in those days (manual). He can’t build shelters anymore, raise animals or till the soil. So the colony takes up a collection, in the form of taxes, which enables the wounded fighter to retire and continue to support himself and his family.
You know who collected these taxes from the colonists? Usually the guy himself. True story.
The concept of retirement evolved from there. For most of the 1800’s, you basically worked on a farm til you died. Retirement took place in a graveyard. Until 1875, when the American Express railroad company established the first private pension fund in America, followed by many other companies shortly after. It was no big deal, given that the average person wasn’t expected to make it long past their 50th birthday. The US government created a public version of this – the Social Security system – in the 1930’s when it became apparent that not everyone was going to have a job long enough (or secure enough) to earn these pensions.
But something else is going on right now. There is a sense of desperation underlying the way in which we’re investing.
Why won’t people panic!?!
Trump! Kim-Jong-Un! Nukes! Border walls! Race riots! Trade agreement demolition! Impeachment proceedings! Sell, goddamn you!
But they won’t sell. Stocks make new highs, volatility completely disappears. Every week a fresh reason to freak out. No reaction from the investor class whatsoever, other than in short, sharp bursts that dissipate within hours.
Well, if you think Donald Trump’s mentally ill outbursts on Twitter should be scaring investors, then perhaps you failed to consider the possibility that there is something even scarier out there.
A 45 year old married father of two with a mortgage and a pair of college educations to fund. The remote yet persistent threat of a nuclear war is not what keeps him up at night. In fact, he might almost see it as a relief should it come. He is a bundle of raw nerves, and each day brings even more dread and foreboding than the day before. What’s frying his nerves and impinging on his amygdala all day long is something far scarier, after all. He, like everyone else, is afraid that he doesn’t have a future.
He is petrified by the idea that the skills he’s managed to build throughout the course of his life are already obsolete.
In Kurt Vonnegut’s 1952 novel, Player Piano, we are introduced to a future in which only engineers and managers have gainful employment and meaningful lives. If you’re not one of the engineers and managers, then you’re in the army of nameless people fixing roads and bridges. You live in Homestead, far from the machines that do everything, and are treated throughout your life like a helpless baby. The world no longer has a use for you. Anything you can do a machine can do better, and you are reminded of this all day, every day by society and the single omnipotent industrial corporation that oversees it all.
He wrote this 65 years ago. It couldn’t have been more apropos to what we’re witnessing now than if had he written it this morning, right down to the nostalgia-selling demagogue who seizes the opportunity to foment rebellion amongst the displaced and disgruntled. When millions of people start seeing their purpose begin to erode and their dignity being stolen from them, the idea that there’s nothing left to lose starts to creep in.
In the book, the result is a violent rebellion against the machines. In the real world, we’ve resigned ourselves to investing in them instead.
If you’re on the other side, however – the losing side – it’s a horror movie in slow motion.
The only way out? Invest in your own destruction. In this context, the FANG stocks are not a gimmick or a fad, they’re a f***ing life raft. Market commentators rhetorically ask aloud what multiple should investors pay to own the technology giants. That’s the wrong question when people feel like they’re drowning.
What multiple would you pay to survive? Grab a raft.
Here’s the “Robotics and Automation ETF” over the last two years:
There’s panic in this chart. A much more sustained kind of panic than can be sown by the pronouncements of Trump or the bellicosity of North Korea.
There’s a great joke about an automated car plant in Japan, where the machines work in the dark (no need for light, they don’t have eyes) and there are only two living things authorized to be on the factory floor – a man and a dog.
What’s the man there for?
His job is to feed the dog.
What’s the dog for?
The dog keeps the man from touching any of the machines.
Matt Levine at Bloomberg View has an interesting way of thinking about Bridgewater, a gigantic hedge fund overseeing almost $200 billion in assets:
If you had to describe in two words what Bridgewater’s 1,500 employees do, “not investing” would be a pretty good fit. They have a computer to do the investing! Bridgewater runs on algorithms, and famously few of its employees have much visibility into how the algorithms actually work. They instead spend their time marketing the firm, doing investor relations, and — crucially — evaluating and critiquing one another. I once explained my theory of Bridgewater: “One stylized model for thinking about Bridgewater is that it is run by the computer with absolute logic and efficiency; in this model, the computer’s main problem is keeping the 1,500 human employees busy so that they don’t interfere with its perfect rationality.”
This heuristic – a room full of geniuses playing mind games with each other while computers keep the profits rolling in – is definitely silly, but Vonnegut would have loved it. And it works really well symbolically, even if it’s a distortion. You don’t get a better educated, more highly pedigreed workforce than the folks at Bridgewater. So the image of them looking for ways to fill their days – even though untrue – could only increase the dread of people working in firms further down in the Knowledge Economy food chain.
“Specialize” the displaced workers are being told. “Up your eduction and increase your skills! Move to a different city! Find a niche where technology can’t replace you! Learn to code!” They’re trying, but this doesn’t seem to be a long-term solution. We’re in an age where we’re being told AI is about to start writing its own software. Machines are going to be trying legal cases and diagnosing illnesses, writing songs and architecting buildings, giving financial advice and driving our vehicles. Every day more articles about this or that breakthrough. There are no limits, there are no protections. It’s bordering on lawlessness.
No one is immune. Not even the creatives. Netflix users have spent 500 million hours watching Adam Sandler content, so it isn’t far-fetched to imagine its programming algorithm devising an art house film starring Sandler. Why do we need producers? Why is a monster like Harvey Weinstein even necessary in a near future where software determines what we want to watch and automagically gives us more of it? What would be Weinstein’s role in that, besides grabbing people and running up massive legal and travel bills for the studio?
People have never felt more ill at ease about their own reason for existing. This is manifesting itself in the trillions of dollars being thrown at Facebook, Google, Uber, Nvidia, Apple, Amazon, Alibaba. Yes, these companies create jobs, but they are different jobs that the people being displaced mostly can’t get. When 10,000 sweater-folding department store workers are laid off in fifty different cities on a Friday, it’s not like they can all relocate to Seattle and begin building mobile user interfaces for Amazon the next Monday morning.
Professor Scott Galloway, an expert on the technology giants that now dominate every facet of the economy and our lives:
Uber only has a few thousand employees, and they’re very technically literate. Uber has figured out a way to isolate the lords (4,000 employees) from the serfs (2 million drivers), who average $7.75/hour, so its 4,000 employees can carve up $70 billion vs 2 million on an hourly wage. So, Uber has said to the global workforce, in hushed but clear tones: “Thanks, and f*** you.”
Michael Batnick frames this as the price of progress, which is becoming a full blown crisis. We have no answers for this yet. He is hopeful that we come up with some. It’s happening a lot faster than we can adjust to it, even if it’s all eventually for our benefit (and what sort of capitalist would be caught dead arguing otherwise?).
The anarchists in Vonnegut’s book have paid the price of progress. They worry about their sons committing suicide when their IQ test results sort them out for a lifetime of roadwork rather than an invitation into the upper echelon of managers and engineers. They write a letter explaining the destruction they’re about to unleash as payback for all of the “progress” that’s been inflicted on them…
I deny that there is any natural or divine law requiring that machines, efficiency, and organization should forever increase in scope, power, and complexity. I see these now, rather, as the result of a dangerous lack of law. The time has come to stop the lawlessness.
Without regard for the wishes of men, any machines or techniques or forms of organization that can economically replace men do replace men. Replacement is not necessarily bad, but to do it without regard for the wishes of men is lawlessness.
Without regard for the changes in human life patterns that may result, new machines, new forms of organization, new ways of increasing efficiency, are constantly being introduced. To do this without regard for the effects on life patterns is lawlessness.
Men, by their nature, seemingly, cannot be happy unless engaged in enterprises that make them feel useful. They must, therefore, be returned to participation in such enterprises.
The disruptor’s credo, say it with me: Your profit margin is my opportunity. Put another way: Your profitable small business is basically a market failure. But only for now, because we’ve got investors, motherf***er.
Friend of a friend owns a small chain of grocery stores in New Jersey. A few years ago, when Amazon got into groceries, he changed his mind about investing in the growth of his own business. He started buying Amazon shares with his investment capital instead. He saw what happened to Circuit City and Tower Records, Borders and Barnes & Noble. So he bought some Amazon and then he bought some more.
This wasn’t retirement investing. This was something else. What should we call it? Disruption Insurance?
I don’t know. Anyway, long story short, Amazon is up over a thousand percent over the last ten years, and <jersey accent>he don’t need the stores no more.</jersey accent>
Of the people actively looking for jobs right now, 96% of them are currently employed, as of the latest labor report. This, of course, excludes tens of millions of working age folks who have stopped looking, are working off the books or who have otherwise just given up. A great deal of them come from industries or vocations that no longer exist. This is not a new phenomenon, it’s been going on since the beginning of time.
What is undeniable, however, is that the pace of this process has increased to breakneck speed. It also seems to be perennially advantaging those for whom advantage has already accrued. Winners keep winning. A momentum strategy, but for people. You would expect the folks on Wall Street to be celebrating all time record highs for asset prices. It’s the opposite – it’s making them miserable. Head counts and fund closures are this bull market’s accoutrements, not lavish parties and cocaine. It’s never been like this before.
For the last fifty years, we’ve invested for retirement. For the last two or three years, we might be investing for a whole other reason. What price is too high to pay for a company’s stock if the company spends every waking minute trying to replace you?
So what else is left to do? Just own the damn robots.