Times are Changin’ – Part 2: Dynamics of 20th Century Economic Growth

Watching the first test the other day reminded me of how projecting ‘what has been’ into the future is a flawed exercise.

Warney and Gilchrist were part of the Fox commentary team.

Both wore the baggy green when Australia dominated world cricket in the late 1990s and early 2000s.

Then times changed. One by one they retired. There was still an Australian cricket team, but the composition and talent of that team was vastly different.

Our world ranking slipped. The future of Australian cricket was not looking as bright as the past.

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The thoughts on extrapolation came thick and fast.

What if we projected the first half of Australia’s innings into the future?

Our first five wickets yielded 506 runs. Would the next five wickets deliver a similar run total?

No. Not even close. The last five wickets added only 74 runs.

Pitch conditions vary. Batsman get tired. New balls are taken. Bowlers get invigorated.

The game between the ears can change.

There are a host of reasons why the runs tally of one session may not be repeated in the next session.

And when it comes to the game of life, change is ever present.

In last Friday’s Rum Rebellion we presented the case for why the extraordinary growth of the 20th century cannot possibly be replicated in the 21st century.

The conditions that produced past growth no longer exist.

Where there was once minimal household debt, there is now maximum debt.

Limited welfare schemes once viewed as a handout, are considered an entitlement.

In a time before widespread acceptance of contraception, family numbers were largely unplanned. Today, family numbers are very much planned…on average, it’s two and no more.

Lower birth rates are why the UN forecasts the world (ex-Africa) has reached peak population.

For almost 9/10ths of the 20th century, the Western world enjoyed the majority of the gains from global growth.

That all changed from 1990 onwards.

Now, the two global giants — in terms of population numbers — want for their citizens, what we’ve long enjoyed.

We’re facing stiff labour force competition from hundreds of millions of people in India and China.

Wage growth on the scale of times past cannot possibly occur when tasks can be outsourced globally.

The dynamics behind 20th century economic growth have changed.

Quality of Employment — As Opposed to the Quantity

And that gradual change in the quality of employment — as opposed to the quantity — is evident in the US Private Sector Job Quality Index…

The U.S. Private Sector Job Quality Index (JQI) assesses job quality in the United States by measuring desirable higher-wage/higher-hour jobs versus lower-wage/lower-hour jobs.’

Since 1990, the job quality index has fallen around 14% — the two grey bars are when the US experienced a recession.

The Rum Rebellion 28-11-19

Source: Job Quality Index

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The US may have record low unemployment, but the quality of those jobs is deteriorating.

And if people do not have the income, then they cannot spend and/or borrow as much.

Which is why — beneath the surface — the US economy is a lot weaker than the official data suggests.

If we look to the future, the downward pressure on employment opportunities and income is only going to increase, due to automation.

And this is where we pick up the second part of this series…

The Smithsonian Magazine published an article titled: ‘When Robots Take All of Our Jobs, Remember the Luddites — What a 19th-century rebellion against automation can teach us about the coming war in the job market’.

The article begins with:

Is a robot coming for your job?

The odds are high, according to recent economic analyses. Indeed, fully 47 percent of all U.S. jobs will be automated ‘in a decade or two,’ as the tech-employment scholars Carl Frey and Michael Osborne have predicted. That’s because artificial intelligence and robotics are becoming so good that nearly any routine task could soon be automated. Robots and AI are already whisking products around Amazon’s huge shipping centers, diagnosing lung cancer more accurately than humans and writing sports stories for newspapers.’

Let’s err on the side of caution and reduce the expected carnage in the US job market from 47 percent to 30 percent…that’s still a big number. Apply that percentage to developed and developing world workforces and ‘Houston we have a problem’.

Without employment how do you go into debt? If less people take on less debt (because they’re not sure if their job is next to be cannibalised), how does the debt funded economic growth model propel itself?

With less people in the 21st century workforce, who’s paying taxes to finance 20th century entitlements?

The good news is history shows us that new jobs will replace the old ones.

The bad news is, that’s going to take a generation or two to occur.

We are more concerned with here and now. And that’s looking to be a whole lot different to the world of recent times.

On 3 May 2017, the Financial Times published an article written by David Eiswert, portfolio manager of global equities at T Rowe Price.

The article was titled: ‘The era of ‘deflationary progress’ means betting on automation — Investors need to come to reconcile themselves to the contradiction of progress and slower growth’.

The concluding paragraph summarised the author’s outlook:

…there is more than politics and policy, demographics and debt slowing dollar GDP growth. There is a difference between stagnating statistics and the change and progress happening in the world. Automation is leading to a condition of ‘deflationary progress’. Investors and voters will have to come to terms with the contradiction of progress and lower growth.’

It looks and feels like we are on the cusp of a major change in the dynamics driving economic growth.

Red tape; green tape; ageing Boomers; and, historical debt levels are all contributing to the governor on GDP growth. But, ‘wait there’s more’ according to Eiswert.

Throw in automation for good measure and economic progress is going to resemble that of a snail on Stilnox.

Back to our golden rule on economic growth…increased workforce + increased productivity.

Increased workforce — unlikely.

In fact, the un and underemployment in the millennial demographic is estimated to be in the 10 percent to 20 percent range.

And for those fortunate enough to be employed, the news on the wage front is not as good as they would like.

In his book Average Is Over, Tyler Cowen wrote:

Inflation-adjusted wages for young high school graduates were 11 percent higher in 2000 than they were more than a decade later, and inflation-adjusted wages of young college graduates (four years only) have fallen by more than 5 percent.

Increased productivity — possibly.

However, any gains are likely to be ‘deflationary progress’.

For example, Amazon is driving efficiencies but that comes with a cost to employment and at the expense of less efficient competitors.

Elusive Economic Growth

In a low-growth world, growth becomes almost a zero sum game. One company’s gain is another’s loss.

Without growth in the workforce and/or productivity, economic growth is going to be elusive.

On a day-to-day basis the world goes on about its business. Very little appears to change.

Same stuff, different day.

However, as I hope I’ve managed to demonstrate to you, under the surface there are strong currents of change.

Speaking as a baby boomer, when I was a young fellow, we fully expected to earn more than our parents. We had been conditioned to expect the next generation would live better than the one before. Not so today.

Ask a group of Gen Y and millennials if they have the same expectation and my guess is the majority will answer in the negative. HECS debts, stagnating incomes, higher cost of living (rent), high-six and low-seven figure mortgages, these are all growth retardants we boomers never had.

The base is simply not there to repeat past levels of growth.

To maintain the illusion of growth we are seeing ballooning levels of public debt. A fair percentage of this is being incurred for recurring expenditure…health and welfare spending.

Much has been said about borrowing for infrastructure spending. My guess is this will not be as economically productive as it is trumpeted to be. Anything government and unions are involved in planning, inherently costs far more and delivers far less.

In summary, the components for growth are not there. The immediate outlook for the 21st century is it will be an equal and opposite force to what we witnessed in the final decades of the 20th century.

Warren Buffett’s forecast of the Dow rising to 1 million points in 2117 could possibly happen.

Let’s assume that Buffett is correct and the Dow does pump out the long-term compounding average over the next century.

The thing is, this could be like a cricket innings.

The run rate starts really slowly and then accelerates in the back half of the innings.

It could be a case that most of the US market’s compound growth occurs in the second half of the 21st century.

Whereas, the first half of the 21st century might be spent dealing with the debt and entitlement legacy issues of the 20th century.

We could spend a few decades clearing the decks for a period of above-average growth.

And that’s the problem for today’s investors.

You don’t have the luxury to wait 30, 40 or 50 years before markets resume normal compounding operations.

As investors we have to play the ball in front of us, not the one that’s going to be bowled tomorrow or the day after.

And the way I see it, the market is firing down bumper after bumper.

During this fiery spell, we have to play defensively and do our best to weather the coming barrage.

Eventually the market’s attack will tire. But it could take much longer than any of us predict.

And when that happens, those who managed to hold onto their wicket (cash) will enjoy an innings as fine as Bradman at his best.


Vern Gowdie,
Editor, The Rum Rebellion

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Vern has been involved in financial planning since 1986.

In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners.

His previous firm, Gowdie Financial Planning, was recognised in 2004, 2005, 2006 & 2007, by Independent Financial Adviser magazine as one of the top five financial planning firms in Australia.

In 2005, Vern commenced his writing career with the ‘Big Picture’ column for regional newspapers and was a commentator on financial matters for Prime Radio talkback.

In 2008, he sold his financial planning firm due to concerns about an impending economic downturn and the impact this would have on the investment industry.

In 2013, he joined Fat Tail Investment Research as editor of Gowdie Family Wealth. In 2015, his book The End of Australia sold over 20,000 copies and launched his second premium newsletter, The Gowdie Letter.

Vern has since published two other books, A Parents Gift of Knowledge, all about the passing of investing intelligence from father to daughter, and How Much Bull can Investors Bear, an expose on the investment industry’s smoke and mirrors.

His contrarian views often place him at odds with the financial planning profession today, but Vern’s sole motivation is to help investors like you to protect their own and their family’s wealth.

Vern is Founder and Chairman of The Gowdie Advisory and The Gowdie Letter advisory service.

The Rum Rebellion