A vigorous debate is going on between economists, stock traders, and investors on if computer A.I. and automation will take all our jobs and destroy the economy. I have been studying this issue for more than a year and I'm ready to give you my final opinion on the subject.
Please take a moment to watch this video of two of my economics teachers debating if machines will take all our jobs and thus destroy the economy. This will give you a good economics foundation on both positions so I can give you my opinion without rehashing the entire argument.
At first, most people will support Tyler Cowen's position that computer A.I. and automation is bad for the economy. But over time, I think you'll come to the decision that Alex Tabarrok's position is the right one.
Let's take Tyler Cowen's argument to the extreme. Let's say that computer automation continues to eliminate good paying jobs and that rich CEOs and business owners make crazy profits while the rest of us go broke without a job. In this scenario, millions of people will be without jobs.
The unemployment rate would rise about 10%, then 15%, then 20% and beyond. What would happened to consumer spending? It would drop as nobody would have any money to buy what these rich CEOs and business owners are producing.
For example, Amazon takes over Whole Foods, eliminates thousands of cashier jobs, and replaces those jobs with automated checkout stands. This lowers the price at which Amazon sells food because of lower labor costs. Now Albertson's and Walmart, they follow what Amazon does so they too can compete on price. Soon the entire grocery industry becomes mostly automated. Now imagine that this plays out across many sectors beyond just grocery as millions of jobs are replaced by computer automation. If that happens, who is buying what the computer automation is producing? Nobody.
The rich will stop getting richer and the entire economy will implode as the human race destroys civilization through expanded automation and the pursuit of greed at any cost.
Rich people are not stupid. They know that employees are also their customers. Rich corporations and CEOs are not going to advance an agenda that is ultimately going to result in their own destruction. But it's more than just that, it's economics.
If computer A.I. and automation caused massive unemployment and poverty, consumer demand would fall through the floor and there would be no demand for the products that computer A.I. and automation creates. Therefore, economics tells us that if there's no demand, these services and products would cease to exist. Corporations would have no need for automation and so they would stop investing in it and developing it.
Here's another example. Back in the early 80's, I was a computer programming prodigy. I learned programming on a Commodore 64 and did things that blew people away. I was going to be a computer programmer when I got out of high-school, or so I thought. By the time I graduated high-school, coders like me with mad skills were obsoleted by “canned software”. Was I out of a job opportunity? Not really. 3D video games used canned 3D engines which allowed games to be produced by a greater number of businesses. Because the engines driving the 3D games were “canned”, it brought down the cost of video games. More people could afford video games at $30 instead of at $90 or more back before canned software. An entire gaming industry rose up and is now a multi-billion dollar industry.
The Internet came soon after and so I started programming websites. I learned Java, HTML, SQL, and PHP. Just when I was getting really good at programming websites, along came the “canned” software again. AOL came out with Rainman in the early 90s and back then, AOL pretty much was the internet for most people. I still got a little bit of work from various businesses but then came out BBS's which allowed anybody to set up a message forum and put up a dial up website. In the early 2000s came WordPress, another “canned software” that greatly reduced the need for my programming skills. Every business on the planet began putting up a website and shopping cart and the ability to buy things online was born. People began making money selling things online. Was I out of a job? Not really. WordPress lead to millions of people putting up websites and so I finally got smart and realized the money was in content production and selling online and not in computer programming.
If computer automation was something that was so bad for the economy, then why has the internet and automation made the world better for so many people regardless of their income class? If automation (which is what “canned software” essentially is) was something that was bad, economics and the law of supply and demand tells us that its value would eventually go to zero and such automation would stop because their would be no demand for it. But that's not what has happened. Today, millions of Americans make money online with automated CMS platforms.
I could go on. What about stock trading? Back in the 70s and early 80s, you had to call a broker on the phone and pay $120 a trade or more if you wanted to invest in the stock market. When the internet came out and the discount broker industry sprang up, brokers said it was going to destroy their industry. Did it? Not really. With cheaper trading fees of $10 a trade and lower, millions of Americans began investing in the stock market. Brokers went to work for online discount brokerage firms as more people than ever started investing and stock trading. If the internet and automation was a bad thing, the value of online brokerage firms would eventually drop to zero as demand for their services would eventually come to an end. That's not what happened. In fact, entire new trading software companies sprang up and even stock trading blogs like GuerillaStockTrading came into being.
Computer automation has created new jobs that no one could even imagine 40 years ago. Automation has increased wealth across all income classes as prices are lowered so consumers are happier and can buy more with their hard earned dollars. The economy becomes deeper and more diverse as life becomes richer with greater opportunities for everyone, even someone who is disabled with Muscular Dystrophy (M.D.) like myself that can't do a more physically demanding job.
Computer automation has led to so many opportunities that years ago, a disease like Muscular Dystrophy (M.D.) would have doomed me to poverty because physically I'm unable to do a lot of jobs. Today, I can work a day job in an office as a bookkeeper and in IT support, and at night I can stock trade and produce value for others over the internet blogging about the stock market. I've never been on government assistance and a burden to tax payers even though I have M.D. thanks to computer automation creating a deep and diverse economy.
For every change there's always another opportunity of equal or greater value waiting.
Therefore, my final opinion on computer A.I. and automation is that it's a positive for the economy. I don't believe that computer A.I. and automation is going to take all of our jobs because of economics and the law of supply and demand. If it did take all of our jobs, it would cease to be. Our goal then is to find emerging opportunities in this space that we can invest in and make a fortune over the coming years.
You may be angry because you lost your job to automation and so you don't agree with me. That's fine. I understand this is a highly debated topic even among brilliant economists. This is only my personal opinion based on my own life experiences and observations that I wanted to share with you.
The sell-off in technology is more about market reversion to the mean than it is indicative of some gloom and doom scenario where technology stocks lead the rest of the market lower.
Credit Suisse just released a report to clients where they are neutral to slightly cautious on technology stocks for the next 3 months, but remain positive longer out.
There are many bottoms-up drivers in the technology sector right now including the new iPhone, continued increase in cloud usage, greater adoption of artificial intelligence across various sectors, and autonomous driving. Technology adoption and market penetration are likely to increase over the next couple of years.
The S&P 500 is dominated by a few big tech companies. Innovations such as more automation in the grocery industry from Amazon, the iPhone 8, and Tesla's Model 3 are catalysts for the S&P 500 to move even higher.
Reversion To The Mean
The green line is what I would calculate the mean to be at. As you can see, QQQ has overshot the mean over the last few months and so a move back towards the 10 year mean line is normal.
Fiscal policy will also be a catalyst for continued growth such as tax reform. The medical device tax, investment tax, tanning tax, Medicare Hospital Insurance surtax, the health insurance fee and tax on brand pharmaceutical manufacturers, all will likely be repealed at some point in the future.
Credit Suisse set negative expectations for consumer goods. Stocks that trade in the consumer goods sector are likely going to be stocks we should avoid. Fundamentals and valuation are likely to continue to deteriorate in clothing, department stores, grocery, and packaged food.
Momentum trading the June 14, 2017, Federal Reserve announcement is fairly straight forward with the 5, 10, and 20 period simple moving averages and the Parabolic Sar indicator.
Momentum Trading Against the Algos
It looks like the algo computer AI trading desks create a wave of volatility on the release of the Fed announcement. The volatility wave is itself neutral. It's not meant to favor either the bulls or the bears. The purpose of the wave is to see if it sucks in human traders. If a very small number of human traders bite on the upward move, presumably to play a breakout, the algos will take the market back down to see how many human traders bite on the downward move. It's like price discovery by the computer AIs in an attempt to figure out which side of the market to trade.
In the video below you'll get to look at SPY in real-time when the Fed announcement of a quarter point rate hike hit the market on June 14, 2017 at 2 PM eastern time.
On Friday, June 9, 2017, the technology sector did what can only be described as a flash crash. I have captured the real-time event in under 7 minutes on a sped up 10 minute chart.
Anatomy of a Flash Crash
Notice the algos manufacturing a sell the breakout move. Opps, no humans left and all the quants doing the same thing, selling the breakout. The machines are not smart, their machines. It's ARTIFICIAL intelligence, meaning fake intelligence. Programming sub-routines start all running sell code as stop loss levels are hit. It's an AI manufactured flash crash that destroys everything in its path. It's machines run amok.
There's some irony that this happened in the technology sector, the very home of AI.
As wages rise, more and more business owners are turning to machines instead of human labor. President Obama and Democrats have spent the last 8 years replacing high-paying jobs in the manufacturing sector with low-paying jobs in the services and health care sectors. But in all fairness, both Republicans and Democrats are to blame for outsourcing, offshoring, and the elimination of good-paying manufacturing jobs. Both Democrats and Republicans have demonstrated how not to build up a middle class that will support the economy.
Technology is a rising threat to jobs as more robots are used in the workplace. Since wages began rising in 2015, there has been a significant increase in the implementation of robots, starting with the fast-food industry.
In my home state of California, Zume Pizza has replaced its human chefs with robots, cutting labor costs in half. TechCrunch visited Zume Pizza for a tour of their robotic pizza factory.
In response to recent minimum wage hikes, Wendy’s is now replacing fast food workers with robots. The fast food chain announced it would start automating all of its restaurants by installing self-serve kiosks in 6,000 locations by the end of the year. Although McDonalds has already been experimenting with kiosks, Wendy’s announcement is the largest roll-out to date and will likely spark a trend leading to fully robotic restaurants.
Uber is experimenting with using self-driving cars in parts of America, and there’s a push to start using self-driving trucks for long-distance deliveries.
Research firm Forrester reports that robots could eliminate many positions in customer service, trucking and taxi service which amounts to about 6% of the U.S. job market.
Robots are slowly making their way into every industry. ICICI Bank Smart Vault now offers customers the ability to access their valuables 24 hours a day while reducing their labor costs to provide such a service.
Royal Bank of Scotland recently announced that it would soon unveil Luvo — a “human” AI that can answer questions online and mimic human empathy. This robot will be able to serve customers 24 hours a day, reduce the workforce and cuts costs.
A Swedish bank plans to use the robot Amelia for customer services. And companies in China, Japan, and Taiwan have already implemented Softbank’s Pepper robot.
Previous technological revolutions over the centuries have mainly focused on enhancing human productivity. My concern with the robotic revolution is that its goal is increasingly that of replacing human productivity.
Alex Tabarrok and Tyler Cowen of George Mason University, who had a significant impact on my life through their International Trade course, debate the issue of whether machines will take our jobs. Tyler Cowen agrees with me that the robotics revolution is one of the leading causes of concern for the future of the US economy. Alex Tabarrok's “don't worry, be happy” argument is the same one we heard regarding international trade in the 90s and about how it was going to create so many jobs in the US. After 20 years of economic data, we can now say that international trade was not so good for the US economy. Economists underestimated Game Theory and the “cheat” motivator regarding currency devaluation and government intervention in the free market.
Here is the debate between Tyler Cowen and Alex Tabarrok in its entirety and you can decide who you agree with more.