The Trump Administration is following the playbook of Reaganomics. As part of its Reaganomics program, the Reagan Administration cut back sharply on the regulation of everything from monopoly and oligopoly to pollution and product safety, important elements that likewise effect the aggregate supply curve. Continue reading “Oligopolies and Monopolies”
Put on your macroeconomics hat and hold on for a wild, brain-stimulating ride as Lance dives into the GDP formula and explains the President’s monumental speech at the Asia Economic Summit in Vietnam last week.
This week's show features commentary on President Trump's monumental speech at the Asia Economic Summit in Vietnam last week.
Folks, this speech from the President was bigger than all other stories combined.
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 United States economy is teetering, despite what the stock and job markets are saying. The US economy is consumption-centric. Growth in the current recovery has focused on three sectors that have fed through to consumption in its various forms: autos, energy, and financial services.
The scariest set of financial indicators to emerge in decades reveals what is crushing the dreams of record numbers of young, middle-class and older Americans.
While nationwide unemployment is down to 4.3 percent, policy experts and economists are warning of disturbing signals in the economy.
As any industry veteran can tell you, those on the sell-side are the second-to-last to surrender to a downturn in economic activity. A 401K Advisor or money manager will not produce negative forecasts when their most important objective is keeping its customers completely invested in risky assets.
United States Economy
The Citi Surprise Index shows a big disconnect between the economy and Wall Street.
The disconnect will not last for long as the chart above shows. Either the economy improves a lot over a short period of time, else the stock market comes plunging down to earth. It's easier for the stock market to come down than it is for the Federal Reserve and republicans to somehow get this economy going, a feat that has remained elusive for the last 8 years.
Debt is what has kept the United States economy going for the last 8 years. Debt placed a floor under and then helped commercial property reach for the skies. Debt kept dying retailers alive. Debt also caused back-to-back years of record car sales.
Salaries for the typical American worker have hardly grown for decades, well-paid middle-class jobs are disappearing, and lots of the new jobs are from the low-wage service sector.
Consumers are being crushed by high healthcare costs and it partially explains why the American population grew at a small 0.7 percent this past year, the lowest rise since the Great Depression. As Russ Zalatimo of HudsonPoint Capital said, the tendency around recessionary times is that the birth date really drops like we are now seeing.
Bank of America Merrill Lynch stated autos are headed for a “decisive downturn” that will trough in 2021 at about a 13-million-unit annualized rate, down from last year's blistering record 17.6 million. A week earlier, Morgan Stanley, whose numbers aren't quite as grim, also reduced its revenue forecast, recognizing that the best days of this cycle have come and gone.
With the Trump White House scrambling to advance different measures to fuel economic growth – tax reform, infrastructure spending, maintaining jobs from fleeing abroad, some analysts say more radical steps are desperately needed.
Manufacturing isn't just dead, say analysts. But it's no longer dominated by smokestacks and rudimentary assembly. There are about 360,000 jobs in US manufacturing that are vacant and not being filled and companies are saying, “We need people to fill them.”
Meanwhile, retailers are currently choking on their debt as profit margins implode. Restaurants today employ 10.6 million individuals.
According to the Tax Policy Center, Trump's tax reform could cause overall tax cuts of $6.2 trillion over the next ten years.
Losses on securities backed by automobile loans are piling up even as the unemployment rate has hit 4.3 percent, the lowest since 2001.
Additional evidence that the United States economy is teetering is becoming more and more apparent in credit card delinquencies. Experian reported that the domestic bank card default rate climbed to 3.53 percent in May, a four-year high. There are even nascent signs that families have started to struggle to make their mortgage payments.
Housing starts have contracted for the third month in a row. According to an article in the WSJ (link above) economists had forecast a 3.4% increase. The actual number was a -5.5% decrease. That's a huge miss folks and the reason is the “builders can't keep up” fallacy.
Housing Starts Are Falling From Rate Hikes
The reason that economists keep getting surprised about weakness in the housing sector is that their reasoning is wrong about why the sector is contracting.
Think about the spin that home builders are struggling to meet buyer demand and so that's why starts are falling. One simple chart defeats that reasoning: Interest Rates versus Housing Starts.
Clearly you can see that when interest rates rise, starts fall. When interest rates fall, starts rise. The high correlation between rates and housing looks like a mirror image.
Anyone who has recently purchased a house has likely overpaid for it and we know this because the average selling price of homes is above even the 2007, $322,100 high.
The average selling price today is $374,500 which is insane because wages have not kept pace with the rising cost of homes.
Now we have the Fed hiking rates which pushes up the cost of financing a home and thus it pushes housing starts down. That's what rate hikes do, they slow down the economy because they make it more expensive to finance consumption.
You will not see this stock market correction logic from AMTV (link above) in the mainstream financial media.
Christopher Greene thinks that a stock market crash of a lifetime is coming soon.
We are in a bubble today that is far worse than the technology bubble in 1999 and the real estate bubble in 2007. We are in the mother of all bubbles because of the Fed buying trillions of dollars worth of collateralized debt and the US government's irresponsible spending of tax dollars during the Obama Administration that has taken the national debt to $20 trillion.
Every major asset class is in a bubble, including digital currencies now. Real estate is in a bubble. Automobiles are in a bubble. Oil is in a bubble (because Saudi Arabia is trying to control global production to prop it up). The stock market is in a bubble because of the Federal Reserve and QE and a $4.5 trillion balance sheet.
Stock Market Correction But Not Crash
I think Christopher Greene is overstating the magnitude of the coming stock market correction. Mr. Greene's logical fallacy is that he is not figuring in what the Federal Reserve will do if the stock market does indeed start to crash. Mr. Greene's logic assumes that the Fed will do nothing when markets begin crashing.
Remember, the Fed holds $4.5 trillion worth of collateralized debt. That gives the Fed major control over our economy and markets. For example, if the auto bubble pops and banks are stressed from a high level of defaulting car loans, the car loan debt will be collateralized and purchased by the Federal Reserve. Think about how much control the Fed has over our markets right now. We have a global holy war with radical Muslims murdering Americans and major terrorist attacks in the US and England but our markets keep going higher. We have the government Establishment trying to unseat a US President but markets keep going up. We have Qatar being financially attacked by Saudi Arabia and yet markets keep going up. We have President Trump bombing the sovereign country of Syria that is being protected by Russia and markets keep going up. We have North Korea testing nuclear bombs and long range missiles and markets keep going higher. We have China building man-made islands in the ocean and then claiming the area for miles around those islands in violation of international treaties and markets keep going higher. We have Mexico dumping criminals and drugs into our country and then threatening retaliation when we try and build a border wall yet markets keep going higher. We have a sitting President being sued for trying to restrict travel to this country from radical Muslim countries where people coming here are not properly vetted and markets keep going up. We have George Soros creating unrest using NGO's around the world, including here at home but markets keep going higher.
Markets keep going higher because they are not based on economics and supply and demand. When everything can be securitized and propped up by the central bank, there are no major stock market crashes because the government won't allow it. Christopher Greene is missing this logic by assuming that we still live and trade in a free market system. We have a government managed market much like the Chinese. If the market started to crash in a certain sector, the defaulting debt would be securitized, collateralized, and purchased by the central bank to prop up member banks. This is why I think we will see a deep stock market correction but not an actual stock market crash.
Here is the Christopher Greene video where he predicts the mother of all crashes:
Most investors and traders believe there is a stock market bubble right now but in a new Keiser Report (link above) Max Keiser makes a powerful argument that everything is in a bubble. The economics of supply and demand are not what's driving the market higher.
Stock Market Bubble
Central banks bought $15 trillion worth of bad assets from banks to keep the stock market bubble alive. Central banks could continue buying bad debt from banks and keep pushing the stock market higher. This is why we have real estate bubbles in countries around the world.
Too many auto loan defaults? The central bank will just come in and start buying up those bad auto loans.
What about the FANG stocks on Wall Street. Facebook, Apple, Netflix, and Google. These stocks can double again because there's no accountability. If you can collateralize a bubble and sell it to pension funds with the help of Goldman Sachs, and there's no law against it, then the economics of supply and demand is meaningless. There is no real price discovery. The entire market is based not on economics but on derivatives of derivative packages that are sold to pension funds.