FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
April 4, 2017
- US Private Sector Productivity Actually Declined Last Year
- Sluggish Productivity Growth is Now a Worldwide Trend
- “Robo-Advisors” – What Are They & Do You Need Them?
- Alpha Advantage Webinar Recording Now Available
One key measure of US economic productivity actually declined in 2016 for the first time since the depths of the Great Recession in 2009. The amount of goods and services produced, versus the total inputs of labor and capital to produce them, declined slightly last year for the first time in seven years. We’ll look at the reasons why below.
Seth Klarman: Investors Can No Longer Rely On Mean Reversion
"For most of the last century," Seth Klarman noted in his second-quarter letter to Baupost's investors, "a reasonable approach to assessing a company's future prospects was to expect mean reversion." He went on to explain that fluctuations in business performance were largely cyclical, and investors could profit from this buying low and selling high. Also Read More
This troubling trend is not limited to the United States. In fact, the latest drop in US productivity is part of a recent worldwide trend of sluggish productivity growth among rich countries, and economists are still not sure why it’s happening. We will explore the prevailing theories for why this is happening as we go along today.
The debate over how to increase productivity, and increase living standards, is currently focused on the development of robots. There is a great deal of uncertainty (and fear) about the growing trend towards the use of robots to perform human tasks. I will speak to these concerns and argue that we should not fear the trend towards robotics.
Finally, I will also address the issue of “Robo-Advisors” and whether or not they make sense for most investors. In my view, they do not. I’ll give you my reasons in today’s E-Letter. Finally, a recorded version of the webinar we had last Thursday with Alpha Advantage and its Portfolio Manager Paul Montgomery is now available. If you were not able to attend the live webinar, you don’t want to miss your chance to watch it now. That’s a lot to cover, so let’s get started.
US Private Sector Productivity Actually Declined Last Year
The Labor Department reported last Thursday that US private sector productivity – the amount of goods or services produced, versus the total inputs of labor and capital to produce them – declined 0.2% in 2016 for the first time since the depths of the Great Recession in 2009.
The so-called Multifactor Productivity Index for 2016 reflected a 1.7% increase in total output last year but with a 1.9% increase in the combined inputs of labor and capital, for a net productivity decrease of 0.2%. This key measure of productivity differs from the more commonly watched worker productivity per hour index, but is still very important.
Here’s why. On March 8, the Labor Department reported that US worker productivity, or average output per hour, increased a modest 1.0% in 2016. Yet the Multifactor Productivity Index of output versus input decreased 0.2% at the same time.
What this means in simple terms is that US workers produced more goods and services but did so less efficiently. Or put differently, this means that it took more workers to produce the same amount of goods as the year before.
Here’s another way to think about it. Our anemic GDP growth of only 1.6% in 2016 was largely caused by companies hiring more people and buying more machines and software, not by improvements in technology or organization that allows companies to squeeze more out of the resources they already have.
In other words, the economy has on average actually gotten less efficient. Americans made more stuff in 2016 only because we had more people working and more tools for them to use, according to the Labor Department’s latest report. Productivity in terms of output versus input got worse.
Sluggish Productivity Growth is Now a Worldwide Trend
Sluggish productivity is not news any modern economy wants to hear, especially as America looks at a future of declining birth rates and a shrinking workforce. If the nation wants more economic growth, it will quickly need to find ways of producing more with fewer people (ie: higher productivity).
This troubling trend is not limited to the United States. In fact, the latest drop in US productivity is part of a recent worldwide trend of sluggish productivity growth among rich countries, and economists are still not sure why it’s happening.
There are two prevailing theories. Perhaps the most common is that the drop-off in productivity in recent years is simply the hangover from the Great Recession and the financial crisis of late 2007-early 2009. That’s a plausible theory… except that this is 2017, a little late for a hangover.
The other theory, advanced by pessimists like Northwestern University professor Robert Gordon, is that the vast benefits from computers petered-out in the 2000s – and since then the world has come up short on innovative new technologies. That is to some extent true.
Yet optimists argue that we are currently in a so-called “incubation period” and that the next big wave of innovative breakthroughs is just around the corner. They most often point to the surprising breakthroughs in robot technology and argue that this next major wave of change could come rapidly. I tend to agree.
Many Americans have a fear of robots and other advancing technologies, and worry that they could lose their jobs to these machines as technology advances. I don’t share those fears for a number of reasons.
First, in order to have robots on a large scale, this will require more and more engineers to design and build them. Engineers are in short supply (my son is one), and the engineering field is experiencing a significant increase in demand.
Likewise, there will be a big increase in demand for software programmers for the robots and all sorts of new human jobs – many of which we don’t even know about yet – to develop, support and maintain them.
With our aging population and shrinking workforce, I am confident we’ll need robots, as well as more working-age Americans in the workforce, if we are to see productivity rebound in the next decade or so. I’ll come back to robots just below.
In closing on this subject, we hear many in the media who want us to believe that the current drop-off in productivity is permanent, and that there’s little we can do to reverse it. While we can’t definitively rule out that conclusion, there is much historical evidence to question it.
Even in the first few decades of the Industrial Revolution – the greatest economic change that has ever happened in modern history – productivity growth was slow and some historians believe that living standards initially fell during that era.
It took nearly half a century until breakthroughs like the steam engine made a real dent in people’s lives. When technology was harnessed to power trains and generate electricity, living standards vaulted higher. Despite periodic slowdowns in productivity, Americans have always prevailed, and I have little doubt we will do so again.
“Robo-Advisors” – What Are They & Do You Need Them?
My comments above regarding robots and our future with them provides the perfect opportunity for me to address the issue of Robo-Advisors. I assume that most of my clients and readers have heard this term in the financial media over the last year or so.
Robo-Advisors are an emerging class of financial advisors that provide financial advice and/or portfolio management online with minimal human intervention. They generally provide “digital” financial advice based on mathematical formulas or algorithms.
These algorithms are executed by software and this financial advice does not require a human advisor. The software utilizes its algorithms to automatically allocate, manage, rebalance periodically and supposedly “optimize” clients’ assets .
First and foremost, it is important to realize that Robo-Advisors are not free – there is always a management fee involved. It is also important to know that the asset fee is often based on how many services are provided.
Robo-Advisors emerged in 2008 with greater acceleration in the United States and other countries after 2011. Robo-Advisors typically allocate customer assets on the basis of their individual investment goals, risk tolerance and desired target return. This sounds good on paper, especially to younger investors who are Internet-savvy. But the lack of human interaction may not be a good thing.
Robo-Advisors can only do what they’ve been programmed to do. They may not be programed to ask questions that are relevant to your unique financial needs, or pick up on important things a human Advisor learns during an actual conversation with a client. To me, it’s kind of like having a robot for your personal doctor – I’m not sure I would be comfortable with that.
In the United States, Robo-Advisors must be Registered Investment Advisors, which are regulated by the Securities and Exchange Commission. In the United Kingdom they are regulated by the Financial Conduct Authority.
As should be obvious by now, I am not a fan of Robo-Advisors. The vast majority of my clients work with us because they want an experienced human to answer their questions and help them make informed investment decisions that are right for their own unique financial situation. They don’t want to be guided by the impersonal advice generated by some complex algorithm.
Alpha Advantage Webinar Recording Now Available
If you missed our Alpha Advantage webinar with Portfolio Manager Paul Montgomery on March 30th, a recorded version of it is now available for you to watch at your convenience. Paul gives an excellent overview of how this strategy works and why it might be worth considering for your portfolio.
Our webinars are a great way to hear directly from the portfolio manager to learn how their strategy works, followed by a question and answer session at the end. I think Alpha Advantage is a really good webinar to watch because it is a unique combination of three different strategies in a single account. Each strategy has the ability to go long, short or in cash (money market), so it can make money whether the markets are going up or down.
This is important with all the uncertainty in the markets today, especially with the markets near all-time highs. Will the Trump rally continue, or will investors lose confidence and send the markets spiraling downward? With Alpha Advantage, it really doesn’t matter, since the strategy has the potential to make money either way.
While past results are not necessarily indicative of future results, Alpha Advantage has a very attractive track record. You can review it here. (Be sure to read all the Important Disclosures before making a decision to invest.)
If you have any questions about Alpha Advantage or any of the other strategies we offer at Halbert Wealth, you can always call us at 800-348-3601. We’re happy to answer any questions you have. You can also check out our website at www.halbertwealth.com.
Gary D. Halbert
Article by Gary D. Halbert