My wife’s father was a perfect mix of Walter Mattheu & Fred Flintstone. He didn’t talk much so when he did you tended to listen. My wife’s name is Kate but he called her Kay. When we first met, in the mid-1970s, I remember Ivan asking her about our relationship: “Now Kay, I always raised you to make the right decisions; now are you sure that you want to marry this guy?” There was something to his statement because, at that time, I didn’t have two nickles to rub together and my prospects didn’t look good.
Ivan’s most famous quote was this: “You cannot stop progress.” It was not a judgement call of ‘good or bad.’ It was just truth.
The evolutionary history of humans involves occasional leaps in technology, whether it was the wheel or the computer or the current blockchain technology which makes data, records and transactions more secure from hacking. Things coast along and then they take a giant leap. The phone in your pocket has now become a super-computer. This “progress” that Ivan said “cannot be stopped,” is also known as ‘disruptive innovation’ and it changes your world.
Disruptive innovation refers to an innovation that completely disrupts an existing market. Think about what the computer did to the typewriter. Older companies are dinosaurs that often see but cannot pursue the new technology because it cuts into their current near-term profitability. Disruptive innovation is almost always introduced by smaller startup companies that are unknown to the larger world. Three out of four startups fail and more than nine out of ten never earn a return, but one out of four succeeds and one out of ten, with a combination of luck and proper timing, has the opportunity to become the next great thing. Amazon in; JCPenney out.
Below are 20 areas where one can find investments that exhibit the qualities of innovative disruption. Obviously, robotics and artificial intelligence are the most disruptive innovations on this list because they also disrupt by taking jobs on a massive scale. (Please note that these innovative ideas, plus Bitcoin @ 6-10%, can be picked up in the ETFs of: ARKK & ARKW and also somewhat in FFTY. These three ETFs, because of their volatile nature, should be intermediate-term tactical trades and not long-term holds.)
- Artificial Intelligence (A.I.)
- Cloud computing (Skynet)
- Machine learning
- 3D printing
- Self-driving vehicles and planes
- Cyber security
- Social platforms
- Digital Media
- Internet of Things
- Energy storage
- Stem cells
- Space exploration
- Alternative energy sources
- Innovative materials
Artificial Intelligence? Unlike a robot, an A.I. does not need to have a material body. Larry Page, the brilliant co-founder of Google has stated (15 years ago) that Google is not a search engine, but rather it is an artificial intelligence that people continually build upon when searching items on the Internet. And on November 25, 2017, billionaire investor Mark Cuban stated that the United States is in an A.I. race against Russia and China, except that the U.S. doesn’t yet realize it. Putin just stated that Russia will beat the U.S. in the A.I. “arms” race. Most people don’t care.
Three good books on the topics in this month’s blog:
- The Inevitable: Understanding the 12 Technological Forces that will Shape Our Future, by Kevin Kelly
- Rise of the Robots: Technology and the Threat of a Jobless Future, by Martin Ford
- Dark Money, by Jane Mayer
The science fiction image of a friendly robot from when I was a kid:
The current reality of a more fearsome robot coming out of Boston Dynamics:
Average probability of automation by occupation and across population:
The rise of robots. If you want to understand the most important thing about your future, it is the global disruption represented by the intersection of these two lines!
People need to get their investment accounts busy because automation is going to make the following chart WORSE with each passing year. Currently in 2017, the purple 1%-line would be much higher than shown. The top 1% will only get richer while many workers will slowly lose their jobs to A.I. and automation and robots. Slight-of-hand keeps everyone confused. The 1% is busy ‘taking the world’ while the voters are kept busy worrying about who’s ‘taking a knee.’ And now the wealth gap is rapidly and progressively becoming so wide that citizens might eventually be given the handout of a “Government Guaranteed Minimum Income” of perhaps $15,000… to keep us all (literally) consuming. (Chart courtesy of Business Insider):
The undisputed global thought leaders of the 1% would be the secretive billionaire Koch brothers out of Texas in the United States. If they created a political platform, how would we know what it would look like? Well, they did. David Koch ran on the Libertarian Party ticket in 1980. David Koch told reporters to expect a coming “very big Tea Party.” Here was his actual 1980 publicly stated platform; it was a wish-list for the 1%.
- Eliminate the following taxes: inheritance, corporate, individual and capital gains
- Eliminate Medicare and Social Security (even though taxpayers had paid into it)
- Eliminate all public welfare for the poor
- Eliminate public transportation
- Eliminate publicly held assets such as roads, parks, public lands, libraries, etc
- Eliminate public schools
- Eliminate child labor laws
- Eliminate the ‘Minimum Wage’
- Eliminate anti-drug and anti-prostitution laws
- Eliminate seat belt laws
- Eliminate the Food and Drug Administration (FDA)
- Eliminate the Occupational Safety and Health Administration (OSHA)
- Eliminate the FBI and CIA
- Eliminate financial and consumer protection and regulation, including the SEC
- Eliminate all environmental and animal welfare protections, including the EPA
It was the Koch brothers that realized that they could expand their voter base from 1% to 51% by adding just a few ‘positions’ such as anti-abortion and pro-guns. Working with Jerry Falwell, they were co-founders of the Moral Majority. They also realized that one way to “eliminate” is to put people in charge of government agencies that actually want to dismantle the same agencies that they now head. Sound familiar? And who knows what went unsaid and apart from this publicly stated declaration, or what would apply currently, such as eliminating ‘net-neutrality’ which essentially means turning the Internet over to corporations. It may be of interest that if either version of the proposed U.S. tax changes become law, it is estimated that the two Koch brothers will pocket $40-Billion. This is slightly more than you or I will pocket.
On a similar note, Citigroup recently wrote this in a private memo to their wealthiest clients: “The United States is evolving into a ‘Plutonomy’ — a top-heavy economic system where growth is driven primarily by a tiny, prosperous elite who consume an ever larger fraction of everything the economy produces. Shy away from the stocks of companies catering to the rapidly dissolving American middle-class and instead focus on purveyors of luxury goods and services aimed at the richest consumers.”
More on artificial intelligence: According to Moore’s Law, the intelligence of an A.I. would double every two years, non-stop, and compounding makes this a scary proposition. Imagine an eventual artificial intelligence several thousands or even millions of times smarter than the smartest human. Or perhaps A.I. won’t even work and just ends up being a total science fiction. In May of 2014, Cambridge University physicist Stephen Hawking wrote: “A computer that exceeded human-level intelligence might be capable of outsmarting financial markets, out-inventing human researchers, out-manipulating human leaders and developing weapons that we cannot even understand. Dismissing this as science fiction might well turn out to be potentially our worst mistake in human history.”
Now, on a separate topic: During the first week of November, the Chinese Central Bank (PBOC) uttered this shocking sentence about the 2008-like financial leverage that is starting to build again in the stock & credit markets… a risk that will jump out to greet us much further down the road: “Latent risks are accumulating, including some that are hidden, complex, sudden, contagious and hazardous.”
For several months now, MarketCycle Wealth Management has held protective hedges on our client accounts. This is unusual for us and it normally only occurs for a few months out of every few years. Quantifiable risk was higher than normal, began to dissipate, then began to build again. Our selected hedges have the ability to not get too much in the way should stocks continue to head higher and our hedges have also made money. When risk has abated (which may be soon) we will go back to a full stock position (we’re currently still at roughly 50-60% stocks with enough hedge to protect perhaps as much as ¾ of that position). We will always re-evaluate the market daily, diversify based on the market cycle, and protect as needed.
Tax Plans? And on November 9, 2017, CNBC posted this interesting chart on the two proposed Republican tax plans in the United States. The House plan, as is, has minimal chance of fully passing into law. On November 14th, the Senate added the total elimination of the massive 3.8% Obamacare tax on investment income (of the wealthy) to its side of the chart. The vast majority of loopholes that are being closed are those that will ultimately hurt the poor and elderly. Overall, this is being billed as a tax reduction that will create jobs but today’s companies hire minimal employees and rely on technology and automation instead… and both Republican plans actually subsidize corporations for purchasing robotic workers. It seems crazy that a company the size of Google only has 38,000 employees worldwide, but this is the new norm and they will soon have less employees, not more. Much of the money that corporations save via these new tax changes will go toward stock buy-backs and not job creation. This means: Despite the occasional recession, the stock market generally grinds higher for as much as another dozen years, but jobs down and worker-incomes low for the next dozen decades. (Chart is courtesy of CNBC and the ‘hover function’ does not work on this snippet.)
Bitcoin, the digital ‘currency’ that everyone is talking about, cannot, in its present form, be used as a working currency because it crashes at least once per quarter (see chart below) and its price is too volatile. It in no way represents a safe way to store or use one’s hard earned money. I might actually use Bitcoin if I lived in Zimbabwe, but I don’t. Bitcoin is a good market for Pump & Dumpers (which is what causes the chronic crashes) and for tax-evaders, criminals and millennials. It is digital and can be hacked. $31-Million was ‘stolen’ last past week in just one hack-attack. Since Bitcoin is a classic Ponzi Scheme that was started by some ‘anonymous’ individual, we do not know how many Bitcoins that now rich person initially created for him or herself. Investors of every Ponzi Scheme eventually discover that the idea was worthless while the creator became wealthy. People are now rushing to buy Bitcoin with their credit cards so that when the bubble pops, and it will pop, they can then enjoy the double pain of paying their losses off over time and with interest. Ouch! No, I don’t know how high it goes (a ridiculous $40,000??) or how long it all takes to play out (less than 2 years??), but play out it will. But unlike the similar Tulip Mania bubble of the 17th century where one tulip cost the price of a house, when the bubble finally collapses, someone holding a tulip still has a flower. (Chart from Mauldin Economics.)
This next chart shows how one can get trapped in the Bitcoin bubble. I’ll receive 50 angry messages about how I don’t understand Bitcoin. The general public is very active and ‘greed’ is now firmly moving into ‘delusion.’
SUMMARY: The future is uncertain and, while there will be wonderful times and opportunities ahead, we also need to prepare now for the eventual difficult times that will come. I currently still expect the period between today and 2029 to generally be looked back at as having been a super-boom-time for the stock markets before surrendering to the commodity & gold markets in the 2030 decade. Make hay while the sun shines!
Well, that’s it for this month… thanks for reading! (Cartoon below)
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Article by Stephen Aust, MarketCycle Wealth Management