How Did You Go Bankrupt? Hemingway, China And The EU

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critics in acknowledging that lost jobs, ruined companies, and vanishing industries are inherent parts of the growth system. The saving grace comes from recognizing the good that comes from the turmoil. Over time, societies that allow creative destruction to operate grow more productive and richer; their citizens see the benefits of new and better products, shorter work weeks, better jobs, and higher living standards.

Herein lies the paradox of progress. A society cannot reap the rewards of creative destruction without accepting that some individuals might be worse off, not just in the short term, but perhaps forever. At the same time, attempts to soften the harsher aspects of creative destruction by trying to preserve jobs or protect industries will lead to stagnation and decline, short-circuiting the march of progress. Schumpeter’s enduring term reminds us that capitalism’s pain and gain are inextricably linked. The process of creating new industries does not go forward without sweeping away the preexisting order.

Transportation provides a dramatic, ongoing example of creative destruction at work. With the arrival of steam power in the nineteenth century, railroads swept across the United States, enlarging markets, reducing shipping costs, building new industries, and providing millions of new productive jobs. The internal combustion engine paved the way for the automobile early in the next century. The rush to put America on wheels spawned new enterprises; at one point in the 1920s, the industry had swelled to more than 260 car makers. The automobile’s ripples spilled into oil, tourism, entertainment, retailing, and other industries. On the heels of the automobile, the airplane flew into our world, setting off its own burst of new businesses and jobs.

Americans benefited as horses and mules gave way to cars and airplanes, but all this creation did not come without destruction. Each new mode of transportation took a toll on existing jobs and industries. In 1900, the peak year for the occupation, the country employed 109,000 carriage and harness makers. In 1910, 238,000 Americans worked as blacksmiths. Today, those jobs are largely obsolete. After eclipsing canals and other forms of transport, railroads lost out in competition with cars, long-haul trucks, and airplanes. In 1920, 2.1 million Americans earned their paychecks working for railroads, compared with fewer than 200,000 today.

What occurred in the transportation sector has been repeated in one industry after another – in many cases, several times in the same industry. Creative destruction recognizes change as the one constant in capitalism. Sawyers, masons, and miners were among the top thirty American occupations in 1900. A century later, they no longer rank among the top thirty; they have been replaced by medical technicians, engineers, computer scientists, and others.

Technology roils job markets, as Schumpeter conveyed in coining the phrase “technological unemployment”. E-mail, word processors, answering machines, and other modern office technology have cut the number of secretaries but raised the ranks of programmers. The birth of the Internet spawned a need for hundreds of thousands of webmasters, an occupation that did not exist as recently as 1990. LASIK surgery often lets consumers throw away their glasses, reducing visits to optometrists and opticians but increasing the need for ophthalmologists. Digital cameras translate to fewer photo clerks.

And while your job may be one of those that will ride easily into our brave new future, the same may not be true of your stock investments. Companies show the same pattern of destruction and rebirth. Only five of today’s hundred largest public companies were among the top hundred in 1917. Half of the top hundred of 1970 had been replaced in the rankings by 2000.

The chart below was recently produced by Richard Foster at S&P. What it shows is that the average lifespan of companies in the S&P 500 Index was about 60 years in 1960. Today they last about 15-20 years. That means we are currently replacing a stock in the index about every two weeks.

How did you go bankrupt

Since the index is representative of the largest US companies, that means that each year 25 big companies either can’t grow enough to keep up or are outgrown by other companies, otherwise fail or get merged; but in general terms it means that if you are invested in the S&P 500 Index, it is almost guaranteed that at least 10% of the companies in your portfolio are old dogs.

Blockbuster failed to recognize that the world was changing, and it was Netflixed, to coin a verb. (Actually I think it’s quite a workable word to describe what happens when a company fails to adapt. It gets Netflixed.) There is going to be a bright dividing line in the future between companies that “get” change and companies that don’t. Measuring companies by past performance and recent profit trends will no longer be enough in the Age of Transformation.

No industry is going to be safe. Within the next 10 years, solar technology will develop to the point where it will be cost-competitive with fossil fuels. Currently, the solar industry is growing at 30% a year; and while solar is only 1% of US energy consumption today, if we are able to keep up that compounding effort, it it could be almost 100% in 20 years. Solar roads? Possible. And yes, we need new batteries and storage systems, but those are on the way. What will your mother’s safe utility companies do?

In China they are literally 3D printing 3000-square-feet houses in a day! One company is planning to 3D print a car with 20 moving parts this fall, using advanced materials much stronger than steel and aluminum. Think AT&T is safe? The competition for new wireless systems is brutal. Both Facebook and Google are developing technologies to place “high-balloons” and permanent solar drones at 65,000 feet in order to blanket the globe with Wi-Fi. I’ve read estimates that a “mere” 40,000 such devices could do the job. Netflix itself is in danger of being Netflixed by Hulu and other competitors.

You can’t believe what they’re doing with robots and artificial intelligence. AI, long the poster child for disappointing technologies, is getting ready to go mainstream by the end of the decade.

Just for fun, look at this RadioShack ad from 1991. Essentially everything on that page is in a smart phone. And far more powerfully. And throw in a free camera. For a tiny fraction of the prices advertised then.

Now fast-forward 20 years. I’m not sure what our can’t-live-without-it computing and communication devices will look like, but they will probably be quite small, wearable, and a million times more powerful! We will likely be (or at least some of us will be) connected to our devices in rather unique ways. (Google Glass will seem so odd and quaint, which is kind of how it is perceived now.) Think of being able to access scores (hundreds?) of expert systems waiting in the cloud with answers on any topic, so that the solutions to the problems of improving our personal lives and our businesses will be limited only by our imagination in asking the questions (and doing the work to make those answers real). And we’ll be able to direct those AI experts to work together to come up with powerful, novel solutions. The cross-fertilization of technologies will soar!

Now imagine putting these tools into the hands of practically every person on earth who wants them. Along with all the other tools that are coming from all the other exponentially accelerating technologies. Especially life-altering will be the biotech breakthroughs. We won’t be physically immortal, but the things that kill most of us today will not be a problem. We will just get … older. And we will be able to repair a great deal of the damage from aging. Plan on living a lot longer and needing more money than you think.

I can see many of my readers rolling their eyes and saying it won’t happen in 20 years. Or 30 or 40. Things just don’t happen that fast, you say. But that is just your old Homo sapiens brain extending the past in a linear fashion into the future. Moore’s law tells us that the number of transistors on a chip roughly doubles every two years (and the chip drops in price). But other industries, like solar tech and genome sequencing, are on exponential paths that make Moore’s law look positively snail-like. If the power of exponential change keeps working – and it will – we will see more change in the next 20 years than we saw in the last 100!

I get lots of newsfeeds from services that list 3-5 new advances in some field every day. It can be overwhelming. (We have our own such free service here at Mauldin Economics, called Patrick Cox’s Tech Digest.) The time from proof of principle in the lab until rollout in the factory is dropping as well. We are now using over 200 different materials in our 3D printers, combined in ways that were never before possible. (We’re even starting to print human organs, a feat that I predict will seem like so “last-century” in 20 years). I am lucky in that I get to tag along every now and then with Pat Cox as he interviews the leading scientists and entrepreneurs in a wide range of industries. He does the groundwork in sorting through that gale of creative destruction, and I get to see the pick of his litter.

One of the risks in investing in technology, by the way, is not so much that your company might not discover some new, cool tech that blows away the competition, but that someone else might come along and do it even better and cheaper before you’re even out of the starting gate. You can be right about the tech and STILL lose money.

Homo rationalis

The thing that is going to be overwhelming to nearly all of us is the degree of acceleration of change as the years fly by. We are not psychologically prepared for it. The only way we will be able to adapt is to ignore that primal part of our brain that says change is bad and use our frontal lobes to rationally observe and choose a path forward. Just as Neanderthals gave way to Homo sapiens, we need to evolve, at least in our thinking, to become Homo rationalis.

All of our investments and our businesses – and our very lives – will be fundamentally changed, transformed by these two Super Trends we have looked at. Needless to say, we cannot turn our backs on the nitty-gritty details of the faltering global economy. We still have to read financial statements and government reports and stay on top of which central bank is doing what to whom, and to translate our research and analysis into smart, nimble investments. Simply knowing that things are going to change in technologically wonderful ways will not be enough. Acting too soon will be as frustrating and ineffective as not acting soon enough. We will continue to explore together in this letter to figure out how all the pieces of the puzzle fit.

I would like to remind readers that I will be part of an exclusive webinar with investment industry heavyweights Richard Perry and Jack Rivkin on Tuesday, June 24, at 1:00 p.m. EDT / 10:00 a.m. PDT, hosted by my partners at Altegris. Richard founded Perry Capital in 1988 and is one of the originators of event-driven investing – a very interesting strategy to look at right now, given increased corporate activity this year. My friend Jack brings more than 45 years of direct investing, research, general management, and investment management experience at leading financial institutions to his role as Altegris CIO. Unfortunately, this event is limited to qualified US investors. You can go tohttp://www.altegris.com/mauldinreg to sign up, and someone from Altegris will call and make sure you get an invitation. I hate to limit it, but that is the rule.  (In this regard, I am president and a registered representative of Millennium Wave Securities, LLC, member FINRA.)

Rome, Nantucket, New York, and Maine

I finish this letter on the train from Chiusi (in Tuscany) to Rome, where I will spend the next four nights. Tomorrow I am tourist, probably seeing the Vatican courtesy of a connection from Martin Truax. We met up in Cortona the other night, which turned into an adventure itself, and had dinner at a delightful outdoor restaurant overlooking the old town square, with 1,000-year-old walls as our backdrop. And a nearly full moon. Then I am in business mode, meeting with a series of corporate and government leaders and attending as much as I can of a very interesting conference organized by Banca IMI (the Investment Bank of Intesa Sanpaolo Group) and intriguingly titled “Back to the Future: Are Markets and Policy Makers Ready for Normality?” They have asked Christian Menegatti of Roubini Global Research and me to speak jointly to the main topic. Looking over the attendee list of government officials, bankers, and major market players is quite daunting, but we will try to provide a few useful thoughts. My first thought on hearing the question was, “What can be considered normal in Europe?” And upon reflection I am still trying to come up with an answer. Just saying.

Travel slows down this summer, with just a trip to Nantucket for a speech and to NYC for a few meetings in mid-July – and of course the annual Maine fishing trip. Even though Texas will be hot, I will enjoy being home for what will seem like an extended time.As I am thinking a lot about change, I keep wondering how it will affect my family and friends. I know the unemployment number keeps falling, but good jobs seem problematical, and so many are going to disappear even as others appear, and that will mean learning new skills. Yet so much will not change. Humans will basically remain the same even as our tools improve. Family and good times with friends will still be important. We will still want to find meaning outside of ourselves. Most of us will still enjoy

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