The era of low returns awaits…Are you ready?

Financial Planners

To see where we are going, we need to look back at how we got to this moment in history.

20th This century has been a time of great change and progress…especially since 1950.

There has never been a better time to live in the history of human progress.

All “actions” – drugs. Disinfection. financialization. innovation. Electrification has given those of us in the West a much higher standard of living and a longer lifespan.

A rising wave of prosperity lifted all ships.

The expanding middle class in the Western world has become a major contributor to global GDP growth.

Sadly, we are witnessing the collapse of the middle class.

According to Pew Research findings (emphasis added):

The middle class, once the economic class that made up the clear majority of American adults, has steadily shrunk over the past 50 years. The percentage of adults living in middle-class households has fallen from 61% in 1971 to 50% in 2021.according to a Pew Research Institute analysis of government data.

And the trend is being repeated in Australia…

[An OECD] found in research The share of people in middle-income households fell from 64 percent to 61 percent from the mid-1980s to the mid-2010s.

Even lower in Australia, 58%says Jason Palant, a lecturer in marketing at Swinburne University.

It doesn’t seem like a big change when you look at the actual percentage, but it’s actually a big deal considering it represents millions of people.

That means the rich are getting richer while the people in between are really suffering. Many people move down the middle class instead of moving up.

Australian Chartered Accountant, March 2020

Robotics and AI are coming

Some believe that the relentless introduction of robotics and AI will put even more pressure on centrists.

I predict that more than a third of all American men between the ages of 25 and 54 will be unemployed mid-century.

Larry Summers (Former U.S. Treasury Secretary, former President of Harvard University)

ChatGPT is sparking a new debate about the potential impact of AI on the job market.

Will it be net positive or negative for employment?

In April 2020, Daron Acemoglu (Massachusetts Institute of Technology) and Pascual Restrepo (Boston University) published a working paper entitled “Robots and Work: Evidence from the US Labor Market.”

According to their modeling (emphasis added):

We estimate that an increase in robot inventories from 1990 to 2007 (approximately 1 additional robot per 1,000 workers from 1993 to 2007) led to a decline in the average employment-to-population ratio. is suggested. The commuting zone decreased by 0.39 percentage points and the average wage by 0.77% (compared to the commuting zone with no robot contact).

…again Equivalently, one new robot reduces employment by about 3.3 people..

Is it possible that a Pac-Man-like effect of robots devouring jobs is contributing to the reversal in US labor force participation?

In June 2021, Daron Acemoglu and Pascual Restrepo published another research paper, “Tasks, Automation, and Growing US Wage Inequality.”.

Here are some of their findings (emphasis added):

…Most of the change in the US wage structure over the last 40 years is explained by the relative decline in wages for routine workers in industries that have experienced a decline in the labor share.

We find that the same pattern applies Focusing on factors that reduce the labor share caused by automation technology.

Our framework makes it clear why Worker groups specializing in automated tasks will bear the brunt of these changes, suffering relative and potentially absolute wage declines..

Automation will not only lay off workers, but it can also act as a wage depressant.

Inflationary pressures are driving calls for continuous job stoppages and wage hikes.

But when labor costs rise too high, how long will management start looking for lower-cost alternatives?

ChatGPT is the latest leap in AI advancement…but it won’t be the last.

Will Moore’s Law become less relevant to workers?

Moore’s Law of Exponential Growth is also known as the “Law of Earnings Acceleration”..

As more robots are created, they will become cheaper, smarter and more specialized.

Why hire people (with accompanying IR regulations and multiple vacation entitlements) when you can lease or buy a robot or invest in AI for much less? and Do you work 24/7?

Whether you agree or disagree with this argument, when your competitors gain a price advantage through automation and AI, you either adapt or die. I can assure you.

Market Watch reported on the expected momentum of automation and its potential impact on prices, wages and employment (emphasis mine).

“You understand that we are Increased use of new automation with greater potential for cost savings than in the pastsaid Sal Guatieri, senior economist and research director at BMO Capital Markets in Toronto.

“”The use of automation, especially robots, is still relatively limited compared to the number of people employed,” he said in an interview with MarketWatch.

“It’s finally come to the point, In some studies, automation replace almost half of all tasks the worker is currently doing‘ said Gatieri.

With the introduction of smart robots, labor costs are being relentlessly reduced. Reducing expenses helps companies maintain profits and also keeps prices down in a highly competitive global economy.

This is just the beginning.

Wait until the ratio of (cheap) robots to (expensive) workers increases.

Even if jobs are not threatened by technology, another major restraint on incomes in developed countries is the rapid progress taking place in developing countries.

The following graph shows the distribution of world population by region since 1800.

In 1900, about one-third of the world’s population (the United States, Europe, Japan, and Oceania) enjoyed the bountiful benefits it offered.

The Western world prospered, but the other two-thirds of the world was left behind.

The rise of China, India and other Asian nations is changing the dynamics.

Well-paid Westerners face stiff competition from billions of people for what we have: a higher standard of living.

who can blame them?

get used to slowing growth

Given the strong headwinds of technology and increased competition from Asian economies, a return to the impressive growth rates of the past is unlikely.

In 2012, Professor Gordon (in his research paper “Is US Economic Growth Finished? Stalling Innovation Faces Six Headwinds”) The probable trajectory of

It’s not a pretty picture, but

That downward trend is evident in the following chart of real (post-inflation) US GDP growth from 1935 to 2023.

The contraction in real GDP growth comes as more and more debt is injected into the economy.

How much debt can even an economy the size of the United States support before it collapses under the weight of service costs and defaults?

What will happen to growth when the current (and very long-running) debt supercycle collapses?

Gordon’s projected GDP growth trajectory may seem overly optimistic.

Dealing with legacy

golden 20th This century has left us with a legacy of debt, demographics and budget deficits.

21 only wayscent This century could even be expected to fund the 20th centuryth The century (welfare and lasting growth) promises unlimited real economic growth in excess of 2% per annum.

Given the headwinds we’re facing, this growth rate doesn’t seem achievable on an annual or year-on-year basis.

Sure, there may be glimpses of above-average growth from time to time, but it’s temporary. The trend is to lower lows.

20th The century has left us with an unprecedented legacy.

The Great Depression was the result of the world becoming a little too extravagant from the prosperity of the 1920s.

However, there is a big difference between then and now.

Debt levels were much lower than they are today.

People became much more self-sufficient and less dependent on government.

Rights were almost non-existent.

Life expectancy has shrunk, and fewer seniors the system can support.

Planning for retirement was a luxury enjoyed by some privileged classes.

It may seem hard to understand, but the system we have today is far more fragile than the system that existed in 1929.

Our current economic and financial system has evolved from the prosperity of the 20th century. Past successes will sow the seeds of future failures unless the growth rate of Glory Days can be replicated.

We are in unexplored waters.

The only reliable guide we have is the blindly simple logic of economist Herbert Stein. “If something can’t go on forever, it will stop.

Logic and mathematics make a compelling argument as to why the current system of over-indebtedness and over-promised cannot continue unchanged.

Unfortunately, there is no easy way to lower society’s expectations and entitlements.

Politicians won’t do it.

Jobs will therefore fall into the market. That’s why I believe we have a long and very painful bear market in our future.

nice to meet you,

Burn Gordy
Editor, Australian Daily Reckoning

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