Speaking as an investment professional of three decades - not, NB, as a prognosticator (we ought all to heed the OT condemnations of sorcery and divination) – the 16K DJI does not seem to me to be quite wholly a case of irrational exuberance, in that I can see a reasonable argument for it. As Proph recently wrote to me:
So maybe the best we could say is that the [financial markets are] completely rational given the complete irrationality of the prejudices of the age?
Yes. Included in the information processing system of the species – of which the financial markets are an important organ – are all the defects thereof.
Particularly, these days, that government idiocy has so increased the cost of employment that almost all firms are refusing to hire, instead pouring all their (considerable) profits into automation that will permanently reduce their demand for workers, increasing their profitability, and thus their market valuations.
This is a process that can continue for some time. Consider the knock on effects of the Industrial Internet – hooking up machines to the internet – which is only in the first few months of implementation. They are absolutely immense. Ditto for fracking. Ditto for automated cars (the increase in transport efficiency could be staggering, and all of it reaped via relatively stepwise investments in automotive automation – no immense rebuilding of the roads, but rather just making cars marginally smarter than they were last year). Ditto for robotics, nano-tech, 3D printing.
The list goes on and on. Our whole industrial sector is undergoing a phase change, just like what happened to agriculture when the fruits of the industrial revolution began to be applied to it. Retail, too: Amazon is going to displace about 2/3 of the brick and mortar sales outlets, by some estimates. Even the efficiencies due to pervasive deployment of smart phones are only just clicking into gear.
The private economy, in other words – and by this I mean the real economy that moves mass around and provides services, not so much ephemera like Twitter and Facebook – offers the prospect of massive, permanent increases in profits. But such increases always feed through to reductions in prices (such as Amazon’s reduction of shipping costs to $0). The prices of industrial goods are set to drop precipitously, just like those of ag products did when ag was industrialized. So are the prices of ag products, for that matter.
But all this just means that we are going to have more and more wealth to spend on social dysfunction and vice. Unemployment is likely to get worse and worse, as the industrial sector need for manpower vanishes.
It needn’t, of course. If the employment market were free and efficient, anyone who wanted to work could find gainful employment in the real economy, or even the good economy. Look at organic foods, or craft beer, or any of the other high quality items that people are more and more demanding. There’s lots of room in those sectors for more competition, and dropping prices, and employment. But that isn’t going to happen.
So apart from the occasional periodic crash, of the sort that are almost guaranteed to recur from time to time, we can expect corporate profits to keep climbing, even as unemployment and social dysfunction keep compounding. Technology may enable us to avoid a total crash, that would force us to correct the social dysfunction. So, it’s a lousy, delicate, vulnerable state of affairs. I don’t expect it to last – too unstable.
When it comes, the crash – and by this I mean, not the next market correction down to a DJI of 12K, but the real Collapse™ that Proph writes about, the Collapse™ we trads all anticipate with a mix of eager gladness and terror - is going to be generated by an explosion of social dysfunction, not by a failure of the private economy to generate increasing wealth.
The Real Economy and the Fake Economy are de-linking. The Fake Economy has added so many costs to the price of labor that the labor market is languishing. No one’s buying labor at that price. They’re buying capital goods instead – that’s what you’re generally doing, when you buy stocks or bonds – which will structurally reduce the demand for labor.
Fake wages will keep growing, fake jobs will keep being added. But real household incomes will not grow, because as the Fake Economy adds jobs, the Real Economy is going to shed them, big time. Proph wrote also:
What baffles me is how we can sustain a move toward a functionally labor-less economy.
That is the central problem of the technology revolutions. It won’t do us any good for everything to get cheap as chewing gum, if no one has any employment income. As private sector demand for labor crashes, how will people earn the money to buy the dirt cheap iPhones? The rational way to solve the problem is to let people earn money by supplying goods and services to each other that they really value – origami supplies, liturgy, fun movies, comedy, artisanal cheese, whatever. These are in the final analysis all species of our affection for each other and for the creation. People make artisanal cheese, not just to earn a buck, but for love. The laborless economy then is really only the economy that has succeeded in automating the sort of work that people cannot love for its own sake, like mining coal.
NB: there may be almost no such occupations out there. Almost every line of work has an inherent fascination for certain types of mind (for, there is no part of the created order that is not reflective of the beauty of her Creator). I loved being a woodcutter, one of the lousiest jobs I can think of. I even enjoyed washing dishes in a restaurant. The only sort of work that is hard to love, really, is work that is pointless, like being paid to dig ditches and then fill them back up, or do anything else that no one really wants done. Many modern jobs fall into that category; almost all the fake economy falls into that category.
But even if the only sort of work available was of the creative, interesting sort that simply cannot be automated, there are always going to be lots of people who have nothing of value to offer other people, either because they love nothing very much, or have not the talent, initiative, mental health, or intelligence to provide it. For them, there are two options: either welfare (or make work – same thing) – which by subsidizing vice vitiates virtue, compounding the problem from one generation to the next: or else, true charity, such as the monasteries once offered to all in need. Since Henry VIII, the West has chosen the former.
Clearly the latter is preferable, if only because it does not subsidize vice. One of the things that those who are lacking in talent, intelligence, and so forth can always offer to society is their charitable work. If you can’t find useful employment providing something your fellows value enough to keep you flourishing, so that you are destitute, you should be able to knock on the door of an abbey and find useful employment there – and a life of value, meaning, significance, indeed even sanctity.
Will we change course away from welfare and back toward charity? That’s the question of the laborless economy. I rather doubt it. If we don’t, then look for an eventual explosion and collapse triggered, not by technics or markets, but by social devolution. If we do, then something like a golden age could happen (setting aside such challenges as are always with us no matter what, e.g., Islam, China, etc.).