Paradigm Shift: “a fundamental change in approach or underlying assumptions.”
This was required in the late 70’s / early 80’s to understand the upcoming move from a manufacturing and industrial driven past to a technology expanding future. The stage is set for it to be a requirement again. Just as it was “not clear” for many years in the 80’s and 90’s – there will be a vast part of the audience working to ignore it again.
Even today, many would not be held responsible for thinking that our tech revolution is already a few decades old. Not. Oddly enough, our biggest surprises are now likely to be an understanding that the tech revolution is just getting started. I will try to make sense of it:
I recall hearing a few times in the past that “margins have peaked” or that “there is no way to squeeze more out of what we do now” or “we have reached the limit of things…”
When I was young, it was pretty normal to get about 80-90 bushels of corn from an acre of farmland during harvest.
Today, DD and DOW scientists are telling farmers in their research efforts to prepare for 400+ bushels per acre in the not-to-distant future.
Tech Perception – the Paradigm
The older generation today looks at tech as a tool for doing things better. The younger generations today see it from a perspective that seems at first to be a subtle shift but one that is set to light the world on fire.
The kids today don’t view technology as a tool that can enhance how we do things; they view it as a fundamental piece of how work is always done, how stuff is made, how services are delivered, how we experience the world – from start to finish.
Efficiency, multi-tasking and parallel-channel work environments are not just buzzwords. Indeed as Gen Y enters management and digs deeper into the workforce, their new management paradigms will be driven by efficiency and convenience in every area they expand into.
They will adapt, shift, and be able to change with ease. It won’t be seen as a problem requiring meetings and study groups – it will be normal.
It’s easy for the Baby Boom and the X-ers to underestimate how important it is that people who grew up, lived and breathed nothing else but the Internet, computers, smart phones and mobile gadgets are now just beginning what will become a wave flooding into management, science, research and political channels in our economic system.
Make no mistake:
They see the world through a completely different lens – a paradigm shift indeed. One that we can keep simple by adjusting – or one we can make difficult by fighting.
The bottom line here: The benefits of innovation very often aren’t immediately witnessed when we invent something new. Instead – sometimes we have to wait for their more significant impact – like when the people with power and influence embrace it without reservation.
The good news for us? We’re just getting there now with technology.
Cash Hoarding Expands
In a surreal sense, as markets slowly trudge higher under the August haze and low volumes, one thing is not slow – and that is the cash levels held by investors of every shape and size. Data out of a group of reports in the last 30 days from UBS, BoAML, Citi and the like all show the same result: investors have little confidence in the future.
This even as all three of the widely-followed indices stand at record highs. Make no mistake – this is a stunning occurrence we will speak of years from now.
BoAML kicked it off with the report that cash levels from their fund survey were at 5.8 percent of portfolios – the highest levels since November 2001. Two weeks ago, UBS told us many of their wealthy clients have requested 25% cash levels in their accounts and this weekend, research from the Wealth-X Billionaire Census showed that the world’s billionaires are holding more than $1.7 trillion in cash.
The largest reason given? Here it is: “Uncertainty about the future.”
Folks – let’s get two things straight:
First – risk is in all that you invest in for the future
Second – the future is always uncertain
However, by “producing” the information in the manner the media does, it causes too many to almost subconsciously assume that there somewhere in the pathway, the future will be “certain.” After all, NLP practitioners will tell you it is a form of mind control: If something is uncertain now, it implies there would be another time when it is not. This is a mental fallacy that has cost too much for too many.
I close this section with two facts:
The investor audience continues to show how deeply fearful they remain as these paradigm shifts unfold. Further, I would simply remind you that fear does not go away as and if/when markets correct or pullback.
Fear only fades when prices rise and suddenly, oddly, mystically:
“the future becomes more clear…” or in this case, apparently, “certain”
The Next Fear?
You should know by now, there is always a next fear – a next monster – a next reason to hold on to that security blanket in the shadows. In the last days of August as media strives hard to manufacture stuff to grab your attention in the doldrums of summer, one item could be the age-old replay: the wilting consumer.
After all, the latest retail sales stuff showed things being “flat” with last month. Gasp – flat? Uh – oh. Not.
Can stock prices melt up if consumer spending is freezing up? Of course, that is not a likely scenario. Before we choke on our coffee though, let’s review which part of this scenario isn’t likely.
Consumer spending is not likely starting to stall.
This became the chatter within minutes of the report Friday morning showing July’s retail sales was flat m/m. This was just two days after we stated right here in the notes that two big retail sales months are often – normally – followed by a pause.
Of course, the loudest vices on Friday quickly attached this to the other worry last week where the quarterly productivity report showed a disturbingly large downward revision in nominal hourly compensation during Q1 from the preliminary jump of 3.9% to the revised decline of 0.8%.
That revision was actually included in the wages and salaries component of personal income, which was released on July 29 in the annual update of the national income and product accounts, which covers the most recent three years and the first five months of 2016.
A few reasons we might want to let this fear wave pass:
Dr. Ed reminds us that July’s flat retail sales report comes after several months of strong gains. June’s increase was revised up from 0.6% to 0.8%. Please don’t be surprised by an upward revision for July. In addition, along with the heat wave late in the month around the country, many were on vacation at the beaches.
Don’t forget, we are also seeing many Americans getting pretty fired up about the coming presidential election. As such, they could have spent more time than usual watching the news, especially during the Republican and Democratic conventions.
One other ripple (maybe)? On July 12, Amazon had it’s biggest Prime Day ever, with US orders rising a staggering 50%++ from last year.
To participate, customers had to join the Prime premium service. Since then, many articles and reports have suggested that these online sales might cut into the sales of traditional stores, though it’s not clear why the net impact would be flat unless the seasonal adjustment factors were thrown off by the event.
Amazon’s Bite – another paradigm shift
No matter how government reports learn to adapt over time to the current shift, online shopping rose to a record 28.0% of GAFO plus e-shopping in June. Put another way, the average household spent $14,910 at annual rate on GAFO plus e-shopping during June, with $10,730 on in-store GAFO and $4,180 online.
We can be sure that when July stats are broken down, the latter will be bigger in July thanks to Prime Day.
Lost in Yield and Fears
We have noted often that fear can be scene in the pathway of investor capital flow. With outflows in equities at any red ink and waves of inflows into bonds, it becomes more and more difficult to mesh with the news.
The chart above shows us that nearly 65% of S&P 500 stocks now have a trailing yield in excess of the 10-year treasury bond. This in a world where the forward P/E of the S&P 500 as a whole is 17.1 and the aforementioned bond is 65. (bond P/E below)
For those headed off into the final weeks of summer vacation haze, a reminder on energy. We have spent so much time fretting over the earnings recession and related garbage on the energy shift that we have forgotten it has benefits. Long-lasting and so far, either completely misunderstood or entirely overlooked.
It is hard to exaggerate just how much benefit is unfolding under the surface.
The next chart shows us the shift over time – and it’s current acceleration. In the 1980s Americans spent more than 8% of their disposable income on energy. By the 1990s that was down to 5%. Today it’s at an all-time low of 3.5% and falling fast.
Clearly, the latest moves are the result of one of the largest bursts of energy/technology innovation in history, more than a decade in the making. Let’s be clear, it has been stated that “The history of predicting oil prices makes astrologers look smart.”
Some facts are clear though: Energy innovation from fracking means we have far more recoverable oil today than we thought even a few years ago. Forecasts of what we’re capable of have changed not because of market optimism, but because things truly are different now.
Other things are unfolding which will not go away – and likely even improve from here:
I have stated before that the average MPG on US cars has gone from 13.1 in 1975 to 24 in 2013. While not as sexy, this is the same as cutting the price of energy almost in half.
Combine this with the falling cost of solar, and supercharge that with battery-powered cars charged by solar, and a whole new paradigm is set to emerge in the next 5, 10, 15 or 20 years.
We could see energy costs go from one of the economy’s top expenses to something far less meaningful.
In the end, we stand by this theme as we have for the last couple years: we’re probably discounting the possibility that the high energy prices of the 2000s are a thing of the past. Thanks to innovation, technology shifts and other changes we’re now seeing (set to accelerate more with Gen Y), we are likely looking at decades ahead of energy prices that could fall so low you barely think about them anymore.
There will be a day when our kids look at us and say in wonder, “You used crude oil for what in your cars?”
Tomorrow I am going to cover something very hard to implement in the world of high finance – and building wealth for family and legacy over time: simplicity.
It’s very mention brings a ruffle to the thinking right? I mean, it really all can’t be simple can it? With all this stuff to fret over and the robots and the high-speed guys and the politics and negative interest rates…and….
Well I hope you will enjoy my effort at suggesting we can learn from keeping it simple.
Until then, the theme of surprises remains up.
It amazes me that we started this year off “the worst in 80 years.” The media was having a field day in those first 6 weeks of 2016. It seems like years ago even as many more fears have unfolded since.
Now, summer is coming to a close. The sell in May guys are going to be quite upset when they come back from the beach. I am left with something terribly disquieting yet factual:
Unless one is going to accomplish something no one else has over time, the long-term investor must get comfortable with this:
To gain the results so many study in the past, we must adhere to the idea that the pathway to those results included every single terrible element – and market reaction – along the way. To gain said results, one had to accept living through each and every part of the ride up the mountain.
More paradigm shifts await. Do not underestimate the strength of the building demands in our generational pipeline. We have spent far too much time fretting over the next problem to erupt and not nearly enough time on meeting the demand that is coming.
Warning: when we finally do feel that wave washing ashore in multiple sectors – be assured we will be told all sorts of problems are getting ready to unfold.
It’s much like this news: $148 oil is the end of the world – so is $26 oil.
The crowd laughs now – the not-to-recent-past showed they did not laugh much when it was unfolding.
Stay focused, be patient, remain disciplined. The future is far brighter than many care to accept today.
Tomorrow – simplicity.
Until we see again, many your journey be grand and your legacy significant.