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Monthly Archives: October 2017

VR changes everything

31 Tuesday Oct 2017

Posted by beyondoverton in VR

≈ Leave a comment


The history of humankind is one of gradually reduced mobility. We generally travel for three reasons: resources, work, entertainment. In the past, as humans captured and started governing more of nature thanks to advances in technology, the need to travel for each of the above decreased. Now, as we move to the digital medium thanks to advances in VR, the need to travel may completely disappear. With VR on the cusp of mass adoption, betting on the autonomous car, whether EV or solar-battery powered, as the next big thing in mobility, may not be the smartest thing to do.

It is no wonder that the means of transportation have actually barely changed even from pre-historic times. For example, in some parts of the world people still use the horse to go places. The cart and the boat are still here, just more powerful because we have improved our energy sources (when it comes the cart-auto, not necessarily even faster in the big cities). The train may look novel but, ultimately, it is just a more efficient version of a mass transportation ‘cart’. The airplane, however, is really a novel way of covering distances. First, because it is air-based while all other means of transportation had so far been land/water-based. Second, because it is much faster than any other means of transportation. 

Perhaps that is why we have been so fascinated with the flying car as the next step in improving our mobility. But the flying car never came. I argue below that this is because there is no need for it as humans have naturally moved less and less through the ages. (It may actually seem less so, as images of the great sea voyages during the Renaissance or as we recently have started to conquer space, come to mind, but these are exceptional cases which actually do not involve that many people relative to the mass human movements in the past.) In addition, as VR continues to improve, we are in the process of ‘moving’ away from the physical to a completely new and different medium of being: the digital.

It is generally believed and accepted that the first human appeared in Africa and from there settled all distant corners of the Earth in search for basic resources for survival. We cut on our nomadic lifestyle of ‘travelling’ for resources first after the Agricultural Revolution when we stopped chasing wild animals for food and settled to a more sedentary lifestyle. That included conquering more arable land and learning wholesale farming, as well as perfecting animal domestication. Mobility actually temporarily increased as people moved to where the arable land is – cities formed and grew. But once settled there, there was barely a need to go anywhere else.

This was also the first time we acquired a surplus over and beyond our needs for survival. Sadly, this did not eliminate scarcity because we lacked the means for its ‘fair’ distribution. The Agricultural Revolution was perhaps the peak of human mobility for resources.

The second time we drastically reduced our mobility was after the Industrial Revolution. Back then we stopped producing our own food and focused on specializing in producing goods for basic needs in much greater quantity than it was ever necessary. This also resulted in a temporary increase in mobility as people had to come to the factories. Cities naturally grew bigger, but once people settled there, mobility went down again. During this period our welfare drastically improved to the point that we soon started to produce goods not just for basic consumption but also for leisure and entertainment. Our ability to distribute this surplus accordingly, unfortunately did not. The Industrial Revolution heralded the beginning of the need to travel for work. That need probably reached a peak sometime after WW2.

The beginnings of the Digital Revolution sometime in the 1980s marked the third time we reduced our mobility as the need to travel to acquire resources and for work became less prevalent. Again, similar to the previous instances, our mobility got a temporary boost because we started travelling for leisure. By then, the fruits of the technological advances of the past had brought an unbelievable welfare surplus which, though never distributed equally, was enough to push not just basic but also discretionary goods prices down. This made leisure and entertainment affordable to the masses. People not only went to restaurants to eat (instead of at home) but to the movies and bowling alleys for fun. Later on, people even started taking vacations in different continents! Mobility for entertainment probably reached a peak in 2007 with the invention of the smartphone (and, unfortunately, with the wider spread of terrorism more globally).

I fear the wide adoption of VR will bring the final nail in the coffin of human mobility. Just until a few years ago, at least we used to go ‘shopping for resources’ to our corner grocery store. Now Amazon and a bunch of other companies bring our food and necessities to our door step. Travelling for work is also decreasing as Internet/network connectivity improves. VR brings the culmination of our mobility for entertainment as well, as the need to go to a concert, the movies, etc. or even travelling across the world on vacation is reduced.

VR will eventually be able to replicate the stimulation to all our senses and once that happens the ‘V’ in VR may become redundant. At the moment vision and sound are the easiest to manipulate. But still, a wide-field vision is mostly lacking in current VR headsets (humans can see at about 220 degrees, the best VR headset is about half that). Resolution is another one which needs to undergo further improvements to get to the 20/20 human vision. Touch is probably the next one after to improve on, and there are already huge strides made in that regard with the haptic glove, for example. Taste and smell are the most difficult ones to replicate but there is progress there too.

Our VR experience does not need to be 100% of what is current ‘reality’. But as that experience improves and as the cost of VR-ing goes down, humans will naturally use more of it relative to the ‘real thing’. Our physical mobility will suffer even more as a result. That is the easier bet simply because there is such a strong trend of this process going back thousands of years. However, eventually, anything associated with the current physical reality may become irrelevant.

And this is likely to happen within our lifetime, or as we used to say on the trading floor, before the long bond matures. It is simply inconceivable that, from one hand, we are working on brain-computer interface and we have even managed for the first time to upload a brain on a computer but then, on the hand, we are still forecasting that our relationship to the physical world will not change much.

I am sure the self-driving EV/Solar ‘car’ is coming but I think the overall number of ‘cars’ on the road will be much, much smaller than what people are currently forecasting. And, yes, most likely people will still be travelling in the physical world, but that will be the exception rather than the rule. And since I mentioned the ‘flying car’, well, it is already here – the drone. But unlike in most science fiction movies, it will continue to be used to transport mostly basic physical goods to the humans in VR ‘capsules’ who need to refuel their energy in the old-fashioned way, i.e. until we decide to upload our brain and be completely cut off from this reality…  

Low productivity is the least of our problems

17 Tuesday Oct 2017

Posted by beyondoverton in Uncategorized

≈ Leave a comment

Low productivity is the least of our problems. Why would we want to produce more output, when there is no one able to consume it, is beyond me. If we take care of our stagnating aggregate incomes and put more real purchasing power in the consumers’ wallets, productivity will take care of itself. However, it is a fact that the 200-year old Industrial Revolution-time model of income generation and distribution has broken down due to the spread of globalization and the rise of sophisticated technology which displaces even cognitive and non-routine human jobs. The problem is that we keep wanting to fix it instead of coming up with a new model which fits better our economic realities.

  • Low wages are not a result of low productivity. It is the other way around.
  • If full employment comes at the cost of lower wages, purchasing power may not rise and aggregate demand may not rise->output stagnates.
  • Stagnating numerator (output) and a rising denominator (employment)-> decreasing productivity.
  • Work dynamics have changed dramatically. The 200-yr old distribution model of Work=Job=Income is broken.
  • Machines are cheaper, more efficient and smarter than humans in increasingly more industry sectors.
  • The rate of growth of human cognitive skills (education and training) is unlikely to keep pace with the rate of growth of machine learning.
  • IBM Watson reads 1m books per second (now probably even more): 100k of human evolution is now ‘equal’ to 7 minutes of machine learning.
  • New ‘job’ creation in the digital era will happen but is unlikely to keep pace with the destruction of old jobs.
  • We will always want to work but do we need a job? If we create AGI but insist on people having a job for survival, we would have totally failed.

US corporate profits and the S&P Index

10 Tuesday Oct 2017

Posted by beyondoverton in Equity

≈ Leave a comment

One would think that US corporate profits and the S&P Index should move closely together. And they do… most of the time. But when they diverge, should we be buying/selling US equities?

1990-2017

The chart above shows that since the 1990s there have been three such divergences where the S&P Index ‘outperforms’ US corporate profits by a large margin followed by a subsequent crash in equities: Dotcom Crash, the 2008 GFC, and whatever we have now (WWHN). The Dotcom crash was indeed an equity bubble with US equities starting to diverge already in the mid-1990s.

The 2008 GFC crash did not have much to do (if anything )with equities. However, US corporate profits started declining already in Q3 2006 while the S&P Index continued to rise well until the summer of 2008. Nevertheless, the divergence between the two was not that stark as the in DotCom crash. Still, the declines in the S&P Index during the Dotcom and 2008 GFC were similar.

The bounce back in US corporate profits after 2008 GFC was rapid and extreme, just like the decline was. This was again in stark contrast to the Dotcom crash which was preceded by flat US corporate profits since the mid-1990s. Their rise post the Dotcom crash, thus, was gradual. The 2008 GFC was such an extreme event that caused US corporate profits to ‘outperform’ the S&P Index between 2008 and 2013, a very rare event indeed (see Chart below).  

However, since Q1 2012, US corporate profits are more or less unchanged while the S&P Index continues to power higher. Still the divergence between the two now does not seem that extreme as in the Dotcom crash.

1947-1990

The only other time when US corporates ‘outperformed’ the S&P Index was between the mid-1970s and the mid-1980s. After being flat for almost 10 years priors, the rise in US equities after 1983 to ‘catch up’ with US corporate profits was extreme which might have contributed to the sudden crash in 1987. But one could think of that event as just a sudden stop to regain one’s breath after running a 100m sprint. The S&L crisis that followed, similar to the 2008 GFC, had almost nothing to do with equity valuations which, this time, was reflected in the performance of the S&P Index (no crash).

So where do we go from here?

Another way to look at the relative performance of US corporate profits and US equities is to index them to 1947 when data for US corporates started to be available (Chart below). What is obvious here is that ‘something’ happened in the early 1980s: The Great Financialization of the US economy started. Moreover, US equities got an extra ‘artificial’ push when the SEC introduced Rule 10B-18 which gave safe harbor for US companies to buy back their own shares.

The DotCom crash, 2008 GFC and WWHN (TBC) are much more visible and it seems that the divergence between the S&P Index and US corporate profits now is at least comparable to the Dotcom era. So, when is the ‘crash’? All this tells us, is that US equities are running ahead of US corporate profits and that they are on the expensive side when using traditional valuation methods. But there are other things that one should consider before making any conclusions about potential setback in share prices. And even when all things are lined up for that crash that everyone has been waiting for now years, there is still the trigger – leverage.

The elephant in the room is Virtual Reality

09 Monday Oct 2017

Posted by beyondoverton in VR

≈ Leave a comment

The Digital Revolution

The most profound shift happening now is the one from physical to digital. In terms of concept this follows all the other big transitions of the past: agriculture->industry->services. However, in terms of scope and in terms of its effects, this transition is much bigger. All other shifts in the past have been within the physical medium. This is the first time we are transcending mediums. At the same time, we continue to project the future only in terms of the physical medium. For example, when it comes to transportation, the main discussion is what the car of the future will be. One of the boldest predictions that I have seen so far, for example, is an autonomous EV run by a DAO. That still assumes that the physical world will remain the main medium for humanity. But what if that is not the case? How can we reconcile that the brightest human minds are discussing computer brain upload and transhumanism while at the same time entertaining the idea of humans going from point A to B still in a box? The two ideas are incompatible.

A big diversion

Technology has at last developed so that Virtual Reality (VR) has the potential to change humanity profoundly. VR is closely linked to the idea of sub-consciousness and we are already spending 1/3 of our daily life (on average) in such a state while sleeping and dreaming virtual worlds. In fact, the conscious state is just a cover of the subliminal perception which determines to a large extent our actions. It is the guardian of the virtual world and by filtering through only that which we are able to make sense of, it creates the ‘real world’ which we inhabit in our conscious states.

Our human body processes information through the senses (sight, hearing, touch, taste and smell) in various ways we are most of the time not aware of because our consciousness does not have the ability to analyze all this data. To a certain extent, consciousness leaves a lot of stuff on the table when it comes to our understanding of what is going on (no wonder humans have always tried various means to transcend our conscious state). It only gives us just about enough information so that we can ‘survive’. The bottom line is that the process of VR is a natural continuation of what we humans are. The physical reality has been good to us so far but perhaps we are at a stage of development which we can start to ‘make sense’ of the much bigger world which sub-consciousness can reveal to us, a world in which we can not only survive but prosper.      

Back to the ‘car’ of the future

It is not inconceivable that in the future a VR machine would be the main means of human ‘transportation’. Even today we travel less for work and pleasure, we shop on line, we prefer to play video games than participate in outdoor activities, we hang out in virtual chat rooms and engage with our friends on Facebook, etc. And even if there is work in the future, most likely it would not be of a physical nature which would mean that we would be able to do it ‘from distance’. And if VR eventually is able to re-create the same emotional experiences which we now encounter in real life, travelling for pleasure would also be minimal. It does not mean that humans would not move in the physical world, but that would be a ‘luxury’.  

Forecasting auto production numbers, whether EV or ICE or whatever that far in the future (2030-2040), etc. becomes a totally meaningless exercise. It is not just that though. Forecasting anything that has to do with the physical medium becomes a non-linear exercise: energy demand, consumer behavior, health, education, etc.

Policy makers need to take that into account and do not submit to calls to spend blindly on old-fashioned infrastructure. Investors need to think laterally how the VR world will totally change some of the existing industry sectors. We might not know which would be the company of the future to bet on, but we could do well to identify some of the companies which are less likely to make it in the future VR world.

Why US equities keep outperforming?

07 Saturday Oct 2017

Posted by beyondoverton in Equity, Questions

≈ 1 Comment

A lot has been written lately about the outperformance of US stocks over European stocks. Here is a good summary.

I would add two other things to the list of possible reasons for this outperformance.

Corporate share buybacks

US corporate stock buybacks are a feature in US equities to a much larger extent than European corporate stock buybacks. For example, US corporates were given a “green light” to buy their own shares when Rule 10b-18 was introduced in 1982. The S&P Index started outperforming the DAX in the mid-1980s (Chart below, both of them indexed to 100 in 1959).

Source: Bloomberg, author’s calculations

As US buybacks increased, the outperformance became more obvious (Chart below).

Source: Bloomberg, author’s calculations

Intangible assets

A second reason for the outperformance of US stocks could be the higher % of intangible assets in US indices (Charts below).

Source: “Intangible Asset Market Value Study” by Cate M. Elsen and Nick Hill

Historically, the combined value of a company’s physical assets should equal its market value. But we know that this Tobin’s Q ratio has become a bad predictor of the stock market. Why? Because intangibles have replaced physical assets as the main factor of production. We cannot see the intangibles on companies’ balance sheets but there are ways to guess their worth (look at investments/expenditures on the income statement). According to Simcha Barkai from the University of Chicago, intangibles are worth $48Tn just in the US (that’s more than the physical value of all companies’ assets)!

Plenty of liquidity but scarce money

05 Thursday Oct 2017

Posted by beyondoverton in blockchain, Debt, Monetary Policy, UBI

≈ 3 Comments

“All the perplexities, confusion, and distress in America arise…from downright ignorance of the nature of coin, credit and circulation” John Adams in a letter to  Thomas Jefferson

1)We should have never ‘put together’ “store of value” and “medium of exchange”.    

2) If something has intrinsic value which is expected to go up in time, it will be hoarded and exchanged less often.

3)’Money’ is a “unit of account” which we ‘exchange’, in order to efficiently get the things we really need and want in life.

4)Inflation/Deflation are simply measures of whether ‘money’ is abundant or scarce relative to the economic activity we desire.

5)In the economic system we have created, purchasing power is gained either through paid work or through credit.

7)As long as companies earn a profit, they retain more ‘money’ than they distribute in wages and other payments, thus there is insufficient medium of exchange to meet the supply of goods.

7)Even if companies invest the profit in new projects, this only adds to the previous supply-demand imbalance unless new medium of exchange is added endogenously in the form of credit.

8)Advances in technology make the old paradigm of Work=Job=Income obsolete; purchasing power is lost.

9)Credit only makes the scarcity of ‘money’ more acute because new medium of exchange needs to be added just to pay the interest on the debt; a vicious cycle develops.

10)This credit/debt cycle also eventually comes to a natural end (2008); no more purchasing power can be added even endogenously.

11)If we want to keep the current economic system going, we need to find a new way of generating ‘purchasing power’.

12)But if the paradigm has shifted, normalization is meaningless; instead of going back to something that does not work, let’s look forward.

12)’Helicopter money’ has an, unjustifiably, bad reputation historically.

13)UBI is politically unfeasible to implement in a large country with open borders.

14)The problem with them in the past has been our lack of knowledge of existing economic activity, and thus our inability to disburse the right amount of purchasing power needed.

15)M≠PxT, so we invent V, in order to MxV=PxT

16) Both of them, however, are great ideas which need to be put in the context of our existing institutional framework.

17)The central bank opening its balance sheet (CBDC) to the public at large is the next step in monetary/fiscal policy.

18)Blockchain, as in a large, open, decentralized, distributed, real-time database of all economic transactions, is the digital equivalent of ‘GDP’ of the industrial era.

19)The Fisher’s equation above then takes the form of CBDC=Blockchain, ‘money’ matches economic activity.

What if central banks gave the QE money to the people?

03 Tuesday Oct 2017

Posted by beyondoverton in blockchain, Debt, Monetary Policy, Questions, UBI

≈ Leave a comment

I would not be blindfolded by the fact that the US is trying to go back to ‘normal’ with the Fed on a rate-raising spree. ‘Normal’ changed a long time before 2008. You cannot go back to ‘normal’ with a broken monetary transmission mechanism. We can create all the money in the world but if it goes in the hands of the few, if it is subsequently ‘hoarded’ and if it cannot  reach the end consumer because Work≠Job≠Income (whether that is because of technology, globalization or whatever) or because the credit channel is closed (the end of the private debt super-cycle in 2008), the economy is not going to go anywhere. And if there is little demand because there are not enough mediums of exchange, aka money, circulating in the economy, optimizing production is a waste of time and resources.

Instead of focusing on going back to a ‘normal’ interest rate policy, a forward-looking central bank would be looking into the opportunity presented by the rise of the blockchain technology and the subsequent spread of digital cryptocurrencies. The latter are a direct response to the broken down monetary transmission mechanism: if the traditional mediums of exchange do not circulate in the economy, people are devising their own ways of exchanging goods and services.

The interest-rate cycle is something of the past now. If the financial crisis of 2008 did not make it obvious, perhaps, we have to wait for the next one, which would be here like clockwork as policy makers embark on the policy of ‘normalization’. But there is some hope that some central banks are looking into ways to introduce a digital currency of their own and opening their balance sheet to the public at large.

Back of the envelope calculation shows that if the money spent on buying financial  assets by the central banks of UK, US and Japan, was instead disbursed directly to the people, working wages would have risen substantially.

Between 2008 and 2016, central banks’ balance sheets have risen by 360% in the UK, 99% in the US and 280% in Japan.

Source: Bank of England, US Federal Reserve, Bank of Japan

At the same time, over this period, nominal wages have risen by only 14.8% in the UK, 18.4% in the US and actually fallen by 2.9% in Japan! In 2016, the average annual wage in the UK was GBP 34,142, in the US – USD 60,154 and in Japan – Yen 4,425,380.

Source: OECD

Japan is peculiar also because its working age population declined by 7.4%, while US’ and UK’s rose by 4.5% and 2.7%, respectively, during this period.

Source: OECD

I took the actual change in central bank balance sheets and divided it over the average working age population between 2008 and 2016. If this money could have been disbursed directly to the people, workers would have received a lump sum of GBP8,574, USD10,997, Yen4,430,424 over the period.

Let’s imagine that this lump sum was disbursed to the working age population at the end of 2016. Compared to 2008, their wages in 2016 would then have been higher by 44% (UK), 40% (US), 98% (Japan)!

If wages could indeed ‘miraculously’ rise by almost half in the UK and US and almost double in Japan over this 8 year period, what are the chances that we would still be stuck around 2% inflation in the US and UK and around 0% in Japan? Where would GDP be?

This is a very simple exercise. Undoubtedly real life is much more complicated that this and it is rarely black and white. Moreover, this would have been a lump sum disbursement, a one-off boost to income, and not a permanent rise in wages. Consumer behavior in this case, Ricardian equivalence, etc., would have been very different from a situation with a permanent rise in wages.

However, instead of patting ourselves on the back that things could have been much worse had the central banks not backstopped the financial system by buying financial  assets, can we not also think how they could  have also been much better if we found a better use for the money miraculously created out of thin air? If we could create money out of thin air to boost financial asset prices, is it really not possible to devise a way whereby the consumer also gets a permanent rise in income? Can we have an adult conversation about the effects of such an experiment without resorting to the taboos of the past? Can we include people other than economists in this conversation?

The free market may be the best and most efficient optimization model available so far to us, but what if we are optimizing the wrong variable?

We need a ‘Marriner Eccles’ of our time

01 Sunday Oct 2017

Posted by beyondoverton in Quotes

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Marriner Eccles, Chair of the Federal Reserve, 1934-1948, one of the unsung heroes of the Great Depression in the US.

Below is from a Hearing before the Committee on Finance US Senate, February 1933.

  • Before effective action can be taken to stop the devastating effects of the depression, it must be recognized that the breakdown of our present economic system is due to the failure of our political and financial leadership to intelligently deal with the money problem. In the real world there is no cause nor reason for the unemployment with its resultant destitution and suffering of fully one-third of our entire population. We have all and more of the material wealth which we had at the peak of our prosperity in the year 1929. Our people need and want everything which our abundant facilities and resources are able to provide for them.
  • The problem of production has been solved, and we need no further capital accumulation for the present, which could only be utilized in further increasing our productive facilities or extending further foreign credits. We have a complete economic plant able to supply a superabundance of not only all of the necessities of our people, but the comforts and luxuries as well.
  • Our problem, then, becomes one purely of distribution. This can only be brought about by providing purchasing power sufficiently adequate to enable the people to obtain the consumption goods which we, as a nation, are able to produce. The economic system can serve no other purpose and expect to survive.
  • If our problem is then the result of the failure of our money system to properly function, which to-day is generally recognized, we then must turn to the consideration of the necessary corrective measures to be brought about in that field; otherwise, we can only expect to sink deeper in our dilemma and distress, with possible revolution, with social disintegration, with the world in ruins, the network of its financial obligations in shreds, with the very basis of law and order shattered. Under such a condition nothing but a primitive society is possible.
  • The nineteenth century economics will no longer serve our purpose— an economic age 150 years old has come to an end. The orthodox capitalistic system of uncontrolled individualism, with its free competition, will no longer serve our purpose. We must think in terms of the scientific, technological, interdependent machine age, which can only survive and function under a modified capitalistic system controlled and regulated from the top by government.
  • Money has no utility or economic value except to serve as a medium of exchange.
  • The debt structure has obtained its present astronomical proportions due to an unbalanced distribution of wealth production as measured in buying power during our years of prosperity. Too much of the product of labor was diverted into capital goods, and as a result what seemed to be our prosperity was maintained on a basis of abnormal credit both at home and abroad.
  • This naturally reduced the demand for goods of all kinds, bringing about what appeared to be overproduction, but what in reality was underconsumption measured in terms of the real world and not the money world.
  • Why was it that during the war when there was no depression we did not insist upon balancing the Budget by sufficient taxation of our surplus income instead of using Government credit to the extent of $27,000,000,000? Why was it that we heard nothing of the necessity of balancing the Federal Budget in order to maintain the Government credit when we had a deficit of $9,000,000,000 in 1918 and $13,000,000,000 in 1919? Why was it that there was no unemployment at that time and an insufficient amount of money as a medium of exchange?
  • Why resort to inflation of the sort referred to when prices can be increased and business revived on the basis of our present money system? We have nearly one and a half billion currency more in circulation at the present time than we had at the peak of 1929, and under our present money system we are able to increase this by several billion more without resorting to any of the three inflationary measures popularly advocated. There is sufficient money available in our present system to adequately adjust our present price structure. Our price structure depends more upon the velocity of money than it does upon the volume.
  • I repeat there is plenty of money to-day to bring about a restoration of prices, but the chief trouble is that it is in the wrong place; it is concentrated in the larger financial centers of the country, the creditor sections, leaving a great portion of the back country, or the debtor sections, drained dry and making it appear that there is a great shortage of money and that it is, therefore, necessary for the Government to print more. This maldistribution of our money supply is the result of the relationship between debtor and creditor sections— just the same as the relation between this as a creditor nation and another nation as a debtor nation—and the development of our industries into vast systems concentrated in the larger centers.
  • Senator WALSH of Massachusetts. When do you think prosperity will come back? Mr. ECCLES. It depends entirely on what the Government does. It will not come back unless action is taken by the Federal Government, in my judgment.

Note: Italics and bold are mine

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