Blog Archives

So You Want to Get Rich: Focus on Human Capital

So you want to get rich: OK, what’s the plan? If you ask youngsters how to get rich, many will respond by listing the professions the media focuses on: entertainment, actors/actresses, pro athletes, and maybe a few lionized inventors or CEOs.

The media’s glorification of the few at the top of these sectors masks the statistical reality that those who attain wealth in these pursuits number in the hundreds or perhaps thousands, not in the millions. As in a lottery, the odds of joining such a limited group are extremely low.

There are 330 million Americans and 150 million people reporting income, so statistically, the odds of getting rich improve significantly if we focus on joining the ranks of the 11 million people who are getting rich from their human capital rather than on the few thousand people earning big bucks in music, film, sports, etc.

As I noted yesterday in The “Working Rich” Are Not Like You and Me, the nature of work and capital is changing. Markers that were once scarce–college degrees, for example– are now abundant, and have lost their scarcity value. What’s scarce isn’t credentials–what’s scarce are skills that generate productive problem-solving: human capital.

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Where Will You Be Seated at the Banquet of Consequences?

The Banquet of Consequences is being laid out, and so the question is: where will you be seated? The answer depends on two dynamics I’ve mentioned many times: what types of capital you own and the asymmetries of our economy.

One set of asymmetries is the result of the system isn’t broken, it’s fixed, i.e. rigged to favor the few at the expense of the many. There are many manifestations of neofeudal asymmetry that divides neatly into two classes and two systems, the nobility and the serfs.

A rich kid caught with drugs gets a wrist-slap, a poor kid gets a tenner in the Drug Gulag.

Upper-middle class households are tax-donkeys, paying high taxes and getting few deductions, while mega-wealthy corporations and financiers enjoy offshore tax shelters of the kind exposed by the Panama Papers.

The stock market operators use high-frequency trading to front-run the market and generate profits that are inaccessible to serfs with retail trading accounts.

And so on. Given that the nobility control the machinery of governance (so-called democracy), there’s no way for commoners to influence the neofeudal cartel-state asymmetries short of shutting down the entire system.

Which leaves the asymmetries created by the dynamics of the 4th Industrial Revolution in which new technologies and business models are destabilizing every sector of the old economy.

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The Crisis of Capital

The undeniable reality of the 21st century economy is that capital has gained while labor has stagnated. While various critics quibbled about his methodology, Thomas Piketty’s core finding–that capital expanded faster than GDP and wages/salaries (i.e. earned income from labor)–is visible in these charts.

Real wages have gone nowhere for decades. Only the top 5% of wage earners have outpaced inflation’s erosion of the purchasing power of their earnings.

Household net worth has soared $60 trillion while GDP expanded by $9 trillion.Compare the relative growth trajectories of the economy and net worth of assets. Clearly, capital has expanded at rates far above the expansion rate of the economy.

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When Certainty Frays, Capital Gets Skittish

As we look ahead to 2019, what can we be certain of? Maybe your list is long, but mine has only one item: certainty is fraying.

Confidence in financial policies intended to eliminate recessions is fraying, confidence in political processes that are supposed to actually solve problems rather than make them worse is fraying, confidence in the objectivity of the corporate media is fraying, and confidence in society’s ability to maintain any sort of level playing field is fraying.

When certainty frays, capital gets skittish. Predicting increased volatility is an easy call in this context, as capital will not want to stick around to see how the movie ends if things start unraveling. The move out of stocks into government bonds is indicative of how capital responds to uncertainty.

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The Rowboat (Wages) and the Yacht (Assets)

The reason why the status quo has failed and is fragmenting is displayed in these three charts of wages, employment and assets: wage earners (labor) are in a rowboat trying to catch the yacht of those who own assets (capital).

Here is a chart of weekly wages of those employed fulltime: up a gargantuan $4/week in the 18 years since 2000. Let’s see, $4 times 52 week a year–by golly, that’s a whole $208 a year. Brand new Ford F-150, here we come!

If we go back 38 years to 1980–an entire lifetime of work–we find real (adjusted for official inflation, which seriously understates big-ticket expenses such as rent, healthcare and college tuition/fees) wages have notched higher by $10/week–a gain of $500 annually.

If we adjusted wages by real-world income, we’d find wages have declined since 1980 and 2000.

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There Is One Way Out of Debt-Serfdom: Fanatic Frugality

If we accept that our financial system is nothing but a wealth-transfer mechanism from the productive elements of our economy to parasitic, neofeudal rentier-cartels and self-serving state fiefdoms, that raises a question: what do we do about it?

The typical answer seems to be: deny it, ignore it, get distracted by carefully choreographed culture wars or shrug fatalistically and put one’s shoulder to the debt-serf grindstone.

There is another response, one that very few pursue: fanatic frugality in service of financial-political independence. Debt-serfs and dependents of the state have no effective political power, as noted yesterday in It Isn’t What You Earn and Owe, It’s What You Own That Generates Income.

There are only three ways to accumulate productive capital/assets: marry someone with money, inherit money or accumulate capital/savings and invest it in productive assets. (We’ll leave out lobbying the Federal government for a fat contract or tax break, selling derivatives designed to default and the rest of the criminal financial skims and scams used so effectively by the New Nobility financial elites.)

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What Would a Labor-Centered Economy Look Like?

Let’s spend a moment deconstructing the word “capitalism.” Note it contains the word Capital. So far so good. Obviously the key concept here is capital.

So what is “capital”? It turns out there are multiple kinds of capital. The most familiar kinds are tangible: cash, orchards, factories, water rights, tools, and so on.

Then there’s credit. If you have unlimited credit at very low rates of interest, you can buy all the tangible capital you want, as long as it produces enough income to cover the costs of production and the interest you owe on the borrowed money you used to buy the factories, orchards, etc.

Some types of capital are intangible but essential to the productive use of tangible capital. You can have the credit, land and pile of lumber needed to build a house, but if you don’t have the knowledge, experience and skills needed to turn the pile of wood into a productive form of tangible capital, you have nothing but an unproductive pile of lumber.

We call this form of capital human capital (also called knowledge-based capital, intellectual capital, etc.).

If you hire a person with some of these skills, that’s a good start, but you need specialists who can complete all the trades needed to build a fully functional house that can be rented or sold, i.e. earn a return on the capital invested.

If the person you hire knows a lot of other trustworthy tradespeople, that’s what we call social capital.

If we dig deeper, we find even more forms of capital.

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The Coming War of Central Banks

History has shifted, and we’re leaving the era of central bank convergence and entering the era of central bank divergence, i.e. open conflict. In the good old days circa 2009-2014, central banks acted in concert to flood the global banking system with easy low-cost credit and push the U.S. dollar down, effectively boosting China (whose currency the RMB/yuan is pegged to the USD), commodities, emerging markets and global risk appetite.

That convergence trade blew up in mid-2014, and the global central banks have been unable to reverse history. In a mere seven months, the U.S. dollar soared from 80 to 100 on the USD Index (DXY), a gain of 25%–an enormous move in foreign exchange markets in which gains and losses are typically registered in 100ths of a percent.

This reversal blew up all the positive trades engineered by central banks:suddenly the yuan soared along with the dollar, crushing China’s competitiveness and capital flows; commodities tanked destroying the exports, currencies and economies of commodity-dependent nations; carry trades in which financiers borrowed cheap USD to invest in high-yielding emerging markets blew up as currency losses negated the higher returns, and global risk appetite vanished like mist in the Sahara.

The net result of this reversal is global markets have struggled since mid-2015, when the headwinds of the stronger dollar finally hit the global economy with full force.

In one last gasp of unified policy convergence, G20 nations agreed to crush the USD again in early March 2016, to save China from the consequences of a stronger yuan and the commodity markets (and lenders who over-extended loans to commodity producers).

That Shanghai Accord lasted all of two months. The engineered collapse has already reversed, and the USD is gaining ground, reversing the gains in risk assets, commodities and China’s export-dependent, debt-based stability.

The problem is there is no win-win solution to this foreign exchange battle.Japan and the Eurozone benefit from a stronger USD as the euro and yen weaken, but China loses as the USD soars.

Commodities lose when the USD gains, but the domestic U.S. consumer’s purchasing power increases as the USD strengthens.

It’s Triffin’s Paradox writ large: As the primary global reserve currency, The USD plays both a domestic and an international role, and each set of users has a different set of priorities.

No matter what policy the Federal Reserve pursues, there will be powerful winners and losers.

This sets up a war between central banks everywhere in which winning may be as disastrous as losing. The conventional central bank policy is to lower interest rates to weaken their currency, as a means of boosting exports.

But the unintended consequence of lowering rates is capital flight, as capital flees devaluation and negative returns and seeks higher returns elsewhere.This is a self-reinforcing process, as capital flight causes the currency to lose value, reducing the purchasing power and wealth of all who hold the currency. This motivates everyone who anticipates this devaluation to get their money out of the depreciating currency, which further weakens the currency which then triggers even more capital flight, and so on.

The only way to avoid the devaluation is to pull your cash out of that currency and put it into a currency that’s strengthening. For many, that currency will be the USD, due to its ubiquity and the liquidity of its capital markets.

Nations such as China are boxed into a lose-lose choice. If they lower rates to weaken their currency (to maintain a competitive export sector), they trigger capital flight, which weakens the domestic economy and creates a self-reinforcing feedback loop.

If they do nothing and their currency rises as other nations aggressively devalue their currencies, their export sectors whither as competing exporters take market share.

Any central bank that dares to raise rates will make their nation a magnet for capital seeking a higher return–both in yield and in currency appreciation.

The Fed is boxed in, too: if the Fed can’t raise rates after seven years of “growth,” then its credibility suffers. If it raises rates, that accelerates the capital flow into USD and the U.S., pushing the dollar higher, which then triggers mayhem in China, emerging markets, commodity markets and U.S. corporate profits earned overseas.

Welcome to a currency war in which victory depends on your perspective. If the USD continues strengthening, the winners will be those holding USD, as their currency will increase its purchasing power as other currencies devalue.

As I always note: no nation ever devalued its way to hegemony or empire.

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The Most Profitable Work Will Be Automated: The Rest Will Be Left to Us

What’s abundant and what’s scarce? The question matters because as economist Michael Spence (among others) has noted, value and profits flow to what’s scarce.What’s in over-supply has little to no scarcity value and hence little to no profitability.

What’s abundant is unprofitable work, commoditized goods and services, and conventional labor and capital (which is why wages are declining and yields on capital are near-zero).

What’s scarce is profitable work, highly profitable niches that are immune to commoditization/ automation, and meaningful work.

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Why I Will Never Hire Anyone, Even at $1/Hour

One of the most appealing beliefs about technology–that it will always create more jobs than it destroys–is no longer true. It was true in the first and second industrial revolutions, for one simple reason: the new industrial revolution created vast numbers of low-skill jobs that offered displaced workers abundant opportunities for work that did not require more than entry-level skills.

It only took a few minutes to learn one’s job on an assembly line in the first industrial revolution, and many workers recoiled from the sheer boredom and physical repetitiveness of this work. This is one reason why Henry Ford famously raised his workers’ wages to the then-princely sum of $5/day: the high turnover of people quitting was killing him.

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Technology, Competition and the ‘Crapification’ of Jobs

Two recent articles shed light on the ‘crapification’ of jobs and the rise of income inequality:

Martin Wolf on the Low Labor Participation as the Result of the Crapification of Jobs (Naked Capitalism)

The Measured Worker: The technology that illuminates worker productivity and value also contributes to wage inequality. (Technology Review, via John S.P.)

While both articles offer valuable insights into the secular trend of stagnating employment and wages, I think both miss a couple of key dynamics.

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Don’t Think It Won’t Happen Just Because It Hasn’t Happened Yet: Loss of Faith in the Fed

Much of the supposedly godlike power of central banks is participants’ faith in their powers to control not just finance but the real world that can be leveraged by finance.

The Grand Narrative of the global economy since the 2008 financial meltdown has been: whatever the problem, zero interest rates and more credit will fix it. Too much debt? Zero-interest rates and more credit will fix that. Government spending far exceeds tax revenues? Zero-interest rates and more credit will fix that. Economy sluggish? Zero-interest rates and more credit will fix that. Few jobs being created? Zero-interest rates and more credit will fix that.

Had a bad hair day? Zero-interest rates and more credit will fix it.

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