For several years, the conventional wisdom has been that the dollar was destined for the trash heap due to an expected huge rise in inflation, given the amount of dollar printing the Fed was doing. Contrarily, the analysts at Elliott Wave International (EWI) said that deflation, not inflation, would be the major problem in the global economy over time and the demand for dollars to service the immense debt overhang would drive the dollar up. In February 2008 they forecasted that the dollar was making a very important bottom and would be rising for many years to come. So far, the forecast is right on the money (!):
Meanwhile, ever the classic trend followers, the big banks were putting on huge short sales against the dollar in 2008 when EWI was recommending long positions. Now it is starting to hurt:
Citigroup Facing $7 Billion Currency Hit on Dollar, Peabody Says
Bloomberg, June 11
Conversely, the bond market, which moves up as interest rates go down, was held by most to be in a strong uptrend, and would stay that way as long as the Fed kept supporting it with its bond purchases. Elliott Wave International was on the other side of the trade. In late spring last year they said bonds were making a big, big top, and would be heading down in a big bear market as interest rates would be going up. Despite the Fed’s increased purchases, that is what has happened:
Bond prices began their decline in June 2012, and have continued to oscillate lower. May of this year was a disaster–bonds declined over 6% for the month. The EWI forecast is for continued declines, and the worst damage should be in high yield (junk) bonds, where millions of retirees have made major investments to get more yield. Of course, conventional analysts are mystified:
A Bond Market Plunge That Baffles the Experts
Published: June 7, 2013
The stock market is another story. Long time readers know that EWI has been labeling the current period a top, with parts of the action already in bear market mode. Stock market tops tend to be diffused because once the crowd turns bullish, they hang on a long time hoping to be right. Today, virtually every cohort interested in stocks–investors, analysts and speculators–is as bullish as they have ever been and, once again, EWI is taking the opposite position.
EWI’s forecast is based on Wave analysis, but if you need a fundamental factor to justify staying out of stocks, you need only look at the future of employment.
No job is safe. Automation, Robotics, Artificial Intelligence and Singularity–the theoretical emergence of superintelligence through technological means, are technologies that are evolving exponentially. Exponential growth is a phenomenon that is hard to grasp. Author-researcher, Federico Pistono, whose studies have included Synthetic Biology, Artificial Intelligence and Robotics, Nanotechnology and Digital Fabrication, Energy and Environmental Systems, Space and Physical Sciences, Design, Future Studies and Forecasting, Policy, Law and Ethics, puts it this way. Imagine taking thirty steps out your front door. How far would that get you? To the curb if you have a decent lawn. Now, if you took each step exponentially, thirty steps would take you to the curb, to the moon and back, and around the globe five times.
Exponential growth in technology conforms, roughly, to Moore’s Law, which states that the computing capability of integrated circuits doubles every two years–now held to be more like eighteen months. The technologies of Automation, Robotics, AI and Singularity are advancing at this rate. What was a gee-whiz gadget a year ago is a technology replacing truck drivers, retail workers, manufacturing, real estate workers, construction workers, secretaries, cashiers, and even journalists (for a more complete picture, read Pistono’s Robots Will Steal Your Job, but That’s OK}.
The drive to replace humans with technology is profitability in a brutally competitive global economy. Pistono describes an inexorable push to increase revenue per employee. Virtually all of the job creation occurring today produces mega revenues per employee. Quite a different outlook than in our past history. McDonald’s, a company founded in 1940, has 400,000 employees. The revenue per employee is $60,000. Facebook, founded in 2004, has 3,000 employees producing $1,423,000 in revenue per employee. This is the direction of business innovation.
Wal-Mart, the world’s largest employer with 2,100,000 employees, has per employee revenues of $200,000. Pistono claims that the technology to run the company with 100,000 employees is rapidly coming into reality. Does anyone imagine they won’t go this route?
We can already see an impact in the employment participation rate, which has been declining for some time. Exponential growth in the technologies that replace employees will accelerate the trend. Short term, increased productivity per the remaining employees helps corporate profits. Long term, the effect is to destroy an economy geared towards growing consumption.
These trends are now in place and, if you look around as you move about town, you can see plenty of evidence. What happens in the global economy beyond the period during which the bulk of this technological disruption takes place is something for futurists to speculate on. What investors need to consider is that there are very few companies in the broad stock market that stand to gain from a horrendous increase in unemployment.
No one should consider any part of this presentation as a recommendation to buy or sell any securities whatsoever.