October 2011

Let’s try something a little out of left field.

It may sound a tad incongruous but bear with me. It could have a greater impact on your future finances than you might imagine possible. Because today we’re going to look at Moore’s law and its possible impact on your job, and your kids’ jobs.

Moore’s law states that the number of transistors that can be placed inexpensively on an integrated circuit doubles approximately every two years. What that means is processing speed (in computing devices of all kinds) and memory capacity are doubling every two years. The law has held true for fifty years now and is showing no signs of slowing down.

If you double anything, every two years, you’ll find yourself on a steep gradient of accelerating change, otherwise known as an exponential curve. The key concept to grasp is that the rate of change is always increasing. In this case, computers are getting faster, faster.

As hardware accelerates, the software that rides atop it becomes commensurately more powerful, along with its effects on society – and that’s where we arrive at the subject of personal finances.

You all know the drill. Technology makes some industries redundant while others spring into being. For example, telegraph operators found themselves out of work when the telephone came along. Fancy shares in a typewriter company?

Sure, you might say, the new has always replaced the old. So what’s different now?

Remember when video stores seemed the best local business in town? A license to print money? If you’re not already streaming movies online, you will soon. Remember when you used to go to a travel agent and sit in a red chair while someone booked a flight for you? How quaint. Remember when bookstores were the only places to buy books? When books were made of paper?

All of these changes have happened in the last decade. And that’s just a fraction of it. Real estate agents are finding it tough as people go online to buy and sell houses directly. Publishers are struggling as authors begin selling straight to readers through sites like Amazon. Retailers are hurting all over the shop. Want an Apple or Dell computer? Buy it from Apple or Dell.

What’s going on here, of course, is disintermediation. The removal of the middleman.

So ask yourself: Am I a middleman? Could I be disintermediated? Don’t settle for an easy answer. Really stretch yourself to imagine ways technology could shut you out. If you can imagine it, chances are it’ll happen. Maybe sooner rather than later.

A final case in point. Remember Yahoo!? The internet company thriving on the reality of Moore’s law? One of the big players in the new, high-tech world? Now it’s a minnow. And why? Yahoo! was essentially a portal that provided services between you and the internet.

Middleman.

Gone.

It could happen to many of us, because two years from now technology will be improving twice as quickly as it is today. If you think the last ten years were crazy, wait for the next ten. And the ten after that. Hold onto your hats, folks.

I say multidirectional economy

As previously discussed, a sustained and unprecedented increase in our terms of trade is reshaping the structure of our economy. This is driving the AUD higher, which is good for importers and for Aussies travelling overseas but an absolute shocker for international educators, retailers and manufacturers. Mind you the decline of manufacturing has been a long time coming and, as I mentioned the other week, is probably unstoppable. In the 70s manufacturing accounted for 22% of the economy and today it’s around 11%. But I digress.

This all brings me to my point, which is all about the economy “stoopid”. Apparently we have a two-speeder – Wayne calls it “patchwork” because he reckons the differences aren’t just between sectors, states and industries but go even further to between individuals, households and even businesses on the same street. My point? Well it’s about the nomenclature (a posh way of saying how things are named). Calling it a multi-speed economy is not 100% correct. It should be called a multi-directional economy. By definition a multi-speed economy has different sectors travelling at different speeds but all in the same direction. However, as we have different sectors going in different directions I reckon multi-directional is more accurate. The most obvious examples would be mining going north and retail and manufacturing going south. I mean there’s more directions than a George Bernard Shaw play and it’s throwing the compass out with the bathwater.

Again this turmoil throws up my usual list of questions – what are we going to do when we hit the bottom of the quarry? Do we even need a manufacturing sector? and shouldn’t we have a sovereign wealth fund?

Hmmm, with questions like that who needs answers!

And in other news… by 2030 China’s share of global economic power will match America’s in the 1970s and Britain’s a century before. According to a book by Arvind Subramanian reviewed in The Economist, this will be dictated by three forces – demography, convergence and “gravity”. The “gravity” bit assumes that commerce between countries depends on their economic weight and the distance between them.

How’s ya Mandarin?

High petrol prices seem to be a part of life nowadays, but do they have to be that high?

One of the biggest drivers of recent price increases has been the turmoil in the Middle East. Most notably, the struggle against Gaddafi in Libya has knocked about a million barrels a day out of global supply.

Prior to the uprising, the Libyan regime could be counted on for a reliable 1.8 million barrels a day, give or take a few hundred thousand. Post uprising, they’re pumping an anaemic half million. That loss might not sound like a lot, out of the global total of about 87 million barrels a day (2010 figures). But the reduction, and its spooking effect on markets, is large enough to be noticed at the pump.

So with the good news that Gaddafi is gone, shouldn’t we just get a million barrels back in time for all that summer driving? If history is any guide, I’m afraid not.

Before Saddam went on his romp through Kuwait in 1990, Iraq’s oil production was about 3 million barrels a day. When George W. Bush went on his romp through Iraq in 2003, plenty of Hawks predicted good ole American know-how and free enterprise would boost Iraqi production to 4 million barrels by 2010.

How do you think that worked out? Iraqi production currently tops out at about 2.9 million – less than the pre-invasion levels of almost a decade ago. And don’t forget, this country we’re talking about has the second largest proven oil reserves in the world, after Saudi Arabia.

Here’s another example for you. Prior to the Iranian revolution of 1979, the Shah’s regime was pumping about 6 million barrels a day. Nowadays, Iran struggles to produce 4 million.

The takeaway message? Revolutions, invasions, civil wars… they don’t just hurt oil production short term. They hurt it long term and, arguably, they hurt it permanently. Oil rigs and pipelines cost a lot of money to repair or rebuild. Engineers take a long time to train. The Exxon’s of the world need significant lead times before they can start pumping.

So folks, I wish I had some good news for you on the Libyan oil front. But sad as it sounds, nothing short of a euro zone meltdown or U.S. double dip recession or bursting Chinese bubble is going to depress global demand on a sufficient enough scale to reduce the price of oil. In other words, for something good to happen, first something bad must happen.

Sub-optimal but true.

Manufacturing is a bit like hair, you won’t realise how much you liked it until it’s gone.

As I wrote last week, the current squeeze on manufacturing is part of an unstoppable ‘structural change’ led chiefly by the cheaper labour offered by a rapidly industrialising Asia. Basically manufacturing is more globalised and Australia is being priced out of the market. What’s left in our economy is being reallocated to the resource sector where the money’s better.

The question a lot of people are now asking is – do we even need a manufacturing sector? I mean why bother making stuff when digging up dirt for China and India is heaps easier? Well I reckon we do. Manufacturing is a bit like hair, you won’t realise how much you liked it until it’s gone. For starters it is the mother of invention, innovation and technological change. Australian manufacturers spend about $5 billion each year on R&D in adapting existing technologies and developing new ones. This is the focus of a lot of cutting-edge creativity and if we diminish our capacity for innovation we’ll go backwards.

Secondly without a manufacturing base, Australia would need to import more ‘stuff’, which sends money out of the country. Even now, with more dirt leaving the country every day than a News of the World exclusive, we’re barely offsetting our imports.

Thirdly there’s the skills base issue. Manufacturing employs armies of scientific, engineering and computing types who have taken us generations to create and whom we’ll need in the new economy of renewables and biotech. And who’s going to install and maintain our desal plants, fix the phone networks and service the defence systems? Karl Stefanovic? Folks, engineers provide us with the core infrastructure skills our modern economy needs. Let’s give them the love they deserve.

I agree that no company should be guaranteed the right to survive by government. I also acknowledge markets must adapt to mega-trends. Karl Marx termed this ‘creative destruction’ and it includes things like globalisation, digitisation and the emergence of Asia. However, there is a small role for some form of protectionism. This is when a government uses tariffs, taxes etc. to make its exports more competitive and protect its struggling manufacturers. The trick is calibrating that role.