Sunday, December 02, 2012

Pursuing Opportunities of the Past

Pursuing opportunities of the past only speeds the dissolution of any Status Quo that depends on spent models of growth.


If we had to summarize the global effort to reflate various debt and asset bubbles to "restart growth," we might say the Status Quo is pursuing opportunities of the past.

Let's start with investing in real estate. Retail space is in massive oversupply. Others have done an excellent job describing the overcapacity, high vacancy rates and cannibalizing of sales at existing stores by adding stores: Are you seeing what I'm seeing?

Suffice it to say that an era of deleveraging, declining household income and aging populace is not a good foundation for retail expansion.


The wave of creative destruction unleashed by the Internet has yet to envelop commercial office space--but it's already reached the front steps. Just as online retail has decimated retail sectors such as bookstores, the Web is busy revolutionizing white-collar work, the mainstay of office towers and business parks.

Real work can now be done offsite/remotely at a home office, café, or anywhere but a cubicle at headquarters, and the cost advantages of this flexibility will not be going away. Yes, there are still powerful reasons to meet in person, but there are equally powerful reasons to permanently downsize travel and office costs.

Structural changes in the economy are increasing self-employment and contract labor and shrinking the scale of new enterprises. Millions of well-educated American workers already work at home, and since the average U.S. house has grown in size over the past 50 years, free-lancers and self-employed professionals have plenty of space rent-free.

High-growth companies which once hired thousands of employees and rented entire buildings are increasingly offer highly automated products and services. New-tech juggernaut Twitter recently leased more space in San Francisco as it was expanding its staff by--gasp!--200 employees. Will Twitter be filling that empty office tower near you? No, because its "service" is largely automated software. It now requires less than 1,000 employees to operate a global tech juggernaut.

Many global companies no longer need a headquarters; their senior staff work just like junior employees, from home, hotel room, cafe, etc. Airbnb, Coursera and Uber: The rise of the disruption economy.

The "recovery" in housing is limited for structural reasons. Household formation is in a multi-decade downtrend, household income is also in a structural decline since 2000 and trillions of dollars in subsidies and giveaways have barely budged the needle of housing sales, starts, etc.


Buy and hold stocks: adjusted for inflation, returns on the "buy and hold stocks forever" strategy since 2000 registered a 14% loss, as we see in this chart, courtesy of master chartist Doug Short:


The "buy and hold bonds" strategy is also running out of air. Now that interest rates are zero or negative when adjusted for inflation, there are limits on how much bond yields can decline. This game may run for for awhile but the returns from here until the day rates rise in a "credit event" are modest. Not only have the low-hanging fruits been picked in the 31-year bond bull market, those buying now are stripping the last fruit from the top of the tree.

What happens to those who buy into opportunities of the past? As a guide, we can see what happened to household net worth since the 2007-8 global financial meltdown ended the financialization era: American Households Hit 43-Year Low In Net Worth.

Pursuing opportunities of the past only speeds the dissolution of any Status Quo that depends on spent models of growth. 



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