Automation vs. Growth – Sooner Or Later, Something Has To Give

By , in Current Events Markets / Finance on .

Zerohedge shared a recent Bloomberg analysis which articulated how the rise of automation has changed the capital markets and entire business models:

Similarly, technology is reducing the need for labor. While those with specialized skills can continue to earn more in a wealthier world, the rise of robots provides a significant disinflationary force on the median wage globally. This effect will be most extreme in developed economies where labor costs are already elevated. (And as an aside, is the reason why increasing inequality and populism isn’t going away any time soon).

The knock-on effects of this are profound: bond curves should remain flatter than we are used to, equity valuations will look distorted relative to history due to a sustainable paradigm shift in discount rates, and many financial operations will have to adjust their whole business model.

Something to think about next time you want to fight current financial valuations purely on the basis that they look historically anomalous. Technology has changed the game.

The analysis put into simple terms what is quite possibly the most profound change in the global economy in centuries – automation, which is increasingly putting people out of work, is changing business models everywhere.  But, missing from the analysis is a look at the impact automation is having on the consumer, and the types of goods and services consumers will purchase in the future.

While it can be simply stated that it amounts to more disposable income for those at the top and less for those at the bottom, with more people in the middle being dragged towards the bottom, the effects of a reduction in disposable income at the bottom will lead to a significant rebalancing of businesses everywhere.  Nowhere is that more evident than the recent trend in automobile sales.

While bailed-out automakers have enjoyed substantial sales over the past eight years, with said growth going sharply lower recently…


Zerohedge has again pointed to Bloomberg to articulate how inventory levels for autos are building at an equally steady rate…

Auto Inventory

…which can be explained by the types of cars auto manufacturers (especially the US ones) are producing – priced for an increasingly nonexistent middle class, and built by the very machines that have moved them to the bottom:

To understand why the U.S. auto market isn’t growing, consider a top-of-the-line minivan from Fiat Chrysler Automobiles NV now costs about $50,000.

With twin second-row touch screens, reclining third-row seats, a vacuum and automated parallel parking, the Chrysler Pacifica packs plenty of features to justify a hefty expense. But this big a price tag puts the prototypical family vehicle out of reach for most Americans.

With marginal buyers beginning to balk due to sticker shock, Ford Motor Co. cautioned last week it’s not going to be able to count on price increases to boost North American profits the rest of this year.

“At some point that will be one of the aspects that will continue to drive down the volume,” Bob Shanks, Ford’s chief financial officer, said in an interview. “It will become tougher.”

While Free Market Shooter has in the past noted that few (arguably zero) jobs are not at risk of being automated, what this website has not explored is the effect this is having on the workforce today.  And while this website has examined how income inequality is changing the economics and pricing models of aviation

…it is much easier for an airline to reconfigure its seating configurations and pricing than it is for a lot of industries to reconfigure their entire business models. 

Any business or industry that is unable to quickly acclimate its business model to acclimate both richer and poorer tastes will find itself in the crosshairs.  And when it comes to “acclimation”, that includes the supply side of things – fixed costs like existing contracts (see: ESPN) and difficult-to-downsize labor forces (see: unions) will leave many businesses unwilling and/or (more likely) unable to adapt.

While there is a lot of material available about how jobs will be replaced by machines, there is stunningly little data available on how the impact income inequality will affect exactly which goods are offered to consumers, and what items may all of a sudden be classified as “luxury” by an ever-increasing number that are unable to afford them.  Changing consumer trends will also generate a self-perpetuating cycle of failing businesses, mostly small ones but some large ones, adding to the number of people who will be pushed into the bottom rungs of society.

When the bottom falls out, you will hear a similar chorus from the past, with the same cast of characters asking for the same exact thing all over again – a bailout

And the auto industry is the perfect example of one that is going to try to take the taxpayer for another ride, because they clearly haven’t learned their lessons from the past.  They will certainly not be alone – automation is already permanently changing the workforce, and the businesses that cannot adapt to an economic landscape with increasing inequality will fail and be liquidated, or somehow manage to sucker the taxpayer into propping their poor business model up for another eight years. 

Rest assured, when it happens, they won’t be alone; in either asking for a bailout, or blaming Trump for their own business failures