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The Age Of Transformation - John Mauldin

June 15, 2014

The Second Wave of Transformation

Contrasting with this rather negative set of circumstances is the second great transformational theme that I want to explore with you, and that is the far more positive accelerating trend in a vast array of technologies. It’s not too much of a stretch to say that we’re in a race between how much wealth and value and improvement in lifestyles human ingenuity can create versus how much destruction of wealth and lifestyles governments can destroy.

It is a tendency of ours to take our recent past and project it in a linear fashion into the future. That’s the way we are hardwired. And while we all acknowledge that change is happening faster today than it did 20 or 30 years ago, we really don’t expect the pace of change to quicken in the future. The next 20 years, we figure, will more or less unfold as the last 20 years has. Not a chance. That assumption is missing the second derivative of change – the acceleration of the pace of change.

As a thought experiment, let us assume that we were going 40 miles an hour in 1984, and by 2004 we were going 50 miles an hour. But today we’re going 60 miles per hour. It took 20 years to get that additional 10 miles per hour (from 40 to 50) but only 10 years to go from 50 to 60 miles per hour. If we continue to accelerate, we’ll be going 100 miles an hour in another 20 years!

While the impact of the internet and computers is evident, what I’m suggesting is that we are going to see multiple technologies go from deceptively hiding in the background, with the pace of change they promise frustratingly slow, to suddenly taking center stage and becoming disruptive. It will be as if the steam engine and electricity and the automobile and telecommunications all appeared at the same time, after having been developed in the background for many decades.

The mobile and wireless internet, artificial intelligence and automation, the internet of things, advanced robotics, autonomous vehicles, advanced energy exploration technology, renewable energy (especially solar energy), advanced materials, the rapidly accelerating biotechnology revolution, nanotechnology, and even electronic currencies (Bitcoin et al.) are all rapidly approaching the “elbows” of their own accelerating curves. Each of these areas is going to go exponential in the next 10 to 20 years.

The change I am contemplating is not simply better phones and electric cars and a few new medical therapies. I think we are in for a radical adjustment to the very mechanisms of production and the very structure of our economic and social life.

Joseph Schumpeter described capitalism as the “perennial gale of creative destruction.” In an excellentessay on creative destruction, W. Michael Cox and Richard Alm lay out the paradox between the demise of old industries and the rise of new ones (emphasis mine):

Schumpeter and the economists who adopt his succinct summary of the free market’s ceaseless churning echo capitalism’s critics in acknowledging that lost jobs, ruined companies, and vanishing industries are inherent parts of the growth system. The saving grace comes from recognizing the good that comes from the turmoil. Over time, societies that allow creative destruction to operate grow more productive and richer; their citizens see the benefits of new and better products, shorter work weeks, better jobs, and higher living standards.

Herein lies the paradox of progress. A society cannot reap the rewards of creative destruction without accepting that some individuals might be worse off, not just in the short term, but perhaps forever. At the same time, attempts to soften the harsher aspects of creative destruction by trying to preserve jobs or protect industries will lead to stagnation and decline, short-circuiting the march of progress. Schumpeter’s enduring term reminds us that capitalism’s pain and gain are inextricably linked. The process of creating new industries does not go forward without sweeping away the preexisting order.

Transportation provides a dramatic, ongoing example of creative destruction at work. With the arrival of steam power in the nineteenth century, railroads swept across the United States, enlarging markets, reducing shipping costs, building new industries, and providing millions of new productive jobs. The internal combustion engine paved the way for the automobile early in the next century. The rush to put America on wheels spawned new enterprises; at one point in the 1920s, the industry had swelled to more than 260 car makers. The automobile’s ripples spilled into oil, tourism, entertainment, retailing, and other industries. On the heels of the automobile, the airplane flew into our world, setting off its own burst of new businesses and jobs.

Americans benefited as horses and mules gave way to cars and airplanes, but all this creation did not come without destruction. Each new mode of transportation took a toll on existing jobs and industries. In 1900, the peak year for the occupation, the country employed 109,000 carriage and harness makers. In 1910, 238,000 Americans worked as blacksmiths. Today, those jobs are largely obsolete. After eclipsing canals and other forms of transport, railroads lost out in competition with cars, long-haul trucks, and airplanes. In 1920, 2.1 million Americans earned their paychecks working for railroads, compared with fewer than 200,000 today.

What occurred in the transportation sector has been repeated in one industry after another – in many cases, several times in the same industry. Creative destruction recognizes change as the one constant in capitalism. Sawyers, masons, and miners were among the top thirty American occupations in 1900. A century later, they no longer rank among the top thirty; they have been replaced by medical technicians, engineers, computer scientists, and others.

Technology roils job markets, as Schumpeter conveyed in coining the phrase “technological unemployment”. E-mail, word processors, answering machines, and other modern office technology have cut the number of secretaries but raised the ranks of programmers. The birth of the Internet spawned a need for hundreds of thousands of webmasters, an occupation that did not exist as recently as 1990. LASIK surgery often lets consumers throw away their glasses, reducing visits to optometrists and opticians but increasing the need for ophthalmologists. Digital cameras translate to fewer photo clerks.

And while your job may be one of those that will ride easily into our brave new future, the same may not be true of your stock investments. Companies show the same pattern of destruction and rebirth. Only five of today’s hundred largest public companies were among the top hundred in 1917. Half of the top hundred of 1970 had been replaced in the rankings by 2000.

The chart below was recently produced by Richard Foster at S&P. What it shows is that the average lifespan of companies in the S&P 500 Index was about 60 years in 1960. Today they last about 15-20 years. That means we are currently replacing a stock in the index about every two weeks.

Since the index is representative of the largest US companies, that means that each year 25 big companies either can’t grow enough to keep up or are outgrown by other companies, otherwise fail or get merged; but in general terms it means that if you are invested in the S&P 500 Index, it is almost guaranteed that at least 10% of the companies in your portfolio are old dogs.

Blockbuster failed to recognize that the world was changing, and it was Netflixed, to coin a verb. (Actually I think it’s quite a workable word to describe what happens when a company fails to adapt. It gets Netflixed.) There is going to be a bright dividing line in the future between companies that “get” change and companies that don’t. Measuring companies by past performance and recent profit trends will no longer be enough in the Age of Transformation.

No industry is going to be safe. Within the next 10 years, solar technology will develop to the point where it will be cost-competitive with fossil fuels. Currently, the solar industry is growing at 30% a year; and while solar is only 1% of US energy consumption today, if we are able to keep up that compounding effort, it it could be almost 100% in 20 years. Solar roads? Possible. And yes, we need new batteries and storage systems, but those are on the way. What will your mother’s safe utility companies do?

In China they are literally 3D printing 3000-square-feet houses in a day! One company is planning to 3D print a car with 20 moving parts this fall, using advanced materials much stronger than steel and aluminum. Think AT&T is safe? The competition for new wireless systems is brutal. Both Facebook and Google are developing technologies to place “high-balloons” and permanent solar drones at 65,000 feet in order to blanket the globe with Wi-Fi. I’ve read estimates that a “mere” 40,000 such devices could do the job. Netflix itself is in danger of being Netflixed by Hulu and other competitors.

You can’t believe what they’re doing with robots and artificial intelligence. AI, long the poster child for disappointing technologies, is getting ready to go mainstream by the end of the decade.

Just for fun, look at this RadioShack ad from 1991. Essentially everything on that page is in a smart phone. And far more powerfully. And throw in a free camera. For a tiny fraction of the prices advertised then.

Now fast-forward 20 years. I’m not sure what our can’t-live-without-it computing and communication devices will look like, but they will probably be quite small, wearable, and a million times more powerful! We will likely be (or at least some of us will be) connected to our devices in rather unique ways. (Google Glass will seem so odd and quaint, which is kind of how it is perceived now.) Think of being able to access scores (hundreds?) of expert systems waiting in the cloud with answers on any topic, so that the solutions to the problems of improving our personal lives and our businesses will be limited only by our imagination in asking the questions (and doing the work to make those answers real). And we’ll be able to direct those AI experts to work together to come up with powerful, novel solutions. The cross-fertilization of technologies will soar!

Now imagine putting these tools into the hands of practically every person on earth who wants them. Along with all the other tools that are coming from all the other exponentially accelerating technologies. Especially life-altering will be the biotech breakthroughs. We won’t be physically immortal, but the things that kill most of us today will not be a problem. We will just get … older. And we will be able to repair a great deal of the damage from aging. Plan on living a lot longer and needing more money than you think.

I can see many of my readers rolling their eyes and saying it won’t happen in 20 years. Or 30 or 40. Things just don’t happen that fast, you say. But that is just your old Homo sapiens brain extending the past in a linear fashion into the future. Moore’s law tells us that the number of transistors on a chip roughly doubles every two years (and the chip drops in price). But other industries, like solar tech and genome sequencing, are on exponential paths that make Moore’s law look positively snail-like. If the power of exponential change keeps working – and it will – we will see more change in the next 20 years than we saw in the last 100!

Continue reading: http://www.mauldineconomics.com/

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