The Age of Transformation

June 18, 2014 14:14
The solar industry is growing at 30% a year; and while it is only 1% of US energy consumption today, if we keep up that compounding rate, it could be almost 100% in 20 years. Photo: Bloomberg

Today I offer some musings on what I've come to think of as the Age of Transformation. I believe there are multiple and rapidly accelerating changes happening simultaneously that are going to transform our social structures, our investment portfolios, and our personal futures.

We're going to explore two broad themes, neither of which will be strange to readers of this letter. The first transformational theme that I see is the emerging failure of multiple major governments around the world to fulfill the promises they have made to their citizens. We have seen these failures at various times in recent years in "developed countries". For instance, Canada and Sweden in the early '90s. Both ran up enormous debts and had to restructure their social commitments.

I think similar challenges are already developing throughout Europe and in Japan and China, and will probably hit the United States by the end of this decade. While each country will deal with its own crisis differently, these crises are going to severely impact social structures and economies not just nationally but globally. Taken together, I think these emerging developments will be bigger in scope and impact than the credit crisis of 2008.

European governments are going bankrupt gradually, and then we will have that infamous Bang! moment when it seems to happen all at once. Bond markets will rebel, interest rates will skyrocket, and governments will be unable to meet their obligations. Japan is trying to forestall its moment with the most breathtaking quantitative easing scheme in the history of the world, electing to devalue its currency as the primary way to cope. The US has a window of time in which it will still be possible to deal with its problems (and I am hopeful that it can), but without structural reform of entitlement programs we will go the way of Europe and numerous other countries before us.

The actual path that any of the countries will take (with the exception of Japan, whose path is now clear) is open for boisterous debate, but the longer there is inaction, the more disastrous the remaining available choices will be. If you think the Greek problem is solved (or the Spanish or the Italian or the Portuguese one), you are not paying attention. Greece will clearly default again. The "solutions" have so far produced outright depressions in these countries. What happens when France and Germany are forced to reconcile their own internal and joint imbalances? The adjustment will change consumption patterns and seriously impact the flow of capital and the global flow of goods.

Most people in most places will attempt to ignore the transformational wave barreling at them. After all, aren’t bond rates in Europe lower than ever? Indeed, French and Spanish bond yields are at their lowest levels since the 1700s, believe it or not. Isn't the market telling us there isn't a problem? If Japan is such a problem, shouldn't the yen be going into the toilet by now? The US deficit is shrinking, and government spending is actually falling. Seems like the problems have all gone away.

But the problems I'm thinking about are not ones that will manifest themselves this week. The markets did not foresee the 2008 credit crisis or the last two recessions or the European crisis, even just a few months before they hit. When the world doesn’t come to an end as predicted, we seem to get complacent and ignore the basic arithmetic that you have to have more income than you have expenditures, and to conveniently forget that debt, even at low interest rates, is compounding.
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.

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.

The process of creating new industries does not go forward without sweeping away the preexisting order.

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 accompanying chart 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 percent of the companies in your portfolio are old dogs.

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 percent a year; and while solar is only 1 percent of US energy consumption today, if we are able to keep up that compounding effort, it could be almost 100 percent in 20 years. 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.

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! 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!

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!

One of the risks in investing in technology, by the way, is not so much that your company might not discover some new, cool tech that blows away the competition, but that someone else might come along and do it even better and cheaper before you’re even out of the starting gate. You can be right about the tech and STILL lose money.

The thing that is going to be overwhelming to nearly all of us is the degree of acceleration of change as the years fly by. We are not psychologically prepared for it. The only way we will be able to adapt is to ignore that primal part of our brain that says change is bad and use our frontal lobes to rationally observe and choose a path forward. Just as Neanderthals gave way to Homo sapiens, we need to evolve, at least in our thinking, to become Homo rationalis.

All of our investments and our businesses – and our very lives – will be fundamentally changed, transformed by these two Super Trends we have looked at. Simply knowing that things are going to change in technologically wonderful ways will not be enough. Acting too soon will be as frustrating and ineffective as not acting soon enough. We will continue to explore together in this letter to figure out how all the pieces of the puzzle fit.

The writer is an author, a commentator and publisher of the Thoughts from the Frontline newsletter.

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The average lifespan of companies in the S&P 500 Index was about 60 years in 1960. Today they last about 15-20 years.

A noted financial expert, a New York Times best-selling author, an online commentator, and the publisher of investment newsletter Thoughts from the Frontline