We asked our economics commentator to engage in some investment related myth busting. Here is part two: looking at the techs and the economy.
Michael Baxter's Mythbusting: Tech & economy myths
Yesterday, I looked at some specific myths concerning investing and assumptions based on those myths. Today I turn to bigger issues concerning the wider economic backdrop. There are myths, and they need busting.
Techs are risky
Technology is disrupting business in a way that has no precedent. Established businesses that seem to operate in mature markets are coming under pressure from disruptive new technologies.
Retailers and publishing companies have already seen long tried business models ground into the dust, thanks to new technologies.
Technology is likely to disrupt a much broader range of businesses.
- Banks are seeing market share eroded thanks to digital technology lowering barriers to entry.
- Automotive companies face the multiple threats of the rise of electric vehicles, self-driving technologies, and convergence with the Uber economy.
- Oil companies face the challenge of remaining relevant in an age of global warming and rapidly falling costs of renewable energy.
Technology will disrupt in multiple ways and tech companies may represent the optimal hedge against the difficult to quantify ramifications.
This time it is different
I am going for some ironic irony with this one. ‘This Time it is Different’, is cited by cynics to mean the opposite. So, during the dotcom bubble, when valuations went off the charts, bulls tried to defend it with all kinds of justifications. Post-crash, such justifications seemed absurd. Whenever a high valuation or excessively bullish market emerged, and people tried to defend it, a bear, in a sarcastic tone of advice, might say: “Oh, I see, this time it is different.”
Often such irony is justified, see below. But there are occasions when things are genuinely different. Take demographics, the twin forces of falling fertility rates in the developed world, and exploding population in Africa is unique, with quite new implications. A few years ago, as tech stocks began to boom, cynics said it was just like the dotcom boom all over again. But, in fact, as the extraordinary profits enjoyed by the big techs since then have shown, the valuations of a few years ago were justified, that time it was different.
And some macro-economic myths
But with some economic developments the lessons of the past are still valid - this time it is no different and we repeat the errors of the past.
Central banks have full control over interest rates
Deep, deep forces are at play determining conditions to which central bankers can merely react. If rising protectionism leads to falling growth in global output, at a time when the US engages in massive fiscal stimulus, then the conditions may be created in which central banks have no choice but to increase interest rates, like they have done in the past, even if debt levels are such that rate increases may lead to a financial crash, precipitating a severe economic fallout.
There is no reason to worry about the Shiller index
The Shiller PE ratio, which compares company valuations with average profits over the previous ten years is at roughly the same level it was at in 1929 before the famous crash. Some argue that there is no need to worry as profits over the last ten years have been distorted downwards by the economic recession. However, total profits to GDP are close to an all-time high, suggesting current levels may not be sustainable in the long run.
House prices always go up, especially when we live on an island
In that case, explain why house prices have been falling in Japan for decades.
Beware hubris, but not too much
And finally, an actual Greek myth. We are told that Icarus ignored the advice from his father, Daedalus, and flew too close to the sun, causing the wax that held the feather in his flying suit to melt. From that we learn the lesson of hubris: the danger of excessive pride in defiance of the gods. But Daedalus also advised his son not to fly too low, as the sea foam might soak the feathers. A forgotten lesson of that myth is that a little bit of hubris might be a good thing.
These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees