When Markets Go Pop!

Much has been made about the financial markets in recent weeks. A number of hedge funds shorting the US bricks and mortar retailer Game Stop have been seriously derailed by a horde of amateur day traders who organise on Reddit. In some narratives, this is a case of the little guy winning one over on Wall Street. In other narratives, this is a case of a serious criminal conspiracy that attempts to create a false market in Game Stop stocks. Whichever might be the case, it is worth stepping back to consider what is going on here, whether it is a portent of things to come, and how it all might end up.

What is going on here? There is no question about it, two technological trends have allowed this state of affairs to come about. One is the continued disintermediation of financial services. The growth of commission free trading, with ever lower margins on account, has increased the number of individual trading accounts. The other trend is the growth in fractional trading. Instead of buying whole shares in a company, it is possible now to buy fractions of shares, which effectively lowers the minimal value of trades that an individual can undertake. These trends were entrenched well before 2020.

What was different in 2020 was the pandemic. One of the consequences of the policy response to the pandemic was a large number of tech-savvy people with time on their hands and money in their pockets. In the UK, the furlough scheme provides employees with 80% of their salary on the condition that they don't go to work. In the US, a number of stimulus cheques have found their way into the pockets of a similar demographic. Various grades of lockdown have prevented this demographic from spending their disposable income, and the suspension of most sporting calendars have taken away opportunities for sports betting. This sets the scene - we have a body of, predominantly young, bored, tech savvy, people; who have money and time on their hands and who are looking for the thrill of the casino. Where else would they end up but in day trading?

Evidence suggests that this demographic has propelled the gravity defying rise of the S&P 500 in 2020. As a response to this, the day traders have resorted to internet forums to swap gossip about stocks over the course of the year. In some areas, it appears as if team plays have been deployed, the one in the case of Game Stop being a case in point. It is painted as striking a blow against corporate Wall Street, but it is nothing of the sort. The financial system is a complex ecosystem. Whilst some hedge funds may have taken a blow, the profits in the financial system are derived from activity, even if a trade is 'commission free'. The day traders are actually strengthening the system and pouring more profit into 'Wall Street'.

This is a situation that cannot go on for ever. There are two natural limits that need to be accounted for. The first is counterparty risk. As the trading increases in value, the potential for a default grows proportionately. In order to avoid a liquidity crunch, market makers will require trading app counterparties to lodge a larger margin against the possibility of default. This is why the trading app Robinhood had to suspend the trading of Game Stop until it secured an additional capital injection to cover this counterparty risk. Had that additional capital not been forthcoming, the bubble would have gone 'pop' at that point.

The second limit is one of fundamental value. How much is a share in Game Stop worth? For much of 2020, the market value was about $4.00 per share. That was seen as fair value given the underlying assets of the company and the prospects for the business. Trading volumes in the shares started to increase in September, leading to a frenzy of purchasing in January 2021, when the price rose to $347. At that point, there had been no material improvement in the assets of the company and the prospects, if anything, have worsened. Since the peak, the share price has fallen back to around $60 per share. This is despite that underlying assets probably being worth less than $4. At some point, those fundamentals will assert themselves, and when they do the share price will fall both dramatically and rapidly.

For this reason, it is not a portent of things to come. You can pay $60 for something worth $4 for only so long. In the last day trading frenzy - the Dot Com Bubble - the half life of a day trader was only nine months. This means that half of the number of day traders had lost all of their capital in less than a year. This is not a long term trend.

We need to be concerned at where this will all end. The case of Game Stop is neither really here nor there. We should be more concerned at the degree to which the day traders have inflated the S&P 500 over 2020. They are buying stock at inflated values and eventually the fundamentals will re-assert themselves. This is likely to be on the other side of a liquidity crunch that exposes counterparty risk. With the volumes of QE being pumped into the financial system, this isn't that much of a challenge just yet. However, should inflation start to rise, the QE money-go-round will slow, and at that point the whole system looks vulnerable to a major correction. 

It is at that point we shall hear a vast amount of popping, and it won't be champagne corks making that noise!

Stephen Aguilar-Millan

© The European Futures Observatory 2021

The Modern Tribes Of Scotland

We seem to be living through a period of constitutional upheaval in Great Britain. In the past decade, it has become apparent that many Britons do not feel that they are living in the best of states. What's more, their dislike of the present arrangements are sufficiently strong to compel them to act to change it. This has come to a head over two issues - British membership of the European Union, and Scottish membership of the United Kingdom.

We are all aware of the outcome of the review of British membership of the European Union, conveniently called Brexit. Britain marginally voted in 2016 to leave the EU and finally achieved that ambition fully in 2021. At the 2019 General Election, only one national party - the Liberal Democrats - stood on a policy of re-joining the EU, and they only attracted 11.5% of the votes. This hardly demonstrates a popular desire to re-join the EU. For all intents and purposes, we ought to treat Brexit as an established fact.

A more interesting question arises when looking at the regional votes on Brexit. In 2016, only 38% of voters in Scotland voted for Leave. 62% voted to Remain in the EU. This is an important variation on the national picture when set against the Scottish Referendum vote in 2014. In that, 45% of Scots voted for Independence, with 55% voting for the Union. In the two years between, the questions of independence and Europe became intertwined. In 2014, Scots were asked to vote for the Union as a way to guarantee continued membership of the EU. After Brexit, many Scots felt let down about the implicit promise made in 2014, which has galvanised the support for the Scottish National Party (SNP).

It would be tempting to portray the Independence faction as Remainers, but that would be misleading. There are, as it happens, four main tribes in modern Scotland. There are the Indy/Remainers, whose principal voice is the SNP. These are mainly liberal, credentialed, middle-class voters. Then there are the Indy/Leavers, whose voice used to be the Labour Party, but don't really have a home in Scottish politics at the moment. These are mainly conservative, school leaver, lower middle class and manual voters. They will be a key constituency in any future vote. Thirdly, there are the Unionist/Remainers, whose principal voice is provided by the Liberal Democrat Party. These tend to be the liberal, credentialed, more affluent voters. Finally, there are the Unionist/Leavers, who are mostly represented by the Conservative Party. These tend to be the conservative, credentialed, more affluent voters. These tribes have become more tribal in recent years. They even have their own tartans.

As we look ahead, one of the consequences of Brexit has been to open up again the question of Scottish Independence. The sides have already started to form. The Indy/Remainers are coalescing around the SNP, who are looking to consolidate their support with a commitment to seek to rejoin the EU. Ranged against this are the Unionist/Remainers and the Unionist/Leavers, who are coalescing around the Conservative Party, the rump of the Labour Party, and the Liberal Democrats. In terms of support, current polling suggests that the SNP has the edge over the Unionists, but that the lead is smaller than those who are undecided. The key uncertainty is which choice the Indy/Leavers will opt for.

The Indy/Leaver vote, although small, may be pivotal in deciding a future Independence Referendum. Many voters in this group are hostile to the idea of rule by Westminster, but also have reservations over taking on rule from Brussels instead. The SNP are struggling to make the case with this constituency. If the Unionist/Leavers can make the case that Westminster is the lesser evil when compared to Brussels, then the SNP may not win the day.

Of course, this assumes that the national government agrees to allow a second Independence Referendum. The government in Westminster is no longer the liberally inclined conservatism of the Cameron years. Westminster is now controlled by a virulent form of English Nationalism. Already Westminster has signalled that it will not grant a legally valid second referendum. If the SNP received a mandate from the Scottish people in May 2021 - if the elections aren't postponed because of COVID - it remains to be seen how the SNP will convince Westminster to pass the necessary legislation.

One inducement could be the Barnett Formula. This was a funding formula that was devised in 1978 to buy off the vote on Scottish Devolution at that time. It permanently enshrines higher levels of public spending per capita in Scotland when compared to England. In 2018-19, that equated to an additional £2,000 per capita. If the SNP were to offer to give this up in return for a second referendum, that might be palatable for the English Nationalists. It would be a gamble on the part of the SNP. If they won the referendum, they would lose the additional funding in any case as an independent nation. If they lost the referendum, the spending cuts associated with the loss of funding would generate a grievance to be nurtured over the long term.

Whatever happens, change is coming. All parties are unhappy with the present situation. All parties have their ideas about how the future should unfold. These ideas are generally mutually exclusive, which means that a degree of conflict is inevitable. How it actually unfolds is anyone's guess. At present, the numbers are with the SNP. However, their position is so tenuous that, on a binary issue, the opposite could be true at any time.

Stephen Aguilar-Millan

© The European Futures Observatory 2021

Where Are The Robot Overlords?

It is now a decade since the publication of 'Race Against The Machine' by Erik Brynjolfsson and Andrew McAfee. This is seen as the seminal work that highlighted the possibility of the increased use of robotics and automation leading to a significant displacement of labour in the economy. Some of the wilder forecasts suggested that up to a half of all jobs could be lost to automation and AI. We are now a decade further down the road, which gives us an opportunity to take stock of how accurate some of those forecasts have been.

How far down the road could we expect to be in ten years? The main factor underpinning this view is the operation of 'Moore's Law'. This establishes that the speed and power of computers doubles roughly every two years. The way this works is that, over a decade, if Moore's Law still holds, the speed and power of computing would increase not by five times, but by a factor of five. Such is the power of the exponential. Whilst there have been significant increases in the speed and power of computers in thet past ten years, to suggest that this has happened by a factor of five is a bit of a stretch.

The key to increased automation and use of robotics is the further development of Artificial Intelligence (AI). It seems that AI is one of those promised technologies - it has great promise for the future, but that future never quite arrives. Once again, it is wrong to say that no developments have been made. There have been developments in AI that have formed part of our contemporary every day experience. The use of Chat Bots in customer service might be an example here. However, these developments represent incremental change rather than the radical change originally forecast.

It also gives a clue to how we are likely to experience the greater use of robotics. In the 1950s, the view of how we would use robots today was very much along the lines of domestic servants. What has actually happened is the robots have been incorporated into the appliances that the domestic robots would have been operating. It is the internalisation of automation, robotics, and AI that we can see all around us rather than the creation of some huge army of 'Robbie the Robots'.

There is one further factor that argues against the narrative of the robot overlords - demographics. Western societies are currently ageing. Older workers are leaving the workforce in increasing numbers. This is starting to have an impact on the pool of labour and is set to increase across the course of this decade. It is entirely possible that any increase in automation could be the result of the displacement of labour - from the workforce into retirement - rather than the cause of it. If the currently tight labour markets tighten even further, employers may well experience a cost advantage to invest in automated systems. In this case, the use of robots would be to augment the workforce rather than to replace it.

Which brings us back to the original question. Where are the robot overlords? They are obviously not as evident as forecast ten years ago. The original forecast was flawed because it didn't allow for the long term impact of the global financial crisis. It was also seduced by the promise of potentially disruptive technologies. That promise has not fully materialised. The technology that has been developed has been used to augment existing systems rather than replace them. And the workforce is reducing as part of a natural process in any case. 

To many observers, the wild forecasts of job losses from ten years ago did seem a bit extreme. The numbers suggest that caution should have been the order of the day. More jobs were created than lost in the past decade and the future visions of mass unemployment now seem rather fanciful. However, having said that, this view of the future does still creep into the work of some members of the futures community. This is more to serve a political narrative of the future. It is really a question of belief. If someone really wants to believe in robot overlords, no amount of persuasion will help to change their minds. 

Stephen Aguilar-Millan

© The European Futures Observatory 2021

Will The Pandemic Accelerate The End Of Capitalism?

The response of many western governments to the pandemic has been to collapse their economies and maintain social support through a very large fiscal expansion. Some observers have questioned if this would herald the demise of capitalism as a means of organising our affairs? Does the pandemic herald the end of capitalism? 

The operation of capitalism as a social system relies upon the market for the distribution of goods and services. It is a monetary system, using price signals as an allocation mechanism, and the profit motive as a motivational driver. Key to the system is the exercise of personal choice in determining what to buy and when to buy it. Some goods need to be purchased collectively, which calls for governmental provision that is funded through the tax system. Another important role for government is to regulate the markets and to correct for market failure. In making the distributional decisions about taxes and subsidies, a collective decision framework is called for. In the western liberal democracies, this is in the form of representative government. All of this has ceased to operate during the pandemic.

The market is still used for the distribution of goods and services, but consumer choice can only be exercised during lockdown for 'essential goods'. The lack of a clear definition of what is essential and what is not has been something of a legal question during the pandemic so far. Absurd cases have arisen, such as the denial of the Welsh government that female sanitary products were essential. This interruption of the market has had two effects that may store problems for later on. First, it means that, owing to the high levels of income support, households are generating higher than usual levels of savings. Second, because people are not spending, and because government assistance is aimed at income support, profit levels are falling and the closure of firms is accelerating. Capitalism operates as a 'Money-Go-Round', and if one element seizes up, then the whole system becomes fragile.

There has been little public consultation over any of this. The organs of representative democracy have been suspended. The English local elections scheduled for May 2020 were postponed and it is currently uncertain whether or not the English local elections, the English mayoral elections, and the elections to the Scottish and Welsh Parliaments will go ahead as planned in May 2021. In place of a representative democracy, and autocratic technocracy has assumed control of the government, with key decisions being made by 'scientists and experts'. The scientists and experts who have assumed control display the British desire to centralise and the risk aversion of the British Civil Service. The population has been largely compliant so far, but rumblings of discontent and non-compliance with the regulations are starting to grow.

The key question is whether or not this represents the end of capitalism? Much depends upon how temporary these measures turn out to be. If a high level of vaccine delivery can be achieved, then the economy and civil society can start to thaw sooner than otherwise. This is the critical uncertainty. If a thaw can be achieved in the near term, then the process of normalisation can begin at the same time. If a thaw cannot be achieved, then the Conservative government of Boris Johnson will achieve what Jeremy Corbyn failed to achieve in two general elections - a Socialist Britain.

Two cases during the pandemic have given us a hint at what that might be like - the NHS Test and Trace App and the Oxford Vaccine. A test and trace facility is key to the management of the spread of the COVID virus. Despite there being commercial options available, the NHS decided to develop its own tracing App. The scientists and experts took control and the centralising tendency in NHS management took over. The result was far from the world beating App that was promised. The actual result - at a cost of just under £12 billion - was a non-functional App. In the end, a functional App was developed with the assistance of Apple and Google. The episode highlights how life could be if normality does not return.

By way of contrast, an effective vaccine was delivered in record time. This came about because sufficient government money was pledged to cover the cost of the initial research. This was handed on to the competitive oligopoly of the pharmaceutical companies to commercialise. It then received regulatory approval in record time and is now being delivered by private firms on contract to the NHS. If anything, this case demonstrates the best result of capitalism. A worthwhile social purpose - mass vaccination - that is underpinned by the government is being delivered by private sector companies. This represents the system working as it should.

This is an important point as we go forward. The emergency socialism of the pandemic has managed to ensure that public health is maintained and that households are not impoverished. This is a major achievement. But as we look beyond the crisis period, the public sector is unable to deliver goods and services effectively. There needs to be some return to the market and that needs to be underpinned by a return to representative democracy. It is quite likely that the pandemic will have rejuvenated capitalism rather than hastened its demise.

Stephen Aguilar-Millan

© The European Futures Observatory 2021

How fast will Europe recover from the pandemic?

It's always the case that one thing leads to another. The study of the future often consists of no more than simply joining all the dots to see where we arrive. The pandemic has provide a number of opportunities to engage in this type of thinking, both for the near future and for further ahead. The most striking aspect of the pandemic is that it has had a different impact in different countries. The virus is broadly the same, saving a few mutations, so much of the differing experiences of the pandemic are the result of policy decisions.

Some countries have risen to the challenge of the pandemic very well. Others not so well. However, as we progress through the second wave of infection, we find that those who did well in the first wave may not be doing so well through the second wave. The key difference between the first wave and the second wave is the vaccine. This is a question of policy approval, adoption, and roll out. The race is now on to vaccinate as many people as quickly as possible. In this, performance to date is rather patchy.

The question of Europe arises in this context. Generally speaking, Europe had a good first wave, especially when compared to America. Lockdowns were imposed sooner and with tighter conditions than the US. Infections rates were lower, as were death rates. The economic policy response was slower in the Eurozone - it still has to be deployed - and frugal to the point where some may question its usefulness. This suggests that the economic fallout from the pandemic will be harsher and longer lasting in the Eurozone compared to the US.

America went into the second wave with GDP more or less restored to where it had been a year earlier. Europe, on the other hand, was operating at about 10% lower GDP than a year previously. This is now where institutional factors start to have an impact. The roll out of the vaccine is derogated to national governments in Europe, whereas the approval and roll out is determined at the European level. This hasn't been as nimble as it could have been. The approval and deployment of the vaccine has been slower than the US. Joining the dots, it means that the return to 'normality' - whatever that may mean - will take longer, periods of lockdown and will be longer, and periods of economic inactivity will be longer. This suggests that the Eurozone economy will be hit harder than that of the US over the course of the pandemic.

It is hard to assess the consequential impact of this because we don't know the point to which the Eurozone will recover. We don't know the likely path to recovery. We can only assume that the fiscal response will be sluggish and that the ECB will continue to pump liquidity into the system. All of this suggests a rather stagnant recovery that will be delayed compared to other economies. 

As things stand, there is the potential for this to develop into something more serious over the longer term. A delayed and sluggish recovery could permanently scar the Eurozone economy, leading us to question if Europe could ever catch up? A stressed recovery could see the flaws in the architecture of the Euro become fissures. Of course, many have speculated on the demise of the Euro before. They have been wrong, but there is always that nagging sense that perhaps this time might be different?

Stephen Aguilar-Millan

© The European Futures Observatory 2021

How Will The Pandemic Affect Productivity?

By placing the global economy into deep freeze, governments across the world have triggered one of the deepest economic downturns in living memory. In England, the present downturn is said to be the worst one since 1707. It is hard to find much upside to this, but perhaps some solace might be found in the question of productivity?

It is normally the case that a deep recession will raise productivity within an economy. It is usually the case that lesser productive firms go to the wall, releasing the staff and capital that they used into the pool of available capital and labour. At that point, as a matter of sheer arithmetic, the average levels of productivity will rise. As we go forward in time, new firms will be formed, drawing upon the pool of available labour and capital, to raise the total level of productivity in the economy. This is how the process of Schumpeter's 'Creative Destruction' works. 

The process of creative destruction has not been evident following the global financial crisis of 2008. Within the advanced economies, a sustained slowdown in productivity set in that suggests a more muted recovery from the pandemic might be the order of the day. There are three broad explanations as to why this might be. First, it may be the case that the impacts of the newer technologies - AI, Cloud Computing, and Robotics - have been over-exaggerated. Second, it may be the case that investment in the newer technologies has been constrained by weakened demand. Third, it might be too soon to see the impacts of a new adoption curve. All three of these may be right, in varying degrees, but what does that tell us about the years ahead?

The pandemic has made us do things differently. One factor noted by many observers is that much more work is now being undertaken from home. It is uncertain whether or not this makes us more productive. In some cases it will, and in other cases it won't. Either way, a combination of the new technologies - AI and cloud computing in particular - have enabled this trend. For some, this will be the way of the future. For others it won't. We might reasonably expect to see more home working and fewer trips to a centralised office, so perhaps those who declare the end of the office might be a bit premature?

It is not only in the uptake of new technologies that might contribute to a productivity uptick. The need for social distancing is forcing businesses to organise their production differently. We are all familiar with the growth of home delivery becoming incorporated into business models. The internal organisation of work teams and the flow of work through complex business processes has also had to change. Some of these changes represent real improvements to productivity. Some enhance the quality of output - a disguised productivity gain. These changes are likely to be retained after the pandemic, raising the productivity of the surviving firms.

After a long period of stagnation, we can be optimistic about the prospects for productivity in the years ahead. The fiscal response of expansion - rather than austerity - will help to underpin corporate profits in the near future. Contrary to the Piketty model, the rates of corporate profits following the global financial crash had been falling. If they start to rise again, we can reasonably expect corporate investment to rise again, especially if coupled with public investment in digital infrastructure and education. It is possible that both supply and demand factors could act to spur productivity in the near future.

One further long term factor may act to enhance productivity - demographics. In the next few years, a natural process of labour shedding will gather pace as the Baby Boomers retire in ever increasing numbers. This will have an effect - in the absence of mass immigration - of leading to wage rates hardening. In some case, by a great deal. If labour becomes appreciably more expensive, then a cost advantage for mechanisation arises. This is the point where AI, cloud computing, and robotics are likely to dominate as trends. If this is the case, then productivity could be set to rise substantially.

It remains to be seen how much of this is the result of the pandemic and how much would have happened in any case. Prior to the pandemic, the government had announced an end to austerity and had signalled an intention to develop both the physical and digital infrastructure of the UK. The ageing of the Baby Boomers has only been marginally impacted by the pandemic and their departure from the workforce is relatively independent of government policy. In this respect, the pandemic will not have influenced productivity greatly. 

What the pandemic could be claimed to have done is to accelerate the trends already under way. In the public sector, in particular healthcare, the adoption of the new technologies has greatly accelerated over the pandemic. For example, family doctors are now far more productive owing to video consultations. Although austerity had ended, it was not envisaged to have ended with quite the fiscal expansion that we have actually seen. In this respect, existing policy is far more exaggerated than originally planned.

Perhaps that's how the pandemic has affected productivity? Perhaps the pandemic has forced us to do what we were doing in any case, only more so? To that extent, it could have a lasting impact.

Stephen Aguilar-Millan

© The European Futures Observatory 2021

UBI and the pandemic

One of the difficulties in the social sciences, when compared with the physical sciences, is that it is hard to experiment with the subjects under review. This means that social scientists have to take their data points wherever they arise, often using a set of surrogate readings to either confirm or refute their previous theoretical conjectures. The scientific method in the social sciences is essentially inductive. Data points are observed and theoretical underpinnings are conjectured.

In recent years, there has been a growing belief in a Universal Basic Income (UBI) as a means to resolve the issue of inequality. The proponents advocate this policy as a means to deliver a decent basic standard of living to everyone. This would be achieved by everyone receiving a regular payment without any strings attached. It would allow people to study without having to earn a living, it would allow people to have a financial firebreak to start a business, and it would allow people to focus on unremunerated care giving. The absence of being forced to earn a living would allow the innate creativity within people to flourish.

There have been a number of limited trials of UBI. The results of these are best described as mixed. None have been a resounding success. The supporters of UBI hold that the trials have been poorly implemented, the payments not entirely unconditional, and the levels of funding too low to hit critical mass. All of this is true, but it disguises the principal objection to UBI - the cost. For UBI to be at all effective, the recipients have to receive a significant sum of money. Across a population, that presents a taxation challenge.

Prior to the pandemic, UBI as a proposal was quietly falling out of fashion. It is expensive and is seen as an inferior policy device when compared with payments targeted on those who need them. The pandemic has changed that perspective. As an employment support measure - in the UK - the government entitled all staff to a payment of 80% of their salary. This is conditional. The conditions are that the staff do not work in their jobs. They can get a different job. They can stay at home and do nothing. They can engage in their hobbies or even start a business. They can do anything except return to their jobs during the furlough period.

This is almost a surrogate for UBI. The take up of the furlough scheme (somewhere between a quarter and a third of the UK workforce over 2020) was large enough to make this a statistically significant sample. On the issue of cost, it is difficult to fix this because a variety of schemes were under way at the same time and rates of fraud were exceptionally high. However, the cost of the furlough scheme between March and September was estimated by the National Audit Office as something n the region of £47 billion. Simply multiplying the numbers up suggests that the total cost of a UBI of £2,500 per month (the furlough ceiling) for the UK workforce (about three quarters of the population) would be in the region of £350 billion to £400 billion a year. These are the rocks of affordability upon which the ship of UBI flounders.

There then arises the question of the benefits of UBI. It is supposed to unleash a surge of creativity. Has that happened under the furlough scheme? Admittedly, it is a bit early to tell in definitive terms, but some early indications do highlight the direction of travel. We ought to discount what people reply to surveys and look at how they deploy their cash. This is a more revealing approach. During the furlough period, companies selling pizza deliveries are reporting record sales. Streaming TV services are reporting record subscriptions. Even adult web sites are reporting high subscription levels. There doesn't appear to have been an outpouring of literature, or fine art, or music. The expected wave of creativity has yet to materialise. What does that tell us? Perhaps people would rather watch TV eating pizza than locking themselves away to paint that masterpiece? As I said, it is too early to be definitive on this matter, but the evidence there is points in one specific direction.

No doubt the more resolute promoters of UBI will say that the evidence is tainted, or that we have drawn false conclusions from a limited data set. These are valid objections. However, most unbiased people will see that this is an experiment that has proven to be very costly and has yet to deliver the promised results. It has little to recommend it. Perhaps now, as an idea, UBI can die a quiet death?

Stephen Aguilar-Millan

© The European Futures Observatory 2021