Imagine what it was like back in the days of prehistoric hunter-gatherer cultures. Most economic activity—by far—would be subsistence production at the family level. What internal and external trade there might be would be almost entirely barter of surplus production. You smoke more mammoth meat than you need, you can trade it for spearheads from someone who’s better at making those than you are. And so forth.
It’s hard to imagine anyone making a living in such an economy as a pure service provider. I can’t see “waiter” or “hairdresser” as a viable career in a primitive tribe.
But let’s imagine a very creative fellow with great skill at using dung and egg whites to create fantastic hair designs that frighten enemies and make hunters smell like whatever they were hunting. Let’s stipulate that this fellow was so good at this that everyone else in the tribe was willing to pay him in food, clothing items, and everything else he needed to live comfortably. Great. If the tribe is productive enough to do this pure service provider, we’d have the world’s first professional hairstylist.
Now let’s say that everyone else in the tribe sees this guy staying back in the cave where it’s safe and warm while others go out, risking their lives hunting. And being hunted.
How long before others discovered a sudden passion for hairdressing?
What would happen if everyone in the tribe were to toss aside their spears and take up hairdressing?
Imagine an entire tribe sitting on logs arranged in a big circle, each artfully applying mud, feathers, dung, twigs, bits of bone, and so forth to create the most amazing hairdo for the person in front of him or her. Every day, the tribe would be the most wonderfully coiffed in the world… until they all starved to death.
This is why there’s no such thing as a service economy. It’s a myth.
Yes, I’ve oversimplified to make a point, but bear with me for a moment. Let’s translate to modern times:
Joe cuts Joan’s hair.
Joan serves Bob his latte.
Bob rings up Barb’s purchases at a fashion outlet.
Barb chances the oil in Joe’s car.
And so on.
It’s like that tribe of hairstylists. A giant circular flow of people doing nothing but serve one another is impossible. Someone has to actually produce stuff: food, clothes, cars, houses, etc.
Ah, but what if “we” have a service economy, and people in other countries can do all that nasty, dangerous, and polluting work of producing the things we need?
Well, the world is also like our hairstylist tribe. Who’s going to want to go out and risk encountering a saber-tooth tiger while gathering berries, when they could stay home and risk no more than an ugly hairdo? Every country wants to evolve from agriculture to industry to services. Or so they think.
You can export oil, but you can’t export haircuts.
Pockets of service-based economic activity exist, obviously, but we can’t all be hairdressers or financial advisors—or even pure investors. Somebody still needs to produce the stuff we all need and want.
Why does this matter?
This mental exercise is important because understanding the myth of the service economy helps us avoid related misconceptions—and hence misreading market signals.
For instance, when the Fed reported recently that US industrial production declined again last month, Wall Street shrugged it off and surged to an all-time high.
But it’s a mistake to say that declining industrial output doesn’t matter because we have a service economy.
It’s true that manufacturing is a smaller part of the US economy today. It was reported to be only 11.4% in 2018. The entire reportedly economy grew by 3.1% in that year—that’s not much of a margin. If manufacturing had been about a third less, the US would have seen negative real GDP growth in 2018.
This clearly matters even more in economies that rely more on industrial production, like Germany and China. But it also matters a great deal to countries with economies that depend heavily on supplying the resources industry needs. That’s not just OPEC countries and banana republics, but places like Canada and Australia.
In today’s global economy, so-called service economies need the industrial, resource, and agricultural economies of the world, or they would end up with no one to serve.
There must be fountainheads of material wealth in the world—and there must be a rule of law and positive cultural support for them—or we’d all starve like our imaginary hairstylist tribe.
Unfortunately, with the likes of Elizabeth Warren and AOC in the ascendancy, both law and culture are attacking the very foundations of wealth creation.
Okay, but why does it matter now?
This all came into focus for me after interviewing wealth manager Ross Gerber recently. I asked him how he can sleep at night, investing in FAANG stocks and other mainstream equities in the face of negative interest rates, the trade war, and other craziness affecting today’s financial world.
His answer was to pull back and look at a much bigger picture than most of us usually do. Compared to the Great Depression, WWII, and such cataclysmic periods, the world is in a relatively benign period of history. Today’s resurgence of socialism and social uprisings are not that big a deal by comparison.
That wasn’t at all the answer I was expecting, and I’ve been thinking about it ever since. I have to concede that Ross has a good point. As scary as many of today’s headlines are, things are overall better in the US and many parts of the world today than during history’s more painful periods.
So why not, like Warren Buffett, bet on America and buy the S&P 500? Or like Ross, bet on the NASDAQ?
I think Ross’ point is correct, so I have to ask myself if I could be missing something important. Am I just resistant to the idea because I’ve been in the gold-bug echo chamber so long, my views of the world have become distorted?
As Ayn Rand said, we must always check our premises.
That’s a work in progress. My initial thinking brought to the myth of the service economy and many other myths investors believe.
Common economic myths prevent people from seeing just how fragile the global financial system is.
On the surface, things do look good. Stocks keep going up, and I’ve missed out on a lot of upside since 2008. So why not join the party?
My answer: it’s a mistake to think that the end of this record party on Wall Street—which we all know must come—will be a garden-variety bear.
As most readers know, I don’t think that any of the causes of the crash of 2008 have been addressed. I think most have been made worse. And all the unprecedented government actions since then will have unprecedented economic consequences—which won’t be good.
This is why I like to say that in the post-Lehman world, we are all speculators, and the advantage goes to those of us who know it.
Could I be wrong?
I don’t think I am, but let’s say Ross is right and the NASDAQ is the place to invest for years to come. I still don’t see much downside in the precious metals space—not in a world awash in negative interest rates. Ross agrees with me on this. And while geopolitical tensions don’t rival a world war, they are sure to keep a lot of people all around the world keen on owning safe-haven assets.
Fortunately for Ross and his clients—unlike Warren Buffett and his shareholders—Ross does understand gold. He owns it and is hedged in case I’m right. We can agree to disagree about the rest, like gentlemen.
Time will tell which of us has the better strategy.
That’s my take,
Friday, November 29, 12:12pm, EST, 2019