Profit from the rise of the robots
John Stepek Sep 05, 2012
Signs that the global economy is slowing down continue to roll in.
Logistics group FedEx warned that earnings for the three months to August 31 would be lower than expected. As the FT points out, express delivery groups are particularly sensitive to the slowing economy. As companies see inventories of goods pile up, “demand for express services to replenish them can fall sharply”.
It shouldn’t come as a huge surprise. Manufacturing data from around the world has been gloomy in recent months. In most countries, activity in the sector is shrinking.
Business cycles come and go. We had a boom and we’re still in the bust stage. It’s only to be expected.
But behind all this, there’s a far bigger, longer-term change taking place in manufacturing. And smart investors should be looking at how to profit from it now...
What happens to humans when machines take over?
Robots have been used in factories for decades. But now, as John Markoff reports in The New York Times, a new wave of “far more adept” robots are “replacing workers around the world in both manufacturing and distribution”.
In short, robots are getting cheaper, and better at doing things. According to Markoff, Erik Brynjolfsson and Andrew McAfee of Massachusetts Institute of Technology believe that the coming transition could be comparable to the collapse in US agricultural employment over the last century. That’s a big claim. About 40% of the workforce worked on farms in 1900. Now it’s 2%.
The pace with which robots take over might be exaggerated – these things often are, particularly by breathless ‘experts’. But it’s only taken around 20 years for the internet to demolish the business models of the music, print, and retail industries, from a virtually standing start. So it’d be naive not to start considering the impact of any changes now.
From a social angle, this all raises some interesting and difficult questions. What are the human beings going to do when their jobs are automated? Sure, a lot of these tasks aren’t pleasant: smartphone factories come under attack regularly over their working conditions. But being unemployed in an emerging economy with little by way of a social welfare safety net isn’t much fun either.
No one has the answers, and our job here is to look at the investment angle rather than the social angle. But I’d be interested to hear your opinions on this – give us your tuppence worth in the comments below.
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Why the rise of the robots is good news for the US dollar
There are plenty of investment implications. But from a ‘big picture’ point of view, it’s another reason to be sceptical of China’s imminent ascendance over the US. Why?
China’s big trump card for the last decade or so has been cheap labour. That’s already changing. For one thing, wages are rising in China, while in many cases they are falling in the US. So when you throw in high transport costs (due to high energy prices), then the advantage of making goods in China to sell to the US becomes far less obvious.
But if you remove cheap labour from the equation altogether – as happens with automation – then energy, rather than wages, becomes the major issue. You need a supply of cheap electricity to run these factories on.
The shale gas bonanza in the US has already driven natural gas prices to near-record lows. This may not last, but the US also has plentiful reserves of coal. So there’s plenty of scope for utilities to switch between the two fuels as necessary, and keep prices low. And if solar power takes off on top of that, you can see that it makes a lot of sense for forward-thinking companies to use the US as their manufacturing base – particularly if that’s where their customers are going to be too.
As James Ferguson pointed out last year in MoneyWeek magazine, this is one major reason why, despite the best efforts of Federal Reserve chief Ben Bernanke, the US dollar is likely to be a stronger currency in years to come.
The race to devalue paper currencies is likely to continue as the world economy remains fragile. That’s why we’d hold onto gold as portfolio insurance. But we also think that having exposure to a stronger US dollar in your portfolio is a sensible idea. This can come in the form of solid dividend-paying blue-chips with US earnings, or even a short position in a currency that is hugely overvalued against the dollar (such as the Australian dollar).
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