PrefBlog

So equities got crushed today and the media are breathlessly telling us it’s a correction:

•The S&P 500 Index fell 3.8 percent at the close in New York.
•The Dow Jones Industrial Average lost 4.1 percent and the Nasdaq 100 Index fell 4.2 percent.
…
•The yield on 10-year Treasuries fell less than one basis point to 2.83 percent.

It takes me back! I remember early in my career, in late October 1987, I was asked whether I thought “it” was a crash or a correction. I thought that was the stupidest question I’d ever heard. The market’s down 22%+ – stick that in your thesaurus, buddy. But I was young then and foolish and the guy was influential in the company, so I pretended that classifying things was very important and meaningful, particularly if they’re classed by multiples of ten.

The technical wizards at Canada’s leading financial oligarch showed off their prowess again today:

Royal Bank of Canada is once again in the hot seat with investors after its online brokerage platform – RBC Direct Investing – experienced technical difficulties that prevented clients from making trades just as markets were plummeting and the Dow headed towards a loss of more than 1,000 points.

RBC clients took to social media this afternoon to express their frustration with the rolling outages the bank has recently been experiencing since early January.

Thursday’s outage appeared to spike at 1 p.m. (ET) and remained through the market close.
…
“Our initial investigation indicates that this is related to a fibre optic cable, not to volumes. We have implemented a temporary solution and clients can now place orders online,” an RBC spokesperson said in an email to the Globe and Mail.

Regrettably, the journalist did not ask any questions about redundancy and fail-overs; but let us simply be grateful the regulators have placed the entire industry, just about, in such reliable and competent hands.

In a speech important enough to be reported in the Globe, Bank of Canada Senior Deputy Governor Carolyn A. Wilkins delivered an address at the G7 Symposium on Innovation and Inclusive Growth titled At the Crossroads: Innovation and Inclusive Growth:

It is perhaps only in the last decade or so that mainstream macroeconomists have sharpened their focus on how income distribution may affect long-term growth and macro dynamics. There is compelling evidence that innovation has been an important reason behind rising income inequality in advanced economies in recent decades.2 Research also finds that rising inequality can result in weaker and less-stable macroeconomic outcomes. This places us, as policy-makers, at a crossroads. Do we choose to stay on the same road and repeat the past? Or do we apply fresh thinking to policy and choose a new road where innovation delivers even stronger and more-inclusive growth?
…
There’s a lot of good research, including by people in this room, pointing to many possible forces at play. I think three stand out:
•Technology has benefited skilled workers more than other workers because it has made them more productive. People in more-routine jobs have tended to be replaced entirely. Digitalization will likely reinforce this dynamic. Machine learning and other technologies mean that tasks requiring routine cognitive skills, such as reading medical scans or preparing legal and investment advice, can now be automated too. That said, I do not share the dystopian view of a world without workers. People will still have an absolute advantage in tasks that require common sense and a human touch. And they will also find employment in areas where they have a comparative advantage. The question is not so much whether there will be jobs for people, but, rather, how well they will pay, and what the working arrangements will be.8

•Some types of technology lead to market concentration and the rise of “superstar” firms. These firms tend to have fewer employees than conventional companies and can earn impressive monopoly profits.9 Market concentration happens quite naturally in industries with prominent network effects and other scale economies. There is nothing new in that. Phone companies are traditional examples, and social media companies and online marketplaces are more-modern examples. What is new is that the “winner-takes-all” effect is magnified in the digital economy because user data have become another source of monopoly power. Data from a large network create a formidable barrier to entry. Another barrier to entry can come from firms using their position as gatekeepers to crucial online services to impede their competitors. And, it’s easier to avoid taxes when production is not tied to a large factory with a fixed physical location.10

•Technology has helped to separate work into discrete tasks, allowing businesses to make more use of short-term, temporary jobs to maintain flexibility or respond to changing needs. Workers in these types of jobs tend to have less bargaining power than regular employees. They usually earn lower incomes, get fewer benefits and have less job security.11 This may be one reason why we have seen relatively weak wage growth in Canada and other G7 countries despite improving labour market conditions. With the current wave of innovation, the “gig economy” is likely to keep growing.12

I suggest that a major factor is simply the pace of innovation. It has long been known (except to regulators) that the lion’s share of the profit from innovation goes to the innovators. Nowadays, the pace of innovation is frenetic … while I would not want to state flatly that we have reached a maximum, we’re far removed from the medieval peasant ploughing his fields the same way his great-grandfather did, while secure in the knowledge that his great-grandson would be ploughing the same way. So, sure, more innovators, more disruption, more concentration of wealth among the lucky winners. And, what’s more, with every increase in our ever-increasing productivity, there is more time and funding available for a few more guys to sit quietly in a corner and wonder if maybe such-and-such might work. I don’t know when we’ll see the end of it … it’s a wild ride!

This entry was posted on Friday, February 9th, 2018 at 1:54 am and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.