Tuesday, May 14, 2013

Are stocks especially safe for the long run as a hedge against robot/computer unemployment?

Wonkblog has a great interview with Kevin Drum on the dangers of long term, or permanent, unemployment in the future with great advancement of computers and robots. As an adjunct professor of personal finance at the University of Arizona and President of National Personal Finance Education this is a subject I've been studying and thinking about a long time, along with, of course, how to protect yourself and your children. It's very important, and I hope to say a lot about it in the future.

But for right now, there's a big thing I've been conjecturing for a while, and I think I'm ready to at least state it publicly for discussion:

Stocks are widely acknowledged among experts and academics to have a great risk-adjusted average, or "expected", return over the long run, decades, and for some conventional reasons. And I have a hypothesis for the "Equity Premium Puzzle" too, that I haven't heard in the literature or elsewhere, basically that a firm can simply create more value and be more productive when they finance with stock because it gives the ability to think long term and be flexible, without the short term constraints and requirements that come with debt. There is more too it, though, like the particular way it affects the aggregate supply curve of firms. For details, see here.

Now, one big thing that lowers the risk of stocks over the long run, that you often hear, is that, unlike fixed income assets, they move very well with inflation, being claims on real assets and income (See the great book, "Stocks for the Long Run", by Wharton financial economist Jeremy Siegel.)

But there's potentially another big thing; if robots and computers really take off, creating a huge risk of being long term unemployed, then stocks may be a fantastic hedge against this risk. As the better the robots do – the more wealth they create, the more they produce – the more the value of your stocks may explode, because your stocks are robots; they're claims of ownership of corporations' robots and computers. It’s like you own your own robots to create wealth for you personally, and you may not have to own many when each one can produce the equivalent of a well skilled man for a lifetime.

So one of the best ways to protect the future of your children may be to every year put money into your 401k and IRA in a well-diversified stock index fund, not just for your retirement, but for even longer term, for your children when they're 30, 40, 50, and have a family, and it may be very hard for them to find any job that robots can't do for 50 cents per hour, or much less. Then they'll own many of these fantastic robots themselves to year after year make a good income for them.

And, of course, it would be great if you could skip the McMansion and new cars every three or five years, and instead put more into stocks for your children than just the 401k and IRA limits, like starting trusts. Believe me, the kids are a lot better off driving around in older used cars and not having a great room or granite countertops, but having their future insured against devastating long-term unemployment and poverty.