Great chart here from Macromon (via Ritholtz) on the growth of the F.I.R.E. (Finance, Insurance & Real Estate) industry and the shrinking of the manufacturing base. Now, granted, some of this is merely due to greater productivity, efficiency, etc. On the other hand, what accounts for the growth in the FIRE industry? Why has the capitalist system in America attributed such a high value on these industries that produce little and take so much?
I have said in the past that this growing divide is bad for the future of the country (read similar commentary from Bill Gross here), but you simply can’t argue with the fact that much of this growth in the financial sector is due to increased demand for these services. Is the marketplace incorrectly attributing this value or is this growth justified? If so, how can it ever be reversed?
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icBrokerWidget('pragcap', 600, 55); Comments michaelMy feeling is that the next great recession (circa 2015-2016) will decimate the FIRE economy. I think the disgust from the populace will not be as easily soothed this time. Also since the economy will probably not add enough jobs between now and 2015 to make meaningful impact in the 2 highly agitated demographic groups (18-25 years old) and (40-60 years old male) the support for further help for the FIRE will not be very forth-coming. Maybe we may get to implement the Swedish model after all.
Reply 02/06/2011 at 11:57 PM Klaus BohmThe rational for F.I.R.E:
…unbrideld greed _narcisstic self-delusion_play for power
…a F.I.R.E. Economy can only thrive on the back of a dying industrial economy, since any amount of surplus savings need to be diverted into:
-bidding stock_bond_real estate prices continuoulsy higher
…as a result, no surplus savings left to be invested into tangible capital investments
-no new factories -no new employment (Wall Street goose-bumps on rising employment and investment) -privatizing socoal security
The ultimate outcome is for a society:
-lapsing into chronic depression_war_social unrest..
Kind Regards
Reply 02/07/2011 at 1:27 AM alexIn some ways, I agree with you Michael. If there was another crisis, I don’t think banks would get as much support, and might fall. They are not popular with the public as it is now, let alone if all goes wrong again.
On the other hand, those in the finance industry are not going to simply walk away and get a job at McD’s. As this last crisis proved, they want to stay for good.
Reply 02/07/2011 at 1:33 AM AnonymousYou should disallow the legalized bribing of politicians by the big lobbies. That is the only way to stop it. The FIRE economy has proven that it not only does not add value, it extracts value (acts like an unproductive tax) from the economy.
Reply 02/07/2011 at 3:38 AM Derfem“On the other hand, what accounts for the growth in the FIRE industry? Why has the capitalist system in America attributed such a high value on these industries that produce little and take so much?”
Free money given by the FED. Maybe the reason of this high value is the better understanding of MMS…
Reply 02/07/2011 at 3:54 AM GunnyIf you made a similar chart showing the relative importance of agriculture during the first half of the last century it would look the same. If you substituted the FIRE data for, let’s say, the entertainment industry it would also look the same as FIRE. Basically it just illustrates that we need less resources to produce what we eat, what we wear and all other physical products and that services and experiences are a more important part of our society. Is this bad? Well, that’s of course depending on what you value.
Reply 02/07/2011 at 5:08 AM Derfem“Is this bad ?”
Less and less human intervention in the production of goods, mean, at one point, that you must manage the high level of unemployment (on a worldwide basis). Trees doesn’t grow to the sky…
Reply 02/07/2011 at 5:15 AM K GardinerI suspect part of this trend is simply due to the aging of our population. Older folks have more resources that need management and protection. It will take a while for this boom to go bust baby.
Reply 02/07/2011 at 8:35 AM toddoAre you still short from 3 weeks ago? Do you cry uncle or just absorb losses?
Reply 02/07/2011 at 11:04 AM Cullen RocheCry uncle after a position goes against me for 2%? You’ve gotta have thicker skin than that to be in this game….
Reply 02/07/2011 at 1:13 PM Klaus Bohm…good one from a ‘meister’; especially when protecting a fully invested portfolio
Kind Regards
Reply 02/07/2011 at 1:45 PM KingPawnNot to mention you never described how you played your short(I am not asking for your trade secrets btw), you could have shorted the Russell 2K in which case you are even on the trade. Its not just the trade but how you “trade” it.
Reply 02/07/2011 at 2:41 PM Cullen RocheI’ve given a pretty rough overview of my approach. One portion of my portfolio is keyed entirely off of an algo that gives a buy, sell, short or short cover signal. Trades tend to last 6-8 weeks. It’s one of my more speculative approaches though I do have one strategy that is even shorter in duration though entirely differently. Layering time frames in a multi strategy approach has worked extremely well for me.
Position sizing is key with this one. You never get the exact top or bottom right. So, if the trade goes against you you have some buffer. Add more. But do so in a manner that you’re not overextending your portfolio. It’s all about risk management. It’s one of my more successful algos. 23% per year compounded since 2007. Max drawdown of -5.1%. Sharpe ratio of 2.29. Wish I had been using it more, but I assume it will not always work this well….
Reply 02/07/2011 at 2:50 PM firstFarmers made up about 90% of labor force in 1790 and 49% in 1880 of by 1900. it was down to 38%.
In 1950 it made up only 12.2% and now its only about 3% of of the labor force and we have a obesity problem.
We produce much more with less and that is very good except that a lot of the rewards and benefits have been diluted toward a growing bureaucracy and a contractual sector that is sucking the blood out of America’s ingenuity.
With less lawyers we would also save the forest.
Reply 02/07/2011 at 11:41 AM MonetaOil for fabricating and running farming machinery. Oil for producing fertilizers.
Not long ago I read a report that said that food took 5% of an American household’s income, 10% of a Canadian household’s income and 15% of a European one.
I wonder how much longer it will stay at 5%.
Reply 02/07/2011 at 12:12 PM michaelAs I have stated before, once we reach a certain level of productivity, we will continue to experience a high level of labor surplus. It remind me of George Jetson’s job. I wonder if eventually will we have to accept that high structural unemployment is in our destiny or will we accept Europe’s job sharing schemes; everyone works a bit less so that most have some kind of formal jobs. Increasingly, the innovations that benefit healthier and longer life expectancy put increasing pressure on society to provide for all. Much of the technological progress that have comes within the last decade or so are very minor; although they command a much higher amount of attention and energy from all of us. Maybe as a species, we have pretty much reach a plateau for progress. It may be a matter of just maintenance from this point onward.
Reply 02/07/2011 at 12:23 PM DerfemI live in Europe, and i must tell you : that’s wrong ! Of course, we have a sharing job scheme with part-time workers and so on, but the employment level is really high in “old Europe” (without new comers from eastern countries). I think those levels of high employment and job sharing drive Europe to the way of non-productive of the labour force. It’s against all entrepreneurial approach, where you rewards the “loosers”. And whatever you do, you’re right: once we reach a high level of productivity, there is a high level of unemployment because demand is limited somewhere. There is no solution to the productivity problem. It’s a worldwide problem.
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icBrokerWidget('pragcap', 600, 55); Comments michaelMy feeling is that the next great recession (circa 2015-2016) will decimate the FIRE economy. I think the disgust from the populace will not be as easily soothed this time. Also since the economy will probably not add enough jobs between now and 2015 to make meaningful impact in the 2 highly agitated demographic groups (18-25 years old) and (40-60 years old male) the support for further help for the FIRE will not be very forth-coming. Maybe we may get to implement the Swedish model after all.
Reply 02/06/2011 at 11:57 PM Klaus BohmThe rational for F.I.R.E:
…unbrideld greed _narcisstic self-delusion_play for power
…a F.I.R.E. Economy can only thrive on the back of a dying industrial economy, since any amount of surplus savings need to be diverted into:
-bidding stock_bond_real estate prices continuoulsy higher
…as a result, no surplus savings left to be invested into tangible capital investments
-no new factories -no new employment (Wall Street goose-bumps on rising employment and investment) -privatizing socoal security
The ultimate outcome is for a society:
-lapsing into chronic depression_war_social unrest..
Kind Regards
Reply 02/07/2011 at 1:27 AM alexIn some ways, I agree with you Michael. If there was another crisis, I don’t think banks would get as much support, and might fall. They are not popular with the public as it is now, let alone if all goes wrong again.
On the other hand, those in the finance industry are not going to simply walk away and get a job at McD’s. As this last crisis proved, they want to stay for good.
Reply 02/07/2011 at 1:33 AM AnonymousYou should disallow the legalized bribing of politicians by the big lobbies. That is the only way to stop it. The FIRE economy has proven that it not only does not add value, it extracts value (acts like an unproductive tax) from the economy.
Reply 02/07/2011 at 3:38 AM Derfem“On the other hand, what accounts for the growth in the FIRE industry? Why has the capitalist system in America attributed such a high value on these industries that produce little and take so much?”
Free money given by the FED. Maybe the reason of this high value is the better understanding of MMS…
Reply 02/07/2011 at 3:54 AM GunnyIf you made a similar chart showing the relative importance of agriculture during the first half of the last century it would look the same. If you substituted the FIRE data for, let’s say, the entertainment industry it would also look the same as FIRE. Basically it just illustrates that we need less resources to produce what we eat, what we wear and all other physical products and that services and experiences are a more important part of our society. Is this bad? Well, that’s of course depending on what you value.
Reply 02/07/2011 at 5:08 AM Derfem“Is this bad ?”
Less and less human intervention in the production of goods, mean, at one point, that you must manage the high level of unemployment (on a worldwide basis). Trees doesn’t grow to the sky…
Reply 02/07/2011 at 5:15 AM K GardinerI suspect part of this trend is simply due to the aging of our population. Older folks have more resources that need management and protection. It will take a while for this boom to go bust baby.
Reply 02/07/2011 at 8:35 AM toddoAre you still short from 3 weeks ago? Do you cry uncle or just absorb losses?
Reply 02/07/2011 at 11:04 AM Cullen RocheCry uncle after a position goes against me for 2%? You’ve gotta have thicker skin than that to be in this game….
Reply 02/07/2011 at 1:13 PM Klaus Bohm…good one from a ‘meister’; especially when protecting a fully invested portfolio
Kind Regards
Reply 02/07/2011 at 1:45 PM KingPawnNot to mention you never described how you played your short(I am not asking for your trade secrets btw), you could have shorted the Russell 2K in which case you are even on the trade. Its not just the trade but how you “trade” it.
Reply 02/07/2011 at 2:41 PM Cullen RocheI’ve given a pretty rough overview of my approach. One portion of my portfolio is keyed entirely off of an algo that gives a buy, sell, short or short cover signal. Trades tend to last 6-8 weeks. It’s one of my more speculative approaches though I do have one strategy that is even shorter in duration though entirely differently. Layering time frames in a multi strategy approach has worked extremely well for me.
Position sizing is key with this one. You never get the exact top or bottom right. So, if the trade goes against you you have some buffer. Add more. But do so in a manner that you’re not overextending your portfolio. It’s all about risk management. It’s one of my more successful algos. 23% per year compounded since 2007. Max drawdown of -5.1%. Sharpe ratio of 2.29. Wish I had been using it more, but I assume it will not always work this well….
Reply 02/07/2011 at 2:50 PM firstFarmers made up about 90% of labor force in 1790 and 49% in 1880 of by 1900. it was down to 38%.
In 1950 it made up only 12.2% and now its only about 3% of of the labor force and we have a obesity problem.
We produce much more with less and that is very good except that a lot of the rewards and benefits have been diluted toward a growing bureaucracy and a contractual sector that is sucking the blood out of America’s ingenuity.
With less lawyers we would also save the forest.
Reply 02/07/2011 at 11:41 AM MonetaOil for fabricating and running farming machinery. Oil for producing fertilizers.
Not long ago I read a report that said that food took 5% of an American household’s income, 10% of a Canadian household’s income and 15% of a European one.
I wonder how much longer it will stay at 5%.
Reply 02/07/2011 at 12:12 PM michaelAs I have stated before, once we reach a certain level of productivity, we will continue to experience a high level of labor surplus. It remind me of George Jetson’s job. I wonder if eventually will we have to accept that high structural unemployment is in our destiny or will we accept Europe’s job sharing schemes; everyone works a bit less so that most have some kind of formal jobs. Increasingly, the innovations that benefit healthier and longer life expectancy put increasing pressure on society to provide for all. Much of the technological progress that have comes within the last decade or so are very minor; although they command a much higher amount of attention and energy from all of us. Maybe as a species, we have pretty much reach a plateau for progress. It may be a matter of just maintenance from this point onward.
Reply 02/07/2011 at 12:23 PM DerfemI live in Europe, and i must tell you : that’s wrong ! Of course, we have a sharing job scheme with part-time workers and so on, but the employment level is really high in “old Europe” (without new comers from eastern countries). I think those levels of high employment and job sharing drive Europe to the way of non-productive of the labour force. It’s against all entrepreneurial approach, where you rewards the “loosers”. And whatever you do, you’re right: once we reach a high level of productivity, there is a high level of unemployment because demand is limited somewhere. There is no solution to the productivity problem. It’s a worldwide problem.
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