The Long-Term Costs Of Trusting Things 'Flash'

Includes: AMZN, BRK.A, BRK.B
by: Dr. Stephen Leeb


The belief that computers and all things "flash," IT and high-speed can solve all America's problems imposes a high cost on everyone.

From 2000 to 2011, the Bureau of Labor Statistics recorded the largest gap ever between annual growth in U.S. productivity and yearly increases in compensation.

If the U.S. wants its economy to continue to rule the roost, we must harness computers to fashion long-term strategic goals and investors must start thinking longer term, like Warren Buffett.

In "Flash Boys", his latest book, Michael Lewis reveals new disheartening information on how the techno-wizards of Wall Street put the rest of the trading universe -- from the little guy to the giant hedge funds -- at a disadvantage. New high-frequency traders, what I'll call nano traders, execute huge volume trades that elbow out even some of the biggest hedge funds and mutual funds by executing nano seconds ahead of everyone else.

The economic costs hurt everyone. Here, we see only the latest disturbing manifestation of a broader issue that has long troubled me: society's increasing -- and I think misguided -- belief that information technology, generally and faster computers more specifically, should provide our overall salvation. I see no evidence to prove this theorem, and "Flash Boys" just confirms my thinking. I first deplored the notion that "technology-will-save-all" 15 years ago in "Defying the Market: Profiting from the Post-Technology Market Boom", where I also predicted the tech stock crash.

Individual investors seeking financial security could well ask if investing in stocks hasn't morphed into a fool's game. Believe it or not, people can still make money the old-fashioned way -- by picking decent stocks with good growth prospects in industries poised to expand.

While outrageous and intrinsically undemocratic nano trading makes very rich traders even richer than they would be otherwise, it little affects any individual investing for the longer haul. Paying the few extra nano cents or dollars that nano trading adds to the cost of investing, in other words, detracts but a nano percentage of potential gains from good stocks held long term, as the track record of the luminous Oracle of Omaha, Warren Buffett, suggests.

Moreover, while over-exaltation of IT, and obsession with ever faster speeds hurts everyone and everything, here I'll focus only on how it distorts productivity measures and in turn fosters illogical economic policies.

To calculate productivity gains, the Bureau of Labor Statistics treats faster computers as intrinsically translating into higher productivity. The reasoning goes that as computers get faster, the same dollar buys much more computing power. Nano traders and their kin may create illusions of increased productivity -- but it's ridiculous to think that something like huge nano trading volume would add to or otherwise meaningfully benefit overall economic output.

This bears directly on something dubbed "the productivity paradox." For nearly a generation, despite increases in computer speed and power, broad-based measures show that productivity has not increased despite the artificial lift from faster computers. During the post-War growth heyday, from 1947 to 1973, productivity rose an average of 2.8% annually. From 1990 to 2011, years characterized by exponential growth in computer speeds, by contrast, productivity grew on average only 2.2% yearly. Even to equal growth rates seen during the post-War years, productivity would need to rise more than 25%.

Still more striking, from 1947 to 1973, productivity growth and real earnings marched nearly in lockstep. As students learn in Economics 101, companies compensate workers for additional products generated, which defines productivity growth. But in recent years, that basic relationship broke down. From 2000 to 2011, the Bureau of Labor Statistics recorded the largest gap in U.S. history, hence the productivity paradox. While annual productivity grew 2.3%, workers received annual compensation increases of less than 1%.

Productivity growth may be actually overstated. This would compute (pun intended), considering that while such activities as nano trading add nothing to real wealth or economic growth, statisticians count them as productivity boosters.

That's but one example of the delusion created by our faith in ever-faster computing speed. Of course, techno-optimists like "Second Machine Age" co-authors Eric Brynijolfsson and Andrew McAfee, would disagree. They claim faster computers set the stage for a golden age of 20% annual productivity gains.

Toyota (NYSE:TM), arguably the most successful post-War era manufacturing company, apparently disagrees. In the last three years, in many areas it has replaced robots with humans. Robots continue to play a major role in Toyota manufacturing, but the company believes it needs human involvement to stay on top -- that technology can't substitute for human creativity. That's one reason I like Toyota.

Moreover, if we want our economy to continue to rule the roost, we must harness computer speeds to fashion long-term strategic goals. Investors who understand this will obtain the best long-term results. Warren Buffett is probably the leading apostle of long-term thinking. Berkshire Hathaway (NYSE:BRK.A) (BRK.B) has long been one of my most favorite stocks. I put Amazon's (NASDAQ:AMZN) Jeff Bezos up there with Buffett, ironically, since perhaps no other company depends more on computer power and speed than Amazon. Today's weakness in Amazon is a great example of the costs of short-sightedness, and long-term investors might profit mightily from taking advantage.

What separates Amazon from so many fallen-angel tech companies is its commitment to the long term. For more than a decade, Bezos has relentlessly sought to build an Internet franchise without regard to short-term costs.

In other words, to put his technological tools to work, Bezos has leveraged technology, plus human intuition, emotion and intelligence. That made Amazon one of the most successful tech stocks of all time.

The computer is a useful tool -- sometimes extremely useful. But to maintain U.S. global economic dominance, our country must rev up long-term thinking and define long-term goals. Meanwhile, investors should better reward creative approaches of those like Buffett and Bezos.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.