Surviving Digital Disruption

When putting together your investment portfolio you are considering both current and future conditions.  The current part should be easy, that’s the “known knowns”, however predicting the future, the known and “unknown unknowns”, is nigh on impossible.  That’s why we never suggest going ‘all in’ gold and silver, rather have a balanced (and importantly uncorrelated) portfolio that can collectively weather whatever the future delivers.  We’ve spoken plenty about a sharemarket at sky high valuations (indicating earnings are going to get a lot better going forward) but earnings are arguably a symptom not a cause.  Right now we are in the midst of one of the most uncertain times in history when it comes to the near future.  There are the obvious elements at present of growing geopolitical tensions, including threats of outright war, the snowballing demographic shift in our aging population, the shift of popular sentiment in terms of globalisation and effects on the growing lower and middle class, record high debt levels, and of course the impacts of the ‘robotisation’ of our labour force and more fundamentally digital or internet disruption.

Chinese billionaire and founder of the e-trading platform Alibaba, Jack Ma, recently warned of protracted social upheaval and pain as the internet disrupts the global economy:

“In the next 30 years, the world’s pain will be much greater than its happiness,” Ma said at an entrepreneurial conference in Zhengzhou, China. “Social conflicts over the next 30 years will hugely impact every industry.”

But he fears the world is not listening.  He believes we must radically change the way we educate ourselves and plan working with robots.  Maybe now his status will make a difference as he said:

“Fifteen years ago I gave speeches 200 or 300 times reminding everyone the internet will impact all industries, but people didn’t listen because I was nobody,"

Ironically the Alibaba platform epitomises the transformational power of the internet on commerce. 

Ma’s warnings come as the US in particular is seeing record traditional store closures.  Credit Suisse last week warned that around 2,880 stores had closed already this year in the US.  Extrapolated on historical distributions that should see around 8,640 close this year, easily surpassing the record set in the GFC’s 2008 of 6,200.  We wrote about the US retail situation recently here.

That is just retail however and the ‘internetisation’ of things will impact way beyond retail.  Last year Macquarie Bank’s chief strategist warned this is far different to the industrial revolution.  Like the fears around digital disruption, people feared the mechanisation of jobs in the industrial revolution would decimate employment.  On the contrary, it ushered in a new era of growth and prosperity as it created new opportunities of employment.  But that is not what he sees with this new era of digital disruption and shared a similar fear to Jack Ma.

The truth is we don’t know how this will end up, but the current trajectory is not reassuring.  An investment portfolio should have an allocation to safe haven or defensive assets, assets uncorrelated to the myriad other (but often highly correlated) financial instruments, and indeed correlated with volatility or uncertainty.  Assets that have stood the test of time of 1000’s of years of previously, fundamentally disruptive events.