I’m a cyclist. Typically, I ride the tarmac, but in the cold my friends and I will get out our mountain or cyclocross bikes and hit the dirt roads. Those roads are sheltered, offer stunning scenery and have enough steep pitches to ensure a good workout. Another feature of the dirt roads and their surrounding woods are the stone walls built from the colonial era through the mid-nineteeth century. They are evidence of an industry that began leaving the Northeast almost two centuries ago, farming.
It has been estimated that there were once over 250,000 miles of stone walls in New England, New York and New Jersey. The stones were there due to the abrasive action of advancing and retreating glaciers. They were gathered into walls to denote boundaries when European settlers turned the forests into farms.
The Erie Canal put paid to the Northeastern farming industry. The canal opened the midwest to commerce. Grain flowed east. Manufactures floated west. It is a classic case of comparative advantage and the gains from trade. It was not without its costs. Over time the northeastern farms returned to forest. It has been said that the Northeast is more heavily forested now than when the Europeans arrived.
We are in transition today. Some, like nineteenth century New England farmers, will lose from the transition. Manufacturing will not return to these shores in the same form it took when the U.S. owned most of the world’s capital stock and produced the bulk of its goods. Whatever manufacturing jobs are created will require different skills than they did before. They will not be for the high school grad…or the dropout.
This is true in finance too. The heyday of the vast trading floor is past. FX and government bond trading are largely automated. The specialists are gone from the exchange floor. Heck, the floor is gone. The neutron bombs that hit manufacturing are now dropping on the banks and the broker-dealers. It’s like the joke about the factory of the future that can be run by a man and his dog. The dog is there to bite the man if he tries to assume the controls.
This is the way it has been since the inception of the industrial revolution. Industries are born, grow, consolidate, are undermined by new technologies and processes. Sometimes they survive in altered form as manufacturing has done and the financial sector will do. Sometimes they shrink to mere curiosities like the horse drawn carriage industry of Central Park.
There is a lot of angst about what the future will bring. The presidential campaign, the attention to income inequality and questions about productivity growth are all symptoms of the economic transformation being caused by globalization and innovation.
Managing money taught me that the sector or driving idea behind the last bull market was never the sector or idea that drove the next cycle. Bull markets feed on euphoria. Bear markets and their aftermath stoke anxiety; the world focuses on the attempt to put humpty-dumpty together again rather than looking for opportunities elsewhere.
This time is not different. The sun will come out tomorrow. It just won’t be shining on the stone walls in the woods.