One of my friends retired from the futures brokering business last month. The pace of technological change in futures execution made it difficult to make a living being a voice broker on the floor. Just ten years ago, most of the volume in the CME was handled by brokers. I’d tell the broker what I wanted to do, he would flash hand signals to some people on the floor or the locals directly, and this would all get relayed back to me. And once an order was executed, there was a laborious system that involved another group of people to reconcile the orders. Now that I write the process down, it’s not too shocking that computers took over as much of the brokering business as it has. I don’t have the statistics now, but an overwhelming percentage of the futures volume is now electronic. And this leads me to the topic of today’s topic, which is, disintermediation and its effect on GDP.
US GDP is very low by historical standards. Many “pundits” offer this as a criticism that Fed policies have been ineffective in stimulating the economy. But I am of the belief that there is something bigger going on. And that is disintermediation. As technology progresses, the middle-man gets removed from the equation. Other variations have been out for a while – people talk about high-paying manufacturing jobs being removed from the economy, or Walmart killing a lot of local businesses. But it seems to me that a lot of the recent technological advances the past decade have been related to disintermediation of higher paying jobs.
Think about the example of a voice broker. If you are to look from the perspective of the income method of calculating GDP, you basically went from a system where you had the wages of brokers, locals and other employees related to a futures transaction, and you are replacing it with a system where one end-user transacts with other end-users. When a process goes electronic, you basically wipe out entire levels of (high) salaries from the GDP calculation. I suppose those folks end up doing other things, but probably something that pays much less (otherwise, they would have done something else earlier).
There are tons of examples of disintermediation in the economy now. I still use State Farm (LOL) – so I pay my insurance guy to keep his office in the local strip mall. When you think about it, a dedicated broker is not really necessary in the “buy insurance” equation. A few months ago UPS invested in a company that would facilitate manufacturers to ship directly. Who needs a distributor? There are apparently financial planning apps that do a reasonable job. Do people really need to pay someone 1-2% to do this? My father-in-law is applying for a mortgage, and the process is more automated than in the past. Even if we get another real estate boom, I don’t think we’ll need as many mortgage brokers. Playboy is no longer publishing nude photos – there are just much easier ways to get porn nowadays. You really don’t need traditional print media any more, just like people won’t need cable TV to watch TV any more. These are just a few examples, of how intermediaries are getting dropped from the economy. These are huge chunks of reasonably well-paid labor that gets dropped from the GDP… all because of disintermediation from technology advances.
I’m not saying disintermediation is bad. The consumer does benefit in the form of lower costs. However, there are side effects. Previously, a whole bunch of people benefitted from these intermediary jobs. Now the savings are shared between the consumer and the fewer people/companies at the top who benefit (disproportionately) from the technological advance. AND there is a huge chunk of GDP that just went “poof” from all this “efficiency.” So when you take a step back and think about all the jobs that are getting disintermediated in our economy, is it really any surprise that: (1) GDP is lower, and (2) inflation is low and (3) wages aren’t growing? And this does corroborate the narrative that the “good jobs” are gone.
So just because you have all three of these observations does not mean the economy is necessarily weak. Part of it is that we are undergoing a structural change in the way the economy works. So you may be comparing apples to oranges if you expect these levels to return to “historical norms” – it’s more a sign of the disintermediation we are going through right now. This, combined with the demographic changes in the economy, would make it difficult for us to reach the old historical levels of “normalcy.”
As a public service announcement, make better use of your current brokers. I still have a lot of friends in the business, so I am a little biased. I’m not saying you should make up business to give to them (which wouldn’t be so terrible), but most traders could probably make better use of their brokers. They are basically extra trading assistants that you have at your disposal. You can have them watch trades for you, give them small orders to work to see what levels trade around the clock (so you don’t have to), ask them to do some trade-related research (send you charts), have them compile information you find useful, etc. This will free up more of your time to do more value-added activities. Win-win.