A Tale of Two Americas

  • COVID-spring: A 17th-century response? 
  • The West’s “innovation famine”
  • Illusory U.S. life expectancy 
  • Post-2008 economic mini-bubbles… 
  • … and the Federal Reserve’s cheap money spigot
  • Biotech and “do harm” health care
  • CEO rogues’ gallery: Kalanick, Neumann and Holmes
  • Great Recession’s generational consequences
  • Tale of Two Americas 2020

“Faced with a 17th-century plague, we are left to fall back mainly on the 17th-century response of quarantine and closing the theaters,” says the British science writer Matt Ridley.

Ridley is out with a new book today called How Innovation Works: And Why It Flourishes in Freedom. A piece of it was adapted for The Wall Street Journal last weekend.

The pandemic has thrown the spotlight on human progress — or the lack thereof, in Ridley’s assessment.

“It is commonplace today to say that innovation is speeding up,” he goes on, “but like much conventional wisdom, it is wrong. Some innovation is speeding up, certainly, but some is slowing down.

“Take speed itself. In my lifetime of more than 60 years, I have seen little or no improvement in the average speed of travel… The record for the fastest manned plane, 4,520 miles an hour, was set by the X-15 rocket plane in 1967 and remains unbroken…

“Throughout the economy, with the exception of the digital industry, the West is experiencing an innovation famine.”

Ridley’s lament is not new. In fact, it harks back to a lament of our own nearly a decade ago…

“We wanted flying cars, instead we got 140 characters.”

So read the subtitle of a 2011 report from Founders Fund — a venture capital firm co-founded by Peter Thiel, the guy who launched PayPal.

His thesis? Computers were getting faster, cheaper, better. But in the realm of “real stuff,” human progress was nearing a standstill.

As he summed it up to an audience at Stanford University in 2012, “Whether we look at transportation, energy, commodity production, food production, agro-tech, nanotechnology — that with the exception of computers, we’ve had tremendous slowdown…

“I believe we are in a world where innovation in stuff was outlawed. It was basically outlawed in the last 40 years — part of it was environmentalism, part of it was risk aversion. And all the engineering disciplines that had to do with stuff have basically been outlawed one by one.”

Again, this is what Thiel was saying in 2011–12. Nearly a decade later, how much has really changed?

“I’m not denying that the changes in digital IT over the last three decades have been breathtaking,” chimed in The Fourth Turning co-author Neil Howe, also in 2012. “They have been.”

But progress otherwise during his boomer lifetime, he suggested, was much slower than during the life of, say, Dwight Eisenhower, born in 1890. “When he was a child… you needed to know Morse code to communicate faster than a horse could run, and (in fact) horses were the only mode of ordinary street transport. Children routinely died from bacterial infections. And Lord Kelvin, one of the greatest scientists of that age, declared that ‘aeronautical travel’ was impossible.”

By the time Ike was president in the late ’50s, “he was inside in a Boeing 707… dictating memos on the deployment of hydrogen bombs, sugar-cube vaccines for polio and plans to put a ‘man on the moon’ while flying at 35,000 feet over a nation whose vast, affluent, homeowning, car-driving, union card-holding middle class would have been utterly inconceivable in the presidency of William McKinley.

“Meanwhile,” wrote Howe, “I get up every morning and drive basically the same silly internal-combustion car that people drove 50 years ago through the same suburbs on the same interstates to the same buildings powered by the same nuclear plants and hydroelectric dams that Eisenhower’s peers saw fit to build.”

He might have added — as Thiel did and Ridley does — that passenger air travel has actually slowed since the last Concorde flight in 2003.

Again, Howe wrote that in 2012. Nearly a decade later, how much has really changed?

Here’s a mind-bending proposition, getting back to medical matters: Even the growth in human life span has been, some doctors argue, illusory.

Yes, average U.S. life expectancy was only 47 in 1900… growing to 78 by 2007. “But average life expectancy is heavily skewed by childhood deaths,” wrote internist Craig Bowron in The Washington Post in 2012, “and infant mortality rates were high back then. In 1900, the U.S. infant mortality rate was approximately 100 infant deaths per 1,000 live births. In 2000, the rate was 6.89 infant deaths per 1,000 live births.

“The bulk of that decline came in the first half of the century, from simple public health measures such as improved sanitation and nutrition,” he says. As a result, average life expectancy had already grown from 47 to 68 by 1950.

Again, Dr. Bowron wrote that in 2012. Nearly a decade later, how much has really changed?

Around that same time, from roughly 2012–14, a running theme in this e-letter was something we called “A Tale of Two Americas.”

Recall the context: The Panic of 2008 was still burned into people’s brains. Lost jobs, lost homes, lost retirement dreams.

But something else was afoot.

Addison Wiggin, our fearless leader and founder of The 5, described the new era like this on Jan. 24, 2012 — “the contrast between the overwhelming rot penetrating governments and the financial system on the one hand… and the staggering entrepreneurial potential that can overcome the rot on the other."

That is, none of the problems that led to the Panic of 2008 had been fixed. But the innovation going on in America's biotech labs, in Silicon Valley, in the shale energy patch, was undeniable.

In that environment, you couldn’t pass up those opportunities. It wouldn’t work to merely hide out in cash and gold — as many of our most faithful readers were inclined to do.

In early 2013, to their great consternation, we declared gold in a bear market at $1,650; it bottomed in late 2015 at $1,050.

Meanwhile, our editors guided readers to gains of — these are random examples plucked from that era — 266% on a firm with a treatment for ovarian cancer… 225% playing options on a shale oil producer… and 1,000%+ on Tesla Motors.

As 2014 wound down, the landscape began shifting again, and we felt “A Tale of Two Americas” was no longer apt. The stock market was getting more volatile… while global elites had begun warning each other about an impending crisis, although as usual they hid behind euphemisms like “the potential for a buildup of excessive risk in financial markets.”

But what would be the new overarching theme going forward? We never did come up with a clever catchphrase for the remainder of the 2010s. Even now, it eludes us.

But with the benefit of hindsight here in the COVID-spring of 2020, here’s how we can describe the rest of the story. Or should we say, two interpretations of the rest of the story.

The charitable interpretation is that the booms in America's biotech labs, in Silicon Valley, in the shale energy patch… became mini-bubbles.

The cynical interpretation is that much of it was a mirage and a sham from the get-go, fueled by the Federal Reserve’s cheap money.

With easy access to credit at bargain-basement interest rates, shale energy players loaded up on debt.

It was all good with oil prices over $100 a barrel. When those prices started cratering in mid-2014, the shale players got into trouble. They managed to escape, for a while, by innovating even more — so they could still make money with oil below $50.

But now, in the low $30s, and with storage tanks worldwide nearly filled to the brim? Forget it.

Biotech, meanwhile, leveraged everything that’s wrong with the U.S. health care system to its advantage. And so a hepatitis C cure that cost only $900 in Egypt cost $84,000 in the United States.

At the same time, the Big Pharma companies rested on their laurels, engaging in almost no research and development. To keep their pipeline of new drugs full, they relied on easy access to credit at bargain-basement interest rates to buy out — at vastly inflated prices — the tiny companies that were doing the real innovation.

Whatever the industry did accomplish, it was no match for the SARS-CoV-2 virus.

And Silicon Valley? Hoo boy.

Hedge funds, venture-capital types and private equity players had the easiest access to credit, at the lowest interest rates. They had way more money than sense and acted like it every time someone came along with an idea he or she promised would “change the world.”

These investors unwittingly turned companies like Uber into Ponzi schemes. Around the time Uber founder Travis Kalanick stepped down as CEO in 2017, we spotlighted one reliable estimate that Uber investors were subsidizing 61 cents out of every dollar an Uber ride actually cost. But as long as new investors kept piling in, profitability didn’t matter.

Investors also fell for the song-and-dance of WeWork founder Adam Neumann. He started a company in the mundane and capital-intensive business of subleasing office space. But because he created an app for it, wealthy and gullible Silicon Valley types couldn’t throw money at him fast enough.

Perhaps the poster child for the demented decade gone by is Theranos — whose founder Elizabeth Holmes reeled in renowned venture capitalists like Tim Draper and Steve Jurvetson. Marc Andreessen of Netscape fame called her the next Steve Jobs. But her company’s “world changing” blood-testing machine was a bust.


Holmes in her Jobs-ian black turtleneck, the face of the demented 2010s
[Photo by Flickr user Max Morse for TechCrunch, posted at Wikimedia Commons]

To this day it’s an open question whether Holmes was an outright fraudster or whether to some degree she believed her own BS. Whatever the case, her “best and brightest” investors were out $700 million and the promise of cheap blood tests for hundreds of diseases never came about.

Meanwhile, before the shutdowns, everyday Americans struggled to bump along as best they could in the post-2008 world.

Overeducated millennials finally moved out of Mom’s basement, but their master’s degrees were still woefully underutilized as they settled for jobs as baristas and Uber drivers.

Gen Xers managed to find new jobs, but at lower pay than the jobs they had pre-2008. Some of those who fell victim to foreclosure — Gen X had the misfortune of reaching prime home-buying age just before the housing crash — managed to rejoin the ranks of homeowners. Those were the lucky ones. The less lucky ones gave in to suicide and fatal levels of substance abuse — so much so that from 2014–18, those lofty U.S. life expectancy levels we mentioned were actually falling.

Boomers in general made out better — but only because they managed to stay on the hamster wheel. Remarkably, the workforce age 55 and over did not shrink during the 2007–09 crisis, and it grew steadily from 2010 forward. But in a strange irony, the most educated and highest-earning boomers were the ones most likely to keep working well past “retirement age” — it was the only way to maintain the standard of living to which they became accustomed.

And now?

Because none of the problems leading up to 2008 had been fixed, it was only a matter of time before they reared their heads again; it comes back to that elite chatter six years ago about “a buildup of excessive risk in financial markets.” If the catalyst weren’t virus-driven lockdowns in March 2020, it would have been something else at a later time.

The computer innovation of the last decade became concentrated in the smartphone — a device that leading up to the corona-crash was a source of growing always-connected stress, and soon will become the instrument of always-pervasive surveillance. Innovation in other realms will remain as scarce as ever.

The Tale of Two Americas in 2020 has morphed into a funhouse mirror image of 2012–14… and it’s common knowledge. Nearly a third of the workforce is out of a job… while the S&P 500 is only 12% below its record close three months ago to the day. Folks might not know the precise numbers, but they know something’s badly amiss.

For the top 0.01% — the only people who are substantially better off now than they were at the dawn of the 21st century — the other side of the corona-crash will be another unearned windfall because they’re the ones closest to the Federal Reserve’s money spigot and that’s how they’ve rigged the system for themselves.

The 9.99% below them will make out all right because the top 10% combined own 85% of the stocks, and the Federal Reserve won’t let the stock market fall — not much, anyway.

For the 45% of Americans below them who own the other 15% of the stocks, it will be more of a challenge — i.e., borrowing from their 401(k)s to get by for the moment — but not impossible.

And for the 45% who own no stocks at all? They will sink further into the permanent underclass.

Here, our objective is to help you move from wherever you are now to the next-highest level.

Finding real innovators in which to invest will be harder than ever, but we’re redoubling our efforts. And if you haven’t boosted your gold allocation yet, there’s still time — but at seven-year highs, it might not be much time.

Best regards,

David Gonigam

Dave Gonigam
The 5 Min. Forecast

P.S. Now for some important housekeeping: As Emily hinted here last week, we’ve had a project in the works for months now. And the wraps come off tomorrow.

After 13 years, The 5 Min. Forecast will be getting its own website — where our voluminous archives will be housed.

And for the first time in five years, your daily emails will get a facelift. Check out the spiffy new logo…

Drone Strikes Saudi Oil

Don’t worry, we’re not changing the typeface of the text or anything radical. These are evolutionary, not revolutionary, changes that we’re making to coincide with some necessary under-the-hood adjustments — including a fix for the filtering issues that have prevented these daily missives from reaching some of your fellow readers. See you tomorrow…

Dave Gonigam

Dave Gonigam

Dave Gonigam has been managing editor of The 5 Min. Forecast since September 2010. Before joining the research and writing team at Agora Financial in 2007, he worked for 20 years as an Emmy award-winning television news producer.

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