THE GROWTH OF THE F.I.R.E. ECONOMY….

Great chart here from Macromon (via Ritholtz) on the growth of the F.I.R.E. (Finance, Insurance & Real Estate) industry and the shrinking of the manufacturing base.  Now, granted, some of this is merely due to greater productivity, efficiency, etc.  On the other hand, what accounts for the growth in the FIRE industry?  Why has the capitalist system in America attributed such a high value on these industries that produce little and take so much?

I have said in the past that this growing divide is bad for the future of the country (read similar commentary from Bill Gross here), but you simply can’t argue with the fact that much of this growth in the financial sector is due to increased demand for these services.  Is the marketplace incorrectly attributing this value or is this growth justified?  If so, how can it ever be reversed?

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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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Comments

  1. My feeling is that the next great recession (circa 2015-2016) will decimate the FIRE economy. I think the disgust from the populace will not be as easily soothed this time. Also since the economy will probably not add enough jobs between now and 2015 to make meaningful impact in the 2 highly agitated demographic groups (18-25 years old) and (40-60 years old male) the support for further help for the FIRE will not be very forth-coming. Maybe we may get to implement the Swedish model after all.

  2. The rational for F.I.R.E:

    …unbrideld greed _narcisstic self-delusion_play for power

    …a F.I.R.E. Economy can only thrive on the back of a dying industrial economy, since any amount of surplus savings need to be diverted into:

    -bidding stock_bond_real estate prices continuoulsy higher

    …as a result, no surplus savings left to be invested into tangible capital investments

    -no new factories
    -no new employment (Wall Street goose-bumps on rising employment and investment)
    -privatizing socoal security

    The ultimate outcome is for a society:

    -lapsing into chronic depression_war_social unrest..

    Kind Regards

  3. In some ways, I agree with you Michael. If there was another crisis, I don’t think banks would get as much support, and might fall. They are not popular with the public as it is now, let alone if all goes wrong again.

    On the other hand, those in the finance industry are not going to simply walk away and get a job at McD’s. As this last crisis proved, they want to stay for good.

  4. You should disallow the legalized bribing of politicians by the big lobbies. That is the only way to stop it. The FIRE economy has proven that it not only does not add value, it extracts value (acts like an unproductive tax) from the economy.

  5. “On the other hand, what accounts for the growth in the FIRE industry? Why has the capitalist system in America attributed such a high value on these industries that produce little and take so much?”

    Free money given by the FED. Maybe the reason of this high value is the better understanding of MMS…
    :-)

  6. If you made a similar chart showing the relative importance of agriculture during the first half of the last century it would look the same. If you substituted the FIRE data for, let’s say, the entertainment industry it would also look the same as FIRE.
    Basically it just illustrates that we need less resources to produce what we eat, what we wear and all other physical products and that services and experiences are a more important part of our society. Is this bad? Well, that’s of course depending on what you value.

  7. “Is this bad ?”

    Less and less human intervention in the production of goods, mean, at one point, that you must manage the high level of unemployment (on a worldwide basis).
    Trees doesn’t grow to the sky…

  8. I suspect part of this trend is simply due to the aging of our population. Older folks have more resources that need management and protection. It will take a while for this boom to go bust baby.

  9. Farmers made up about 90% of labor force in 1790 and 49% in 1880 of by 1900.
    it was down to 38%.

    In 1950 it made up only 12.2% and now its only about 3% of of the labor force and we have a obesity problem.

    We produce much more with less and that is very good except that a lot of the rewards and benefits have been diluted toward a growing bureaucracy and a contractual sector that is sucking the blood out of America’s ingenuity.

    With less lawyers we would also save the forest.

  10. Oil for fabricating and running farming machinery. Oil for producing fertilizers.

    Not long ago I read a report that said that food took 5% of an American household’s income, 10% of a Canadian household’s income and 15% of a European one.

    I wonder how much longer it will stay at 5%.

  11. As I have stated before, once we reach a certain level of productivity, we will continue to experience a high level of labor surplus. It remind me of George Jetson’s job. I wonder if eventually will we have to accept that high structural unemployment is in our destiny or will we accept Europe’s job sharing schemes; everyone works a bit less so that most have some kind of formal jobs. Increasingly, the innovations that benefit healthier and longer life expectancy put increasing pressure on society to provide for all. Much of the technological progress that have comes within the last decade or so are very minor; although they command a much higher amount of attention and energy from all of us. Maybe as a species, we have pretty much reach a plateau for progress. It may be a matter of just maintenance from this point onward.

  12. I live in Europe, and i must tell you : that’s wrong ! Of course, we have a sharing job scheme with part-time workers and so on, but the employment level is really high in “old Europe” (without new comers from eastern countries). I think those levels of high employment and job sharing drive Europe to the way of non-productive of the labour force. It’s against all entrepreneurial approach, where you rewards the “loosers”. And whatever you do, you’re right: once we reach a high level of productivity, there is a high level of unemployment because demand is limited somewhere. There is no solution to the productivity problem. It’s a worldwide problem.

  13. Not to mention you never described how you played your short(I am not asking for your trade secrets btw), you could have shorted the Russell 2K in which case you are even on the trade. Its not just the trade but how you “trade” it.

  14. I’ve given a pretty rough overview of my approach. One portion of my portfolio is keyed entirely off of an algo that gives a buy, sell, short or short cover signal. Trades tend to last 6-8 weeks. It’s one of my more speculative approaches though I do have one strategy that is even shorter in duration though entirely differently. Layering time frames in a multi strategy approach has worked extremely well for me.

    Position sizing is key with this one. You never get the exact top or bottom right. So, if the trade goes against you you have some buffer. Add more. But do so in a manner that you’re not overextending your portfolio. It’s all about risk management. It’s one of my more successful algos. 23% per year compounded since 2007. Max drawdown of -5.1%. Sharpe ratio of 2.29. Wish I had been using it more, but I assume it will not always work this well….

  15. When will this get corrected??? Like an overgrown forest we’ve come to the point where we just need to let it burn. Instead of letting the markets groom itself naturally of economic deadwood the Fed and Treasury dispatched the heavy aircraft for flyovers to discharge fire suppressants.

    This isn’t rocket science it just more pain than most people want to endure.

  16. Don’t Panic Bernanke is leading us in to stratospheric agronomics.

    Federal Reserve Chairman Ben S. Bernanke said stock markets “seem to be working well” “There’s not much indication at this point that sub prime mortgage issues have spread into the broader mortgage market, which still seems to be healthy,” “It’s a concern, but at this point we don’t see it as being a broad financial concern or a major factor in assessing the course of the economy”.
    That is what Bernanke said in response to a question in 2007.

    0% will act like a slingshot the longer the more violent the reaction.
    He is containing inflation, sure he is and I suppose that “at this point we don’t see it as being a broad financial concern or a major factor in assessing the course of the economy”.

  17. The FIRE Economy IS the economic problem. All Financials, Insurance, and Real Estate cause are economic problems. Health, home, fire, flood, all that insurance is a shell game, and so is health insurance. ALL A SCAM! Financials? Have to be kidding me, the financials and investors and mutual fund managers, economic gurus know nothing. If they knew so much how did the mortgagers, and MBS creators mess up so bad and nuke the entire flipping global economy?

    The FIRE industry needs to be regulated like a casino or a confidence game. That gentlemen is from a GOP member.

  18. “It’s one of my more successful algos. 23% per year compounded since 2007.”

    SO YOU are an algo trader? No wonder you don’t like ZeroHedge. LOL!

  19. I like ZH. Tyler and I started our sites around the same times and I have a very cordial relationship with him. We disagree on some things, but it happens. I think in the greater scheme of things we both agree that the country is not headed in ther ight direction. We just think it’s going there on slightly different paths.

    Plus, I am not HFT. Not even close….

  20. The above chart is not unique to the US: every other country, when it industrialises, experiences a steep rise in the proportion of GDP devoted to manufacturing. Then this proportion declines (with the possible exception of Germany, which very much specialists in manufacturing).

    As to WHY this happens, I can think of two very simple explanations.

    1. As people become wealthier, they demand more FIRE products relative to manufactured products: what economists call “income elasticity of demand”, I think.

    2. Productivity has increased faster over the years in manufacturing than in other sectors of the economy. See:

    http://www.evolvingexcellence.com/blog/2006/04/business_week_n.html

    This will tend to result in manufacturing taking a smaller percentage of GDP. Reason, to illustrate with an example, is as follows.

    Assume:

    i) The relative volume of output consumers demand from the two groups (mfg and FIRE) remains constant,

    ii) Productivity in manufacturing doubles relative to that in FIRE industries.

    In this scenario, the proportion of GDP taken by manufacturing relative to FIRE industries will halve. That is a counter-intuitive result – in view of the above assumption that the volume of manufactured products remains constant relative to the volume of FIRE products. But the explanation is that half the number of people are required in manufacturing after the productivity increase. (Unless I’ve got something wrong!).

  21. Finance Capitalism – F.I.R.E – reality (move on, if you think, you belong to the top wealthy 10%; nothing new here for you)

    Bob Herbert on page A15 of the weekend NYT:

    “The policy makers who rely on the data zealots are just as detached from the real world of real people. They’re always promising in the most earnest tones imaginable to do something about employment, to ease an awful squeeze on the middle class (policy makers never talk about the poor), to reform education, and so on.

    They say those things because they have to. But they are far more obsessed with the numbers than they are with the struggles and suffering of the real people. You won’t hear policy makers acknowledging that the unemployment numbers would be much worse if not for the millions of people who have left the work force over the past few years. What happened to those folks? How are they and their families faring.

    The policy makers don’t tell us that most of the new jobs being created in such meager numbers are, in fact, poor ones, with lousy pay and few or no benefits. What we hear is what the data zealots pump out week after week, that the market is up, retail sales are strong, Wall Street salaries and bonuses are streaking, as always, to the moon, and that businesses are sitting on mountains of cash. So all must be right with the world.

    Jobs? Well, the less said the better

    What’s really happening, of course, is the same thing that’s been happening in this country for the longest time — the folks at the top are doing fabulously well and they are not interested in the least in spreading the wealth around.
    People are falling through the cracks at an alarming rate as they come off their extended jobless benefits

    The people running the country — the ones with the real clout, whether Democrats or Republicans — are all part of this power elite. Ordinary people may be struggling, but both the Obama administration and the Republican Party leadership are down on their knees, slavishly kissing the rings of the financial and corporate kingpins.”

  22. Ralph Musgrave: … industrialises, experiences a steep rise in the proportion of GDP devoted to manufacturing. Then this proportion declines (with the possible exception of Germany, which very much specialists in manufacturing).

    …Germany’s ongoing economic success has always been credited to its high marginal tax rates on ‘unearned income’, its high wages, highly educated workforce, high level of personal savings, and relative low debt levels. The last time the US experienced ‘real’ economic prosperity for its people was during the ‘Progressive Aera’.

    …after WW2, industrial societie’s wealth has been founded on ever increasing debt levels and ever diminishing marginal tax rates for unearned income. As a result, the US industrials base has increasingly been eroded and its wealth distribution concentrated into the top 10% of the pyramid.

    Kind Regards