In the 1967 movie “The Graduate,” a middle-aged businessman has one word of life advice for our hero: “plastics.” He meant that the younger man should try to get rich by going into the booming plastics industry. In the 1960s, plastics and other technology industries of the day seemed like a gold rush. But they weren’t the first or the last.
From whale oil and the actual California gold rush in the 1800s, to the dot-com boom and the finance mania in recent decades, Americans have always been entranced by the idea of an industry where everyone can get rich quick. Like Bill Gates dropping out of college to start Microsoft Corp, millions of young entrepreneurs over the centuries have picked up and moved to where they saw opportunity.
Now, though, the US economy looks like it might have run out of gold rushes. Overall, the economy is doing pretty well — unemployment is low, labour force participation is recovering, wages have risen and stock markets are at record highs. But if you’re a young, energetic American entrepreneur or talented worker looking to strike it rich, where do you go in 2017? The Wall Street and real estate booms of the 2000s are now ancient history. What’s left?
Until recently, the obvious answer was Silicon Valley. Plenty of money is still being made in tech start-ups, but it no longer looks like the bonanza it was a few years ago — investors like hedge funds and mutual funds have lost some of their enthusiasm for financing start-ups. Meanwhile, San Francisco, the Mecca of the second tech boom, is looking less attractive as an investment destination. More generally, the availability of venture capital looks like it peaked in 2015:
One remaining bright spot is machine learning — lots of start-ups are figuring out ways to use big data and new statistical algorithms to automate things. But machine learning tends to be very data-intensive, meaning big established businesses like Alphabet Inc (Google) and Amazon.com Inc will probably have the advantage over young upstarts.
A second fading boom for smart, technically oriented types is in quant trading. In recent years, as financial exchanges became electronic and banks spun off their trading operations to follow the Volcker Rule, a lot of smart young people rushed to set up their own quant hedge funds and proprietary trading firms.
But as in all financial markets, quant investing was self-limiting — as soon as enough people piled into the sector, trades got crowded and returns started to fall. High-frequency trading, the most famous type of quant trading, has seen a large chunk of its profits get competed away and firms are now combining to cut overhead. Hopes that new quant trading firms could be as big and lucrative of an investment boom as tech start-ups have generally faded. Meanwhile, the hedge-fund industry is seeing waning enthusiasm as average returns continue to lag:
Large established quant firms like Renaissance Technologies, Two Sigma Investments, Bridgewater Associates and Citadel will probably continue to make lots of money, but the openings for new entrants may be more limited than in the past.
A third modern gold rush was overseas investing, especially in China. But as the Chinese economy slows, the ways to make money off of that country’s unprecedented growth boom are drying up. That’s probably why US direct investment into that country has fallen:
So although plenty of companies are making money in the new economy, there’s no obvious path for young enterprising Americans to strike it rich. Many people will keep making money in a variety of industries, and a few areas like machine learning are still hot, but there’s nothing to match the booms of previous years.
This lack of opportunities could create more pessimism and disaffection than economic conditions warrant. An increasing body of economic research shows that people tend to form extrapolative expectations — they expect recent trends to continue forever. Over-optimism is also a common psychological bias. Booms make a lot of young, energetic Americans believe that they’re going to get rich. On the one hand, this causes inevitable disappointment when the froth dissipates. But as long as there’s a gold rush somewhere in the economy, big dreamers can dream big.
In an economy dominated by large, established players, young people are likely to turn their energy and enthusiasm away from chasing riches, and toward other pursuits — in particular, politics and social movements. Political anger may well increase simply because young people aren’t turning their energies toward material pursuits. In other words, the absence of a dream for talented and ambitious Americans to chase may signal stormy times ahead for society.
The writer was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.
