People we have seen a huge bubble in credit, we have developing countries supporting the spending of developed countries, we have governments buying toxic assets, we have ZIRP, we have QE, we have governments spending more they raise in tax receipts, etc…
Yet, the debate is on when inflation is going to get here. Lets hear from some other ideas, I mean, we have embarked on a new path, this isn’t a run of the mill recession, I keep hearing, but the path forward is just inflationary?
Even my macro view is somewhat boring, I see deflation for a year or so then inflation. Somehow, I just feel we will see a lot of surprises.
What about you?
Wednesday, September 23, 2009
Alternatives will never be able to replace fossil fuels -
Big oil is not worried about alternatives, oil prices are lower, and consumers will again go into a slumber from worrying about high energy prices, old habits will rein supreme again. But is it different this time? Aren’t solar companies producing solar panels which are really becoming cost competitive? Will China turn into a mass producer of solar panels that will drive the cost to the floor?
Even if the oil industry believed that solar or wind was an economical choice, what could they do with 100 years of investment in fossil fuels? How does Exxon quietly exit fossil fuels? For awhile a few energy companies had jingle that went like, we are not a fossil fuel company, but an energy company, meaning we can sell any energy. It sounds logical, but is even remotely possible that fossil fuel based company will adopt alternative energy? On the flip side no way will alternative energy companies be able to provide the vast amounts of energy the world consumes in a day. Sounds like a messy dislocation is coming.
Think of the impacts of solar or wind energy on profits from fossil fuel. Imagine thate the marginal energy user now switches to solar or wind, that reduces the demand at the margin, and that lowers the price of energy across the entire market. At least that is what I learned in economics. Maybe 10% renewable based energy would set the market price or reduce the profit for what will still be big oil.
Now in the 80s and 90s, I always heard that Saudi Arabia sets the price of world oil. How? The Saudis only controlled 8-12% of the market. But it was common knowledge that Saudi Arabia had control of enough market share to set the price.
Now if renewables were to get to some level, say producing 10-15% of the energy, wouldn’t they have the ability to do the same? You can’t be selective about market pricing impacts, if Saudi Arabia could and in fact did set the price during the 80s and 90s, then it must be true that another country which approaches that production size or another source would, could, and will do the same. When I state this that renewable could impact the price of energy in a few years, maybe 10 years, this is roundly met with laughs.
But if the price of fossil fuels is impacted by renewables we have an interesting intersection of events.
Oil will continue to become more expensive to produce over the next 10 years, I think there is wide agreement on that.
Renewables such as solar are continuing to come down in price, weather or not China becomes a mass producer or not, simply look at the price per kilowatt over the past couple of years, it has dropped.
So we have two trends that we should have wide agreement on, oil prices swing widely but, the base price to produce oil is rising, and due to technology and production advances solar energy is dropping in price. Oil based energy is cheaper then solar currently.
When the two price curves intersect, then the price of power will be capped, why buy expensive oil produced electricity, when you can get cheaper solar produced electricity. Now in reality you will have to, because solar will only be able to produce so much electricity. At that point, producing oil will become progressively more expensive, and these increased costs will not be easily passed onto consumers. The impact on profits at oil companies will be dramatic and felt long before renewables become a major producer of energy. I would guess that the stock market will realize this and it will reflect in the price of oil company stocks.
The consensus right now is with increasing demand, oil companies can be almost limitlessly profitable. In fact that is not true, at some level maybe $150/bbl, the world will go into a recession, maybe at $100/bbl as we have seen. But oil is widely seen as a great place to invest and will be profitable for years to come, any disruption of that outlook will have impacts on investing.
Making Money
It seems so simple buy solar companies and short big oil, especially the high cost producers. But when will this theory come true? Today? No, Next year, in 5 years time?
Now you can pass legislation all day encouraging energy conservation, but when energy prices soar, a landslide of energy conservation is unleashed. The lesson is that free market capitalism is more effective then government and it can turn on a dime.
Even if the oil industry believed that solar or wind was an economical choice, what could they do with 100 years of investment in fossil fuels? How does Exxon quietly exit fossil fuels? For awhile a few energy companies had jingle that went like, we are not a fossil fuel company, but an energy company, meaning we can sell any energy. It sounds logical, but is even remotely possible that fossil fuel based company will adopt alternative energy? On the flip side no way will alternative energy companies be able to provide the vast amounts of energy the world consumes in a day. Sounds like a messy dislocation is coming.
Think of the impacts of solar or wind energy on profits from fossil fuel. Imagine thate the marginal energy user now switches to solar or wind, that reduces the demand at the margin, and that lowers the price of energy across the entire market. At least that is what I learned in economics. Maybe 10% renewable based energy would set the market price or reduce the profit for what will still be big oil.
Now in the 80s and 90s, I always heard that Saudi Arabia sets the price of world oil. How? The Saudis only controlled 8-12% of the market. But it was common knowledge that Saudi Arabia had control of enough market share to set the price.
Now if renewables were to get to some level, say producing 10-15% of the energy, wouldn’t they have the ability to do the same? You can’t be selective about market pricing impacts, if Saudi Arabia could and in fact did set the price during the 80s and 90s, then it must be true that another country which approaches that production size or another source would, could, and will do the same. When I state this that renewable could impact the price of energy in a few years, maybe 10 years, this is roundly met with laughs.
But if the price of fossil fuels is impacted by renewables we have an interesting intersection of events.
Oil will continue to become more expensive to produce over the next 10 years, I think there is wide agreement on that.
Renewables such as solar are continuing to come down in price, weather or not China becomes a mass producer or not, simply look at the price per kilowatt over the past couple of years, it has dropped.
So we have two trends that we should have wide agreement on, oil prices swing widely but, the base price to produce oil is rising, and due to technology and production advances solar energy is dropping in price. Oil based energy is cheaper then solar currently.
When the two price curves intersect, then the price of power will be capped, why buy expensive oil produced electricity, when you can get cheaper solar produced electricity. Now in reality you will have to, because solar will only be able to produce so much electricity. At that point, producing oil will become progressively more expensive, and these increased costs will not be easily passed onto consumers. The impact on profits at oil companies will be dramatic and felt long before renewables become a major producer of energy. I would guess that the stock market will realize this and it will reflect in the price of oil company stocks.
The consensus right now is with increasing demand, oil companies can be almost limitlessly profitable. In fact that is not true, at some level maybe $150/bbl, the world will go into a recession, maybe at $100/bbl as we have seen. But oil is widely seen as a great place to invest and will be profitable for years to come, any disruption of that outlook will have impacts on investing.
Making Money
It seems so simple buy solar companies and short big oil, especially the high cost producers. But when will this theory come true? Today? No, Next year, in 5 years time?
Now you can pass legislation all day encouraging energy conservation, but when energy prices soar, a landslide of energy conservation is unleashed. The lesson is that free market capitalism is more effective then government and it can turn on a dime.
Tuesday, September 22, 2009
Are we Taking the Best Medicine?
If you look back on recent economic history, you see it is filled with a lot of countries which spent more then they could tax and experienced debt crisises. Lets see how they dealt with them.
The Washington Consensus
Over the past few decades, the best recipe for recovery when a government is embroiled in a debt crisis is to follow the following sets of guidelines issued by the IMF and the World Bank called the Washington Consensus, they are as follows:
Impose fiscal discipline
Reform taxation
Liberalize interest rates
Raise spending on health and education
Secure property rights
Privatize state run industries
Deregulate markets
Adopt a competitive exchange rate
Remove barriers to trade
Remove barriers to foreign direct investment
I would guess that if that is the best advice given from the IMF and the worlds best economists, over and over again, paired with a record of success, that the U.S. would surely want to take a dose of the best medicine.
But are we?
Impose Fiscal Discipline
Not even close, we have chosen to reflate via ZIRP on the monetary side and deficit spend on the fiscal side. In fact, Mark Thoma, Reagan/Bush advisor has come out and said, it is politically impossible to cut spending. The only way is to cut taxes and hope that reduction results in increased economic growth to shrink the debt to GDP ratio. So the number 1 recommendation is not possible in the U.S., it is impossible to administer such bitter medicine to ourselves.
Reform Taxation
This usually means to lower tax rates and promote growth, in spite of what the right claims I don’t think we can reduce tax receipts without risking a serious problem with the government flooding the market with government debt.
Liberalize Interest Rates
Market set not artificially set by the government. Well that means they go up and that squelches the economy and the U.S. is aiming for recovery, full employment, so it is ZIRP all the way.
Raise spending on health and education
The U.S. does spending a lot on these at least in gross dollar terms, we probably don’t get the benefits from these expenditures.
Secure Property Rights
Clearly other countries would nationalize foreign assets instead of servicing debts, in the U.S., when push comes to shove property rights are being skirted by various means.
Privatize State Run Industries
Well, this complicated, the financial industry had to be nationalized or supported by the U.S. government or it would have collapsed. This wasn’t done in any thought out manner it was carte blanche and inevitable included a lot of wasted tax payer dollars.
Deregulate Markets
The U.S. has gone a long way down this road. Many claim that government regulations are strangling businesses at all levels, it appears poor management of businesses has caused more harm to businesses then any regulation.
Adopt a Competitive Exchange Rate
The U.S. but China pegs to the USD and that surely needs to be changed.
Remove Barriers to Trade
I think this really applies to countries which were very protective of their industries. The massive amount of aid provided from the Fed and Treasury to the financial industry was basically a form of protectionism. Hundreds if not thousands of these institutions showed themselves to be poorly managed and would have gone bankrupt if we let the market choose the winners and losers. At this point in the cycle the field would be wide open for better suited firms to grab market share. Unfortunately, we have the same bad players in business.
Remove barriers to foreign direct investment
This would really apply to allowing foreign countries to exchange their holding of U.S. Government debt for other assets, such as whole companies. No wanted China to buy Unocal, so no one will want to see any other investments by China or petro dollars. This is a problem.
So, there are alot of angles to this, are we following the best medicine?
The Washington Consensus
Over the past few decades, the best recipe for recovery when a government is embroiled in a debt crisis is to follow the following sets of guidelines issued by the IMF and the World Bank called the Washington Consensus, they are as follows:
Impose fiscal discipline
Reform taxation
Liberalize interest rates
Raise spending on health and education
Secure property rights
Privatize state run industries
Deregulate markets
Adopt a competitive exchange rate
Remove barriers to trade
Remove barriers to foreign direct investment
I would guess that if that is the best advice given from the IMF and the worlds best economists, over and over again, paired with a record of success, that the U.S. would surely want to take a dose of the best medicine.
But are we?
Impose Fiscal Discipline
Not even close, we have chosen to reflate via ZIRP on the monetary side and deficit spend on the fiscal side. In fact, Mark Thoma, Reagan/Bush advisor has come out and said, it is politically impossible to cut spending. The only way is to cut taxes and hope that reduction results in increased economic growth to shrink the debt to GDP ratio. So the number 1 recommendation is not possible in the U.S., it is impossible to administer such bitter medicine to ourselves.
Reform Taxation
This usually means to lower tax rates and promote growth, in spite of what the right claims I don’t think we can reduce tax receipts without risking a serious problem with the government flooding the market with government debt.
Liberalize Interest Rates
Market set not artificially set by the government. Well that means they go up and that squelches the economy and the U.S. is aiming for recovery, full employment, so it is ZIRP all the way.
Raise spending on health and education
The U.S. does spending a lot on these at least in gross dollar terms, we probably don’t get the benefits from these expenditures.
Secure Property Rights
Clearly other countries would nationalize foreign assets instead of servicing debts, in the U.S., when push comes to shove property rights are being skirted by various means.
Privatize State Run Industries
Well, this complicated, the financial industry had to be nationalized or supported by the U.S. government or it would have collapsed. This wasn’t done in any thought out manner it was carte blanche and inevitable included a lot of wasted tax payer dollars.
Deregulate Markets
The U.S. has gone a long way down this road. Many claim that government regulations are strangling businesses at all levels, it appears poor management of businesses has caused more harm to businesses then any regulation.
Adopt a Competitive Exchange Rate
The U.S. but China pegs to the USD and that surely needs to be changed.
Remove Barriers to Trade
I think this really applies to countries which were very protective of their industries. The massive amount of aid provided from the Fed and Treasury to the financial industry was basically a form of protectionism. Hundreds if not thousands of these institutions showed themselves to be poorly managed and would have gone bankrupt if we let the market choose the winners and losers. At this point in the cycle the field would be wide open for better suited firms to grab market share. Unfortunately, we have the same bad players in business.
Remove barriers to foreign direct investment
This would really apply to allowing foreign countries to exchange their holding of U.S. Government debt for other assets, such as whole companies. No wanted China to buy Unocal, so no one will want to see any other investments by China or petro dollars. This is a problem.
So, there are alot of angles to this, are we following the best medicine?
Monday, September 14, 2009
Good Summary of Events
I think the chalkboard is a good summary of events that have occurred over the last 10 if not 20 years.
It is a bit scary, we seem to be embarked on a grand experiment. I saw a post regarding the biggest story not being reported right now, well, its more big picture then recent event. Does the public realize where we are?
We are ZIRP, we are QE, we are turning bad private debt to public debt, we are beyond the reaches of monetary and fiscal stimulus. One could just state these facts as ominious facts that indicate a great fall is in the offing, however, events write their own history.
We may be in for something new and probably unexpected, but you have to look at the chalkboard to see the steps to what lies ahead.
I case can be made for inflation or a currency crisis, a case can be made for deflation, but it is not 1970, alot has changed so to the coming events will reflect the changes to the globe.
It is a bit scary, we seem to be embarked on a grand experiment. I saw a post regarding the biggest story not being reported right now, well, its more big picture then recent event. Does the public realize where we are?
We are ZIRP, we are QE, we are turning bad private debt to public debt, we are beyond the reaches of monetary and fiscal stimulus. One could just state these facts as ominious facts that indicate a great fall is in the offing, however, events write their own history.
We may be in for something new and probably unexpected, but you have to look at the chalkboard to see the steps to what lies ahead.
I case can be made for inflation or a currency crisis, a case can be made for deflation, but it is not 1970, alot has changed so to the coming events will reflect the changes to the globe.
Saturday, September 12, 2009
Thoughts on What happened and What it Means?
To view what happened from a political view like what we see taking place on talk radio, such as blaming the democrats in Congress for requiring banks to lend money to low income earners for home purchases is probably not going to yield an accurate view of what forces caused the financial panic of 2008.
I am not sure why but the conservatives seem to be determined to blame everything on the Democrats, Unions, and socialized thinking. Their thoughts boil down to “If only the free market was allowed to work then everything would have been fine”.
Similarly, the Democrats see the same events and blame tax cuts, the Reagan and Bush Administration’s lax regulatory or de-regulatory actions as what allowed or even encouraged a financial community to engage in a credit boom and nearly worldwide bust.
From looking at what happened, and many things happened, I am not sure you can really logically trace it back to the Democrats. That’s unfortunate because it be a readily implementable solution – vote Republican. We are not so lucky.
In fact viewing the financial collapse through any political view is probably a hindering move and it doesn’t seem to get you to any cogent explanation of what happened.
How To View the Modern World
This is a grand or super Macro vision of the state of the globe. We have the West an area of financial innovation, of democratic institutions that may not be working so well.
Into the mix we have probably peak global oil output, however with a shrinking world GDP we can put the effects of that aside for a few years.
We have China, a mercantile driven economy. The Chinese decided to engage in massive industrialization and have found they like being the dominant manufacturer in the world. They like the vast sums of money that they made and for awhile the global corporate CEOs also liked the fact that they could boost profits, off of cheap Chinese labor and a pro business environment.
The Chinese embarked on a calculated path of vendor financing with the U.S., they understood if goods only flow out of the country then their currency would strengthen and it would hurt their manufactured goods, so they bought US agency debt, treasury bills, and the USD directly as currency reserves. This balanced everything for many years it made everyone happy, what is wrong with that? Sure there were loosers in this, like the environment, the US manufacturing workforce, but on balance it was a happy world.
The US Fed the situation with every lower interest rates to get they system kick started whenever it fell into recession.
However there were grotesque distortions taking place, many I was never aware of.
OK, we now know that low interest rates to spur the economy distorted the housing industry. We know that the calculated buying of US Debt on the surface distorted the trade imbalance between the US and China. We know that ultra low interest rates buoyed the U.S. but over stimulated the Chinese economy due to currency pegs, we know that these imbalances were balanced by Chinese Central Bank purchases of U.S. debt. We know that this may be coming apart and we suspect these artificially stoked economies consumed more than they should have, mainly in the West.
So what comes next, the U.S. consumer is tapped out, so what will the Chinese do? Do they continue to find a way to allow the U.S. consumer to buy goods? I don’t the answer to this.
The U.S. needs some way to fund the coming debt issuances, how will this be accomplished. Since it is a known problem, I suspect that is a problem that someone is trying to solve.
Distortions Then and Now
In the early 2000s the low interest rates led to distortions in the market, it helped spur growth which Greenspan wanted but it led to abnormally low returns on capital, so investment banks went for leverage, well we know how it ended, aren’t we back at it again?
What are the distortions of Zero Interest Rate Policy (ZIRP), there must be some, likely many? I hear the USD may be the new carry trade, gold prices continue to surge, what else?
Now all the problems that eventually came to characterize the financial crisis were not known in the years before the crisis, I think we all heard from Roubini stating housing, commercial real estate, credit in general were all in bubble territory, but I do not recall anyone saying that the investment banks and banks like Citi were leverage 100:1, I never heard about CDS or that AIG had basically become a concentrated risk counterparty for a lot of this bad debt to be.
We knew about the carry trade from Japan and heard about speculators buying the Swedish Krona a higher yielding currency, but nothing about how the ARS market or money markets or the function of SIVs and how huge these had become.
So while we knew some stuff, we didn’t know a lot of what was to come. Are we not basically there again.
I am not sure why but the conservatives seem to be determined to blame everything on the Democrats, Unions, and socialized thinking. Their thoughts boil down to “If only the free market was allowed to work then everything would have been fine”.
Similarly, the Democrats see the same events and blame tax cuts, the Reagan and Bush Administration’s lax regulatory or de-regulatory actions as what allowed or even encouraged a financial community to engage in a credit boom and nearly worldwide bust.
From looking at what happened, and many things happened, I am not sure you can really logically trace it back to the Democrats. That’s unfortunate because it be a readily implementable solution – vote Republican. We are not so lucky.
In fact viewing the financial collapse through any political view is probably a hindering move and it doesn’t seem to get you to any cogent explanation of what happened.
How To View the Modern World
This is a grand or super Macro vision of the state of the globe. We have the West an area of financial innovation, of democratic institutions that may not be working so well.
Into the mix we have probably peak global oil output, however with a shrinking world GDP we can put the effects of that aside for a few years.
We have China, a mercantile driven economy. The Chinese decided to engage in massive industrialization and have found they like being the dominant manufacturer in the world. They like the vast sums of money that they made and for awhile the global corporate CEOs also liked the fact that they could boost profits, off of cheap Chinese labor and a pro business environment.
The Chinese embarked on a calculated path of vendor financing with the U.S., they understood if goods only flow out of the country then their currency would strengthen and it would hurt their manufactured goods, so they bought US agency debt, treasury bills, and the USD directly as currency reserves. This balanced everything for many years it made everyone happy, what is wrong with that? Sure there were loosers in this, like the environment, the US manufacturing workforce, but on balance it was a happy world.
The US Fed the situation with every lower interest rates to get they system kick started whenever it fell into recession.
However there were grotesque distortions taking place, many I was never aware of.
OK, we now know that low interest rates to spur the economy distorted the housing industry. We know that the calculated buying of US Debt on the surface distorted the trade imbalance between the US and China. We know that ultra low interest rates buoyed the U.S. but over stimulated the Chinese economy due to currency pegs, we know that these imbalances were balanced by Chinese Central Bank purchases of U.S. debt. We know that this may be coming apart and we suspect these artificially stoked economies consumed more than they should have, mainly in the West.
So what comes next, the U.S. consumer is tapped out, so what will the Chinese do? Do they continue to find a way to allow the U.S. consumer to buy goods? I don’t the answer to this.
The U.S. needs some way to fund the coming debt issuances, how will this be accomplished. Since it is a known problem, I suspect that is a problem that someone is trying to solve.
Distortions Then and Now
In the early 2000s the low interest rates led to distortions in the market, it helped spur growth which Greenspan wanted but it led to abnormally low returns on capital, so investment banks went for leverage, well we know how it ended, aren’t we back at it again?
What are the distortions of Zero Interest Rate Policy (ZIRP), there must be some, likely many? I hear the USD may be the new carry trade, gold prices continue to surge, what else?
Now all the problems that eventually came to characterize the financial crisis were not known in the years before the crisis, I think we all heard from Roubini stating housing, commercial real estate, credit in general were all in bubble territory, but I do not recall anyone saying that the investment banks and banks like Citi were leverage 100:1, I never heard about CDS or that AIG had basically become a concentrated risk counterparty for a lot of this bad debt to be.
We knew about the carry trade from Japan and heard about speculators buying the Swedish Krona a higher yielding currency, but nothing about how the ARS market or money markets or the function of SIVs and how huge these had become.
So while we knew some stuff, we didn’t know a lot of what was to come. Are we not basically there again.
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