“President-elect Obama campaigned on a platform of launching a massive, 10-year buildout of renewable energy systems. In the process, this means that the government will exercise more control over emissions of carbon from the likes of oil and coal. Will the U.S. Environmental Protection Agency (EPA) start setting national industrial policy? Well, that’s sort of built into the election promise, isn’t it?
“But the election is over. Now it’s time to get real. Sure, we can build a lot of windmills and solar installations. More geothermal would be great, too. But the U.S. and world industrial base is limited in what it can turn out, and at what rates. There are constraints in manufacturing, in materials, in systems integration, in the grid, in the labor force and in the regulatory system. And we are going to overcome this in 10 years? By comparison, putting Neil Armstrong on the moon in the 1960s was a piece of cake.
“So will the U.S. – let alone the world – abandon carbon sources of energy in the next 10 years? You just gotta be kidding me. That ain’t going to happen. If it does happen, your world will turn upside-down. Count on it.
“So the long-term thesis of Outstanding Investments – in energy and resources – should still be valid. We just have to navigate our way through the economic and political land mines that are getting dropped like cluster bombs onto the landscape. Remember what Friederich Nietzsche said: ‘That which does not kill you makes you stronger.’ It’s getting past the ‘not killed’ part that’s the hard part.”
*** But let’s get back to Obama. Seems like a decent fellow, as near as we can tell. But he has a great temptation to become a jackass. And early indications are worrying; we think we see his ears are growing (more below).
Obama is beginning to realize what he’s up against. This is no ordinary cyclical downturn. Typically, a slump brings interest rates down. (Usually accompanied by central bank rate cuts.) Cheaper borrowing arouses business and speculative activity… which, in turn, tends to get the economy moving again.
This time, that’s not happening. The authorities are handing out money below the inflation rate and practically begging banks to lend… But who wants to lend when there’s a danger you might not get your money back? And who wants to borrow when everyone is desperate to get out of debt?
Today’s Financial Times announces that another 70,000 jobs could be lost on Wall Street. Who needs so many employees when no one’s doing any deals? No one’s borrowing… no one’s lending… investors are running scared… and private equity is curled up in a cave somewhere…
Why? Because it’s a ‘balance sheet recession,’ not a regular, cyclical downturn. People have lost a lot of money… and they’re afraid of losing more. So businesses are cutting back as fast as they can. The job losses aren’t limited to Wall Street. Today’s news from Associated Press tells us that there are 10 million people out of work – the most in 25 years. The New York Times says unemployment is at a 14-year high. (We didn’t study the figures to see how they differ; but we predict that the figures in the last quarter of this year will be even more alarming… )
Everywhere, investment portfolios are being trimmed… cash is more than king; it has become a demi-god. This despite the fact that there are some great investment bargains around.
After “Black October,” says the FT, it’s the “buying opportunity of a lifetime.”
Stocks were overpriced for the last 20 years. Now, they’re not so overpriced. In fact, by almost any measure you use, they’re fairly reasonable. Compared to the yield, you get from Treasury bonds, for example – a popular method of gauging the stock market – stocks look like a good deal. P/E ratios, too, are in the ‘normal’ range. Or, you can look at James Tobin’s q ratio – comparing stock prices to business net worth. Here again, stock prices don’t look out-of-the-ordinary.
But a ‘balance sheet recession’ is an unforgiving, mean, and tenacious rascal. After such big losses, businesses, consumers, investors, and banks need to rebuild their balance sheets – by paying off, defaulting on, or working out their debt. And then they need to rebuild their confidence… with rising asset prices and a growing economy. All that takes years… many years.
Worse, a balance sheet recession is like a straightjacket; the harder you fight against it, the tighter it gets. When government tries to prevent assets from being marked to market, for example, it delays and obstructs the process of adjustment. Rather than let the debts and mistakes be flushed out, they remain on balance sheets… blocking progress, frustrating change.
“Change is Nature’s delight,” said Marcus Aurelius. Trying to stop change – at least in a balance sheet recession – is Nature’s horror. Balance sheets need to be corrected. Until they are corrected future growth can’t happen. So, the whole system is stymied, clogged, stopped up, constipated… like the U.S. economy in the ’30s… or like Japan’s economy in the ’90s…