Entries Tagged 'energy' ↓

Predictions are probably the best Rorschach tests for bloggers and investors. Everyone is in the prediction business, because every act of investment (including sitting on cash in the sidelines) is an implicit prediction about the future.

Writing down my predictions for the year has proven itself to be a great tool for me to become explicitly aware of my cognitive biases. Because if there’s one thing I’ve learnt in investing, its this - It’s not what you don’t know that kills you, but instead its what you know that’s wrong. (Can’t seem to find the original source for this quote).

So here’s the top 10 predictions on my mind as of today:

1. Stock market - The Obamarama stock market rally will be mostly over by Obama’s first quarter as President. By late 2009, it will be obvious that all of the government bailout and spending efforts are like holding an umbrella in a hurricane. The nation will finally resign to the reality of a longer term depression. This realization alongwith a few shocking municipal bankruptcies will cause the stock market to finally bottom in early 2010.
2. Bond bubble - The treasury bond bubble will continue to inflate, pushing yields to even lower levels than today. Bond bears will get clobbered in 2009 by being too early and too aggressive. The only thing that can burst the treasury bond bubble is a “growth scare”, which will not occur until 2010.
3. Obama - Barack Obama will not have the courage to give the economy the bitter pill it needs to quickly get rid of the mal-investments and excessive leverage that led to the current crisis. Nor will Obama have the courage to suggest that the government needs to be a referee in the market, rather than the dominant player it has become thanks to Paulson and Bernanke. The high of “Yes we can” will slowly morph into a hangover of “Yes we could have.”
4. Economy - By the end of 2009, almost everyone in the country will continue to believe in the perpetual motion machine that is Keynesian economics and fractional reserve banking. The Keynesians, led by Paul Krugman will still propagate the “free lunch” myth: Deficit spending and huge amounts of bad credit can cure all the problems created by deficit spending and huge amounts of bad credit.
5. Suburbia - 2008 will be seen in 2009 to have been the last year of the techno-triumphalist era. By the end of 2009, it will be apparent that technology (software, finance, green technology) alone cannot indefinitely sustain the now defunct credit-driven consumerist suburban SUV lifestyle. Austerity will be the new black.
6. Real estate - Real estate will overcorrect on the way down, and “fortress areas” like Cupertino in the Bay Area will also experience severe price reductions as IPO/options wealth, jumbo mortgage financing and the hope for a quick recovery dries up. It will be finally realized that encouraging excessive home ownership tends to hurt the economy by making it harder for workers to relocate to where the jobs are.
7. Alternative energy - Alternative energy and OPEC countries will ironically find themselves on the same side, hoping for higher oil prices so that their respective industries and  economies become viable. Oil prices will continue to disappoint them by being stagnant, and this will be a silver lining for the middle-class consumers.
8. Pakistan - The world will again be fashionably outraged for a few days in the Fall of 2009, when it becomes clear that new attacks were being planned against Indian targets even while Pakistan was condemning the recent 26/11 Mumbai attacks. India and Pakistan will again lurch towards war after the next terror attack. The US will once again force India to back down by essentially telling India: “not tonight dear, I have a headache”.
9. Microsoft - Microsoft will realize (if it has not already) that there is no point going after has-been giants like Yahoo, and will instead (correctly) acquire Facebook and/or Twitter at bargain prices. For the first time in its history Google misses out on the obvious due to the “not built here” syndrome.
10. Google - Google revenue will surprise to the upside, but it will be at the cost of cutting down on other expenses, including payroll/bonuses, bandwidth bills for Youtube and possibly even Gmail and other Google apps.

Never intended as investment advice. Read my disclaimer.

Image by Getty Images via Daylife

Today we face the ironic situation of the US government abandoning free market principles to save the free market.

Whether or not the Government will succeed remains to be seen. But in the mean time, there are some fascinating unintended consequences going on (fascinating in a morbid sort of way).

It seems like every generation learns the hard way that central planning does not work, and indeed often worsens the situation that it claims to cure.

So here are just a few examples of how the current US government actions often worsen the situation that they are trying to solve:

1. Lowering interest rates reduces credit to companies

People who invest their money in CDs and money markets are (sometimes unknowingly) lending this money to companies who need the money and are willing to pay interest for short-term loans.

By driving interest rates so low, the Federal Reserve risks a perverse side effect - many money markets will have an expense ratio that’s higher than their interest rate! This means that many money market investors will have a negative return on investment. If this causes investors to withdraw from the money market (and invest into, say treasuries), it lessens the amount of money available for companies to borrow. This is already happening, as evidenced by the huge demand for treasuries (even at near-zero interest rates).

If the government wants more money to be available for lending to companies, it needs to increase interest that people earn on savings. This will provide incentives for people to save, which causes more money to flow into money markets and CDs, and hence increases the pool of money to be lent to companies! Right now the very opposite is happening.

2. Lower interest rates reduces lending to individual borrowers

If you are a bank, here is an easy way for you to get almost free money with virtually no risk:

1. Borrow nearly unlimited amounts of short-term money from the Fed (at the 0.5% “discount rate”)
2. Buy longer term treasuries with this money (earn >2%)
3. Hold to maturity if necessary
4. Repeat

Note that the above does not include having to lend to flaky retail borrowers! So this rate cut actually has an unintended consequence of making retail borrowers even less attractive to banks!

3. Helping defaulting homeowners encourages more to default

If the government provides relief to homeowners who are behind on their payments, it creates incentives for even more homeowners to fall behind, so that they too can get lower interest rates and hopefully even principal reductions!

Surely not what is intended.

4. Guaranteeing deposits causes money to leave good banks

By providing strong guarantees to money deposited in unhealthy banks, it creates an incentive for people to withdraw their funds  from otherwise healthy (but not government-backed) institutions into bad banks that are guaranteed by the government!

5. Lesson learned by bankers - take even bigger risks next time

This is probably the worst of the unintended consequences. An entire generation (and probably more) of bankers and traders have now learned - that if you take risks, make sure you take huge ones. So that if you fail, you are more likely to be bailed out in the long run. The moral hazard being created by this bailout is just staggering.

The financial, mortgage, insurance and auto bailouts almost guarantee that the next bubble will be even bigger and even more disastrous when it bursts.

Many people are underestimating the tidal wave of demand destruction that is looming over our heads.

Deepak Shenoy gets it almost right:

What’s the buzz word this time? Energy. This boom has fuelled an enormous amount of money into energy - from research to discovery to exploration to production. There’s now solar and wind energy coming up. Nuclear’s picked up steam unintended. In India, coal and gas fired plants are coming up - mega and ultra-mega who coined that? power projects. There’s investment in distribution and transmission. And most of this has already gone in, in the hope that power will sell for a lot.

Will it? I honestly doubt that. We in India cannot imagine “too much” power. I think that’s what we in the cities will have - because no body has yet figured out how to make people in the villages pay, and no one is yet thinking of drawing lines to them. Too much power means it will become cheap - and I mean in five to ten years, not tomorrow.

This, I think, is the next boom, come 2014 or so. Businesses built on the back of seemingly unlimited power supply - from refrigeration to recreational vehicles - will start to benefit the most. And the biggest will probably come from an area I cannot yet imagine, but I’m sure it will start becoming visible in the next few years

The Indian Investor’s Blog: Excess Power - the next boom, after five years? >> Investing in Indian Stocks, Futures and Options

The only correction I’d make to Deepak Shenoy’s thesis is - We already live in a world designed for “seemingly unlimited power supply”! There will be excess power in the future - but that will be because there will be very few avenues to deploy the power that is coming online.

And before you start thinking of “China and India”, let me just say this - it doesn’t matter how many emerging market citizens yearn to live western lifestyles - the only thing that matters is whether they can afford to pay market prices for that energy and the products that depend on it. And right now, even at these depressed prices, the answer is - they cannot.

So - suggesting that cheap energy prices will create a new boom industry is like saying that cheap paper will create a new boom industry. Ultimately it is demand that pulls industry, and not the cost of raw materials. Hence any prediction on what the “next boom” will be must define clearly where both the demand, and the ability to pay will come from.

Image credit: criminalintent (license)