The New Yorker has endorsed Barack Obama for President in 2008 in its October 13th edition. I was really impressed with the eloquence and lucidity of this article. Though long, it's well worth the read. The link to the article online is here:
http://www.newyorker.com/talk/comment/2008/10/13/081013taco_talk_editors
I include the full text below. Although I normally provide only the link, TNY's website has been crashing a lot lately.
*****************
Never in living memory has an election been more critical than the one fast approaching—that’s the quadrennial cliché, as expected as the balloons and the bombast. And yet when has it ever felt so urgently true? When have so many Americans had so clear a sense that a Presidency has—at the levels of competence, vision, and integrity—undermined the country and its ideals?
The incumbent Administration has distinguished itself for the ages. The Presidency of George W. Bush is the worst since Reconstruction, so there is no mystery about why the Republican Party—which has held dominion over the executive branch of the federal government for the past eight years and the legislative branch for most of that time—has little desire to defend its record, domestic or foreign. The only speaker at the Convention in St. Paul who uttered more than a sentence or two in support of the President was his wife, Laura. Meanwhile, the nominee, John McCain, played the part of a vaudeville illusionist, asking to be regarded as an apostle of change after years of embracing the essentials of the Bush agenda with ever-increasing ardor.
The Republican disaster begins at home. Even before taking into account whatever fantastically expensive plan eventually emerges to help rescue the financial system from Wall Street’s long-running pyramid schemes, the economic and fiscal picture is bleak. During the Bush Administration, the national debt, now approaching ten trillion dollars, has nearly doubled. Next year’s federal budget is projected to run a half-trillion-dollar deficit, a precipitous fall from the seven-hundred-billion-dollar surplus that was projected when Bill Clinton left office.
Private-sector job creation has been a sixth of what it was under President Clinton. Five million people have fallen into poverty. The number of Americans without health insurance has grown by seven million, while average premiums have nearly doubled. Meanwhile, the principal domestic achievement of the Bush Administration has been to shift the relative burden of taxation from the rich to the rest. For the top one per cent of us, the Bush tax cuts are worth, on average, about a thousand dollars a week; for the bottom fifth, about a dollar and a half. The unfairness will only increase if the painful, yet necessary, effort to rescue the credit markets ends up preventing the rescue of our health-care system, our environment, and our physical, educational, and industrial infrastructure.
At the same time, a hundred and fifty thousand American troops are in Iraq and thirty-three thousand are in Afghanistan. There is still disagreement about the wisdom of overthrowing Saddam Hussein and his horrific regime, but there is no longer the slightest doubt that the Bush Administration manipulated, bullied, and lied the American public into this war and then mismanaged its prosecution in nearly every aspect. The direct costs, besides an expenditure of more than six hundred billion dollars, have included the loss of more than four thousand Americans, the wounding of thirty thousand, the deaths of tens of thousands of Iraqis, and the displacement of four and a half million men, women, and children. Only now, after American forces have been fighting for a year longer than they did in the Second World War, is there a glimmer of hope that the conflict in Iraq has entered a stage of fragile stability.
The indirect costs, both of the war in particular and of the Administration’s unilateralist approach to foreign policy in general, have also been immense. The torture of prisoners, authorized at the highest level, has been an ethical and a public-diplomacy catastrophe. At a moment when the global environment, the global economy, and global stability all demand a transition to new sources of energy, the United States has been a global retrograde, wasteful in its consumption and heedless in its policy. Strategically and morally, the Bush Administration has squandered the American capacity to counter the example and the swagger of its rivals. China, Russia, Iran, Saudi Arabia, and other illiberal states have concluded, each in its own way, that democratic principles and human rights need not be components of a stable, prosperous future. At recent meetings of the United Nations, emboldened despots like Mahmoud Ahmadinejad of Iran came to town sneering at our predicament and hailing the “end of the American era.”
The election of 2008 is the first in more than half a century in which no incumbent President or Vice-President is on the ballot. There is, however, an incumbent party, and that party has been lucky enough to find itself, apparently against the wishes of its “base,” with a nominee who evidently disliked George W. Bush before it became fashionable to do so. In South Carolina in 2000, Bush crushed John McCain with a sub-rosa primary campaign of such viciousness that McCain lashed out memorably against Bush’s Christian-right allies.
So profound was McCain’s anger that in 2004 he flirted with the possibility of joining the Democratic ticket under John Kerry. Bush, who took office as a “compassionate conservative,” governed immediately as a rightist ideologue. During that first term, McCain bolstered his reputation, sometimes deserved, as a “maverick” willing to work with Democrats on such issues as normalizing relations with Vietnam, campaign-finance reform, and immigration reform. He co-sponsored, with John Edwards and Edward Kennedy, a patients’ bill of rights. In 2001 and 2003, he voted against the Bush tax cuts. With John Kerry, he co-sponsored a bill raising auto-fuel efficiency standards and, with Joseph Lieberman, a cap-and-trade regime on carbon emissions. He was one of a minority of Republicans opposed to unlimited drilling for oil and gas off America’s shores.
Since the 2004 election, however, McCain has moved remorselessly rightward in his quest for the Republican nomination. He paid obeisance to Jerry Falwell and preachers of his ilk. He abandoned immigration reform, eventually coming out against his own bill. Most shocking, McCain, who had repeatedly denounced torture under all circumstances, voted in February against a ban on the very techniques of “enhanced interrogation” that he himself once endured in Vietnam—as long as the torturers were civilians employed by the C.I.A.
On almost every issue, McCain and the Democratic Party’s nominee, Barack Obama, speak the generalized language of “reform,” but only Obama has provided a convincing, rational, and fully developed vision. McCain has abandoned his opposition to the Bush-era tax cuts and has taken up the demagogic call—in the midst of recession and Wall Street calamity, with looming crises in Social Security, Medicare, and Medicaid—for more tax cuts. Bush’s expire in 2011. If McCain, as he has proposed, cuts taxes for corporations and estates, the benefits once more would go disproportionately to the wealthy.
In Washington, the craze for pure market triumphalism is over. Treasury Secretary Henry Paulson arrived in town (via Goldman Sachs) a Republican, but it seems that he will leave a Democrat. In other words, he has come to see that the abuses that led to the current financial crisis––not least, excessive speculation on borrowed capital––can be fixed only with government regulation and oversight. McCain, who has never evinced much interest in, or knowledge of, economic questions, has had little of substance to say about the crisis. His most notable gesture of concern—a melodramatic call last month to suspend his campaign and postpone the first Presidential debate until the government bailout plan was ready—soon revealed itself as an empty diversionary tactic.
By contrast, Obama has made a serious study of the mechanics and the history of this economic disaster and of the possibilities of stimulating a recovery. Last March, in New York, in a speech notable for its depth, balance, and foresight, he said, “A complete disdain for pay-as-you-go budgeting, coupled with a generally scornful attitude towards oversight and enforcement, allowed far too many to put short-term gain ahead of long-term consequences.” Obama is committed to reforms that value not only the restoration of stability but also the protection of the vast majority of the population, which did not partake of the fruits of the binge years. He has called for greater and more programmatic regulation of the financial system; the creation of a National Infrastructure Reinvestment Bank, which would help reverse the decay of our roads, bridges, and mass-transit systems, and create millions of jobs; and a major investment in the green-energy sector.
On energy and global warming, Obama offers a set of forceful proposals. He supports a cap-and-trade program to reduce America’s carbon emissions by eighty per cent by 2050—an enormously ambitious goal, but one that many climate scientists say must be met if atmospheric carbon dioxide is to be kept below disastrous levels. Large emitters, like utilities, would acquire carbon allowances, and those which emit less carbon dioxide than their allotment could sell the resulting credits to those which emit more; over time, the available allowances would decline. Significantly, Obama wants to auction off the allowances; this would provide fifteen billion dollars a year for developing alternative-energy sources and creating job-training programs in green technologies. He also wants to raise federal fuel-economy standards and to require that ten per cent of America’s electricity be generated from renewable sources by 2012. Taken together, his proposals represent the most coherent and far-sighted strategy ever offered by a Presidential candidate for reducing the nation’s reliance on fossil fuels.
There was once reason to hope that McCain and Obama would have a sensible debate about energy and climate policy. McCain was one of the first Republicans in the Senate to support federal limits on carbon dioxide, and he has touted his own support for a less ambitious cap-and-trade program as evidence of his independence from the White House. But, as polls showed Americans growing jittery about gasoline prices, McCain apparently found it expedient in this area, too, to shift course. He took a dubious idea—lifting the federal moratorium on offshore oil drilling—and placed it at the very center of his campaign. Opening up America’s coastal waters to drilling would have no impact on gasoline prices in the short term, and, even over the long term, the effect, according to a recent analysis by the Department of Energy, would be “insignificant.” Such inconvenient facts, however, are waved away by a campaign that finally found its voice with the slogan “Drill, baby, drill!”
The contrast between the candidates is even sharper with respect to the third branch of government. A tense equipoise currently prevails among the Justices of the Supreme Court, where four hard-core conservatives face off against four moderate liberals. Anthony M. Kennedy is the swing vote, determining the outcome of case after case.
McCain cites Chief Justice John Roberts and Justice Samuel Alito, two reliable conservatives, as models for his own prospective appointments. If he means what he says, and if he replaces even one moderate on the current Supreme Court, then Roe v. Wade will be reversed, and states will again be allowed to impose absolute bans on abortion. McCain’s views have hardened on this issue. In 1999, he said he opposed overturning Roe; by 2006, he was saying that its demise “wouldn’t bother me any”; by 2008, he no longer supported adding rape and incest as exceptions to his party’s platform opposing abortion.
But scrapping Roe—which, after all, would leave states as free to permit abortion as to criminalize it—would be just the beginning. Given the ideological agenda that the existing conservative bloc has pursued, it’s safe to predict that affirmative action of all kinds would likely be outlawed by a McCain Court. Efforts to expand executive power, which, in recent years, certain Justices have nobly tried to resist, would likely increase. Barriers between church and state would fall; executions would soar; legal checks on corporate power would wither—all with just one new conservative nominee on the Court. And the next President is likely to make three appointments.
Obama, who taught constitutional law at the University of Chicago, voted against confirming not only Roberts and Alito but also several unqualified lower-court nominees. As an Illinois state senator, he won the support of prosecutors and police organizations for new protections against convicting the innocent in capital cases. While McCain voted to continue to deny habeas-corpus rights to detainees, perpetuating the Bush Administration’s regime of state-sponsored extra-legal detention, Obama took the opposite side, pushing to restore the right of all U.S.-held prisoners to a hearing. The judicial future would be safe in his care.
In the shorthand of political commentary, the Iraq war seems to leave McCain and Obama roughly even. Opposing it before the invasion, Obama had the prescience to warn of a costly and indefinite occupation and rising anti-American radicalism around the world; supporting it, McCain foresaw none of this. More recently, in early 2007 McCain risked his Presidential prospects on the proposition that five additional combat brigades could salvage a war that by then appeared hopeless. Obama, along with most of the country, had decided that it was time to cut American losses. Neither candidate’s calculations on Iraq have been as cheaply political as McCain’s repeated assertion that Obama values his career over his country; both men based their positions, right or wrong, on judgment and principle.
President Bush’s successor will inherit two wars and the realities of limited resources, flagging popular will, and the dwindling possibilities of what can be achieved by American power. McCain’s views on these subjects range from the simplistic to the unknown. In Iraq, he seeks “victory”—a word that General David Petraeus refuses to use, and one that fundamentally misrepresents the messy, open-ended nature of the conflict. As for Afghanistan, on the rare occasions when McCain mentions it he implies that the surge can be transferred directly from Iraq, which suggests that his grasp of counterinsurgency is not as firm as he insisted it was during the first Presidential debate. McCain always displays more faith in force than interest in its strategic consequences. Unlike Obama, McCain has no political strategy for either war, only the dubious hope that greater security will allow things to work out. Obama has long warned of deterioration along the Afghanistan-Pakistan border, and has a considered grasp of its vital importance. His strategy for both Afghanistan and Iraq shows an understanding of the role that internal politics, economics, corruption, and regional diplomacy play in wars where there is no battlefield victory.
Unimaginably painful personal experience taught McCain that war is above all a test of honor: maintain the will to fight on, be prepared to risk everything, and you will prevail. Asked during the first debate to outline “the lessons of Iraq,” McCain said, “I think the lessons of Iraq are very clear: that you cannot have a failed strategy that will then cause you to nearly lose a conflict.” A soldier’s answer––but a statesman must have a broader view of war and peace. The years ahead will demand not only determination but also diplomacy, flexibility, patience, judiciousness, and intellectual engagement. These are no more McCain’s strong suit than the current President’s. Obama, for his part, seems to know that more will be required than willpower and force to extract some advantage from the wreckage of the Bush years.
Obama is also better suited for the task of renewing the bedrock foundations of American influence. An American restoration in foreign affairs will require a commitment not only to international coöperation but also to international institutions that can address global warming, the dislocations of what will likely be a deepening global economic crisis, disease epidemics, nuclear proliferation, terrorism, and other, more traditional security challenges. Many of the Cold War-era vehicles for engagement and negotiation—the United Nations, the World Bank, the Nuclear Non-Proliferation Treaty regime, the North Atlantic Treaty Organization—are moribund, tattered, or outdated. Obama has the generational outlook that will be required to revive or reinvent these compacts. He would be the first postwar American President unencumbered by the legacies of either Munich or Vietnam.
The next President must also restore American moral credibility. Closing Guantánamo, banning all torture, and ending the Iraq war as responsibly as possible will provide a start, but only that. The modern Presidency is as much a vehicle for communication as for decision-making, and the relevant audiences are global. Obama has inspired many Americans in part because he holds up a mirror to their own idealism. His election would do no less—and likely more—overseas.
What most distinguishes the candidates, however, is character—and here, contrary to conventional wisdom, Obama is clearly the stronger of the two. Not long ago, Rick Davis, McCain’s campaign manager, said, “This election is not about issues. This election is about a composite view of what people take away from these candidates.” The view that this election is about personalities leaves out policy, complexity, and accountability. Even so, there’s some truth in what Davis said––but it hardly points to the conclusion that he intended.
Echoing Obama, McCain has made “change” one of his campaign mantras. But the change he has actually provided has been in himself, and it is not just a matter of altering his positions. A willingness to pander and even lie has come to define his Presidential campaign and its televised advertisements. A contemptuous duplicity, a meanness, has entered his talk on the stump—so much so that it seems obvious that, in the drive for victory, he is willing to replicate some of the same underhanded methods that defeated him eight years ago in South Carolina.
Perhaps nothing revealed McCain’s cynicism more than his choice of Sarah Palin, the former mayor of Wasilla, Alaska, who had been governor of that state for twenty-one months, as the Republican nominee for Vice-President. In the interviews she has given since her nomination, she has had difficulty uttering coherent unscripted responses about the most basic issues of the day. We are watching a candidate for Vice-President cram for her ongoing exam in elementary domestic and foreign policy. This is funny as a Tina Fey routine on “Saturday Night Live,” but as a vision of the political future it’s deeply unsettling. Palin has no business being the backup to a President of any age, much less to one who is seventy-two and in imperfect health. In choosing her, McCain committed an act of breathtaking heedlessness and irresponsibility. Obama’s choice, Joe Biden, is not without imperfections. His tongue sometimes runs in advance of his mind, providing his own fodder for late-night comedians, but there is no comparison with Palin. His deep experience in foreign affairs, the judiciary, and social policy makes him an assuring and complementary partner for Obama.
The longer the campaign goes on, the more the issues of personality and character have reflected badly on McCain. Unless appearances are very deceiving, he is impulsive, impatient, self-dramatizing, erratic, and a compulsive risk-taker. These qualities may have contributed to his usefulness as a “maverick” senator. But in a President they would be a menace.
By contrast, Obama’s transformative message is accompanied by a sense of pragmatic calm. A tropism for unity is an essential part of his character and of his campaign. It is part of what allowed him to overcome a Democratic opponent who entered the race with tremendous advantages. It is what helped him forge a political career relying both on the liberals of Hyde Park and on the political regulars of downtown Chicago. His policy preferences are distinctly liberal, but he is determined to speak to a broad range of Americans who do not necessarily share his every value or opinion. For some who oppose him, his equanimity even under the ugliest attack seems like hauteur; for some who support him, his reluctance to counterattack in the same vein seems like self-defeating detachment. Yet it is Obama’s temperament—and not McCain’s—that seems appropriate for the office both men seek and for the volatile and dangerous era in which we live. Those who dismiss his centeredness as self-centeredness or his composure as indifference are as wrong as those who mistook Eisenhower’s stolidity for denseness or Lincoln’s humor for lack of seriousness.
Nowadays, almost every politician who thinks about running for President arranges to become an author. Obama’s books are different: he wrote them. “The Audacity of Hope” (2006) is a set of policy disquisitions loosely structured around an account of his freshman year in the United States Senate. Though a campaign manifesto of sorts, it is superior to that genre’s usual blowsy pastiche of ghostwritten speeches. But it is Obama’s first book, “Dreams from My Father: A Story of Race and Inheritance” (1995), that offers an unprecedented glimpse into the mind and heart of a potential President. Obama began writing it in his early thirties, before he was a candidate for anything. Not since Theodore Roosevelt has an American politician this close to the pinnacle of power produced such a sustained, highly personal work of literary merit before being definitively swept up by the tides of political ambition.
A Presidential election is not the awarding of a Pulitzer Prize: we elect a politician and, we hope, a statesman, not an author. But Obama’s first book is valuable in the way that it reveals his fundamental attitudes of mind and spirit. “Dreams from My Father” is an illuminating memoir not only in the substance of Obama’s own peculiarly American story but also in the qualities he brings to the telling: a formidable intelligence, emotional empathy, self-reflection, balance, and a remarkable ability to see life and the world through the eyes of people very different from himself. In common with nearly all other senators and governors of his generation, Obama does not count military service as part of his biography. But his life has been full of tests—personal, spiritual, racial, political—that bear on his preparation for great responsibility.
It is perfectly legitimate to call attention, as McCain has done, to Obama’s lack of conventional national and international policymaking experience. We, too, wish he had more of it. But office-holding is not the only kind of experience relevant to the task of leading a wildly variegated nation. Obama’s immersion in diverse human environments (Hawaii’s racial rainbow, Chicago’s racial cauldron, countercultural New York, middle-class Kansas, predominantly Muslim Indonesia), his years of organizing among the poor, his taste of corporate law and his grounding in public-interest and constitutional law—these, too, are experiences. And his books show that he has wrung from them every drop of insight and breadth of perspective they contained.
The exhaustingly, sometimes infuriatingly long campaign of 2008 (and 2007) has had at least one virtue: it has demonstrated that Obama’s intelligence and steady temperament are not just figments of the writer’s craft. He has made mistakes, to be sure. (His failure to accept McCain’s imaginative proposal for a series of unmediated joint appearances was among them.) But, on the whole, his campaign has been marked by patience, planning, discipline, organization, technological proficiency, and strategic astuteness. Obama has often looked two or three moves ahead, relatively impervious to the permanent hysteria of the hourly news cycle and the cable-news shouters. And when crisis has struck, as it did when the divisive antics of his ex-pastor threatened to bring down his campaign, he has proved equal to the moment, rescuing himself with a speech that not only drew the poison but also demonstrated a profound respect for the electorate. Although his opponents have tried to attack him as a man of “mere” words, Obama has returned eloquence to its essential place in American politics. The choice between experience and eloquence is a false one––something that Lincoln, out of office after a single term in Congress, proved in his own campaign of political and national renewal. Obama’s “mere” speeches on everything from the economy and foreign affairs to race have been at the center of his campaign and its success; if he wins, his eloquence will be central to his ability to govern.
We cannot expect one man to heal every wound, to solve every major crisis of policy. So much of the Presidency, as they say, is a matter of waking up in the morning and trying to drink from a fire hydrant. In the quiet of the Oval Office, the noise of immediate demands can be deafening. And yet Obama has precisely the temperament to shut out the noise when necessary and concentrate on the essential. The election of Obama—a man of mixed ethnicity, at once comfortable in the world and utterly representative of twenty-first-century America—would, at a stroke, reverse our country’s image abroad and refresh its spirit at home. His ascendance to the Presidency would be a symbolic culmination of the civil- and voting-rights acts of the nineteen-sixties and the century-long struggles for equality that preceded them. It could not help but say something encouraging, even exhilarating, about the country, about its dedication to tolerance and inclusiveness, about its fidelity, after all, to the values it proclaims in its textbooks.
At a moment of economic calamity, international perplexity, political failure, and battered morale, America needs both uplift and realism, both change and steadiness. It needs a leader temperamentally, intellectually, and emotionally attuned to the complexities of our troubled globe. That leader’s name is Barack Obama.
Monday 20 October 2008
Saturday 18 October 2008
Cry for me, Argentina
I've stated before in a number of posts that deficit and public debt reduction needs to become a major priority. Neither the Obama nor the McCain campaigns has this problem in their sights. The Obama tax plan is on balance better-funded, but it has far greater spending commitments, even before the revised EESA (which cuts at least $ 110 billion in revenue over 10 years) and Obama's latest $ 60 billion economic stimulus plan.
The numbers are becoming amazing, both in absolute terms and as a share of GDP. Remember that they do not include:
- State budget deficits
- Unfunded liabilities for social security, medicare and medicaid, at a time when the retirement of the baby boomer generation is creating a demographic bulge of retirees and senior citizens.
Lori Montgomery and Den Eggen report in today's Washington Post that the current surge in spending may push the annual deficit towards $ 1 trillion (Spending Surge Pushing Deficit Toward $1 Trillion).
Sarah Hernandez reports in Bloomberg that next year's deficit is already projected at above $ 500 billion, without taking into account EESA disbursements or new economic stimulus packages. (U.S. Debt May Grow $1 Trillion on Rescue, Barclays' Pond Says)
David Walker, former Comptroller General, issued a warning in a CNN commentary that according to his calculations, US public debt was on the order of $ 53 trillion is all unfunded liabilities are taken into account. (Commentary: America's $53 trillion debt problem)
My own post, back on 22 June ("Yes we can", or "No, we can't afford it") looks at some of the spending promises before EESA and the new stimulus packages were announced.
I can understand that in the last stages of a Presidential campaign, no self-respecting Presidential candidate is going to start promising tax increases and spending cuts across the board, on a scale necessary to reduce the debt. But unless the United States implements spending cuts (or revenue increases) on the order of at least $ 350 - 500 billion per year and allocate these towards debt reduction and re-funding Social Security, Medicaid and Medicare, the US will enter a debt spiral from which it will not easily exit.
Barack Obama has promised in the past to partially fund his spending plans through ending the War in Iraq. This campaign is costing about $ 10 billion a month, or $ 120 billion a year. This is mainly spent on combat operations deployment for 150,000 troops and support staff (not including contractors). Given the commitment to increase troops in Afghanistan, re-build depeleted military assets, and keep a "residual" force in Iraq (which I estimate would have to number between 35,000 - 40,000 troops), I don't see how more than $30 billion per year can be "saved" under optimal circumstances. That's a long way from funding either Obama's new spending promises (healthcare, infrastructure, middle class tax cuts, etc.) and debt reduction.
We should therefore not be surprised if many of the promises made during this campaign cannot be funded. If they are funded - through deficit spending - we should then not be surprised to see a far worse macroeconomic situation in 2010-2011. The dollar will plummet; the Fed will have to increase interest rates to fund debt instruments; economic growth will slow, and the US economy will start looking like Argentina's in the mid-1990s.
The numbers are becoming amazing, both in absolute terms and as a share of GDP. Remember that they do not include:
- State budget deficits
- Unfunded liabilities for social security, medicare and medicaid, at a time when the retirement of the baby boomer generation is creating a demographic bulge of retirees and senior citizens.
Lori Montgomery and Den Eggen report in today's Washington Post that the current surge in spending may push the annual deficit towards $ 1 trillion (Spending Surge Pushing Deficit Toward $1 Trillion).
Sarah Hernandez reports in Bloomberg that next year's deficit is already projected at above $ 500 billion, without taking into account EESA disbursements or new economic stimulus packages. (U.S. Debt May Grow $1 Trillion on Rescue, Barclays' Pond Says)
David Walker, former Comptroller General, issued a warning in a CNN commentary that according to his calculations, US public debt was on the order of $ 53 trillion is all unfunded liabilities are taken into account. (Commentary: America's $53 trillion debt problem)
My own post, back on 22 June ("Yes we can", or "No, we can't afford it") looks at some of the spending promises before EESA and the new stimulus packages were announced.
I can understand that in the last stages of a Presidential campaign, no self-respecting Presidential candidate is going to start promising tax increases and spending cuts across the board, on a scale necessary to reduce the debt. But unless the United States implements spending cuts (or revenue increases) on the order of at least $ 350 - 500 billion per year and allocate these towards debt reduction and re-funding Social Security, Medicaid and Medicare, the US will enter a debt spiral from which it will not easily exit.
Barack Obama has promised in the past to partially fund his spending plans through ending the War in Iraq. This campaign is costing about $ 10 billion a month, or $ 120 billion a year. This is mainly spent on combat operations deployment for 150,000 troops and support staff (not including contractors). Given the commitment to increase troops in Afghanistan, re-build depeleted military assets, and keep a "residual" force in Iraq (which I estimate would have to number between 35,000 - 40,000 troops), I don't see how more than $30 billion per year can be "saved" under optimal circumstances. That's a long way from funding either Obama's new spending promises (healthcare, infrastructure, middle class tax cuts, etc.) and debt reduction.
We should therefore not be surprised if many of the promises made during this campaign cannot be funded. If they are funded - through deficit spending - we should then not be surprised to see a far worse macroeconomic situation in 2010-2011. The dollar will plummet; the Fed will have to increase interest rates to fund debt instruments; economic growth will slow, and the US economy will start looking like Argentina's in the mid-1990s.
Friday 3 October 2008
Recovering from the US Vice-Presidential Debate
I just finished watching the US Vice Presidential debate on CNN. It was simultaneously the most dispiriting thing I've seen in a long time, and the most chilling.
Sarah Palin stuck almost entirely to her talking points and her version of history. I didn't see a single trace of humanity or humility, or that she could be trusted to think rationally or analyse anything beyond what she had memorised. Speaking politely, the facts did not feature prominently in what she had to say.
Her attacks on Barack Obama were delivered in this chirpy monotone that made me wonder if the control room was somewhere else, perhaps in Nome, Alaska. It was so contrived, so bereft of original thinking and spontaneity that I’m horrified to think of her as Vice President of the United States–a heartbeat away from the Presidency.
I was also struck by the CNN opinion graph, that was playing out like a little seismograph at the bottom of the screen. This gadget raised far more questions than it possibly could have answered: who were these "uncommitted Ohio voters?" Were they female or male? Young or old? How many were there? What education and income level did they have? How were they voting, exactly?
At the beginning of the debate, Sarah Palin was getting a high response for moral platitudes and tinned comments that had all the substance of marshmallow soup. The surge was surged to death; John McCain was ceaselessly intoned as the next messiah; the masses were addressed without the filter of the mainstream media. Repent, ye wicked media. Vade retro, Satanas.
And besides this, the medley of cloying, irritating words: "maverick," "no preconditions," "nucilar," “white flag of surrender,” “Joe Sixpack.” Was she speaking English, or was she speaking code? I had to change channels several times during the debate: watching the weather forecast on Greek public TV was more substantive, even soothing.
There were only two parts of the debate which I felt were vaguely interesting:
• When Joe Biden choked up over raising his sons as a widowed father;
• When Joe Biden unequivocally condemned Dick Cheney as the most dangerous VP in history. We need to hear more of this.
I was not impressed with the spending priorities of the two VP candidates – and the two campaigns. If the House passes EESA today, the public debt will swell to at least $ 11.3 trillion, out of a current GDP estimate of about $ 14.4 trillion. Unless we start a radical programme to pay down this debt, America will go bankrupt in 6-8 years, perhaps even sooner. Neither candidate mentioned debt reduction, yet this is the single most important priority, and will determine the extent to which the spending promises–renewable energy, healthcare “credits”, Iraq–can be financed.
Biden made a much more coherent statement about the role of the VP in the Obama administration, and I like the fact that he would be the point man on getting legislation through Congress. I had the impression that he and Obama have put a lot of through into planning and priorities, but they are still working on the costs.
In contrast, I didn’t see any such evidence from Sarah Palin. All I saw was the same dispiriting mix of lies, distortions and exaggerations:
• You can’t offer a “healthcare tax credit” and cut taxes. What’s the “credit” exactly? It’s a deduction from Federal income tax, obviously, and therefore the Federal budget. So the amount spend on the “credit” has to be reimbursed from other tax sources, or by cutting government spending (which is impossible given the spending promises and deficits).
• Troop levels in Iraq have not fallen to below pre-surge levels.
• She may have cut taxes in Alaska, but Alaska has benefitted from higher revenue due to a surging oil price which coincided with the years she has been elected governor (the last 2 years). Amazing how that's never mentioned. So her tax cuts have, in effect, been financed by all those people using oil. What you give with one hand, you take with the other.
• Her cheerleading for energy independence–through more drilling–is absurd. America’s domestic petroleum energy resources are nowhere near enough to offset petroleum imports. Energy independence is a myth.
• How can John McCain be such a maverick when he’s voted fully in line with Republican initiatives, spent so much time in Washington, and now has a campaign run by Republican lobbyists? Does anyone really believe this?
Over these past 8 years, I haven’t stopped asking myself: where has all the Republican political talent gone? Is this the best they can do? Is this the best America can do?
Is a President who comes to power based on a campaign founded on lies and misinterpretations legitimate? At what point does John McCain’s self-professed honour turn into dishonour? Is the fight for the Presidency worth the high cost of destructiveness and duplicity that we see every day in the media?
Read Sarah Palin’s comments, delivered towards the end of the debate:
"But even more important is that world view that I share with John McCain. That world view that says that America is a nation of exceptionalism. And we are to be that shining city on a hill, as President Reagan so beautifully said, that we are a beacon of hope and that we are unapologetic here. We are not perfect as a nation. But together, we represent a perfect ideal."
I believe that increasingly, American exceptionalism has become American delusion. You can’t possibly claim to represent a perfect ideal, when all you do is spin out lies and negativity while espousing politics that so clearly favour a few rich special interests at the expense of the large majority of the population, the environment and the future.
I’m sickened by the fact that this kind of rhetoric is so clearly in contrast with the reality of political achievement, and yet still so widely believed. With every election, I’m afraid that my faith in politics and the future of this country is further eroded, until I wonder what will be left.
Sarah Palin stuck almost entirely to her talking points and her version of history. I didn't see a single trace of humanity or humility, or that she could be trusted to think rationally or analyse anything beyond what she had memorised. Speaking politely, the facts did not feature prominently in what she had to say.
Her attacks on Barack Obama were delivered in this chirpy monotone that made me wonder if the control room was somewhere else, perhaps in Nome, Alaska. It was so contrived, so bereft of original thinking and spontaneity that I’m horrified to think of her as Vice President of the United States–a heartbeat away from the Presidency.
I was also struck by the CNN opinion graph, that was playing out like a little seismograph at the bottom of the screen. This gadget raised far more questions than it possibly could have answered: who were these "uncommitted Ohio voters?" Were they female or male? Young or old? How many were there? What education and income level did they have? How were they voting, exactly?
At the beginning of the debate, Sarah Palin was getting a high response for moral platitudes and tinned comments that had all the substance of marshmallow soup. The surge was surged to death; John McCain was ceaselessly intoned as the next messiah; the masses were addressed without the filter of the mainstream media. Repent, ye wicked media. Vade retro, Satanas.
And besides this, the medley of cloying, irritating words: "maverick," "no preconditions," "nucilar," “white flag of surrender,” “Joe Sixpack.” Was she speaking English, or was she speaking code? I had to change channels several times during the debate: watching the weather forecast on Greek public TV was more substantive, even soothing.
There were only two parts of the debate which I felt were vaguely interesting:
• When Joe Biden choked up over raising his sons as a widowed father;
• When Joe Biden unequivocally condemned Dick Cheney as the most dangerous VP in history. We need to hear more of this.
I was not impressed with the spending priorities of the two VP candidates – and the two campaigns. If the House passes EESA today, the public debt will swell to at least $ 11.3 trillion, out of a current GDP estimate of about $ 14.4 trillion. Unless we start a radical programme to pay down this debt, America will go bankrupt in 6-8 years, perhaps even sooner. Neither candidate mentioned debt reduction, yet this is the single most important priority, and will determine the extent to which the spending promises–renewable energy, healthcare “credits”, Iraq–can be financed.
Biden made a much more coherent statement about the role of the VP in the Obama administration, and I like the fact that he would be the point man on getting legislation through Congress. I had the impression that he and Obama have put a lot of through into planning and priorities, but they are still working on the costs.
In contrast, I didn’t see any such evidence from Sarah Palin. All I saw was the same dispiriting mix of lies, distortions and exaggerations:
• You can’t offer a “healthcare tax credit” and cut taxes. What’s the “credit” exactly? It’s a deduction from Federal income tax, obviously, and therefore the Federal budget. So the amount spend on the “credit” has to be reimbursed from other tax sources, or by cutting government spending (which is impossible given the spending promises and deficits).
• Troop levels in Iraq have not fallen to below pre-surge levels.
• She may have cut taxes in Alaska, but Alaska has benefitted from higher revenue due to a surging oil price which coincided with the years she has been elected governor (the last 2 years). Amazing how that's never mentioned. So her tax cuts have, in effect, been financed by all those people using oil. What you give with one hand, you take with the other.
• Her cheerleading for energy independence–through more drilling–is absurd. America’s domestic petroleum energy resources are nowhere near enough to offset petroleum imports. Energy independence is a myth.
• How can John McCain be such a maverick when he’s voted fully in line with Republican initiatives, spent so much time in Washington, and now has a campaign run by Republican lobbyists? Does anyone really believe this?
Over these past 8 years, I haven’t stopped asking myself: where has all the Republican political talent gone? Is this the best they can do? Is this the best America can do?
Is a President who comes to power based on a campaign founded on lies and misinterpretations legitimate? At what point does John McCain’s self-professed honour turn into dishonour? Is the fight for the Presidency worth the high cost of destructiveness and duplicity that we see every day in the media?
Read Sarah Palin’s comments, delivered towards the end of the debate:
"But even more important is that world view that I share with John McCain. That world view that says that America is a nation of exceptionalism. And we are to be that shining city on a hill, as President Reagan so beautifully said, that we are a beacon of hope and that we are unapologetic here. We are not perfect as a nation. But together, we represent a perfect ideal."
I believe that increasingly, American exceptionalism has become American delusion. You can’t possibly claim to represent a perfect ideal, when all you do is spin out lies and negativity while espousing politics that so clearly favour a few rich special interests at the expense of the large majority of the population, the environment and the future.
I’m sickened by the fact that this kind of rhetoric is so clearly in contrast with the reality of political achievement, and yet still so widely believed. With every election, I’m afraid that my faith in politics and the future of this country is further eroded, until I wonder what will be left.
It’s not just about Wall Street
Any discussion of the Emergency Economic Support Act and the failure of the real estate market these days is replete with references to greedy and incompetent bankers and the bail-out of Wall Street. This is a vast over-simplification of the issue, and detracts from our understanding of the root causes of the issue, and what to do next.
EESA is primarily concerned with buying non-performing mortgage-backed securities. These are non-performing because the mortgage holders have either defaulted on their loan payments, and the bank has foreclosed, or because they are late with their loan payments, so the security is a non-performing asset. However, signing for a mortgage is the responsibility not solely of the bank, but of the signatory who has committed to the loan.
In evaluating a housing purchase, you need to understand the total cost of the mortgage at current interest rates and decide whether this is affordable. You need to evaluate your current financial situation, but also at what may happen if you lose your job or if interest rates rise. You need to ask the same questions before refinancing your mortgage and cashing out the balance to buy plasma TVs, your third car, or an expensive vacation.
There have definitely been instances of deceptive marketing and possible contractual moves to the detriment of the policy-holder, and the advantage of the bank. However, I also read of blue-collar workers who have taken mortgages on houses which were clearly beyond their ability to pay. I'm not condemning them: the dream of home ownership is a valid and powerful one. But they responded by taking on two or even three jobs, sometimes at minimum wage. With the slightest disruption - such as a 3-month recovery period due to ill-health, or a rise in interest rates - their careful payment plan became impossible to maintain. These things happen, and regrettably they happen more frequently in a country with a low minimum wage and without an effective public healthcare system.
But let's leave this aside for the moment: EESA is purchasing the mortgages of people who can no longer afford to pay for them. How it will manage these mortgages involves a number of decisions, but the government has already established two mechanisms to deal with foreclosures and mortgages, and I believe they will be able to muddle it out.
This is therefore not a bail-out only of Wall Street: it's a bail-out of a vast number of families and individuals who have purchased real estate which they could not afford. We have to be very clear on that if we are to understand why this situation has arisen, and what is to be done in the future.
We also need to be clear about the problems related to the broader credit crisis. This is the real problem, for two reasons:
(1) Banks cannot lend without a risk-assessed capital:loan ratio of 8%. Equally speaking, they cannot borrow to meet short-term obligations.
(2) The failure of banks and traders has led to significant market disruption, which in turn is causing incredible havoc in the derivatives market. This is where the real danger lies. Although the estimated value of outstanding derivatives has fallen from $ 62 to $ 53 trillion, the scope for a catastrophic loss provoked by a highly-leveraged firm or contract is immense.
It is this failure to regulate the contracting and trade of derivatives which is more serious than the current housing crisis. This is why EESA must be passed, and why the Fed needs to keep injecting liquidity into the market through opening its discount window for bank and financial services borrowing.
This is not a new problem - neither is the real estate devaluation, nor is the extremely low saving rate and high debt level of most American citizens. Yet to blame Wall Street exclusively for this problem is ignore other players with shared responsibility of this complex issue: the Federal Government, which has not updated its regulation to keep pace with the financial industry; the pension system, which is increasingly invested in equities; and aspirations of millions of people, and perhaps the society in which they live, which idealise the belief of easy money and immediate self-gratification.
EESA is primarily concerned with buying non-performing mortgage-backed securities. These are non-performing because the mortgage holders have either defaulted on their loan payments, and the bank has foreclosed, or because they are late with their loan payments, so the security is a non-performing asset. However, signing for a mortgage is the responsibility not solely of the bank, but of the signatory who has committed to the loan.
In evaluating a housing purchase, you need to understand the total cost of the mortgage at current interest rates and decide whether this is affordable. You need to evaluate your current financial situation, but also at what may happen if you lose your job or if interest rates rise. You need to ask the same questions before refinancing your mortgage and cashing out the balance to buy plasma TVs, your third car, or an expensive vacation.
There have definitely been instances of deceptive marketing and possible contractual moves to the detriment of the policy-holder, and the advantage of the bank. However, I also read of blue-collar workers who have taken mortgages on houses which were clearly beyond their ability to pay. I'm not condemning them: the dream of home ownership is a valid and powerful one. But they responded by taking on two or even three jobs, sometimes at minimum wage. With the slightest disruption - such as a 3-month recovery period due to ill-health, or a rise in interest rates - their careful payment plan became impossible to maintain. These things happen, and regrettably they happen more frequently in a country with a low minimum wage and without an effective public healthcare system.
But let's leave this aside for the moment: EESA is purchasing the mortgages of people who can no longer afford to pay for them. How it will manage these mortgages involves a number of decisions, but the government has already established two mechanisms to deal with foreclosures and mortgages, and I believe they will be able to muddle it out.
This is therefore not a bail-out only of Wall Street: it's a bail-out of a vast number of families and individuals who have purchased real estate which they could not afford. We have to be very clear on that if we are to understand why this situation has arisen, and what is to be done in the future.
We also need to be clear about the problems related to the broader credit crisis. This is the real problem, for two reasons:
(1) Banks cannot lend without a risk-assessed capital:loan ratio of 8%. Equally speaking, they cannot borrow to meet short-term obligations.
(2) The failure of banks and traders has led to significant market disruption, which in turn is causing incredible havoc in the derivatives market. This is where the real danger lies. Although the estimated value of outstanding derivatives has fallen from $ 62 to $ 53 trillion, the scope for a catastrophic loss provoked by a highly-leveraged firm or contract is immense.
It is this failure to regulate the contracting and trade of derivatives which is more serious than the current housing crisis. This is why EESA must be passed, and why the Fed needs to keep injecting liquidity into the market through opening its discount window for bank and financial services borrowing.
This is not a new problem - neither is the real estate devaluation, nor is the extremely low saving rate and high debt level of most American citizens. Yet to blame Wall Street exclusively for this problem is ignore other players with shared responsibility of this complex issue: the Federal Government, which has not updated its regulation to keep pace with the financial industry; the pension system, which is increasingly invested in equities; and aspirations of millions of people, and perhaps the society in which they live, which idealise the belief of easy money and immediate self-gratification.
Thursday 2 October 2008
Understanding the Boom and Bust Cycle
This is now the third economic crash I’ve lived through in the past 11 years. My first one was the 1997-1998 emerging debt default, which as people may recall led to a total collapse of some currencies, including the Russian Rouble. At the time, my company was advising on a number of investments in Russia and the former Soviet Union, and I remember well the difficulties my clients had: their debt and raw material purchases were usually denominated in US$; most of their sales were in local currencies. The fact that capital dried up overnight and their local currencies devalued against the dollar was a double strike of major proportions.
My second crash was the dot.com crash in 2000-2001. Nearly every week in 1999, a business plan would land on my desk, with yet another idea to revolutionise some aspect of the economy by migrating it online. The problem was that everyone wanted to buy a Ferrari with someone else’s money, but couldn’t figure out how they would pay that money back.
I remember teaching a ecommerce course to executives in Cyprus. I made the comment that if you are going to go online, make sure you know how you will make money, because most online ventures are losing it. The disbelief and reprobation at my comment was nearly universal, and it was most pronounced by one insurance executive who stormed out of the room in protest.
The third crash, real estate, has been a long time coming, and so many people have warned against it. It was Robert Schiller who coined the term “irrational exuberance,” later used by Alan Greenspan in his 1996 speech at the American Enterprise Institute. Any objective price analysis in major urban areas in the United States, London, Paris, or other major cities in the past 3-5 years has usually shown that the price-value relationship is overvalued, particularly when total costs of ownership are taken into account.
I’ve been warning my clients since 2006 to guard their capital, scale back, watch out for leading indicators in their source markets (mostly US and UK) for higher inflation and higher interest rates: these are the advance signs of a crash. Most of them did not listen.
What have I learned from the boom-bust cycle? They tend to follow five phases:
1. Early Innovation
There are good profits to be made through innovation. Whether this innovation is sparked by a company like Amazon.com, which pioneered online book sales, or the Cypriot farmer who sold his land outside Paphos and bought a Porsche, it's clear that at the first stage of the cycle the economic returns are far in excess of any capital invested or any risks involved.
2. Mainstream Acceptance (Jumping on the Bandwagon)
In this stage, the sector and business model in question enters the mainstream. Time, Fortune and The Economist all run features on it as an exciting new field. Coverage branches into hagiography: Jeff Bezos, Captain of Industry.
3. Institutionalisation
In this stage, the boom has become institutionalised. Goldman Sachs develops a separate unit with offices in New York, San Francisco, London, Tokyo and, yes, Moscow, to manage the money they are making. Harvard Business School launches classes on the subject; INSEAD develops a new department. Everyone and their uncle is involved, starting a hedge fund or selling lingerie online. When your taxi driver is giving you tips on what shares to buy, you know a crash is imminent.
In this stage, economic returns are created by economies of scale and sophisticated trading and asset management techniques: much value is generated by foreign capital and late investors who don’t really understand what they are signing onto. The institutionalisation phase is also characterised by the gaudiest and most ostentatious consumption possible: think of Dennis Kozlowski’s $ 6,000 shower curtain, or Enron’s strip club lunch breaks.
This is also typically where you have near-constant references to "a new paradigm," "a revolution in ____ (fill in the blank)," "new horizons," "emerging opportunities in the growth markets of the future," etc. This is often hyperbole cheerleading a trend who's main potential is behind it, rather than ahead of it.
4. Desperation and the First Panic
By this stage, so much money is chasing so few investment opportunities, that the potential for producing an economic return to cover cost of capital and risk is difficult or impossible. Corners are cut: high valuations are justified through improbably forecasts; returns are made through high-risk bets. This is the stage where the risk of an illegal or unethical trade is the greatest. This is where companies advance-book their income, move debt to off-balance sheet vehicles, or take high risk positions. This is also where you will see the first valuation crashes: a share will lost 15-20% overnight; within a week it will have regained its value as investor see “an exciting investment opportunity at a historically low valuation.” Right.
5. Crash
The crash is when the shares of an entire sector drop, dragging the rest of the index or the economy with it. The main emotions of a crash are desperation, panic and ignorance. An observer never knows why the market is dropping; he only knows it’s dropping, and he’d better cash out as well.
The crash is when you have all the natural pessimists (about 75% of the population, in my opinion), come out of the woodwork and start the “I told you so,” and also when you have the craziest ideas surfacing: it’s the government's fault; it’s a Wall Street conspiracy to take over the world.
Politicians inevitably get involved, condemning the evil profit-makers. These are the same politicians who’ve been all too happy raking in the campaign contributions the past 7 years, and customising legislation to suit their important supporters.
Why does a crash occur? Because typically too much money is chasing too few real investment opportunities. When a market opportunity is saturated, it inevitably means that economic returns are far less than cost of capital, and in many cases less than the cost of inflation. Why? Because the innovation stage of the cycle is over; because market demand has been fulfilled; because too many competitors are driving down price; because markets have not yet adapted.
The point is that you can always tell when this point has occurred by fundamental financial analysis. The problem is that the very same people who are doing this analysis are usually the people who have the most to gain from propagating the current system. I’ve seen this up close, and while it's very seductive, it’s never pretty.
So what will come after this crash? The US Presidential Election will be held on November 4th: I’m betting Barack Obama will win. Equity values will settle in a few weeks, and start rising steadily from the first quarter 2009. (Some sectors will continue to be hit: retailers, home-builders, automobiles, etc.) The spring will bring new confidence and possibly a new bull market. It will be “morning in America” again, and as values of equities and homes begin to recover, everyone will optimistically plough their money into the next best thing.
What could go wrong? A number of things. The hedge fund sector could finally melt down. This would be a real crisis. There could be another terrorist attack, or an attack on Iran: these are likely to be mere speed bumps on the road to the next boom. That is, stock market boom.
What will that be? I’ll make two bets:
1. Renewable Energy
The Obama Administration and Democratic Congress will pass legislation favouring renewables, granting tax holidays, emissions limits and funding. Otherwise worthless tracts of the Sonoma desert will suddenly become priceless assets; little-known companies will appear with the solution to change our world. The cycle will start again. Everyone understands renewable energy: everyone loves it.
2. Biotech/Nanotech/Gene Therapy
For the first time, we are near real breakthroughs in mainstream gene therapy and the biotech/nanotech systems needed to deliver them. I’m less confident about this choice, since research is very capital intensive, valuations are already high, and big pharma is already involved. Also, it’s a terribly complex subject, and your average investor may not be in a position to evaluate it.
My advice? Be reasonable. Do the math, and do your homework. Don’t bet the farm. If you have a real opportunity, develop it within your means. All this has happened before, and it will all happen again.
My second crash was the dot.com crash in 2000-2001. Nearly every week in 1999, a business plan would land on my desk, with yet another idea to revolutionise some aspect of the economy by migrating it online. The problem was that everyone wanted to buy a Ferrari with someone else’s money, but couldn’t figure out how they would pay that money back.
I remember teaching a ecommerce course to executives in Cyprus. I made the comment that if you are going to go online, make sure you know how you will make money, because most online ventures are losing it. The disbelief and reprobation at my comment was nearly universal, and it was most pronounced by one insurance executive who stormed out of the room in protest.
The third crash, real estate, has been a long time coming, and so many people have warned against it. It was Robert Schiller who coined the term “irrational exuberance,” later used by Alan Greenspan in his 1996 speech at the American Enterprise Institute. Any objective price analysis in major urban areas in the United States, London, Paris, or other major cities in the past 3-5 years has usually shown that the price-value relationship is overvalued, particularly when total costs of ownership are taken into account.
I’ve been warning my clients since 2006 to guard their capital, scale back, watch out for leading indicators in their source markets (mostly US and UK) for higher inflation and higher interest rates: these are the advance signs of a crash. Most of them did not listen.
What have I learned from the boom-bust cycle? They tend to follow five phases:
1. Early Innovation
There are good profits to be made through innovation. Whether this innovation is sparked by a company like Amazon.com, which pioneered online book sales, or the Cypriot farmer who sold his land outside Paphos and bought a Porsche, it's clear that at the first stage of the cycle the economic returns are far in excess of any capital invested or any risks involved.
2. Mainstream Acceptance (Jumping on the Bandwagon)
In this stage, the sector and business model in question enters the mainstream. Time, Fortune and The Economist all run features on it as an exciting new field. Coverage branches into hagiography: Jeff Bezos, Captain of Industry.
3. Institutionalisation
In this stage, the boom has become institutionalised. Goldman Sachs develops a separate unit with offices in New York, San Francisco, London, Tokyo and, yes, Moscow, to manage the money they are making. Harvard Business School launches classes on the subject; INSEAD develops a new department. Everyone and their uncle is involved, starting a hedge fund or selling lingerie online. When your taxi driver is giving you tips on what shares to buy, you know a crash is imminent.
In this stage, economic returns are created by economies of scale and sophisticated trading and asset management techniques: much value is generated by foreign capital and late investors who don’t really understand what they are signing onto. The institutionalisation phase is also characterised by the gaudiest and most ostentatious consumption possible: think of Dennis Kozlowski’s $ 6,000 shower curtain, or Enron’s strip club lunch breaks.
This is also typically where you have near-constant references to "a new paradigm," "a revolution in ____ (fill in the blank)," "new horizons," "emerging opportunities in the growth markets of the future," etc. This is often hyperbole cheerleading a trend who's main potential is behind it, rather than ahead of it.
4. Desperation and the First Panic
By this stage, so much money is chasing so few investment opportunities, that the potential for producing an economic return to cover cost of capital and risk is difficult or impossible. Corners are cut: high valuations are justified through improbably forecasts; returns are made through high-risk bets. This is the stage where the risk of an illegal or unethical trade is the greatest. This is where companies advance-book their income, move debt to off-balance sheet vehicles, or take high risk positions. This is also where you will see the first valuation crashes: a share will lost 15-20% overnight; within a week it will have regained its value as investor see “an exciting investment opportunity at a historically low valuation.” Right.
5. Crash
The crash is when the shares of an entire sector drop, dragging the rest of the index or the economy with it. The main emotions of a crash are desperation, panic and ignorance. An observer never knows why the market is dropping; he only knows it’s dropping, and he’d better cash out as well.
The crash is when you have all the natural pessimists (about 75% of the population, in my opinion), come out of the woodwork and start the “I told you so,” and also when you have the craziest ideas surfacing: it’s the government's fault; it’s a Wall Street conspiracy to take over the world.
Politicians inevitably get involved, condemning the evil profit-makers. These are the same politicians who’ve been all too happy raking in the campaign contributions the past 7 years, and customising legislation to suit their important supporters.
Why does a crash occur? Because typically too much money is chasing too few real investment opportunities. When a market opportunity is saturated, it inevitably means that economic returns are far less than cost of capital, and in many cases less than the cost of inflation. Why? Because the innovation stage of the cycle is over; because market demand has been fulfilled; because too many competitors are driving down price; because markets have not yet adapted.
The point is that you can always tell when this point has occurred by fundamental financial analysis. The problem is that the very same people who are doing this analysis are usually the people who have the most to gain from propagating the current system. I’ve seen this up close, and while it's very seductive, it’s never pretty.
So what will come after this crash? The US Presidential Election will be held on November 4th: I’m betting Barack Obama will win. Equity values will settle in a few weeks, and start rising steadily from the first quarter 2009. (Some sectors will continue to be hit: retailers, home-builders, automobiles, etc.) The spring will bring new confidence and possibly a new bull market. It will be “morning in America” again, and as values of equities and homes begin to recover, everyone will optimistically plough their money into the next best thing.
What could go wrong? A number of things. The hedge fund sector could finally melt down. This would be a real crisis. There could be another terrorist attack, or an attack on Iran: these are likely to be mere speed bumps on the road to the next boom. That is, stock market boom.
What will that be? I’ll make two bets:
1. Renewable Energy
The Obama Administration and Democratic Congress will pass legislation favouring renewables, granting tax holidays, emissions limits and funding. Otherwise worthless tracts of the Sonoma desert will suddenly become priceless assets; little-known companies will appear with the solution to change our world. The cycle will start again. Everyone understands renewable energy: everyone loves it.
2. Biotech/Nanotech/Gene Therapy
For the first time, we are near real breakthroughs in mainstream gene therapy and the biotech/nanotech systems needed to deliver them. I’m less confident about this choice, since research is very capital intensive, valuations are already high, and big pharma is already involved. Also, it’s a terribly complex subject, and your average investor may not be in a position to evaluate it.
My advice? Be reasonable. Do the math, and do your homework. Don’t bet the farm. If you have a real opportunity, develop it within your means. All this has happened before, and it will all happen again.
Subscribe to:
Posts (Atom)