Wednesday, May 19, 2010

Open Letter to the President

Yeah, another one of those open letters. Dontcha hate those. Anyway, here it is.

Dear Barack,

I, as all reasonable Americans do, very much appreciate your efforts over the past year and a half to put the economy back on track after... you know what. The challenges have been enormous and the collateral damage from Wall Street's collapse unprecedented. I know you like that word, so I thought I'd use it here.

As an astronomy geek, I tend to think of the calamities of the recent past by analogy to a supernova. The financial sector used to be a hypergiant star that gave energy to its periphery (the rest of the economy) by a fusion of light elements (mortgage, consumer and corporate debt) into progressively heavier elements (ABS, MBS, CDOs, CLOs and then synthetic CDS-wrapped CDO's) until it ran into the "iron wall" and reached a point where fusion consumed more energy than it generated. At that point, this hypergiant exploded in a supernova-scale explosion, doing enormous damage to its periphery with a shower of life-annihilating radiation, while its core has collapsed into a black hole after a liquidity crunch of the Fall of 2008. This black hole is now sucking away our money and energy (including by being the sole preoccupation of our legislators) with no useful output whatsoever. Well, maybe some output, but not very much more than Hawking radiation - barely a tick above the absolute zero.

But enough flowery metaphors. And enough feeding the black hole -- high time to move on. The American Recovery and Reinvestment Act was mostly a good thing but with two large problems: (1) it wasn't big enough and (2) not all of it was all that good. We gotta acnowledge, at least privately amongst us friends, that Paul Krugman and Christina Romer were right about this, at least in general terms. We're gonna need a second stimulus, most likely sometime around this coming Fall, because by then the growth will stagnate to near zero (or even turn negative again), housing prices will resume the inexorable decline and job growth will not be enough to keep up with population growth. But you already know all that and don't need me to spell it out.

The kicker of course, is how do you do a second stimulus amidst such vocal opposition to more government spending? The short story is that Tom Friedman is right too. The long story is this:

1. What. Call it the American Project for Energy Independence. Names are important, and the name above has at least three words that Americans will eat up: "American", "Energy" and "Independence". "Project" is somewhat neutral so feel free to replace it with "Initiative" if focus groups like it better - I just though that you need at least one consonant in there to make it a semi-plausible acronym and couldn't think of anything else off the top of my head. Just don't try to shove "Jobs" in there - too tired and "J" is never good for acronyms.

But I digress, for substance is important too. The substance is that we will wean ourselves from imported energy in 10 years and all fossil fuels (except for some transportation) in 15 years. We will accomplish this goal by setting out on a massive national program to build (1) mega-windfarms (East Coast and the prairie West), (2) geothermal stations (everywhere), (3) solar plants (the desert SouthWest), (5) one nuclear plant per state per decade and, of course, (6) a new grid to carry all that electricity to our cities.  And boy, are we gonna need a lot of manufacturing and R&D! Think of the manpower that we will need for that! And think of the manpower needed for construction jobs. Foget New Deal - we're talking about a WWII style mobilization of resources, without the side-effects of wanton destruction of most of Europe. Unemployment rate should go down to 4% easily.

Next in order of importance are things we will not be doing.
 - We will not be building or repairing highways and bridges - because this sort of infrastructure is as exciting as watching paint dry: we already have something that works well enough and the concept is totally wanting in novelty.
 - We will also not preoccupy ourselves with transportation issues. Car makers are well on the way to making electric cars a mass-produced reality and will only need a small nudge here and there (like further tightening of CAFE standards) to achieve universal adoption. And while high-speed rail is cool and is needed, it can take a back seat for now - we'll get to it in a decade, and hopefully with Maglevs.
 - We will not meddle too much in home weatherization and efficiency. Seriously, "cash-for-caulkers"? Good luck selling that on any scale that matters. Let's just leave markets to do the job that they can do. We can give it some quiet nudges here and there, by, for example, revamping revenue generation schemes for utilities or by slapping taxes on inefficient appliances. But we will not be making this a part of a major national debate.
 - We will not be soliciting bids from private contractors on the vast majority of EPC work: we will just do the job Roosevelt-style and privatize the pieces later. I would even suggest issuing a new style of bond to finance the project -- modeled on war bonds and with the same marketing push behind it. 
 - We will not be engaging in a lenghty environmental review/public comment process on individual facilities, because this is just too important, including for the environment in the long run. Loosing a dozen endangered species is a very small price to pay to avert a catastrophic global warming and we should keep that in mind. Nuclear and geothermal will and should get a thorough vetting, of course, but wind and PV solar should basically sail free with zero review, while solar thermal should only be reviewed from the perspective of impact on water resources. We will need to rewrite the book on agency review process so that the siting and permitting is finished in a year, long before all of the necessary R&D is complete.

2. How.  How to sell all of this to American public, that is. Obviously, a project like that will be terrifyingly expensive. But the people will only care about that if you keep telling us about cost every frakin' minute. I noticed, for example, that when the stimulus debate was presented in terms of the number of dollars that we needed to spend, it immediately started sounding as something of a big and wasteful boondoggle. 1 trillion sounds scary, especially if you can't clearly spell out what it's  for -- and this should surprise no-one. If, instead, the debate was about what we needed to DO, and how great things would be once we had ACCOMPLISHED it, the stimulus would likely be better, larger and far more popular.

So try a different approach this time. Paint a picture of a future in which we do not pay money to countries who don't like us very much or send our soldiers there. Paint a picture in which oil spills no longer happen because we don't pump oil anymore. Paint a picture of abundant and cheap electric energy that will power homes, plants and cars. We need vision from our leaders. Not accounting.
 - If opposition brings up costs and "we can't afford it argument", ignore it and change the topic onto your vision. And mention that the opposition is in the pocket of Saudis, BP and Exxon and is unpatriotic. 
 - If opposition brings up objections to "big government", ignore them, and talk about your vision again. And mention that the opposition is being unpatriotic and wants to put our brave troops in harm's way.
 - If opposition objects on the grounds that this is socialism, ignore them and tell the American public that the opposition is trying to rob them blind by taking money from their pockets and sending it to the arabs.

Don't get me wrong though, costs are important. Just not that important in the long run. For in the long run, this massive project will put our economy on a path to sustainable prosperity by providing long-term employment to a very large segment of our population in the new energy industry and by making American imports shrink while exports (of all the new tech that we are going to build) will grow dramatically. National debts and deficits will shrink just as they did in the aftermath of WWII.  And reduction of CO2 emissions to dramatically lower levels will be a very nice and welcome cherry on top.

 With best wishes,

Econ Skeptic

Sunday, May 9, 2010

EU's Shock and Awe

From Bloomberg article:
Jolted into action by last week’s slide in the currency and soaring bond yields in Portugal and Spain, the 16 euro nations agreed to offer financial assistance worth as much as 750 billion euros ($962 billion) to countries under attack from speculators. The European Central Bank will counter “severe tensions” in “certain” markets by purchasing government and private debt...
This is Shock and Awe, Part II and in 3-D,” Marco Annunziata, chief economist at UniCredit Group in London, said in an e-mailed note. “This truly is overwhelming force, and should be more than sufficient to stabilize markets in the near term, prevent panic and contain the risk of contagion.”

Well, this is more like what the doctor ordered. To be honest, even that large of a package by itself may not be enough, because the borrowing needs of the likes of Spain and Italy are much, much larger than that. Still, it's sizeable, and if I read things correctly, the cap is really quite soft because of ECB's upcoming debt monetization.

The Euro is surging righ now, but this is all wrong. There's gonna be QE in Europe as ECB starts buying up sovereign debt and this should hurt the currency over the next few months, especially if the Fed doesn't resume its own debt monetization programs. The bond yields should start normalizing though, with spreads for the PIIGS narrowing substantially and the fligh-to-safety trades unwinding both for the German bunds and US Treasuries.

Currencies can't all devalue at the same time. So there's bound to be some give and some take. Good news for gold bugs, I suppose - but that's a side show. The real issue is what happens to US trade balance now and whether the slumping Euro puts a damper on the nascent US recovery.

Thursday, May 6, 2010

It's time for "I told you so"s

1. Zerohedge. When it comes to HFT trading, they've been right all along.  This is their "I told you so" moment, and a richly deserved one.  

A minor observation here: recently, Barry Ritholtz has been a staunch advocate of trading with a stop-loss close at hand - I can't be bothered to look for specific entries on his blog, but there were several. So a question: how would that strategy have worked out today. Suppose you had a stop-loss on SPY at 1100 - it would have gotten tripped up halfway through the meltdown and a solid 2.5%+ lower than the eventual close. Don't get me wrong here: I am not advocating trading without a stop-loss either. Rather, in this algo-driven market, I am advocating not trading equities at all.

2. Yours truly. Didn't I tell you that a bailout for Greece does jack shit to help Spain and Portugal? Didn't I? But I think it's worth repeating the fundamental question for further consideration by Europe's "leadership". I take it that the fundamental goal of a Greece bailout was to attempt to stop contagion to the rest of Europe. And I agree that it is a worthwhile goal - nobody wins if Spain goes down in flames. But if you are not willing to go all out and make ECB into the equivalent of US Treasury and Fed combined, why bother with Greece at all? $140 billion is no chump change, and it's all down the drain as Greece will still default/restructure and the rest of the PIIGS are in as much trouble as they've ever been.  If ye Germans are so keen on preserving your mojo of fiscal discipline and punish the profligate transgressors of Maastricht, why not just (a) withdraw from the EMU and reintroduce the Deutche Mark and (b) bail out your banks and your banks only, as necessary?  Let's get this mess over with one way or another - enough of this charade of half measures!