Jan 302009

I’ve been meaning to write a post about this, but Caroline Baum has written many of the same points I had in a piece for Bloomberg called “Economic Cures Are Like Booze for an Alcoholic”.

“…the U.S. economy was buckling under the weight of the burst housing bubble. The blame game was in full swing, with the villains ranging from Alan Greenspan and his easy money policies to consumers borrowing and spending beyond their means to financial institutions enabling profligate spending to a misallocation of capital to housing.

Fast forward one year, the crisis is still going strong, the villains are still under attack, yet something curious has happened: The policies and actions responsible for the economy’s illness are now being prescribed as cures…”

“President Barack Obama’s crack economics team, including Larry Summers and Christina Romer, and Fed officials from Ben Bernanke on down have to understand that the problem of too much leverage can’t be fixed with more borrowing; that a misallocation of capital to housing can’t be cured with incentives to buy more homes; that consumers (and the nation) can’t spend their way to prosperity.

At least I hope they do.”

Me too. Mr O is doing a number of positive things. For example, I’m very happy with things like a commitment to openness ethics rules. However, I’m not so happy with some of the economic plans floated. To me, the issues we are facing today are primarily a result of excess. The US economy has lurched from bubble to bubble. Our last one was driven by cheap credit and underestimating risk. Now the markets are correcting for that. Profits will not quickly return to their same levels as before, because companies will not be able to leverage on that scale again and the US consumer is still over leveraged.

Keynesian economists are arguing that it is possible to spend and stimulate our way out of a recession, and then before inflation decimates the economy we can return to fiscal prudence. There are several issues with this plan. One, excessive spending caused the boom and bust – we can’t just continue to create bubbles indefinitely. If stimulus could create permanent jobs, then why not triple or quadruple it and eliminate unemployment forever?  It just doesn’t work that way – we would be in ruins and the cost of servicing our debt would be massive.  The second hole is with regards to timing – I have very little faith that any institution would be able to accurately time inflation and adjust accordingly. History agrees.

There are also those out there that believe the US govt does not even have the capital to “save” the markets, even with ridiculous creation schemes. I on the other hand believe that they can come up with enough crazy Zimbabwean monetary policies to get the cash, regardless of the long term effects on our currency and long term wealth. Sadly inflation is a very tempting end result for a large debtor nation like the USA.

If you want to hear just how silly this all sounds, watch this video of Fred on the economy.

Jan 292009

diving islas coronados diving islas coronados diving islas coronados
Photos of diving Islas Coronados with the sea lions

Adam and I headed out with Waterhorse to visit the Coronado Islands just off Tijuana’s coast. The ride back was a bit rough, but overall it was a really nice day. The first dive was at the usual Lobster Shack. The site is popular because it is usually calm in the small bay and you can be visited by the sea lions in the winter and fall. Adam and I were joking with the captain about doing over an hour in the water, but it turned out to be close to reality. The boat pulled its anchor during the dive and I ended up spending 76 minutes under water with the sea lions. Score!

There were about 12 sea lions in total at the site on Sunday, most of them young. We had a lot of fun being visited by them all over the dive site, and then later hanging out in the shallows with them. The younger sea lions liked picking up small rocks to chew on and blew bubbles with the divers. A few were curious about fins, but none tried chewing on us.

The next dive was near middle grounds at a spot they called little rock. It turned out to be mostly mussel shells and lots of purple sea urchins. There was a swim through in about 20 feet of water, but the surge was so huge that we were hanging on for dear life in some parts of the point. Nothing gets the adrenaline pumping like being thrown around rocks covered in urchins.

Jan 292009

David A. Rosenberg from Merrill Lynch has released an 11 page document called “Some inconvenient truths”. It is worth a read for its frank discussion of our current economic condition.

Depressions are basically long recessions – they can last anywhere from three to seven years, while historically cyclical recessions last 18 months – and tend to follow years of leveraged prosperity of Gatsby-like proportions. Considering that in this most recent leveraged cycle from 2002-07, we reached a point where a record 40% of corporate profits were derived from financial activities, where household debt relative to income and assets surged to unprecedented levels and the personal savings rate briefly went negative at the height of the housing bubble, it is safe to say the down-cycle we are currently experiencing did indeed follow a classic elongated period of leveraged prosperity. It is now reverting to the mean.

Forty percent of profits were derived from financial activities. That blows my mind. Given most of these were short term gains and long term losses, it seems safe to say half of 2002-2007 profits were fictional (and actually losses). When you then think about all of the other profits that are ripple effects from the financial side of things, it is hard to see where there is any real profit growth in the near future.

This was a 20-year secular credit expansion that went parabolic starting in 2001-02 as the Fed and the federal government moved to offset the lingering deflation in the technology capital stock by invoking policies that touched off a massive reflation of the housing stock. Since the credit cycle ended in the fall of 2007, an estimated $1 trillion of bad debt has either been written down or recognized. But considering that total private sector credit market debt relative to national income is still near a record-high of 140% versus a long-run norm of 80%, the meanreversion process suggests that before we can even consider embarking on a fresh credit cycle, more than $6 trillion of excess household and corporate debt has to be eliminated.

Uh, wow. We are possibly only 1/6th of the way through credit/debt destruction.

With the consumption-to-GDP ratio at a record 70%, the personal savings rate barely above 2%, and the homeownership rate still near an all-time high of 68%, it goes without saying that investors looking for growth should look beyond the American consumer and housing market. These areas of the economy, even after they stabilize, are unlikely to be the leaders in the next economic expansion or bull market.

It sure seems that way to me. However, given the status of the US dollar and strength of treasuries, the world’s investment community clearly doesn’t see it that way yet. Maybe they don’t know where to hide.

Jan 282009

The UT has some positive words (in fact, it sounds a little like a press release) about a fish farm proposal from Hubbs-SeaWorld. The fish farm would be located off Mission Beach and would grow striped bass. This would be the first in the county, but not in the area. A 30 minute drive into Mexico or a trip to the Coronado Islands would yield a number of fish pen sightings – mostly tuna exports for Japan.

As Jay at the Linkery states, these fish farms would have a negative impact on our local environment:

Concentrated animal feedlot operations degrade their environment, propagate antibiotic-resistant disease, and ultimately provide second-rate nutrition, because the animals aren’t eating their natural food. Feedlots’ “positive economic effects” are simply that they exploit certain subsidies in our economy (commodity crops and unregulated environmental damages) to externalize most of their costs and thus make money for their operators.

He also states that this method of raising fish also ultimately impacts other areas of the country:

Just as in the movement of cattle to feedlots, they’re saying we can raise cheap fish by feeding them something that’s not their natural diet, but which is cheap. Of course, commodity corn is grown primarily through the use of fossil fuel, and is a big cause of the degradation of the soil and of rural communities in the Midwest, and the water in the Gulf of Mexico.

I agree with everything Jay wrote, his post is worth a read. Yet even believing all of the above, a part of me also believes the fish farms could have two positive effects. The first is California pollution controls. If we don’t farm the fish I believe some other country will. This country will probably have much lower standards for pollution controls and the health of local populations. We can probably do it cleaner here than China can and perhaps even set the bar higher.

The second reason is that we need more awareness of our food sourcing. The US is a net importer of sea food – most of the US population has no idea where our seafood comes from, or the damage that its harvest may have caused. The ocean stocks are on the brink of collapse, yet there is no problem walking into any seafood (or sushi) restaurant in the county and ordering whatever type of fish you want. Local production will force us to confront many of the ills that industrial farming produces. This will hopefully encourage people to think about where their food comes from and make better decisions.

Would the positive effects outweigh the negative effects? I’m not sure. I am probably being too optimistic, or naive about our ability to do it better or change peoples behavior. All the same, I think it is in everyone’s best interest to avoid NIMBY behavior.

Jan 222009

Just one day after George W. Bush left office, an NSA whistleblower has revealed that the National Security Agency’s warrantless surveillance program targeted U.S. journalists, and vacuumed in all domestic communications of Americans, including, faxes, phone calls and network traffic.

This is probably just the beginning – I’m guessing more information will trickle out (over several years) that details what else the Bush administration did with all that secrecy.

Jan 192009

On Saturday I headed out on the Sea Bass to dive some oil rigs just off the coast of LA. The first dive was on the Elly oil rig. Visibility was a solid 50 feet until the end of the dive near the water pipes. There were lots and lots of playful sea lions of all sizes. A few came down to visit us on the super structure at about 80 feet, blowing bubbles and barking. After that they left us alone for while and we explored the mass of life growing on the supports. At 30 feet a large group came to visit us, and playfully looped around us while blowing bubbles.

The next dive was on the Ellen oil rig. The visibility had dropped to about 25 feet and it was fairly dark under the structure, but it was still fun to explore the structure. The currents had really picked up when we were doing our safety stop – a steady swim was needed to keep place. There weren’t as many sea lions on this dive, but it was probably that they were bored with us finally. There was a third dive scheduled on the Eureka rig, but my ear was giving me trouble so I had to bail out.

It was a gorgeous sunny day with barely a ripple on the water. The boat staff and the other divers (especially my insta-buddies Heather and Harry) were friendly and knew what they were doing. Waking up at 4 in the morning to drive to LA isn’t my favorite activity, but the reward was well worth it.

Heather posted a video that gives a pretty good idea of what it is like to be in the middle of a sea lion play time – a lot of fun. I’m in the video a couple times, rolling on my side and making strange chicken wing movements. As much as I love the chicken dance, I’m actually trying to vent some stubborn air from my drysuit. Enjoy: