Wednesday, November 28, 2007

The Perfect Storm

The mortgage market is hurting, real estate is down, oil is near historic highs, the stock market is volatile, troop levels in Iraq are as high as they've been since the start of the war, consumer confidence is low. The stage is set.....for an economic rebound of monumental proportions.

Given all of the factors listed above, the economy is growing at around 4%, unemployment is around 5%, mortgage rates are historically low, the stock market is still near an all time high, the surge is working and consumers say they're not confident while they continue to spend. If this is a low point in the current economic cycle, it's got to be among the highest of low points in recorded history.

Fortunately, the United States is still a relatively free market. Free markets make adjustments on the fly. The mortgage market will correct, real estate will come back, energy (oil or no oil) will be had. Troop levels will decrease and consumer confidence has become irrelevant as it is more a reaction to what people see on the news than a prediction of what they'll do.

Let's take them one at a time. Mortgage companies don't make money by not selling product. They got sloppy and they're now paying the price. CEO's who don't recognize and correct problems in their business model soon become former CEO's. The model will be fixed because there is no alternative.

Real estate prices are coming down. It's a buyers market. Prices are coming down because fewer people are qualifying for loans. Demand is still there. Houses for sale will be converted to houses for rent. Consumers will adjust to higher standards for borrowing and prepare accordingly. Builders will incorporated new materials and techniques to make homes more affordable.

New technologies in energy are becoming more and more competitive with oil. Back in the 70's there was optimism for alternative fuels, but it never panned out. Oil got cheap again and many alternatives were shelved by investors. The focus is different this time around. First, many of the technologies show the potential to compete on price with fossil fuels in the very near future if not already. Second, the emphasis this time is not on curbing energy use, but on using different energy. Lower emissions is a strong motivator as is national security. Jay Leno also recently disclosed another motivation. He outfitted his very large garage with a wind generator and expressed satisfaction with being able to use "home-made" energy. Just as home-made pie tastes better somehow, home-made energy just feels better than energy taken from the grid.

The stock market has been all over the board recently, but is still within 10% of an all time high. The worries are short-term. The long term view is for good times ahead.

The situation in Iraq has improved dramatically. The strategy of securing neighborhoods rather than chasing bad guys is working. The politicians still need to come around, but the movement is working from the ground up. Troop levels will come down over the next year which will bring down federal expenditures, increase demand for housing and generally boost consumer morale.

Consumer confidence has been waning for several months. This has not translated in any significant slow down in consumer activity. It seems people are answering surveys based on their perception of reports on the news and not based on their own reality. Bad news sells, so it will always top the headlines. Reporters always look for the "what if?" that would lead to the worst scenario. I remember asking a friend who commented once about the "runaway crime wave" in the country, "When was the last time you actually had to dodge a bullet?". The situation in his mind was not borne out in reality.

We have a unique situation right now in that several sectors and situations affecting the economy are poised for significant improvement at the same time. There is a convergence of technological and economic advancement going on around the world as information exchange continues to grow. Changes and adjustments take place faster than ever before. Betting on failure takes no imagination. Hunkering down is not a growth strategy. Be prepared for the opportunities ahead rather than bracing for the pitfalls.

Saturday, November 24, 2007

Trade Policy

With the holiday shopping season upon us, the issue of buying products from abroad, particurlarly from China, is in the spotlight. This brings up the broader issue of how much government involvement there should be in international trade, consistent with free market principals.

The rule of law is essential to the free market. Capitalism is the ability to enter into voluntary transactions and associations in the absence of force. It is a legitimate function of government to enable this environment. In the case of forced labor, the transaction is not voluntary or free from coercision. The beneficiary of the labor is a thief. Knowingly entering into a series of transactions that involves the use of force makes one an accessory and equally guilty of theft. It is not in the capitalist's interest, no matter what country they reside in, to tolerate theft. A policy that prohibited trade that involves individuals forced to engage in involuntary transactions is appropriate.

In the case of tainted goods, any party to the transaction that knowingly sells a defective or tainted product should be held accountable both criminally and civilly. The issue here is truth in advertising. One can't voluntarily enter a transaction if one party is giving the other false or materially incomplete information without their knowledge. Deception is aggression and can also, not be tolerated. We tend to treat Fraud as a "white-collar" crime and less serious than more physical crimes. Fraud is, in fact, an act of violence and just as harmful to a free society as physical violence. This is another principal that should be borderless in the minds of capitalists.

A code of behavior that is not necessarily embodied in the laws of government is called ethics. The ethics of capitalism should be clearly spelled out, promoted and defined by capitalists (before someone else defines them). The absence of self-regulation brings government regulation. It is in the capitalist's best interest to expose and confront unethical behavior and hold the responsible party(s) accountable. Communication is vital. The institutionalization of the essential fundamentals of capitalism cannot take place if the masses don't know what those fundamentals are. Freedom, honesty and accountability are among the core principals that should be portrayed as inseparable from capitalism and free markets.

Wednesday, November 21, 2007

Policing the Paparazzi

Getting pictures or videos of celebrities has become a huge industry. There's big money in it. The demand for these images continues to grow. The competition has gotten so intense in recent years that people have been killed and seriously injured by photographers willing to put others in danger so they can get the shot.

I recently saw a video taken from a camera phone, of George Clooney stopping and confronting a photographer who had run a red light and swerved out of his lane to get a picture.

It occurs to me that there are at least two good approaches to this situation. One is to turn the cameras around. Today's technology enables cameras to be installed just about anywhere. When you go out in public, record it from your perspective. Get them on film when their behavior is outrageous. You could probably hire someone for around 80K a year to handle the whole thing for you. The other is to have a personal videographer. Establish your own archive of images and videos of you, by your employees. They of course have a big advantage over the competition because they'd know exactly where you were going, why, and when you'd be there. They'd get better pictures and reduce the value of the competition's shots.

Transparency is a good thing. The knowledge that your behavior is being observed presents a challenge to behave in manner you wont regret. But to put the observations in context, the information should flow both ways. I wouldn't regret punching a guy in the nose for sticking a camera lens in my face, but a third party would interpret my behavior differently if all they saw was the punch in the nose.

Celebrities could take advantage of the current imbalance in the recording of events surrounding them by collecting, editing and selling their own imagery from their own perspective.

Use the market (you know that evil capitalist thing) to your advantage. I'd much rather watch the lengths some loser will go to in order to get a picture of somebody eating lunch than watch the person eating lunch.

Saturday, November 17, 2007

The Tryanny of Universal Health Care

In case anyone thought I had overstated my case in my previous post concerning universal health care and it's impact on personal freedoms, my predictions are already coming true in New Zealand.

New Zealand has a universal health care system. From Wikipedia: "In New Zealand hospitals are public and treat citizens or permanent residents free of charge and are managed by District Health Boards. Under the current Labour coalition governments, 1999 - present, there are plans to make primary health care available free of charge. At present government subsidies exist in health care. This system is funded by taxes. The New Zealand government agency PHARMAC subsides certain pharmaceuticals depending upon their category. Co-payments exist however these are ignored if the user has a community health services card or high user health card. " As I've previously pointed out, this opens the door to all kinds of restrictions on behavior and lifestyle in that society now has a vested interest in your real and potential need for health care.

In this case a couple wishing to immigrate to the country were denied visas because both exceeded the country's Body Mass Index limits. The husband was able to lose the weight necessary to comply. The wife was not. The husband left his wife in England for the time being, but that's a whole other story.

The relevant point here is that since the government is the provider, the government can set the conditions as to who will get resources and when. This woman is a victim of her own metabolism (and the fact that the biggest factor in fat creation and storage is actually the carbohydrates that make up the base of the food pyramid we're all encouraged to use.) She is now, no doubt, frantically seeking weight loss programs and paying through the nose for them, so that she can not be such a burden on the health care system of the country she wishes to live in. Of course, if she's successful, she'll be taxed to help pay for the system she's being encouraged not to have to use.

Regulating your weight is only the beginning. Universal health care makes restrictions on things like recreational activity, diet, mode of transportation, almost any activity you can imagine, justifyable. Anything that carries any potential risk of illness or injury represents a potential "burden" to society.

Take note and be careful what you wish for.

Friday, November 2, 2007

Hollywood's View of the Future

What do all the most successful futuristic sci-fi series have in common? Star Trek, Stargate, Battlestar Gallactica et al? The virtual obliteration of the free market and individualism.

In Star Trek we have a society that no longer uses currency. The only way to advance yourself is through promotion, which comes from the central authority. Even Kirk, portrayed as something of a rebel, ultimately answered to Star Fleet. The whole premise of the Stargate series is a community of space faring earthlings, funded entirely by the government and unknown to the citizens whos taxes pay for the program. Knowledge and new discovery are deemed too dangerous for the general population to deal with. Battlestar Gallactica features the last surviving humans fleeing for their lives from the Cylons. They are totally dependent on the military and government structure. There are something like 40,000 remaining humans, yet a great deal of them belong to the one remaining thriving industry: the press core. In a population the size of a small town, dozens of reporters crowd the room whenever someone in authority has something to say. After all, the two most important groups in the human race are government and the media right? Never mind that neither group actually produces anything.

Where are the capitalists in these programs and movies? Oh, they occassionally appear, but only as shiftless, greedy, dishonest types. They are either direct adversaries of our heroes or quirky, minor characters who are tolerated by the rest, and used mainly for comic relief. Most often they are arms traders, black marketeers, slave traders or some other criminal element. The Firefly series did buck the trend and featured a group of non-government individuals trying to eek out a living amidst an oppressive central authority. The episodes were aired out of sequence and it was cancelled before the end of the first season.

This is Hollywood's vision of the future. A vision based on the belief that someday, we will dispense with the notion of the supremacy of the individual over the mob and embrace instead a primary focus on the good of the state, society, humanity. A vision that builds a society in which a very few benefit greatly from the labor of the masses, and the masses are grateful for the opportunity. This is not surprising coming from a demographic that travels by private jet to meet, greet and eat around the world in $4,000 suits with massive enterourages while telling the rest of us to cut down on consumption for the good of the planet.

So why does an industry that makes all of its money from the free market constantly portray a Utopian future in which the free market doesn't exist? Do they feel guilty about their riches and therefore work to bring about the destruction of the system that created them? Or are they just stupid? I'm not sure. I am sure that the conquering of deep space will never happen under a socialist system. Even a "kinder, gentler" dictatorship is self destructive. You can't order people to be creative. You can't take away individual rights and then expect people to excel. The Soviet Union was able to create a massive war machine through tyranny for a while. But as we found out after its fall, they weren't able to maintain what they built. The fall of many a "great" civilization has come about largely due to the population's lack of interest in passionately defending it.

It's said that life often imitates art. If that's the case, American art needs an overhaul. Do you want an exciting future for your species or for your grandchildren? Are we insignificant parts of a greater whole or are we great people? Don't just watch, think. What's the message? Where are the producers leading our imaginations? What's the end game? Is it time for a rewrite?

Thursday, November 1, 2007

The Peak Oil Scare

What is Peak Oil? In a nutshell it's the notion that we've passed the halfway point of world oil supplies and from here on out it gets more expensive and more scarce. The town criers of this scenerio don't stop there. They predict the end of civilization as we know it as our ever increasing dependence on ever more expensive crude causes economies to collapse and governments to ration energy. The good news is they're off their rockers.

Is oil getting scarce? Maybe. Will it get ridiculously expensive? Maybe. Are we so oil dependent that we can't operate without it? Absolutely not. Exxon's margins on gasoline actually dropped in recent quarters. That's because there is a limit to how much people will spend on gas. When it topped $3, we drove less. We left the SUV's at home. Sales declined. The price came down even as oil continued up.

Crude's still got some room to rise. It's still the fuel of choice due to it's relatively low price (even at $100/barrel) and its widespread availability. But at $4/gallon for gas, other options become commercially viable. You can already get wholesale biofuels for about $2.25/gallon. Hydrogen on demand vehicles are very doable. As are flexfuels, TDP, methane, ethanol and a host of others, not to mention the newly discovered method of releasing hydrogen from salt water using radio frequencies.

The only reason these alternatives aren't more widely used now is that they aren't yet competitive in the marketplace. It will take more than a short term spike to take oil out of the game. But once the price gets too high for a protracted period of time, investors will take the plunge and go full speed ahead with other options. The other thing working against oil is that technology is bringing the price of many of these alternatives down. Solar Ink may bring the cost of solar down by a factor of 10 within 12-24 months. What do you think that will do to the solar market?

Oil is reaching a peak. The peak of its usefulness as a fuel source. Only one thing will bring the fall of the global economy: bad government policy. Free markets enable rapid adaptation and resource allocation.

Is there manipulation in the oil market? Probably. But eventually, some group of chumps will be left holding the bag when the crude bubble bursts.