Sitting in my now-emptier-than-usual coffee shop, drinking my filter coffee (cappuccino's are too expensive!), I had an investment epiphany, or rather several. I thought to myself, "why not take my capital and build a new office building?". Yes, it's true there are half a dozen nearby still under construction, and the existing class-A space has ballooning vacancies and plunging rents, but I'll get the jump on the next cycle..right? Or, why not buy those 3 acres near the water and put up some condos on spec? If that doesn't work I can always turn them into time-shares, right?? Or maybe I should buy the 500 acres of under-utilized farm land and build an auto-assembly plant? Or a disc-brake manufacturing plant? Or an air-bag igniter operation? 250 room businessman's hotel, that does wedding on the weekends? Or I could build a new shopping mall, replete with swank boutiques and over-priced kitchen stuff and of course, a food-court. If that is too low-rent given the income inequality and distress at the lower-income end, I could build a designer-brand factory-outlet shopping center, since the nearest one is more than twenty-five miles away!! We could put a "Hooters" in the vast, usually empty, car-park which would draw the punters and happy-hour crowd. How about an independently-owned coal-fired power generation station? Nahhh, NIMBYs would handcuff me for years and the demand outlook remains tepid at best. Perhaps I could turn the currently disused, former discount store with large empty parking lot on the national highway into a logistics center, by expanding the loading bays at the back, and by putting a "Hooters" in the corner of the front parking lot? I know, maybe I should build a new municipal stadium with all the attendant concessions and super-boxes, and then I can lure a professional football or baseball team here? Perhaps a disc-drive plant? A credit-card operations center? A mortgage origination and processing center? What about a pilot fitness center of a chain that I will take nationwide? A supermarket? A car-dealer? A lawn & garden center? A new subdivision of 4000sq ft "luxury" homes squeezed onto 3000sqft lots with gallery ceilings? A new community bank? A coffee shop? A lumber mill? A factory for making paper-making felts? A community newspaper? A building materials supplier? Open a new hedge fund? OK maybe none of these qualify as epiphanies. Maybe for any of these, I couldn't even find the finance I needed it despite my equity. But upon closer inspection, maybe credit crunch is wrong description. Maybe it's a actually a useful productive idea crunch. Maybe, we are - for the moment - overbuilt, over-satiated, over-consumed, and just full-up. And that is before we ask anyone for credit. Certainly not everyone, for there is obvious dire need on the north and east sides of town, Am I am crazy to even be thinking about making useful productive investments? Maybe not, but I think back to Yossarian of Joseph Heller fame, refusing to fly more missions, so he's protesting naked in a tree, and sent to the army shrink.Doc Daneeka: So I understand you don't want to fly any more missions.
Yossarian: Yes that's right
Doc Daneeka: Why not?
Yossarian: Because there's lots of young people my age, back home, going out, getting drunk, having a good time, and that's what I should be doing
Doc Daneeka: But were at war, with a brutal and merciless enemy. What if everybody felt as you do...?!?
Yossarian: Then I'd be a fool to feel any different.
Yea, maybe I'm not crazy, but I'm probably a fool...
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There's always something needs doing though. We need a new energy infrastructure for instance. And that's a global thing, and it gets to the heart of the debate of what you can achieve for the widest and best interests with a for-profit, capitalist system, versus sometimes intervening and planning something for maybe longer time horizons than capitalists are interested in.
The logic of whining about energy insecurity or dependence on unfriendly countries escapes me completely when the useable solar energy falling on a small, desert, corner of the US alone would generate not just the terrawatts the US uses (for everything) but also enough spare for most of the rest of the world. It "appears" more expensive than current conventional alternatives, in so far as perceptions of cost of anything related to energy economics have any meaning (a bit like earnings and profits declared by ex-investment banks over the past decade).
Thoughts?
Umm, diminishing marginal returns on the 2oth century?
Charles - You haven't seen anything. Wait 'til the challenging demographics kick-in...
goto100 - a US General friend-of-the-family used to cynically joke that it really didn't WHAT we spent it on - shooting rockets into space for example - so long as it was spent and people were employed and keept in the shops and off the streets. Even at a young age I wasn't amused by this man. I, believe that there are superior long-term returns, both economic and social to long-term infra-structure like investment, particularly energy and transport. The energy, of course needn't be supply-oriented for as Amory Lovins points out the highest EROI is NOT supply but conservation - which is essentially engineering and use.
I was probably a touch brief. The demographic problem falls under diminishing marginal returns to ideology (or better, to keep the ranters at bay, 'belief system'). If the current mess isn't, that will be the one that gets inflated out of.
Cassandra,
If there's a dearth of investment ideas right now, why are we about to let a bunch of politicians spend willy nilly? What are the chances that they are smarter than you?
If we do let them waste a bunch of money on politically correct but dubious projects, what happens when an entrepreneur comes along in six months or a year or two with a good idea? Will the capital be available to fund a good idea in the future if we waste it today?
Maybe we'd be better off just waiting for things to develop. Some of the best trades in my life were ones I didn't do....
Maybe there is just a dearth of good ideas that are capital intensive? Maybe capital itself is showing weakness?
Perhaps in this century it will be harder for people have capital, but no actual ideas, to make money like they have in the past. Would that be the so bad?
I was talking with the owner of an antique clock shop last weekend--the kind of guy that goes through 19th century Elliots and replaces the little bronze gears no one makes anymore. For the first time in his life, he's going to make a grandfather clock. From scratch, which he'll take all year. And then he's going to sell it for ~25K.
Unlike the ideas you mention, where you might end up with an empty office building or other relic of failed DNA in the evolution of capitalism, if his product doesn't sell he'll have a clock. That he made himself. The ROE might not be great, but it probably won't matter to him. The bad thing about focusing on putting money where it is most efficiently used is that if you don't make money, the meaning of the whole process falls apart.
And wind-up clocks save energy too...
As systems become both more structured and more complex, the ideas required to make true progress become themselves exponentially more complex. Compare the discovery of fire with the discovery of the atom, to the search for a unified field theory. This concept applies in finance as well as the real economy. Your laundry list of ideas were basically all "been there, done that" (and I know this was intentional). New ideas need to respond to new a complex human needs (for example I have a few hundred gigabytes of family photos, would love to easily manage them...delete copies, internet backup...publish select online, etc) but no one company has really "solved" this problem, and it is not clear it would be profitable to (I want the solution but I want it to be cheap and easy to implement).
So new ideas must fill incrementally smaller needs gaps and the ideas themselves are more difficult to generate.
Cassandra: There's a fantastic idea for generating all our energy from solar power based on the Moon. Whizz bang, get on the blower to the General. It would keep him from starting wars at least? Devils and idle hands and all...
I'm wondering if there is a real dearth of ideas or just a dearth of new ideas from people who have access to finance. A surplus of the same ideas from people who live in Greenwich and Atherton, Nottingham and Brentwood. I wonder if the good ideas are lurking in Compton and Oakland, or Shreveport....guess we'll never know... I wonder what else is on ? ... click
"But upon closer inspection, maybe credit crunch is wrong description. Maybe it's a actually a useful productive idea crunch. Maybe, we are - for the moment - overbuilt, over-satiated, over-consumed, and just full-up. And that is before we ask anyone for credit."
Good ideas are still getting funding, like in some areas where current technology or business methods are egregiously inefficient.
You folks need to re-read those Joseph Campbell books gathering dust on your shelves.
The new ideas always come. Subscribe to Kurzweil's daily email to get a different perspective. Chill... it's nothing new: see
http://www.econ.yale.edu/smith/econ116a/keynes1.pdf
This is how Keynes saw our ultimate path -
I see us free, therefore, to return to some of the most sure and certain principles of religion and traditional virtue-that avarice is a vice, that the exaction of usury is a misdemeanour, and the love of money is detestable, that those walk most truly in the paths of virtue and sane wisdom who take least thought for the morrow. We shall once more value ends above means and prefer the good to the useful. We shall honour those who can teach us how to pluck the hour and the day virtuously and well, the delightful people who are capable of taking direct enjoyment in things, the lilies of the field who toil not, neither do they spin.
I was convinced, as I was reading this, that you were going to make some acerbic point about the manner in which Japanese corporates squander shareholder capital on non-core "ventures" such as these. I was looking forward to "pet cemetary" and "unit bathroom business" to appear in the list..
Cassandra
Last year in Hokkaido I found a picture of "PM Abe" outside an LDP office. Now that Mr. Abe (who he?) is the last PM but one, (maybe two; who gives a ****) unlike the LDP, isn't it time you updated your blog links?
Some people aren't being fair here. This is a really interesting question about how pretty much everything in society works.
What says there isn't a better solution than where the ball stops on the roulette wheel of capital allocation in a 'free' market?
That point about the General in the comments is really interesting too. Build anything you want,it doesn't matter. The Neocons built a war in Iraq...for the same (possibly less) money, you could actually have built that lunar based solar energy scheme! The principal author of the idea (David Criswell) suggests ultimate generation costs of 2c per KwH if I remember correctly (google his name, there's enough detail in various articles he wrote that are publically available).
But the philosophical point is, we COULD have not gone to war in Iraq, built the space based generation scheme and now have energy available that costs a fraction of what it currently does. Saddam Hussein would probably still be in power, admittedly, but the scale of this 'alternative outcome' is mind blowing. The money for Iraq was spent. Ergo, it did exit. It was available. If it was available for Iraq, it could have been available for something else. And the principal argument against that something else was always that it's too expensive? And of course, you wouldn't have needed to build something like that on the Moon, even if it is technically a fantastic, and dare I say it, inspiring, challenge....
So why did we get an obviously massively worse outcome for the money, one that has moved society backwards if anything, when instead we could have ended global energy poverty? I speak as someone fairly convinced that availability of energy is the main driver of prosperity in a society. I don't dispute conservation is a good thing, but the optimum is clean, abundant, renewable energy, surely? I still love my gadgets, personal transportation (often a bike, but even they need energy to make) and a warm house (though our energy consumption per sq. m would leave most Americans rubbing their eyes in disbelief).
In short. Are we completely mad and irrational?
another great catalyst for discussion. thanks Cassandra and all the comments thus far. I understand what you mean about the General. I like how we come to those places and realize "those" sorts of epiphanys.
Ideas? - Going back to the same idea bin that got us here is not what I envision. I see this period as the catalyst and accelerator to new ideas. This will be a new paradigm. I also see it as a purging of some of the excessive ideas of yore. A rebalancing and redistribution ... of priorities ...... of a whole host of things. No I do not see it necessarily as all good. I do believe that although the impact to the current working cohort is massive, it might be that the greater impact will be on the upcoming working cohort, the fresh minds that will push tomorrow's ideas into reality. I see it in the attitude of my own children, their excitment and intrigue. I believe the real value will be in those ideas. Born on the new realities that will develop in the next years. That is as long as the Russia-Ukraine and Israel-Gaza and various other global conflicts do not merge and throw our rebalancing into something more tumultuous and damaging to forward progress?
Those of us old enough to have lived through the 60s remember it as a sustained binge based on the notion that "let's all share someone else's stuff." Clearly, the legacy lives on. All the prescriptions presented by your thoughtful contributors involve spending someone else's money. As your colleague to West, Michael Pettis, points out, "a program of massive fiscal spending to replace household demand is not going to solve the current problem. It simply replaces one kind of unsustainable behavior with another, and still has to be resolved at some point with massive deleveraging."
"I do believe that although the impact to the current working cohort is massive, it might be that the greater impact will be on the upcoming working cohort, the fresh minds that will push tomorrow's ideas into reality. I see it in the attitude of my own children, their excitment and intrigue."
After excess capacity is destroyed or reallocated through war and/or bankruptcy.
nice post
we had a system where the economical thing to do is write uncovered out of the money puts.
wouldn't it be better if it were now economical to buy out of the money calls?
sure, there would be "waste" and unproductive work, but there is a lot of unused capacity out there, esp in human capital
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