Super Boom - 500% increase in stock prices

Barry Ritholtz comments on plausibility of Jeff Hirsch's Super Boom: Why the Dow Jones Will Hit 38,820 and How You Can Profit From It | The Big Picture. As Barry mentions, it is plausible. However, timing the bottom still remains a challenge.

I believe there were trends ready to take over during episodes Jeff points to. There was the automobile boom, suburban boom and consumer products boom, the internet and computing boom etc. The problem is, as of now, I do not see any sector ready to create the growth momentum required for 500% increase in stock prices. I was looking at alternative energy among other things, but it doesn't seem to be a big contender as yet.

For a sector to be an able contender to create (not simply augment or drive) growth momentum it needs a few qualities. It needs to be a mass employer at a value-chain level. It needs to create productivity gains in existing economic engine while creating ancillary products and services that are growth engines in their own right. The first past will help finance investments in the technology while the second will create exponential gains in the sector both in terms of adoption and profitability.

Alternative energy cannot, as yet, be a mass employer. Though it can create energy independence and help the economic engine. To be specific, I think the sector has the potential to become a top trend creator in 10 years time. Another sector in its infancy could be water management and treatment. In my view, healthcare services or healthcare delivery services as industry fellows call it, may be a reasonable bet. I do not have much conviction in the idea as yet, but it ticks off some important boxes. It can be a mass employer, it will help improve productivity of economic engine (by keeping labour employable), it is a critical need so funding should not be an issue. The missing link is the exponential take-off. Unless people come up with innovation, I do not see exponential take-off materializing easily.

In all probability, the identification of trend should take at least couple of years. Till such time I do not see the beginning of the 500% trend. However, I am convinced that once such a trend is in place, we will see a period of sustained growth as the trend propagates through the global economy and benefits begin to stabilize. I am not sure if the percentage 500% is relevant but a sustained growth is always welcome. So let us hope for a quick revival!

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My book "Subverting Capitalism & Democracy" is available on Amazon and Kindle. 

Good debt and bad debt

Michael Pettis clarifies the difference in his post Reforming the banks.

The relevant paragraph reads:

The reason debt levels always seem to grow unsustainably, I suspect, is that in the initial stages of the growth model much if not all of the investment is economically viable as it pours into building necessary infrastructure whose profits and externalities exceed the cost of the investment. The result is real growth. At some point, however, the combination of subsidies, distorted incentives (in which investment benefits accrue to those making the investment while costs are shared broadly through the banking system), and very cheap financing costs leads inexorably to wasted investment and debt rising faster than asset values. This is when the debt burden begins to rise in an unsustainable way.

This explanation points to a difference between productive and unproductive debt that we discussed in earlier post. Productive debt creates an asset of higher value than itself. Let us highlight this sentence:

Productive debt creates an asset of higher value than the debt itself.

Please refer to the causality, critical to the equation. With housing, the sentence was correct except for the causality. The causality in housing was reverse - it was higher housing prices that were creating debt not other way round.

Snippet: What is a risk-free return?

In this snippet I restrict the question to investment firms and investors. These firms and investors get capital at some expected rate of return. Thereafter, the firms use their knowledge and management skills to generate returns  on this capital. Ideally, the returns they generate are higher than those expected by providers of capital. Further, and let us read this carefully, the returns these firms generate are higher than returns they could generate through any other activity.

In such cases, Risk-free return is rate of return slightly higher than cost of capital for these firms.

Your comments?

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My book "Subverting Capitalism & Democracy" is available on Amazon and Kindle. 

Crisis and plight of common man?

John Mauldin describes a letter sent by one of his readers. The reader, Bill, asks why is it that economists and analysts are promoting austerity implying pain for the common man. He particularly points to capitalism working for "have-gots" rather than the common man. John Mauldin answers well but I would like to add a few points.

The crisis is a problem for "have-gots" but the correct have-gots are ones who have got the debt. It is debt that is the problem for common person, not job or income. Somehow, we must realize that the mechanics of debt is not properly explained to the lay-person. Debt is good if it creates something that can repay the debt - a production asset. The collateral is just to allay the fears of the lender. Some how we created debt for assets that did not generate returns to repay the debt - like housing. These are, in my book, consumption assets and not production assets. 

The future for those with unpaid debt is bleak. Further, those who do not have enough savings, are likely to suffer next. To get through this phase of economic consolidation we need people to have strong backing of savings. These are usually the rich people, but this also includes those who were prudent with their money.

The question of austerity and jobs, to my mind, are mixed up. We need austerity in programs that are wasteful. However, constraining job-creating projects under the name of austerity is not a right remedy. Jobs are what will get the economy out of the woods.

The question, therefore, is why is there no job recovery. My sense is that we are undergoing a phase transformation in terms of employment profile of the economy. This is, in many ways, what Alwin Toffler calls "waves". The first wave created an agrarian-dominated employment profile. The second wave created a factory work-dominated profile. The third moved the profile to services and within services to technology driven services. We are awaiting the fourth transformation.

The problem with phase transformation is that individuals are often well-versed in older wave skills rather than new wave skills. To change this, we require extensive training and education. However, before we begin training, we need to know what the wave is. To survive this period of uncertainty we need savings and monetary solidity. The common person, almost always, does not have this. The dilemma, therefore, is how to assist the population while we determine what the next wave will be.

As a solution for this problem, Keynes suggested creating any job, even digging and filling ditches will do. Such a program goes against the principle of austerity. However, to my mind, Keynes' solution about  job creation represents way out.

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My book "Subverting Capitalism & Democracy" is available on Amazon and Kindle.