Posts from economics

A Glimpse Into The Future

Justin Fox has an excellent blog post up on Bloomberg.com talking about some changes he is seeing in the global economy.

In the post Justin observes that the global economic slowdown we are in the midst of may well be more about the accelerating change from a goods based economy to a services based economy than the traditional business cycle playing out.

There are a ton of good charts in the post and I would strongly suggest everyone go read it.

Here’s the final paragraph which sort of nails the argument, as good final paragraphs do:

Finally, consider the things that people do want to spend their money on. The defining consumer product of our age is the smartphone. A smartphone is a good, and it takes resources to make and transport it. Still, it takes a lot less resources than, say, a car. Most of its value is in the software that is loaded onto it and the people, information and entertainment you can connect to with it. That’s a different sort of value creation than 20th-century resource-based value creation. If that’s the direction the global economy is headed in, the connections between growth, trade and resource consumption aren’t going to be the same as they have been. That is probably a good thing.

The Bull Case For Solar

My partner Albert blogged about solar yesterday and posted this chart:

solar cost trends

I’d like to add another chart to this conversation, mortgage rates over the past thirty years:

mortgage rates 1980-2013

The bear case for solar has been that the payback times are too long. But with cost declines (Albert’s chart) and carrying cost declines (my chart), solar makes more sense today than ever.

The other chart worth looking at is home energy prices over time. Your payback on solar depends a lot on how much you are paying for alternative sources of energy.

This part of the analysis is not as easy. It depends on what kind of energy you are consuming (coal, natural gas, oil) and where you live.

But my view is that the long term price of carbon energy will not decline as fast as the long term price of solar. Particularly if carrying costs (which are dominated by interest rates) continue to be low.

Cap rates (the yield an investor gets in real estate) are in the 5-6% range around the US these days. That means an investor is willing to wait for 15-20 years to get their money back on a real estate investment.

Solar payback times are half of that and going down fast.

The Gotham Gal and I are putting solar onto every building and home we construct these days. We are believers and bullish on solar.

Deflation

Last week my friend Tom Evslin left this comment here at AVC:

Trial investment thesis: deflation is here to stay, get used to it. Of course we’re used to that in high tech and communication because of Moore’s Law. we don’t model price increases in our business plans. But the rest of the modern economy and the goals of various central banks assume inflation is normal and desirable.

I’ll leave aside whether it’s desirable because I’m positing that deflation is going to happen (except in terms of certain debased currencies).

Energy prices are going relentlessly down. They drive costs, of course, through the economy. Moore’s law has had an effect on these prices both in the more efficient use of energy and more effective ways to extract or even generate it it and manage it in grids. But historically, if you measure by manhours required to generate a BTU, energy costs HAVE gone way down since the first fire was intentionally lit in dry sticks.

Moore’s law will eventually even drive the price of health care down (see Andy Kessler).

Food costs are arguable but energy has much effect here as does genetic engineering and computerized farming.

Currency devaluation as an instrument of national financing becomes more difficult with globalization and perhaps nation-independent currencies.

Obvious losers from deflation are the current banking system (built for inflation), debtors with non-productive assets, and governments both because they are debtors and because they lose the taxes on inflationary portion of interest is there is not interest.

The winners are? That’s the investment question I’m thinking about.

I did not reply to Tom’s comment but I’ve been thinking about it ever since. I had a long conversation last night at dinner with another friend about it. What if we have seen peak energy prices on our lifetime? What if we won’t see long term rates in the US of 10% again in our lifetime? What if deflation is what we are managing instead of inflation?

We’ve been in a low rate and deflationary cycle since the financial crisis of 2008, but the assumption has always been that we will someday come out of that and we will return to economic conditions that existed prior to that event. What if that is not the case and we are in the new normal and it is here to stay?

I am writing this post because I’m still trying to wrap my head around what this means. If the global economy is going to have a deflationary bias for the foreseeable future, what should we all be doing and what should we not be doing? That’s the question and I’m looking for a discussion and some answers. Which I hope we will all find in the comments.