In his latest quarterly letter Grantham outlines his current thoughts in a point by point format. Overall his tone is highly cautious which doesn’t surprise me given the current economic background. He seems to see some of the same things I have been harping on recently, although I will admit I have been following him for years so I have been influenced by his thinking before (so possibly a bit of chicken and egg syndrome going on here and since he is my senior I guess he wins, oh ya and hes also one of the greatest money managers alive so ya he definitely wins).
Rogoff gives us this very well written article asking a very important question that I haven’t seen much thought devoted to. So I will go ahead and indulge you with some mental rymes of my own on the subject below. Enjoy!
The Sustainability of the Current Socio-Economic Paradigm
The question of whether or not the current form of capitalism is sustainable is one of the most important questions of our day. We live in a time of stress that magnifies the weakest parts of the system and one HUGE problem I see is that the well being of the current paradigm is predicated on growth. How many times have you heard people say the phrase “if we can just get the economy to start growing again”.
The important question to ask here is this; Why is it so important that the economy grows? I would argue that it is important for many reasons but I want to take some time to focus on why its important when viewed through the monetary system because it is really at the core of many of our current problems which arise from a society that is bumping up against the limits of “growth” as we currently view the term. Money is created through credit, the only way new money comes into existence is as debt. This leads to a scenario where if there is no growth; then the debt can not be repaid and wealth is destroyed via the various mechanisms such as bankruptcy, capital market fluctuations, and by reductions in the prices of assets such as housing. This is because debt must be repaid with interest and the only way all the current interest can be repaid is through issuance of more credit or debt (which is fine as long as the fundamentals can support a system that grows exponentially).
I want to make one thing clear; the current system is the best the world has seen to date and has helped propel humanity in ways never seen before. When harnessed in conjunction with technological advancement it has been an enormous success benefiting literally billions of people. The reality is that the system has flaws but it has worked great in the past and can continue to work well again once enough wealth has been destroyed, but if the underlying fundamentals cannot continue to support exponential growth we must assess this inherent flaw in our monetary system and expunge it.
One of the long term fundamental problems of the current paradigm is that the growth that has historically underpinned this system is composed of population growth and the concurrent growth in energy supplies. The monetary, population, and energy components form the foundations of our economic system. All of the consumer products and the corresponding technologies that allow their production stand on top of these three pillars. The monetary pillar provides the means for incentivizes to be distributed according to laws of economics as well as societal laws. The population provides the innovation, knowledge and demand to push the civilization forward, and the energy drives the whole machine forward.
For the system to “grow” we need more economic activity which has to be backed by corresponding energy expended. That energy can be harnessed in various ways in order to satisfy some sort of consumer demand so we can become more efficient per output of economic unit and there are some promising trends in this arena. Consumer demand manifests itself in various ways such as demand for necessities such as food; as well as demand for the millions of products and services including the needs of the industries which support them, historically the growth in consumer demand has been highly correlated with growth in energy demand.
Its important to understand there are strong feedback mechanisms between these three things and shock-waves in one pillar can drastically affect the others.
Think I’m wrong about all this? Consider the following population graph…….
The explosion in population you see here was enabled because of technological advances and through the extraction of fossil fuels to power the system. This combination allowed living standards to begin to increase faster than they ever have before and the population with it. With plentiful food and energy the human population has grown exponentially and now we have parlayed this wonderful excess even further into very high living standards. Think of how many people today simply work on advancing the human-machine civilization through various industries as well as pure academic research, this work would not be possible without excess energy.
Alas exponential growth cannot continue forever, at some point the human population will stabilize until a time comes where we can expand the frontiers of our settlement. How we end up expanding in the long run is anyone’s guess (I have a few but they are outside the scope of this post). Suffice it to say Earth can only hold as many humans as energy production and current technological advancement can sustain.
So hopefully some dots are now starting to connect in your head, given current energy supplies and technology the advanced countries seem to be running into some headwinds to growth. The US houses approximately 4% of the worlds population boasting about 312 million people; we account for approximately 22% of world GDP and use about 25% of the worlds energy that is produced each year. As the population of China (1.2 Billion; 17% of world) and India (1.3 Billion; 18.6% of world) modernize they use more and more energy which creates vastly increased demand on a system ill equipped to deal with the growth. Ever notice that extracting fossil fuels requires more and more investment each year and we are having to find it in exotic places and develop new technologies to extract lower grades of energy? Well the simple reason behind this is that there is ultimately a finite amount of this type of energy stored on our planet. This is a hotly debated subject and after about 200 hours of reading everything I could find and access (which is actually a substantial amount of expensive information), my conclusion is that we are currently having trouble bringing the energy needed online in an economically viable fashion. Furthermore in the future substantial investments will need to be made in renewable energy sources and the sooner we make real progress down this path the better.
This is the main driver behind the rise the in cost of food because (and i know I’m breaking ground here) food production takes energy! Not only do we use energy to drive the machines that create food; we also use energy to fertilize the fields via petrochemical fertilizers.
Ok; you may be saying that’s all well and good, we just need more energy! You would be correct! One of our main problems lies in the supply side of energy, thankfully there are realistic solutions to these problems but they are going to take long periods of time to implement. Possibly longer than the debt laden western system can sustain while keeping the transition smooth. If we have a massive breakdown in the western monetary system the risks are very high for political and social instability that is very hard to predict. Often times events such as these send waves through societies that lead to war and other undesirable outcomes.
I know this sounds awfully pessimistic; but you have to remember these processes occur over long periods of time and if we as a society wake up to these realities (as I believe we are) there should be plenty of time to remedy this situation. We need some of our best minds to be objectively looking at the system as a whole and offering up realistic solutions that we as a society can tackle. The issues range from sustainable energy development & sustainable food production all the way to a more stable money system.
Is there a possibility that the system or market can work these things out on its own? Absolutely, the system is resilient and seems to have a way of working itself out. However that is no reason to stand by and risk the highly negative possibilities that can occur if we choose to idly stand by with no plan.
So are we going to risk the level of human societies advancement in the long run on a monetary system that forces growth? In my mind this is a question we need to take into serious consideration. Are there solutions to our energy problems and financial problems? Yes, its simply a matter of opening your mind to new ideas and paradigms, constructing a viable plan of action and applying human innovation into the needed pursuits.
Fortunately I do see strong signs that some of these things are happening on their own as a sort of emergent property of the system when viewed as a whole. The best example is the technological and developmental progress of the solar power industry. (Remember that all the Energy in use today including Oil Coal Nat Gas ect. was ultimately derived from the Sun through bio mechanical and geological processes). As solar continues to become more cost effective its going to be hard to make a case for continued use of fossil fuel technologies. This is due to the fact that solar has much room to go in terms of efficiency and that the remaining supplies of fossil fuels will become more and more energy intensive to extract.
Our financial problems are working themselves out slowly but there is a risk of unforeseen consequences without a viable plan for the long run. Another financial system shock is highly undesirable and could bring things into reality that seem impossible today such as widespread societal upheaval and a shaking of the stability of the US government. I think we can all agree while the risks of such outcomes may be small; the ramifications are very severe so this warrants a detailed discussion and assessment of the situation. A sort of country/system wide risk management discussion.
A duo from MIT argue that rapid computer advances may be vaporizing careers faster than workers can train for new ones. This is a topic I have touched on many times on this site; as technology continues to advance at an EXPONENTIAL pace education is becoming more and more important. Its like a force of nature and only the strong survive; or in this case the correct word may be thrive instead of survive. If you think this trend is going away anytime soon please smack yourself in the face and wake up. Look at Watson handily beating out the best Jeopardy champions, AI is real and its coming on stronger each year. The people who embrace and lever these trends to their advantage will thrive, and until vast swaths of society pick up on this, the gap between the haves and have-not’s will continue to be a part of worldwide society.
Omega Advisors, Inc. I Wall Street Plaza • 88 Pine Street • 31 st Floor | New York, New York 10005
Tel: 212-495-5210 | Fax: 212-495-5236
Leon G. Cooperman, C.F.A. Chairman & Chief Executive Officer
OPEN LETTER TO THE PRESIDENT OF THE UNITED STATES OF AMERICA
November 28, 2011
President Barack Obama
The White House
1600 Pennsylvania Avenue, NW
Washington, D.C. 20500
Dear Mr. President,
It is with a great sense of disappointment that I write this. Like many others, I hoped that your election would bring a salutary change of direction to the country, despite what more than a few feared was an overly aggressive social agenda. And I cannot credibly blame you for the economic mess that you inherited, even if the policy response on your watch has been profligate and largely ineffectual. (You did not, after all, invent TARP.) I understand that when surrounded by cries of “the end of the world as we know it is nigh”, even the strongest of minds may have a tendency to shoot first and aim later in a wellintended effort to stave off the predicted apocalypse.
But what I can justifiably hold you accountable for is your and your minions’ role in setting the tenor of the rancorous debate now roiling us that smacks of what so many have characterized as “class warfare”. Whether this reflects your principled belief that the eternal divide between the haves and have-nots is at the root of all the evils that afflict our society or just a cynical, populist appeal to his base by a president struggling in the polls is of little importance. What does matter is that the divisive, polarizing tone of your rhetoric is cleaving a widening gulf, at this point as much visceral as philosophical, between the downtrodden and those best positioned to help them. It is a gulf that is at once counterproductive and freighted with dangerous historical precedents. And it is an approach to governing that owes more to desperate demagoguery than your Administration should feel comfortable with.
Just to be clear, while I have been richly rewarded by a life of hard work (and a great deal of luck), I was not to-the-manor-born. My father was a plumber who practiced his trade in the South Bronx after he and my mother emigrated from Poland. I was the first member of my family to earn a college degree. I benefited from both a good public education system (P.S. 75, Morris High School and Hunter College, all in the Bronx) and my parents’ constant prodding. When I joined Goldman Sachs following graduation from Columbia University’s business school, I had no money in the bank, a negative net worth, a National Defense Education Act student loan to repay, and a six-month-old child (not to mention his mother, my wife of now 47 years) to support. I had a successful, near-25-year run at Goldman, which I left 20 years ago to start a private investment firm. As a result of my good fortune, I have been able to give away to those less blessed far more than I have spent on myself and my family over a lifetime, and last year I subscribed to Warren Buffet’s Giving Pledge to ensure that my money, properly stewarded, continues to do some good after I’m gone.
My story is anything but unique. I know many people who are similarly situated, by both humble family history and hard-won accomplishment, whose greatest joy in life is to use their resources to sustain their communities. Some have achieved a level of wealth where philanthropy is no longer a by-product of their work but its primary impetus. This is as it should be. We feel privileged to be in a position to give back, and we do. My parents would have expected nothing less of me.
I am not, by training or disposition, a policy wonk, polemicist or pamphleteer. I confess admiration for those who, with greater clarity of expression and command of the relevant statistical details, make these same points with more eloquence and authoritativeness than I can hope to muster. For recent examples, I would point you to “Hunting the Rich” (Leaders, The Economist, September 24, 2011), “The Divider vs. the Thinker” (Peggy Noonan, The Wall Street Journal, October 29, 2011), “Wall Street Occupiers Misdirect Anger” (Christine Todd Whitman, Bloomberg, October 31, 2011), and “Beyond Occupy” (Bill Keller, The New York Times, October 31, 2011) – all, if you haven’t read them, making estimable work of the subject.
But as a taxpaying businessman with a weekly payroll to meet and more than a passing familiarity with the ways of both Wall Street and Washington, I do feel justified in asking you: is the tone of the current debate really constructive?
People of differing political persuasions can (and do) reasonably argue about whether, and how high, tax rates should be hiked for upper-income earners; whether the Bush-era tax cuts should be extended or permitted to expire, and for whom; whether various deductions and exclusions under the federal tax code that benefit principally the wealthy and multinational corporations should be curtailed or eliminated; whether unemployment benefits and the payroll tax cut should be extended; whether the burdens of paying for the nation’s bloated entitlement programs are being fairly spread around, and whether those programs themselves should be reconfigured in light of current and projected budgetary constraints; whether financial institutions deemed “too big to fail” should be serially bailed out or broken up first, like an earlier era’s trusts, because they pose a systemic risk and their size benefits no one but their owners; whether the solution to what ails us as a nation is an amalgam of more regulation, wealth redistribution, and a greater concentration of power in a central government that has proven no more (I’m being charitable here) adept than the private sector in reining in the excesses that brought us to this pass – the list goes on and on, and the dialectic is admirably American. Even though, as a high-income taxpayer, I might be considered one of its targets, I find this reassessment of so many entrenched economic premises healthy and long overdue. Anyone who could survey today’s challenging fiscal landscape, with an un- and underemployment rate of nearly 20 percent and roughly 40 percent of the country on public assistance, and not acknowledge an imperative for change is either heartless, brainless, or running for office on a very parochial agenda. And if I end up paying more taxes as a result, so be it. The alternatives are all worse.
But what I do find objectionable is the highly politicized idiom in which this debate is being conducted. Now, I am not naive. I understand that in today’s America, this is how the business of governing typically gets done – a situation that, given the gravity of our problems, is as deplorable as it is seemingly ineluctable. But as President first and foremost and leader of your party second, you should endeavor to rise above the partisan fray and raise the level of discourse to one that is both more civil and more conciliatory, that seeks collaboration over confrontation. That is what “leading by example” means to most people.
Capitalism is not the source of our problems, as an economy or as a society, and capitalists are not the scourge that they are too often made out to be. As a group, we employ many millions of taxpaying people, pay their salaries, provide them with healthcare coverage, start new companies, found new industries, create new products, fill store shelves at Christmas, and keep the wheels of commerce and progress (and indeed of government, by generating the income whose taxation funds it) moving. To frame the debate as one of rich-and-entitled versus poor-and-dispossessed is to both miss the point and further inflame an already incendiary environment. It is also a naked, political pander to some of the basest human emotions – a strategy, as history teaches, that never ends well for anyone but totalitarians and anarchists.
With due respect, Mr. President, it’s time for you to throttle-down the partisan rhetoric and appeal to people’s better instincts, not their worst. Rather than assume that the wealthy are a monolithic, selfish and unfeeling lot who must be subjugated by the force of the state, set a tone that encourages people of good will to meet in the middle. When you were a community organizer in Chicago, you learned the art of waging a guerrilla campaign against a far superior force. But you’ve graduated from that milieu and now help to set the agenda for that superior force. You might do well at this point to eschew the polarizing vernacular of political militancy and become the transcendent leader you were elected to be. You are likely to be far more effective, and history is likely to treat you far more kindly for it.
Leon G. Cooperman
Chairman and Chief Executive Officer
Worried about the long term energy future of the world? Fret no longer my friend the laws of thermodynamics do not apply! (Well; they still do; but this could help us circumvent the energy limitations of our planet). The fact is the human population is growing at an exponential rate along with our energy consumption and despite what some people assert, we will eventually burn through our stock of carbon based fuels. Sure we know of many other forms of carbon energy such as oil sands, and new techniques such as fracking will allow us to extend the rein of our carbon based energy economy, but this paradigm will not last forever.
Think this idea seems far fetched? Remember private companies such as SpaceX are working hard every day to lower the cost per pound of putting assets into space. The long run future is so bright I gotta wear shades! its just what happens in the interim that makes me nervous.
The automation tusnami continues apace; the only way to hold out in my opinion is to be continually educating yourself with regard to new trends and ideas to keep up. Very interesting read here. I have read the book written by Martin Ford “The Lights in the Tunnel” (referenced in the Economist article) and the points he makes are very interesting and I continue to see evidence of this trend all around me. Most people are simply not aware that many pieces of what we call “intelligence” or “cognition” are being built on computers everyday. The science of AI (artificial intelligence) and of what is now called AGI (artificial general intelligence) are advancing rapidly and once true AGI is unleashed the consequences are hard to see through. Ultimately AGI will have to be used as a tool by humans to create more and more advancement as the Darwinian evolution of the human race continues through advanced technologies. A very interesting question is how will we “plug” into these machines?
People around the world are already working on direct brain/computer interfacing so that is the path humanity is already forging ahead with. Don’t believe me? I challenge you to do some of your own digging on the subject and tell me what you find . As for what this will mean for the economy and job market its anyone’s guess. However I do know one thing, creative destruction can be painful for some.
Below is the excerpt from the call
Harry Curtis – Nomura Securities: The topic at least here in New York is occupy Wall Street, and I was going to ask wise-ass question about whether or not you were going to contribute to that cause, but I do think, that it raises an interesting political question, which is the how do you see the landscape politically now, is there any reason for optimism given the current slate of candidates to give you hope for the regulatory environment improving for your business?
Stephen A. Wynn – Chairman and CEO: We had the debate here last night and we had a focus group that actually took place in Tryst last night with Frank Luntz on television. It’s very interesting about the folks who are occupying Wall Street. That group is quite diverse. There are people in there that think the government should give them more just because they are alive regardless. There are people there who are opposing government spending. There are people there that are opposing bailouts. That group is not homogeneous by any means. What you do have on Wall Street is a reflection, a real reflection, my opinion, of the anxiety, the insecurity and the fear that is endemic in the United States of America about the way government has gotten into the business of managing its life and the ability of the government to manage the economy intelligently by increasing these deficits and government spending rationally to the point that we (indiscernible) everybody’s financial security. I am watching my employees’ standard of living drop because of deficits. I think that the American public is beginning to make a connection between deficits and their own loss of living standards. People that work from here are being paid a (80% dollars on their way to 70% dollars), and even though I have given two cost of living increases to my employees despite of operating losses in America, because I have been able to (indiscernible) some money from Macau, I have not been able to use some money from the cap. I have not been able to keep up with the effect of deficits on the living standard of my employees, and that result of all this is frustration, anxiety and anger. You are seeing that on occupy Wall Street. You can see it taken to the next level in Greece, where people are trying to break into a parliament, primarily controlled by the unions and the very kind of government that the people who are trying to breakdown the fences elected. There comes a moment when the population realizes that it has to stop and sometimes it takes a form of tax to rich people, which is a reflection more of a lack of understanding of how the economy works. Rich people are now being defined by the administration as people who make $1 million. Well, most of the businesses in America, other than giant corporations, are paying taxes under Chapter S, partnerships or individual proprietorships. So somebody shows that they’ve made $3 million or $2 million this year and they pay personal taxes on that money. They subtract their cost of living and then once left they after and that does not show that probably 25% or 30% of their profits are tied up in accounts receivable or inventory, stuff that they can’t spend or get their hands on but to support their business and their employment, and then they take whatever is left, these so-called millionaires and they open another shop or another office and that that is the only known engine of growth in the United States of America. And we have administration that is fanning the fires that this is somehow underserved profligate millionaires, and it is worst than hypocrisy. It is totally dishonest. It represents by young people who don’t know the difference of simple misunderstanding and lack of understanding on how the economy works or what’s going on in America, but if it’s a politician that does it or a union leader, than it represents something much more pernicious. It represents a deliberate misleading of the public, and I think that Americans are waking up to this, and its taking the form of anger and dissatisfaction with the government. And I think that’s probably just right because until there is a change, until this all stops, it’s only going to get worse no matter what anybody says in some fancy speech even if it’s the President; it is going to get worst. People say we’re angry at the government for not comprising both sides, well, we don’t really have a situation that lends itself to what reasonable people would call compromise. We’ve got a situation that requires a change. That is to say one side is right here and the other side is wrong. You cannot sustain these deficits, you cannot undercut the people that form the jobs and create the employment in this country. I’ll give you an example of Las Vegas in my own industry. Across the street from me is an empty piece of property that’s 34 acres. It’s owned by two Israeli gents that are friends of mine that bought it at a very high price and are sort of in a difficult position now. They even owe money against that property. They have come to me on a monthly basis to say, ‘go ahead Steve, you take it, build something, connect it to Wynn and Encore, your golf courses and convention facilities, and help us get out of this. We are willing to take a very long-term approach and we’ll turn the property over to you even if we have to pay off the loan.’ Well, that’s a very attractive offer, especially since they are willing to pay us for management, design and supervision as well as inviting us to invest, but I have to tell both of these men who are friends of mine, ‘look, I can’t give you a reasonable projection of what this return on investment will be even if we spend $2 billion and create 10,000 direct jobs and another 30,000 indirect jobs for a total of 40,000 jobs; that’s how many jobs I could create, if I broke ground on the Frontier property in the next six months or a year, and we would now how to do that. But I can’t tell the men who are willing to sacrifice any short-term benefit in exchange for a long-term opportunity because I cannot predict what healthcare costs are going to be, what regulatory load they are going to heap on us, what new taxes or other burdens this insatiable governmental appetite for money from the citizens will take us to. Now that is simply a statement of fact. It isn’t a partisan political pitch, it’s simply a statement of fact from a business man who has supported probably more Democrats than republicans, but I say right now that the democratic agenda of spend and bribe the public has bankrupt this country, and until it stops the citizens of this country are in for more hard times, and fancy speeches aren’t going to change that. Only a fundamental realization that citizens are going to have take real sophisticated responsibility for how we allocate the resources of this country.
Martin Feldstein makes an interesting argument on a way for the three constituencies (Government / Homeowners / Mortgage Bond Holders ie. Banks) involved in the housing crisis to move forward in a way that will allow the economy to heal faster. The essence of the argument is allow for write-downs on the notes so some of the debt can be forgiven and in return the homeowner would be forced into a recourse loan, meaning if they defaulted the bank could go after assets that current contracts do not allow for. The government would pay for 1/2 the cost of the write-down in order to entice the bankers to move forward on the deals. The program would be voluntary so all interested parties know the risks and rewards of their decisions ahead of time. Its no panacea but in these tough times maybe we need a drastic measure to put our economy on a more solid footing.