Musings Report #19 5-11-13 Up Against Hard Limits: Food and Finance
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Up Against Hard Limits: Food and Finance
In the first 25 years after World War II (1946-1970), an abundance of cheap oil and plentiful opportunities (low-hanging fruit) for global development led to rapid urbanization and economic growth in much of the world. As oil became more expensive and the demands for more resources by an expanding middle class rose, various limits on available resources became visible. These were catalogued in the famous Club of Rome report, "The Limits of Growth."
For roughly forty years (since the report was published in 1972), technology has pulled one magic rabbit after another out of the hat, making a mockery of claims that there were limits on consumption and resource extraction: the green revolution and fossil-fuel fertilizers expanded food production, new super-giant oil fields and improved drilling technologies opened up vast new energy reserves, and a variety of technologies led to more efficient use of resources.
The success in pushing back looming limits has created a widespread confidence that technology can dissolve any apparent limits. For example, if the seas have been stripped of fish, then aquaculture will fill the desire for fresh fish. Presto-magico.
But what if the technological improvements are entering a terminal phase of diminishing returns? What if the "solutions" don't really replace what has been destroyed? For example, the ecosystem of the open ocean is not restored by aquaculture; rather, it is further harmed by poor aquaculture practices.
The analogy is cutting down a rain forest, which is a diverse habitat for a variety of life, and replacing it with a monoculture tree farm. Economically, the tree farm may appear superficially to have the same "value" as the forest, but this only shows the poverty of economic models that only value what can be commoditized for human consumption in the global marketplace.
Everything that doesn't fit that definition is discounted as worthless--for example, the air in Beijing. Since it can't be monopolized, marketed and sold, it is not valued. The consequences (i.e. external costs)--millions of cases of lung cancer--are not included in the "cost of production."
A trusted correspondent recently emailed me this sobering commentary about global food production:
"I recently spoke with a longtime friend and former colleague in int'l aid and development work from "back in the day" with 30 years of experience in the field, and he notes from his work that global food production per capita has peaked (not coincidentally with crude oil extraction per capita), and growth of consumption against supplies could result in acute shortage conditions in the marginal areas as soon as this year or next, with China and parts of SE Asia experiencing intractable shortages as soon as '15-'18. He estimates the risk of "permanent drought and famine" in parts of Africa now at well over 50%."
Crops still need water and healthy soil; no amount of GMO magic or fertilizer can replace water and soil. It certainly seems humanity may be pushing up against hard limits in food production.
I see the same complacent confidence in global finance: it is widely assumed that the world's central banks can create money and credit with abandon and manipulate currencies and stock and bond markets on a permanent basis, with no limit on their activities and no consequences that escape their control.
It seems "impossible" there could hard financial limits when credit creation is unlimited, and the central banks' ability to manipulate and control global markets also appears unlimited. But it seems to me that there is a financial ecosystem that is an analog of a natural ecosystem, and therefore there are hard limits on financial engineering. That these limits are not yet visible does not mean they don't exist.
Market Musings
The most interesting story of the week was released after Friday's close, on the Fed's exit strategy from endless $1 trillion/year quantitative easing. That the Fed wanted this made public (and after the close of the market on Friday) is clear, and this suggests that the Fed is feeling pressured to respond to concerns about the stock bubble its policy has inflated.
I have always maintained that political pressure will eventually limit Fed policy, despite its supposed independence. This report may well be intended to let some air out of the stock market rally, and those "in the know" may well have gotten short to profit from the decline. Alternatively, this intentionally vague story was released to see how the market reacts to "tapering" QE.
The stock market is looking for an excuse to book profits: the McClellan Oscillator (NYMO), the SPX:VIX ratio, the put-call ratio (CPC)--all sorts of indicators are signaling a near-term top. Even the strongest rallies run 12-14 weeks, and this one has run 19 weeks with four minor down weeks and 15 up weeks. It's long in tooth and just looking for a excuse to retrace.
Additionally, the mind-boggling decline in the Japanese yen which has powered U.S. stocks higher, has reached what looks like a blow-off stage. If the yen simply stops dropping, that will remove a key driver of ever-higher stock prices.
The only question is the size of the retrace: will it be another one-week modest decline, or something sharper? Virtually no one anticipates more than a tiny, brief decline that launches another round of "buy the dip," and for this reason I am open to a much deeper decline unfolding, as the market's predictability (always up) may well be overstated. (I have a small short position via SDS.)
The best thing that happened to me this week
My brother and sister-in-law are visiting us from France. It's great to spend time with family!
From Left Field
On Buying Local Food, And Why (via Joel M.) "I shop for food the way I do in part because of my deeply held beliefs concerning self-governance: I cannot govern myself well if I cede so many acts of governance to people who I have never met, do not know, and cannot trust."
Chinese DIY Inventions--amazing stuff: submarines, robots, airplanes: "One visible sign of China's recent economic growth is the rise in prominence of inventors and entrepreneurs."
Nobody dares call the capital ugly: The Beige of Beijing (via Maoxian) " I announced on stage that Beijing was the ugliest city I'd ever seen. Even the expats were offended. Yet the problem wasn't simply my typical tactlessness. After a few days of trudging through that dingy fug, as ranks of monotonous, cheaply constructed tower blocks foreshortened into the gloom, I didn't think I was venturing an opinion, but stating a self-evident fact."
The New European Exile: Cowed by large national debt and unfavorable demographics, some young Europeans have given up on change. They just want to leave. (via Steve K.) Letter from a 20-year old to President Hollande of France.
Small Donors May Make Politics Even Worse (is that even possible?) (via Joel M.) "What individual donors tend to want, Murphy said, is partisanship."
Least welcome news to Realtors: Challenge to Dogma on Owning a Home (via Kevin M.) "Rising levels of homeownership in a state are a precursor to eventual sharp rises in unemployment in that state.”
Infographic: Inequality & Mass Transit in the S.F. Bay Area: "The results show the Bay Area's economic inequality and its relationship with transit and urban form." This strikes me as lacking any conclusion: so wealth goes up and down along subway and bus lines. Isn't this what we would expect? Not all data is useful or enlightening....
"We must believe in luck. For how else can we explain the success of those we don't like?" (Jean Cocteau)
Thanks for reading--
charles
