Diatribes of Jay

This is a blog of essays on public policy. It shuns ideology and applies facts, logic and math to economic, social and political problems. It has a subject-matter index, a list of recent posts, and permalinks at the ends of posts. Comments are moderated and may take time to appear. Note: Profile updated 4/7/12

11 April 2015

Straight Talk about Value


Introduction: Mohamed El-Erian
A Bond Guy
Risk-Adjusted P/E: a Universal Measure of Value?
The Wild Card of Risk
Conclusion
Coda: the Wild Card of Climate Change

Introduction: Mohamed El-Erian

Sometimes inspiration springs from the oddest sources. Take Mohamed El-Erian, for example. I read all the news about him that I come across. Why? Because he’s a Muslim with an obviously Islamic (Egyptian) name. He’s also a generally recognized financial and business genius.

In our Yankee society, Christian Taliban have far more influence today than is healthy. So being a Muslim and a being hailed as a genius is a rare combination here, to put it mildly. El-Erian is probably twice as smart as even conventional wisdom gives him credit for being.

Not only that. Like our President, who also has had to drag around a racial ball and chain, El-Erian has a world-class temperament. At Pimco, he was the adult in the room, while his one-time partner and now nemesis Bill Gross played the tantrum-throwing child.

Remember the character “Marvin” from Doug Adams’ Hitchhikers’ Guide to the Galaxy? He was a robot with a planet-sized brain, who had to perform demeaning, mundane tasks like opening doors for people. El-Erian had to keep Pimco highly profitable, with the aid of his Oxford economics PhD and his even temperament, while working with Gross, who has a planet-sized ego and apparently a somewhat smaller brain.

Recently, Gross went to Janus Capital Group, where his first acts were to remind the press and public how smart he is. El-Erian, who earned $230 million in his last year at Pimco, is now spending time catching up with his young daughter. It’s hard not to like and admire the guy: he has his priorities straight.

A Bond Guy

So a recent interview with El-Erian in the Orange County Register caught my eye. It especially caught my eye when it reported that he has nearly all his money in cash because he thinks “most asset prices have been pushed by central banks to very elevated levels.”

Wow! Here’s one of the smartest financial geniuses in our nation, if not the world. And he’s got most of his money in cash because he thinks assets are overvalued. Should I sell out, buy gold bars, and put them under my mattress? That might hurt my back while I try to sleep. But if El-Erian is right, maybe I should.

Then I remembered. El-Erian is a bond guy.

Let me confess. I never understood the attraction of bonds. The kind of bonds that El-Erian dealt with are reputed to be very stable, very predictable, and very dull. He didn’t do much with so-called “junk bonds,” i.e., the high-yield, speculative stuff. The bonds he made his fortune on are binding promises of solid companies and sovereign nations to pay back money they borrowed, on a regular schedule and at reasonable (or at least market-based) interest rates.

Take a bond-issuing business company, for example. It doesn’t matter whether the company discovers a cure for cancer or nuclear fusion in a bottle. If you buy its bonds, all you’ll get is about 2% to 3% per year, at most today, or whatever the coupon rate is then. All you’re betting is that the company (or the sovereign nation or its agency) will still be around and able to pay back its debt, along with interest at the rate it promised.

What a bond issuer does in its business or governing—even if spectacular—doesn’t and needn’t concern you. Germany, for example, is way ahead of the rest of the world in our inevitable energy transition, which Germans call Energiewende. I would love to be able to bet on that: betting against German engineering is never a good idea! But none of these facts affects the terms or value of Germany’s bonds, although its strong government solvency and export surplus do.

Now bonds, at least long-term bonds, also have a peculiar characteristic. When general interest rates go down, their value goes up, because they promise larger returns than prevailing interest rates allow. Conversely, when general interest rates go up, long-term bond values fall.

In other words, bonds are not quite so dull as you might have thought from their general nature as glorified promissory notes. When prevailing interest rates change radically, you can gain or lose some serious money just on dull, pedestrian bonds.

That, of course, is precisely what made El-Erian and Pimco rich and famous in the aftermath of the Crash of 2008. El-Erian foresaw that central banks, in order to bail out the too-big-too-fail bankers who had caused the Crash, would have to peg interest rates low and keep them there for, in Fed-speak, an extended period of time. That meant that good ol’ dull, pedestrian long-term bonds (at higher interest rates) would rise in value and stay there for a while. And as central banks worldwide pegged interest rates close to zero and kept them there, the value of those pre-existing bonds would skyrocket—a rare event in the sleepy, stable, musty bond world.

So while I knew the abstract principle (bonds go up when rates go down), it never occurred to me that it would work so spectacularly as to make sleepy holders of sleepy bonds rich. I had saved my own retirement by selling out in 2007 on my Diogenes Test. I had noticed, quite painfully for me, that virtually no one in business or politics had been telling the truth, at least publicly. And I made some money by buying equities on the way back up, after the Crash. But I missed the whole four-year-plus bond rally.

Not only didn’t El-Erian miss it. He owned it. As a superb quantitative economist and bond expert, he knew much more than the general principle I knew. He knew in detail how much the terms (durations) of bonds would affect their value. And so he and Pimco cleaned up, cashing in on an absolutely unprecedented and (we hope) never-to-be-repeated interest-rate plunge in the aftermath of the Crash. Geezers who invested in Pimco’s products did correspondingly well.

Today, El-Erian is wisely counting and conserving his money and raising his daughter. Gross is beating his chest and telling everyone who will listen that his own brains, and not a unique financial environment, did it all. It’s not hard to see who is the more realistic person, let alone the humbler one. Since Francis became Pope, the value of humility has risen sharply.

Risk-adjusted P/E: a Universal Measure of Value?

But the big question remains. Is El-Erian right that assets now are grossly overvalued (pun intended)? And, if so, how can we tell? More to the point, did El-Erian mean to include equities when he said “assets”?

In order to answer that question, we have to have a metric of value that works for both stocks and bonds. I propose a three-variable measure, depending on price, earnings and risk.

The first two variables are straightforward and pedestrian. They are the basis of the price/earnings ratio, a universal measure of the value of equities. We’ll have to adjust this measure for risk and define what “risk” means. But let’s do that later.

You take the price of an asset and divide it by its annual earnings, in the same currency units as its price. The result is a dimensionless number describing the ability of your asset to earn money. You will find this number computed and listed for virtually every stock. For example, on Google Finance quotes, it appears at the bottom of the first column of statistics, just to the right of the big price.

For dividend-paying stocks, the P/E ratio helps determine the dividend rate or payout ratio (which Google Finance calls “Div/yield"). But it’s not the same because no company pays out all it makes to its shareholders. Companies like Apple hoard a lot of dough, at least until their shareholders get restless and demand payouts, in the form of dividends or stock buybacks.

There’s nothing unusual or difficult about a P/E ratio. It’s simple arithmetic. A slight nuance intrudes in deciding whether the period for calculating earnings is leading or trailing and for how long. There’s also something called the “Shiller P/E ratio,” which is based on a ten-year moving but trailing average of earnings. It’s supposed to be both more stable and reliable than single-year-based P/Es and a bit high on an historical basis right now. But otherwise the P/E ratio is a universal and pedestrian way of measuring the value of equities.

So here’s the rub. Right now, if we take the unusual step of applying the same P/E metric to bonds, the result is really, really high. Consider, for example, a short-term (six-month) Treasury Bill. As of April 6, it was earning 0.10%. So its P/E ratio, which is just the reciprocal of its earnings rate, was 1/0.001 = 1,000.

Just how high is that compared to P/Es for equities? Well, before market opening on April 22, Apple’s P/E was 17.10. Google’s was 26.34. Exxon Mobil’s was 11.45. First Solar’s was 16.15. Pretty far below 1,000, huh?

So if you compare just P/Es, you would have to conclude that the sixth-month T-Bill is vastly overvalued, at least as compared to Apple’s, Google’s, Exxon-Mobil’s or First Solar’s stock. Maybe El-Erian’s reference to “assets” was intended to cover only the bonds that he made his fortune on, and not stock.

I know, I know. It’s unfair to compare returns on bonds with P/E ratios because you never get all of a business company’s earnings back as dividends. Some companies, including Google, pay no dividends at all. Some, like Apple, pay small dividends—and only under shareholder duress—while continuing to hoard huge sums of cash.

But corporate earnings are real money, too. They don’t come back to you, the shareholder, immediately and directly. But they do, indirectly, increase the value of the stock. And they are much more “real” than future profits or future appreciation of the stock, at least if the earnings figures used in P/E ratios represent ”trailing“ or past earnings. They are money in the bank, just not your bank as shareholder.

Money is money, after all. And if a corporation makes money reliably and copiously, shouldn’t the markets recognize that in valuing the company’s stock? Is a T-bill with a P/E ratio to you of 1,000 really worth over 50 times as much as a share of Apple stock?

Before you answer, consider that bonds, unlike stocks, have no prospect of appreciation, except when interest rates go down, as they did when central banks saved the global economy after the Crash of 2008. But we all know—or at least we all believe—that interest rates are going nowhere but up. So why are bonds worth so much more than stocks on a P/E basis?

To answer that question, we have to plunge into the final and most murky variable in my proposed valuation scheme, namely, risk. It’s where math and science fade into the never-never land of art, emotion and mob psychology.

The Wild Card of Risk

In order to get a handle on risk, we first have to define the term. By itself, “risk” is a pejorative. It’s uncertain and scary. But the flip side of “risk” is “reward.”

There are, in general, two kinds of risk. The first is the risk that earnings will fall, or the upside chance that they will rise. The second is the risk that the value of the investment will depreciate, or the upside chance that it will appreciate, for reasons other than changes in direct earnings.

With equities, this risk often involves qualitative estimates of a company’s general future prospects. For companies like Tesla and solar array vendors, which are trying to start whole new industries, these estimates vary with every company announcement, rise or fall in actual earnings, and prognostication of a trusted source. Hence the volatility of their stocks.

To some extent, this volatility is irreducible. No one has yet invented a real crystal ball, and predicting the future of these leading (or possibly failing) companies involves much the same uncertainty as predicting a national or the entire global economy.

Similar uncertainty arises out of he murky relationship between earnings and non-earnings appreciation, including the guesstimation of future earnings. Except for non-productive investments like jewelry and artwork, value depends both on how much an asset can earn and what others are willing to pay for it. These two variables are related, as are the factors that make them rise and fall. But often their relationship is complex, as is the timing (short or long term) of changes in them.

Take Tesla, for example. It might sell fewer of its electric cars in China in the current quarter because Chinese buyers don’t see enough charging stations in China to assuage their range anxiety. That’s a short-term risk with a direct effect on next quarter’s sales and earnings. But sales might also fall, in the longer term, because the Chinese desperately want to make their own electric cars and might put lots of legal and practical barriers in Tesla’s way. Or, in contrast, sales might rise in the longer term because China’s rich folk and leaders don’t much like breathing soot and want clean air sooner than later. And then there’s the additional wild card of Tesla’s announced new business: selling modern batteries for use in energy solutions entirely outside of cars.

No amount of arithmetic can simplify these sorts of predictions or make assessing the short- and long-term risks a mechanical process. You might even have to know something about engineering and science. But the important point is that there’s both an upside and a downside. In this essay, the term “risk” includes both, even though the term “risk” sounds pejorative. We should remember that, in nearly every case, there’s a potential reward for every risk.

Now, having defined “risk,” we find our analysis getting curiouser and curiouser. Take Apple, for instance. Our P/E = 1,000 T-bill is presumably priced so high because the US government has the world’s lowest credit risk. In spite of the Tea Party’s repeated attempts to shut down our government and provoke a default, no one, apparently, believes that our government will actually default on its debt. That 0.10% interest may be meager and miserable, but it’s all but guaranteed. Or at least it’s perceived as such.

So what about Apple? Is it likely to go belly up anytime soon? Isn’t it now the world’s most valuable private company? Didn’t it just get inducted into the Dow 30?

My wife and I bet heavily on Apple, and for good reason. It makes nearly every computer, tablet and smart phone we own, plus nearly all their peripherals—some ten devices in all. (And that’s not even counting the obsolete stuff put away in drawers, closets and boxes.) Its products and software are an irrevocable part of our lives.

We could live without Apple. But we have no desire to, and it’s not what we’re accustomed to doing. So we’re not going to forsake Apple anytime soon, whether as consumers or as investors. Nor are hundreds of millions of consumers like us worldwide. Apple is going nowhere south.

Furthermore, 3.5 years have now passed since Steve Jobs died. Tim Cook has sheperded Apple through several iPhone models, numerous supply problems, and the Apple Watch introduction. He’s reportedly looking at automotive electronics, including self-driving and maybe even electric cars. Those are markets in which Detroit has so far failed miserably (except for the Chevy Volt) and has little expertise.

Cook has revealed he is gay. So what? He’s less mercurial, emotional and tyrannical than Jobs. He’s probably a better and steadier CEO. He might even have been the real power behind the throne all along. The notion that a company as large and as consistently innovative as Apple subsists on a single man’s genius is, like Mark Twain’s early demise, greatly exaggerated.

So why are people willing to pay $1,000 for every short-term dollar that our Treasury pays and only $17.10 for every buck that Apple makes, when Apple is in no more danger of imminent demise than our nation?

Sure, the United States of America is even less likely to go under than Apple. But we’re talking about short-term bonds, or T-bills. Is our nation really that much more likely to survive the next six months? Even with Ted Cruz running for president? Even with the Tea Party influencing, if not controlling, Congress?

No, I find it hard to understand the vast differences in what investors are willing to pay, and to accept in return, for bonds and stocks today. And I haven’t even mentioned the negative real returns (interest less inflation) that investors are getting on many sovereign bonds, especially in Europe.

Conclusion

Long term, there are still risks and imponderables for any business. In fields like computers, mobile devices and cars, it’s hard to get a clear picture of what the world will look like five or more years out.

But as we all know, no one investing today thinks that long term. The farthest ahead anyone (perhaps besides our President and Warren Buffet) thinks today is two quarters ahead: six months. We Yanks are a culture of hucksters looking for the quick buck; hence high-frequency trading.

A Japanese CEO recently lamented our Yankee short-term mentality. He even expressed a desire to limit transient financial investment in real (nonfinancial) Japanese companies to three years or longer. During that length of time, companies like Apple are more likely to thrive than our own United States, let alone many sovereign nations. Right now, for example, Apple has more cash reserves ($178 billion) than France ($148 billion).

So what accounts for the extreme variance between bond earnings and corporate P/Es? I can think of only three possibilities.

First, there’s the risk aversion of the Baby Boomers, the most selfish and risk-averse generation ever. They’re starting to retire now. As we all know, older people are more risk averse than younger ones. And as I’ve analyzed in an earlier essay, Baby-Boomer retirees have lots of money, which they are hoarding in their little investment jars. Apparently they would rather put that money into low-return bonds, or even lose money from inflation, than risk losing any principal in equities or even money-market funds that might “break the buck.”

The second possible source of the bond/stock earnings chasm is habit, aka inertia. Bond guys and stock guys (the gamblers and swindlers who set the pace and culture for investment are still almost all guys) are two different tribes, with two different cultures and mentalities. Were that not so, El-Erian and Pimco could hardly have cleaned up so handily after the Crash of 2008. Others would have recognized the well-known relationship between bond values and interest rates and exploited it equally successfully.

So far no one from either tribe, apparently, has given much thought to how out of whack earnings from bonds are now with earnings from equities. For well over a century, we have thought of bonds and stocks as different species, not just different animals, so much so that we tend to forget they are all financial instruments and all designed for the same purposes: to fund business and make investors money.

The third possible source of discrepancy is the fear that constitutes our species’ strongest emotion and causes the worst and most irremediable financial stampedes. Investors are scared to death that a small twitch in the bond markets, slightly lowering the effective P/E for bonds, will send equity markets into a tailspin. In this they have much precedent: the most sudden and drastic equity-market dips recently have followed mere hints that the Fed may some day raise interest rates.

Of course all three factors no doubt play a role. But the result is a striking anomaly. April’s rate for French sovereign bonds is 0.47%, for an effective P/E of over 212. Meanwhile, the P/E for Apple, which has bigger cash reserves than France, is a bit over 17. And without derogating France, whose culture and contrarian approach to life I revere, which entity would we tag as having having the greater upside for short-term, surprising innovation?

Some day, someone might begin to notice that these figures are apples and oranges. Then what might happen? A crash in the French bond market, and maybe even in our own, might ensue. Or equities might rise.

One final thing really puzzles me. Everyone knows—or at least most believe—that Janet Yellen is going to raise interest rates slowly and gradually, so as not to do anything rash and cause unintended economic upsets. The process of getting back to “normal” interest rates, whatever that means, is likely going to take the better part of half a decade.

During all that time, the ineluctable logic of bonds is going to make their value go down. Bond investors are going to lose principal. At least investors in long- and medium-term bonds are. And they’re going to lose it steadily, reliably and predictably, as Yellen raises rates.

At least that’s the conventional wisdom. As I’ve analyzed in another post, I’m a contrarian on this point. I think low inflation and a risk of deflation may be the new “normal,” at least in well-managed economies, and at least for a decade or two. This conclusion has more to do with demographic and structural changes in developed-country economies than the Crash and its aftermath, which may have temporarily obscured these longer-term changes.

If I’m right, central banks will delay raising interest rates, and medium- and long-term bonds will muddle along without losing value. They won’t gain principal value because central banks already have pushed their interest-rate levers to the limits on the low side. And if I’m right, central banks won’t even try to lower interest rates, for fear of provoking a deflationary spiral. So medium- and long-term bonds are unlikely to appreciate or depreciate, and the present disparity between their miserable returns and returns on stocks will remain.

At the same time, short-term bonds are not going to provide enough interest for most geezers to live on, at least not until short-term rates get a lot higher. At 0.1%, for example, six-month T-bills will give you an income of $1,000 a year on an investment of a million bucks. No one can live on that. In contrast, to take just one extreme example, Royal Dutch Shell, the big oil company, is paying a dividend yield of 6.02% (before market opening on April 22), or over sixty times as much.

Maybe the notions that bonds are usually safer than stock, and that they don’t normally lose principal (except in financial panics) are so deeply embedded in geezers’ minds that they don’t have room for any other information. Maybe geezers and their advisors don’t understand that what goes up must come down: the four-plus-year bond rally caused by the Fed is going to reverse itself, and over about as many years, if and as the Fed slowly raises rates. (Take me, for example. I missed the bond rally because I’m an active sort of guy. I don’t think bonds do much. But now that I’ve missed the party I sure don’t want to partake of any hangover.)

Maybe the general and fuzzy notion of “diversification” has captured the imagination of geezers and their investment advisors. Bonds and stocks act differently, the notion goes, so you should always have some bonds as a hedge against dips in equities. But does that notion hold true when you think that bonds are likely to dive, or at least not appreciate, for an extended period of time, and they don’t pay enough to live on anyway?

So why aren’t we seeing a gargantuan shift of geezers’ savings from bonds to equities? Beats me. As the old saw goes, markets can stay irrational longer than you can stay solvent. But unless I’m missing something pretty basic, bond markets are pretty irrational right now.

Of course bond markets aren’t going away any time soon. Companies and governments need to borrow money from time to time, and they need loans for longer terms than commercial-paper markets can provide. But why any geezer in my position would be eager to put a substantial part of his or her portfolio into them at this particular time has left me scratching my head. Maybe corporations, as distinguished from hard-pressed governments, will start issuing fewer bonds as the interest they must pay rises and they find some way to repatriate their estimated $ 2 trillion-plus collective overseas cash horde.

The financial gurus willing to talk on record appear to agree. High-grade corporate bonds are now yielding, on average, 2.94%. That’s a P/E of over 34, about twice Apple’s and more than that of any stock mentioned in this post. When you consider that bonds offer no corporate-success upside and are vulnerable to higher-interest-rate declines for an extended period of time, you might understand why one expert said, “It’s an awful time to be an investment-grade bondholder.”

Which brings me back to El-Erian and Gross. El-Erian has retired and is raising his young daughter. Gross is beating his chest. Maybe Gross has nothing else but marketing to sell his bonds now.

One thing is utterly free from speculation. El-Erian has the economics PhD from Oxford. Gross has an undergraduate degree in psychology and an MBA. Go figure.

Coda: the Wild Card of Climate Change

To summarize the foregoing post, bonds are not good investments now because they offer miserable returns. Almost any good dividend stock can beat their long-term returns, and short-term returns are abysmal. Remember that $1,000 annual return on an investment of a million bucks?

Unfortunately, returns on bonds are probably only going to get worse. As interest rates rise, existing bonds (as distinguished from newly issued ones) will lose principal, negating their meager interest. That’s what conventional wisdom expects.

But that’s not terribly likely to happen, at least in the immediate future. Inflation is tame and, due to demographic factors, likely to stay so. The so-called “wage-price spiral” is probably dead, perhaps for a decade or more, due to demographic factors, continuing automation and disintermediation of everything, and continuing globalization, with its intrinsic migration of work to lower-wage environments.

As for interest rates, what’s to raise them, unless the Fed and/or other central banks jump the gun? Our species is now in the throes of a massive, global deleveraging effort, beginning here at home. If the GOP ever wins the presidency, our Yankee deleveraging effort will accelerate. China is deleveraging, too, if only to avoid asset bubbles. Even tiny Greece is.

As for corporations, they’ve all used nearly-free money, which central bankers have been happy to provide since the Crash, to build up their balance sheets. Our Yankee corporations alone have an estimated cash horde of over two trillion dollars.

So if interest is the price of money, where’s the demand for money going to come from? And where’s it going to come from in the foreseeable future? Based solely on demographic and economic factors, the most likely forecast is for interest rates to remain low for the foreseeable future, except in mismanaged economies like Russia’s.

And if interest rates somehow do rise, what will happen to bonds, or at least the medium- and longer-term ones? They’ll lose principal. They’ll tank.

Could anything change this dismal outlook for bonds? One thing could: a sharp spike in global demand for money, which would raise interest rates. Medium- and long-term bonds would lose principal, but returns on short-term bonds would rise. As the markets adjusted and accepted the change in interest-rate environment as durable, so would returns on newly issued medium-term and longer-term bonds. (Old ones would truly merit the term “junk”).

What could cause a massive global spike in the demand for money? Climate change.

No, not the change itself. That’s already baked in (pun intended). What most business leaders and policy makers still don’t fully appreciate is that greenhouse gases aren’t like a volume control that you can turn up and down. They stay in the atmosphere for the better part of a century. And every day they stay they heat up the Earth more by trapping more of the Sun’s energy.

To put it simply, the amount of greenhouse gases in our atmosphere determines not just global warming, but the rate of increase of global warming. The amount we have in the atmosphere right now is further heating our planet continuously, not just keeping it warm, as I write these words. In other words, greenhouse gases are not merely a blanket, but a heater. (More precisely, the Sun is the heater, and the greenhouse gases trap more of its heat every day.)

As the amount of greenhouse gases that our species collectively dumps in the atmosphere increases, global warming doesn’t just stay put. It accelerates.

Every single day, our species’ coal power plants, natural-gas power plants (at half the rate), cars, trucks and planes, and fossil-fueled space heating are accelerating the rate of global warming by dumping more carbon dioxide into our atmosphere. And that’s not even considering the possible sudden, nonlinear effect of positive global-warming feedback, as warming melts our planet’s glaciers and ice caps, releases methane from melting permafrost, and releases yet more methane by warming undersea methane hydrates.

It’s impossible to predict before it happens. Our Earth is too big and complex a place, and our science is too primitive. But right now we could be on the cusp of a catastrophic feedback loop that could change our planet forever, extinguishing a large part of our species and a majority of others. (Recall that methane has ten times the warming effect of carbon dioxide.)

But before that happens (we hope) there may also be a dramatic economic effect. Remember the concept of financial stampedes—a much better model of financial panics than the cliched “bubble”? Climate change—or rather its penetrating the thick skulls of global business leaders and policy makers—could cause something like that.

It’s beginning to look as if even we recalcitrant Yanks are starting to believe that climate change is real. The era of denial is coming to a close. It’s doing so in slow motion, but it’s doing so. (Thank you, Mike!) So is the era of finger pointing, as marked by China’s recent (but vague!) agreement to begin cutting its own contribution seriously.

What happens when, all of a sudden, the world’s high and mighty begin to acknowledge the catastrophic risk we face as a species, and that they, their families, their companies and their nations are not immune? There will be a stampede of another sort: toward massive, global capital investment in renewable energy, safer nuclear energy, conversion away from fossil fuels, and energy conservation.

Now renewables (principally solar arrays and windmills) have peculiar economic characteristics. They offer electricity at lower cost than fossil fuels, because they have no fuel cost, no effluent-control cost, no pollution cost, no global-warming cost, and very low maintenance. But they do so at a price: large, up-front capital investment.

Nuclear power plants are similar. They offer non-intermittent “baseload” power without producing greenhouse gases. But they cost much more than fossil-fuel plants to design and build. And safer ones than we have now will cost even more.

So what happens when it finally penetrates our species’ thick skulls that we are going to have to go on an unprecedented, global building spree, of renewable-energy sources and safer nuclear power plants, or else we are all going to cook, all together, pointing our fingers at each other as we fry?(See 1 and 2)

We are going to have a collective capital investment stampede of unprecedented global size and scope. Then, and only then, will demand for money increase radically, and interest rates will rise accordingly.

When will that happen? Your guess is as good as mine. Global warming is now as reliable as death and taxes, both of which it may soon cause to rise. As I type these words, it is slowly, steadily and inexorably accelerating. Positive feedback could cause a sudden “jerk”—the scientific term for rate of increase of acceleration.

But physical processes, even jerky ones, are much more predictable than human psychology, especially mob psychology. The massive, global capital-investment stampede probably won’t get started in earnest until we have a summer, or several summers, in which heat waves kill large numbers of people all over the world. Don’t worry. Such a summer will come. It could be this coming one. But we can’t know precisely when until it happens. In the meantime, we can plan and build, or we can deny and point fingers. Your choice.

Footnote 1: Actually, El-Erian did mean to include equities. In a very brief (less than one minute) video on Bloomberg.com, published over two weeks after the interview that inspired this post, El-Erian explicitly mentioned equities. He also described his own investment strategy, which he called “barbelling.” What he apparently meant was cutting down investments in public stocks and bonds, which he view as influenced by central bankers’ financial (not real!) inflation, and putting more money into illiquid, non-public investments, presumably including private offerings, private firms, real estate, etc. Whether the “bar” in the “barbell” is his large cash holdings or his remaining public investments, and which is larger, he didn’t make crystal clear.

Of course you can put a lot into illiquid, non-public stuff if you made $230 million in your last year before retiring. Not only did El-Erian do so; he also has numerous contacts in business, especially finance, which can give him opportunities for illiquid, non-pubic investment that the rest of us will never see.

For the rest of us, El-Erian’s advice is not especially relevant to our circumstances, except in two respects. First, it’s always a good idea to be ahead of the crowd in investing; normally you do that, if you can, by investing before the public gets a chance to. There’s not much surprising there. Second, it’s a good idea to remember that, as admirable and smart as he may be, El-Erian is a bond guy, with the bulk of his actual business experience outside of equities. Is is just possible that he might be inclined to overlook today’s stark differences in valuation between bonds and equities?

As for whether equities are also grossly overvalued (pun intended), doesn’t that depend on alternatives? With tens of millions of retired geezers (nearly all much less wealthy that El-Erian) looking for places to generate reasonable income to live on, money will probably flow to the places that provide the best combination of income and security. Right now, they doesn’t appear to include bonds, at least for those investors who need current income. And it probably won’t be until the prices of equities rise so much as to put their price/earnings ratios much closer to the extravagant current levels (or then-prevailing levels) of bonds’.

Tens of millions of geezers with filled investment jars looking for income are a demographic fact. If they can’t get income from bonds, they’ll put it into equities, perhaps with a preference for those that pay dividends. Unlike El-Erian, they don’t have the options of finding illiquid, nonpublic investments and waiting for appreciation or of sitting on cash.

So equity markets are likely to become a rising tide that raises all boats. The trick in such markets will be to identify and avoid those sectors and/or particular equities from which volatility will cause a greed stampede to become a fear stampede first. In short (pun intended), it looks as if stock pickers are going to earn their pay again, but on the downside.

Footnote 2: If you’re about my age, it’s hard to think of any interest-rate regime as “normal.” As I grew up, I postponed buying real property for about a decade because interest rates were stuck for years far north of 10%. Now they’re near zero. The only constant I can see from that vantage point is change.

And what about central banks? They’ve discovered that they can keep national and global economies stable by jiggering interest rates. They can even—with few side effects and no Weimar Hyperinflation—cure the aftereffects of something as severe as the Crash of 2008. Russia’s central bank, too, has discovered the game, to the point where the ruble is now too strong.

Don’t get me wrong. Having disinterested, well-trained experts whose primary goal is not enriching themselves in charge of our species’ economic infrastructure is a major advance in human civilization. Three cheers for Janet Yellen, her expert peers, and all they represent! But one way their stabilizing hands work is by assuring us all that no particular regime of interest rates will ever again be “normal.” Self-seeking private bankers and investors are just going to have to adapt.

Footnote 3: Want to build America and American jobs without raising taxes? Doing so would be pretty easy if Congress weren’t utterly dysfunctional. Just provide tax incentives to bring that two-trillion-plus dollars back to the US and into real (non financial) productive investment.

How to do that? Also easy. Let the money come back tax free, but only if and to the extent it ends up in new, physical, job-creating capital investment. Not in excessive salaries or bonuses for already too highly paid executives. Not for windfall distributions to undeserving shareholders through dividends or stock buybacks. Not into so called “capital gains” for speculative purposes, which are really short-term (one year) anyway. But into real, long-term, productive, job-creating physical capital investment in new plants or industrial infrastructure that adds real long-term value to our already grossly over-financialized culture.

Could we Yanks do it? Could we track the money and claw back tax relief if it didn’t go into building our nation, rather than into inflating useless personal individual wealth and increasing already-gross inequality? Of course we could.

Already we Yanks have the most intrusive and complex tax system in the known Universe. If and when we get out there into interstellar space and meet really foreign cultures, their members will come from all over the Galaxy to marvel at our Yankee tax system. They will study it assiduously as something for younger, less sophisticated cultures not to do. They will note, no doubt, that this entirely artificial system, which has nothing to do with reality, physics or even sensible finance, is far more complex than the tricks they will teach us to travel easily among the stars.

But if we Yanks can find some rational way to get that two-plus-trillion back home and into productive use—and not into the undeserving personal pockets of plutocrats—at least some of these highly advanced interstellar intelligences might argue against putting all of us Yanks in a big zoo.

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