Sunday, August 2, 2015

Distressed Investing

By Jared Dillian 

When most people think of distressed investing, they think of buying CCC-rated bonds at 20 or 30 cents on the dollar, then maybe sitting in bankruptcy court to divvy up the capital structure, making healthy risk-adjusted returns in the end. You just need to hire a few lawyers.

Distressed investors are a different breed of cat. It’s one of those countercyclical businesses, like repo men, who do well when everyone else is getting hammered.

I remember distressed guys killing it in 2002. Most people remember the dot-com bust, but there was a nasty credit crunch that went along with it. Nasty. High yield/distressed investments had some amazing years in 2003 and 2004. Convertible bonds in particular.

Funny thing about distressed investors is that they like to stay within their comfort zone. In my experience, they’re not keen on commodities. Like coal mining, which this week saw one bankruptcy filing and another one in the works. Distressed guys hate commodities because they are just timing the earnings cycle – which is the same as market timing.  Distressed guys want less volatile earnings so their projections aren’t totally dependent on commodity prices rising.

Coal is distressed, all right. But you don’t see the distressed guys getting involved. Even they are too scared!


Here’s a somewhat controversial statement: I think most commodities are distressed. Coal is definitely distressed. So is iron ore. Copper, too. And yes, even gold. Corn and beans have had a nice little run, but metals and energy in particular have been a complete horrorshow.

So I think it’s time to start looking at commodities as a distressed asset class. The assumption is that fair value of these commodities/producers is well above current market prices, and current market prices are wrong because of, well, a lot of things. In particular, a self-reinforcing process where selling begets more selling.

If you’re a distressed investor and you’re buying something at a deep discount, if you have a long enough time horizon, you’ll be vindicated eventually. Sometimes, it takes a long time. Sometimes, not very long at all. It’s pretty great when it works.

I have never had much aptitude for it. But I am trying it now.

Gold: A Special Case


Gold is a little different.

How do you value gold? It has no cash flows. An industrial commodity like copper is pretty easy to value. With gold, you’re trying to gauge investment demand (at the retail or sovereign level), which is hard, against mining production, which is a little easier.

But what an ounce of gold is worth is entirely subjective. More subjective than copper or cocoa or coffee. For example, if everyone started using bitcoin, there would be little to no demand for gold. (For the record, I think cryptocurrencies indeed have had an impact on gold demand.)

Basically, people want gold when they think their government no longer cares about the purchasing power of their currency. In our case, that was when the Fed was conducting quantitative easing, known colloquially as printing money.

But that’s not really what people were nervous about. Think about it. The Fed was printing money for monetary policy reasons. They were trying to effect monetary policy with interest rates at the zero bound. That’s different from printing money to buy government bonds because nobody else wants to. That’s called debt monetization.

When budget deficits get sufficiently large, people worry about things like failed bond auctions, that the Fed will have to step in and be the buyer of last resort. This is the nightmare scenario described in Greenspan’s Gold and Economic Freedom essay.

We had $1.8 trillion deficits not that long ago. The bond auctions were a little scary. I thought debt monetization was a possibility.

The deficit is lower today, mostly because of higher taxes, more aggressive revenue collection, and economic growth. As you can see, the price of gold has corresponded almost perfectly with the budget deficit.


With a small deficit today, nobody cares about gold.

Is the deficit going higher or lower in the future? Higher. Ding-ding-ding, we have a winner. One of the reasons I’m happy owning gold as a part of my portfolio.

Paper vs. Things


Asset allocation gets a lot easier when you figure out that the financial markets are a tug-of-war between paper and things. Sometimes, like now, financial assets (stocks and bonds) outperform. Stocks are overpriced, and bonds are way overpriced. Other times, like 10 years ago, commodities outperformed.

It has to do with the degree of confidence people have in… other people. A bond is a promise to repay. A stock is a promise to pay dividends, or that there will be something left over at the end. A dollar is a promise that it’s worth something, namely, a divisible part of the sum total of the productive abilities of all the people in the country.

These are pieces of paper. Paper promises. When confidence in promises is high, nobody needs gold, coal, or copper. When confidence in promises is low, time to build that underground bunker in the backyard. Confidence in promises is currently at all-time highs. Without making a positive statement either way, I’d say that only in the year 2000 were commodities more undervalued than they are right now.

Sidebar: it is tempting to treat commodities as an asset class, but you should try not to. They are idiosyncratic, and for most commodities, the cost of carry is high enough that it’s impractical to hold them for long periods of time.

Commodity related equities are a different story.

Disclaimer


I’m kind of biased on this, and I always think commodities are undervalued because I’m a deeply suspicious person and I don’t believe promises. I’ve owned gold and silver for years (plus GLD and SLV, and GDX and SIL), and if prices get low enough, I will add to those positions.

Keep in mind that I worked for the government under the Clinton administration. Clinton’s mantra to government employees was, “Do more with less.” The man did a lot to restrain the growth of government—and he was a Democrat!


People resented him for it. They wanted their fancy toys and their boondoggles. Public servants have been much happier under Bush and Obama. Not coincidentally, gold bottomed in 2000, at the end of Clinton’s presidency, and has basically been going up since.

So here is the secret sauce: You want to know when commodities are going up?
Watch the deficit. If someone dreams up free college for everyone, buy commodities with veins popping out of your neck.
Jared Dillian
Jared Dillian

If you enjoyed Jared's article, you can sign up for The 10th Man, a free weekly letter, at mauldineconomics.com. Follow Jared on Twitter @dailydirtnap


The article The 10th Man: Distressed Investing was originally published at mauldineconomics.com.



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Tuesday, July 21, 2015

Spotting Reversals Using Simple Patterns in the Markets

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Monday, July 20, 2015

Is it Time to Take Gold and Copper Seriously?

With gold bulls sitting on the sidelines for some time now, and copper bulls basically being an extinct species it's a bit of a surprise to see a trader poke their head out and say....it just might be time. And when that trader is our friend Carley Garner we pay attention. But we aren't the only ones. Mad Moneys Jim Cramer brought Carley into the studio this week. Check out Carleys Mad Money appearance and her call on gold and copper. You better be paying attention.



Carley Garner is a technician and co-founder of DeCarley Trading and author of "A Trader's First Book on Commodities." Click here to get it on Amazon.com


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Sunday, July 19, 2015

The Biggest Trade Ever....No Exaggeration

By Jared Dillian


I won’t keep you in suspense. The biggest trade ever is in demographics. In particular, our rapidly increasing life expectancy.

Quick story. My Coast Guard friends are retiring now. You get to retire after 20 years of service, but some of them have been taking advantage of early retirement and are leaving the service as young as age 40.
Oh my God, what a deal: At age 40, you can bring home about $50K a year and then start a whole new career on the side!

In the old days, you could offer that deal because military folks would die at 47. Now they will live to 100.
Paying out benefits for 60 years to retired military personnel doesn’t sound like a great deal for the taxpayer.
Of course, the military pensions are just the tip of the iceberg. To receive Social Security, you can retire at age 62 (or 67 for full benefits). Again, that’s fine when most people die before 62. The blended life expectancy (for both men and women) is almost 79 years and trending higher.


Or my favorite chart on life expectancy ever, also a rebuttal to those who don’t like capitalism.


If you pay attention to Silicon Valley stuff, you know that Google and Ray Kurzweil and some other folks are working on projects that will allow us to live to 150 or even beyond. That would involve doing a couple of things, first
  1. Curing cancer
  2. Curing heart disease
  3. Curing Alzheimer’s disease
You do these three things, it increases life expectancy by another 10 years or more. And we are actually doing those things!

Once you have a cure for all known diseases (attainable in my lifetime), then you have a different problem. Cells get old and die. The Silicon Valley folks are working on that too. Funny, if you don’t smoke, eat right, and get a little exercise, you will pretty much live to 80, no matter what. What happens beyond that is up to genetics, which we will solve one day. So what will the world look like if people live to 100, 150, or more?

It Looks Like Greece


Greece’s retirement age (to receive benefits) used to be 55 years. Again: retiring at 55, what a deal! I would only have 14 more years to go. People are pretty healthy at 55 (though maybe not the Greeks—they have the highest rate of tobacco use in the developed world).

So if people live way longer than the retirement age, the Social Security system goes kablooey. It just does. And yet people resist all attempts to reform it. We know Social Security is in trouble. George W. Bush tried to tackle it. For all his faults, it was the right thing to do. But he got laughed at.

The first thing we will do is to means-test the benefits, which will just make it more progressive but won’t solve the actual problem. You need to push back the retirement age, like, to 80.

But wait a minute. There aren’t even enough jobs for people to work until age 80.

I know…..

The World Was a Lot Simpler When People Just Died When They Were Supposed To


We’re going to look back at the 1940s-2000s as an exceptional period in economic history—with high, virtually straight line, uninterrupted economic growth. We had debt problems before, but biology has made them intractable.

In fact, the whole profession of economics is based on the very idea that there is population growth and inflation. What happens if birth rates decline? They are. Population growth rates will peak very soon. (By the way, the old Malthusian idea of overpopulation is being discredited.) What does the profession of economics look like with declining populations, people living longer, a dearth of unskilled jobs?

Is it nonstop deflation?

Many economists predict years of global deflation based on this premise. They say that you should buy bonds at any price. It’s a compelling argument. I think we’re going to learn a lot of really interesting things about money velocity in the coming years.

The Trade


Like tech in the ‘90s and energy in the 2000s, health care has been and will be the trade of the 2010s. You have the happy accident of huge technological advances and a government that seems willing, for the time being, to pay for it all. You hear some squawking about the cost of some treatments, but seriously, if you can cure cancer for $250,000, who is going to say no? Especially when that person’s chemotherapy, radiation, and hospital bills could easily exceed $2,000,000.

Lots of folks thought that Obamacare would tomahawk the health care sector. In classic market fashion, it has done the exact opposite. The insurers in particular have been the biggest beneficiary. You probably saw the recent Aetna/Humana merger.

People have tried for years to short biotech. Hasn’t been fun for them.

People have funny attitudes about death, you know. You ask someone if they’d like to live to 100, 120. “Noooooo,” they say. “I wouldn’t want to just sit in a chair.” Me, personally, I’d be okay with sitting in a chair. But the point of these treatments is that you can be active into your 100s. What then?

“I don’t know…” they say.

Are you kidding me? Forever young, my man. I’m 41, and I look a lot younger than my parents at the same age (sorry, Mom and Dad). I’m still DJing parties, for crying out loud.
Still don’t get the point of Snapchat, though.
Jared Dillian
Jared Dillian



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Friday, July 17, 2015

Psychopathic Traders and a Trading Plan for Today’s Market

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See you in the markets,
The Stock Market Club

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Tuesday, July 14, 2015

It Could Never Happen Here

By Jared Dillian


I was watching the 6 o’clock news and saw images of closed banks in Greece and people lined up at ATMs. I’m sure you did, too.

This must seem surreal to most people because it seems so remote. But put yourself in these people’s shoes for a second. You have money in the bank. Suddenly you can’t get to it. After standing in long lines, you can only get 60 euros at a time, which isn’t going to last you very long.

What if you didn’t plan adequately and haven’t stashed away any cash? The banks will be closed for a while. What happens?

How do you pay for rent? Or food?
How does your employer pay you?
Do you go homeless? Or hungry?
Do you get really angry, take to the streets, blame someone or something (probably the wrong thing), break stuff, set things on fire?
Will Greece descend into anarchy?
It might.


Doomsday Preppers


Of course, not everyone in Greece is hurting. Many people saw this coming and took action. They took all their money out of the banks, put it under the mattress, or maybe stored it in a safe. Maybe they bought gold, or diamonds, or something else. These people aren’t standing in lines at ATMs. They aren’t going to go homeless or hungry.

But these people get a pretty bad rap—at least here in the US, where we call them “doomsday preppers.” Or “bunker monkeys.” Or “conspiracy theorists.” Or “gold bugs.” They take a beating. Jim Rickards tweeted the other day, “I’ll bet there a lot of Greeks saying, ‘I wish I had bought some gold.’" Truer words have never been spoken.

This week’s issue of The 10th Man is not a gold promotion, but rather a broader discussion about how you can prepare for financial catastrophe. People keep fire extinguishers and first aid kits in their cars. They test their smoke alarms twice a year. They purchase flood insurance or, in my neighborhood, hurricane shutters.
Why would you do all these things but just leave your money in the bank and hope for the best?

I have studied all kinds of financial crises in all parts of the world, from depressions to hyperinflations. The thing they all have in common is that people who do not prepare get crushed. People who are not appropriately paranoid get crushed.

There is such a thing as being too paranoid (if everything you own is in gold and hard assets, you can miss out on some meaty returns in financial assets), but a little paranoia is healthy. For a few years, I had a pretty concrete escape plan, with assets, just in case.

In case of what?.....In case of anything.

No Sympathy Whatsoever


I don’t feel sorry for Greece. I don’t feel sorry for the people in the ATM lines. They have had years to prepare for this day. Most people in similar situations don’t have so much time. I’m shocked that the banks had any deposits left at all.

Probably what will happen is that the banks will require a Cyprus-like bail-in and the depositors will take a massive haircut, getting only a fraction of what they once owned. There are no wealthy Russians to go after. The burden will fall on ordinary Greeks.

It’s also hard to feel badly for a nation of people who have chosen to pursue this ruinous political path—people who cast 52% of their votes for communists or neo Nazis, and who have proven completely unable to take any responsibility for what has transpired.

Greece will probably respond to the failure of extreme left Syriza by electing even more extreme politicians. It seems likely that they will choose a strongman to “get things done.” I think people fail to understand how totalitarianism can happen in the 21st century. Think of this as a YouTube tutorial video on the subject.

Full Faith and Credit


A financial crisis of similar magnitude will happen in the US someday. The only question is whether it will happen in 20 years or 50 or 100 or 200. But it is a virtual certainty. My only hope is that I won’t live long enough to see it.

Still, I know how to prepare for it. You know, in the old days before deposit insurance, people used to keep their money in five to ten different banks to diversify their counterparty risk. If a bank was perceived to be less creditworthy, the banknotes would trade at a discount.

I think that in the days of FDIC and various investor protections, we are lulled to sleep, believing that things really are safe when in reality, they are not. We were hours away from a complete and total financial collapse when the Reserve Primary fund broke the buck and there was a run on the money market mutual funds. We were that close.

After those dark days in 2008, I vowed that I’d never be in that position again.

You do sacrifice investment returns when you do this kind of stuff. Cash or gold or diamonds doesn’t yield anything. But then again, nowadays, neither do bonds. Don’t let the financial media shame you into thinking that taking basic emergency precautions to protect yourself financially is somehow “crazy.”

You can overdo it, though. You don’t need that many cans of pork and beans.
Jared Dillian
Jared Dillian

The article The 10th Man: “It Could Never Happen Here” was originally published at mauldineconomics.


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Sunday, July 5, 2015

Xi’s Anti-Corruption Campaign Is Key to China’s Prospects

By John Mauldin


George Magnus is one of the most influential economists in the world today. From his position as chief economist at UBS for a number of years, he enjoyed a front-row seat to growth miracles, credit booms, and financial crises in major economies around the world and is widely credited with identifying the trigger points that eventually led to the global financial crisis in 2008.

Today, he works as an associate at Oxford University’s China Center, a senior economic adviser at UBS, and an independent economic consultant to governments and private investors who can afford his limited time.

George is the author of two of my favorite books: The Age of Aging (published in 2008), which explores the consequences of deteriorating demographic trends; and Uprising: Will Emerging Markets Shape or Shake the World Economy? (published in 2010), which takes an in-depth look at the new and more sober prospects for emerging markets going forward.

In the following chapter from our recently published e-book on China, A Great Leap Forward?, George explains that moving forward on “more substantive and politically sensitive economic reforms” depends on Xi Jinping’s ability to consolidate power and break through the disruptive vested interests that threaten the Chinese Communist Party’s legitimacy and stand in the way of true economic rebalancing.

While Beijing has made some progress on its stated reform agenda since the Party’s Third Plenum in November 2013, it remains to be seen whether President Xi and his allies have not only the stomach for more difficult reforms and deleveraging but also the political capital needed to move forward without a revolt within the Party.

As George explains, China’s ruling elite find themselves at a do-or-die moment for the ruling Communist Party. Their ability to follow through on tough reforms is one of the biggest points of uncertainty in assessing whether the Middle Kingdom will rise above the muck to escape the middle income trap or fall victim to the same fate that beset the former Soviet Union.

By the way, China is a tad more important than Greece. For starters, there are 20 cities in China whose economies are bigger than Greece’s. Etc. etc. Greece is more dramatic – more hot news – and thus the mainstream media loves it, but the rebalancing act going on in China that we write about in our book is one of the most important economic events of this century so far.

For those of you interested in more of what George writes about China, and the other 16 contributors in A Great Leap Forward?, you can get it as an e-book on Amazon Kindle, iTunes iBook, or Barnes & Noble Nook. It’s a very reasonable $8.99 and has been getting great reviews. China matters and coauthor Worth Wray and I did this book to give you the background and current information to truly understand what is happening. If you don't understand China, it’s like trying to build a house without all the right tools.

You can still build one, but it won't be as good.

I’m on a train from Princeton back to NYC, where I will have dinner with Art Cashin, Barry Ritholtz, Rich Yamarone, and a few of the other usual suspects. One of the fun things about dinner with these guys is that you never know who else might show and how the conversation might unfold. Last night I spent a few hours at Nouriel Roubini's apartment, sitting outside and discussing one thing after another. You gotta love New York.

I am about halfway through my rather unusual new training, where I sit for an hour a day, wired in, trying to control a computer with my mind. I know, it sounds like I’ve gone off the deep end, but there is serious science at work. The idea is to help me to learn to focus better and think more clearly. At times, I feel like a young Luke Skywalker being coaxed by Yoda: “There is no try. Just do.” The conversations that surround this research and practice truly open your eyes to the amazing discoveries being made in a hundred different fields by a variety of geniuses focused on particular new ideas or the solutions to thorny problems. What an amazing world. (The training I’m taking is not ready for commercial application yet, so no use even asking. But in a few years? Oh, yeah; it will be everywhere.

I will get to spend July 4 in NYC. I assume we will find some fireworks somewhere. I tried some BBQ last night, which was guaranteed to be world-class. That would be the case only for people who have never had Texas BBQ. Or BBQ almost anywhere in the South. There is some great food here, but it is NOT BBQ. And now, let's turn to George Magnus.

Your seeing Chinese in my dining future analyst,
John Mauldin, Editor

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Xi’s Anti-Corruption Campaign Is Key to China’s Prospects

By George Magnus
President Xi Jinping’s anti-corruption campaign has been underway now for almost three years and shows no sign of relenting. One major bank has estimated that the cost of the campaign in terms of lower luxury goods purchases and less ostentatious consumption may have been about 1.5% of GDP in 2014, but even if this were really measurable, it would only skim the surface of significance. For it is now undeniable that China’s economic prospects are inextricably bound up with the substance and consequences of the anti-corruption campaign. Any short-term effects on consumption pale into insignificance against the weightier matter of whether the campaign serves to stimulate or stifle the entire economic reform agenda. China’s economic performance in coming years, its chances of avoiding the middle income trap into which most emerging countries have lapsed over the last 60 years, the fate of President Xi and perhaps even of the Communist Party, itself, depend on nothing less.

Party purity as major weapon of governance

Anti-corruption measures are not new in China, but in the past they were short-lived and their principle purpose was to punish or remove foes. The current campaign is different. It is both a traditional purge and a major weapon of governance, designed to bolster the power and legitimacy of the Communist Party at a time of change that is considered threatening. It is probably no exaggeration to say that the current leadership sees the campaign as a sort of do-or-die moment for the Party, specifically to save it from the fate of that of the former Soviet Union. The prevailing narrative is that China must not succumb to the Soviet Communist Party’s failure to stick with Leninist discipline, which allowed political rot, ideological heresy and military disloyalty to undermine and destroy it.

The campaign actually started before Xi came to power. At the Party school in Beijing in March 2012, Vice-President Xi spoke at length on the very familiar Leninist topic of ‘party purity’, which is about the integrity, reputation and effectiveness of Party members at all levels. Cadres were told to take their Marxism seriously and to implement the programmes, regulations and policies of the Party, and shun all interest in personal gain and influence.

This was no run-of-the-mill political speech. Xi insisted then and since that ‘party purity’ was essential if China was to succeed in building a prosperous society, implementing reform, and changing the development model. This could only happen if members opposed and struggled against all forms of corruption, and defended the health of the Party.

Two weeks after the speech, Bo Xilai, governor of Chongqing who was also vying for the job of President, was removed from office. Over time, as is now known, he was stripped of all his Party posts, expelled from the Party, found guilty of corruption, bribery and abuse of power, and sentenced to life imprisonment. This was the curtain-raiser to an unrelenting and comprehensive anti-corruption campaign that shows no sign of winding down.

Implemented by the extra-legal Central Commission for Discipline Inspection (CCDI), the campaign has targeted over 200,000 ‘tigers and flies’, that is high and lower level officials in the Party, People’s Liberation Army (PLA), and state enterprise system. In 2014 alone, 68 top officials and over 70,000 lower level officials were investigated for violations of anti-graft rules. Roughly 36 tigers have been brought down, including Zhou Yongkang, former Minister of Public Security and member of the Politburo Standing Committee, and Xu Caihou, former general in the PLA, who died from illness in March.

Also being investigated for corruption is Zhang Dongsheng, a former director of the finance department in China’s powerful National Development Reform Commission, China’s top macroeconomic management agency. In December 2014, Ling Jihua, once Political Secretary to former President Hu Jintao and Director of the Party’s General Office was put under investigation for disciplinary violations. This move showed that Xi had no inhibitions about going after close associates of both Hu and former Party General Secretary Jiang Zemin, who, at 88, continues to wield influence, and actually supported Xi for the job of President.

In the first three months of 2015, the chief of military intelligence Xing Yunming was removed from office, scores of PLA officials, including up to 16 generals, were placed under investigation, and senior commanders in the PLA were in the process of being reshuffled. The CCDI announcement that it would target state-owned enterprises (SOEs) in a new intensification of the campaign resulted in the removal or investigation of senior personnel, including Song Lin, the Chairman of China Resources, and Xu Jianyi, the Chairman of the FAW automotive group.

The anti-corruption campaign, therefore, is certainly designed to fight foes, and favour friends. Indeed, one of the objectives is to sideline past leaders and others who continue to wield power in the Party so that the current leadership gets a clear run in getting its nominated members on to the elite Politburo Standing Committee at the 19th Party Congress 2017. Five of seven will stand down having reached the age of 68. The other two members are Xi, himself, and Premier Li Keqiang, both of whom will serve until 2022.

But the campaign is also designed as a weapon of governance to make the Party and the state sector more responsive and efficient, as leaders try to guide China through a very important, and potentially unstable economic transition. To this end, they have raised an enormous flag of economic reform. The broad goals were laid out at the Party’s Third Plenum at the end of 2013, and subsequently, including at the Fourth Plenum in October 2014, which focused on the ‘rule of law’, which is better referred as rule by law, or rule according to law. There is no possibility of the re-ordering Chinese society to make the state and party subservient to an independent judiciary.

It is undeniable that changes are occurring. Progress has been most marked in areas that less politically contentious, for example, financial and capital account liberalisation, and the environment. The government has been reducing some of the red tape required for the approval of public projects, it has introduced important, if partial, reforms affecting the pension system and the household registration system in small and medium-sized cities, and more recently, it proposed fiscal reforms affecting local governments and measures to streamline SOEs.

The key issue, though, is whether the anti-corruption campaign succeed in facilitating the implementation of more substantive and politically sensitive economic reforms. These are widely acknowledged to be essential to rebalancing China’s economy away from an excessive reliance on investment and credit, sustaining a new phase of high economic growth based on service industries, productivity and greater efficiency, and to avoiding the fabled middle-income trap.

Anti-corruption, the paradox of reform, and the economy

Optimists argue that even if anti-corruption measures are dampening down ostentatious consumption now, they will ultimately have strong, positive effects on economic growth. The argument goes that the purge of corrupt Party officials and business managers should lead to more efficient business enterprises. And by making the Party structure more effective, and members more compliant, the implementation of multi-purpose economic reforms and of greater ‘marketisation’ of the economy should lead to better resource allocation, and rising productivity and prosperity. But this is political rhetoric, not judgement.

To be sure, President Xi is using the anti-corruption campaign to amass and centralise power around himself in order to strengthen the Party’s control and primacy. To further this process, Xi has expanded his existing authority over the State Council, the military and the Party by establishing 4 additional ‘leading groups’, which he heads, on national defence and the military, state security, cybersecurity and information, and ‘deepening reform comprehensively’. These secretive groups are key to policy implementation, and the last of those listed is perhaps the most significant because it has a comprehensive portfolio, and unprecedented scope of power and responsibility.

Yet this strategy is also throwing up an intriguing paradox. On the one hand, the centralisation of power and cleansing of the Party are necessary to serve the prospects of successful reform. On the other hand, the same concentration of power raises significantly the danger that the political structure being created will stifle and suppress real reform. How so?

First, a major anti-corruption campaign isn’t an engineering challenge with a neat beginning and end. It is likely to spawn consequences, and could be dangerous. Without an open, transparent and legally accountable campaign, picking off a few rotten apples may still leave an essentially diseased tree intact. It is simply impossible for the government to call an entire ruling class to account.

Second, it risks spreading conservatism throughout the Party and system, so that cadres fear stepping out of line, using initiative or experiment by being disruptive and innovative. Worse, it threatens vested interests that may dilute or stall significant reforms, even if they don’t (yet) come out in open opposition. The latter, though, remains a distinct possibility, perhaps at a point when economic growth slows down more significantly or if and when Xi’s corruption and economic plans should go awry in other ways.

The behaviour of vested interests is already evident in key reform areas, such as capital account liberalisation, where SAFE — the State Administration for Foreign Exchange rules the roost, SOE’s that fall under SASAC — State-owned Assets Supervision and Administration Commission, and local and provincial governments.

Capital account liberalisation has been a Party goal for about 20 years but there is still strong resistance to giving citizens free rein to import and export capital. The capital account is actually more porous than one would imagine, but most of the changes that have occurred have been designed to facilitate capital inflows into China rather than out. Free trade zones have been created in Shanghai, Tianjin and Guandong and it is proposed to create a further 18, but Shanghai — a bellwether — has been criticised by some experts as unworkable because of spillover effects to the rest of the country, which would not be welcome. Businesses generally have expressed disappointment over the incremental and limited scope of liberalisation, and few foreign firms have set up in the zone.

SOE reform is also a key slogan, and the new broom in the country is certainly making waves in getting SOEs to tow the line on outsized executive compensation and perks. SOEs are also being encouraged to become more efficient, pay higher dividends to the government, and merge. But the prime motive of reform isn’t to transfer ownership to the private sector, put SOEs on an equal financial footing with private companies, or increase productivity and other growth-oriented outcomes. Rather it is to strengthen the Party in the iron triangle of Party-State-Business.

Local and provincial governments, which account for the bulk of public revenues and spending, were encouraged to raise copious amounts of debt after the financial crisis. They are now being brought into line a bit as the financing platforms they created are banned from new borrowing. They are being encouraged to refinance expensive and in some cases unserviceable debt through the fledgling municipal bond market though the degree to which they will save debt service costs is probably quite limited. In any event, the incentive system in local governments, in which there’s a strong tendency to push for growth and compete with one another, isn’t really being changed, and there remains a strong resistance to the kind of fiscal and financial reforms that might make them legally accountable and subservient to a central fiscal authority.

Third, the drive for Party purity can already be seen to be leading to a dictatorial style based around the prestige and personality of the leader. While this enhances his authority and increases the ‘fear factor’ among opponents and underlings, it also runs the risk of alienating the urban middle class, on which so much of China’s future success depends. With an on-line population of over 600 million people, a throughput of over 7 million college graduates a year, and a more significant exposure to foreign influence than ever before because of travel, trade and cultural exchanges, it would be rash to assume that the Party will command unswerving support under all or any circumstances.

Increasingly uncertain prospects

There is little doubt that China will continue to introduce economic and governance reforms in its attempts to bolster efficiency and achieve an orderly rebalancing of the Chinese economy. Equally, there is little doubt that these reforms will not seriously ‘marketise’ the economy (other than to serve the iron triangle better), effect a meaningful transfer in structure from the public to the private sector, or introduce rule of law based on an independent legal system and neutral contract enforcement. The question then arises as to what the implications of this juxtaposition might be for the economy over the next several years?

For the time being, the government is likely to struggle to sustain economic growth at the new target of ‘about 7%’ while the economy is rebalancing or after. The downturn in investment growth, especially of real estate and construction, is a secular phenomenon. The government will have to acknowledge this sooner or later because it must also address the challenge of unwinding the economy’s reliance on credit creation and debt accumulation, sooner or later. That will doubtless affect economic growth.

The major problem is that in spite of the rhetoric about managing debt, there is little political appetite at the moment to do so. Credit growth has slowed down from over 30% a few years ago to about 14.5%, but so has the growth rate of money GDP, from 15% to about 7.5-8%. So there will be no let-up in the increase in the ratio of debt to GDP, which is on course to double again by around 2020 or just after, having done so already since 2004. Debt has to be paid for via losses and write-offs, losses have to be assigned and recognised in the balance sheets of private and public enterprises, and the state. Reform, as such, cannot resolve this, only proper de-leveraging can.

Reform, though, is in some ways exacerbating the problem of indebtedness. While financial, fiscal and capital account liberalisation policies are all in principle desirable, they tend to stimulate the demand for and supply of credit, which is precisely what the authorities are supposed to be trying to tame. Deleveraging, meanwhile, is still at a very early stage and it will probably entail several quarters of declining transactions volumes in real estate, defaults, falls in the investment rate, and declining credit to GDP. These trends, though, would add to deflationary pressures, put employment creation at risk, and pose a significant political and economic challenge to the government.

In the longer-term, economic reforms have to go much further now that China’s potential to derive growth from the deployment of physical labour, or from limitless capital accumulation is diminishing quickly. A different sort of economic growth is required for China to grow its per capita GDP strongly as well as its nominal GDP. This would be based much less on the dominance of state institutions, and more on innovation, higher educational attainment standards, stronger productivity, and entrepreneurship. This is all the more relevant because China’s working age population share of the population is declining, and rising wage costs and digital technologies are encouraging foreign companies to go home or to cheaper manufacturing nations in Asia, such as Vietnam, Cambodia, Bangladesh, and now perhaps Modi’s India.

China’s leaders are well aware that the growth and development model has to change. The anti-corruption campaign is essential to securing the reforms that would lead to that change. But, as argued, the campaign has weaknesses and shortcomings. Reforms, especially to create robust and inclusive institutions that would really put China on course to become a high income country are most likely incompatible with the central philosophy of Party, which is to rule unchallenged. A purified Party is no substitute for political reforms in which the Party has no interest.

We can understand the resulting insecurity that seems to pervade the behaviour of the leadership, which has manifested itself in fear, distrust, and a major crackdown on opponents, critics, liberals, and most recently, Western values and influences. The government has forbidden universities from teaching or discussing universal values, press freedom, civil society, civil rights, historical errors of the Party, capitalism and an independent judiciary — collectively known as the ‘seven don’ts’. Ironically, allowing these don’ts would go much further in purging the country of corruption than an extra-legal campaign of going after tigers and flies that by comparison, seems quite limited.

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Thursday, July 2, 2015

Commodity Traders, the Environment and How Nature Rebounds

By John Mauldin


The common meme in today’s world is that we are slowly (or perhaps even rapidly in some instances) destroying our global environment. Not just by way of global warming, but pollution, over farming, water usage, and increasing use of all sorts of resources taken from the ground. Post apocalyptic movies and books are the rage, showing us living in a world where man has ravaged his environment and our lives have been degraded if not destroyed. Our failure to deal with global warming and the destruction of the environment are key components of the mantra repeated by the mainstream media, pundits, and politicians.

Technology is supposed to somehow save us from our dystopian future by creating new ways to clean the environment, feed us, and help us become more thrifty and less wasteful. But when? When will we see those breakthroughs, that light at the end of the tunnel?

A few years ago I met Jesse Ausubel, who ran a two week long think tank for the US Department of Defense at the Naval War College, tasked with thinking about the challenges of the next 20 years. The Office of Net Assessment brought in 15 futurists from a number of disciplines and personnel from each branch of the military who were the heads of future scenario planning for their respective branches. We sat for over a week, 10-12 hours a day plus dinners, thinking through the issues we might have to face. Andrew Marshall, who was 93 and had been running that department since he was appointed by Nixon in 1974, gathered this group of nonconsensus thinkers each summer to think about long range issues. I was fortunate enough to be part of the group for two years.

Jesse corralled this herd of cats into a cogent work group and kept us on track. The experience was exhausting but exhilarating. It was soon clear that Jesse was not only capable of organizing a group of eclectic minds, he was also a first rate thinker himself, knowledgeable on a wide variety of topics, a true Renaissance man.

Jesse is Director and Senior Research Associate of the Program for the Human Environment at Rockefeller University, a pure-research institution with more Nobel laureates than any other university. The work they do is astounding in its breadth. I recently spent an afternoon with Jesse talking over a number of topics and especially a paper he recently published which lays out serious research in an accessible way on the subject of how things in our beleaguered world might actually be getting better. It is called “Nature Rebounds,” and it’s today’s Outside the Box.

To get the import of this paper, you may need to know more about who Jesse is. You can read his wiki bio, which is extensive; but the short version is that he was integral to setting up the first (and then subsequent) conferences on climate change in Geneva in 1979. Later, he led the Climate Task of the Resources and Environment Program of the International Institute for Applied Systems Analysis, near Vienna, Austria, an East-West think tank created by the US and Soviet academies of sciences. Beginning with a 1989 book called Technology and Environment, Jesse was one of the founders of the field of industrial ecology. He also co-developed the concepts of decarbonization and dematerialization. He has more serious science attached to his name than most climate and ecological scientists do, and he has the awards and honors to prove it.

And what Jesse tells us is that for much of the world, in many ways, things are getting better. Nature is winning. Not everywhere, of course, and he documents the downside as well, notably the serious devastation of our oceans and fishing. There is still a lot to do, but the trends are positive (except, notably, for the oceans). He shows us that the effort to clean up the environment and expand the areas that are allowed to return to a more natural state has been worth it. This is a great summer read. The entire paper is included in today’s OTB, but if you would like to read it in its original format, you can download a PDF here.

I was recently in the wilds of New Hampshire and Vermont. I spent the weekend at the fabulous retreat compound of Gary Bahre, where some 15 people involved in his investments and businesses listened to Mark Faber, David Rosenberg, Ed Yardeni, Danny (David) Blanchflower, Peter Boockvar, Gary Shilling, and your humble analyst present and debate a series of economic topics. Trish Regan, now with Fox Business, moderated, kept things moving along, and displayed a very wide breadth of knowledge in her questioning. Those who know the characters involved will know that the event was, of course, cordial but also rather highly spirited. The theme song should have been “Hit Me With Your Best Shot!” I don’t get to be in many small group sessions like that, and I thoroughly enjoyed myself. My special thanks to Gary for being such a fabulous host. The place is now for sale, and I wish him the best, although I really would like to be a part of another conference like that again.

I have now moved to my temporary home base in the NoHo neighborhood of NYC, where I’ll be through mid July, in an apartment provided courtesy of AirBnB (I think). I have a business reason to be here, but on a personal level I have always wanted to spend an extended time in NYC. There is just so much to do and so many friends here. Randomly, I find myself in the same building with Nouriel Roubini. We’ve already scheduled to meet up in the next few days.

As a quick aside before hitting the send button, I was pleasantly surprised to find my photo in the New York Times. As I mentioned last week, I attended a small meeting with Governor Bobby Jindal. I wasn’t paying attention to whom the photographers were shooting as I talked with the governor. Somebody was evidently there to cover the event. New York has the potential for a lot of interesting dinners.
You have a great week.

Your happy to see the world getting better analyst,
John Mauldin, Editor
Outside the Box
subscribers@mauldineconomics.com

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Nature Rebounds

Jesse H. Ausubel, Director, Program for the Human Environment

Trends in America may portend a global restoration of nature, a rebound. To understand, let’s go into the woods, not in a far off kingdom, but only about 45 miles northwest of New York City in New Jersey, where a scary side effect illustrates the American trend to expand nature. In September 2014 a bear killed Darsh Patel, 22, a senior at Rutgers University majoring in information technology, while hiking with friends. Patel’s death in the Apshawa Preserve was the first fatal bear attack recorded in New Jersey in 150 years. Five friends were hiking when they came across the bear, which they photographed and filmed before running in different directions. After regrouping, they noticed one was missing. State authorities found and euthanized the bear, which had human remains in its stomach and esophagus, and human blood and tissue below its claws.

Five years earlier, the state of New Jersey had restored its bear hunt. In 2010 wildlife ecologists estimated that 3,400 bears were living in New Jersey. After five years of hunting, the experts now estimate the population has fallen to 2,500. During the six day 2014 season, hunters killed 267 bears. Protesters have picketed and petitioned to stop the annual hunt.

Should the re-wilding of New Jersey shock us? I answer “no,” because about 1970 a great reversal began in America’s use of resources. Contrary to the expectations of many professors and preachers, America began to spare more resources for the rest of nature, first in relative and more recently in absolute amounts. A series of decouplings is occurring, so that our economy no longer advances in tandem with exploitation of land, forests, water, and minerals. American use of almost everything except information seems to be peaking, not because the resources are exhausted, but because consumers changed consumption and producers changed production. Changes in behavior and technology liberate the environment.

Farms

Consider first land. Agriculture has always been the greatest raper of nature, stripping and simplifying and regimenting it, and reducing acreage left. Then, in America, in about 1940 acreage and yield decoupled (Figure 1). Since about 1940 American farmers have quintupled corn while using the same or even less land. Corn matters because it towers over other crops, totaling more tons than wheat, soy, rice, and potatoes together (Figure 2).


Figure 1. Decoupling of US corn production from area farmed.
Data source: US Census Bureau (1975, 2012).


Figure 2. Domination by corn of US crops and meats produced in 2011.
Data sources: USDA; US Census Bureau.

Crucially, rising yields have not required more tons of fertilizer or other inputs. The inputs to agriculture have plateaued and then fallen, not just cropland but nitrogen, phosphates, potash, and even water (Figure 3). A recent meta analysis by Wilhelm Kl├╝mper and Matin Qaim of 147 original studies of recent trends in high yield farming for soy, maize, and cotton, funded by the German government and the European Union, found a 37 percent decline in chemical pesticide use while crop yields rose 22 percent. The story is precision agriculture, in which we use more bits, not more kilowatts or gallons.

Importantly, the average yield of American farmers is nowhere near a ceiling. In 2013, David Hula, a farmer in Virginia, not Iowa or Illinois, grew a US and probably world record 454 bushels of corn per acre, three times the average yield in Iowa. His tractor cab is instrumented like the office of a high speed Wall Street trader. In 2014 famer Hula’s harvest rose 5 percent higher to 476 bushels, while Randy Dowdy, who farms near Valdosta, Georgia, busted the 500 bushel wall with a yield of 503 bushels per acre and won the National Corn Growers Contest.


Figure 3. The transition to precision agriculture. Absolute US consumption of five agricultural inputs.
Data source: USGS2013.

Now one can ask if Americans need all that corn. We eat only a small fraction of corn on the cob or creamed or as tortillas or polenta. Most corn becomes beef or pork, and increasingly we feed it to cars (see Figure 4). An area the size of Iowa or Alabama grows corn to fuel vehicles.


Figure 4. US uses of corn. *Note: Includes production of high-fructose corn syrup,
glucose and dextrose, starch, alcohol for beverages and manufacturing,
seed, cereals, and other products.
Data source: USDA Economic Research Service.

Unlike corn that becomes beef or soybeans that become chicken, potatoes stay potatoes, and they conserve the scarce input of water in Idaho or California’s Kern County around Bakersfield. Ponder the rewards of success for the potato grower (Figure 5). Potato growers have also lifted yields, but their markets are saturated, so they remove land from production. This sparing of land—and water— is a gift for other plants and animals.


Figure 5. Sparing of land by potato growers: US potato yield, production,
and harvested area.
Data source: USDA 2013.

Steadily, the conversion of crops, mostly corn, to meat, has also decoupled, because the meat game is also one in which efficiency matters. From humanity’s point of view, cattle, pigs, and chickens are machines to make meat. A steer gets about 12 miles per gallon, a pig 40, and a chicken 60. Statistics for America and the world show that poultry, land’s efficient meat machines, are winning (Figure 6).


Figure 6. Chicken wins market share in US meat consumption.
Data source: USDA.

High grain and cereal yields and efficient meat machines combine to spare land for nature. In fact, we have argued that both the USA and the world are at peak farmland, not because of exhaustion of arable land, but because farmers are wildly successful in producing protein and calories. To prosper, farmers have allowed or forced Americans to eat hamburgers and chicken tenders, drink bourbon, and drive with ethanol, and they have still exported massive tonnages abroad.

Wasted food is not decoupled from acreage. When we consider the horror of food waste, not to mention obesity, then we further appreciate that huge amounts of land can be released from agriculture with no damage to human diet. Every year 1.3 billion tons of food are thrown away globally, according to a 2013 report of the Food and Agriculture Organization of the UN. That equates to one-third of the world’s food being wasted.

Some food waste results from carelessness, but laws and rules regulating food distribution also cause it. Germany, the UK, and other countries are changing rules to reduce food waste. In California the website Food Cowboy uses mobile technology to route surplus food from wholesalers and restaurants to food banks and soup kitchens instead of to landfills, and CropMobster tries to spread news about local food excess and surplus from any supplier in the food chain and prevent food waste. The 800 million or so hungry humans worldwide are not hungry because of inadequate production.

If we keep lifting average yields toward the demonstrated levels of David Hula and Randy Dowdy, stop feeding corn to cars, restrain our diets lightly, and reduce waste, then an area the size of India or the USA east of the Mississippi could be released globally from agriculture over the next 50 years or so (Figure 7).


Figure 7. Peak farmland? Global arable land 1961– 2009 and projections to 2060.
In the alternative scenario, the several favors (rising yields, diet, waste reduction,
cessation of using land to fuel cars) sum to a higher total.

Rebound is already happening. Abandonment of marginal agricultural lands in the former Soviet Union and Eastern Europe has released at least 30 million hectares and possibly as much as 60 million hectares to return to nature according to careful studies by geographer Florian Schierhorn and his colleagues. Thirty million hectares is the size of Poland or Italy. The great reversal of land use that I am describing is not only a forecast, it is a present reality in Russia and Poland as well as Pennsylvania and Michigan. I will discuss some consequences of this reversal later.

In America alone the total amount of corn fed to cars grows on an area equal to Iowa or Alabama, as mentioned. Think of organizations like the Long Now Foundation turning all those lands that are now pasture for cars into refuges for wildlife, carbon orchards, and parks. The area is about twice the area of all the US national parks outside Alaska.

Forests

Let’s now turn from farms to forests. Foresters refer to a “forest transition” when a nation goes from losing to gaining forested area. France recorded the first forest transition, about 1830. Since that time French forests have doubled while the French population has also doubled. Forest loss decoupled from population.
Measured by growing stock, the USA enjoyed its forest transition around 1950, and measured by area, about 1990. In the USA, the forest transition began around 1900, when states such as Connecticut had almost no forest, and now encompasses dozens of states. The thick green cover of New England, Pennsylvania, and New York today would be unrecognizable to Teddy Roosevelt, who knew them as wheat fields, pastures mown by sheep, and hillsides denuded by logging.

The forest transition, like peak farmland, involves forces of both supply and demand. Foresters manage the supply better through smarter harvesting and replanting. Simply shifting from harvesting in cool slow growing forests to warmer faster-growing ones can make a difference. A hectare of cool US forest adds about 3.6 cubic meters of wood per year, while a hectare of warm US forest adds 7.4. A shift in the USA harvest between 1976 and 2001 from cool regions to the warm Southeast decreased logged area from 17.8 to 14.7 million hectares, a decrease of 3.1 million hectares, far more than either the 0.9 million hectares of Yellowstone Park or 1.3 million of Connecticut.

Like farmed meat, forest plantations also produce wood more efficiently than unmanaged forests, and forest plantations meet a growing fraction of demand, predictably, and spare other forests for biodiversity and other benefits. The growth in plantations versus natural forests provides even greater contrast than the warm versus cool forests. Brazilian eucalyptus plantations annually provide 40 cubic meters of timber per hectare, about five times the production of a warm natural forest and almost 10 times that of a cool northern forest. In recent times about a third of wood production comes from plantations. If that were to rise to 75 percent, the logged area of natural forests could drop by half. It is easy to appreciate that if plantations merely grow twice as fast as natural forests, harvesting one hectare of plantation spares two hectares of natural forest.

An equally important story unfolds on the demand side. We once used wood to heat our homes and for almost forgotten uses such as railroad ties. The Iron Horse was actually a wooden horse—its rails rested on countless trees that made the ties and trestles. The trains themselves were wooden carriages. As president of the Southern Pacific and Central Pacific railroads in their largest expansion, Leland Stanford was probably one of the greatest deforesters in world history. It is not surprising that he publicly advocated for conservation of forests because he knew how railroads cut them. The US Forest Service originated around 1900 in large part owing to an expected timber famine caused by expansion of railroads.

Fortunately for nature the length of the rail system saturated, creosote preserved timber longer, and concrete replaced it. Charting the three major uses of wood—fuel, construction, and paper—shows how wood for fuel and building has lost importance since 1960 (Figure 8). World production has also saturated (Figure 9). Paper had been gliding upward but, after decades of wrong forecasts of the paperless society, we must now credit West Coast tycoons Steve Jobs and Jeff Bezos for e-readers and tablets, which have caused the market for pulp and paper, the last strong sector of wood products, to crumple. Where are the newsstands and stationers of yesteryear? Many paper products, such as steno pads and even fanfold computer paper, are artifacts for the technology museums. E-mail has collapsed snail mail. US first-class mail fell a quarter in just the five years between 2007 and 2012 (Figure 10). As a Rockefeller University employee, I like to point out that John D. Rockefeller saved whales by replacing sperm oil with petroleum. ARPANET and the innovators of e-mail merit a medal for forest rebound.


Figure 8. Declining favor of wood products:
Global forest products consumed per dollar of GDP.
Data sources: FAO 2013; World Bank 2012.


Figure 9. Saturation of world production of forest products, in tons; 1961 = 100%.
Data source: UN FAOSTAT.

Figure 10. Dematerialization in action: Falling US mail volume.
Data source: US Postal Service.


Global greening

So far I have described bottom-up forces relating to farms and forests that spare land. Top-down forces are also at work, and together the forces are causing global greening, the most important ecological trend on Earth today. The biosphere on land is getting bigger, year by year, by 2 billion tons or even more.

Researchers are reporting the evidence weekly in papers ranging from arid Australia and Africa to moist Germany and the northernmost woods (see text box, below). Probably the most obvious reason is the increase of the greenhouse gas carbon dioxide in the atmosphere. In fact, farmers pump CO2 into greenhouses to make plants grow better. Carbon dioxide is what many plants inhale to feel good. It also enables plants to grow more while using the same or less water.

Californians David Keeling and Ralph Keeling have kept superfine measurements of CO2 since 1958. The increasing size of the seasonal cycle from winter when the biosphere releases CO2 to the summer when it absorbs the gas proves there is greater growth on average each year. The increased CO2 is a global phenomenon, potentially enlarging the biosphere in many regions.

In some areas, especially the high latitudes of the Northern Hemisphere, the growing season has lengthened, attributed to global warming. The longer growing season is also causing more plant growth, demonstrated most convincingly in Finland. Some regions, including sub-Saharan Africa, report more rain and more growth.

More nitrogen here and there in the environment may also be causing global greening. A group of us led by Pekka Kauppi of Finland is trying to dissect the shares attributable to the various factors.

In any case, the numbers are huge, and satellite comparisons of the biosphere in 1982 and 2011 by Ranga Myneni and his colleagues show little browning and vast green expanses of greater vegetation (Figure 11). I repeat that global greening is the most important ecological phenomenon on land today.


Figure 11. Global greening: Corroborating satellite images, models simulate greening
1990–2011 with growing net primary production spanning tropical, temperate,
and boreal regions and all vegetation types but also of course some areas with losses.
Trend is measured in grams of carbon per square meter per year.
Source: Sitch et al. 2015, fig. 6.


Materials

In speaking about land, I have occasionally mentioned materials such as nitrogen and water. Let me now suggest that in addition to peak farmland and peak timber, America may also be experiencing peak use of many other resources. Back in the 1970s, we thought America’s growing appetite might exhaust Earth’s crust of just about every metal and mineral. But a surprising thing happened, even as our population kept growing. The intensity of use of the resources began to fall. For each new dollar in the economy, we used less copper and steel than we had used before. Figure 12 shows not just the relative but the absolute use of nine basic commodities, flat or falling for about 20 years. In the 1967 film The Graduate, a successful businessman tells the new college graduate played by Dustin Hoffman, “I just want to say one word to you. Just one word. Plastics” (https://www.youtube.com/watch?v=PSxihhBzCjk). About 1990, Americans began even to use less plastic. America has started to dematerialize.

The reversal in use of some of the materials so surprised me that Iddo Wernick, Paul Waggoner, and I undertook a detailed study of the use of 100 commodities in the USA from 1900 to 2010. One hundred commodities span just about everything from arsenic and asbestos to water and zinc. The soaring use of many up to about 1970 makes it easy to understand why Americans started Earth Day in that year. I marched.


Figure 12. Use of nine basic commodities, US 1900–2010.
Note: Uses five-year moving average; legend is ordered top- down by value in 2010.
Data source: USGS National Minerals Information Center 2013.

Of the 100 commodities, we found that 36 have peaked in absolute use; Figure 13 shows a selection of these. Good riddance to asbestos and cadmium. Figure 14 shows some of the 53 commodities we consider poised to fall. These include not only cropland and nitrogen, which I have discussed, but even electricity and water, about which more soon.


Figure 13. Absolute use of peaked commodities, US 1900–2010.
Note: Uses five-year moving average; legend is ordered top-down by value in 2010.
Data source: USGS National Minerals Information Center 2013.


Figure 14. Absolute use of likely peaking commodities, US 1900–2010.
Note: Uses five-year moving average; legend is ordered top- down by value in 2010.
Data source: USGS National Minerals Information Center 2013.

Only 11 of the 100 commodities are still growing in both relative and absolute use in America. These include chickens, the winning form of meat. Several others are elemental vitamins, like the gallium and indium used to dope or alloy other bulk materials and make them smarter. We have titled our forthcoming report “Chickens and Gallium.”

Dematerialization is no surprise to San Franciscans, who make the devices that replace the big old clumsy hunks of metal and blobs of plastic pictured on the right in Figure 15.


Figure 15. The smart phone as dematerializer, one small device replacing many larger ones.
Credit: M. Tupy 2012.

Even Californians economizing on water in the midst of a drought may be surprised at what has happened to water withdrawals in America since 1970. Expert projections made in the 1970s sprayed rising water use to the year 2000, but what actually happened was a leveling off. While America added 80 million people, the population of Turkey, American water use stayed flat. In fact, as Figure 16 reports, data through 2010 just released by the US Geological Survey shows water use has now declined below the level of 1970, while production of corn, for example, has tripled. The largest reasons are more efficient water use in farming and power generation.


Figure 16. Total US water withdrawals: absolute (ABS) and relative to GDP (IOU).
Withdrawals have been flat since about 1975 while production of corn
and soybeans has grown 300%, wheat 60%, potatoes 25%.
Data sources: USGS 2013; Williamson 2014.

In the land of Lyft and Uber, I must speak about petroleum and mobility too. Until about 1970, per American petroleum use rose alarmingly. Most experts worried about further rises, but Figure 17 shows what actually happened—plateau and then fall. Partly vehicles have become more efficient. But partly, travel in personal vehicles seems to have saturated. America may be at peak car travel. If you buy an extra car, it is probably for fashion or flexibility. You won’t spend more minutes per day driving or drive more miles.


Figure 17. Rise, saturation, and decline of US per capita petroleum consumption,
1900– 2012.

Unlike the car companies, I would not bet on selling a lot more cars either. The beginning of a plateau in the population of cars and light trucks on US roads suggests we are approaching peak car. The reason may be that drone taxis will win. The average personal vehicle motors about an hour per day, while a car shared like a Zip Car gets used eight or nine hours per day, and a taxi even more. As venture capitalists here know, driverless cars can work tirelessly and safely and accomplish the present mileage with fewer vehicles. The manufacturers won’t like it, but markets do simply fade away, whether for typewriters or newsprint.

Moreover, new forms of transport can enter the game. According to our studies, the best bet is on magnetically levitated systems, or maglevs, “trains” with magnetic suspension and propulsion. Elon Musk has proposed a variant called the hyperloop that would speed between LA and San Francisco at about 1000 kilometers per hour, accomplishing the trip in about 35 minutes and thus comfortably allowing daily round trips, if the local arrangements are also quick.

The maglev is a vehicle without wings, wheels, and motor, and thus without combustibles aboard. Suspended magnetically between two guard rails that resemble an open stator of an electric motor, it can be propelled by a magnetic field that, let’s say, runs in front and drags it.

Hard limits to the possible speed of maglevs do not exist, above all if the maglev runs in an evacuated tunnel or surface tube. Evacuated means simulating the low pressure that an airplane encounters at 30–50 thousand feet of altitude. Tunnels solve the problem of permanent landscape disturbance, but tubes mounted above existing rights of way of roads or rails might prove easier and cheaper to build and maintain.

Spared a motor and the belly fat called fuel, the maglev could break the “rule of the ton,” the weight rule that has burdened mobility. The weight of a horse and its gear, a train per passenger, an auto that on average carries little more than one passenger, and a jumbo jet at takeoff all average about one ton of vehicle per passenger. The maglev could slim to 300 kilograms, dropping directly and drastically the cost of energy transport.

Will maglevs make us sprawl? This is a legitimate fear. In Europe, since 1950 the tripling of the average speed of travel has extended personal area tenfold, and so Europe begins to resemble Los Angeles. In contrast to the car, maglevs may offer the alternative of a bimodal or “virtual” city with pedestrian islands and fast connections between them. Maglevs can function as national and continental-scale metros, at jet speed.

Looking far into the 21st century, we can imagine a system as wondrous to today’s innovators as our full realization of cars and paved roads would seem to the maker of the Stutz Bearcat. Because the maglev system is a set of magnetic bubbles moving under the control of a central computer, what we put inside is immaterial. It could be a personal or small collective vehicle, starting as an elevator in a skyscraper, becoming a taxi in the maglev network, and again becoming an elevator in another skyscraper. The entire bazaar could be run as a videogame where shuffling and rerouting would lead the vehicle to its destination swiftly, following the model of the Internet. In the end, a maglev system is a common carrier or highway, meaning private as well as mass vehicles can shoot through it.

The city air can be clean, too, if the source of electricity is clean. In fact, Americans have been doing a good job of decoupling growth and air quality. We already see not only decoupling but absolute falls in pollution. Emissions of sulfur dioxide (Figure 18), a classic air pollutant, peaked about 1970 because of a blend of factors including better technology and stronger regulation. The arc of sulfur dioxide forms a classic curve in which pollution grew for a while as Americans grew richer but then fell as Americans grew richer still and preferred clean air.


Figure 18. Decoupling of US economic growth and sulfur dioxide emissions.
Note: the orange Environmental Kuznets Curve of sulfur emissions,
which peaked in 1970,contrasts with the blue straight line of growth of GDP.
Economic slumps as in 1929 and 1944 reverse growth for 5–10 years
but do not affect the longer-term trends for GDP or emissions.
Data source: EPA. Credit: Waggoner and Ausubel 2009.

American emissions of carbon dioxide (Figure 19) now similarly appear to be peaking. The data in the figure go through only 2007 while emissions have dropped since then to 1990 levels. These trajectories seem preset, not created by public policy or politicians. As the German politician Bismarck said in a speech in 1895, a statesman does not create the stream, he floats on it and tries to steer. In California terms, the best politicians are surfers, winning attention for riding waves.


Figure 19. Decoupling of US economy and carbon dioxide emissions.
2013 emissions were 10% below 2007. Carbon emissions seem around their peak,
especially by analogy with sulfur emissions.
Data sources: Carbon Dioxide Information Analysis Center, EPA. Credit: Waggoner and Ausubel 2009.


Population

I have spoken about farms, forests, materials including water, and mobility. Let me report briefly on human population as well. The US fertility rate declined six years in a row beginning in 2008, falling to 1.86 births per woman in 2013, well below the replacement level of 2.1. Immigration will continue to keep the US population growing, but globally it appears that Earth is passing peak child (Figure 20). Swedish statistician and physician Hans Rosling estimates that the absolute number of humans born reached about 130 million in 1990 and has stayed around that number since then. With fertility declining all over the world, the number of newcomers should soon fall. While momentum and greater longevity will keep the total population growing, technical progress can counter the likely mouths. A 2 percent annual gain in efficiency can dominate a growth of population at 1 percent or even less.


Figure 20. Peak child? Population growth slowing at all levels of development.
Source: The European Financial Review 2013.


Oceans

If only everything were trending in the right direction. I explore and observe the oceans a lot, and ocean life is getting a raw deal. Let’s think a bit about the form of meat called fish. Consider the change in the catch of a charter boat out of Key West between 1958 and 2007—no more large groupers (Figure 21). Or take a trip to the Tokyo fish market. Sea life is astonishingly delicious, and tastier and more varied in markets than ever, owing to improved storage and transport. An octopus from Mauretania ends in Japan.


Figure 21. Recreational fishing on the Greyhound charter boat,
Key West, in 1958 (left) and in 2007 (right).
Source: Census of Marine Life, History of Marine Animal Populations, and Loren E. McClenachan.

Before the advent of refrigeration, fresh sushi was a delicacy for the emperor of Japan. In January 2013 a 489-pound bluefin sold for $1.76 million. We may say that the democratization of sushi has changed everything for sea life.

Fish biomass in intensively exploited fisheries appears to be about one-tenth the level of the fish in those seas a few decades or hundred years ago. Diverse observations support this estimate. For example, the total population of cod off Cape Cod today probably weighs only about 3 percent of all the cod in 1815. The average swordfish harpooned off New England dropped in size from about 500 pounds in 1860 to about 200 pounds in 1930. To survive wild in the ocean, an unprotected species needs to enjoy juvenile sex and spawn before capture.

Earlier I spoke about land meat. How does world consumption of fish that depletes the oceans compare with the 800 million tons of animal products humanity eats? Fish meat is about one fifth of land meat. In 2012 about 90 million tons of fish were taken wild from salt and fresh water and a fast-growing 66 million tons from fish farms and ranches.

Americans in fact eat relatively little sea life, only about 7 kilograms per person in a year. Much of that 7 kilograms, however, is taken from the wild schools of the sea, and that fraction of total diet, though small, depletes the oceans. The ancient sparing of land animals by farming shows us how to spare the fish in the sea. If we want to eat sea life, we need to increase the share we farm and decrease the share we catch.

Fish farming does not require invention. It has been around for a long time. The Chinese have been doing very nicely raising herbivores, such as carp, for centuries. Following the Chinese example, one feeds crops grown on land by farmers to herbivorous fish in ponds. Much aquaculture of catfish near the Gulf Coast of the US and of carp and tilapia in Southeast Asia and the Philippines takes this form. The fish grown in ponds spare fish from the ocean. Like poultry, fish efficiently convert protein in feed to protein in meat. And because the fish do not have to stand, they convert calories in feed into meat even more efficiently than poultry. Let’s say 80 miles per gallon.

All the improvements such as breeding and disease control that have made poultry production more efficient can be and have been applied to aquaculture, improving the conversion of feed to meat and sparing wild fish. In most of today’s ranching of salmon, for example, the salmon effectively graze the oceans, as the razorback hogs of a primitive farmer would graze the oak woods. Such aquaculture consists of catching small wild fish, such as menhaden, anchovies, and sardines, or their oil to feed to our herds, such as salmon in pens. We change the form of the fish, adding economic value, but do not address the fundamental question of the tons of stocks. A shift from this ocean ranching and grazing to true farming of parts of the ocean can spare others from the present, ongoing depletion. So would persuading salmon and other carnivores to eat tofu, which should happen very soon.

Cobia, sometimes called kingfish, widespread in the Caribbean and other warm waters, grow up to two meters and 80 kilograms favoring a diet of crab, squid, and smaller fish. Recently, Aaron Watson and other researchers at the University of Maryland Institute of Marine and Environmental Technology turned this carnivore into a vegetarian. A mixture of plant-based proteins, fatty acids, and an amino acid like substance found in energy drinks pleased the cobia as well as another popular fish, gilt head bream. Conversion of these carnivorous fish to a completely vegetarian diet breaks the cycle in which fish ranchers plunder the ocean’s small fish to provide feed for the big fish.

I have described fish farming in ponds, and much the same applies for the filter feeders, the oysters, clams, and mussels. With due care for effluents, pathogens, and other concerns, this model can multiply sea meat many times in tonnage. Eventually we might grow fish in closed silos at high density, feeding them proteins made by microorganisms grown on hydrogen, nitrogen, and carbon. The fish could be sturgeon filled with caviar. In fact, much caviar now sold in Moscow comes from sturgeon farmed in tanks in northern Italy.

The point is that the high levels of harvest of wild fishes and destruction of marine habitat to capture them need not continue. The 40 percent of seafood already raised by aquaculture signals the potential for reversal. With smart aquaculture, life in the oceans can rebound while feeding humanity and restoring nature.


The vegan extreme

Because California is the world capital of experimentation in cuisine, let me offer an alternative more radical than vegetarian salmon.

We can understand that in a world of 7 billion human mouths aquaculture must largely replace hunting of the wild animals for many, maybe all forms of marine life. We are accustomed to the reality that even vast America does not produce enough wild ducks or wild blueberries to satisfy our appetite.

Back to basics, we depend on the hydrogen produced by the chlorophyll of plants. As my colleague Cesare Marchetti has pointed out, once you have hydrogen, produced for example by means of nuclear energy, a plethora of microorganisms are capable of cooking it into the variety of substances in our kitchens.

Researchers for decades have been producing food conceived for astronauts on the way to Mars by cultivating hydrogenomonas on a diet of hydrogen, carbon dioxide, and a little oxygen. They make proteins that taste like hazelnut.

A person consumes around 100 watts. California’s Diablo Canyon nuclear power park operates two 1,100-megawatt electric power plants on about 900 acres, or 1.5 square miles. The power of Diablo Canyon, a couple of gigawatts, is enough to supply food for a few million people, more than 2000 per acre, more than ten times what David Hula and Randy Dowdy achieve with corn.

A single spherical fermenter of 100 yards diameter could produce the primary food for the 30 million inhabitants of Mexico City. The foods would, of course, be formatted before arriving at the consumer. Grimacing gourmets should observe that our most sophisticated foods, such as cheese and wine, are the product of sophisticated elaboration by microorganisms of simple feedstocks such as milk and grape juice.

Globally, such a food system would allow humanity to release 90 percent of the land and sea now exploited for food. In Petaluma and Eureka, humanity might maintain artisanal farming and fishing to provide supreme flavorings for bulk tofu.


Conclusion

I do not expect 90 percent of exploited nature to be spared. But I do think that humanity is moving toward landless agriculture, progressively using less land for food, and that we should aim to release for nature an area the size of India by 2050. Overall I think the next decades present an enormous opportunity for what Stewart Brand and Ryan Phelan call Revive and Restore.

People will object that I have spoken little about China and India and Africa. I respond with a remark from Gertrude Stein, who came from Oakland. Stein said about 1930 that America is the oldest country in the world because it had been in the 20th century longer than any other country. In fact, as early as 1873 America became the world’s largest economy, and since then a disproportionate share of the products and habits that diffuse throughout the world have come from America, particularly California. My view is that the patterns described are not exceptional to the US and that within a few decades, the same patterns, already evident in Europe and Japan, will be evident in many more places.

Now, rebound is not without challenges. We considered the black bear and the college student to begin. Later in the Long Now seminar series you will discuss the challenges of a woolly mammoth. But consider the fox (back cover photos). Fox experts now estimate that about 10,000 foxes roam the city of London, more than the double decker buses. Foxes ride the London Underground for free. The mayor of London, Boris Johnson, became enraged when his cat appeared to be mauled by a fox, and perhaps because of the fare beating too. English snipers charge $120 to shoot a fox in your city garden.

Meanwhile in rural England, badgers are causing an uncivil war between farmers and animal protection groups. You know more about bobcats in California than I. So we have a new round of what journalist Jim Sterba has chronicled in a great book titled Nature Wars: The Incredible Story of How Wildlife Comebacks Turned Backyards into Battlegrounds.

I want to end not with complications but with inspiration, with examples of why we want rebound, re-wilding, why we want a rapprochement with nature, why the achievements of farmers David Hula and Randy Dowdy and aquaculturist Aaron Watson and their counterparts in forestry and water resources matter.

The incipient re-wilding of Europe is thrilling. Salmon have returned to the Seine and Rhine, lynx to several countries, and wolves to Italy. Reindeer herds have rebounded in Scandinavia. In Eastern Europe bison have multiplied in Poland. The French film producer Jacques Perrin, who made the films Winged Migration about birds and Microcosmos about insects, is working on a film about re-wilding. The new film, The Seasons, scheduled for release in December 2015, will open millions of eyes to Europe’s re-wilding.

As thrilling as Jacques Perrin’s films are, I propose the image of a humpback whale in New York Bight with the Empire State Building in the background as the most significant environmental image of 2014. Humpback whales and other cetaceans, perhaps even blue whales, are returning in large numbers to New York Bight. Recall the whale despair of the 1970s and consider that the Bronx Zoo has just announced a program together with the Woods Hole Oceanographic Institution to monitor whale numbers and movements in sight of New York City. Many decades without hunting and improved Hudson River water quality have made a difference.


Whether into the woods or sea, the way is clear, the light is good, the time is now. A large, prosperous, innovative humanity, producing and consuming wisely, might share the planet with many more companions, as nature rebounds.

Back cover photos
Fox in the wild (photo: Galatee Films)
Foxes in London, Underground (photo: Kate Arkless Gray) and near St. Paul’s (photo: Carine Thomas)

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The article Outside the Box: Nature Rebounds was originally published at mauldineconomics.com.


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