What to Expect in 2014 (And Beyond)

This outlook is being written a good 45 days later than when “What to Expect in 2013…” was written over a year ago. It is amazing how much can happen in that short time frame and can influence one’s view of the next year. If I let another 45 days pass I am sure there would be some things that would change. I believe the risks are to the upside on more positive news on the economy but at some point that news could affect Fed action.  Much of what could happen this coming year is influenced by what is going on in the energy sector. Middle East economies, of course, but also inflation, GDP growth, and geopolitical events will affect markets and the US economy specifically. These points will become clear as I spell out some of my expectations. Understand that these expectations follow the Byron Wien formula where I believe there is greater than a 50% chance they happen when the rest of the world may not agree. The “Expectations” are designed to stimulate thought. Some of them can relate directly to the securities markets, but some do not, and this year, a little whimsy. Hopefully, you can figure out which one that is. Let’s begin:

1. After printing two 4% GDP quarters in 2013 and seeing a 1 percentage point drop in the unemployment rate, there is finally some recognition that, maybe, the Fed’s actions really did produce some stimulus. This could lead to self-sustaining growth in the US economy in 2014 with at least one more 4% print this year. Less noise from the crazies in Washington adds to business confidence and, ultimately, capital expenditures.
2. Economic growth and job creation become more apparent with forecasts for a decline in the unemployment rate possibly approaching 6% before the end of the year. The Federal Reserve begins making noise about speeding up tapering and hints at reducing the time the Funds rate would remain anchored at its current level. This is in spite of limited evidence, at least early in the year, that the inflation rate is approaching the targeted 2% level. This ultimately has a dampening effect on the markets.
3. We begin seeing some academic work and, of course, the pundits talking about an acceleration of the technological revolution making the case that low inflation or maybe even some signs of deflation are actually a good thing in this technologically driven environment. The low inflation picture is reinforced at the headline level by energy supplies expanding within the US, in the Middle East from Iraq and, ultimately, Iran. As other countries embrace fracking the potential for even more supply keeps downside pressure on energy prices.
4. The negative elements on inflation, which are not sufficient to cause major concerns, come via erratic supply in soft commodities from continuation of drought in certain areas combined with weather abnormalities which, more and more, are blamed on climate change. As we get into the latter part of the year, the improving developed market economies combined with growth in Asia put some upward pressure on hard commodities. Investors must make the decision to invest in the extraction companies that have suffered from low prices or directly into the commodities themselves.
5. The positive change in US trade balances from lower imports of energy combined with rising energy exports adds more than a percentage point to US GDP and reinforces the case for a strong dollar relative to almost every other currency except possibly the Chinese yuan. Asia shows growing signs of a currency war fueled by the impact of further weakening of the Japanese yen beginning to very seriously affect the export trade of its Asian competitors.  While this has a tendency to push up inflation rates in many of the Asian countries, the developed markets benefit from lower prices on many imported goods further softening their inflation rates.
6. The impact of the currency wars raises questions about the stability of some of the emerging markets, particularly in Asia. There are also concerns about the pace of wage increases in these heretofore attractive locations for outsourcing. Manufacturing and some service corporations begin making different strategic decisions on the best places to locate manufacturing and processing centers.  The decisions are reinforced by a growing belief that technological advances will continue to allow capital to substitute for labor, or at least keep pressure on wages. More business activities find their way back into the developed countries of the world. China moves cautiously in the same direction, taking advantage of its own technological progress. It begins marketing itself as a technological leader as opposed to a low-cost labor market. This is not easy as China, at the same time, continues to push toward a more consumer-oriented society. Incomes have to rise and, politically, the population needs to be kept content. It will not be a smooth year for China.
7. Coming elections in India point to a possible loss of leadership for the Congress party. Combined with continued economic difficulties and some strife associated with the potential leadership change, the country moves further down the path of being even less attractive for foreign direct investment. It loses another year to the relative growth of its Asian neighbors and finds itself participating in the currency wars as a possible way to salvage elements of growth.
8. With the exception of Chile, Colombia, Mexico and Panama, the rest of Central and South America flounders. The US begins to pay more attention to its southern neighbors. Out of desperation, Argentina reaches a settlement on its outstanding debt and begins a focus on building its energy sector with some help from outside sources. A Menem-like regime change becomes a more likely political outcome.
9. The changing energy picture outside the Middle East, combined with likely increased production out of Iraq and, ultimately, Iran, result in a change in the relative importance of Saudi Arabia and, to some extent, Israel. This could produce some positive movement in the Palestinian situation, and some changes in the relationships of Saudi Arabia with the rest of the Middle East and possibly Asia as the US becomes an even smaller market for its oil and an export competitor. On the other hand it raises the risk of some turmoil in the region as the power picture changes and attempts are made to preserve the old order in  a possibly military fashion.
10. The fading newspaper industry surprises the street with its earnings in the early part of the year and benefits from contentious congressional races in the third and fourth quarters as well. The advertising related to Academy Award nominations and ultimately selections reaches new heights in print and social media. Studios advertise some small (but not cheap) movies to extremes to compete with some very high quality films and performances. We actually walked out of a couple of the most highly advertised ones. Aren’t two-page spreads a little extreme? Unfortunately, the correlation between the advertising and the nominations and awards becomes very direct leaving it up to the audiences to hopefully, make their own decisions after the fact. The quality and audience continue to rise for television productions and the associated delivery mechanisms for these performances leaving 3-D sequels and prequels to the movie industry. Can’t wait for “Inside Llewyn Davis Today–in IMax.”

So what does this all mean for the markets? I wish I knew. History says that the kind of equity market we had in the US in 2013 is usually followed by a decent year.  I don’t think it is that simple. We could see some re-allocation by institutions whose US equity portfolios have been pushed above their target percentages. At the same time, if we are beginning to return to a more normal relationship between earnings yields and fixed income yields, traditional debt doesn’t look that attractive. It may mean that markets outside the US are more attractive–maybe Europe and maybe some of the emerging markets if the currency is hedged out. There are some risk elements in the geopolitical situation. I think we will have to look harder for returns this year and the risks are high enough to look for some less correlated investments. I wouldn’t reduce my equity exposure, but I might change the mix.

We’ll have to see if another 45 days sets us up for totally different surprises. If nothing else I hope this has provided some food for thought.

I have some longer term expectations including a carryover from past years which, one of these days, will actually come to pass. I include these as additional repast for the brain. As has been the case since the millennium, the year will likely be more interesting than we anticipated.

1. Contrary to normally quiet years during a transition of leadership, to some extent in reaction to some elements of an “Asian Spring” in the region, China takes further steps in response to a more activist populace upset with corruption, the environment, and some areas of economic stress. Externally, this includes significant acquisitions in other countries as well as the opening of manufacturing and service facilities where there is a receptive government. At home, R&D is accelerated, particularly in alternative energy, space and IT processing. Subsidies for hydrocarbons are reduced and an explicit carbon tax is put in place.
2. As the US economy grows, corporations find qualified hires difficult to come by.  Enlightened corporations become educational institutions to provide skills and basic knowledge to a work force that has been idle and undereducated by the public systems. Corporations become much more vocal about creating paths to bring more immigrants into the US system, expanding visa programs and finding other mechanisms to add talented labor to the domestic pool. The tide shifts significantly on immigration issues. The skill match is aggravated by decisions on the part of some US corporations to bring business operations back into the States. Labor costs are rising elsewhere and the elements of control, rule of law, productivity, available feedstock and relative safety lead to better economics for manufacturing and service operations.
3. Moore’s Law, driven primarily by Intel driving down the nanometer scale and introducing other innovations,  continues to march on. The use of Big Data becomes ubiquitous. This produces technological advances that enhance the opportunities in health care, manufacturing, extractive industries, media and services beyond even the imagination of some of the best speculative fiction writers. These advances, on balance, are positive but continue to raise concerns about the environment and quality of life and opportunity for those at the lower end of the economic and educational spectrum.
4. Breakthroughs in stem cell research particularly led by work coming out of the New York Stem Cell Foundation change the nature of disease management and eradication and move general therapeutic advances away from animal models to direct testing on human cells. Targeted therapeutics driven by DNA analyses tied to narrower classes of patient recipients change the nature of drug and health delivery. It becomes apparent that the US FDA model is slowing the pace of US therapeutics development by the cost and time required to bring solutions to market. Much as financial services regulation was geared to the benefit of larger entities, it becomes clear that therapeutics development has been on the the same path. Change occurs in response to other countries moving more rapidly in bringing solutions to market.
5. Away from continual ups and downs in financial assets as the world works its way through the hangover from the 2008-2012 financial crises, the general march of human progress is positive. I hope to be around to observe it. Maybe the breakthroughs suggested in the previous expectation will help that.

The Economy, The Markets, Obama’s Climate Change speech and Idealab: A Podcast

I recently did a broadcast on the Hays Advantage reviewing the turmoil in the marketplace, tying it back to our outlook of last November. We also spent some time on Obama’s speech and introduction of some new regs on Climate Change. I pointed out that we need to do something as we are falling behind technologically what is happening in Germany, Japan and, to some extent, in China. I wrote about what Germany is doing a couple of years ago.  I think we would all agree that regulations have a place, but it is not the best way to deal with this issue. At some point we need to have an explicit Carbon price which allows for economic decisions within a broad framework of rules.

Kathleen Hays had visited Idealab two weeks before and we had a chance to talk about innovation and the process there as well. You might find the 20 minute podcast interesting.

Labor Market, Stock Market, The Economy, and Why the JOLTS Report is Both Good and Problematic

The labor market is fine, but there are some concerns (and opportunities). Listen to the podcast of a conversation with Bloomberg’s Kathleen Hays and Vonnie Quinn of “The Hays Advantage” on Bloomberg Radio from April 10, 2012. These two posts and a link will also provide some background: http://bit.ly/wfpykq , bit.ly/zAEswR , bit.ly/H9EBHo .

Download the podcast

Shutting Down Nuclear Power in Germany? This May be the Best Thing for Renewable Energy and Emissions Reductions.

So, Germany is shutting down all of its nuclear plants by 2022. At the peak the plants produced 27.5% of Germany’s electricity. Renewable Energy is now up to 17.5%. There is a big gap to fill in a short period of time and it has German industry and the utilities screaming. This is on the path to have 80% of all its electrical energy come from non-carbon sources by 2050 in addition to a 50% reduction in consumption.  While one could question eliminating Nuclear from the clean energy picture, what Germany is doing will very likely produce an acceleration in innovation, efficiency and the development of intellectual property that will 1) keep Germany’s energy costs from rising, 2) expand Germany’s trade surplus 3) increase Germany’s share of global Intellectual Property and 4) reduce the world’s CO2 emissions more than would have occurred otherwise. This is a bold, audacious step and does require a leap of faith that the German engineers and scientists will accelerate the pace of economic renewable energy development, and German industry and its people will further increase the efficiency of energy usage. I think they will do it, primarily because they have to and they have the talent to do it. This may be one of the most exciting moves by a government to date in the renewable energy field—and a positive move on emissions.

In the meantime, the US is looking for more carbon in less mature formations to fill its energy needs. We’ve basically found all the pooled oil and gas that took 300 million years or more to produce and are now going after “tight” carbon in shale formations as our solution to meet energy demand and produce energy independence. While the shale gas most likely will produce fewer emissions than coal over the 100 year life of a formation, it is still producing carbon and requiring a fairly aggressive use of other resources, primarily water, and some real brute force in liberating the carbon. This, too, is a bold step with some big environmental risks associated with it. It may prove to be a bold step in the wrong direction. We will take a closer look at this in a future blog. The move by Germany is an exciting one, but it saddens me to see the innovation and the aggressive steps to produce the lower carbon world we need taking place elsewhere.

Risk and Opportunity

Mother Nature, the Economy, Intellectual Property & Innovation, Strategic Risk and Private Equity 

The first quarter of 2011 was rather tumultuous to say the least, and we are entering the second quarter with very little of that turbulence fully calmed and the human toll and uncertainty continuing to rise. This has heightened concerns about specific Risks and, more generally, the global economy…  Continue reading the text version →

Or fast forward to the Q&A session in the video below.

Reduce Oil Imports by 1/3? Can we do it all with fuel efficiency?

The short answer is maybe. It would require that vehicles being sold ten years from now would have to average 75 miles per gallon—not impossible, but  improbable–unless. It requires political will, higher and real CAFE (fuel efficiency) standards and continued technological improvements or a gasoline price that rises substantially. The latter two are the factors about which I have the most confidence.

I hate to do this, but we need to understand the numbers. Try and stick with me on this. These numbers are rough but get us into the ballpark.

We import 9 million barrels of oil a day, about half from OPEC by the way. So we need to get rid of 3 million barrels a day or 1.095 Billion barrels a year. Now, those barrels don’t just go into making gasoline, but let’s make the leap of having all that reduction come from gasoline.  Based on refining experience, each barrel of oil typically produces about 19  gallons of gasoline (there are 42 gallons in a barrel). If we are to get rid of 3 million barrels of oil per day that means we need to reduce gasoline consumption by about 46 Billion gallons (42 gallons per barrel x 1.095 Billion barrels);  that’s out of the 160 Billion gallons consumed each year by the 240 million vehicles on the road today. (Notice that I capitalize Billion. We are talking BIG numbers.)  Those vehicles, each traveling about 12,000 miles a year, are actually averaging about 18 miles per gallon. To think about it another way (inverted), each vehicle is consuming about 0.0556 gallon per mile or 0.00132 barrel per mile. Pretty exciting so far…

Over the next ten years at a scrappage rate of 5% a year we will replace half of those 240 million vehicles. That’s where the reduction in consumption has to come from.  Let’s calculate what the mileage improvement has to be to eliminate those 1.095 Billion barrels a year.   Currently the half of the fleet that will be scrapped, which is less efficient than the whole fleet, is likely consuming about 1.8 Billion barrels a year or 4.93 million barrels a day. We would need it to be consuming only 1.93 million barrels per day or 0.705 Billion barrels a year or 29.61 Billion gallons per year. If each vehicle in that half of the fleet is traveling 12,000 miles a year it would have to be averaging about 49 miles per gallon. You can do this calculation yourself by dividing the total mileage for the fleet (1.44 Trillion miles) by the gallons expected to be consumed (29.61 Billion).  To get that average for the 120 million vehicles assuming a linear increase in miles per gallon over that ten-year period, the vehicles bought in 2022 would have to be averaging 75 miles per gallon.  While the all-electrics are already getting over 100 miles per gallon equivalent and many of the hybrids over 50 mpg it is still a stretch to think that we will get the average on all vehicles sold in a year up to 75 miles per gallon in 10 years or about 50 miles per gallon in 5 years.  It is not impossible, but would require one hell of a change in the growth path for highly fuel-efficient vehicles, supported by significantly higher CAFE standards.  The problem is we are starting with only 40% of all vehicles being subject to the higher CAFÉ standards. We have a lot of light trucks and real trucks on the road.

We should strive for all 3 million barrels a day coming from fuel efficiency. As I said, political will, CAFE standards, and technology are required, and higher oil prices are a given unless we do this. And, by the way, every million barrels a day of gasoline we don’t use, reduces CO2 emissions by 148 megatons per year.

One Million Electric Vehicles by 2015? Well, It’s a Start.

In the State of the Union address President Obama announced a goal of 1 million electric vehicles on the road in the United States by 2015.  Part of that plan involves continuation of some existing incentives such as the $7500 credit on a purchase, but some new incentives and actions as well—incentives to communities for vehicle fleet conversions, HOV access and other steps. In addition the GSA will purchase 40,000 alternative fueled and fuel-efficient vehicles as replacements for aging vehicles in its fleets. 1 million sounds like a nice number, and we have to start somewhere, but let’s hope the number is significantly larger.

There are over 240 million vehicles on the road in the US now, and a replacement of 5-7% of those vehicles a year. Those vehicles average about 20+ miles per gallon.  Replacing 0.4% of the fleet with vehicles averaging, let’s say, 100 miles per gallon equivalent, under the most optimistic assumptions reduces our oil-equivalent consumption by about 12 million barrels a year and CO2 consumption by about 4 million tons.  Unfortunately, we import 9 million barrels of oil a day.  However, it’s a start! It also has the effect of stimulating activity in electric vehicles and associated and competitive technologies.  Importantly, it will stimulate activity on increased fuel efficiency of all types.  In my view, this is where we need to focus—set very aggressive targets on average fuel efficiency for each manufacturer selling in the US with a goal to getting the whole fleet—all 240 million vehicles–up to 60 miles per gallon or better in 25 years. That does start making a big dent in CO2 emissions and our dependence on foreign oil. I have written about this in earlier posts, (see TRADE DEFICITS, ENERGY INDEPENDENCE AND, OH YES, CO2 EMISSIONS—November, 2009).  In other words, provide incentives for fuel efficiency in general.  With electric having the potential for the highest efficiency, the credits and other specific incentives there will drive the rest of the industry, but lets get more explicit on very aggressive fuel efficiency targets.  The competitive juices and the resulting innovation will get us there.  President Obama talked about out-competing and out-innovating the rest of the world. That has to start with competition and innovation at home.  More to come.

 

China and the Economy, China and Innovation, China and Climate Change

The extra emphasis on China in the media culminates this week with the US visit by President Hu Jintao. Much has been written about the visit and much posturing has taken place to set a “proper” tone. It’s hard not to comment on some of what has been said before hitting on the important topics of Innovation and Climate Change.

Economy. Let’s start with the currency. I don’t quite get all the noise about China needing to increase the value of the Yuan relative to the dollar. Secretary Geithner says it will help them control their inflation and will be “fairer,” whatever that means. The prices of Chinese goods are already going up which is a result of wages rising and productivity, particularly in low value goods, not offsetting labor costs. A rise in the value of the Yuan would increase prices more and would also increase the buying power of the poorer segments of the Chinese population while doing just the opposite for that segment in the developed world.  It would have the effect of creating jobs outside of China—not in the US, but in Mexico, Vietnam and other countries that will have a labor cost advantage relative to China. The rate of inflation would likely fall in China, but, of course, it would rise in the developed world. The short-term effect on the relative trade balance would be negative for the US, as it would take time for US corporations to shift purchasing to other countries. Plus, commodity prices, particularly oil, would likely rise in dollar terms, increasing our trade deficit in energy. Anyone who really expects that such an action would create jobs or a significant enough cost advantage to stimulate US exports or US buying of US goods vs. creating exports for other low cost countries isn’t looking at what China exports and imports vs. what the US makes. Odds are the media and our wonderful congress will spend more time on the currency issues than anything else. I think President Hu is here to go shopping. By that I mean putting China in a position to buy US assets that will be of value to its growth plans, primarily access to technologies that can allow it to meet its objectives of being a leader in innovation over the next several decades. The tradeoff will likely be further access to Chinese companies and markets by the US.  I reach this conclusion from a thorough read of China’s Patent Policy put forth this past fall.

Innovation. China’s National Patent Development Strategy (2011-2020) is a scary read. China sets very high targets for patent filings over the next 5 years, dwarfing filings by the US and Japan (which already exceeds the US in patents in force). It establishes a budget for Patent services that could reach US$16 Billion annually at current exchange rates. It proposes to have ten model cities focused on utilizing the patent system and the incentives to create a vigorous intellectual property market. It will seek to acquire intellectual property from others. A couple of direct quotes from the Strategy are worth noting: “A large number of core patents will be acquired in some key fields of emerging industries and some key technological fields in traditional industries. …Encourage enterprises to acquire patent rights through innovation on the basis of digesting and absorbing imported patented technology. …Support and foster exports of patented technologies and increase the proportion of exported patent-intensive commodities and strengthen guidance on patent policies for enterprises in the process of overseas mergers and acquisitions.”  Implied in the budgets for patent services is a vigorous enforcement of patent rights. Once China has intellectual property rights (IPR) to defend, it will likely be one of the more aggressive enforcers of those rights. The number of patents in force today with their origin in the US and Japan are each almost 20 times those of China. When those numbers get closer to parity it may very well be the US that finds itself on the defensive for not respecting IPR.  This was last the case in the early days of the Industrial Revolution when the US was the upstart and more intellectual property resided in Europe, primarily the UK.

Climate Change.  China’s plans for Patent Development raise significant issues about where intellectual capital will ultimately reside. When it comes to capitalizing on two significant areas of expected (or should we say required) technological innovation and value over the next decades, China is explicit as to their importance:  “…Balance the relationship between the patent policies and some major public policies such as public health and climate change.” (My emphasis)  Others can hold forth on the health front. In the patent document and others, China continues to highlight Climate Change as a focus of its policies and its technological efforts. It is clear that China sees the requirement to respond to this threat as political as well as societal. We will ultimately be a buyer of what China and others produce unless we also look at what policies we can put in place to be competitive.  At the moment we have the intellectual leadership existing in a variety of our institutions. Shame on us if we let that leadership slip away.

Fuel Cells: Maybe they aren’t 10 years away…….

Up until a couple of years ago I have been in the camp that “fuel cells are 10 years away,” which is where they have been for the last 30 years. However, as I commented in a recent tweet that is no longer the case. After that tweet commenting on Katie Fehrenbacher’s post on GigaOm.com  re test driving the Mercedes Fuel Cell vehicle I got a reply from Ron Glantz. Ron, who for many years was the number one ranked auto analyst on Wall Street and a successful money manager, has forgotten more about the auto industry than most people actually know.  While he claims he truly has forgotten almost everything and has not kept up on the industry, his email to me belies that point and raises some interesting questions. I have copied it below:

“While automakers are still working on fuel cells, apparently they have given up on generating hydrogen in cars by processing gasoline. (I had previously sent you a note saying that the problem was the cost of the platinum used in the catalyst.) Instead, they are counting on hydrogen refueling stations:

• The Nikkei says that the Japanese government is supporting an initiative to draw hydrogen from oil refining. Oil refining uses hydrogen to remove sulfur from oil. The hydrogen used in this process doesn’t have to be high quality, 90 percent pure suffices. Fuel cells expect 99.9 percent pure hydrogen. The sponsored project aims to produce high purity hydrogen, based on “industrial” hydrogen technology”. The Japanese government will bear half the cost of a cheap project. It is estimated to cost 500 million yen ($ 6.15 million) over a three-year period.  It wants to be ready before 2015. Why 2015? Japan’s Ministry of Economy, Trade and Industry (METI) expects a “wide adoption of fuel cell vehicles by fiscal 2015” and “seeks to secure a steady supply of high-purity hydrogen.” Again: Why 2015? It just so happens that Toyota is dead set on selling its first mass-produced fuel cell car by 2015.

• In Korea, Byung Ki Ahn, general manager of Hyundai-Kia’s Fuel Cell Group, said recently: “There are already agreements between car makers such as ourselves and legislators in Europe, North America and Japan to build up to the mass production of fuel cell cars by 2015.” Indeed, if you go through the many files produced in Brussels, you find that in Europe “car manufacturers are getting ready for the commercial production of hydrogen vehicles by 2015.”

So, now you have a “chicken and egg” problem — how can you sell cars before there are refueling stations; how can you justify building stations before there are cars?”  -Ron Glantz, 01/01/11.

Of course this is not a problem for a country that is building into a growth market, e.g., China, India. If one has to build service stations for a growing population of vehicles, anyway, they can just as easily be hydrogen, or natural gas, and, maybe as an interim step, battery recharging or replacement stations.  This is an oversimplification, but it highlights the problem facing the developed world when it comes to a new paradigm. Most innovations applied in the developed world are as replacements, not necessarily meeting new demand. A different economic equation which the developed world has to accept or be left behind.

What to Expect for the Economy and the Climate in 2011

2011 is shaping up to be an interesting year for the global and the US economies, and it could be an interesting year on the climate change front as well. In mid-December, 2010, it is the normal time for prognostications on the next calendar year by those who actually do the work and may know what they are talking about and those of us who read the work and make our less data-driven forecasts.  Indulge me while I put some of my thoughts about next year in print.  I think this is an important exercise for anyone to do.  It establishes a base line from which to look for and measure deviations from expectations. And it puts in place a discipline that I always suggested to analysts who worked with me: once one has developed a point of view, spend the time looking for disconfirming information. At the same time, one needs to step away from the data and do a little speculation, particularly when in the early stages of a change in direction and a possible change in the second derivative of an established trend. So here we go:

The Economy. I think next year could be surprisingly good in the US with the likelihood of us printing a 5% GDP quarter at some time during the year. The truth is the economy has been clicking along reasonably well in most areas excluding the construction industry. That industry, which at its peak can employ 10 million people, has always produced the amplitude on the downside and upside to our statistics on employment and overall GDP.  Without much lift there we are still starting to see employment numbers improve. The trade numbers, aided by a weaker dollar over the last year working its way into purchase decisions, will also add to GDP, even if the dollar does better than many expect over the next year. At the same time, we have just passed a very stimulative tax package, which puts money in wage earners’ pockets as well as corporate America, while quantitative easing continues. QE2 and the tax package probably represent the last of the stimulus efforts, which almost always are lagging indicators of economy. We do have some issues around several state budgets, but the responses by the new crop of governors could be surprising, maybe because they have to be.  One can almost sense a palpable shift now toward addressing the federal deficit with the Budget Commission’s recommendations producing some fundamental change. It may not all happen next year, but I suspect that before we are done, we will see some major changes in the tax law. I am looking forward to a 28% top rate on income and I will accept the other changes that get us there. Lots of details to observe along the way including what’s happening in the rest of the world, but if the US surprises, that may be enough.

The Climate. In spite of the cold December in populous areas of the Northern Hemisphere, 2010 may end up being the second or third warmest year globally since measurements began in 1880.  There are some indications that the changing weather patterns are themselves a product of long term anthropomorphic-driven climate change. Based on what took place in Copenhagen at the end of last year and what was just concluded in Cancun, there will be no concerted world-wide effort to do anything other than recognize that there is a problem requiring some movement away from a carbon-based global economy or simply adaptation to a warmer world. On the other hand I continue to be amazed at the innovation that is taking place globally to produce non-carbon or low carbon solutions to energy needs either through greater efficiency or truly new economic approaches. These include the transportation sector in most countries where mileage standards are much higher than in the US. These changes are driven by a desire for energy independence, economic innovation, or a response to the will of the people, even in China.  It is sad to see the limited response by the US which will ultimately result in much of the new technology being owned and controlled elsewhere. We should not be buying 9 million barrels of oil a day from other countries for many reasons well beyond the effect on the atmosphere.  And we don’t need to take on the cost and risk of additional carbon production domestically as a way to eliminate our trade imbalance, although natural gas is an interim step in the right direction. We do need to support the technology and innovation that can occur domestically to move us away from carbon and affect our trade balances as we export these solutions to others.

More to Come. There is much more to talk about on both the economy and the climate. Stay tuned.