emerging.org

Today, we’re going try to take the unusual tack of finding the market upside in all of the bad news of a questionable US economy, a sliding dollar, a blown-out housing market, and such. We all know that there’s always another bubble around the corner, and now’s the time to figure it out. (Of course, there may not be a bubble, and the whole world might fall apart, but we’re screwed in that situation anyway, so let’s focus on what we can deal with.)

It’s tempting to perform a process of reduction, geographically. This separates the world into little chunks of good ideas and bad ideas. If the US is down, all of the countries heavily leveraged with it (in terms of trade, currency dependencies, etc.) look bad, right? So that would mean that if the US economy falls from grace, so would Mexico, Canada to some degree, China, India, and more. The ones that are left would be those farthest in the graph of dependencies.

Reduction may have worked a few decades ago to some degree. Now, the global market ties everyone together in really fun ways. China’s still bound to the US, but floating the Renminbi against something other than the dollar might do a lot of good. Of course, the artificial weakness it holds right now makes China’s output seem cheap, too.

Likewise, reducing the ‘good markets’ to those least dependent on the US to, say, ‘Europe’ ignores a lot of internal complexity like the current labor market issues and other bureaucratic messes that have prevented the EU from getting some of the stature it probably deserves. EADS’s performance is a pretty clear example of both of these issues combined into one.

Because everything’s intertwined, it’s pretty much impossible to isolate a specific region or country that seems like a good investment. APAC still seems most poised for growth overall, China specfically, but that’s not what we’re after here. The goal is the next bubble, remember? That’s a specific sector, although usually within a specific country. Think IT outsourcing and India a few years ago.

If this was truly easy, we’d all be there already. It’s not. And I have zero real background in economics, which doesn’t help.

However, the gut reaction is that the next 5-10 years will see a large amount of interest in energy (technology and security) and currency trading. The US is going to have to unhook from oil in a serious way, and the rest of the world has to unhook from the dollar as the US falters in the process.

Sounds reasonable, right? Scientific? Maybe not - but hey, if the numbers gave a really clear view, we’d all have the answer already.

Hmm. So, who has the next big idea in energy, and where are they? And really, how do you make money exactly in currency trading? The concept makes sense, but what are the specifics? Can you just cut a check to a trader and get a bigger one back?

Any thoughts would be appreciated - a real energy option would be good to read about. Biodiesel’s neat, but there’s some serious questions on efficiency, at least right now. Advances in photovoltaics seem to be just ‘2-5′ years out from full production, although it seems like if it could be perfected, as a source, the sun is the most reliable source of energy we have for the next few billion years.

Other guesses would be helpful too. I sure can’t figure it out. Comment or email matt.sherer@gmail.com and tell me how this all fits together.

The housing market’s been flagged for years now as being in a bubble. Clearly it is, especially around the bay area. (Come on, 1/10 of an acre with 1200sq feet of living space is not worth $800k. Build from scratch with reasonable options and I think you’ll find it hard to break the $650/sq.ft. mark without doing something pretty stupid.)

There are a lot of factors here that I won’t go into, but the correction people have been talking about is getting closer. Housing construction’s dipping, values in most major markets are slipping, and the subprime/ARM resets should really start to hit in the next few months.

On top of this, the national saving rate’s been negative for some time, bouyed supposedly by pulling equity out of housing. I haven’t seen much real data here binding the negative supply to housing, but I guess it doesn’t matter whether it comes from savings, housing, or anything else, right? If you’re running in the red, and pulling money from anything means an overall loss in my book. Pulling money from an equity line or credit card is worse than a savings account due to payback interest, I suppose, but the point stands.

The overall trend seems to be complaints about what’s going to happen to the US economy. There are lots of people saying the bottom’s going to fall out, the bubble will be worse than the .com boom/bust cycle, and so on. (Primarily because consumers actually have ‘real’ investments in their houses, whereas the .com cash was play money, or at least not directly the average family’s cash.

Neat. That’s a great point to complain about. If you extrapolate and add in all of the factors, you can correlate the current environment to Britain’s fall from being a world power almost 100 years ago. (Hey, it could be right on target. It sure makes sense.) Wow.

The interesting piece is getting lost in all of the noise here. And that is, the answer to the question “How are the smart people going to make money on this?” Because, in the end, that’s how this works. There’s a bubble here or there, and the smart crowd (or at least the ones with the money for the best advisors) always come out ahead. So they’re out and onto the next big thing. Where did they go?

It may be that there’s actually a soft landing here. If the dollar falls further, there’s a slim chance that US goods and labor costs start to look viable again, exports go up, trade imbalances rebalance, and everything becomes rosy again.

I don’t really buy that scenario - our trade imbalance is really far off. Plus, we don’t really ‘make stuff’ anymore. All of that infrastructure migrated out of here years ago - can anyone imagine Detroit coming back for real? We build services and ideas now, and while it sounds corny, that’s what we’ve got. Our future depends on a wobbly set of intellectual property support models being supported by the world - more on this later.

This is a distracting subject - my nature tends to draw me off into the weeds of what’s going to go wrong, how bad it could be, and how we’re all screwed. But that’s not the important point. The focus should be on where the next bubble is - even if this all collapses, and the world falls into a global recession for 10 or 20 years, there’s money to be made there on the way down. Someone always makes money, no matter what.

This time it might be the policy setters - has Cheney really dumped all his money out of the country in preparation for heavy inflation and/or a collapsing dollar? If so, where did it go? I’ll follow quickly behind, if there’s time.

Part 2 will go through some processes of elimination to make some hopeful guesses as to what areas we don’t want to be in, in hopes of figuring out where we all should be. Maybe something magical will happen and it’ll all start to become clear.

We went hiking in Tahoe last week, and ran into a bunch of people doing the Pacific Crest Trail where it overlaps with the Tahoe Rim Trail. One of the ultralight hikers (who claims to be a foster son of the Amazing Randi) got me thinking on consumption. More below, after I meander:

It’s amazing how quickly books date themselves. I’ve been reading The Consumer’s Guide to Effective Environmental Choices, which has a lot of really good information. They’ve got what looks to be a good model that breaks down various factors involved in consumer impact - like exactly how much does that SUV contribute to your land use versus greenhouse gas production?

It’s definitely not perfect, but it seems solid. The problem is, it was written in 1999. Yeah, a whole what, 8 years ago? The points still make sense, but some of the scales are way off. For example, they talk about recent advancements that allow consumers to select alternative electricity supplies. That’s now a standard, or getting there. CFLs are now commonplace. They also talk about imagining $3/gal gas to induce shorter trips. The SUV age came and is slowly going out since this happened.

Anyway, to the point. One of the main points of the book is to use the model to decide where the ‘long pole in the tent’ is in order to concentrate savings on those areas. Rather than pushing the public to fuss over minor points and then give up in disgust after the results show minor gains, the idea is to run the model and figure out where time’s best spent.

This makes perfect sense - the approach results in a clear set of goals, with units of measure to gauge progress. Fix the big issues, run the model with the new numbers, and see how rosy the future may or may not look. It’s not perfect, but it’s a damn good step.

However - early on, they discount overconsumption as a specific knob in turning back ecological waste/climate change/etc. They claim it’s too vague and hard to quanitfy, probably for both them and the consumer. It’s true - if your goal is to generically reduce consumption, without a specific guide, there’s no way to tell if all the work being done is doing any good.

This is where I think they’re off base - overconsumption is easy to counter, and it can have some great results. Here’s how:

A. Ask yourself if you really need whatever it is you’re going to buy. If the answer is YES, go to B. Else, go to C.

B. Buy it.

C. Don’t buy it.

Admittedly, this is hard. Quick or bad judgement can blow this simple line of reasoning apart. A more rationed process that can yield the same results is:

A. Ask yourself if you really need whatever it is you’re going to buy. If the answer is YES, go to B. Else, go to C.

B. Write it down on a piece of paper. Write down the date one month from now next to the item’s name. Come back on that date and go to A.

C. Don’t buy it.

If you can survive a few iterations of this, in the end, you probably don’t need it. But at least one iteration is useful to determine if this is moment of compromised reasoning or not.

This process is important, because the consumption feeds on itself. The more you have, the easier it is to buy more. But the more you concentrate on not consuming more, the harder it is to consume. I don’t know why this is - there’s probably a study somewhere.

Now back to the topic on the first line, because an ultralight hiker is a beautiful illustration of this idea. We were hiking about 65 miles, with (more than) enough food for the trip. Our packs were large, and on the edge of a light load, but definitely not ultralight. My pack was 35lbs, with a spike to 48lbs with a full water load. Heavy, but managable.

Pygmy was thru-hiking (2655 miles, but with restock points) with a pack weight of 18lbs, with water. He used to hike with 50-80lbs on his back. But as he lightened the load, interesting things happened. A lighter pack weight can mean a lighter sleeping pad to make up for the sore back. Add in a lighter sleeping bag, lighter tent, and lighter pack frame, and now the overall weight is significantly lower.

What can you do with a lighter pack weight? Well, go farther on the same caloric/nutritional input. So now the food requirements can drop a bit, decreasing weight further for the same distance. Now the pack’s even lighter, and other factors can start to show. What about that propane stove? Drop it in favor of alcohol.

You get the point - the more consumption patterns (shown here in weight) can be turned around, the easier it is to see the smaller factors. So to get back to the original point on the book, it’s definitely sound practice to determine the ‘long pole’ and chase it. However, a simple and systematic approach to reducing overall consumption as shown in the A, B, C pattern above can also expose the same factors. The latter may not do so as scientifically, but a mindset, as the public has shown to have, is a powerful thing and a difficult item to break. If the right one could be put in place, it would be a strong influence on Brower and Leon’s more scientific approach.

We’ve been here a little while now, and are getting moved in. Now that the dust is settling, I’m getting a feel for exactly what the cost differences are between rural New Mexico (Magdalena) and urban California (Alameda).

I’ll admit this is fairly unscientific - there’s only a little bit of data here, and it is still early.

Most of my info here is proportional instead of absolute, but here’s a sense of scale: Socorro County has an average family income of $29,544, compared to Alameda’s $65,587. Alameda is basically a small town in the shadow of Oakland, so it’s not as service-centric as some of the surrounding city areas like San Francisco. (SF’s average family income is $67,809, but with much higher housing costs, so Alameda works out to be a little cheaper.)

So, at first blush, you’d think that salaries between the two locations roughly double to maintain par, right? Sure, that’s about it, give or take a little. If salaries roughly double, pretty much everything else could too, while keeping the same standard of living. Let’s take a look:

1. Gas - Actually, right now, NM has higher gas prices than California. That’s unusual. In general, CA is higher on average, by about 7%.

However: Alameda is bike friendly and has public transportation. So, the car is getting used much less. We sold one car off, so there’s no more depreciation there, no gas for it, no repairs, no insurance, no parking fees, etc. Where we were commuting and spending ~$6/day in gas, plus wear on the car, now Jen’ll use the bus at $3.50/day. The truck remains, which is handy, but with less wear, less gas/oil/repair cost.

Winner: CA

2. Internet - We went from satellite at $60/month to a cable modem at $30/month. Speed and latency are much improved (~20x improvement), but the service worked the same in both places, basically. Those not on satellite in Magdalena usually had DSL, which had comparable costs with land line and ISP requirements.

Winner: CA

3. Food - this one seems to be a tie. Socorro tended to have a markup on food that puts it on par with Alameda costs. I’m not even counting the Magdalena markup, that would put it off the charts. (That could be as much as 2x the Socorro markup.)

However: In Alameda we actually have selection and a lot of variety. There’s a Trader Joe’s that doesn’t take 3 hours round trip to get to, plus ~20 or so in gas. The produce selection is respectable. There’s a Chinese market through the Posey Tube. (Again, that’s not a trip to Albuquerque.)

Winner: CA

4. Insurance - I don’t have comparable data here yet - auto insurance will go up a bit on the truck, but down overall since we can get by with one car. We’re renting, so we only have renter’s insurance rather than housing insurance, which is of course cheaper, but not a good comparison. Based on propery taxes, I would expect home insurance to be higher here, ludicrous if you want or can get earthquake coverage. (Update - it’s about 10 bucks a month more total in CA to insure the truck. So a slight gain, but much less than what we would pay with two cars. Shameless plug - Progressive is a great company to work with, they’re really easy to interact with and were really great when a freak hailstorm pretty much totalled both of our vehicles in NM a few years back.)

Winner: Unknown

5. Housing - Ah, here we go. Yeah, housing’s insane here. We went from 1600 sq ft on .5 acres to ~500 square feet. Cost nearly doubled, in line with the salary increase, but for an incomparable result. If you buy an equivalent house here, it’s easy to spend $3000/month for 30 years to compare to what I paid $500/month for a 12 year mortgage. We’ve kept the cost in line with salary, but it would be easy to get out of control. (Rentals can be $2500 if you want a big cookie cutter place.)

Winner: NM, by a long shot.

6. Utilities - There’s not a whole lot of data here yet, but overall, it looks like costs are reasonable. The rental owner covers a few services, so they’re actually built into the housing cost. Power is more expensive here ($0.13/kWh compared to $0.09/kWh in NM) but we’re likely to use less in our small space, overall. Gas prices will probably follow a similar trend in the winter - heating 500sq feet is cheaper than 1600sq feet. Telecom costs are unknown - we don’t have a land line. Cell phone costs are down, but not comparably - I’m using my work line, Jen’s on a simpler plan. Data networks here are of course much better, but we probably won’t use them directly.

Winner: CA, by a bit due to lower energy requirements in a smaller space? Need more data.

So, overall, housing is the big blip here, but it’s on par with salary, albeit for a reduced space. Nearly everything else here is in favor of CA. There are a lot of factors not considered, but these make up the bulk of expenditures overall, so it’s a good first look at the data. Keep in mind this is in a city with decent services and pretty low crime rates - moving to a more suburban area or other city could cause transportation or insurance price spikes.