The most recent issue of National Geographic includes a fascinating article on the Supervolcano that currently lies beneath Yellowstone National Park (yes, something rather ominous is indeed heating the geysers). Over the past 2.1 million years, the Supervolcano has erupted three times. The largest of the three emitted 2,600 times as much ash, rock and other volcanic detritus as Mt. St. Helens. The smallest of the three expelled 250 times as much as Mt. St. Helens.
So what? We won’t go so far as to imply that the boiling tension beneath the surface of Yellowstone resembles in any way the highly levered turmoil beneath the surface of our economy, but there are some takeaways worth noting;
- It is good to key into events that occur in geological time rather than CNN Situation Room time. It slows one down. It provides the perspective of long sweeps of history rather than daily (or even inter-day) trends. Our numerous crises are less urgent in the context of millions of years.
- The fundamental geologic structure of the Supervolcano is unchanged; thus, it is reasonable to expect that similar eruptions will occur in the future, as they have every few million years for at least 16 million years. If, fundamentally, we wish to continue operating with a highly levered economic system (with additional public capital in lieu of private capital), then the fundamental economic structure will retain many of the characteristics that led to the most recent meltdown and many if not most of its predecessors. What, then, is our responsibility to the future?
- While hard sciences such as geology are rich with controversy and politics, there is at base a common aspiration for using facts to prove hypotheses regarding how the world works. It may take awhile to sort it all out, but at the end of the day, there is a mechanism for vetting information and moving forward. How could we collectively develop a similar mechanism for economics? Is there a way we could develop a system for data collection and analysis that strips out the ideological biases, political agendas and other self-serving interests that color most economic analysis? For now, economics is indeed a social science; do we have the means and will to make it more of a hard science?
Our desire for a more objective economic framework is well-illustrated by this week’s economic issues. While last week’s S&P earnings surprises have been to the upside, much of that upside was due to cost cutting rather than revenue generation. It is logical and appropriate to reduce expenses in this environment, yet cost cutting is not generative for the broader economy, nor is it a long-term business development strategy. At some point, one needs increasing revenues to generate the earnings growth. With this perspective in hand, should money be flowing out of cash into US equities? Is that the best opportunity?
Let’s take that one level deeper before we sign off. Much of the media attention focuses on changes in the DJIA (30 US stocks) and the S&P500 (500 US stocks); yet in 2009, US equities in general are one of the poorest performing asset classes. They have dramatically underperformed their corporate bond counterparts, as well as developed and emerging equities around the world. And, given that a well diversified, moderate growth portfolio would only include about 20-25% US equities anyway, why doesn’t the media focus more intensely on the other 75-80% of the investable marketplace?
In reflecting on this letter, it appears that we wish economics were a harder science, while we also acknowledge that more than most any other science, economics—and its corollary, investing—are subject to the whims and whimsy of human behavior far more than we desire. And it will likely remain thus, even in the broad sweep of geologic time.