Many Happy Returns

Today brings not one, but two, cautionary tales. The reason for doing quants, either for anonymous blogging or mucho dinero, is to deal with issues which can only be answered with data, not policy. I'm on record that policy trumps data every time, but with the proviso that the policy can be enforced *despite* the eventual collapse. Greenspan's crashing of interest rates was a policy which motivated The Great Recession; he almost fully admitted it after the fact. There was clear data that the collapse was in the making, but ignored by both policy makers (who wants to admit error?) and participants (who wants to be first to miss the boat?). Capital's need for real return, and the consequent need for monopoly, appears in disparate stories today.

To recap. The justification for real physical investment is to make, and sell, either more product at constant price or current/less product at lower cost. This productivity delta is the real return. The Great Recession(s) come about when fiduciary capital is placed in other fiduciary instruments, rather than physical investment. Returns on real estate, whether residential or commercial, can only come out of the income streams of the underlying entities, households or businesses. Residential housing provides no financial returns, in use; paying the vig either comes out of rising incomes (there weren't any during Bush II) or consumption shifts (the volume of moolah needed couldn't be supported by that, although some apologists asserted so). In almost all commercial cases, the same is true. One might argue that a Park Avenue address will attract more business than one in Alphabet City (do they still call it that? and is it still a slum?), in greater proportion to the rent differential; but I'll consign that to outlier status.

So, real return to real capital requires making more and better stuff. Banksters tend to ignore that. AnandTech has another Haswell piece posted today.

If all mainstream client computing moves to smartphones, and Intel doesn't take a dominant portion of the smartphone market, it will be left in the difficult position of having to support fabs that no longer run at the same capacity levels they once did. Without the volume it would become difficult to continue to support the fab business. And without the mainstream volume driving the fabs it would be difficult to continue to support the enterprise business.

There's more background in the text, but it amounts to this: Intel needs to keep its fabs running full blast to get the return on the cost of the fabs. In order to do that, it needs to produce chips which move like hotcakes. You sorta have to get it right.

On the other side of the world, we get the Chinese solar problem. The title: "Strategy of Solar Dominance Now Poses a Threat to China" in my dead trees copy, the title on-line is different.

But now China's strategy is in disarray. Though worldwide demand for solar panels and wind turbines has grown rapidly over the last five years, China's manufacturing capacity has soared even faster, creating enormous oversupply and a ferocious price war.

Trying to generate that real return? You betcha. Does it work, by default? Not hardly.

In the solar panel sector, "If one-third of them survive, that's good, and two-thirds of them die, but we don't know how that happens," said Li Junfeng, a longtime director general for energy and climate policy at the National Development and Reform Commission, the country's top economic planning agency.

We have to do something about that Ruinous Competition!!! Wind turbines? Same thing.

The Chinese government also wants to see the country's more than 20 wind turbine manufacturers, many of which are losing money, consolidate to five or six. "Wind does not need so many manufacturers," said Mr. Li, who in addition to drafting renewable energy policies is the president of the Chinese Renewable Energy Industries Association.

Capitalists continually assume that they deserve outsize returns, but every time they try it, chaos results. Will they never learn?

The modest cutbacks in production barely put a dent in China's overcapacity problem. GTM Research, a renewable energy consulting firm in Boston, estimates that Chinese companies have the ability to manufacture 50 gigawatts of solar panels this year, while the Chinese domestic market is on track to absorb only 4 to 5 gigawatts. Exports will take another 18 or 19 gigawatts.

The enormously expensive equipment in solar panel factories needs to be run around the clock, seven days a week, to cover costs.

Both Intel and the Chinese alt energy sectors are the poster children for fiduciary "investing": while fiduciary "investing" is faux, the return is largely controlled, in the short run (which is all they care about), by policy. The residential home builders made out like bandits, literally, while mortgage companies, banksters, and MacMansion buyers got the shaft. As always, one needs to follow the money. The Chinese alt energy companies (and the government) can't, or won't, find buyers for its shiny new toys. One might argue, and the government surely did, that investing in some fiduciary capital in product producing entities is better than investing only in infrastructure. Infrastructure, as MacMansions, is difficult in the same way: how does one impute (much less collect) real returns? For infrastructure, the return is explicitly societal. PhD candidates have been writing dissertations on the problem for decades. Eisenhower's "National Defense Highway System" was the earliest in my lifetime. The official name became "Dwight D. Eisenhower National System of Interstate and Defense Highways" under Bush I. What's it worth? Well, Ike wanted it because he saw the difficulty (to the Allies) caused by Germany's Autobahn; it was intended to be a network to move men and materiel during the coming wars. Just as DARPAnet was all about the military and turned into a commercial enterprise we call The Web. Who gets the return?