Street Capitalist: Event Driven Value Investments

Jeffrey Sachs is probably one of the few economists that you’ll see mingling with celebrities like Angelina Jolie and Bono. He climbed to “rock star” status by working with the UN on pursuing the Millennium Development Goals, which are talked about in one of his books, The End of Poverty. Nowadays, some see him as less of an academic and more of an evangelist. However, whenever I see something by him in the news, I take a moment to read it. Here is an excerpt from his article in Fortune magazine:

Stagflation is back. Here’s how to beat it

Three decades ago, in a bleak stretch of the 1970s, an economic phenomenon emerged that was as ugly as its name: stagflation. It was the sound of the world hitting a wall, a combination of no growth and inflation. It created an existential crisis for the global economy, leading many to argue that the world had reached its limits of growth and prosperity. That day of reckoning was postponed, but now, after a 30-year hiatus, at least a mild bout of stagflation has returned, and matters could get much worse. We are back to the future, with the question we asked 30 years ago: How can we combine robust economic growth with tight global supplies of such critical commodities as energy, food, and water? It’s worth comparing the earlier episode of stagflation with our current travails to help us find our way. In fact, this time the resource constraints will prove even harder to overcome than in the last round, since the world economy is much larger and the constraints are much tighter than before.

We’ve been seeing a popular criticism that speculation is the main reason oil has risen so rapidly over the last few years. Sachs does not seem to acknowledge that and instead points towards a rise in demand coupled with tight supplies. High commodity prices could be lead to poor global growth:

The first stagflation was overcome at very high cost, including 15 years of slower global growth. While the world economy expanded by about 5.1% during the period 1960-73, it grew by a much slower 3.2% during the period 1973-89. A lot of the slowdown had to do with the worldwide profit squeeze and restraint on investments, jobs, and growth caused by tight energy supplies.

Sachs goes on to say:

Our global resource binds are much tighter now than in the 1970s, because the world economy is that much larger, the resource constraints are tighter, and quick fixes are harder to find. In 1974 the world population was four billion, and total world income was around $23 trillion (in today’s dollars adjusted for purchasing power). Now the world population is 6.7 billion, and the economy is around $65 trillion. The same annual growth rate of the world economy, say 4% per annum, requires vastly more natural resources - energy, water, and arable land - than in the 1970s and poses much larger risks for the world’s climate and ecosystems.

In terms of tradable ideas, I think it’s clear that Sachs believes we have global supply and demand factors that are putting us at risk and not speculative ones. If that’s the case, it could be dicey for anyone who is short oil or other in demand commodities. That doesn’t mean though that we wont see volatility in prices or any pull-backs in oil, that could be attributed to profit taking by traders.

The solutions Sachs gives are simple but difficult. We need to promote government support of ways to combat our current energy, food, and environmental problems. This means increased government spending at a time when we are already running a rather large deficit. Sachs gives the example of our defense spending as a place we could cut from, but that could be disastrous when fighting two simultaneous wars. I feel that some efforts could be solved through tax incentives as well. A number of venture capital firms are springing up that solely focus on clean technologies (see Al Gore at Kliener Perkins), these groups could be aided through a modified capital gains tax, likewise we could give greater tax incentives for hybrid cars, public transportation usage, or other “green” efforts.

With both political parties talking a good deal about the environment, we might be taking a step in the right direction but it is too soon to tell.