Wednesday, April 30, 2008

notions of trichet

once again, the new york times brings us a pair of very important stories:

For months, beleaguered American consumers have defied expert forecasts that they would soon succumb to the pressures of falling home prices, fewer jobs and shrinking paychecks. Now, they appear to have given in. link

and across the pond...

LES ULIS, France — When their local bakery in this town south of Paris raised the price of a baguette for the third time in six months, Anne-Laure Renard and Guy Talpot bought a bread maker. When gasoline became their biggest single expense, they sold one of their two cars. link

at first they may seem similar because they're about people struggling with hard economic times. but let's look closer:

for americans, the problems are: falling home prices, fewer jobs and falling paychecks.

for europeans, it's rising prices.

I know history doesn't repeat itself exactly, but it seems that we're setting up for some interesting paralells to the late 1970s.. this time jean-claude trichet, head of europe's central bank, plays the role of paul volcker, the US Fed chairman who jacked up interest rates to shut down inflation. I say this for at two reasons... first, volcker is recognized as one of the great economic heroes of all time. I think trichet will naturally be drawn to follow his example...

secondly, trichet has a sole mandate of fighting inflation. in contrast the fed has a dual mandate of fighting inflation and maintaining full employment. that means ben bernanke is much more worried about keeping the economy strong. cynically, one might add the fed's second job is actually "full employment (for wall street and bankers in general)" ... that means they don't want people's loans blowing up. europe doesn't have to worry about that because spain and ireland are the only two countries where debt-financed houses are losing value.

home prices find an equilibrium reflecting interest rates and, more importantly, the willingness of lenders to extend credit. given that the people who ultimately finance home mortgages are credit-market investors, let's take their point of view. they price loans based on collateral -- what thing can I take and sell to get my money back? they see home prices rise steadily for decades, and come to view them as good collateral. they may have some doubts about liar loans, but then their boss gives them 50 million to invest right now. they have to hit certain yield targets to keep up with the joneses at the other mutual funds. as a result, everyone follows the crowd, chases yield and buys subprime bonds. bad loans get made and home prices rise more than they should. it's bubble behavior 101.

in a bubble, the market is incapable of scratching its head and asking: does it make sense to lend $300k-500 to a family that has little savings, maybe some other debt, plus unfunded college expenses and retirement needs? millions of loans were made to these people, even though the cost structures of their daily lives are vulnerable to swings in a volatile and increasingly scarce commodity like oil...

speaking of volatile commodities, consider the bubble of that's deflating right now in U.S. fixed income assets. asian exporters like japan originally bought treasury bonds to recycle their surplus dollars... over time, foreign buyers moved into corporate bonds and mortgages in search of greater yield. this was a big part of the general bubble in credit that ended late last year ... these recycled trade dollars were always considered a major source of liquidity. some charts illustrate the trend:



in the top chart, we see the increases in how many US bonds foriegners bought, smoothed with a 4 month moving average. the middle chart is the trade deficit relative to GDP. it basically shows that as americans bought more foreign goods, foreigners bought more US debt. they bought treasuries, corporates and mortgages. by the time I started paying attention to credit in 2004, overseas buyers were just becoming a fundamental pillar in the credit market... bond investors talked about it, and ben bernanke described it as a global savings glut...

thus home prices surged higher before recently pulling back, seen in the bottom chart of the case-shiller index of home prices. I think the similar shape of all three charts is remarkable and noteworthy.

the US went through a trade bubble, a credit bubble, a housing and even a corporate profitability bubble . ( regarding profits, I spoke with a trusted old analyst source who agreed when I suggested that the surge of profits we saw in the 2002-7 period may have resulted heavily from lower input costs due to globalization and outsourcing. it's not to say it's over -- just to suggest that the trade bubble also enabled a profitability bubble. plus, the low hanging fruit may have all been reached.. )

anyway, my basic point in this was about trichet. I just wonder if he isn't looking at the US and realizing he faces a different set of problems. we're facing a semi-implosion of our trade-and-borrow economic model. because we have debt, we want low interest rates..

in contrast, trichet faces high energy prices and an overheating but relatively rigid economy. cutting rates does nothing for him. if anything, it just makes things worse. he knows if he causes a recession now he can always cut rates later.. maybe he says: politicians will finally get serious and fix some of the rigidities and inefficiencies in the European economy... but there's no worry about a bigger collapse. as a result, I posit that trichet may follow the volcker model and remain hawkish -- even in the face of a recession!

one last thing to remember... after also, trichet and volcker probably both believe this:

inflation doesn't just go away. it builds upon itself as people accept higher prices and come to expect increases. it becomes a self-fulfilling prophecy. generally, central banks step in and jack up rates, making it impossible for anyone to pay for anything. prices then collapse and people regain confidence in the system. then interest rates can be lowered, boosting liquidity for all economic activity. usually the period of cutting rates that follows provides some of the best economic times.

now, I know this inflation is qualitatively different than what happened in the late 1970s because it's less the result of income growth in western countries. instead, it's caused by income growth in developing countries. they might go from $30 a month to $300 a month... then $800, then $1500.. even as they climb to these relatively modest levels by US standards, they eat more meat, drive more and buy more stuff in general.

one crazy alternate idea is that perhaps trichet should cut rates. after all, that would trigger a major dollar rally and take much of the froth out of the oil and commodities market. inflation would subside. what a crazy world we live in where trichet's attempts to fight inflation might actually be causing commodity-price inflation!?!?!?

no matter what, I have to think that, these days, opec would defend $100 a barrell oil now that it's been achieved. but, maybe it will all help in the long run when americans wake up and realize the simple solution to fixing social security and medicare in one swoop -- give them ANWR!!! (I know it wouldn't pay for all of the liabilities, but it would be a good start! better than taking it from our taxes!!!)

Tuesday, April 22, 2008

seven foolish years...

there are many things you can say about george bush's years in the white house. I think they have been foolish for many reasons... mainly foolish for getting distracted with things like terri schiavo, unneeded tax cuts and an a poorly planned war in iraq. these issues have depleted his political capital and may condemn him to being considered one of history's worst presidents ...

but I see bush as sympton of a larger phenomenon... we as americans in general have taken a collective leave on responsibility during the last 7-10 years ... as a country and a political system we have foolishly ignored major problems growing in our midst. I believe that some five decades of easy living allowed us to neglect problems rather than solving them. this complacency bubble seems to have hit an apogee in the bush years and the subprime mortgage crisis.

decades of error and negligence are finally coming home to roost. these two charts illustrate what I consider two of the central problems that really exploded during these seven foolish years...



these two charts essentially show two interconnected changes in our economy since the 1980s emerge...

1- a growing reliance on debt to spur demand

2- a growing reliance on foreign suppliers to meet that demand

on top is our trade balance as a percentage of GDP. for most of the 20th century, the U.S. ran a vast trade surplus. we started the 20th century as the biggest exporter of everything from steel to crude oil. we financed allied victory in two world wars and transferred trillions of wealth to other countries .. incomes rose in most of that period, making americans the richest people in the world.

but, we also started consuming more than we produced, and imported more than we exported. by late in the rah-rah reagan years, the trade gap was 3% of GDP, the highest since at least 1952 ... it subsided in the late 1980s and early 1990s, before exploding to 4% of GDP by mid-2000. when bush came to office, it kept widening... by late 2005 we were transferring 7% of our economy to other countries every year...

as we consumed more than we produced, our culture came to value consumption more than production. I personally think this was tied to the deterioration of public education as unions came to assert control and devalued hard sciences in favor of inclusivity and diversity... I believe many apparently innocuous causes are behind this change. for example, the government subsidized loans for college students regardless of what they were studying. taxpayers shelled out cash as some youths ran up six figures of debt studying economically worthless disciplines such as english. not only has this made education costs rise at more than twice the overall rate of inflation ... it has also passed along the perverse incentive of encouraging people to incur debt and pursue education without considering whether it's a worthwhile use of time and money.... this is just one example ... our entire body politic is rife with such foolish and negligent policies...

the second chart shows how this lifestyle was funded ... household debt as a percentage of personal income... it showed big growth between 1952 and 1964, then basically held at 50-60% until 1986, when it started growing again. household debt to income kept creeping up throughout the clinton years and exploded higher starting in 2000 -- surging from 80% of income to about 115% by late 2007.

the current credit crunch marks the end of that era. I have heard much talk about the fiscal stimulus plan. while such a scheme may have worked previously, I contend that we've entered a new era. after being burned on subprime and seeing gasoline approach $4 a gallon, americans will never go back to spending blithely as they did in the 2002-2006 period.

this is why I am bearish overall on the economy. as old habits die hard, trillions of dollars of assets and millions of jobs will be destroyed. entire shopping centers and subdivisions need to be razed and returned to nature.... the economy needs to absorb these blows and relaunch in a new direction. that takes time, and probably some political direction.

speaking of poltical direction: one of the most annoying things to me about conservatives is they ignore how essential the government has been to the economy -- and I have often considered myself "conservative." for example, carroll quigley brilliantly observed that the same laissez-faire republicans who opposed FDR's public works like the Tennessee Valley Authority gladly supported nuclear weapons -- even though the manhattan project would have been impossible without cheap hydroelectric power in places like Oakridge TN ....

in the same way, conservatives forget how the government promoted the post-WWII consumer economy by subsidizing sprawl, building highways and directly transferring wealth from established northeastern states to the sunbelt.

there are many other examples... for instance, the New York state government built the erie canal in the early 1800s, opening the midwest to commerce -- and thus settlement. and in the 1860s, washington encouraged railroads... everything from the airplane to the internet, more or less, was created or massively promoted by the government.

in another posting, I discussed how the state can move advance a new form of development we should consider. but now, I'd like to show a few more charts to illustrate the problem as I see it.


in the first, we see the quarter on-quarter change in corporate profits, smoothed with a four-period moving average. it illustrates the great profitability surge of the last few years, which resulted from merchandise-price deflation, globalization, currency devaluation and leverage. after a steady expansion, it's clearly subsiding.

second, we see the earnings yield of stocks ... basically, profits divided by price. the lower this number is, the more expensive stocks are ... I think all bulls should study this chart closely... it shows that stocks are still relatively expensive in the long term... high stock multiples are always worrisome when inflation comes.

let me just say I don't think this is just like the 1970s. I think we can keep higher multiples because companies are more global and are still growing fast. but higher inflation, merely as a phenomenon, will push all yields -- both bond yields and stock yields -- higher. that means that even if companies grow earnings fast, they might still get cheaper.

finally, let's top it all off with my favorite chart of all. this is all financing-related debt as a percentage of GDP. it includes securitized home loans, credit cards, plus the unsecured debt of banks and finance companies that levered up as earnings grew...



this chart shows an unsustainable and essentially insane process. since 1997, this debt almost doubled from 60% of the GDP to 110%. now that banks are recapitalizing and writing down assets, it seems safe to conclude this chapter is over. we've had some foolish years as an economy, as a society, as a body politic and as citizens. the 1990s bull market was the culmination of the triumphant cold war american economy, and was 40 years in the making. we now need to find a new direction... one that's based on intelligent health care, intelligent people and intelligent regulation of financial markets. I think it will take at least one more presidential election before these issues are addressed seriously. as a result, I think it's still far too early to get truly bullish about the market. it may take years for the ingredients to converge perfectly once again for U.S. stocks.

Wednesday, April 16, 2008

giving credit where it's due

credit ratings have gotten a bad rap because of the subprime crisis. but when it comes to the established areas of corporates and sovereigns, credit analysis is still one of the best indicators of what the future holds.

better credit ratings beget borrowing, which spurs demand, feeding employment and investment. people get richer and assets go up in value. companies that get upgraded frequently see their shares rally. (examples include GT and ABB).

that's why I noticed this from Moody's today:

Middle East, Africa and Latin American regions have more issuers on review for upgrade than on review for downgrade

three times as many issuers in the United States and Canada have negative outlooks as opposed to positive outlooks.

more European issuers are on review for downgrade thanreview for upgrade

once again, we see the trajectory. it will be hard for US stocks to rally when credit is pointing in this direction. this has been predicted by NYU Stern credit guru ed altman, who sees bankruptcies and defaults spiking higher this year. we've already seen the demise of bombay & co, buffets, sharper image, the near death of bear stearns and linens and things, plus several others. saying stocks will make new highs under these circumstances is to hope for what has never been and cannot be. however, it's still logical to expect continued strength abroad. right now, one of my favorites is the middle-east and african ETF (GAF).

every silver lining ...

every silver lining has a touch of grey.

since I am feeling so very negative, I might as well play the bear for now.

first of all, on some recent earnings: IBM just beat its numbers and raised guidance. here's what they said:

revenue rose 11%
net income rose 26%

IBM definitely grew more profitable over the last 12 months... but how did they do it?

the gross profit margin rose, and they got a bigger boost from a falling income tax rate.
they also bought back stock, cutting their share count by 8%.

as a result:

earnings per share rose 36%

this number, plus the raised guidance, got all the jubilation. it should push IBM shares out of an eight-month consolidation pattern. it's one of the better-looking members of the DJIA right now.
perhaps the most import number in the IBM report:

excluding the benefit of the falling dollar, revenue rose just 4%. that's right-- more than half the growth rate was currency-related.

sam palmisano has done a good job of turning this company into an a vehicle for investors seeking to offset the ailing greenback. IBM is essentially serving the same purpose as oil or gold at this point. only 31% of their employees are in the USA. but I would assume the USA still accounts for more than half the cost structure. (people in the USA probably earn much more on average than overseas employees. I don't like to assume, but it seems pretty safe since their headquarters and senior executives are here. besides, they don't disclose their labor costs by region.) as the dollar falls, their costs shrink relative to revenue. this explains the margin expansion.

so, overall it was a good quarter for IBM and I think the stock could end the year above $150. but, one should ask how long they can milk the falling dollar for profits?

here's another touch of gray:

interest expense rose 144%

and, more curiously:

total debt fell 0.3%

IBM is paying way more to carry the same amount of debt. what happened? were they hiding a subprime mortgage that suddenly reset?

IBM's effective annual interest rate more than doubled from about 8% to 20%. (interest expense represented 5% of total debt in Q1.. that is about 20% on a full-year basis.)

and...

short-term obligations rose to 43% of their total debt from 35%.

again, that's a strange combination... short-term financing is supposed to be cheaper than long-term financing. this should be especially true when you consider the fed slashed the overnight rate 3 percentage points since the last time IBM reported Q1 earnings. they blamed their share buyback program ... I don't like seeing interest costs more than double when the debt load actually fell.

they're spending money to buy back shares, and paying for it with relatively expensive short-term debt. this has worked pretty well so far. but people should recognize it for what it is: financial engineering.

palmisano is doing more than selling IT hardware and services. he's turned big blue into a vehicle for investors to play the weak dollar, borrowing in the US to buy back stock. if the dollar keeps falling, that debt will shrink relative to its increasing foreign earnings. the real value of that debt magically declines. shareholders literally profit from a weakening dollar.

still, any interest-rate spike like that we saw in Q1 is potentially troubling. IBM must ride the roller coaster of refinancing debt from one month to the next in a difficult credit environment, or bite the bullet and term it out. this strategy exposes them to more risks.

another other potentially troubling feature on IBM's balance sheet was:

cash reserves declined 25.5%.

as a result, balancing out debts and assets, book value (shareholder equity) only rose 0.9%.

there's no doubt they're in a weaker financial condition than a year ago. it's not as bullish as it looks. finally:

accounts recievables fell 1.7% and they didn't seem to provide any kind of strongly bullish news on their backlog.

I am not suggeting IBM will have any sort of credit or financial problems. I don't think anything of the kind. they are a very strong and respected credit. my points are simply that IBM is in a weaker financial position than a year ago, and earnings are at a greater risk of credit-market disruptions.

people shouldn't take too much heart in this supposedly great quarter. it's more of a well-constructed EPS story than any true greatness.

it doesn't tell a bullish tale of the US economy in any way. still, the chart is quite bullish and the shares should outperform.

Infosys

another reason why I called this post "every silver lining ... " was infosys's bullish forecast.

the company speaks of robust growth -- despite all the pain at US financials. maybe it is actually because of the pain at US financials. one fund manager recently told me banks will rely more, not less, on outsourcing as a way to cut costs after the credit crunch.

this thesis still needs to be tested more, but the proximity of the two events -- the investor's comments and the INFY forecast -- is important. it means our own mortgage-market profligacy could force banks to kick americans out of their jobs. it would be a sick irony of the credit crunch -- especially since the people getting laid off would most likely be at lower levels, rather than the people who made all the bad decisions in the first place.

for the US, it is one more touch of gray in a silver-plated earnings forecast.

Tuesday, April 15, 2008

gasping for air

in a scene near the end Total Recall, a group of rebellious martians are nearly suffocated by a greedy capitalist. they lie panting for breath, staring at the motionless fan that normally brings them fresh air before they're finally saved.

it seems an apt metaphor for what's happening in suburban, consumer-oriented USA... after years of enjoying an easy draft of credit and liquidity, an entire consumer-based economy is starving for money. take for example the current top story in today's NYT:

The consumer spending slump and tightening credit markets are unleashing a widening wave of bankruptcies in American retailing, prompting thousands of store closings that are expected to remake suburban malls and downtown shopping districts across the country.

for years, our economy relied on an artificial and unsustainable flow of money and credit. this multi-decade process is now unwinding, threatening to undo much of the material culture -- the hard archaeology that makes up our society. this year, nearly 6,000 retail establishments will close, the most since 2004, according to the NYT, which cites the International Council of Shopping Centers.

I would like to stress that our suburban-based consumer economy itself is a strange and idiosyncratic model. it's a true product of the 20th century -- a period when the big challenge was finding a use for all the cheap commodities available everywhere. coming out of the Great Depression, blessed by the Keynesian notion of keeping strong effective demand, the US economy grew by aggressively consuming large amounts of oil, steel, plastics, food and fabric. we promoted highways, gave tax breaks to make suburbia cheaper than urban living and subsidized sunbelt economies with everything from big dams (TVA, Hoover Dam, etc) to defense spending.


it's important to understand the bigger picture historically, and few things tell the story better than the above chart. part of this 60-year process of consumerism and sprawl was an easy growth of credit and increasing household debt. in 1952, debt was 7% of household net worth.. by last year, it was over 23%... and, as home prices decline, it could increase further because their wealth will fall while debt will remain constant.

I studied this subject in college and recently found one of my old papers on the subject, which can be accessed here

one more thing I would like to throw out to the people who think commodities are in a bubble... one sure sign of a bubble is that inventories are rising and demand is falling. that was true with houses in 2006, true with credit last summer, true stocks in 1929 and again in 2000.

commodities are simply no where near that level yet. oil supplies are high, but still in strong demand. grains are in very tight supply. so, I say commodities still have more to go. oil seems to be establishing new ground above the key level of 110 ... as this blog predicted... the next leg up may be even sooner than I thought.

Wednesday, April 9, 2008

o liquidity where art thou...

one of the key lessons I have learned from years of covering stocks and companies is that they tend to be "cheap" or "expensive" for really good reasons. assets aren't valuable just because they're intrinstically good. at any given moment, they derive most of their economic value from investors' ability to pay for them. if investors are taking hits in other areas, they are less willing and able to pay X multiple for earnings. if they fear inflation, recession and home declines, they're also less likely to feel optimistic about the future.. and, now that many americans have enjoyed little income growth for the last 7-8 years, they're also less willing to buy stocks.

the key factor determining values is liquidity -- how much money can the market puke up at any minute to snatch up an asset. I remember the strange days of the bubble, when many companies could term out floating-rate short-term debt to 10 year periods and actually reduce their interest rates. it was a time when investors watched as the hedge funds, flush with billions of borrowed yen, drove in the spreads on countness debt offerings. the hedge funds were big clients of the big banks, and thus recieved major allocations for almost anything with decent yield. there was also strong demand from overseas investors recycling their trade surpluses.

that surge of liquidity has been draining out of the US economy at various points over the last few years -- depending on how you look at it. the dollar has been falling since 2002. but the yen was stable for much of that period and foreign purchases of US securities surged.

let's view some charts. I know they are crude, but my graphical capacity now is limited... the top one shows foreign purchases of US "corporate bonds" -- which by the Treasury's method includes asset-backed securities and non-agency mortgage bonds. the line is smoothed with a 5-month moving average.

next is the monthly change in the sp-500, smoothed with a 3 month moving average. this basically holds above or below zero depending on the market's overall mood. below are an approximation of corporate-bond yields -- which tend to reflect risk appetite.
the top and bottom charts show large liquidity reductions. spreads tend to move in sympthany with stocks. the one clear exeption on these charts was the early 1980s, when a violent rally in treasuries caused their yields to plunge. (it took corporates a few months to catch up.)
if you don't know, spread is the difference between treasury yields (say 4%) and the yield on corporate bonds (say 6.5%). for safe companies like GE, the difference is very small... obviously, the riskier the borrower, the wider the spread.
we enjoyed an ever-expanding bubble of credit starting with paul volcker's defeat of inflation in the late 1970s. now, I feel the danger of inflation is not being fully priced into stock stocks.
here's a fact: if you take a company's earnings and divide it by the share price, you get "earnings yield" -- essentially how much earnings you get for your money. in the 1970s, S&P 500 companies routinely had earnings yields of 10-13%.
as the post-inflationary confidence returned to financial assets, investors grew willing to accept less and less... by 1990, the earnings yield stood at 6.6%. at the height of the stock market bubble in 1999, it had declined to a mere 3.1%. now it's close to 6%. it will clearly go higher -- especially because much of the market's earnings now come from banks.. or, to be more accurate used to come from banks... lower earnings, less liquidity, but inflation for key things like energy and commodities.
now, we might see some more improvement in spreads for a little while.. I am not making any kind of near-term call here.. but it remains a bad picture for valuations on anything with risk attached. no liquidity, no fun.

Thursday, April 3, 2008

peru, investment grade ... usa, ???

fitch upgraded peru to investment grade today. it's just worth noting once again how many parts of the world are getting richer as we face a worrying economy. while commodities remain key to peru's growth, Fitch spots some key changes underway:

... it is important to highlight an incipient structural shift in the drivers of Peru's economic growth, as the most dynamic growth rates now stem from the non-primary sectors.

in other words, they're starting to figure out how to create their own domestic demand to consume their own products...
many parts of the world are starting to look like the USA in the 1950s... and they will view us as we viewed britain after WWII -- poor, weaker and ruined. it took a war to end their empire. for us it took an unrestrained credit monster ... consider the instincts of mass economics, the planning of rockefeller envisioning his massive, integrated refineries, or the imagination of ray kroc? people have been running restaurants since the dawn of civilization. why at this point in time could won explode across the globe? it's because of the american tendency for american explosive growth ... it was also applied to selling more mortgages, more mortgage debt and more houses. more, more, more. an old economist professor of mine in college, steve fazzari, said the key thing in national economics is "more is better" -- the classic keynesian model. but now it's time to start being a little smarter about what we're getting more of...

one more thing fitch said about peru:

Positive trends in public finances, underpinned by high commodity prices and the strength of the economy, have led to an improvement in Peru's government debt burden relative to peers, which at 28% of GDP is in line with the 'BBB' median. 'The Garcia Administration has resisted current spending pressures and has used the commodity windfall to invest in infrastructure, pay down public debt and increase assets,' says Theresa Paiz Fredel.

Fiscal restraint, liability management operations, and sizable reserve accumulation in recent years have allowed net repayments of public external debt. As a result, the public sector became a net external creditor in 2007, sooner than initially anticipated. Peru's net public external debt (NPXD) to current account receipts (CXR) ratio, a key rating weakness in the past, reached an estimated -22% by the end 2007, approaching the 'BBB' median of -26%.
[bold added]

this is a far cry from our situation.. consider the costs we face over time: various mortgage bailouts, the war, the slowing economy and weakening municipal financial -- all under the shadow of long-term medicare and social security liabilities.
within in 3-5 years, the AAA status of the US will come under question. it will slowly start to be discussed with increasing frequency. over time, Treasuries will trade at a discount to german debt, etc. how long until the USA is like Ambac or MBIA, hanging on to AAA just because a downgrade would trigger all kinds of other contingencies? (all the textbooks simply assume the USA will always be AAA.)
it would be interesting to consider the fall of GM and Ford from investment grade into junk as a model for what our own loss of AAA would be like ... so many similarities, and so little time tonight.

Wednesday, April 2, 2008

more visions of the future

sometimes I have ideas for how our economy can be improved and made more harmonious with both the environment and human health.

first of all, let me say I am an ardent supporter of free-market capitalism. any criticism of business you find on this blog will usually result from executives failing to live up to their wealth-promoting mission in the world.

secondly, today I was talking to a US equity analyst who was in europe because that's where the leading alternate energy companies are active. I have to say, I am more than a little annoyed that the germans, spaniards and australians are leading this industry. it's more than a bit worrisome to see americans ignoring developments that will be not only positive, but profitable.

in an earlier post, I said the government should create a legal structure that gives cash-rich oil companies a real and functional incentive to promote green technologies. my idea is to let them create new businesses that can be spun off to shareholders at highly advantageous terms. this more or less ensures it will happen. it would channel tens of billions of dollars now returned to shareholders into more worthwhile causes. furthermore, the new companies would be in small, high growth industries, letting them trade at much higher multiples than the oil companies. stock spinoffs have been profitable for investors in names like philip morris, cendant and motorola, so there would be plenty of interest.

despite all the political and economic might of an Exxon Mobil or Chevron, they still exist for the simple purpose of enriching shareholders.... it's not like the oil companies want to ruin the planet or something... why not simply environmental policies that serve their capitalistic interests?

so, what kinds of businesses should they develop?

1- salt water pipeline to the desert
2- farms in desert
3- cities not suburbs
4- bamboo / seaweed companies

1- reclaim the sea -- literally. brazilians are cutting down rainforest to create new farmland as commodity prices soar. why can't we do the same thing with our most desolate land? I say create a pipeline that would pump seawater into the desert to grow food. at some point when it's close to the destination, the water would enter large flat areas under direct sunlight. the steam would then be sent through a solar-powered condenser to support agriculture. brine would be removed from the bottom of the pools and used for other purposes... it could be used for salt, etc, or formed into inert and harmless stone.
to make it especially energy-neutral, the water could be pumped using tidal/hydraulic power.

2- it seems to me there are at least 2 ways to farm the desert.
first, you simply water the ground a lot, and you let your crops are exposed to the weather.
this requires a constant flow of water, which we'd get from the pipeline.

alternately, one must consider encasing an ecosystem in a bubble of plastic or glass. while I know that might sound like a high-impact activity, imagine using concentrated solar power to melt desert sand into glass, which could then be blown into giant bubbles.

an enclosed ecosystem, could be ideal for raising livestock, for their humidity and carbon emissions could be contained. imagine a bubble for fattening up cows and pigs in the desert? after a few years of their manure, the land would support grass and start turning into real earth capable of holding water. many feed lots already dot the american desert... maybe something like this could begin, even without the pipeline? furthermore, if seaweed were grown in the evaporating pools, it could be possible to reduce the cows' need for grain.

the key point is that we could face global food shortages in the future. commodity prices are soaring, even without any major droughts. who knows whether global warming will cause more droughts? the need for more food production is a no-brainer.

3- cities not suburbs
we have to move away from the model of civilization where the car occupies a central place in the use of space. because we have a large country, we've sprawled rapidly across the country ever since the depression/WWII era. this has produced a series of maladies such as pollution, obesity, dependence on foreign oil and even howard stern (what percentage of his listeners are probably in cars?)
most places in the USA make people own cars to move from home to work, then to fitness centers, shopping facilities and back home. even if we accomplish low- or zero-emission cars, they're still bad for the environment (water runoff, wildlife disruption) and human health (obsesity, etc).

why not seek a new kind of development emulates existing pedestrian-based cities ? why not re-create NYC's upper east side in other places?
our entire real-estate industry is clearly in a state of flux. why not create towns in the future where residences consist of multifamily housing, with a variety of bodegas and small shops at the street level?
in another version of this, a lot of progress could probably be made in the dozens of mid-sized industrial towns that dot the rust-belt. many already have walkable downtowns... in many of these cases, however, I can't think of many easy ways for oil money to support new companies.

4- expand into new kinds of resources. seaweed and bamboo seem the most obvious.

even if people don't eat seaweed, it could be valuable as animal feed. is it possible to carry it by train from the ocean to the farm? or, if there is a saltwater pipeline, could we not create a saltwater-based seaweed farm in the middle of the desert, and feed to livestock there?

bamboo also seems to offer many uses in structural items like scaffolding, but I am out of time for now....