Party like it’s 1599

And so begins yet another day where we have no idea what the world will bring us. But let’s have a crack anyway. At the top of the list of today’s thoughts is whether a contraction in global credit means there will be fewer good investment opportunities. Without an ocean of credit to float on, good businesses will have to sink or swim on their own merits.

But first, here is something that looks like it might be good news for the trader types. Australia is going to get its own “fear gauge.” The ASX told newswires it’s coming out with an index modelled on the Chicago Board Option Exchange’s infamous VIX index. The VIX measures options activity on big U.S. stocks to tell you what the demand for puts and calls in.

Options, even though technically they carry the scary name of derivatives (since they derive their value from the underlying security upon which they’re based), are actually a basic kind of insurance. There are sensible and clever ways to use them to hedge against your risk in a position. And there not-so-clever and not-so-sensible ways to speculate with them.

We asked the current Swarm and Slipstream Trader, Dawes, if an Aussie version of the VIX would be useful. He was not shy in answering.

“If it’s just a measure of underlying volatility in the Aussie market, I don’t need that. I traded options in Sydney for years. It’s pretty easy to see what volatility is in the market if you know where to look.”

“But…?”

“But if it’s something you can buy or sell or trade then yes, it would be useful. Buying volatility through something like the VIX is better than putting on an exotic options strategy through other market proxies. If the index is tradeable or optionable, then it would probably be useful. And I think the market’s going to get a lot more volatile by the end of the year.”

We thanked Dawes and slowly backed out of the room as he turned to refocus his attention on two computer screens filled with charts and lines.

One reason the market may get more volatile – other than the underlying reason that none of us ever know what the future holds – is that the great tide of money that markets have floated on for the last 30 years is receding. Highly-leveraged businesses, or businesses dependent on consumer and household leverage, are not going to do as well in a more frugal world.

More evidence that the tide is going out on cheap money is the retirement of hedge fund legend and billionaire Stanley Druckenmiller. Druckenmiller spent ten years working with George Soros. His $12 billion fund hasn’t lost money in two decades – even in the last two years. He’s down 5% this year, though, and says the emotional and personal toll of managing money isn’t’ worth it anymore.

You’ve got to give Druckenmilller credit for doing well the last two years when everyone else in the world got clobbered. But then, hedge funds were originally designed to be conservative and modest – to match the market’s return and then some in a bull market and to beat the market on a relative basis in a bear market.

With the explosion of credit (cheap capital) around the world since 1980, the number of hedge funds and hedge fund strategies blossomed like an algal bloom on the ocean. That’s the obvious benefit to the financial industry of a consistently low global cost of capital: short-term borrowing rates are so low that you can always lever up and make money in something, even if it’s increasingly risky sovereign government bonds.

But Druckenmiller’s retirement probably confirms part of the deflationist case: when there is less money to manage, you don’t need as many people to manage it.

Here in Australia all eyes are on the Federal election. It’s just two days away, thank goodness. We got a letter from the Greens in the post yesterday. We followed up with a bit of research and learned that the Greens want to eliminate coal power in Australia by 2020 and have all of Australia run on renewable energy by 2050.

Considering 80% of Australia’s electricity currently comes from coal, that’s an ambitious, nation-transforming, life-transforming strategy. What would it really mean for you?

By our reckoning, that would return Australia to about a 16th century lifestyle, before industrialisation and before the energy revolution. What point is there having a worker-friendly industrial relations policy if you plan on eliminating all industry?

If it’s a serious policy proposal, then Australians should think seriously about what it means. Green Senator Christine Milne told Kerry O’Brien on ABC’s The 7:30 Report, “We want to see a carbon price as quickly as possible because we want transformation of the whole economy and society.”

Hmmn. That doesn’t sound very democratic at all.

You reckon most people would be for cleaner air. It’s true that older coal plants produce nasty particulate emissions that are harmful to humans. But it’s also true that newer coal plants are much cleaner. It’s also true that there is zero chance on God’s green earth that you can run a modern industrial economy on renewable energy and eliminate coal.

But that is obviously not the Green plan. The green plan is for a “post-industrial” society based on a labour force organised around smaller local, sustainable, and agrarian communities. That sounds nice, too. But it sounds a lot like the 16th century, when most people spent all day tilling the soil to grow enough food to survive.

What about the division of labour? What about increasing productivity? Those things didn’t happen until coal-fired power did the work that human muscle had to do before. Take away the coal, and you take the man out of the factory and back in the field. You take the factory out of Australia too, which may be part of the plan.

That may sound like an ideal Australia if you’re Bob Brown or Christine Milne. But that is not a minor policy recommendation. It’s industrial suicide. It’s also putting the whole country in a time machine and taking it backwards, probably based on some vague idea that subsistence living is better for the human soul, even if sleeping on a dirt floor is harder on your back.

Give us indoor heating any day. And beware politicians bearing big promises about transforming society. At first, you’ll be asked to change your behaviour. Later, you’ll be told. Once in power, society transformers usually don’t take no for an answer.

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