Yet Another Psychological Meltdown

Recent days have brought us an all too vivid reminder that owning equities is a bet against a the trouble in the world, including old Mother Earth having yet another one of her lethal fits. A portion of Japan has been devastated by one of the strongest earthquakes ever recorded and the tsunami it triggered. Unfortunately, the failure of a backup power system at one of Japan’s nuclear power plants has elevated the ensuing drama to a whole new, much scarier for the rest of us level. It is annoying at times to watch market volatility get amped up by an overdose of bad journalism, but this time maybe not so much. As I have noted in recent weeks, the Market has been casting about for excuses to correct some of its recent excesses. The major US indices have been pushed below what past experience suggests is a -6% “perceptibility threshold” for a market correction.

What is more than merely annoying, though, is how the never ending media competition for “eyeballs” has thrust the problems at the Fukushima Daiichi plant onto center stage and played up the drama for all it is worth (e.g., the “fire” at reported at Unit 4 on March 15 was instantly broadcast, but the next day one had to go looking for the report that the fire company found no fire when it got there a few minutes later.) It is troubling because it is perpetrating the illusion that nuclear power is, by any objective criteria by which the dangers of any undertaking might be measured, somehow unsafe. This undeserved imprecation will likely persist not so much because of irresponsible journalism (hardly unique to our time) but because of what seems like an endemic inability to distinguish what is merely “scary” (a wholly subjective phenomenon) from objective considerations of danger, which entail both the probability and the capability of inflicting actual harm. I find myself more that a bit concerned that even after this event has gone down the same memory hole as Katrina, the BP spill and a host of other not so long ago “catastrophes”, lingering misguided perceptions about what happened and what we have learned from it will contribute to human suffering in ways that are beyond our ability to calculate.

The root of this concern can be found in the answer to the question of why the outcome of this earthquake, for all its vividly horrific imagery, was so much less destructive of human life than so many others we can point to. Why was it so much less lethal than the Great Kanto earthquake of 1923 (when Japan’s population was roughly half what it is today), an order of magnitude less powerful than this quake, which took over 130K lives? Or, the quake in Haiti a little over a year ago, only 1% as powerful, which took over 300K and left a million homeless? The former example is complicated by the fact that many of the deaths were due to fires that were fanned by a waning typhoon, along with a bit of ethnic cleansing unleashed on resident Koreans. The essential difference in outcomes boils down to the technological progress that is elemental to improved standards of living. Just like many diseases are not nearly as devastating as in times past because people are well nourished and not struggling to stay dry and warm, earthquakes are far less destructive wherever building codes are practicable and and routinely implemented. The standards of living that render nature’s fury less lethal have certain hallmarks. Respect for rule of law comes readily to mind, and not far down a not so very long list would be affordable, reliable electrical power. There cannot be much progress away from being like Haiti, or Japan c. 1923, if 24/7 electrical power at a price that does not strain the budget of a preponderance of households and businesses is not more or less a “given”. Understood as such, higher standards of living, not so much for those of us who have advanced to where obesity is an epidemic and drug companies and therapists thrive on our obsession with “dangers” that are largely imagined, but for that next couple of billion whose lives are more like Port Au Prince than Tokyo, it is a moral obligation. As such, undue hesitation with respect to the development of power infrastructure brought about by irrational fears, a development that will simply have to include nuclear power if it is going to be affordable and happen any time soon, would be wrong because it would all but certainly exacerbate human suffering brought about by all but inevitable future natural disasters.

Note that my little fit of moral umbrage is directed at undue hesitation. Surely, an industry as well practiced at making improvements as new data becomes available as the nuclear industry has been over the past fifty years is going to learn something from this episode. Some of the data will not be available until things (literally) cool down, but we already know a few new things. We know that a 9.0 earthquake, nearly ten times as powerful as the largest thermonuclear device ever tested apparently did no damage to the structural integrity of any of Japan’s 54 reactors. It did, however, trigger the normal, programmed shutdown sequences. The ensuing tsunami, which breached 14 foot walls meant to protect coastal towns, did no apparent damage to the reactors as well, other than perhaps an intake structure or two. That the situation deteriorated into the drama it has had to do with back-up generators meant to power cooling water being rendered inoperable by the flood water. The extraordinary measure of spraying seawater triggered the hydrogen explosions that have released radioactive material into the atmosphere. We also know that this “systems” flaw has already been in a sense anticipated, in that “passive” backup systems have been incorporated into designs subsequent to the affected plant.

It appears that thus far, the radiation released has been far from life threatening, but given how much mental effort it takes to keep microsieverts and millirems straight, it is all too likely that most people just give up trying and assume something medically awful has just happened. Comparisons with “normal” exposure over the course of a year are less than helpful. Just because we can measure it doesn’t mean it is within orders of magnitude of affecting anyone’s health. Thus far, with the possible exception of those plant workers and fire fighters on the site (could you get a better definition of reckless bravery than to take what we have learned in recent years about men who fight fires and consider that ethos in the land that gave us kamikaze pilots?), it is unlikely that anyone has been exposed to radiation that was within an order of magnitude of being strong enough to actually induce any symptoms of radiation sickness. So in terms occupational hazard, measured in terms of probability of suffering actual harm, it would appear that even in this almost-worst-case-imaginable situation, nuclear plant sites are less hazardous than many other workplaces that seem to give us no pause at all (coal mining, or oil refining, or those fishing boats we saw swept ashore, come to mind.)

I think a part of the problem here is that we have become addicted to “crises” that might be a crisis or even a catastrophe for those caught up in it but are really just drama for the rest us. If you lived in one of those coastal towns in Iwate Prefecture, this was a bono fide catastrophe. Fifty miles away, it’s a challenging situation, perhaps significantly so. For the rest of us, though, we can dream up some potential knock-on effects that might find their way into our lives, and we might even choose to enter into the grief that the people we read about are experiencing, but the whole exercise strikes me as an indulgence for civilizations arguably too far advanced and too much at leisure for their own good. The world is, in fact, fraught with actual dangers (A quick scan of headlines as this news was developing suggest that based on objective criteria, it was more dangerous to take a bus tour in NYC, fly a helicopter in LA, or raise one’s family among Palestinians, or just about anywhere in the Middle East, than to live just outside the gate of this nuclear power plant.) I strongly suspect that Japan is going to surprise us with how quickly it puts this behind it. I did say recover, reconstruction will do little if anything about systemic challenges like a declining population. The strong social cohesion and other Japanese distinctions are something of a two-edged sword, real assets when it comes to recovering from setbacks (like 66 years ago), not so helpful when it comes to competing in businesses where agility is paramount. They will do fine, it’s the rest of us I would wonder about (“The sky is falling!”). We need to consider why generations of children were told some version of the fable that was Chicken Little, because eventually, something genuinely dangerous, as opposed to merely scary, will actually happen.

The nuclear industry faces what is certainly a challenge, arguably a crisis but in no way a catastrophe. The lessons learned from this episode, and what we are going to do about it, will have to be clearly articulated. Like the aviation industry, which has incorporated the feedback of a century-long succession of spectacularly lethal “bad days” to bring us to where we take thousands of takeoffs and landing each day without incident for granted, a cultural of continuous improvement on matters of safety, reliability and efficiency must continue. However safe air travel has become, we know that its sheer ubiquity makes it inevitable that at least occasional accidents will continue to occur. Similarly, the nuclear industry must consider the distinct likelihood that a future with many hundreds of reactors in service, some operating in countries less scrupulous or inclined towards methodical execution than Japan, means that eventually there will be incident with an outcome worse than Fukushima Daiichi, and be prepared to deal with it. But the industry must press on. This is because bringing a decent standard living to more of the world is a moral imperative, and not merely so those at the margin can better withstand the next natural disaster. Prosperity will not banish all ills, indeed it tends to produce new ones, but when we consider the havoc that comes out of abject “want” and the hopelessness that often accompanies it, it certainly seems prudent to do what we can to make prosperity more accessible.

A more widespread sharing in the blessings of technological progress means clean, affordable and reliable power. This is not going to happen with solar or wind, not in our lifetimes anyway, at least not without imposing a staggering cost on all but the richest households in the developed world. Increased use of natural gas will be a part of it, given the huge transformation that has occurred around shale in the past few years, but how much sense does a massive increase in the transport and storage of gas make if your policy shift is aimed at reducing risks related to earthquakes? Coal could do it, and will be a big part of the mix for decades to come, but even global warming skeptics should not utterly disregard the possibility that there might be something to it. No, the best way forward is incrementally more gas-fired turbines to handle peak load requirements, just enough emphasis on solar to keep the technology moving forward toward some possible future breakthrough, and a concerted effort to harvest what the nuclear power industry has learned over the past sixty years about how to produce safe, clean affordable electricity.

The industry will step up and do its part to keep the nuclear renaissance on track, but government has a part to play as well. Policy responses, in the US anyway, to the Three Mile Island (TMI) incident were, in hindsight, outlandishly overwrought (though a silver lining might be found in the fact that we now have the opportunity to build even safer, more efficient plants than would have been installed during the long hiatus). If the accident at Chernobyl (a much more disaster-prone technology in the hands of an epically corrupt management regime during the final phases of its terminal decay) caused a slowdown in nuclear development, it is not perceptible in the long light of history. This is because the risks and the outcome was objectively and accurately assessed, which led to the decision to press on. The US Department of Energy has stated that nuclear power will be a part of our “diverse mix”, and reiterated as much in the wake of the Fukushima accident. They have a golden opportunity to, as we like to say out here in less enlightened precincts, put their money where their mouth is, by moving ahead with loan guarantees that have been funded to encourage the development of nuclear energy in the US (or put another way, help facilitate the “catch up” that is necessary as a result of the 30+ year hiatus induced by policies in the wake of TMI). From the distance perspective of those of us not used watching government at work, this eminently sensible project, which is to facilitate the development of proven technology, has been moving at an excruciatingly slow pace. A bit of vigor, something at a pace faster than stereotypical bureaucratic lassitude, would provide a strong signal that the US government really is behind nuclear power and all of the benefits that it brings to so many people around the world.

(F.D. Not surprisingly, I own stocks likely to be affected by the developments described herein. While it is always possible that this affects my perceptions and so judgement, after thirty years of doing this, maybe not so much. These would include, in approximate order of position size, USEC, a fuel enricher (USU), Precision Castparts, a maker of gas turbine components (PCP), Allegheny Technologies, a maker of high performance metals (ATI), Hexcel, a leading producer of composite materials (HXL), and Exelon, an electric utility (EXC). In aggregate, these holdings represent about 14% of my investable net worth. I also bought a Japan based ETF (EWJ) on 3/15).

The Bull Turns Two

So here we are at the second anniversary of what we still can’t help but hope was the end of a “once-in-a-lifetime, worst bear market ever”. Two years on, the outlook is still not exactly rosy, but it is worth reflecting on just how dismal and downright scary it got back then, how within-in-a-hairsbreadth-of-utter-collapse the world seemed to be. That the Market has come as far as it has is really not all that remarkable, at least in terms of past experience (i.e, the decompression that marked the two years followed similar generational lows in 1932 and 1974). Yes, it has come a long ways in a hurry, though more so in terms of the past six months than the walk-back from the gates of Hell that has been the past two years. Since Labor Day, the Market has so overachieved that it really deserves to take some kind of a break. That it is having such a difficult time staying in “red mode” for more than a few hours at a time, in the face of so many global class uncertainties, is a strong testament to how badly money-at-the-margin want in. We may yet get that bit of news that tips us into a real correction, but it sure looks to me like we are heading down that path to the Market becoming The Only Game In Town, which last happened in 1997-99.

Speaking of news that tips things over, our HDD (hard disk drive) thesis that was the subject of the previous Musings got a gigantic shove from the news that Western Digital (WDC) is acquiring Hitachi Global Storage. This is a truly meaningful increment of industry consolidation. Once the deal closes later this year, WDC will have nearly 50% of the market (31%, plus HGST’s 18%, less at least a bit of share loss). Seagate is best positioned to pick up share from its recent 29%. This leaves nearly 80% of the market in the hands of WDC & STX, and roughly 20% with Toshiba and Samsung, who are increasingly hard pressed to stay in a game that is about leveraging scale and the cost advantages that come with backward integration into key components. HGST was probably the most disruptive, WDC clearly the best disciplined of HDD companies for as long as anyone is remembering. The CEO of HGST was at WDC before taking that job and will return as President of WD. WDC did an exemplary job of acquiring and integrating head and media capacity, and the lessons of how NOT to merge two drive entities derived from HIT + IBM have not been forgotten. I predict a surprisingly smooth merger and WDC going from strength to strength for years to come (and just bent my “wait for a meaningful correction” guideline to add to my position). This is also good for Seagate, in terms of both likely market share gains and the likely effect on the industry’s ability to maintain relatively disciplined pricing. And this is all to the good for HTCH, in that WDC is by far their largest customer, whereas HGST was committed to the Japan Inc. dictum of preferring Japanese suppliers unless there is no alternative but buying from the gaijin (which seems to be the case for suspension assemblies used in enterprise drives). Look for this merger to drive a big part of the market share recovery that HTCH needs if it is going to remain a viable part of the the HDD supply base.

And speaking of driving, how about the price of gasoline? The fellows with all the world’s spare capacity say there is plenty of oil being delivered into the system, and yet the price remains steadfastly elevated. Speculators have once again feasted at the expense of consumers paying an inflated “anxiety premium”. The problem seems to be not that the freedom agenda inspired unrest has picked up speed but rather that a certain stasis has set in. Here we are with a world class, gold-plated tyrant, a strong candidate many years running for Public Enemy #1, and what passes for leadership in the western world can’t seem to come up with a plan to hurry him along into luxuriant exile. Instead we have the specter of rag tag armies expending a lot of ammunition with little effect (except in those instances where the target is slow and defenseless). It struck me as unconscionable, the feigned helplessness about being unable to enact some kind of no-fly zone as Libyan aircraft took to the skies against the rebels. I mean, do we need a screening of Hotel Rwanda at the White House and the State Department to reacquaint the powers that be with the human toll of such fecklessness? Then it quickly became apparent that these guys are either unable or unwilling to deliver ordnance in a manner that produces anything but noise and a harmless cloud of dust. (To be fair, placing a bomb on target is not as easy as our technology has made it look.) Unless arrangements are being made for the His Ugliness and sundry perfidious offspring to move to a palatial and heavily guarded villa at least a two day’s drive from Tripoli, this pathetic conflict will drag on, and eventually be a drag on a consumer led economic recovery. Neither side looks particularly endowed with martial ardor (one suspects that the list of famous Libyan war heroes would not quite make up a commemorative postage stamp), but both sides know that unless there is some kind of geographic partition, a grim reckoning awaits whomever is on the losing side, so backing down is kinda sorta not an option. Let us all hope that His Ugliness has the G-5s gassed up and ready to roll.

The drama in the Middle East is affecting our household budgets and includes gunfire and occasional explosions, so it is probably distracting us from the much more consequential drama playing out in Madison, WI. It is consequential because it is about much more than “rights” to collective bargaining. It, and similar struggles in other states, represents a turning point in a class struggle that has gone on for the past several decades. We are seeing the beginning of a serious push back against what Mr. Irving Kristol in 1975 referred to as the “new class”. He was referring to a “post industrial” emergence of a class of largely college educated administrators, bureaucrats, scientists, lawyers, etc. who derive their livelihood from the redistribution of income. An “elitist” orientation and a “hostility towards capitalism” were two marks he used to describe a class that was emerging from “what we used to call the intellectuals”. This phenomenon got a certain amount of play in the vanguard leading the Reagan Revolution, and its progressive insinuation into the trough of “public” largesse was slowed for a time, but not stopped. A generation or so later, it got really obvious really quickly that the parasite was about to consume the host. On an intellectual level, this was perhaps best articulated in Angelo Codevilla’s tour de force article in American Spectator last summer. On a more visceral level, it’s like the lightbulb went off when workers whose retirement fund was a badly shriveled 401k, or who had no retirement plan at all, realized that their taxes were paying for defined benefit plans that enabled public employees to retire at 50 and then loaf comfortably or go double-dip. When the most economically secure guy in the neighborhood is doing it on the tax payers’ dime, the tax payers take notice and expect the politicians to step up and do something about it.

The idea of collective bargaining rights for holders of what amounts to localized monopoly power has been tried and found wanting. A New Class that derives its power from the recycling of union dues and variously dependent hangers-on (the Utterly dependent, made up of various victim classes, and the functioning dependent, whose paychecks come from activities evocative of the footmen and handmaidens who attended the elites of previous eras similarly tinged by feudalism) can no longer be sustained. The resistance to implementing the necessary reforms is as ferocious as it is because a whole lot of players, some of whom are very high up in the scheme of things, know in their guts that if this gravy train ends, the next best deal for them is a long ways down. Fortunately, they are on the wrong side of history, and they are up against a fearsome force of nature. That would be the Grandmas (and likely future grandmas), the women who make up so much of this nebulous uprising that is called the Tea Party. They are stirred up not because they studied economics and can crunch the numbers. They probably didn’t and couldn’t, but they don’t have to. No, they are fired up because they know that if nothing is done about the recent profligacy, the open-ended obligations entered into by politicians who will not be held accountable, it will be a crushing oppression not on them but on their grandchildren. And you don’t want to harm, diminish or even threaten anyone’s grandchildren. Anyone with two brain cells to rub together not utterly beholden to the progressive redistribution scam understands this. And, increasingly, all but the most craven of political leaders understand this, too, so there is a level of seriousness in the political arena that I have never seen before. It doesn’t quite make me optimistic about how the next thirty years will go (kind of hard to see how we ever get out from under all that debt, but it was pretty darned hard to discern “light at the end of the tunnel back in 1979, too.) but it is a basis for optimism unlike any I can recall. We should be delighted, though hardly surprised, given the damage that a couple of generations of such folly has inflicted, that the state that launched so much of the early Progressive movement is now leading the way back. Perhaps the neo-feudalism that calls itself Progressivism is not as debilitating as many of us were tempted to believe after all.