Wednesday, April 09, 2008

The fear-shortened outlook problem...

As Americans grow increasing worried about the future, they begin to ignore the far horizons to concentrate on tomorrow - or better yet, this evening. Perhaps partly due to the flood of new information flows - like (ahem) blogs - we have a seemingly real-time readout of how we are doing, and as anyone who has just gotten their first car with the thermometer in it can tell you, it is mesmerizing.

One result is short-termism. While this arguably may be crippling investors, it subverts our ability to find satisfaction by focusing our attention on every tiny up-and-down event, instead of progress toward a goal or even just a well-lived life (which is likely the tool to produce the deepest happiness).

Immediate dangers certainly call for immediate attention, but I wonder if we have not been led to believe too many routine problems are "the nose of the iceberg" of a future calamity. Indeed a brisk industry has erupted among commentators such as your humble correspondent in making the early call for the next recession, epidemic, shortage, rock band reunion tour, or similar catastrophe.

For example, I was about to remind you I had mentioned spiraling steel price jumps way, way back in February. The increases are receiving more attention now.
Chinese steel exports surged in 1H07, then dropped precipitously in 2H07, largely due to booming domestic market prices and increased export costs induced by the government's export policy restrictions. However, recent price data indicate the gap between Chinese domestic prices and international prices has widened sharply over the past month (see chart over the page). We think this justifies Chinese steel exports regardless of the export tax and reduced VAT rebate and suggests exports are likely to bottom out in 2Q08.

Over the past week, Chinese steel prices increased again, reaching record highs. Hot rolled coil prices were quoted at US$662/t ex-Vat, up by 0.4% WoW and cold rolled coil prices also increased by 0.2% WoW to $805/t ex-Vat. Galvanised steel prices were up by 0.5% WoW to US$786/t ex-Vat and rebar prices climbed to US$739/t ex-Vat, up by 2% WoW. [More][BTW, I think WoW = week-over-week. Took me a minute.]
The result is grain bin prices are skyrocketing yet again. [Note: Good article on this in the most recent FarmWeek, but not posted yet, I guess.] The fact I had been told by a friend in the machinery industry earlier doesn't make me any smarter than anyone else, just lucky to have knowledgeable friends. But we still "smug up" when our prediction - especially a grim one - comes to pass.

Such a pastime does little to encourage us to think longer term, rather to scan the ground at our feet for tracks of our next great fear. This game is not worth playing.

Now add to this the breakdown of tools we used to combat these tendencies such as long term business commitments, and it is small wonder most of us have little interest in addressing larger, future problems. Much of the pushback on climate change could be coming from people who feel overloaded at present and really don't need to worry about 2100. Ditto for Social Security, Palestine, education, and yadda, yadda.

I have written about the failure of one of our tools - the futures markets - to manage these fears by transferring risk. But the first steps of disengagement with a riskier future interlock with other mechanisms, causing a domino effect of lost opportunities. I just found out steel prices, futures failures, and production risks have combined to put a hiatus on Cargill's Grain Bin Program (along with similar producer contracts like scholarships, HSA funding, etc. which were essentially based on options) for the time being.

All these aftershocks are tied to something we didn't think would reach all the way out to our farm - the credit crunch afflicting huge investment banks. It turns out it is a small world and no man is an [economic] island. Even in the midst of the ag boom, uneasiness is reshaping our planning. One thing is very likely: when the chances to transfer risk reappear they will look better than ever to many of us. This small financial deprivation has been a sobering reminder of some good deals we have taken for granted.

Oddly though, steps taken now could have the greatest long term payoff we've ever seen. More than a few fortunes were made by shrewd business decisions during the Great Depression. The movie industry was one example. While most suffered greatly, it was not 100%, nor were those winners blessed with wealth to begin with.

Maybe we have lost sight of the probability this tough time will actually pass, and that the US will emerge functional on the other side. There is always a chance that won't happen, but it's a poor way to bet, since this is the boat we are sailing in. In the process of believing that farther on things will get better, we change how we act today.

At the same time we can put today's fears in a better prospective. For example, suppose the looming downturn lingers for a looooong time, like 5 years. I've outlasted 5-year irritations and even had intermittent times of happiness. Maybe it's my age, but it might help if some of us geezers try to share the secret that even a decade can go by in a hurry.

I'm not talking "put on a happy face", but rather avoiding fear-laden myopia. Not only will you not ease your worries, but there is a chance you will be passed by competitors who can still look down the road occasionally.

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