Wednesday, March 15, 2006

Them Businesspeople is Crazy, I Tells Ya, Crazy !!

This is from Share The Worlds Resources.

George Soros, irrationality and contrarian activism
By Max Keiser

The typical activist approach of trying to get rich countries and companies to 'share the world's resources' fails to take into consideration how the individuals in these countries and companies got rich to begin with. What activists don't understand is that the process of accumulating wealth is rarely a rational, direct path. Trying to appeal to the rich to act rationally is therefore, in most cases, folly. [...]

Financiers and speculators call this form of antagonism-for-profit 'contrarianism' and it forms the basis of an entire school of finance that attempts to figure out where the 'crowd' is heading, and then do the opposite. Some quick examples of how this works:
1) the put-call ratio in the options markets. What this number tells contrarians is where most of the speculators are making bets in the markets, and as most speculation ends up in losses it makes sense, according to the contrarian doctrine, to bet the other way.
2) Another contrarian speculating strategy is to look at where professional money managers are placing their bets with their professionally managed funds. Again, since most professional money managers fail to 'beat the market,' it makes sense to do the opposite of whatever they're doing.

Probably the king of contrarianism is the most successful investor in the history of Wall Street: George Soros.
He's taken the contrarian concept and developed it even further into what he calls his theory of 'reflexivity' or the 'human uncertainty principle'. What Soros has observed about markets is that contrarianism itself can breed second and third generations of contrarianism that is self referential or 'reflexive' that, instead of doubling back and ending up where it started, has the power to change the underlying market fundamentals in ways that make the contrarian assumption the de factor market norm. When such situations develop, it's only a matter of time before [...] we get what Soros calls a 'return to equilibrium', i.e., a crash. [...]

[I]dentifying these inflection points, where the market suddenly realizes that its assumptions are worth zero, [can lead to] great fortunes [being] made [by] betting the other way. Soros caught the crash in the English pound back in 1992 using this technique and pocketed over 1 billion dollars in one day.

The point I'm making here for activists is that [the] activists' approach to changing the way business treats the environment relies almost entirely on trying to get business people to act more rationally. And yet, to get to where they [are], these business leaders have relied mostly on obeying the voices in their head that the status quo claims are irrational. [...]

So does this mean that NGO's should give up?
No. What it does mean, however, is that NGO's should consider adopting new strategies that will tap into businessmen's love of the irrational.
For environmentalists, I think carbon trading offers a huge opportunity to turn the tables on business and use the power of irrationality for a positive change. Take a group like Greenpeace for example. They have over 100 million dollars sitting in the bank collecting money market interest. For all intents and purposes, this money is what Wall Street would call, 'dead money.' I propose the following. Greenpeace should start organizing a banking crusade with their money and other NGO money (NGO's combined operating budgets are worth 1 trillion dollars) and start buying Carbon Credits in the open market for the current price of approximately 8 dollars a ton. (The EU has started a program of capping carbon emissions for corporations; but giving them the opportunity to go over their cap by buying 'credits' from companies whose carbon output is below the cap).

This would set up an irrational [i.e., contraintuitive to Leftists] chain reaction, each part of which represents a net positive for the environment.
First, the price of carbon credits will be pressured upward thanks to the speculative buying [...]. Corporations who are banking on the price of carbon credits to remain in a certain range will [...] in many cases be forced to buy more credits than they had planned to in the short term to give themselves the kind of hedging protection these carbon credits offer for their carbon abuse. [!!!] This will drive the price even higher. [...]

[H]igher carbon prices will incentivize companies across the business spectrum to put forward various carbon-efficiency schemes as a way to make money with their excess credits. The money a company makes chasing carbon efficiencies could equal if not eclipse the profits made burning carbon. The government in turn, has the ability to lower the carbon caps greasing this contrarian cycle even more by making carbon more expensive, thus providing more incentive to produce greater efficiencies.

On paper, activists will look at this and balk. They don't like the idea of commoditizing nature. They don't understand why a company would engage in such a scheme. They don't like the fact that the whole thing seems irrational, but that's the point. Business today runs on irrationality and until NGO's adapt, they'll always be behind the curve.

You would think NGO's would have already figured this out. They know for example that ExxonMobil's business model is irrational to the bone. ExxonMobil extract irreplaceable natural resources for virtually nothing, sell them for a fraction of their replacement costs and then we burn them without ever having to pay the environmental costs; all this resulting in parts of CO2 per million in the atmosphere breaching the 'can't go back' levels where the species (ours) is put on the extinction watch list.

ExxonMobil's business model is irrational and suicidal. NGO's know this, so why do they insist in trying to get Exxon to act rationally when nothing in Exxon corporate DNA suggests they even understand what that word means.
Exxon is not rational, but they are profitable. For NGO's to attack their rationale is a non-starter because the company knows it's irrational and doesn't care. Environmentalists, to win against this insanity, must tear a page out of the irrational's handbook in order to effectively combat the current trends blighting our futures. The carbon trading scheme mentioned above is a step in that direction. As distasteful as it must seem for NGO's to drink the 'Koolaide' that runs business, not to do so at this point is completely irrational.

###

Well. Where to begin.

Soros is clearly not "the king of contrarianism", nor "the most successful investor in the history of Wall Street", but those are quibbles. He's good at both, even if not the best ever. (Or even of his generation).

I left in the parts about "drinking the business Kool-Aid", ExxonMobil "extracting irreplaceable natural resources" for "virtually nothing" and "selling them for a fraction of their replacement costs", and "parts of CO2 per million in the atmosphere breaching the 'can't go back' levels where the species (ours) is put on the extinction watch list" for their amusement value.

The "GlobalWarming™ leading to human extinction" nonsense is as nutty as it is ignorant; even the global warmers' own models show only a slight increase in temperatures.
If their clearly flawed models were correct, then billions of humans would die, but the species would be in no danger, and we wouldn't end up living only at the planetary poles, or whatever other nonsensical SciFi fantasy is in vogue right now.

The thought that the oil industry expends no money or effort to find and produce crude oil is a likewise puzzlingly ignorant fantasy, one that would take only thirty minutes or less of research to dispel - if one had any interest in being well-informed on the subjects that one writes about.
Sadly, many people find it agreeable to hold strong opinions on subjects about which they know absolutely nothing, even when knowing the basics would take very little time or effort, the recent/ongoing UAE ports deal dust-up being a perfect example.

Also, why would we want to replace crude oil, or refrain from using it, except to avoid air pollution ?
It's not like it's doing anything but sitting there. Trees, for instance, dynamically interact with the environment and with humans, and so it's problematic to use too many of them at one time, but in situ crude is passive.

All that aside, the reason that I posted this is because Mr. Keiser, loon though he may be, is absolutely correct. This is the best approach for NGOs that wish to lower carbon emissions: Get everyone to agree to establishing a market in carbon emissions, and then corner it.

8 Comments:

Blogger Harry Eagar said...

Trying to corner markets has a really bad track record.

March 17, 2006 12:07 PM  
Blogger Oroborous said...

The Hunt brothers would agree.

At the least, NGOs could raise the cost of doing business, and hopefully drive innovation that way.

Or maybe they'd just drive carbon-emitting industries out of Europe, and increase unemployment.

March 17, 2006 7:50 PM  
Blogger Harry Eagar said...

Also, if NGOs are sitting on assets of $1T, how come all the problems that could be fixed by throwing money at them are not already fixed?

March 18, 2006 10:05 AM  
Blogger Oroborous said...

Two reasons, I would guess:

If NGOs spent all their money on actually fixing problems, that would leave them with nothing to spend on administration; and, too many cooks - they aren't monolithic, NGOs don't agree on what the primary problems are, nor on how best to fix them.

And, if they did combine assets, who would get to run the organization ?

Egos and politics preclude that solution.

March 18, 2006 6:39 PM  
Blogger Hey Skipper said...

Would that be the same Mr. Soros who just took a bath betting against the US dollar?

What I found silliest, a decidedly high bar, about this article was the assumption (pivotal to the entire piece, BTW), that the expense "Carbon Credits" would serve to cause businesses to make investments that are sound in the absence of credits.

If that is so, then the smartest thing for an all knowing NGO to do is invest their money in the company making whatever widgets create that efficiency, and market it straightaway.

No need to wait, right?

March 20, 2006 4:49 AM  
Blogger Oroborous said...

That would be an elegant solution, but the zeitgeist of the piece is that activist types wouldn't understand why that should be done, and many would consider it to be consorting with the enemy, or "selling out".

In the medium term, shorting the U.S. dollar isn't a bad idea; Soros and Buffet are just ahead of the curve.
Economic slowdown in the U.S., from a declining housing market, will probably result in Fed interest rate cuts in '07.

Being a more cautious type than Buffet and Soros, the way that I'd play that would be to buy bonds denominated in Euros and hold them, instead of selling U.S. dollars short, but hey, I'm not a genius billionaire. (I also didn't lose a billion betting against the dollar too early...)

Long-term, it makes sense to short the Euro and the yen, and buy dollars long, but that's a decades-long play.

March 20, 2006 12:46 PM  
Blogger Harry Eagar said...

Wish I was smart enough to figger out a way to short $35K hybrid sedans.

March 20, 2006 7:02 PM  
Blogger Oroborous said...

Get people to put down a non-refundable deposit to buy $ 35,000 hybrid sedans for $ 30,000, with delivery to be in a year.

Then, hope that the manufacturer has to slash the sticker prices and/or offer a nice rebate on those vehicles.

March 20, 2006 8:53 PM  

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