March 27, 2009

The First 100 Days

The event, held at the Harvard Club in New York City, attracted a significant number of reporters from the foreign press, whose intense interest in the effect of the stimulus on the global economy was evident from the barrage of questions they posed to the speakers during a post-panel Q&A.

Moderated by John A. Prestbo, executive director and editor of Dow Jones Indexes, the panel featured presentations by Gus Faucher, director of Macroeconomics for Moody's Economy.com; Craig Noble, portfolio manager at Brookfield Redding LLC; and Richard L. Sandor, Ph.D., chairman and CEO of the Chicago Climate Exchange.

Faucher, who titled his presentation "Breaking the Vicious Cycles," was candidly enthusiastic about the administration's moves. "We think the financial stimulus plan is vital," he said. In fact, Faucher--who served as a senior economist in the U.S. Treasury Department for six years--forecasted that the economy will start to turn around in Q4 of '09... that "the various policies President Obama is taking right now will help end the four system crises" taking place.

The endorsement came after Faucher had painted a dismal picture of what he termed "the worst economic breakdown since the Great Depression." Moreover, the breakdown is "unprecedented," he said, in that it affected the entire country. Ironically, he added, the only area that escaped the breakdown was Washington, D.C. where the federal government does not appear to be in recession.

For the rest of the country, the unraveling of the job market only exacerbated the situation. While Faucher expects unemployment to peak halfway through 2010 at close to 10%, he believes that without the stimulus plan, it could reach 12% in 2011. The other major crises he cited were housing prices and retail sales. His timeline to recovery--the indicators to watch--are TED, unemployment claims, improvement in consumer confidence

Sandor, who founded the CCX, which began trading in 2003, and its wholly owned subsidiary, the Chicago Climate Futures Exchange, was named a "Hero of the Planet" by Time magazine in 2002 for his role as "the father of carbon trading."

Speaking on the same day that the Environmental Protection Agency issued a "finding" proposing that six greenhouse gases should be considered pollutants under the Clean Air Act of 1970, Sandor predicted that "somewhere between Oct. 2009 and Oct. 2010, [the U.S.] will get legislation regulating carbon." Presently, the CCX is North America's "only legally binding, rules-based greenhouse gas emissions allowance trading system, [and] the world's only global system for emissions trading based on all six greenhouse gases."

But Sandor began his remarks with a history lesson, the "history of wealth creation," categorizing preceding decades as:

  • 1945 to 1970 manufacturing--as GM goes, so goes the Nation;
  • 1970s--inflation driven by commodities;
  • 1980s--commoditization of financial instruments, the heyday of MBS, junk bonds;
  • 1990s--commoditization of information, birth of the Web, Google.

"The 21st century," Sandor concluded, "will be the commoditization of air and water--and this will become bigger than anything else. A huge amount of capital is flowing into this new green technology."

CCX members (which include 17% of the DJIA, 11% of the Fortune 500, eight cities and two states) have promised to reduce emissions by 6% in 2010. According to Sandor, the big utilities are selling rights to emit now and buying futures.

"We're just in the first inning of a vast change as regards infrastructure and pollution," he said. "This is not a thing of tomorrow; it's today!"

(For an exclusive Wealth Manager interview with Dr. Sandor on how this sea change will affect you and your ultra-high-net-worth clients, see A Clear Vision.)

A look at the administration's commitment to infrastructure spending was the concern of Noble, who researches and selects stocks for Brookfield Redding's global infrastructure securities strategies. From 2004 to 2008, he was with Brookfield Asset Management, which manages approximately $95 billion in property, power and infrastructure assets and is the source for the Dow Jones Brookfield Infrastructure Index series.

"Infrastructure is a global asset class. There are stimulus bills across the globe," Noble said, noting that his firm focuses on the sector that includes owners and operators--"where the infrastructure assets are"--not builders and contractors.

So far, stimulus money is trending toward public spending, not the private sector. While the administration has allocated more than $50 billion of the financial stimulus plan to infrastructure projects, industry estimates indicate that $2.2 trillion will be the actual amount required to repair the nation's aging infrastructure over the next five years.

The stimulus package, he added, "includes a number of 'shovel-ready' projects like upgrading toll roads, which can start within months and therefore have an immediate effect on the economy."

"It is the longer-term projects such as upgrading the electricity transmission grid that are well-suited to private sector investment," Noble explained, adding, "Therefore, it will be the private sector that fills the gap."

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