What About Rose Colored Swans?

 | Mar 14, 2012 | 2:01 PM EDT
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I had the opportunity this morning to spend some time talking to the New York Kentucky Colonel for a bit while he was stuck on the train. This is always a great conversation as we share affinities for bad baseball teams (Orioles and Mets), good bourbon, ponies with high Beyers and undervalued odds as well as the stock market.

The Colonel is the one who helped me polish the few technical indicators I feel have any value at all for value investors and is very knowledgeable on all things markets and sports. After discussing the Basketball bacchanalia on tap for this week the conversation found its way to the markets and the economy.

Both of us have read recent pieces from notable pundits like John Hussman and Felix Zulauf predicting dire consequences to the current round of money printing and other fiscal measures. We seem to be stuck with either massive deflation and recession or hyperinflation. In one scenario we get to enjoy both. This is consistent with the very pessimistic view I hear from some very smart people these days and it can be a bit disconcerting to read the end of the world on a daily basis. This has led to a rise in Black Swan funds that are designed specifically to bet on a breakdown in the markets and global economy.

The Colonel remarked that he wished we all read more about the potential for a positive Black Swan. Is it impossible to imagine that there is some unexpected event that fixes many of the problems that we face today? Many of the things we take for granted today were the stuff of wild eyed fiction in our parent's comic books. Furthermore he pondered, even if some of the pundits are right how bad will it really be for us? If the U.S. government defaults at some point in the future does the world end? What if the really dire forecasts come to pass and the government falls? Some European nations change governments as often as I change t-shirts in summer time with little or no ill effect.

It is an interesting conversation and for a cautious optimist like me gives rise to some interesting questions. As Zulauf points out we have ourselves in something of a financial pickle. Money printing can lead to inflation but steep cuts in government spending could cause a deep recession around the globe. One wonders if these are really the only solutions available to us? Might there not be some way to reengineer the government balance sheet is such a way as to alleviate many of the problems? Maybe we should let Michael Milken have a whack at restructuring the balance sheet. There may well be a financial solution to our problems that we have not yet considered or tried. As Winston Churchill pointed out, our nation usually does the right thing but only after we have tried everything else.

What about other events or discoveries that could change the economic picture? Many of the solutions to our economic woes will not come from government but industry. Not long ago I read a novel about the discovery of a super connector that allowed electricity to be transmitted an unlimited distance with no loss of friction. That's a game changer for the whole planet. It sounds farfetched, but keep in mind that Buck Rogers had the first smartphone. In fact, we have seen something very much like that develop in natural gas in the past decade haven't we?

The technology of fracking has made it possible and cost effective to tap supplies that were never available before. As a result we have what may be a hundred year supply of natural gas. C&J Energy (CJES) is one of those companies that provides unconventional services like hydraulic fracking and pressure pumping. As a result of the newer technologies they have seen dramatic growth as a result. Right now the stock is very cheap because of low natural gas prices and environmental concerns but that will change. One of these companies is to going to solve the bulk of the environmental concerns and fracking will continue to grow as a method of extracting cheap fuel. As an investor buying these stocks when they are out of favor could produce substantial rewards.

There are many more possible Rose Colored Swans, as I choose to call them. There are companies working to make the electrical grid smarter and cheaper. There are countless biotech companies working on cost effective solutions to many of most pressing healthcare issues. Somebody, somewhere has a better answer to our fiscal problems than out current policies. It is time to spend some time looking for what is right and potentially positive about our future and how we can invest in it while it is still safe and cheap.



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