Wall Street lavishly over-analyzes fiscal and especially monetary policy, while largely ignoring the economic impact of regulatory policy, despite its great importance for investors. Actually three disparate groups are guilty of this oversight:
- The media tends to focus on Washington wars over the level of taxation and government spending, rather than complex regulatory issues.
- Academic economists battle to promote their pet paradigm—Keynesianism, monetarism, supply side, behavioral economics. These macro models have their uses, but they are laughably simplistic and have little to say about regulation.
- Wall Street economists and the traders who support them are focused on Fed policy and its implications for bond, stock, and currency markets.
It is not at all surprising that government regulation receives inadequate attention. It is a murky, mind-numbing morass of highly technical rules that cannot be reliably quantified or modeled. There are few deadlines that investors can trade against; regulation dribbles out into the economy rule by complex rule. Even seminal laws such as Obamacare and Dodd-Frank take literally years to be implemented as agencies interpret and effectuate the legislation. Regulation does not make compelling copy for the media, and regulations rarely move stock prices in a discrete and decisive way. On Wall Street any idea that can’t be expressed in one sentence or, better, a single number, tends to be ignored, rather like the fine print on a credit card application.
Germany’s Green Energy Nightmare
As an example, you could listen to hours and hours of learned discourse on Bloomberg or CNBC about the European Central Bank, the Bundesbank, quantitative easing, the level of the Euro, the budget deficits of France and Italy, banks’ balance sheets and myriad other elements of Europe’s macro gridlock, without every hearing mention of Germany’s Green Energy Nightmare. That’s a pity, because it is important in its own right and symptomatic of what ails Europe.
As a recent Financial Times article ably recounts, Chancellor Merkel (who has a PhD in physics) abandoned nuclear energy in the wake of Japan’s Fukushima nuclear disaster. Heavily subsidized “renewables” such as wind and solar were supposed to take nuclear’s place, but so far dirty coal has filled the gap. “Last year,” the FT writes, “German electricity production from lignite, a particularly polluting form of coal, reached its highest level since 1990.” So dependent on coal has Germany become that the Vice Chancellor, Sigmar Gabriel, “made a dramatic appeal to Sweden to help it out of an energy dilemma.” It seems that Sweden controls two lignite mines in Germany, mines that a new and more environmentally correct government in Sweden wants to close. Gabriel pleaded with Sweden to keep the mines open in order to help stave off an energy shortage in Germany.
This is a story of all pain and no gain. Germany is missing its carbon emission targets even as its energy costs soar and the risk of energy shortages looms. Costly kilowatts are not only squeezing the budgets of German consumers, who pay twice as much as America; they hinder hiring by undermining the competitiveness of heavy industries such as aluminum, steel and chemicals, which compete with cheap-energy venues such as Saudi Arabia and the U.S. Since 2007, 11 of 24 aluminum smelters in the EU have shut down. European smelters without cheap long-term energy contracts have production costs of $2230 per ton versus $1940 in the U.S. and $1400 in Saudi Arabia. We are not talking about a decrepit basic industry that is winding down: aerospace relies on aluminum, and autos are shifting to the white metal to cut vehicle weight and reduce emissions. So smelters support important downstream industries such as packaging, auto parts and aerospace. These industries will leave Germany if they do not have a local supply of aluminum.
Germany’s Green Energy Nightmare is hobbling Europe’s putative “locomotive” while the U.S. thrives on “tight oil” and cheap natural gas, which are far cleaner than German coal. Germany’s energy problem would not be too significant if it were an unusual “one off,” but of course it’s not. From top-to-bottom, Europe’s economy is tangled in red tape; just about the only surviving growth industry is regulation itself. But in the whacky world of macroeconomics, as practiced on Wall Street and in academia, regulation doesn’t matter much. It’s all about monetary and fiscal policy.
Copyright Thomas Doerflinger 2014. All Rights Reserved.
