I’ve been posting very randomly nowadays. A link here, a view there, but nothing coherent seems to emerge – I know I’ve been bearish, but look around today and you see bearishness everywhere. It’s not just the markets – the real economy has bad news. There’s job losses announced, there’s factories shutting down, people taking their lives (!) because of financial distress, lack of credit, lack of initiative and a lack of literally most things positive.
Is this how a recession is like? I think it’s just the beginning, but then it’s always just the beginning until the end. The roller coaster feels the worst after the rapid drop, even if the drop is over.
Yet, some of the most famous businesses we know today have built in recessions. Microsoft was started in the 70s, and built itself through two recessions. Intel, too. Google came through one. The Toyotas and Hondas grew massively through the biggest recession the world has seen: the Japanese recession.
What businesses will succeed tomorrow? I don’t know. But I think the answer lies in understanding these successes, the innumerable failures, and in the word “excess”.
In the 90s, the dot-com boom brought with it a feeling that the world will eventually become theworld.com. Everything was a dot-com, and I’m sure there even was a dotcom.com. Websites came up: one for pets, potted plant, home deliveries of canned food, and anything you could imagine. To fuel this, there were the infra guys. The folks that decided they would take the internet everywhere, by laying what was then expensive fiber all over the US, and indeed, all over the world. They funded this through venture capital and private equity, typically “excess” capital of the rich and famous who would take extreme risk for what was extreme return.
There was way too much capacity being built. It didn’t seem like an excess, because companies were demanding more, hoarding as much as they could get, because if they couldn’t use it, they could sell it, for much more than they paid. Everything always goes up, because the demand is endless.
That bubble broke. With it went the valuations, and most of that capital of the “rich and famous” became zero. Along with it went a lot of money of the not-so-rich and not-so-famous, who chased the same dream – but who couldn’t quite afford to lose the money. The Nasdaq has not seen those highs since, and most of the high flying companies of that day have gone bust.
Yet, that excess capacity was useful. The fiber was already laid – the cost was sunk. After the companies went bust the people who owned their debt – the bondholders and banks – wanted to just get the hell out. They sold that fiber cheap – even Reliance and VSNL in India managed to get a global network at an extremely low cost.
The cheap fiber made broadband available worldwide – for cheap. You could pay $30 a month and get a gazillion Mbps up that socket fixed in your house. (Note: Why the F hasn’t it happened in India?) The cheap, always-on internet fuelled the next boom – the great web 2.0 boom when companies offering videos on the net would get valued at a couple billion dollars. Bandwidth wasn’t an issue, so people would come on board. And people brought content. And content brought comments. And all this got indexed in the googles, and that brought in more people, who, because they had unlimited bandwidth, could search for something at 2 AM.
This pattern repeats itself. Capital excesses have flowed to industries like airlines, cars, mainframe computers, toys, junk bonds, banking innovations etc. And post all of them, the big players have died or retired hurt.
But these “retirements” literally caused the market to change – they would spend a lot of money on research and go bust, and suddenly the results were out there for everyone to use. Flying became safe and cheap, despite the bankruptcies. The capital flow to junk bonds made a lot of the “lesser” US finance its infrastructure very cheaply – and that fuelled transport and business chains and all that. The excesses created excess capacity, capacity one thought could be sold for a lot of money – eventually it sold cheap, and on top of that were the next big businesses.
What’s the buzz word this time? Energy. This boom has fuelled an enormous amount of money into energy – from research to discovery to exploration to production. There’s now solar and wind energy coming up. Nuclear’s picked up steam (unintended). In India, coal and gas fired plants are coming up – mega and ultra-mega (who coined that?) power projects. There’s investment in distribution and transmission. And most of this has already gone in, in the hope that power will sell for a lot.
Will it? I honestly doubt that. We in India cannot imagine “too much” power. I think that’s what we in the cities will have – because no body has yet figured out how to make people in the villages pay, and no one is yet thinking of drawing lines to them. Too much power means it will become cheap – and I mean in five to ten years, not tomorrow.
This, I think, is the next boom, come 2014 or so. Businesses built on the back of seemingly unlimited power supply – from refrigeration to recreational vehicles – will start to benefit the most. And the biggest will probably come from an area I cannot yet imagine, but I’m sure it will start becoming visible in the next few years
I’m going to keep writing about this once in a while. I think this is a long term thought – with no investment potential today. I mean there’s no “call” or even a single company that I think will be the beneficiary of this boom today. The power producers and distributors will become commodities. But the theme I think – excess power fuelling the next boom – will slowly come around, once all this power is available and ready to use.
More thoughts in the next few posts, I know this is all very up in the air but please do comment and let me know your thoughts.
(I just hope the power companies don’t go bust BEFORE they produce this power.)
