Byron Wien does the most thorough job of putting together thoughtful, provocative and useful ideas on possible surprises for each year. I have been fortunate enough to know Byron and to participate in the Third Thursday group on which he draws, in part, to test both conventional wisdom and real surprises. I could not attend the December lunch this year as I was in India. Below is the email I sent Byron in late November. I will use that as the start of my thoughts on surprising things that could happen in 2012 and will then toss out a few additional ideas. Here we go:

“Byron, Am heading to India on Friday. Sorry I will miss your pre-surprise lunch. Am attaching copies of the text and slides I will be using in India. I don’t think they say anything you don’t know, but you might find something in there…My big surprise is that Joe Biden will not be the VP candidate in the coming election. Second surprise would be that the US does better than expected in 2012 given the debacle in Europe. Neither China nor India do as well as currently expected and China steps up to do something in Europe–maybe buy a Greek Island? They need Europe. Brazil starts to look a bit like Argentina–I think they are way understating their inflation rate. Capital flows our way and the RU dips into the 7′s before the election. If so, Obama wins in a walk. The really big surprise would be Huntsman as the Republican candidate–or maybe Obama’s VP candidate? What a ticket that would make. Jack”

The idea of surprises is to get people thinking away from trendlines. I use Byron’s definition, which is a personal belief that there is greater than a 50% chance of something happening where conventional wisdom is less than that. Let’s continue:

1) It is hard to see us getting through the year without an energy crisis of some type where demand significantly exceeds supply and oil prices spike once again. This could stem from trouble in the Middle East, Africa or Asia. It could be brought about by some covert action by the US that has been in the works for some time and comes to fruition within the next 10 months. There are too many possibilities for this not to have greater than a 50% chance of occurring within this calendar year. The combination of a hydrocarbon energy crisis combined with a major climate disaster somewhere in the world will lead to policy actions on the part of the US to accelerate both natural gas development and alternative energy development as well.  Energy efficiency finally begins having its day. Talk of a carbon tax grows particularly as other countries implement implicit and explicit carbon pricing.

2) Contrary to a normally quiet year during a transition of leadership, to some extent forced by an “Asian Spring” throughout the region, China takes several bold steps in response to a more activist populace upset with corruption, the environment, and some areas of economic stress, combined with a desire by Hu and Wen to put more of their stamp on the future.  This includes major acquisitions in the developed countries as well as the opening of manufacturing and service facilities. At home, R&D is accelerated particularly in alternative energy, space and IT processing. Subsidies for hydrocarbons are reduced or eliminated and an explicit carbon tax is put in place. Following Australia’s lead and China’s moves, several Asian countries put in place mechanisms to reduce their use of conventional hydrocarbons for energy–although everyone finds that they have 200 million year-old hydrocarbons in shale formations and begins using the immature  production technologies developed in the US, creating even more environmental disasters.

3) As the US economy grows, corporations find qualified hires difficult to come by. Enlightened corporations, led by GE,  become educational institutions to provide skills and basic knowledge to a work force that has been idle and undereducated by the public systems which were supposed to do the job. Corporations become much more vocal about bringing illegal immigrants into the US system, expanding visa programs and finding other mechanisms to add talented labor to the pool domestically. It becomes clear that a controlled amnesty program for current illegals in the US will add significantly to GDP and to government revenues. The tide begins to shift on immigration issues.

4) The US labor situation is aggravated in the short term by decisions on the part of several US corporations to bring manufacturing operations back into the States.  Labor costs are rising elsewhere and the elements of control, rule of law, productivity and relative safety lead to better economics manufacturing locally. Caterpillar’s actions with its Canadian operations start the ball rolling. As stated above, US corporations take on a significant role in training and general education to meet their labor needs.

5) In spite of the demand for its natural resources, South America finds itself in much more turmoil politically and economically than one might expect. Natural disasters from climate change and it’s young mountain ranges compound economic issues from changes in export markets and a continuing misallocation of financial resources. Led, once again, by problems in Argentina, some degree of turmoil ripples north through the continent into Central America and requires more of the attention of the US than we have been willing to give thus far. Immigration to the US, both legal and illegal, accelerates as the US economy picks up steam.

6) India becomes a focal point. With an economy not growing adequately to provide jobs, upward mobility and political stability, India looks for diversions. Troops move north to “prepare” for confrontation with China, and west to confront Pakistan. Some elements internally are confronted as well. While the numbers show growth, the quality is somewhat problematic. Energy shortages push India toward even more aggressive alternative energy policies.

These aren’t all of the surprises we will find in 2012. I must say I continue to be optimistic about the US in spite of the crazies in Washington and the anger, bigotry and fear manifesting itself during the Republican primary battles. All of those who were planning on moving out of the country if Obama was re-elected–the ABO crowd– or any of the Republican choices–the ABAR crowd, might want to reconsider.

I am very pleased to be here today.  I come to India regularly for pleasure and for business although it is always a pleasure. What I plan to do is provide an economic and market context on what has happened in the United States trying to draw some parallels and contrasts to Asia – India specifically – and Europe. I will start with some history, review where we are today and then venture some guesses about where we may be going. I will relate that to what happened in the venture world historically, again to compare and contrast with what is happening here in India. I will then turn to the opportunities this presents. Several of you here today are investors, and your allocation to potential investments is made in an economic context regarding returns relative to risks. So lets start with economics.

Some history:  I am not sure that recent history provides one with the right context, so it may be helpful to look at a longer time span, which could provide a better perspective. I will give a caveat that “perspective” is an overused word. (As is “caveat” for that matter.) Jane Smiley, a great writer, may have been right when she had one of her protagonists define perspective as actually believing that two parallel lines meet.  Maybe you have to be an engineer to appreciate that. At any rate, this is my point of view and my sorting of the data and my perspective—one that is US centric, partly because it would be presumptuous for me to tell you about your own country, and partly because it represents a model that may be useful to understand.

I am not going to present a comprehensive picture of the economy and the markets. Instead, I will highlight a few points that I think have some relevance to investing today. Let’s start with GDP growth in the United States since World War II.

The US has had 12 recessions since the Second World War.  What is most interesting to me about this recession are 1) the year over year decline has been greater than any of the post-War recessions, 2) the rate of recovery compared to earlier recessions has not been as high, and 3) the official recession exceeded both the 81-82 and 73-75 recessions by a few months. In addition, we haven’t seen a 5% year-over-year GDP gain since late 1999.  High oil prices and Central Bank tightening were the primary causes of the other two lengthy recessions.  This latest one is much more of a financial crisis like a quarter of the 47 recessions the US has had in the last 220 years. Several of those financial recessions were substantially longer and in many cases deeper than what we have experienced thus far. In almost all cases the crises extended globally or even originated elsewhere in the world, primarily England. This crisis is certainly global. And has manifested itself serially from the US to Europe and is now affecting Asia, including India.

However, in the US, which was first to see the downturn, away from the construction market and its impact on economic activity, the rest of the US economy is actually doing well and is growing. And importantly, in my view, it may be approaching self-sustainability.  Profits have more than doubled from their lows in 08 and are 20% above their peak in 06.  In some ways the US securities market reflects this off of its lows generated by the fallout from the Lehman bankruptcy.

I am referring to the S&P Technology Sector, which while still way below its peak in the dotcom bubble is at levels seen in 1998 before the 18-month blow-off produced that final peak in March 2000.

This index is a reasonably good proxy for what has happened to overall values in the venture capital world in the US.  A caveat I would add though, is that while values have tracked one still has to be somewhat concerned about valuations.

The overall valuation in the US, while down, is still above the lowest Price/Earnings ratios that have been hit in the longer cycles of valuation in the market. One can come up with a variety of reasons why valuations may not go to previous lows experienced, but I have to say there were always a set of reasons why valuations could not go lower.   I think it is useful to look at valuations in the public markets, as history shows that private equity valuations tend to track public market valuations overall and by sector going in and coming out.

Valuations in India are not low by historical standards. This does translate into private equity valuations and does raise some points of caution.  It goes without saying, but I would make the point that the valuation one gets going into an investment may be one of the best determinants of the ultimate return.

Historically, the US is bouncing closer to the bottom of a price channel waiting for earnings growth or possibly further market declines to bring down the multiples a bit more. We can review how the US got to this point and where we are likely to go from here. This pattern does relate to what is happening globally.

It is a fairly simple picture. We overleveraged the economy to support consumption, which in turn has led to a very significant trade deficit, about half from overconsumption and about half from dependence on others for our hydrocarbons.  This is a US and European problem for the most part, but to some degree it exists here and in other parts of Asia as well. As we work our way out of this problem it will likely result in lower overall growth in the Western world for a number of years. Europe is likely to show negative numbers next year—maybe even this quarter.  I would point out though, that in the US, there are some positive indications. If one looks at total debt outstanding, the number has actually flattened, with government debt replacing private debt. The ratio of debt to GDP has fallen as well-still high but falling. US corporations have significant enterprise capacity if they only had the confidence and the opportunities for investment. They ultimately have to do something with their cash.  I would also make the point that US banks, in contrast to other banks around the world, are accumulating cash. Deposits are up. The Federal Reserve has bought paper from the banks, and the Europeans, South Americans and others believe that their liquid assets may be safer in US banks than their own. In addition, if the dollar stays where it is or weakens particularly against the Asian currencies we would move closer to values we saw during the 90’s.  A point I am making is that part of the growth in the 90’s in the US was fueled by a lower dollar than we have today.  From its low in 1988 the dollar marched up doubling in value over the next ten years and today is still 50% above that trough but in a recent decline.

However, China’s currency has been rising. On balance, I believe other Asian currencies will track China’s over the long run.

India’s currency tracked China’s earlier this decade but I think internal issues and some concern about the impact of the European problems have affected values more recently. I do believe in the long run, based on economics, the Rupee is likely to strengthen against the dollar. Internal issues, for example allowing for Foreign Direct Investment, could affect the timing and degree of strengthening as trade balances shift.

Looking at High Tech trade, which is a good proxy for some of the venture activity, aided to a measurable extent by the lower dollar and Moore’s law, the US had a positive trade balance annually in High Technology Products through the 90’s. Lots of factors have affected the numbers over time, but the net of it is the US went from roughly a $24 Billion annual surplus at the end of that decade to a $96 Billion annual deficit in 2010. I think the dollar has been an important factor. Looking at India specifically, overall, this year you will have about a $15 Billion annual trade surplus with the US. Actual exports have doubled in the last 5 years and will likely be $36 Billion this year. Venture-backed companies should be getting their piece of that.

I do believe in the long run, currency adjustment may be the most important factor in job growth in the US, and possibly Europe, reducing the labor arbitrage that now exists between the developing world and the developed world. This will require significant productivity improvement in the developing world to offset higher currency values.

It is unlikely the dollar gets back to the lower end of the 90’s level in a straight line any time soon, because, right now, given our relative growth and safety, we see capital continuing to flow in our direction adding some strength to the dollar. However, over the next decade or more, the dollar is likely to weaken, particularly against the Asian currencies.  As the dollar adjusts and the economy does show modest growth, the capital is there in the private sector to finance growth once there is some certainty about where it will come from and if the Europeans can deal with their deficits. Many of those dollars will make their way overseas seeking that growth and creating jobs, if local policies are supportive. Let’s also remember that while the US may be running a trade deficit in high tech products, it is exporting at a $288 Billion annual rate and importing at a $192 Billion rate.

And, in spite of its overall trade deficit with almost every country on the planet, the US still exported over $1.4 Trillion of goods. And not counting oil imports the US bought $1.8 Trillion of goods from the rest of the world. Indian corporations big and small, startups or established companies, can certainly take advantage of the demand that continues to exist in the US for products–and services as well.

While there is a risk that, given the political rhetoric, we could find ourselves aborting the recovery that is starting in the US and is likely to spread, logic or sanity should lead us to a different set of conclusions. This could set the stage for a very interesting investment environment. Globally, particularly in the faster growing developing world which I define as the BAICs not the BRICS—Brazil, Africa, India and China, infrastructure spend and total investment will continue to rise to meet the demands of the populace and the demands of the global marketplace for their products—both natural resources and manufactured goods and some services.  This is continuing to bring more individuals into the middle classes with their own set of demands and needs.

Brazil, India and China, as well as most of Africa have a long way to go before the mix of their economies comes anywhere close to the more mature world. But look at what is ahead.

If we look at a breakdown of GDP and employment by major sector—agriculture, industry, and services, for two developed world countries and three of the BAICs—I don’t have stats for all of Africa–, we will see that India, Brazil and china have a much higher percentage of GDP and employment in Agriculture. To make this a little clearer, let’s take Agriculture and compare the US, Germany and India. US agricultural output represents about 1.6% of GDP and employs 1% of the work force. Germany is at 1% of GDP and 2% of the workforce. India is at 18% of GDP but over 50% of the workforce is still employed in agriculture.  Today’s mix has some similarities to where the US was earlier in the 20^th century, although with higher manufacturing and lower services.  China looks even more like the US at that time.  We are talking about large populations shifting from the agricultural sector to manufacturing and services over the next few decades. This carries with it some political risk and not necessarily a smooth transition. But, this also means on balance, growth. And I would make an important point: It is easier to innovate into growth than it is into replacement.

Growth requires a sense of urgency. Everything speeds up. One does not want to get left behind. There is also an opportunity to experiment and, of course, to fail. But growth covers up many sins and extends the runway to get it right. And, it usually results in multiple approaches to opportunities and problems. Let me elaborate further on this point–that it is easier to innovate into growth than replacement. The economics are different if, instead of simply taking away share from an established player, one is participating in an expanding market. Particularly, when it comes to plant and equipment, customers are making a different calculation if it is an expansion cost vs. a replacement cost. In any instance, replacement or expansion, I believe that most innovations relate to some form of productivity improvement. It is worth thinking about any venture investment in terms of productivity–whether in Social Media or cell phones where the productivity of connecting with others has been enhanced, diagnostics, medical outcomes, energy, agritech, measurement itself, or infrastructure.  When growth is uncertain or out on too far a horizon it becomes more difficult than it already is.  I think the best venture capitalists understand that, to some extent adding a vision that may see growth potential where others don’t. And, many of the best VC firms are on multiple continents having extended their reach to one or more of the BAICs, in particular, to take advantage of changing income levels and a growing consumer class; in other words investing into growth. Some would even say that innovation requires consumption growth. Successful innovation also requires the VC experience and a VC infrastructure as foundations.  I don’t totally accept what some are characterizing as the US exceptionalism, is that exceptional. And that other systems are not producing innovators. Not every engineering or science graduate–or dropout for that matter–in the US is an innovator. I have to believe that the distribution of potential innovators in any country is the same, and ultimately the infrastructure that permits that innovation will exist there as well. In some instances, it is already happening.

Asia and Europe combined are putting more venture capital to work than the US and have been since 2006. India and China are putting Rupees and Yuan to work at about 40% of the US rate. And the rest of Asia is quite vibrant as well.  What is lacking is both a long enough history of repeatable success, and the Tim Harford observation—Harford of the Financial Times–of the Galapagan Isolation vs. Corpocracy, as represented by Silicon Valley, Silicon Alley, the Silicon Wadi of Israel or the other pockets within the US and elsewhere that include investors with reach, experience and staying power; innovators with access; and flexible resources to execute. Harford’s analogy is that in the Galapagos, an ecosystem isolated from the rest of the world, different flora and fauna developed. He equates the ecosystems in parts of the venture world to this phenomenon.  You can go to the World Policy Institute website, www.worldpolicy.org, and look for the Journal issue entitled “Innovation,” to read more about this. This topic is included in an essay by Neal Stephenson, a great Science-Fiction writer and an unusual contributor to this kind of publication. He lays out some challenges for those of us who exist on the portal between the real world and those imagined. A fun and stimulating read.

Well, while Europe and Asia are increasing their venture investing, in the US the VC industry is going through a contraction, which is a good thing for returns—maybe not for the planet.

The number of funds raising capital is down and the number of investments being made is down. By the way, I want to thank my friends at Knightsbridge Advisers for several of the next slides. Knightsbridge is a fund of Venture Funds with a specific and very successful focus developed over a long period of time on the top quartile venture funds in the US, many of whom now reach into Asia specifically.

Historically, stronger returns have followed these contractions. Fund Raising is down to its historically low percentage of stock market capitalization and there is not a great inventory of what has been historically defined as early stage capital.  These are metrics that should be tracked in any market.

And, the top quartile, which has consisted of the same VC funds for many years with only few exceptions, has substantially outperformed the rest of the industry.  These firms are their own Galapagos.  There isn’t enough history here, in India, to determine all the entrants into that top quartile. Some firms are beginning to stand out, but we need a couple more cycles to really tell who has staying power. We may be hitting one of those cycles here right now.

This is an important point. As I said, growth can cover up many sins. To paraphrase Warren Buffet or Mark Twain–“you have to wait until the tide goes out to see who is not wearing a bathing suit.”

Having said that, this takes nothing away from the opportunity here in India, fueled by significant growth.

There is a very fertile environment here for Value Creation. I would highlight three sectors specifically for India. IT, Life Sciences and CleanTech, all in the context of infrastructure development and increasing awareness and demands from the populace for what they see elsewhere in the world.

It starts with the Internet and expands to mobile apps and cloud computing. And, it is driven by increasing processing speeds. We are still in early days regarding the ongoing impact of Moore’s Law. Three weeks ago I attended a three-day Intel Capital conference on the west coast. Duron, is in the Intel portfolio and I was fortunate enough to join our CEO, Ajay Awasthi, at the conference.  200 of Intel’s portfolio companies and 400 Intel managers and technologists attended the conference. Over half the companies were from outside the US. This was a very exciting and stimulating conference. Intel will invest in any company meeting its return criteria that will lead to more chips being sold—that covers the range from the technology around chips to social media.  The most important news though was when Paul Otellini, the CEO, stated that Intel has 10 years of clear visibility on Moore’s Law.  I think that means within 10 years, processing speeds on a single chip will be at least 64 times faster than they are today.  I am not sure we can imagine all the possibilities, but with a sense of certainty around that happening we get very close to Neal Stephenson’s and William Gibson’s worlds.

A big factor in India is bringing basic health care to a broader segment of the population. I think integrated delivery systems will be a part of the solution here. Ultimately, improving outcomes and taking advantage of the IT developments on the horizon will change the nature of health care and create real value for those who participate.

The need to drive both energy independence and cleaner renewable energy creates enormous opportunities. I don’t think India can wait for grid build-out to satisfy its needs. Much of the grid that does exist is aged and outmoded. A leap to models with distributed power and low power products offers many opportunities. This is my bias, but I truly believe that the need for innovation here is critical to the survival of the planet.

I think there are several other asset classes or sectors in which the venture community can participate that have growth characteristics.  Let me give you that broader characterization as we bring this to a close:

I start with Infrastructure. I think this could turn out to be a growth market in the US but will surely continue to be so here. And any innovation that contributes to the more productive movement of goods, services, people or information should find a market. Water also falls under infrastructure. There isn’t enough of it in the forms needed. Quality improvement and more efficient usage are two big opportunities. That leads us to Energy where there are enormous opportunities relating to the technologies being used and the productivity and efficiency of use, some of which I discussed already.

For India, we should include Agriculture or Agritech as its own category. This ties back into infrastructure, energy, water and life sciences, but should be listed here as its own. IT and Health Care are the two other big categories already discussed. Education is a difficult sector because of all the stakeholders who want a say in how the structure evolves, but one where technology can play a significant role and is very important in India. In some ways this sector also ties back into Energy as available and dependable clean power may be one of the most important factors in improving and broadening the educational map in this country. I put Financial Services and Hard Assets here as well as selectively attractive classes. . I list Global as a separate Asset Class, although every class listed can be considered global as well as domestic. The point this emphasizes is that the true growth opportunities involve solutions that extend beyond any domestic borders and truly allow one to be innovating into growth.  None of this is easy.  Persistent performance requires much more than capital and some smart people. It requires the ecosystems that in many cases have taken years to create. Investing beyond just getting Beta to getting real Alpha in any investment class requires patience and the full use of all the resources one can bring to bear. We are at an interesting stage where the nature of the venture industry may be returning to its previous core. I think it is a very exciting time for venture investing–not that it isn’t always exciting.

There are multiple opportunities across multiple sectors globally. Innovation is occurring and the pace is likely to accelerate. India is clearly innovating into a growth market in spite of near term concerns. Experienced Venture Capitalists can make a significant contribution. Smart capital can and should be choosy in this volatile global environment.    But maybe, if one is careful, the next decade may turn out to be a period of great investments with a great benefit to all humankind. Let us hope so.

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The SGEIS of September 7, 2011 provides a very comprehensive review of the risks associated with Horizontal Drilling and High-Volume Hydraulic Fracturing and provides mitigation against many of the known risks either through regulation, approvals or restrictions on where drilling can take place. However, in its work, the DEC with the assistance of Alpha Environmental does recognize that there are substantial risks and actual likelihood of occurrences of damage as indicated by the restrictions on where drilling can take place as well as the substantial amount of requirements necessary to be allowed to drill, to handle the materials and back-flow from the processes, to reduce the GHG emissions and to transport materials and the ultimate hydrocarbons resulting from the drilling. The Marcellus and the Utica formations as well as others that may be exploited represent a significant economic opportunity for New York and other states as well as the United States in general. There will be much comment on the proposals put forth in this document. No doubt, the Oil and Gas Industry will have comments on the costs of the proposals as well as whether the risks highlighted are significant enough to warrant all the proposals for mitigation.  Economics will be a key factor. These formations, the Marcellus in particular, represent a low cost source of domestic energy, in some ways not too dissimilar from the Prudhoe basin, which has been a major economic boon for Alaska and the US.  I would like to suggest that, in addition to the proposals in the SGEIS, that the state of New York, in conjunction with the other states that exist over these formations, consider the following:

1)    Much as the state of Alaska created a Permanent Fund for collection of royalties on the production from the Prudhoe basin and other Oil and Gas activities, there should be a similar Permanent Fund developed for the states where hydraulic fracturing and any other approaches are used to exploit these enormous and game-changing formations. An appropriate royalty (Alaska takes 33%) should be determined. While a small portion of the royalties could go toward the various state operating budgets, the majority would be available for the creation of alternative energy or energy efficiency opportunities to ultimately replace or supplement the production from the formations, as they are depleted. It could also be used for training of local residents in the technical skills required to participate in the manpower requirements for the industry. The royalties could also be used to support the inspection efforts and other mitigating elements in order to support the O&G industry in its exploitation of the formations. The DEC has indicated that drilling approvals will be slow as there are not sufficient resources to meet the likely demand.

2)    While the DEC has proposed many mitigations to avoid problems, specifically with water contamination, there is no certainty that problems, anticipated or unanticipated, will not occur.  The O&G industry is certainly of the view that there are no serious problems that could affect the various water supplies in the state or water that either contains animal life or is important to land-based animals’ survival. It would make sense for the industry to put up a sizable bond to deal with any problems that do arise, requiring treatment plants or other means to correct any such problems. If as the industry states, the occurrence of such problems is remote, such a bond would bear a reasonable price, and could be targeted to specific elements. For example, while the NYC watershed has been excluded from drilling specifically, drilling will be allowed to take place not far from the borders of the watershed area. NYC consumes about 1 billion gallons per day of unfiltered water for which it collects about $1 billion a year. To construct treatment plants and maintain them could cost as much as $30 billion and add about a billion dollars per year to operating costs.  In the event that the unforeseen happens or appears to be happening, it would be good to know that funds are available to insure that sufficient potable water continues to exist.

3)    The DEC has also proposed rules to mitigate GHG emissions, which could be high in the early stages of the process if methane releases are not contained. It is understood that under steady state conditions natural gas produces fewer GHG emissions than coal or oil, but there are still emissions.  And such emissions can exceed those of other hydrocarbons if there are methane releases during the early hydrofracturing activity. A CO2 or CO2e charge per ton above a certain level of emissions would provide an economic incentive for the industry to keep emissions levels in the drilling, production and transportation activity to a minimum. Such a charge could revert to the Permanent Fund.

I leave it to the experts to determine the feasibility of these suggestions and the appropriate economics. Exploitation of the Marcellus and other gas reservoirs in New York and elsewhere in the country can have a major impact on the economics of the United Sates and can serve as a significant interim step toward reduction of GHG emissions if done properly. Much as Alaska, Texas and other states have benefited greatly from the exploitation of resources within the states, New York should as well. I commend the DEC for the thorough review of the risks associated with this method of drilling and production and its proposed rules for mitigation of those risks. I would hope that we use this opportunity to benefit the state and its residents appropriately, and consider the long-term effects of exploiting a depleting hydrocarbon resource.

The palpable sadness that so many people felt hearing of his death is a testimony to the universality of his impact.

Others will have much more to say about Steve Jobs. He was a special individual. He was also the first one to give credit to some of the giants who preceded him who were critical to developing the enabling technologies that he had the vision to use so effectively. It’s a good time to remember them as well—Bill Hewlett, David Packard, Robert Noyce.  And we’ve got some folks who are still around that deserve to be remembered at this time as well—Gordon Moore, Andy Grove and, of course, Ted Hoff. The combination of hard science and organizational skills set the stage for what Apple, with Job’s vision and the creative folks around him, was able to do. Let’s also give a big nod to Jack Goldman and Steve Wozniak.  We could go on. But, enough said.

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China’s Role

This global deficit crisis won’t really be resolved until China enters the picture. China needs an export market to provide sufficient jobs while it tries to move to a consumer economy. It cannot find itself with a slow-growth economy if it wants to avoid political disruption, particularly at a time of leadership change. The developed world, both the US and Europe, needs to be showing some growth in order to be consumers of Chinese goods. With new leadership coming in 2012 there is an opportunity for China to provide some form of quantitative easing through the purchase of longer-dated securities or other mechanisms.  This could be combined with the purchase of real assets and intellectual property as well in both the US and Europe. Until we see some movement by China, the developed world markets will face continued uncertainty, as the resources available to resolve the European crises, specifically, are just not adequate. However, I doubt China will move until both Europe and the US take stronger steps on their own to develop long-term deficit solutions and near-term stimuli.

The US’s Role

Contrary to what has been a continual reduction in GDP forecasts and increasing odds of a double dip by the pundits, I think the US could show decent growth in the second half of this year—not enough to create a lot of jobs, but decent. This does assume that the Super Committee or some variation thereof comes out with a long-term deficit reduction program combined with some near-term stimulus, and Congress actually supports this effort. I think the odds are greater than 60% that they will. This doesn’t necessarily provide a boost for the second half of the year, but it clears the air for next year and eliminates some elements of uncertainty in the minds of business and investors. My guess is we could have one more horrendous scare, probably coming out of Europe, before the world comes to its senses and responds to what could be a real crisis otherwise. What needs to happen long term is a whole ‘nother post, but one could read Friedman’ and Mandelbaum’s new book, “That Used to be Us,” to get a sense of some of what has to happen.

Europe

What a mess. It does not appear that the mechanisms exist to deal with the Greek deficits without putting the European banking system and maybe some other financial entities at grave capital risk. Whatever does come out of Europe as a solution—and I think it will take the Chinese to at least have the appearance of a solution—growth will be slow, as the European banks will not be in a position to lend for some time.  This is an opportunity for the Chinese probably to the detriment of the US, if they choose to pursue it.  China bashing in the US will likely drive China closer to Europe. China can also be more specific in its actions by dealing with individual countries and companies as opposed to the Union.

Other Topics

In spite of what most of the Republican primary candidates say—Jon Huntsman excluded–climate change is happening. We have no coherent policies in place and what was previously there is slowly being dismantled in Congress and by the Administration. Fiscally, we don’t seem to believe we have the resources to tackle this issue now, in spite of the long-term job creation possibilities.  And, the fascination with “fracking” and what that could do for energy independence is in the forefront with massive resources from the energy industry devoted to selling the story. In the meantime the failure of an over-funded science project, Solyndra, has raised issues about government involvement in clean tech.  These are their own topics, which I will deal with separately in other posts. In the meantime, back to the LFIS meeting, I will have a hard time coming up with a good stock idea. My personal portfolio is in cash and private illiquid companies. My compatriots will have some very interesting ideas, particularly at this moment in the market. I am not so sure the public market is as cheap as many opportunities in the private market today, particularly away from some of the frenzy around social media and other Internet related companies. Maybe one more crack in the public markets will get it there if it is combined with some stimulus in response.  In the meantime, real private companies are having a hard time finding funds from the traditional venture capital sources. We appear to be going back to the original sources of capital for venture companies, rich families either in the form of family offices or direct.  They can name their prices.  We are back to the old maxim that one makes the most money on a good price going in vs. the price going out.

In the meantime, the US is looking for more carbon in less mature formations to fill its energy needs. We’ve basically found all the pooled oil and gas that took 300 million years or more to produce and are now going after “tight” carbon in shale formations as our solution to meet energy demand and produce energy independence. While the shale gas most likely will produce fewer emissions than coal over the 100 year life of a formation, it is still producing carbon and requiring a fairly aggressive use of other resources, primarily water, and some real brute force in liberating the carbon. This, too, is a bold step with some big environmental risks associated with it. It may prove to be a bold step in the wrong direction. We will take a closer look at this in a future blog. The move by Germany is an exciting one, but it saddens me to see the innovation and the aggressive steps to produce the lower carbon world we need taking place elsewhere.

The first quarter of 2011 was rather tumultuous to say the least, and we are entering the second quarter with very little of that turbulence fully calmed and the human toll and uncertainty continuing to rise. This has heightened concerns about specific Risks and, more generally, the global economy…  Continue reading the text version →

Or fast forward to the Q&A session in the video below.