Tuesday, January 24, 2012

Roger Cass, The Last Optimist


By Harriet Rubin

Every morning at 5:30, Roger Cass gets up and checks the global markets. He reads the Wall Street Journal and the Financial Times. He surfs the Web, and tunes in to CNBC. Then he goes for a walk along Guadelupe Beach, minutes from his house in Santa Maria, California. Every morning, whether he's scanning the markets or the horizon, Cass is looking for the same thing: the waves. For the past 30 years, he has made a career out of studying them. In his world, the waves carry the message of the new economy. On them ride the first and fastest glimpses of what will come next, the future as it will unfold -- as it must unfold.

By studying the waves, Cass has compiled a perfect track record, predicting with total accuracy the big economic events of the past 30 years.

In the 1970s, when everybody said that the OPEC nations would hold the United States hostage to high-priced oil, Cass said that OPEC's power would fizzle and that the Saudis would enter decades of economic paralysis. He was right.

In the late 1980s, when everybody said that Japan's rise meant the eclipse of U.S. economic power, Cass confidently pronounced that the United States was one year away from its most robust economic recovery ever. He was right.

And as far back as the late 1970s, when everybody was still focused on the economy of the Organization Man, 30 years before anybody else had a glimmer of what would hit in the mid-1990s, Cass saw the new economy coming with the certainty of a wave headed for the shore. He named it as if it were a Hollywood movie, but it was really the most glorious wave of all: the Long Boom.

And what are the waves telling Cass today? True to form, the conventional Cassandras are declaring the end of the new economy and forecasting widespread economic disaster. But Cass isn't short for Cassandra. Where others decry the free fall of a "tech wreck," Cass sees only a "tech transition." The current rise in layoffs and fall of stock prices, he says, is merely an "interruption" in the Long Boom wave -- an interruption that he actually saw coming.

"At a meeting several years ago," says Jack Huber, 65, of Global Business Network in Emeryville, California, "Roger advised us that when the S&P 500 reached 1450, the party was temporarily over. I remembered that, and I watched with interest last year as the S&P edged past 1450 and then dropped -- along with the economy." To Cass, it's not a major problem. He believes that the United States is still in the early stages of a 27-year expansion that is so vast and so deep that, as he says, "we will experience not 100 years of progress in the 21st century, but the equivalent of 20,000 years of progress.

"This thing that we call the new economy, which is really the fifth new economy that the world has seen, is only 7 years old," Cass says. "It should continue for another 20 years." The waves tell him that this new economy is new, but hardly unique. Cass can track how it will behave, based on the other new economies that have washed ashore over the past 200 years. "This interruption will be over by 2002," he says confidently. "Maybe even as early as the second half of 2001."

How does he know? Remember that old cliché "The wave of the future"? For Cass, it's not a cliché. It's a fact.

What's the future got up its sleeve?
To prepare for a career as an economic seer, Cass took exactly one economics course: Economics 202: Introduction to Samuelson. It was enough to make him award the entire economics profession a grade of C-minus. Economists, Cass says, aren't humanists -- which is why they are so often wrong. "Economics has become the science of mathematical modeling," he explains. "But economic behavior is better studied through human history."

Originally from Britain, Cass studied history at the University of Cambridge from 1957 to 1960. He wrote his dissertation on Pope Gregory IX, a medieval church leader who managed to excommunicate his boss, Emperor Frederick II, from the Holy Roman Empire. It was an early lesson for Cass in how to topple authority. The project so inspired him that he learned Medieval Latin and German in order to get as close to the evidence as possible.

In that study, Cass captured an essential truth about change: The fact that Frederick II was excommunicated was big news in the 13th century, but it actually had little impact on the long-term future of the state. An event that happened in the present was rarely important enough to change the wave of history.

In other words, Cass learned an intensely calming lesson: Change is a vastly overrated concept. "Things don't change," explains Malcolm Tulloch, 50, one of Cass's colleagues who runs Tulloch Research, a London-based hedge-fund advisory firm. The way Cass sees it, the future only has two tricks up its sleeve: bigger and smaller. Good times alternate with bad times at predictable intervals. If nothing changes much -- if the fundamentals stay the same -- then you can actually see what's coming next.

It is a lesson that Cass learned from the writings of a French historian named Fernand Braudel, who conceived the notion of projective history: an oxymoronic way to discern the future by studying the past. According to Braudel, you can learn only so much from change -- from the movements of great men, wars, and treaties, from CEO hirings and firings, or from the rise and fall of big companies. The future can't be found on the front page of today's newspapers. Rather, the future can be found by looking at what doesn't change. By studying the eternal truths of history, you can see what has to come next.

Cass, like Braudel, works at a level where things don't change. He studies in detail the small, permanent features of the economy: interest rates, housing, loans, money, taxes, energy consumption. These things are immortal in economies. They have been around ever since the time of Hammurabi, and they are still around today. Trade is as old as the sea itself. Consumer confidence is an eternal condition. Technology has always existed. Trace the deepest movements of economies, and they will tell the story of how change actually occurs in the economy. The message that economies carry is that change is very rarely new. Instead, it unfolds in clear patterns. It unfolds in waves.

Wave theory is the oldest science of change. It is as old as the ancient Mayan belief that catastrophe occurs every 52 years or so. Can you even call it change when it happens that slowly? It turns out that the Mayans were right. Their 52-year cycles were driven by crops and by climate.

"The Mayans had bad cycles every 52 years because the weather turned bad, which made the crops fail," Tulloch says. Mayan culture was agrarian. Crop output was driven by the sun. The more dependent the economy was on crops, the more money farmers had. The more goods they had, the more liquid they were and the more they saved, which meant that banks could lend more easily. This cycle resulted in economic growth and good times. Of course, ours is a service economy, but the waves still hold. You could even say that liquidity in the economy is still based on sunspots -- that the sun still drives our economic well-being.

The future has to start somewhere. What better place than in the past? History tends to be right in a way that reports of the moment never are. "People fall for the conventional wisdom every time," Cass says, "which, by definition, is always wrong. They are always optimistic at the top. Japan was supposed to be the great economic power. But since the late 1980s, I've been predicting that the Japanese market was going to collapse. The conventional wisdom of the 1980s was that America was in decline. People were saying that the United States was in a debt crisis and that it would have an extended recession or even a depression. I totally disagreed with that sentiment. The conventional wisdom is always the obverse of what actually happens. You have to look backward to see ahead."

Here's Cass's take on change: If you focus on what doesn't change, you can see what is genuinely important. The future is already written. Now it's just a matter of reading it.

How does the economy look to an ant?
One of Cass's clients, Pierre Wack, the legendary Royal Dutch/Shell forecaster and the father of scenario planning, used to point out that in Sanskrit, the word for "wise man" is rishi -- directly translated as "seer." Wack taught that the work you do should be a test of your perceptiveness. All great work becomes the art of seeing. And how do you perfect this ability to see? Consider a pile of dust, Wack would say. "If you could transform yourself into an ant, you would see that pile of dust as large black-and-white stones." A true rishi would first see the world through the eyes of an ant, and then through the eyes of a human.

In the afternoon, when the tide is low, Cass becomes an ant. It is then that he studies the boulders of data that roll in from international agencies: the International Monetary Fund, the World Bank, and others. "I input it all into my database myself," Cass says. "I believe that if you work granularly, you can get a perception of things that isn't available from the written analysis. Data can tell you a lot. Opinions without data are severely risky."

What kind of data does a futurist assemble? To arrive at his reading of the waves, Cass collects an odd assortment: He adds up passenger fares, the costs of wireless calls, the export of automotive parts, consumer-confidence ratings, everything oil related, Internet-connection speeds, inflation rates, debt, bonds, loans, equities, claims, trade prices, liquidity growth, exports, demand, consumption. The list of factors that he considers goes on and on -- data from every corner of the world, from 163 countries. Cass is an ant lifting crumbs the size of boulders. The numbers in his reports are like the dots in a pointillist painting: Individually, they are tiny flicks of color. Taken together, they create a brilliant big picture.

Cass has an insatiable appetite for numbers. The passion hit him at the age of eight, when he first read about the Olympics and filled an entire summer writing page after page of related statistics, calculating the odds of winning. Another child would have enjoyed the spectacle; Cass needed the comfort of numbers. For him, it's all about accuracy. Cass's projections are founded on a study of data that is so deep and extreme that Tulloch says, "Only Alan Greenspan works numbers so deeply."

Once Cass has done his ant work, he zooms up to full human size to convert the data into concepts. At this level, Cass tracks liquidity, what Braudel labeled "the sphere of circulation." "When there's no liquidity, it's like pumping the engine when the tank is dry," Cass says. "Global money supply, international bank lending, foreign exchange -- these things are all gas in the tank."

But sometimes the tank can dry up. Sometimes capital can get locked up in nonproductive areas through lack of confidence. And lack of confidence, says Cass, comes from not understanding the waves.

Are waves mystical -- or mathematical?
What happens when you tell people that the future has been written in the past and that for the past 200 years, it has been coming straight at us in long, orderly waves? What happens is that people don't want to hear it. They want the future to be all new! Improved! The latest outpost of progress!

And when you tell people that long-wave analysis is the brainchild of Nikolai Kondratieff, a Russian agricultural economist who was head of the Conjecture Institute, they tend to reject it as fantasy. But for Kondratieff, it was pure fact. In 1928, he predicted worldwide economic collapse, based on his study of history. He was denounced as "wrong and reactionary" by his government and deported to Siberia without a trial. Sentenced to solitary confinement, he became mentally ill -- never a good marketing strategy for a controversial theorist -- and died in prison, just as the Great Depression, which he had also predicted, was devastating Western economies.

All of this helps to explain why waves feel mystical. "Mainstream economists in the United States have dismissed waves as 'a form of occultism,' " Cass says. "Most people have a fundamental distrust of long-term growth. They're still focused on the short-term business cycle and don't put a great deal of faith in 27-year views of expansion and contraction. There's a basic skepticism about the underlying theory. But it works. I've been collecting data for 30 years."

And to Cass, the data offers a sound explanation for the way that waves form. "Waves are caused by excesses of production, investment, and liquidity in the expansion phase that carries the seeds of its own destruction," he says, "leading to overproduction, investment and lending, shortages of raw materials, rising costs, and, eventually, declining demand, profits, and investment. People see the long view as deterministic. They are afraid that they can't predict things over such a long cycle. But I like determinism. There is a comfort to it. It makes investment planning easy. You only have to make one basic decision every 50 years: whether to buy or to sell. If you apply that theory to the market, if you get fully invested in equities at the right point of a down cycle and sell at the midpoint of an up cycle, you can make a tremendous amount of money. This bull market began in 1982, which was precisely the midpoint of the down cycle. The midpoint of this up cycle is 2007. The market still has 6 strong years."

All the future asks is confidence.
Now we're ready to ask the big question: How does Cass explain what we're going through now? Investment, he says, is a psychological state. When people and businesses hoard their money, growth slows. So what changed the psychology? "If you look at cultural events -- not just economic factors -- and the whole mosaic of human experience, it becomes clear that the election mess in Florida last year had a severe effect," Cass says. "It was very divisive. It had a negative effect on race relations and the political system in the United States, and the results of that will be felt for a long time. It had an effect on confidence, which is the key factor. Americans are upset over the political direction of their culture, and that affects the psyche of the American consumer. Businesses simply stopped spending money in November and December. The loss of confidence in the political system and in the economy, and the Fed's delayed response in cutting interest rates, are two critical reasons why we have this falling off of the cliff."

In the 1930s, after two decades of high capital investment and rapid growth, the auto industry plummeted. In the past year, after two years of radical capital investment and spectacular growth, the dotcom world collapsed. The auto industry's sudden decline presaged the arrival of the Great Depression. Will the demise of the dotcoms bring about the same result?

Not according to Cass. "In the 1930s, car sales went bust during an adjustment period," he says. "It was part of a broadly based Great Depression that was shared by the agricultural and manufacturing sectors, who themselves suffered under the decline of serious errors in monetary policy. Around 1937, car sales had rebounded strongly. The main distinction with technology today, however, is that photonics, genetics, and nanotech are still in their infancy. For photonics in particular, capacity is lagging far behind demand. The broadband bottleneck is likely to be eliminated over the next two years, leading to the large remaining balance of a quarter century's worth of expansion."

If the dotcom debacle won't bring this expansive wave to an end, what will? "If CFOs can't see a turnaround, they are going to hold off on capital spending," says Cass. "That in itself feeds nervousness among consumers." However, a major environmental disaster, war, or some kind of cataclysmic event could bring our 27-year cycle to an unanticipated halt. Those are the things to worry about.

As a student of waves, Cass is steadfast in his insistence that this period is an interruption -- not a halt: a technology downturn, not a global downturn. "The main effect of the economic downturn is being felt right now," he says. "By looking at consumer-confidence numbers and at the National Association of Purchasing Managers Index, I can get some information about the depths of manufacturing activity. We had a very short, dramatic downturn last year, and that damaged consumer confidence significantly. But we still have record confidence levels. In 1992, a year after the recession, the Conference Board's Consumer Confidence Index went down to 47.3. We're at 117 right now. We went up to 144.7 in early 2000 -- that was the all-time high. We're still at high levels now. Those numbers will come down further in the next few months before they start to rise again, but the market is bottoming out. To take a longer-term perspective, this is a period of opportunity for business and for investors. If the Fed is aggressive, and if we don't have any major external disruptions, I think we're going to be okay."

Harriet Rubin (hrubin@aol.com [1]) is a Fast Company senior writer and author of The Princessa: Machiavelli for Women (Doubleday, 1997) and Soloing: Realizing Your Life's Ambition (HarperCollins, 1999).

Sidebar: The Five New Economies
The past 200 years have seen not just one new economy but five -- a series of waves that lapped ashore with the predictability of a scheduled event. According to Roger Cass, the five new economies are as follows.

The first new economy: The first boom began in 1789 in the midst of the Industrial Revolution and lasted 26 years. It was brought to a halt by the post-Napoleonic Wars recession, which then persisted for 33 years. Cass calls this "The Industrial/French Revolution."

The second new economy: The second Long Boom began in 1848. Cass calls it "The Great Railway Era." It lasted 25 years and ended in 1872, when European and U.S. financial companies started to go bust, partly due to the outstanding loans that financed many railroad lines and to the failure of panicked banks. The downturn lasted 24 years.

The third new economy: Cars, the telephone, and electricity were the new technologies that premiered during the third cycle in 1897. Overlapping with the original Belle Époque, this cycle was most like our own new economy. This period had a run of 24 years.

It was the time of the greatest freedom and the most expansive economic boom that the world had ever seen. "The Beautiful Age" was marked by bohemian culture in Paris. "World War I brought things to a halt by 1921," Cass says. The downturn for that cycle lasted 27 years, from 1921 until the end of 1947.

The fourth new economy: It started in 1948, prompted by the first computers, the aftermath of World War II, Bretton Woods, the Marshall Plan, and colonial independence. This new economy ended in 1973, after a run of 26 years, around the time of the OPEC oil crisis and the collapse of Bretton Woods. The downturn lasted for 20 years, from 1974 through 1993.

The fifth new economy: In 1994 came our own new economy, the new Belle Époque, almost exactly 100 years after the original Belle Époque. This period was built on new technologies in communications and in globalization, delivering unprecedented wealth.

"The period that we were in during the 1990s was similar to the one that we were in during the 1890s," Cass says. The most powerful link: The revolution in communications, which opened up the global economy, produced revolutions in the Eastern bloc nations, and spread freedom around the world. Our current new economy, which Cass calls "The Internet Age," will last approximately 27 years, until 2020. The adjustment period that follows will last 25 years.

Sidebar: Roger Cass's Coming Attractions
Roger Cass is unique among futurists, because he comes up with one projection and sticks to it. Most futurists prefer to take the safe route, developing alternative futures that frame possible scenarios. "It requires incredible confidence to stick to one story," says Napier Collyns, 73, cofounder of the scenario-planning firm Global Business Network. "A single story can only be found when you look at something incredibly deeply."

Here are Cass's projections for the fifth new economy, which began in 1994 and will run until 2020.

U.S. productivity will grow annually by an average of 3.5% over the next 10 years in the context of 1% annual employment growth.

In local broadband transmission to the home, the "last-mile" issue will be resolved, increasing information use enormously and finally delivering on the promises of the past 15 years.

The United States will shift from making investments in telecommunications to making investments in fiber-optic technology.

Japan will reemerge in a big economic turnaround, driven by a new generation of political and business leadership.

Local capital markets will emerge robustly in developing countries -- and this will be accompanied by a parallel, if not prior, development of human capital.

Economic and productivity growth will be interrupted as a result of environmental degradation. Eastern European success stories founded on environmental ravaging are not likely to persist.

Sidebar: Fernand Braudel Is the Nostradamus of True Believers
Roger Cass's view of the future owes much to the historical writings of Fernand Braudel.

A conventional, mainstream economist might predict the future based on factors such as interest rates. A Braudelian takes a different approach, analyzing the long cycles and studying population growth, political change, and social trends. "You're left with a comprehensive understanding, because human nature doesn't change," says Malcolm Tulloch, Cass's colleague. Economists, including Braudel, recognize that population growth drives economic growth, which makes interest rates short-term and dubious. "America's economic growth is driven by population growth, which is expanding rapidly because of immigration," says Tulloch. "European populations are stagnating -- they are becoming gentrified. One of Japan's biggest problems is that its population is shrinking and graying. That's what's making its economic decline so difficult to repair."

To a Braudelian, the word "change" has lost any significant meaning. "It needs adjectives and qualifiers," says Tulloch. As if to keep the muck of the news off of themselves, Braudelians are constantly rereading Braudel. In particular, Tulloch recommends Braudel's trilogy, Civilization and Capitalism, 15th - 18th Century (Harper & Row, 1982). If you're serious about looking for the future, the best place to start may be with Braudel's history.

Sunday, January 1, 2012

[12/27/11] Shale-Gas Boom Spurs Race

States Vie for New Chemical Factories—and Jobs—Powered by Lower Energy Costs

The boom in low-cost natural gas obtained from shale is driving investment in plants that use gas for fuel or as a raw material, setting off a race by states to attract such factories and the jobs they create.
Daymon Gardner for The Wall Street Journal

Ethylene cracker at Dow Chemical plant in Hahnville, La.

Shale-gas production is spurring construction of plants that make chemicals, plastics, fertilizer, steel and other products. A report issued earlier this month by PricewaterhouseCoopers LLC estimated that such investments could create a million U.S. manufacturing jobs over the next 15 years.

West Virginia is vying with Pennsylvania and Ohio to attract an ethylene plant that Royal Dutch Shell PLC said it plans to build in the Appalachian region to take advantage of the plentiful new gas supplies.

Shell is due to announce a site early in 2012. Ethylene, produced from ethane in natural gas, is used to make plastics and other materials that go into an array of products, including pipes, paint and antifreeze.

West Virginia's legislature, meeting in a special session, passed a bill this month setting rules for shale gas drilling and production. The legislation ensures "a reliable supply" of shale gas in West Virginia and should dispel regulatory uncertainty that could slow investment, Keith Burdette, the state's commerce secretary, said in an interview.

The U.S. chemical industry is the biggest potential winner from the shale boom—which involves a technique opposed by some environmentalists called hydraulic fracturing, or fracking, to obtain gas locked in rock formations—but other industries also see benefits.

Development of shale gas has been ramping up over the past two years and now accounts for more than one-third of all U.S. natural-gas production, according to IHS Global Insight, an economic think tank that earlier this month released a shale-gas study financed by energy-production companies.

"This shale gas development is a game-changer of huge proportions," said Dan DiMicco, chief executive officer of Nucor Corp., a steelmaker based in Charlotte, N.C. Nucor is building a $750 million plant to make iron from natural gas and iron-ore pellets near the Mississippi River in St. James Parish, La. Mr. DiMicco said the investment wouldn't have been possible without the lower costs that have come with shale gas.

The surge in production has pushed down U.S. natural-gas prices. After climbing to as high as about $15 per million British thermal units six years ago, near-term futures prices have fallen below $3.20 in recent days.

Because electric utilities often burn gas, that price drop has helped bring down average electricity costs.

However, long-run energy price and supply projections always are suspect. "Anything we think is going to be a 20-year trend has never turned out to be a 20-year trend," said Amy Myers Jaffe, a senior energy adviser at Rice University's Baker Institute.

There's another big caveat: shale-gas production volumes will depend on environmental-protection rules being set by state and federal regulators. Many environmentalists say that the chemicals pumped into the ground to unlock shale gas are a threat to water supplies, though energy companies say they take precautions to protect water sources.

Even so, Shell and other big companies are proceeding on the assumption that shale gas production is likely to keep growing. Jim Fitterling, an executive vice president at Dow Chemical Co., said the U.S. now has the lowest cost for natural gas outside of the Middle East. The cheap gas makes the U.S. "dramatically more competitive" as a place to produce petrochemicals used in plastics and a variety of other products. As a r esult, Dow plans to build two new chemical plants near the U.S. Gulf coast and upgrade or reactivate others as part of a planned investment of $4 billion over the next six years. Some of the chemicals will be exported to Latin America.

U.S. production of ethylene, valued at about $21 billion a year, is heavily concentrated in Louisiana and Texas, which have large supplies of conventional gas. But the new supplies of shale gas in the Appalachian region are luring some of the industry there.

For producers of nitrogen fertilizers, "the economics have changed radically," said Stephen R. Wilson, CEO of CF Industries Holdings Inc. of Deerfield, Ill. Natural gas is by far the biggest raw-material cost for making anhydrous ammonia, the base nitrogen fertilizer made by CF. The company, which has gone from a high-cost producer by world standards to a low-cost producer, plans to spend $1 billion to $1.5 billion over several years to boost capacity at some of its North American plants.

Even foreign manufacturers are joining in. Low U.S. electricity and natural gas costs were a factor in the decision by Brazil's Santana Textiles to build a $180 million denim plant now under construction in Edinburg, Texas. Santana initially considered putting the factory in Mexico but found that electricity costs would be 30% lower in Texas.

Write to James R. Hagerty at bob.hagerty@wsj.com