This will be a new feature. Every Friday, our resident financial editor, Mike, will provide readers with a quick rundown of news from the world of finance. Enjoy!
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Uncle Warren went shopping. This week, a Berkshire Hathaway subsidiary (MidAmerican Energy Holdings Company) purchased NV Energy for a 23% premium over the most recent trading price. NV Energy supplies energy to the state of Nevada, including both residential and corporate customers.
What’s most interesting about this deal is hinted at in a letter posted on NV Energy’s website:
We will be able to combine MidAmerican’s expertise in renewable energy with the vast renewable resources in Nevada as we consider and develop new, zero and low-carbon generation options.
Uncle Warren is no dummy. He knows that there is big money in renewable energy resources due to government subsidy. Therefore, making this acquisition at a premium makes sense, since Buffett’s company will likely be able to leverage its government connections and lobby for more “green energy” subsidies.
I doubt that NV Energy will be the “next Solyndra,” but one of the reasons why MidAmerican made this acquisition is the government subsidy. Yet another example of government interference in markets, right?
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Have you been paying attention to the Japanese stock market? The Nikkei, as it’s called, has been all over the place over the last week or so. After hitting a high of 15,627 on May 22, the Nikkei has pulled back to 13,802 as I write this post, a pullback of over 10%, which investment professional typically refer to as a “correction.” Going back to late 2012, the Nikkei has risen well over 50%. That’s quite a move.
What’s the reason for the spike? Many are crediting “Abenomics.” Japanese Prime Minister Shinzo Abe is the Japanese version of Ben Bernanke, meaning he’s all about inflating the Japanese Yen in order to stimulate inflation and cause a rise in asset prices. It appears to be working (for now), in terms of the stock market. However, there are (at least) two problems with “Abenomics.” First, fake growth through money printing has its limits and is no substitute for real growth. Second, inflation hurts the purchasing power of the currency. Indeed, the Yen has been devalued by well over 20% since Abe has been in office. Imagine a sudden jump of 20-30% for the costs of fuel, food, and other necessities. Would that hurt, or help you?
Finally, there are rumors that the public Japanese pension fund is considering moving out of bonds and into Japanese equities — as a result of the sharp move in the Nikkei over the last six months. Caveat: when the government makes an investment decision, it’s usually the sign of a big top (or bottom) in prices. The Alaskan Pension Fund bought gold in January, 1980 – right at the height of gold prices, which then became depressed for decades.
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Finally, U.S. bond prices have spiked this month, with the 10 year note rising from 1.675% to 2.12% in less than a month. In a normal market, rising bond rates are usually a sign of a healthy stock market and economy. The problem is that we’re not in a normal market. With the Federal Reserve purchasing long-dated bonds in its so-called “Quantitative Easing” program, it’s tough to know if the recent spike in bond prices is due to economic recovery, or people and institutional investors seeking higher yield.
The problem with interference by Quantitative Easing is two-fold. If the Fed were to shut down Quantitative Easing too soon, the economy could sputter and revert into a recession. If it continues too long, inflation could rear its ugly head.
What do I think? I think things are getting better, in spite of the massive debt and government interference into the markets. I also think that inflation is present, but not at an uncontrollable level yet (at least in terms of food and energy). I think that health care and education are the areas where inflation is particularly rampant. Interestingly, the government has most recently interfered in the health care market (through Obamacare) and education (through federalizing the student loan process). Is it really shocking that prices are rising at an astronomical rate in these areas?
When will we learn? Freer markets are better markets.