Since it has been demonstrated that markets are no longer free in the sense that the government will intervene to prop up essential services—an almost inevitable consequence of the free market leading to effective monopolies, which is a problem since a monopoly is not exactly free(*)—the question for those of us who need to invest for the next 60 years or so becomes: Which sectors are very consolidated and so essential that the government will prop them up.

(*) This suggests that a free market model is not optimal for a sustainable economy but only for a growth economy.

I think it was Jim Rogers who suggested that these sectors would be: banking, communications, and energy.

Banking is important because we have become a society of individuals who can not do very much for ourselves. We rely on other people even for simple things like hair cutting, cooking dinner, and raising children. Since this requires an exchange, the system of exchange, that is banking, must survive. It has been amply demonstrated that the government is willing to go to great lengths to bail out “too big to fail” banks. Previously much money has been made from a transfer of money from a country in a decade(s) long recession (Japan) and lending out to consumers in another country (US). It is almost impossible to have a consumer based economy (it does not produce anything it does not immediately destroy or turn into useless doodads) and so this economy fails. This means the end of the transfer and a similar decade(s) long recession. However, banks can still make money on service fees even while giving up the carry trade and so this is what they will do. I am looking forward to them raising their dividends again.

We are rich mostly because we spend a lot of energy. This has been referred to “our way of life” and again it has been shown that the government is willing to start invade other countries to preserve the integrity of the energy markets. Now it is well-known occupying another country while extracting resources or taxes generates resentment and leads to resistance which is highly asymmetric in terms of costs. I thus see this as a short term solution at best. Eventually energy will go to the places where it is underground rather than to those who have the money. In other words, energy will become less globalized. Similarly, it has been shown that energy as a commodity does not exhibit the expected stiffness—at least not at our level of use. Since production is peaking this means that prices will become highly volatile (you already saw that once, prepare to see it again). If you can stand the volatility, prices should still go up on average as we become poorer in “our way of life”.

The government certainly have their own communication systems, but the overall economy is so leveraged in time and anti-resilience (outsourcing) that efficient communication is necessary to keep the public going (and if they public isn’t “going” the government will soon find itself voted out of office). Communication is about as essential as banking is to business. It has counterparty risk in the sense of transferring calls between carriers. Essentially communication is very similar to banking except it carries different information. Fortunately, communication is not as subject to the hocus pocus of leverage.

I own WFC, GE, CVX, WIN, WWVY, T, and V. These are not specific recommendations. In particular, except for WWVY and GE, I paid less than what they are trading at now.

Originally posted 2010-01-12 11:14:14.