Dear All,

A few months back, I spoke eerily of the feeling that I felt like we were frogs sitting in a pot of slowly boiling water (for refreshers, the parable goes that if you put a frog in boiling water, it will instantly jump out. If you put it in cold water, and slowly boil it, it will sit there and boil to death because it cannot detect slow changes in its environment. This parable is used to describe how slow we typically tend to be in responding to changes in our environment). Well, I am starting to feel the water heat up!!!

As most of you know, California is undergoing an energy crisis brought on by the mismanagement of our electricity deregulation efforts. Today is the most serious day yet as both major utilities have filed for bankruptcy and the state is rushing to support power purchases with taxpayer monies. As the rolling blackouts increase, I started wondering how my life might be effected. I went home last night to find my clocks reset...no big deal. Then I hear about people not knowing how to drive through intersections with blacked-out traffic lights. Uh oh... Coming into the office, a dire warning was posted outside advising taking the stairs since at any moment you could get stuck during a rolling black-out. Yikes! And I wonder whether commuters can continue to rely on timely service from all the public trains?

Then it occurred to me, Greenspan must have been feeling the same uneasiness as I am just now feeling about the power crisis. Sure, he had all sorts of indicators telling him the economy was slowing down way too fast, and that he might be too late to stave off a recession. Even today, economic indicators warn of a dire collapse in the Philadelphia region (I am still trying to understand this one). But imagine, the world's 7th (or 8th?) largest economy, can't even keep the lights on. This state has not built a new power plant in over 10 years, and our population has soared something like 20% in that time. In the next 5 years, there will (should) be a scramble to build these much needed plants, but in a credit scarce environment, with sickly stock markets, companies like Calpine would struggle to raise the more than $15 BILLION it needs to expand its plants. In a poor environment, how do you refinance over $12 BILLION owed by our utilities to wholesale energy providers (this was accumulated in less than a year mind you!)? How does a state raise the BILLIONS in additional bond monies needed to help save the state to limp along until new capacity can be built? Well, thank you Mr. Greenspan, we need to lower the cost of borrowing, and lower it FAST!!!

To me, this was the frog that was boiling last year that I did not even know to pay attention to. It is the boiling frog that has everyone leaping like crazy over here in Cali now. Again, we hope it is not too late to avert disaster. Again, what worries me even more that too many pundits are pooh-poohing our problems as an isolated case. Sure, the utilities in Minnesota may not go under because of our problems, but there can be serious economic consequence if California's economy tanks because of the lack of reliable energy. Some of us have seen and experienced the problems Third World countries face when their power infrastructure fails to respond reliably. Imagine what happens in a high-tech society that is geared to ASSUME the reliable supply of power?!?! Already, companies like Intel must rethink their plans to build significant new facilities in this state.

Again, there is some hope we can avert the worst. But, the Fed remains in a very tight spot. So far, this month's news shows that there are plenty of sectors in the economy that are bucking the recessionary trends we'd expect to see by now. If they are not just the last hold-outs in a tanking economy, a strong easing of rates by the Fed can stoke the inflation that they have long struggled to keep at bay. This is the "rock and a hard place" I spoke about a few months ago as well. This includes pockets of strong retail performance, continued robustness in the sale of homes, LOW unemployment levels that refuse to budge, increasing costs for energy (esp. natural gas), inflation that is higher than in the last few years, and, of course, a stock market that is picking up steam fast (for now anyway). Greenspan is counting on the US to continue its record productivity gains of the last decade to keep inflation cool while employment still remains high. Just how productive can 30 million Californians be when the power keeps going out?

Well, speaking of being unproductive, time for me to get back to work while the power is still on!

Take care, and be SAFE if you are driving the streets of Cali!