The Dow sold off 500 points this morning. Traders say the world is now focusing on a global recession. This is better than the crisis of confidence we have been suffering through for the last 30 days. The Europeans have guaranteed their banks, the Asian banks are generally in good shape and the Paulson plan should secure most big U.S. banks. Once the banks begin to trust each other, TED spreads will decline and normal credit should flow, though at a reduced level. That’s OK because the global recession will need to reduce capacity, so there will be less need for credit. There will be fewer malls, car dealerships, restaurants and other retail outlets. On a macro level, if we can get past the confidence crisis, then at least investors can evaluate companies on the fundamentals. If you can buy GE at 8 times earnings with almost a 6% yield, then that looks cheap to me, given that their portfolio of alternative energy (wind, solar, geothermal) investments is very forward looking. Obviously Warren Buffett thought so.
Where credit will really be needed will be for the huge ET investments that Pickens and others plan to build. As long as the market price signals are clear, so that solar and wind can compete, investment will flow to them. Silicon Valley is pouring millions into the early stage companies and the same virtuous cycle we saw in IT will apply to ET.