Thursday, April 24, 2008


There are piles of easy money laying around. Stocks like PFE, BAC and WB have little down side and lots of long term upside. Ed Yardeni notes that US savings deposits are at the record high of over 4 Trillion Dollars! Money market funds now hold another 1.1 Trillion Dollars. Institutional Money Market Accounts hold another 2.2 Trillion Dollars. The sum of 6.3 Trillion is an all time record of money laying around. The yield on these deposits averages about 1.1%. The yield on the three stocks mentioned is better than 6%. WB and BAC just wrote down assets to the tune of billions of dollars and these assets will create extra large profits for these firms over then next several years. In the case of PFE, about a billion people can afford drugs today that could not afford them 10 years ago. The profits of the pharmaceutical companies over the next 20 years is going to be mind blowing.


With 13% of companies having reported earnings, the doomers have been proven wrong. Profits are running double digits ahead of expectations. Even the losses of the financial group have been substantially lower than expected.


Please send me an email. I really would like to know the reason for the gloom and doom. Is it all about the price of gasoline? Is it stock prices and gasoline? Is it the fear of a new president and congress?


A cause for short term optimism can be found in new oil production. In the Bakken Formation in Montana and North Dakota there were 250 producing wells in 2004. Today there are 900. Production has jumped from 15,000 barrels per day to 75,000. Only a tiny portion of this formation has been explored. Those who believe that Peak Oil is just around the corner discount this new production as being insufficient to make a real difference. The fact is that the price of oil is high enough to make sophisticated new fracturing techniques highly profitable. Horizontal wells are being drilled and hydraulic pressure is being used to make multiple fractures along the path of the well. There could be as much as 500 billion barrels of oil in this massive formation. Anyone that tells you he knows different is projecting his mind set.

Next month, the Saudis will start 300,000 barrels per day of new production at a new field. The Saudis have produced 109 Billion Barrels of oil which is about 1 of 7 of their discovered reserves. They own more that is yet to be discovered. Those who believe the world will soon fall into a great depression because oil is running out are badly mistaken.

There are any number of reasons to be optimistic for the long term. Have you heard about the plan to grown meat in vitro?


Scientist believe that stem cells can be used to grow beef, chicken, pork, etc. In my home town of Winston-Salem, human tissue is being grown in down town labs. The tissues are being used to make replacement bladders. Growing a bladder, liver or kidney in a lab has to be more complicated than growing a steak!

Some scientist believe production will start within 5 years. This sounds like scary science fiction, but the potential savings are incredible. It currently takes 7 or 8 pounds of feed to add a pound to a beef cow. Since only something like 60% of the beef cow is used for food products, the feed per pound of meat is over 13 pounds! Expensive whole grains are fed to beef cows for a few weeks immediately prior to slaughter. Can you understand why the price of meat has temporarily fallen? The farmers can not afford the grain.

A few tons of resources are used to make every one of those Trillions of McDonald's burgers. While the time forecasts might be overly optimistic, I believe the projected result. Just imagine how much more low cost food would be available if the efficiency of growing meat could be increased by several hundred percent!


At the Next Big Future website, there are a number of excellent articles about nuclear power (I think I saw the in vitro meat story there as well). The nuclear summary is that there are 15 nuclear plant applications pending in the USA. The Watts Bar Unit, under construction in Tennessee, is expected to produce electricity at a cost of 4.4 cents per kilowatt. The spread between the current cost of oil produced electricity and nuclear produced electricity is huge. As a result, it is projected that the USA will have 34 plants on the drawing boards by 2010. In the rest of the world, there are 35 reactors currently under construction with completion dates around 2012 or 2013. Ninety-one reactors are projected to be complete by 2016. I need to do a little home work, but I bet each of these nuclear reactors will serve as the substitute for millions of barrels of oil.


The history of the world shows that innovations occur when and only when there are people around who can afford to be the guinea pigs. Columbus would not have discovered America had he not found a patron. We would not have microwave ovens today had there not been people willing to pay $10,000 for the first to be built. Today, there are billions of people who can afford the latest and the greatest. Companies can afford to spend a 100 million making a new drug or other product, knowing that the rewards from a successful product will be huge.

The Next Big Future site has a few pictures of the new electric and hybrid-electric motor cycles. They make absolutely no common sense today but that $10,000 microwave was pretty silly too. The point is to show the extremes to which the private market will go to solve a problem. Billions have been spent to develop advanced fuel cells, batteries and capacitors. Week after week progress is announced. The situation is similar to the time when Thomas Edison tried 10,000 filaments for the electric light bulb, he knew the technology would work, he simply had to increase the efficiency. We know how to convert sunlight directly into electricity, 10's of thousands of "Edisons" are working on the problem.

I believe the internal combustion engine will be around for many years to come. I see no reason why the little 650-1000cc engines used in Japan should not become common place in US cities. It is silly to drive a 6,000 pound SUV back and forth to work, but eventually, we will not drive to work.


The piles of money lying around make it cheap for companies to innovate. The cost of capital is an important ingredient in the cost of research. Trillions of dollars will be spent on electronic devices for the purpose of using resources more efficiently. The gains being made in the electronic area are incredible. Intel is making a chip that operates on less than 10% of the electricity of prior chips! Piles and piles of money lying around is going to lead to innovation and to higher asset prices. The low cost of money is very bullish for everything from house prices to in vitro meat!