Thursday, July 03, 2008

Maximize Your Optimizim -- Wear the Shoes of John Adams

By 1754, 19 year old John Adams believed in America. He held the remarkable belief that 13 weak and defenseless British Colonies would become the greatest of empires. Twenty years later, he seconded the resolution of Richard Henry Lee to prepare for independence. He and 5 others served on the committee to write the Declaration of Independence. Thomas Jefferson, who would later deny Adams a second term as President, wrote most of the declaration but it was Adams who lead the debate. Adams was never a part of the appease England crowd, from early on he was prepared to risk life, limb and fortune in exchange for freedom. In 1775, Adams nominated George Washington to be the Commander and Chief of a new nation. A new nation that barely survived the winter of 1777.

Adams believed in government by the people and thus pushed the founders to adopt a system of separation of powers, of checks and balances. As the first Vice President and President of the Senate, he cast a record 29 tie breaking votes. As the second President, he appointed John Marshall to the Supreme Court. Marshall brought the judicial branch of government to an equal footing with the executive branch and the legislative branch. Our nation has survived 232 years because of the optimism worn by John Adams.

Warren Buffet and a number of other great investors have suggested that the time to be optimistic is when others are pessimistic. Now is that time! The children's riddle, How far can a bear go into the woods? (Half way because after he goes half way, he is on his way out.), should be restated today as, How far can a bear market go into the woods? The analogy seems to break down because the market continues to be slammed by an oil price that continues to bubble, however, there is no question that a clearing price has been reached.

At current fuel prices, truck drivers in India, Spain and the UK are parking their trucks in the middle of the roads. In American, the land of passenger trucks are parked in driveways, in garages and on new and used car lots. When oil traded at $25 per barrel, it made no sense to build coal to liquid plants that produced $45 diesel fuel. With oil at $140 per barrel, South Africa is building CTL plants as fast as they can. China has committed to spend $25 billion so that it can use some of its abundant coal resources as transportation fuel. It is no real surprise that China is willing to turn to coal but, did you know that GE just won a contract to build the first clean coal plant in Europe! GE has invented a new more efficient laser method for enriching uranium and the competition is on. Camco, the large Canadian uranium miner, just purchased a 24% stake in Global Laser Enrichment. Power companies are making substantial investments to secure the rights to uranium ore. The classic spider web supply and demand mismatch in commodities is partially due to US power companies deferring construction of coal plants while waiting for approval to build zero carbon emission nuclear plants.

The heavy investments being made now ($210 billion of OPEC projects over the next 5 years, $125 billion of Exxon projects and Shell Oil projects of more than $125 Billion and many billions more) will not contribute to the clearing of markets this year. However, investments made 3 to 7 years ago are coming on line now. Furthermore, the parking of trucks has an almost immediate effect.

The process and progress are not isolated. For example, South Koreans have cut back on miles driven more sharply than have Americans. South Korea has prepared for tighter sanctions on Iran by storing over 76 million barrels of oil as a strategic reserve. In addition, new production from Iraq is being shipped directly to storage tanks in South Korea for the benefit of other nations. With more than 4 billion barrels in strategic reserves, it has become an easy decision for nations to support the UN efforts to isolate Iran.

The threat of Iran to cut off supplies has also encouraged alternative investments. For example, the Joint Genome Institute plans to tackle 44 sequencing projects in 2009. The Lob Lolly Pine is proving to be an excellent biomass feedstock. It should be relatively easy to increase the yields just the way corn yields have been increased by more than 100 fold.

Your optimism should flow from the supply side, the demand side and from initiative after initiative. Joe Biden, a Senate Democrat Committee Chair, has already committed to pushing the US-India 123 Agreement through. Next week, the Prime Minister of India will travel to the G-8 meeting to meet with Bush. India already has over 100 billion dollars of commercial deals ready to move as soon as this deal is approved. It is my guess that the deal will be signed next week.

US manufacturers are contributing to lower energy consumption by dramatically lowering the power consumed by computers. Pat Gelsinger of Intel sees 10 nanometer chips by 2012. Last year, Intel began to mass produce 45 nanometer chips and next year Intel will begin mass production of 32 nanometer chips. Just another year later, Intel plans to mass produce 14 nanometer chips. These chips too small to use much electricity. These chips will allow many enhancements to cell/computer phones while providing extended battery life.

Deals, Deals, Deals

There have been several compromises in regard to the deal to permit US troops to stay in Iraq. This deal is getting close.

Negotiations between Syria and Israel have continued. The leaders will meet in France in 10 days.

Negotiations between Iran and the 5+1 have moved another few inches forward. It is amazing that the negotiations are down to the level of cultural exchange. The US is about to go from the perceived brink of war to having career diplomats stationed in country.

Colombian officials are calling for the release of all prisoners held by FARC. Extremist around the world are discovering their secrets have been compromised. The UK and the US are close to a new plan that will allow intelligence agencies more access while protecting the privacy of non-terrorist. Even Obama now supports US intelligence efforts.

The Senate has actually made a few compromises too. Our Senate rules need to be overhauled so that spending can be reigned in and gerrymandering needs to be reduced or eliminated so that partisanship is reduced but our constitution is strong and the checks and balances pushed by Adams are still a blessing.

Walt Williams Versus the Doomers

Walt Williams, a George Mason University Economist, just wrote a piece to debunk the Malthusian hype promoted by the extreme environmentalist crowd. It has become common for extremist to blame population density for poverty. Walt points out that the population of Hong Kong is 300 times as dense as the population of Zimbabwe. Where had you rather live? Walt says that if we were to put all of the worlds people in America that America would be much less densely populated than is Hong Kong and that he is confident that America would find the way to feed all of these people. Using my example and Walt's logic brings us to the question of where was the laser uranium refinement invention hidden? It is only by achieving weath that we can afford to employ people to bring the best to all of us.

It is perhaps Machiavellian to suggest that the world needed an energy crisis in the 70's to get nuclear energy established and in the 2000's to get nuclear energy re-established. The fact is that most people are now willing to go along with the development of nuclear power. Citizens of the world who did not study economics in school have gotten a few first hand lessons by witnessing the waste of ethanol, wind and solar subsidies. Now there are several clear paths to low cost energy. Some in congress will moan and groan about India gaining nuclear fuel and technology while they maintain their stock of nuclear bombs and some will moan and groan about trading nuclear technology with Russia, but, at the end of the day, these deals will pass.

Technology Does Not Go Backwards

The price of oil will ultimately go back to the marginal cost of production of the last barrel. Given time, $140 oil will be forced down to match $60 coal liquids and 4 cent kilowatts. However, the electricity used to cool computers certain computers will never be needed again. The knowledge gained by sequencing a Lob Loly pine tree will not be lost. Now that we know how to build a laser, we will not forget.

The great pessimism that covers the world like a thick fog is about to be vanquished. Please make sure you are fully invested when the market "space rocket" is launched.