Tuesday, July 08, 2008

The World Has Changed -- G-8 Emissions Lower in 2050

A Regular Reader Wrote The Following:

People are slowly and surely being laid off. Many more are taking deep pay cuts. People are spending more on just the necessities. It seems even your vacation rental business is off. (Care to fill us in on how much)? Many are selling shares, mut funds, cashing in 401k's, and money put away for retirement.

All of this does not leave many left to push stock prices higher.

Due to recent earnings, or lack of them, and a serious downgrade of future outlook, and after buying at much higher prices, a major newsletter writer who specializes in value stocks, one with a very envious long term record, has just cut GM to a sell.

Caution is the word, when cash is scarce.

The reader who wrote this is an astute observer but he has fallen victim to the sirens of doom. It is a common disease. The AAII bull-bear index shows that this reader is not alone. This index is fully in the BUY, BUY, BUY zone with a majority of these "public" investors running scared. The first paragraph above is a description of what typically happens at the end of a bear market. Unemployment is the lagging indicator that typically jumps 1.2% just before the turn of a bear market to boom. Paycuts are part and parcel to the same thing. Spending more on necessities is the same as saying that core inflation has risen; again, just what happens at the end of a bear market. I retired from the vacation rental business two years ago but there is no doubt that people are cutting back on vacations, just as they did in 1981-1982, 1990-91 and 2001-2002, just before big market moves. The public has a 100% incorrect record in regard to their timing for mut funds, shares and 401k's. As far as money being available to drive stocks higher, there has never been so much money on the sidelines. US citizens hold more than 6 trillion dollars in liquid assets. As far as the track record of analysts who put sells on GM, that pitiful record has been well documented.

Today, the G-8 showed just how much the attitude of the world has changed. Had this meeting taken place two years ago, the call would have been to dramatically reduce carbon emissions in large steps, starting almost immediately. The price of fuel has changed attitudes to economy first, lower carbon emissions later.

The debate with and within Germany is telling. The previous German administration passed legislation to dismantle Germany's 17 nuclear power plants. The current administration is committed to going through with the dismantling. The plan in Germany has been to lead the world in wind, solar and other renewables. Part of the idea has been to develop new technology and to reap rewards from patent royalties. Germany operates the largest wind farm in the world. The sad thing for them is that the construction cost, including the vast transmission network turned out to be a lot more than projected. Nuclear and wind power are similar in that they are each capital intensive; the difference is that nuclear produces consistent power and wind produces sporadic power. At the G-8 meeting, Germany made the argument that nuclear should not be viewed as the only answer. This is correct but the most of the rest of the world has come down on the side of nuclear as the largest piece of the answer.


The price of oil has fallen sharply as the nuclear debate within Iran has picked up. The attitude of the world has changed. If nuclear energy is going to be a huge part of the new solution and if a consortium is going to be able to supply nuclear fuel for a very low price, then even oil rich nations had better get on board. Countries such as Saudi Arabia will no longer waste trillions of cubic feet of natural gas to produce electricity when they have nuclear power available. New pipelines will make these trillions of cubic feet of natural gas available for more valuable purposes. Iranian leaders are debating one another and rethinking their position; the price of oil has fallen more than $8 in two days.

You and I do not know all that the leaders know but we can learn from their responses. Some years ago, Italy closed down all of its nuclear plants. In recent times, the economy in Italy has been one of the weakest in Europe. A few weeks ago, Italian leaders came out in full support for the new nuclear "plan". A year ago, who would have predicted that Italy would be prepared to "go nuclear" or that the G-8 program for carbon emissions would have a 2050 goal. Of course, the fact that the scientific support for global warming is much weaker than is constantly reported or implied may have made some difference. Perhaps there are others in the world who realize that increased CO2 is like fertilizer to our food production.

Just a month or two ago, I wrote about China's plans to build 30 nuclear power plants; yesterday, I wrote about China's plans to build 100 Westinghouse plants by 2020. The speed of the move to nuclear is accelerating. A few months ago, most observers would have said it would be impossible to build 100 plants in China in only 12 years. The Westinghouse plant is basically a single design that will come in sizes ranging from 1000 to 1,700. It is believed that construction time will be cut to 2 years per plant! Steel companies that make the nuclear steel collars are expanding in at least 6 countries. The move to nuclear power is already being met with responses from power users. Renault has announced full production of a battery powered car; Sam Sung and others are building new battery plants, GM is rushing to produce an all electric, etc. How will your life change as the relative cost of electricity falls?

Do you see the paradigm shift? A few months ago, the world was quickly running out of energy; peak oil now and economic depression ahead. Today, the world is awakening to the fact that 10,000 years worth of nuclear fuel is available. Two months ago, Obama was proposing outlandish proposals to court MoveOn.org and today he is moving to the political center. Three weeks ago, McCain was talking about Cap and Trade Taxes on Energy and yesterday his 17 page economic platform included nuclear power and drilling but did not include a mention of Cap and Trade. A few months ago, major areas of Iraq were under the gun of Shiite Militias, today these areas are under control of the Iraqi government. The question today is how many of our troops will be coming home?

After agreements are signed by Lebanon and Syria, Israel will be surrounded by states that have signed peace agreements. Gaza and the west bank will both be surrounded by countries at peace with one another. Once Iran signs on, the remaining militants will be rag tag rebels in the mountains of Pakistan and Afghanistan. Now that US air power is being shifted from Iraq to Afghanistan, these rebels must go underground or die.

We have seen today's market action before but conditions are ripe for follow though. The third trip down, making a triple V bottom in financials, appears to be the last plunge. Assets that have been written down to cents on the dollar will prove to be worth many cents on the dollar.


In the face of a crashing European economy, the ECB just raised interest rates to fight inflation! How silly! This action will be reversed soon. Either the economic crunch or the fall in oil prices will show the ECB that inflation is indeed a late cycle phenomenon. High oil prices and high interest rates have worked in harmony to slow the economy; ironically, the ECB's action is so late that the decline in oil prices will be accompanied by a decline in interest rates. Theoretically, the ECB should lean against the wind but in this instance the ECB is riding the curve instead of shaping the curve.

Keep in mind, the 123 Agreement with Russia was submitted to congress on May 13. The congress has 90 days to reject by majority vote. The world has changed; the clock is ticking. If the congress wants to take credit for lowering oil prices, it needs to vote to drill, drill, drill, soon, soon, soon!