Peak-Oil and Mad Max

Are we heading for a massive global energy crisis?  Are we running out of oil?  Will energy prices skyrocket? Will lines at the gas station be 5-miles long again?  Will we need to start drilling into places like ANWR (Arctic National Wildlife Refuge) and coastal waters just to sustain our way of life?

Sadly, the answer to all of these questions is - Possibly.

There are those who, citing a Peak-Oil causation, would have you believe that these scenarios are not only possible, but a near certainty.  I have read numerous entertaining peices espousing the post-apocolyptic Mad-Max world that will emerge in the Post-Peak future.  In these episodes, oil dries up quickly, government resources get directed towards military conquests in order to secure the scarce sources left, riots break out across the globe as the line between the haves and have-nots gets extrapolated into a literal class warfare, and finally we all start living in a survival mode of the tribal hunter-gatherer variety.  Very stark indeed.

However, the good news is that $10,000/barrell oil (which would translate into paying roughly $420/gallon at the pump) is not a foregone conclusion.  The first important thing to understand is what scientists and geologists mean when they talk about Peak-Oil, and secondly, what are the logical consequences of this scenario.

First, Peak-Oil is not a theory!  Its not a myth either, but rather it is simply the reality that we have a finite amount of oil locked inside the Earth and we cannot continue to increase our rate of extraction indefinitely.  Peak-Oil states that the level of production, or the number of barrels we can suck out of Mother Earth will plateau and then start to meaningfully decline.  The only real argument surrounding Peak-Oil is in the timing.  Evidence suggests this may have already started.  Take a look at the chart below from the Department of Energy, courtesy of a website called Planetthoughts.org:

Many people say that this chart shows the production of oil already hitting a peak and thereby it will not be long before this starts heading downward.  They say that Peak-Oil is happening right now.  The less dramatic scientific types say this will actually occur sometime mid 2020's while others say not until 2035.  For more in-depth price and production information, please check out the resources from the Sovestor website.

Whether Peak-Oil occurs now or in 20 years, what would be the implications of such an event?  Well Econ 101 taught us that as demand for a good increases while the supply simultaneously decreases, the price of said good will increase markedly.  We have all seen the results of sudden oil price shocks.  Those around driving in the mid 70's remember the long lines at the gas station.  This same event occured immediately following 9-11.  More recently as the price of oil rose to $148 in 2008 we all thought it was the beginning of the end.  Tourism slowed, sales of trucks and large cars came to a screeching halt, and people went longer in between trips to the grocery store.  Unfortunately, if we see production of oil slow in the very near future we are all in for a similar type of scenario.  Remember to re-up your Costco memberships!

My hope is that the onset of Peak-Oil will mark a watershed event in the course of human history, where we finally "end our addiction to foreign oil"!  Like a meth-head in rehab, you cant consume what you cant find.  This will give us the chance for that "moon-shot" drive to find sustainable power sources which can replace fossil fuels.  Right now there are numerous promising research projects going on but unfortunately most are woefully underfunded.  Companies like Exxon are spending hundreds of millions on alternative energy research right now, but when the price of oil sky-rockets, so will the demand for a lower cost replacement.  When that occurs you will see several billions being put into alternative energy research, and then finally, maybe, a viable long-term solution.

Thats why its my opinion that when Peak-Oil arrives, if it hasn't already, there may be a lot of serious stresses on society, however, like that recovering Meth-Head going through withdrawl pains, thats what it takes to heal yourself from addiction.  In the long run, society will be better off by getting cut off from the black gold addiction.  My vision of the future is much less Mad-Max and much more Back to the Future II.  I'm still waiting for the release of the hover boards!

The Mass of Markets

I am not here to pick any fights this week. Nor to tell my readers how all the more famous investors and economists of the world are getting it wrong (they must be doing something right since they are famous, and I am not quite so much).  Instead I want to focus on some interesting statistics about markets and economies that can help frame a perspective about markets. The size of different markets, along with the size of different market participants, is something that is little talked about in the main stream investment mediums. This is what I am calling the Mass of Markets, and in some future post may be so brave as to try and detail these relationships; but first, a primer.
It is widely known that the U.S. GDP, overall measure of economic activity, weighs in at about $14.5 Trillion.



Below is a chart from the International Monetary Fund IMF on how this compares to rest of the world.

For 2009

As you can see, the whole of the European Union, added together, is a larger economic market than the United States by a couple Trillion dollars. Also note that in 2010, it is widely accepted that China has surpassed Japan as the second largest national economy in the world.

It is also fairly well known that we have a debt problem here in the United States and currently have a National Debt that comes it at around $12 Trillion. This is akin to a household having a debt load of roughly 80% of its annual income. We also find that we run a budget deficit of 10% of GDP. This means that our debt load is growing right now at about $1.5 Trillion per year. 

The question is; when does this burden break our backs? Well, by comparison Japan has a Debt load of roughly 180% of its GDP and can still find willing lenders in the open markets. While we do not want to emulate Japan, (remember some of my last posts on deflation talks), this does show that an economy may not fall apart under this kind an even greater debt load. Someone should poll the Japanese and find out how their standard of living is. From what I have read, the citizens of Japan are not rioting in the streets.  In fact, they are still the biggest purchasers of their governments debt.  Japanese sentiment is a topic for another day.

Now look at this. The total mortgage debt load in the U.S. weighs it at $14.9 Trillion as of the last quarter of '08 (according to the federal reserve). This means that there are more households owing more money on their homes than all the goods and services sold in the United States (sounds incredible until you stop to think about the number of households in the country). Of this nearly $15 Trillion, $9.2 Trillion has been pooled, sliced and sold off on secondary markets. This is what is called securitization; the mortgage bonds that were the ignition of our global financial crisis.

The important thing to remember about this is that back in 2007 and 2008, when some of the pools that contained what I call NINJA (No Income No Job or Assets) loans, and those people began having trouble paying back those loans, we experienced what Mohammad El-Erian, CEO of PIMCO referred to in his book, When Markets Collide, as a Market for Lemons. A Market for Lemons is an economic theory that suggests if you have one or two terribly problematic cars on a used car lot, the price of the good cars can also be brought down by the fear the customer has of getting sold a "lemon". This is exactly what occurred in the $9 Trillion dollar market for securitized mortgage loans. People were afraid of getting sold junk and the whole market seemed suspect.

Some people said that the problem would be contained in housing. Well its hard to see of a $9 Trillion dollar market not having an impact on the greater economy. For comparison purposes here are some other market figures.

Market Cap of the Wilshire 5000 (actually over 6000 companies in the U.S.) - $12.7 Trillion

The biggest 500 of those, the S&P 500 - $10.2 Trillion

Total U.S. Bond market in 2008 weighed in at around $33 Trillion. We can add in another $5 Trillion or so of additional government debt and money market instruments that have been added in the last two years.

The largest U.S. corporation in terms of market capitalization is Exxon Mobil (XOM) at $310 Billion.  In second place is Apple (AAPL) at $252 Billion.

The value of all the gold ever mined in the world stands right now at about $6.3 Trillion based on a price of around $1250 per troy ounce.  Five years ago that was a less than a $2 Trillion market.

What does all this mean?  It means that the more massive a market, the bigger its gravitational pull on other markets.  For instance, if Apple gets some bad news and Ipads dont sell as well as they expected, the whole market index can feel a hit.  However, a small bio-tech company can go out of business without so much as a headline.

This same relationship plays out in bigger markets.  Many big investors will point out the fact that, while the stock market is a lot sexier, the Bond market really calls the shots in the economy.  This is, in part, because as the biggest and most liquid market in the world, it has a deeper and more far reaching effect on people.  Now we can talk all day about the structural differences in the different markets, but the point remains that mass should not be over looked.

Investors would do well to remember Newton when venturing into the global financial market arena.

Austerity v. Stimulus: Why Neither Side is Right

We have an unfortunate economic situation on our hands that, while I do believe the worst has passed, is nowhere near being solved.  With a near 10% unemployment rate, that means we have approximately 15 million people in this country who are unable to find work.  You can see the stats as they are compiled by the Bureau of Labor Statistics by clicking this link.  We also have a rising debt load that threatens the prosperity of future generations.  While I am not normally someone who likes to get into policy debates, it seems that every economist, professor, investor, plumber, school teacher, and song writer, has an opinion on how the government should address this issue, and therefore I feel compelled to jump into the fray....in a sense.  What I would like to do is briefly sum up both sides of this debate, and then state why I feel its a fools argument to begin with.

Austerians:  The Economic Spartans

Austerians are those that believe the debt level of the United States is currently unsustainable.  The government borrows too much money and will very soon find itself in a position where willing lenders will be hard to come by.  Confidence will erode, bond prices will plummet as yields skyrocket, and economic armegeddon ensues.  This is the dramatic crash into a deflationary spiral which I wrote about a few weeks back, in the Lost Decade article.

The answer to this problem is very clear to the Austerians.  Slash spending immediately.  Take a hatchet to the budget and reduce the deficit through painful but needed cuts.  They believe we need to ratchet back our standards of living and live a more "Spartan" lifestyle.  This is really the only responsible thing to do after all.  Currently the U.S. is spending about 10% more than it earns in tax revenue.  Obviously if you spend more than you make you will max out the credit cards, home equity lines, and bank loans eventually, and then what do you do?

Stimulants: The Economic Crack Dealers

The Stimulants (for lack of a better term) believe that the only way to get people back to work is through stimulative actions on the part of the government.  This means more spending.  This means increasing an already high deficit in the budget and thereby increasing the U.S.'s overall debt load.  Their rationale for this is that the economy will continue to falter without some sort of meaningful job creation and job creation can only come when we have money moving through the system.  This means banks finally agreeing to lend money to small and mid-sized business so that they can expand their operations, and it means consumers not worried about losing their jobs through employers having to enact cost cutting measures.

Without this additional spending from the government, the fear is that prospects for growth in the United States will continue to decline.  Investors in the equity markets will continue to pull their money out of the U.S. stock market in search of higher potential growth prospects elsewhere.  Even though it is acknowledged that loose credit standards and high degrees of leverage is what got us into this mess, the thought is that cutting off an addict too abruptly can have disastrous effects.  The Stimulants (pun somewhat intentional) believe it is better to ween ourselves off of the borrowing addiction.

Who is on what side of the aisle?

For a great summary of this debate from some of the more respected residents of each camp, check out this article from the Financial Times.  I encourage everyone to check this out and read more in depth to each participants' view points.  These are all very intelligent and successful players in the global economic scene with widely varying viewpoints.

Conclusion:  The Winner is.....Neither!

The only true winners in this debate are those that argue against this argument.  The problem is that the issue is far from black and white.  The participants in this debate are arguing past one another, and neither side is nailing down the issue in that we need to find a way to do BOTH!  I have been surprised at some of the people who have emerged with this viewpoint.  Primarily Larry Summers, the director of President Obama's Economic Council.  I suppose it stands to reason that someone who is actually in the game, making decisions, can see the issue for what it is, instead of all these professors and economists playing armchair quarterback!

Can we find a way to stimulate the economy and balance the budget at the same time?  This is the challenge faced by the administration.  The solution will involve implementing smart policies that get the most "Bang for the Buck" in creating jobs, while at the same time eliminating wasteful spending.  We need to be selectively Stimulative and Austere.  Unfortunately, I'm not sure we can execute on this task.  Congress, right now, is more polarized than at any point in our history based on voting records of the last couple years.  Combine this with the fact that everyone in the government and the private sector alike will have different opinions on what spending programs can and should be eliminated, and its hard to see how we get this accomplished.
The bottom line is that temporary spending programs to get people back to work accompanied by a legitimate plan to get the budget balanced over time, is the only way to sustain economic growth while retaining the confidence of the bond market.  Again, my ties are with the entrepreneurs of this country and the small and mid-sized business owners.  This is the innovative soul of American business that can lead us out this malaise.

Let me hear your thoughts on the matter.

Keith

Why China Will Not Surpass the United States as the Next Global Superpower

Many global market observers look to China as the next great bastion of structural economic growth.  With one-fifth of the world's population and an emerging consumer class, many believe that China's rise to economic dominance is inevitable.  While China is currently, and may remain for some time, an engine of global economic growth, there are some fundamental weaknesses underneath the headlines that casual investors either miss or ignore, which could prove detrimental in the years to come.  Furthermore, these cracks in the foundation will, in my humble opinion, limit China's capacity to continue building up their economic house. 

The arguments for Chinese dominance are many.  And most of these arguments are compelling and factual.  The emergence of this economy is truly a structural evolution.  It has been a thirty year process, post Mao, that has included a gradual opening of markets to foreigners along with a slowly eroding anti-capitalist sentiment. 

Here are some main points of the China dominance supporters:

The Chinese Consumer - They are getting wealthier and want more stuff.  A recent study found that there are now more Chinese connected to the Internet than the entire population of the United States.  With this connection to global community (as amazingly censored as it is by the Chinese Government) there comes a realization of status in the world, along with a desire and a vehicle to fulfill these new wants.  The Chinese urban population is growing exponentially and infrastructure build out of urban and suburban centers are growing accordingly.

The Chinese Surplus and Currency Reserve - China has amassed the world's largest currency reserve.  They are our single largest creditor and have a massive arsenal with which to stoke the economic engine should it show any signs of sputtering.  They have also experienced double digit economic growth while running trade surpluses around 10% of GDP per year.  Their sovereign wealth funds total over $1 Trillion in assets and could buy over 10% of the entire US stock market.

Now the problems that lurk beneath these seemingly strong endorsements:

Class Struggles - China's economy is currently still driven by exports...that's what causes the large trade surpluses.  These exports are manufactured by cheap Chinese labor.  This labor is so cheap that many American companies have elected to manufacture goods in China and pay to ship them across the Ocean back to the US for sale in our own domestic stores.  In fact, I read somewhere that Chinese workers earn about one-third the pay that Mexican workers earn and we all know how well they must be paid in Mexico if their workers are risking lives and freedom to come to the US to earn below our minimum wage!  This cheap labor cannot and will not continue indefinitely.  We can see this in recent news stories about the surge in strikes at factories across China, like this one from the BBC.  And even sadder stories, like this one from CNN, of the various Foxconn workers who committed suicide this year.  These add up to a working class that demand better pay and better conditions.  This could prove a difficult transition for a country that depends on being the cost leader for manufacturing.

Bubbles - A bubble in real estate has formed...but its not the worst bubble China has to deal with.  The biggest problem for China is the bubble in U.S. treasuries.  While its no question that the real estate market in China has turned into mass speculation in rapid fashion and could pop at any time, this problem could in theory be contained (its mostly in the luxury segment of the industry) and/or absorbed by government intervention.  The truly big problem for China is its holdings in U.S. treasuries.

How many people have heard some version of the theory that China plans to dump huge portions of their US Treasury holdings thereby causing a run on the Federal Reserve?  This version of the story is backwards.  What happens when China starts to sell some of their reserves?  The value of their remaining holdings drop in value and you find a limited number of buyers.  Your strength becomes weakness as these holdings are only as valuable as the country which issued them.  This massive reserve, which was established to keep the Chinese currency pegged to the dollar, has grown into a $2.4 Trillion anchor.

Now China has tried to address this issue in some ways.  The creation of China Investment Corp. (CIC, a sovereign wealth fund run by the impressive Lou Jiwei) has helped China diversify some of its holdings.  The problem remains however that until they decide to revalue their currency they need to continue to buy US treasuries, and once they stop or even slow the rate of purchases their currency will appreciate markedly, and the competitive advantage that China has enjoyed over the last 30 years will all but disappear.

The conclusion

I don't think China will blow up and turn into economic disaster, but I will say that the only other two times in history that a country ran up surpluses of this magnitude was the United States in the 1920's and Japan in the 1980's.  As I said earlier, cracks in a foundation may not ever cause a collapse, but they can severely limit the amount of building you can safely do on top of it....unfortunately I'm not sure China has figured out fully how to stop.

To sum this whole thing up, (and maybe get some sleep tonight), I'll end with a fundamental truth of markets. Excessive lending can be just as dangerous, and perhaps even more so, than excessive borrowing; even if this lending is out to the most credit worthy of clients (US creditworthiness is a debate for another day).  It is with that thought that I am in full confidence that China cannot surpass the United States in terms of economic power...because Chinese Value is only as good as the American currency its printed on. 

If not Disaster, then What? The Inflation/Deflation Debate Summed Up

I was recently asked about my thoughts on how the economy may look over the short to intermediate term.  More specifically, on whether Inflation or Deflation would be the more likely scenario.  In my last post I mentioned that long-term I did not see either of those scenarios playing out in truly damaging extremes. 

So if we are not heading for economic disaster in the coming years, then what will it look like?  Lets also take this to its logical conclusion and ask, "How then can I make money in the next couple years?"  Now we are talking!

First of all I can best sum up the inflation/deflation debate by saying that deflation is by far the more worrying concern for our economy as a whole.  If prices start going down and consumers decide to hold on to their cash for longer and longer periods of time, we will see unemployment shoot up over 20% as economic activity in this country grinds to a halt.  A deflationary spiral is like a black hole in that once you cross the event horizon, the gravitational pull is too strong and you get sucked in.  With a Federal Reserve and Treasury that are keenly aware of the ramifications of crossing the deflationary event horizon, there will be massive action to try and artificially inflate the dollar before we fall into that trap.  I think it is safe to rule out deflation as an economic prospect for the next couple years.

That all being said, there are deflationary pressures.  Again, I mentioned in my last post that wages are the biggest contributing factor to inflation.  Well, I dont hear too many stories of people getting huge raises these days.  This is a big deflationary pressure on prices as people are making less money and getting more and more cost conscious.  The price increases (or lack of decreases at least) that we have seen and will continue to see, are greatly just a factor of government intervention in the form of extended unemployment benefits and stimulus spending.

So as unexciting as it is to hear, I believe we will continue in this malaise of modest-if-existing-at-all rises in the price level.  The government does have the ability, the firepower, and the motivation to keep this economy from entering a deflationary spiral, and as long as the market has confidence in that claim, we will be able to eke out some modest levels of economic activity. 

However the inflation will not shoot up anytime in the near future, at least not until we get some very meaningful reduction in the unemployment rate.  This could take another two to three years, as we are currently only generating enough jobs to almost account for the increase in the labor force (college and high school grads, returning mothers, etc...)  This does not help us pick away at the over 8 million unemployed people in the country.  This could be greatly helped by the current administration if they were able to get some meaningful job creating legislation passed to grease the skids, (tax breaks for small and mid-size companies that hire new people...etc)

So with a very boring slow growth economy for the next few years, or a "New Normal" as Mohammed El-Erian of PIMCO calls it, how do we make any money?  Well we could hold cash at the bank and earn 0.02% on it.  We could try and lock it up for longer term in search of a better yield and maybe get a one-year CD for .85%.  We could buy a 10 year treasury Note for 2.59%.  The good news is with this is that with Inflation being nothing right now we can chalk these figures up as pretty close to Real return (nominal minus rate of inflation), but there has to be some better investments out there.

Well in this sort of scenario we can actually take advantage of the fear mongers and beat them at their own game.  By shorting stocks and bonds and publicly espousing doom and carnage in the business press, the Dr. Dooms of the world have actually created a pretty attractive risk yield in certatin markets, which more rational investors can take advantage of and get paid on.  One area that is particularly lambasted and getting some signs of market pricing fear are muni-bonds.  Right now a municipal bond fund will pay a much better yield than any laddered CD or Money Market, and I believe that fears of defaults coming from major municipalities is very overdone.  That being said, there are some areas I may want to avoid, like Michigan and Arizona where there are some deeper strucural problems that were unveiled by this last downturn.

I am also a fan of the "bet on blue chips" right now.  With our largest corporations holding incredibly large cash balances, they are not out in the capital markets trying to invest in growth, so they are more and more electing to just pay their shareholders cash.  The dividend yields on some of these companies are well over 3 and 4%.  That doesnt mean that there wont be a significant amount of principal volatility, where the value of your shares go up and down violently.  There is still a very fragile market psyche and a lot of headline risk that can move market prices.  But if you invest in solid companies that are paying you cash consistently and reliably then its called "getting paid to wait" for this dyslexic market to figure itself out.

BY FAR, the best investment that you can make right now is education and training on yourself.  In an increasingly competitive job market, where there is not a lot of extra room on many payrolls it is imperitive for people to continually enhance their resumes and bios.  Even those with jobs right now have to realize that there are a dozen people who would line up to take that job from you for less money.  And increasingly these people standing in line are educated and sharp.  Therefore, take some evening classes, buy a book, get some professional licenses, or numerous other options.  While you might make a 3% yield on some great dividend paying stock, you could also get a 20% pay increase with certain credible skill sets added on to your resume (or at least hopefully avoid a 100% pay decrease).

Please let me know your thoughts on questions.  It is getting late and some of this stuff may not translate as well from my brain to the screen as I would hope.

Is this the start of a Lost Decade, or a prelude to post WWI Germany

The hottest topic on financial news networks these days is the question "To which brand of economic collapse do you subscribe?" This is where academic economists and market pundits come on TV to point to similarities to the United States' current environment to that of various other economic horror stories through-out history. And while this type of radical apocalyptic story-telling can make great television, it does not jive with a logical reality.

I will not waste the time of my tiny "but ultra-cool" readership by going into a diatribe about academics vs. markets, or try to give a history lesson. I do want to try and ease any fear invoked by these sensationalists on TV by saying DONT PANIC, because we are not headed for either deflationary Lost Decade status of zero growth and sky rocketing debt loads, nor are we heading for days where a loaf of bread will cost $3.2 Billion.

LOST DECADE:
Starting in 1989 Japans rapid growth of the previous 20 years ground to a halt. Interest rates were dropped to zero, Banks were nationalized, the stock market over the next ten years fell 82%. So what caused Japan to fall into this trap? Their growth was fueled by debt and when that growth ran out, the engine stalled. Once the economic fire goes out, its very hard to start up again. Without prospects for future growth, citizens hide cash in their matresses knowing that everyday they wait to buy, they can buy more. At that point it becomes a self-fulfilling prophecy.

First of all the coup-de-grace that no one talks about is that Japan has zero population growth and with that an aging population that is getting less productive as time goes on. The US however is still making babies and babies cost a lot of money! This in turn creates a natural source for economic activity. More people equals more demand for food, energy, diapers, and hand sanitizer, and thus more people put to work to serve that demand.

Also, while we do have high levels of debt in the US, we still have room to raise it higher. In other words the treasury still has some dry tinder to throw in the furnance in order to stoke a self-sustaining blaze that will get the economic engine turning. The other problem comes when too much dry powder is thrown in and the blaze becomes uncontrollable. This brings us to the next doomsday scenario....

POST WWI GERMANY:
At the height of the crisis in 1923 the price of a kilo of butter at the general store rose over the course of a few months from $26,000 Marks to $6,000,000,000,000 Marks!! Yeah thats trillion. Thats more than all the German Marks that were in circualtion just ten years prior!

Now believe me, I can understand the arguments that this country could experience higher inflation down the road. But to suggest we could see anything similar to the images of people taking wheel barrows of money through the streets to buy eggs is non-sense. The people who own the 1-800-buygoldnow companies may promote this kind of scenario but even on a more muted basis, hyper-inflation of that kind is not on this country's horizon.

There are two quick reasons why we wont experience hyper-inflation. First, the dollar is still considered the reserve currency of the world. This means that there is an international demand to hold dollars. Inflation is described as too many dollars chasing too few goods, but when you have people chasing those dollars then the risk that there are too many out there is significantly lowered. Second, the biggest component of inflation is wage growth. With unemployment at 9.5%, there are over 8 million jobs that need to be created before we have to worry about labor demand rising meaningfully.

In conclusion lets consider a quote from uber-philospher Bertrand Russell
"The whole problem with the world is that fools and fanatics are so certain of themselves, while wiser people are so full of doubt" The next time you see a table pounding, doom-sayer on television, my advice is to be skeptical.

Why Dont We See Solar Powered Cars?

There are a lot of very uneducated people in the media who do an extreme disservice to the country when they talk about the evils of oil and gas companies in regards to alternative clean energy. For example I heard a political talk radio host say "There is no reason, other than corporate greed, that we shouldn't all be driving solar powered cars by now". This is a completely asinine comment for someone to make.

So, Why don't we see solar-powered cars?

Quite simply, the most advanced solar panels can generate the equivalent of one horsepower of energy per square yard. That means in order to capture enough energy to power my old tin can Kia Rio at 110 horsepower would require 110 square yards of solar panels! In fact a leading high-tech solar company was able to add solar panels to the new Prius and generate 240 watts in full sunlight. This was the equivalent of adding 9.5 miles of range to the electric motor on a bright summer day, and adds a total of .3212 horsepower. While not nothing, this does not appear to be something that will be able to power the car independent of other sources.

Don't get me wrong, I think solar and wind energy are incredibly important, and I would like to see this country and the world, reach the loftiest-while-still-realistic forecast of 20% of total energy consumption. But like Bill Gates said, solar and wind power are not credible sources of power generation, its more like energy farming. What he is saying is that its not feasible to cover the entire planet with solar panels and wind turbines, which is what it would take to reach energy demand. Therefore we need another solution.

What about Algae? Unfortunately there we also have a problem with economics and scale. A small clean energy company says they found a way to generate bio-fuels from algae at around the equivalent of $80 to $90 dollars a barrell. With oil trading at $83 or so at the time of this writing that seems pretty competitive, however, in order to get a 10% share of the gas use in the US they would need to be able to apply that 80-90 dollars of cost on an algae pond the size of New Jersey! (insert own NJ joke here) While even a 2% share would be a meaningful cut into demand, the technology has not been proven on a larger scale. A well-known Venture Capitalist out in San Jose has said that he has been approached by many different algae companies and that he hasn't seen one viable business model involved with the technology. We may still have a ways to go here.

Ethanol has been known to be corrosive on engines and is not viable without subsidy. Hydrogen has finally come to terms with the physics of converting hydrogen gas into a more stable fuel ready substance. You expend more energy in the process than it eventually creates. And unfortunately we have not been able to figure out a way to contain a fusion reactor and the millions of degrees it generates just yet.

The most promising alternative clean energy power generator I have seen is the slow-burn nuclear reactor, which would use current stores of nuclear waste and burn it like a candle. The most optimistic forecast on this technology being developed and rolled out is 20 years.

So the next time some media talking head goes on about "greedy board members blocking alternative energy progress" lets remember that capitalism is what has made our current progress in clean energy possible. Intelligent and hard working entrepreneurs are getting closer and closer to finding viable sources of energy. Investment tips in this arena would be to find a small cap clean energy company with a promising new technology that will eventually get bought out by one of the big boys to reach scale. If you find one, let me know. I'm still looking.

Keith

Why Gold is a Terrible Investment (Unless You Give It to a Lady Friend)

Stop buying gold people. Gold is not the world's hard currency. It is not a permanent store of value, in fact it is one of the most speculative, and crooked markets out there.

The only true world currencies are fossil fuels, fresh water, and trust. Now when I say trust I don't mean it in an ABC family special sort of way. I mean it in a credit rating type of way. For instance, many people do not Trust that Greece will give them back the money they borrow from them, therefore, their trust currency is worth very little and creditors ask for arms, legs and other things to compensate them for the risk of not getting their money back. In places like Argentina a few years ago people did not Trust that the paper money they held would be honored by their grocer and therefore it became worth very little (a la hyper-inflation).

We know that people will need to consume energy, and therefore, there will always be a market for fossil fuels (sorry to people who think we can live in a world of solar powered cars). And there is a growing and alarming limit on the amounts of accessible and potable (read, drinkable) water in the world. Investing in companies that provide this may prove a wise move in the long term...just sayin.

Which brings us back to gold. Gold is used for earrings, necklaces, rings, coins, small amounts in fighter plane windshields, and the big bars you would find in Fort Knox...nothing else. (I am sure that if more people read this I could get challenged on this point by numerous other uses, but they don't so I'm not worried) Other than that it is something pretty that only became popular as a currency because of its malleability. They could make it into bars and coins easier than things like iron and bronze. (That's why you see pirates bite the coins they barter with, to see it leaves a mark.)

Bottom line, gold is a terrible investment. 1) There is no way to determine a fair-value on something that has no practical use. 2) At $1200 an ounce, however, I am almost ready to raid my wife's jewelry box (if the people buying it at the "Gold Stores" weren't all crooks) 3) You can tell when asset has hit the bubble stage when you start seeing EVERYONE trying to get in on it. I dont know about everyone else, but I listen to the radio and hear fifteen commercials about Buy Gold Now! Sell us your Unwanted Gold! Does anyone remember shows like Flip This House, and commercials to buy houses with NO MONEY DOWN. I think we all know how that story ended. I cant say that gold prices will plummet tomorrow, hell, they could double if a state or two in the US start issuing IOU's. What I am saying is that buying gold is like buying Beanie Babies in the 90's. Your kinda rollin' the dice.

Do like my buddy John and put down for a house. That is something with a practical purpose and real demand.

What is the Kraken?

This is my very first blog post. I would like to use this opportunity, much too late at night, to answer a question that I think may be on the minds of anyone who ventures onto my humble site....What is the deal with the Kraken?

To answer that question, allow me to set a quick back drop. The Kraken is a mythical sea-monster originating in Scandanavian folk-lore. This creature was reportedly so massive that it could drag the largest known ships underwater, and it would be mistaken for an island if sighted above the water. Much like the biblical Leviathan, the Kraken was a creature of destruction, and represented nothing good for the sailors of antiquity.

So why am I naming my blog about financial markets after a gigantic sea-creature of ultimate destruction? Good question, and its mainly because of the poem from lord Alfred Tennyson, who describes the Kraken as a sleeping giant with near-infinite tentacles with near-infinite reach. Some more on that after a quick story...

One day I was talking to a colleague about a book I was reading about small business development, and said I was helping a friend who was trying to launch a start-up. She responded by saying "well you just have your tentacles into everything, dont you?"

At first blush I felt a little put-off that I was told I "was getting my Tentacles into everything", and (even though I am very happily married) it added a little extra sting to have that kind of comment come from a female, ("my tentacles? What the heck are you trying to say, Lady?"). However, it didnt take long for me to get over my initial worry of getting slammed, and realize that it was just an expression meaning I had my hands in a lot of pots.

I extended that out to the Kraken as typifying the way I try to approach learning about financial markets: Read everything you can and work on increasing your intellectual and compentency "reach". In investing, everything is relevant, and all data can be considered in making decisions, therefore it stands to reason that you had better at least be literate in as many areas as possible. Just like the foxes and the hedgehogs of Isiah Berlin, who says that some thinkers are hedgehogs and burrow down into a topic and become the resident expert of that particular discipline, while others are foxes and jump around and dig a little in a lot of different areas. The problem with the hedgehog is the same one that faces the carpentar who only holds a hammer. All problems look like a nail!

So in a long winded way, thats why I named this blog Kraken Capital Watch, because I try and spread my tentacles out as far as they can reach to devour as much information as possible.