To qualify for transformational status, a technology must save money and resources. The bankrupt Solyndra, poster child for the so-called green economy, did not save money. Solyndra’s entire justification was based on the notion that CO2-producing energy sources would be replaced with “clean energy” sources and mandated by various regulations and laws.

Efforts to raise the cost of traditional energy sources were part of this plan. We’ve heard, for example, certain well-placed politicians and activists brag that they would like to see energy at twice current costs. This bizarre sentiment is evidence, however, of either gross economic illiteracy or sociopathic tendencies.

As energy is the largest component of the economy, ranging around 17%, depending on vacillating energy costs, a doubling in costs would utterly cripple the economy. End of story. It would cause massive hardship that would hit lower-income groups particularly hard. In fact, current restrictions on oil, coal and natural gas extraction have already artificially increased the cost of fuel substantially. The same could be said about nuclear, especially safer thorium power.

Ironically, it’s actually never been clear that solar technology is “clean,” either. Scientists have done cradle-to-grave analysis of solar technologies, measuring their impact on the environment throughout manufacturing, utilization and disposal. Solar technology’s environmental impact may be worse than traditional energy sources. This is because many of the high-tech components require extremely sophisticated and energy-intensive manufacturing processes that produce a wide variety of exotic pollutants. I’d prefer the unproven risks of CO2, known to some as plant food.

Recent scholarship, including the CERN Cloud study, has cast further doubt on the CO2 or anthropogenic climate change models. This comes in the wake of the admitted failure of the climate models over the last decades. This, in turn, has created a crisis among those committed to the anthropogenic view.

The fulcrum event was probably the leaking of University of East Anglia emails involving top proponents of AGW. These emails revealed panic over the their model’s failure and tactics for subverting the peer-review process to keep the truth hidden. Phil Jones, the U.N.’s climate point man and head of the East Anglia climate unit, admitted shortly afterward that there has been no significant global warming in 15 years.

The scientific argument has become so politicized, however, that controversy will continue to rage for some time. A series of high-level resignations from the American Physical Society over the organization’s unwillingness to discuss contrary climate views are just the latest example of the political battle.

While I don’t personally believe the CO2 AGW theory, science is an ongoing process. Consensus is not reliable when it comes to the truth. The vast majority of scientists have been proven wrong over and over, so I certainly could be wrong about this area as well. It is not true, incidentally, that the “vast majority of scientists” believe that humans are driving climate change. Nor has it been the case for some time.

Even so, there are things I can say about AGW as an economist. Namely, it is that we should apply honest cost/benefit analysis to American laws and regulations that are motivated by the CO2 model. This has not been done because every effort, from Kyoto forward, to establish international CO2 controls has failed. Even when some European nations signed on, the most significant and growing carbon producers, including India and China, refused. Moreover, the Europeans never actually fulfilled the terms of their pledges. Canada has also been far less willing to sacrifice economic growth to assuage green demands, perhaps because it’s colder up there.

As a result, any policies that raise American costs to reduce CO2 emissions are essentially meaningless. They will have little or no impact on global CO2 levels and climate. Well, they may not be meaningless, but the true meaning has nothing to do with economics.

Green policies that do not significantly lower global CO2, including the subsidization of solar industries, are gestures in support of a particular worldview. It is, therefore, a symbolic ritual. A similar example is the ritualistic sorting of the garbage. In California, regular trash and recyclables have often been taken by two different trucks to be buried in the same landfill because no market exists for recyclables. In some cases, governments pay others to process supposedly valuable trash.

The public, by the way, isn’t buying these rituals. Historically, consumers have never been willing to support “green” products, despite what they have told pollsters. There is evidence, in fact, that they will prefer an identical product that does not make “green” claims.

Today, AGW hardly shows up on polls of the American public’s important issues. It is similar in Canada. Less than half of Americans now believe that humans are contributing significantly to global warming, and about two-thirds believe fraud has been committed by proponents of increased government control of CO2.

I predicted this general trend, by the way. I also predicted that, eventually, we would stop obsessing about reducing energy consumption and increase production. There’s plenty of energy, believe me. The horror stories of Peak Oil have slipped silently into the night for good reason, primarily vast and unpredicted reserves of shale oil and gas. Moreover, technological progress like one company’s axial flux induction machines will continue to increase energy efficiency.

You can reduce energy consumption significantly by using axial motors. This is a good thing, no matter what your views of CO2 are, because it saves money. This enables economic growth, which creates jobs, the list goes on…

In the case of refrigeration and electrical generation, the specific reductions are more than half. When this technology is universally used, reductions in the cost of energy will yield transformational benefits to the entire world. It will also yield, I’m convinced, extraordinary profits for early investors. That’s the sort of “green” that I unapologetically support.

Yours for transformational profits,

Patrick Cox
for The Penny Sleuth

Forget Solar: A “Green” Energy Technology You Should Be Looking At… was originally featured in the Penny Sleuth.

A Series of Unfortunate Events…

That’s what I thought. Except lately, it’s as if we have entire flocks of black swans, paddling up to the edge of the lake and walking out into the front yard. And then these critters cause big trouble.

Japan Black Swan

Let’s take a look at the Japan black swan, with its associated nuclear blackbird. The Japan earthquake-tsunami-nuclear disaster has wrecked large swaths of the Japanese economy, with ripples out to the rest of the world. Japan faces immense human suffering — they’re still picking out bodies nearly a month after the earthquake and tsunami. God bless them… it’s heartbreaking.

Japan also faces a long, cold future. Expect to see chronic power shortages, industrial disruption, logistical challenges, endless cleanup work and bills that boggle the mind. It’s a heck of a lot more than the news-grabbing article about how Ford Motor Co. can’t get “tuxedo black” paint pigment for its car assembly factories.

There are many globally important production and logistical channels that pass through central Japan. We have yet to understand the full impact on world commerce. Stand by for shortages of everything from name-brand automobiles to electronics to optical instruments to you-name-it. I think we’ll all be surprised as this plays out.

Of course, the Japan disaster ripped into the world’s nuclear power renaissance. Most nuclear stocks are knocked down, although I expect things to get better over time. The question is how long will it take?

At ground zero, the site of the wrecked nuke plants, the Japanese have huge bills to pay. It’ll be hundreds of billions of dollars over many decades. It’s pretty much pure “cost,” too, for the Japanese. That is, it’s not investment in the sense of the Japanese ever getting the money back. The expenses and efforts will go toward keeping the nuclear mess under control, and sort of cleaning it up.

Through it all, stay sanguine. Keep in mind that large capital projects, from mines to power plants, have a life cycle measured in decades. Policymakers, regulators, business executives, bankers and investors need to beware of making 10-year, 20-year or 30-year decisions based on the headlines of a week, a month or even six months.

Japan or no, the rest of the world’s reactors still need fuel. You shouldn’t discount a uranium play as a long-term investment.

[Editor's Note: There are a number of resource funds right now holding uranium assets, but Middlefield Uranium Focused Metals Class (MUTF_CA: MID210) may be worth a closer look.]

Until we meet again,
Byron King
Penny Sleuth

May 11, 2011

This Industry Is Still Gearing Up for Growth was originally featured in the Penny Sleuth.

I was in Mechanicsburg, Pa., for a couple of days. Mechanicsburg is nestled amid rolling hills and cornfields in the middle of Pennsylvania. And no, I wasn’t visiting the Navy’s Ships Parts Control Center, located here. Nice guess, though.

I was attending a two-day conference on electric power. The conference is sponsored by the Pennsylvania Bar Institute, the educational arm of the Pennsylvania Bar Association. Basically, it’s continuing legal education (CLE), which I still attend despite my current status as a recovering attorney.

This conference was not an investment seminar. That is, the difference between CLE and an investment seminar is that nobody there was trying to sell me anything. It’s just a bunch of top-level energy professionals talking to other top-level energy professionals.

Thus, I got to sit back and listen to a series of world-class lawyers, engineers and energy economists talking about the astonishing changes that are occurring in the U.S. and Canadian energy grid.

One key theme of this conference was the rapid national build-out of the so-called “smart grid,” which is occurring all around us. Wow, there’s serious planning, money and technology going into smart grid. Yet according to national surveys, most people have barely heard of the term, let alone know what it means. The smart grid is big science, big engineering, big technology and really big money.

The inside joke is that if Thomas Edison came back today, he’d look around and pretty much understand completely how the U.S. electric power system works. That’s the problem. It highlights how little things have changed over the past 100 years.

But with the smart grid? The smart grid is utterly transformational. It’ll be like grafting an energy equivalent of the Internet onto the electric power lines of the nation. It’s a dramatic move toward enabling energy markets to work more efficiently, from the standpoint of the consumer, the producer and the distributor.

In a sense, the smart grid is being driven by the same forces that are causing much other change in the energy and resource economies of the world. The rise of China and India is altering everything.

Due to rising global demand, there’s increasing scarcity of energy and materials across the world. It means high prices for the good stuff. And that means we can no longer afford — in any sense of the word — to do business with the old energy and material models of our youth, let alone of our parents’ and grandparents’ time.

Another theme at the power conference is the rapid growth of alternative energy systems — the usual suspects being wind, solar, geothermal and hydro. Plus, if you’re going to do alternative energy, you have to have lots of well-functioning storage.

Overall, the alternative energy sources are well-known investment ideas to longtime subscribers of Agora Financial newsletters. If you ever attend the Agora Financial conference in Vancouver, held every July, you get an earful of alternative energy discussion as well.

But longtime readers also know that alternative energy systems are, at best, a small part of the total energy equation — under 5% on the good days. For big energy supplies to run entire countries, for now — and far into the future — it’s coal, oil, natural gas and nuclear.

Still, there’s serious money going into the alternative plays. In fact, there’s so much alternative energy money chasing so many marginal projects that I seldom make any investment recommendations in that energy space. My ESI readers have heard about how to make money on new geothermal technologies and energy breakthroughs. To learn more about these exciting opportunities visit the Energy and Scarcity website….

Until we meet again,
Byron King
Penny Sleuth

October 28, 2010

Big Money in Electric Power and Alternative Energy was originally featured in the Penny Sleuth.

The first is to have at least 5-10% of your portfolio invested in precious metals. (Or more, if it helps you sleep at night.) That’s gold, G-O-L-D. Or silver, S-I-L-V-E-R. Take delivery. Don’t entrust your gold and silver to somebody else. An ETF like streetTRACKS Gold (GLD: NYSE ARCA) is good for trading in your account. But it ain’t real gold. It’s a CLAIM on somebody else’s gold. And somebody else might say “no” one of these days.

This is Gold 101: For absolute monetary safety, you want real metal under your control. Remember the old expression, “Gold is money.” Some people — economists, mostly — disagree with that. OK, buy their gold. Smile. Say thank you. Walk away briskly with the gold. Don’t look back.

Here’s the second: Accumulate positions in solid, cash-rich gold miners. Sure, some of the junior mining guys are great speculations. Eventually, the really good explorers and mine developers will get bought out by the large companies. That’s how it works. Eventually. But for now, especially if you are just getting into owning gold miners, go with the ones that have large reserves, strong operations and plenty of cash flow.

Here are some of the best gold miners. Look at AngloGold Ashanti (AU: NYSE), Agnico-Eagle Mines (AEM: NYSE), Goldcorp (GG: NYSE), Kinross Gold Corp (KGC: NYSE), or Yamana Gold (AUY: NYSE).

I like all of these companies. All of them have good management, reserves, operations, technical ability, cash flow and sheets. Are there any risks? Yes, the stock prices tend to track the price for gold. So if the price of gold falls, these stocks take the hit.

Also, if the stock market has another round of selling, the gold miners may go down in the suction. That’s bad. What happens is that when the market tumbles, some players have to raise cash in a hurry. So they sell their winners, which of late have included many gold miners. Or their broker sells them out at the end of a trading session to meet a margin call. So moving down with the market is a chance we’re taking by owning shares in any stocks at all. Even owning good gold miners has risk.

The third thing you ought to do is be sure to assemble positions in good, solid energy plays. I noted above that gold is money. Let me add that energy is wealth. Really, it’s hard to do very much in this world without energy supplies. You can live in a cave and freeze your butt off, maybe. So the view from my perch is that well-run companies with energy reserves and good cash flow ought to hold up over the long term.

Until we meet again,
Byron King

April 9, 2009

Three Important Pieces of Advice from a Gold Bug was originally featured in the Penny Sleuth.

Of course, this may seem like common sense. But it does make a statement about the necessities in life. Most areas these days are heated with natural gas… Meaning, you are mandated to pay for natural gas to live.

Here’s a small-cap technique to use this pay-to-play mandate in your favor…

Natural gas is much cleaner than other fossil fuels. Coal and oil are just about as dirty as it gets. For the same amount of energy when burned, natural gas produces 29% less carbon dioxide than petroleum and 44% less than coal.

But natural gas is an important energy type even if it’s not simply burned. And it doesn’t take much of an imagination to see how more “green” legislation is on the way.

In 2007, Congress worked its way through a bill mandating a ridiculous amount of ethanol to be produced by 2022 — 36 billion gallons. That’s roughly five times more ethanol than is currently produced. And it takes a lot of natural gas to produce that ethanol.

In the U.S., corn is the largest source of ethanol. To grow corn, it takes a lot of fertilizer — about 22 million tons of fertilizer is consumed every year. The price of fertilizer is 90% dependent on the price of natural gas. On top of that, ethanol plants are powered by natural gas.

While natural gas is greener than what we currently use, there is still one more reason for the natural gas price hike: demand.

If you take a look at the accompanying chart, you can see the expected growth of natural gas in electricity generation. Coal is still the No. 1 energy source, but natural gas is about to blow away oil, nuclear and renewable energies.

The demand for natural gas is only going to strengthen the industry. One way to play this growth is to buy a natural gas producer. However, figuring out which ones will pop is guesswork at best.

What we have today is not a growth story. It’s a true profit story. You see, as strong as natural gas is, we aren’t going to be placing any bets on future prices. Instead, we found the one segment of the natural gas industry that thrives when the price of natural gas is both up and down…utilities.

Gas utilities perform well no matter what the price of natural gas is. These companies pass on costs straight to consumers.

It’s smart business for these distributors. They simply profit from their services, not what the speculative prices are.

Fortunately for us, the overall utility market is fragmented. I know that doesn’t sound like a good thing, but it is…

If we had a national utility, we’d end up with a megacap stock that would have too much attention. With attention comes slow to no gains. That’s why you won’t see us recommend any blue chips here at Penny Sleuth. But, a fragmented industry, such as this one, leads to many small caps to choose from — many of which are extremely undervalued.

The second important aspect to consider when looking at utilities is the monopolistic attributes these companies have. To get into this business, you have to front a lot of costs. You have to secure the product — in this case, natural gas — make sure there’s a large enough customer base, and work out the policy issues — which can be quite a hassle depending on the state and municipality.

You don’t normally have a choice of which supplier you want to get your natural gas from. You just get it from whichever utility company is supplying the rest of the community. That gives almost all of these businesses an advantage. It is also the reward for the upfront costs.

On top of that, many of these companies are considered Master Limited Partnerships, which give them another market advantage — they are tax-free.

With the many small-cap utilities to choose from, it’s important to do your research. It takes plenty of digging to find the right one.

Sincerely,
Jim Nelson

February 25, 2009

Green Energy’s Beneficial Impact on Natural Gas was originally featured in the Penny Sleuth.

The force of the water – going at 12-15 miles per hour – pushed cars around like so much debris. Firefighters had to rescue people from their cars as freezing cold water swirled around them. They had to use a helicopter to pull some out of the more sticky situations.

This was a big deal where I live. My kids came home early as the county closed schools over concerns about water supply. It hit home, too, because I’ve been writing about the dangers of this exact thing for at least two years. So I have cause to revisit one of my favorite investment themes – water. When water pipes get old, they break.

The pipe that broke was 44 years old. The Washington Suburban Sanitary Commission, the local water utility, has nearly 5,500 miles of pipeline. Of these, 1,380 miles of water mains are more than 50 years old.

Another 2,000 miles are between 30-50 years old. Many of these pipes are near the end of their engineered life spans. The WSSC replaces 27 miles of pipe per year. At that pace, the WSSC will replace a pipe, on average, no sooner than once every 200 years.

It’s a simple matter of math to see that’s untenable. This was the third major water main break in the last six months. In June, one break led to the widest disruption of service in more than 20 years. Restaurants closed and residents were under a boil-water advisory. From Jan. 1 through November of 2008, the WSSC repaired 1,357 breaks and leaks – or about four per day.

The previous general manager at the WSSC, a former Navy engineer, raised the alarms in February 2008. "In my view, the public will no longer be able to trust the system that delivers water to residents," he said. Unfortunately, this is a problem that is widespread in our country. Water pipes are aging and need replacement.

The Great Water Build Out

Globally, too, the demand for new water infrastructure is also strong. There is, for example, a huge urbanization movement happening on this planet of ours. Think about this: The average population of the world’s top 100 cities in 1900 was 700,000. Today, the average city has 6 million people living in it. In just the last 30 years, the world’s urban population went from 1.6 billion to 3.3 billion. This puts huge stresses on water systems.

Industrialization also eats up a lot of water. It takes large amounts of water to make food – some 630 gallons of water to make a hamburger. Even basic consumer goods take a lot of water to make – it takes 2,900 gallons of water to make a pair of jeans.

Semiconductor plants are huge consumers of water. Power generators also use water for cooling. Manufacturers use it for cutting, cleaning and more.

We ask a lot of water. The water services industry alone is a $385 billion business – and growing. "There is a boom in the construction of new assets," says Antoine Frerot, CEO of Veolia Water. "The assets are also more complex and more technical than before." Water-related equipment is another $64 billion industry. That too is a growing field.

Energy and water are also linked in ways people don’t appreciate. It takes a lot of water to make energy.

As the easy oil is gone and we go deeper into the earth, our water needs rise. "Enhanced oil recovery," reports the FT , "is particularly water intensive." Alternative energy is no better off. Biofuels, obviously, consume water, but so do solar and wind power. It’s just not as obvious. (There are enormous amounts of water used in making the equipment.)

But this is only half of the greater water crisis. The other half is an issue of supply. I don’t have space to get into that aspect of it again here. But suffice it to say that in the American West, China, India and many other parts of the world, getting water where people live is an ongoing problem. According to the U.N., there are over 1 billion people without access to clean water. This has appalling health effects.

"Water has never been more under threat in modern history," reports the FT without exaggeration. A new special report in the salmon-colored pages of the Financial Times is entirely about water. I give the paper credit for reporting on this topic more than any other mainstream outlet I follow.

Thinking thematically, energy, infrastructure and agriculture all look attractive to me as long-term investment themes. And water issues touch each of these in numerous ways.

Over the holidays, I swapped e-mails with my friend Tom Rooney. He is a former CEO of a water pipe company and a highly sought-after consultant on water issues, especially now. "Water and water infrastructure are getting hotter by the day," he reports.

"It’s not going away." I agree, it’s not going away – whether we have a global depression or not. For investors, water is, indeed, blue gold.

Sincerely,
Chris Mayer

January 8, 2009

Investing in Water: Mining for Blue Gold was originally featured in the Penny Sleuth.

Since then, banks and brokerage stocks were punished. Energy and material stocks have soared-thanks to the Fed’s inflation campaign. Fed officials have taken their ability to devalue the U.S. dollar to new heights. Sure, it’s recovered slightly. But, what collateral backs today’s dollar? Mostly mortgage securities that nobody wants — as if Treasury bond collateral weren’t bad enough.

Despite the latest “reports,” current trends still have room to run. Just consider Fannie Mae and Freddie Mac. Those shareholders could be effectively wiped out by endless equity offerings as early as next year. The mountain of debt holders and bond insurance policyholders comes first.

Now, it’s possible that the federal government could issue hundreds of billions in new Treasuries to officially guarantee Fannie’s and Freddie’s liabilities. If no one lines up to buy these bonds, the Fed could monetize them. Such a scenario could herald a return to double-digit long-term interest rates and a collapse in confidence in paper money — demanding a new monetary system. We live in interesting times. Billionaire currency speculator George Soros thinks we’ve just entered the ugly side of a “super bubble.”

I wrote about George Soros’ investing framework in the August 2007 Strategic Investment. Here’s the excerpt on Soros:

The growth of securitization has truly altered the global economy… One negative consequence is that financial markets are starting to shape the destiny of the real economy, not the other way around. Storied currency speculator George Soros was one of the first to speak publicly about the phenomenon of markets shaping economies. He calls it the theory of “reflexivity” and described it when testifying in front of Congress in 1994:

“The generally accepted theory is that financial markets tend toward equilibrium and, on the whole, discount the future correctly. I operate using a different theory, according to which financial markets cannot possibly discount the future correctly, because they do not merely discount the future; they help to shape it.”

Here’s reflexivity at work: As a company’s stock grows more coveted by wild-eyed speculators, its cost of capital gets lower and lower as its stock skyrockets; the higher its stock price, the more capital a company can raise in a secondary stock offering by issuing a set amount of shares. So its ability to reinvest capital and grow — its future — is shaped by the whims of speculators.

A second consequence of the securitization revolution: The further a lender is separated from a borrower, the more potential there is for fraud on the part of the borrower and underestimation of risk on the part of the lender.

Now, before you dismiss Soros as a Big Government “world improver,” keep in mind that he took the right side of every major financial crisis since World War II. The man clearly understands how markets can boom and bust, especially when greed and fear overwhelm rationality.

To see how Soros views the current crisis, I picked up his latest book, The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means. In the first half, Soros laments that reflexivity is not taken seriously in university economics departments. In the second half, he argues that the current crisis marks the end of a decades-long expansion of U.S. dollar-based credit. Soros dubs the period from the early 1980s-2007 a “super bubble.” He makes a convincing case:

Credit conditions have been relaxed to such an extent that I wonder how they could be relaxed any further. This is certainly true as far as the U.S. consumer is concerned. Credit terms for mortgages, auto loans, and credit cards have reached their maximum extension… It may also be true for commercial credit, particularly for leveraged buyouts and commercial real estate.

Only one thing is off the mark: Soros’ prescription for more government regulation. Nowhere in his book will you find an explanation of how the global paper money system practically guaranteed the formation of his “super bubble.” This super bubble would not have been possible under an international gold standard. The international gold standard of the late 1800s fostered a time of incredible growth and wealth creation in a stable price environment. It wasn’t perfect.

It had periodic depressions. But it was far better than what we’re looking at: Government’s inflationary policy responses to problems created by its policy of perpetual bailouts.

Don’t forget that every paper currency in history eventually fell to its intrinsic value: zero. The dollar is no different, although it has taken longer than most others. For decades, foreign governments have aggressively bought dollars, propping up their value, hoping, thus, to insure long-term economic stability. Instead, this action is heavily responsible for the runaway inflation we’re seeing all over the world.

Soros seems to believe that the real economy cannot grow unless credit is growing. This ignores the fact that credit growth does not create economic growth. It merely assists growth. Over the long term, the economy grows as the capacity to produce goods and services grows. No credit necessary.

But we must invest in the environment we face, not the one that we wish were in place. The government response to the ugly side of Soros’ reflexivity will seriously impair confidence in paper money.

Look for gold, energy and other natural resources to keep performing. Avoid financials, real estate and consumer discretionary stocks.

If gold, energy and other natural resources don’t do it for you, be sure to keep your eyes peeled tonight. I’m sending you my brand-new strategy, that not only has the government’s backing, it quite possibly could bring you upwards of 400%-600% over the next few weeks.

Until tonight…

Regards,
Dan Amoss
August 20, 2008

Protecting Yourself in this Dismal Economy was originally featured in the Penny Sleuth.