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My Favorite Energy Plays: Geothermal and Nuclear |
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Dow jumps 150 as investors eye Trichet’s
travel/bailout plans,
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The word on resource investing from one of the
best in the biz,
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Plus, Bill Bonner on the PIIGS – Portugal,
Ireland, Italy, Greece and Spain – and much, much more...
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Bill Bonner, reporting from under a snowdrift in Maryland...
The Dow rose 150 points yesterday. We’re not sure what to make of it. Does
it mean we were wrong about the beginning of the end? Are we still in the
middle? Or is our whole theory wrong?
Hold your horses, dear reader. We’ll have to wait to find out.
The papers attributed the big upward thrust in share prices to news from
Europe. The specific fact that caused the swing to profit had to do with
Jean-Claude Trichet’s travel plans. He was in Australia for one meeting;
now he’s coming back to Europe early so he can partake of another.
What has caused him to call his travel agent is a problem centered in
Greece. The Greeks are in a jam. They spent too much money in the bubble
years. Then, they saw their tax revenues disappear in the bust.
Sound familiar? It should, because the same could be said of most of the
US states...and most of the world’s countries, emerging markets excepted.
They all spend too much. Almost all run deficits. And almost all their
deficits are getting bigger and bigger.
So far, the big economies don’t have a problem. Lenders think they are
good for the money. Almost miraculously...or supernaturally...the USA –
the world’s biggest borrower – is able to obtain financing for 10 years at
less than 4% interest. Since the official inflation rate is 2.7%, that
means lenders give up their money for a real rate of return of just a
little over 1%.
It’s the little economies that have trouble. They don’t have printing
presses of their own. Like California or New York, ultimately, they have
to balance their budgets. They can’t inflate their way out of trouble. So,
when their backs are to the wall they either get tough and cut expenses
rudely. Or they go broke...default...and then have the cuts forced upon
them.
The focus of this week’s discussion is the PIIGS – Portugal, Ireland,
Italy, Greece and Spain. Together they’ve got about $2 trillion worth of
debt. And lenders are making it more expensive for them to borrow more. If
this continues, they’ll default. And then, say the financial authorities,
terrible calamities will happen. The whole European financial system could
come falling down. It would be the end of the world as we have known it.
Does this sound familiar too? It should. It’s the same scare tactic used
after Lehman was allowed to go under. AIG had to be saved. And Fannie and
Freddie. And GM.
Now, that lame argument is probably going to lead to the bailout of
Greece...and by extension, all the other insolvent nations along the
periphery of Europe. The debts will be collectivized...just like those of
Fannie and Freddie. Instead of being allowed to fail on their own merits,
in other words, European nations are locking arms...they are all going to
fail together!
Germany’s politicians are already talking about a program of support in a
“broad sense” for Greece and other problem economies. Soon, in Europe, the
English word ‘bailout’ will be as common as “hamburger” or “coke.”
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Eric Fry, reporting from Laguna Beach, California...
Greece is the word...or at least it was during yesterday’s trading
sessions in Europe and New York. Everywhere you looked, there was that
word again...
“Euro Surges Against Dollar as EU Signals Support for Greece.”
“Canada’s Dollar Rises Most in Month on Prospect of Greece Aid.”
“US Stocks Rally on Growing Prospects for Bailout of Greece.”
“Corporate Credit Risk Falls Amid Prospects of Greece Support.”
“Treasuries Tumble on Prospect European Union Will Assist Greece.”
“German Bunds Decline Amid Speculation Greece May Get EU Support.”
Greece, it seems, was responsible for almost everything everywhere
yesterday...
No news headlines drew any connection between the bailout of Greece and
the massive winter storm in the East. But maybe that story will land on
the front page of tomorrow’s papers.
The proposed bailout of Greece by Germany – and a cast of EU members to be
named later – might be as significant a macroeconomic event as yesterday’s
financial market reactions would suggest. On the other hand, the Greece
headlines may merely have provided a convenient excuse for what would have
happened anyway – short-term, counter-trend moves, signifying nothing in
particular. After all, markets don’t always zig; sometimes they zag.
The euro, for example, had tumbled nearly 10% during the last two months.
Didn’t it deserve a little bounce? And US stocks had slumped nearly 8%
during the last two weeks. Didn’t they deserve a bounce as well?
Maybe yesterday’s stock market bounce will keep on bouncing for a while.
But your editor would not want to take that bet. The price charts still
depict a stock market that is “rolling over.” More importantly, even if we
were to feed our price charts into a shredder, the global economy is still
looking shaky.
Here at home, a close examination of the stats on GDP and unemployment
reveal an economy that is far from healed. Over in Europe, the “bullish
news” that Germany will bail out Greece is actually quite bearish. (Will
Germany also bail out Spain, Portugal, Italy and Ireland?) Over in Asia,
meanwhile, the Chinese central bank is withdrawing credit from the local
economy, while the Chinese military is urging the central bank to withdraw
credit from the American economy as well.
That’s right, according to Reuters News, “Senior Chinese military
officers have proposed that their country boost defense spending...and
possibly sell some US bonds to punish Washington for its latest round of
arms sales to Taiwan.”
“Our retaliation should not be restricted to merely military matters,” Luo
Yuan, a researcher at the Academy of Military Sciences, tells Reuters,
“and we should adopt a strategic package of counter-punches covering
politics, military affairs, diplomacy and economics to treat both the
symptoms and root cause of this disease... For example, we could sanction
[the US] using economic means, such as dumping some US government bonds.”
Probably, Luo Yuan’s suggestion will gain no traction in Beijing.
Probably. But his suggestion nevertheless underscores the precarious
economic arrangements that support the modern world of finance. Prudent
investors cannot afford complacency.
Even if we assume that Germany will ship its savings to Athens to plug
Greece’s funding gap; and that China will ship its savings to Washington
to plug America’s funding gap, the global economy is not the revitalized
organism that Wall Street analysts imagine.
Greece is spared...for the moment...but what happens to the euro in the
process? What happens to the fiscal discipline that supports the euro and
keeps European interest rates low?
America, too, breathes easily for the moment. But what happens if Luo Yuan
gets his way? What happens if US interest rates jump higher than our
leveraged economy could easily withstand?
No one knows for sure. But a bull market in stock and bonds would probably
not be the first result.
Therefore, as we gaze across the global investment landscape, we see many,
many reasons to own hard assets like gold and commodities. We see a few
reasons to own selected value stocks and/or special situations. But we see
absolutely no reason to own long-dated government bonds.
In tomorrow’s edition of The Daily Reckoning, we’ll take a peek
at another asset to avoid, especially if interest rates begin rising. But
in today’s edition, we’ll focus on the positive, not the negative. We’ll
examine a couple of commodities that are also special situations. Read
on...
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The Daily Reckoning
Presents: |
We touched on Chris Mayer’s opinion about the future of the energy
sector in Monday’s issue, with some of his thoughts on natural gas. In
today’s issue, Chris casts his value investor’s eyes over a couple of
other, exciting plays. Enjoy...
My Favorite Energy Plays: Geothermal and Nuclear
By Chris Mayer, editor, Capital & Crisis
Gaithersburg, Maryland
Last month, I traveled halfway around the world to Australia and New
Zealand while researching one of my favorite investment themes: the
growing scarcity of resources like water, farmland, and energy.
One of the highlights of my trip was taking a group of subscribers to
visit one of the world’s best resource investors – Rick Rule – at his
farm outside of Auckland, New Zealand. After eating lunch, we got down
to the business of the market.
Rule expects markets will be extremely volatile this year, which he
considers a gift. It’s what allows you to pick up assets on the cheap.
Specifically, assets in his favorite sector, natural resources.
There are simple reasons why Rule likes resources: For a long period of
time, very little new investment occurred in most resource industries.
So now they are playing catch-up. From 1982-2000, there was no net
investment in the resource sector, Rule maintains. These industries
require continuous investment because they are, by definition, self-
depleting. If you run a mine, for example, every day you run it, the
deposit gets smaller.
At the same time, global demand for resources has been booming. “When
Indonesians make a little extra money, they buy stuff,” Rule explains
simply. “They upgrade from bicycles to cars. They buy air conditioners
for the first time. They buy refrigerators.” All of these things use
basic materials – steel, aluminum, and other metals. They use energy.
Rule sums it up this way: “When we Americans spend money, we buy
services. When poor people spend money, they buy stuff.” He points out
China uses only 3% as much oil as the US on a per capita basis.
Therefore, if Chinese oil demand were to rise only to the level of South
Korea on a per capita basis, which is 16% that of the US, then China’s
incremental oil demand would account for all of current world
production.
Not surprisingly, Rule’s favorite sector in the resource sector is
energy. “Energy is cheap, and it’s not going to stay cheap. Natural gas
is the same price as it was in 1980 on inflation-adjusted terms.”
Demand is going up and supply is problematic. Rule points out that most
of the oil in the world is produced by national oil companies (NOCs),
like those of Venezuela, Peru, Iran, Mexico, and Indonesia – not by the
ExxonMobils and Chevrons of the world. These NOCs are starving
themselves of much-needed reinvestment so that they can spend the
proceeds on social programs or to advance political objectives. Many of
these countries are on the verge of halting oil exports, simply because
local demand is close to consuming all the local oil production.
Another factor in favor of rising energy prices is “carbon hysteria.”
Skirting the issue of whether global warming is real or not, there are
consequences to the current drive to reduce carbon emissions. For
instance, “coal is bad” has become the pervasive governmental point of
view. So if you found a bunch of coal in Australia or New Zealand and
wanted to develop it, Rule says, you probably couldn’t. Governments hate
coal, despite the fact that most of the world still relies on coal.
So what does Rule like here? His favorites are geothermal and uranium.
“I really like geothermal,” he says. And the US is one of the best
places in the world to develop geothermal reservoirs into power-
generation facilities. Political consensus in the US is that geothermal
is good. Power companies want it and are willing to pay up for it
because it’s “green.” Political subsidies make the economics of
geothermal even more compelling. Rule maintains you can earn a 22%
internal rate of return with a cost of capital less than 5%. These are
far better returns than solar or wind projects generate.
“I can’t say when geothermal stock will take off,” Rule said. “But the
businesses work stupidly well. They really work. It almost doesn’t
matter what stock you buy, just own the sector.” Rule reeled off four
names to own – Ram Power, Nevada Geothermal, Sierra Geothermal, and US
Geothermal.
They are speculative little ventures, but owning a basket is probably a
good move. As for the speculative nature of the stocks, Rule said the
best stock he ever owned was an Australian penny stock. “I bought it for
1.5 cents per share and sold it for $10 per share,” he said. “It was the
best stock of my life.”
He also likes uranium. Uranium had a mania and then the price collapsed,
and the stocks with it, but the businesses kept getting better and
better. “The uranium story that fed the mania is still in place.” Rule
said we consume more uranium than we produce. “The uranium price has to
go up. And more importantly, it can go up.” Meaning, the price of
uranium is very low. It could double and still not have any meaningful
impact on the economics of a nuclear plant. “People don’t care much
about uranium today, but in three years, they are going to care a lot.”
Rule’s favorite themes are much the same as mine. As I explained in the
January 26th edition of The Daily Reckoning,
I’m a big fan of buying mid-sized oil and gas stocks right now because,
like Rule, I believe oil and natural gas prices are going to be higher
three years from now. But I’m also digging into other energy sectors
like geothermal and nuclear.
I am persuaded by Rule’s analysis.
Regards,
Chris Mayer
for The Daily Reckoning
P.S. Right now my publishers are offering a $1,
one-month trial subscription to my premium research service, Mayer’s
Special Situations. In it, I detail the most explosive
opportunities in the resource sector, including one way to make as much
as 234% with four natural gas stocks I’ve got my eye on.
To check out my latest research for only $1, simply
read here and drop your details in sign-up page
that follows. My next update will hit your inbox in a couple of days.
---------------------------------------------------------------
And now to Bill who has today’s reckoning from Bethesda,
Maryland...
Yes, dear reader, your editor is snowed in. Not for the first time this
winter.
And we’re not the only ones. The US government is shut down too. No
matter. They weren’t doing anything but making things worse.
But wait...what’s this?
The Washington Post: “Blizzard or not, top Treasury staff is
snowed in – with work.”
Uh oh. The folks who run the economy for us are still on the job.
“Geithner, aides skip day off to tackle economic clouds.”
We have to confess; we’ve never seen a US Treasury official tackle a
cloud. We can’t quite imagine it. But it’s in the paper, so it must be
true.
Of course, there are plenty of economic clouds around. Heck there are
plenty of real clouds, too, dumping snow on the Washington area.
Politicians and bureaucrats can’t really do anything about either type
of cloud. But it must be a comfort to the woodenheads to think they are
on the job. We’d rather they took the day off – and tomorrow too. And
the next day!
What a godsend this snow is! Think of all the people it puts to work.
Kids shovel out driveways and earn a little spending money. Snow-blower
sales must be going through the roof. Four-wheel-drive vehicles are
sliding out of lots and showrooms...work crews keep busy night and day –
with huge overtime earnings, no doubt.
And think of all the missed work...and school...that will have to be
made up.
You’re probably thinking...now, wait a minute. There’s something wrong
with this picture. How could something as destructive and expensive as a
blizzard be good for the economy?
Well, you’re just not thinking like an economist. You have to learn to
stand on your head. Then, things are turned upside down.
Of course, a storm is not really good at all. But simpleton economists
believe that anything that puts people to work is a good thing for the
economy – even a world war.
What really happens in a storm...a blizzard...a flood...or a war is that
real wealth is lost. Things break down or are destroyed or used up. And
then a lot of resources must be put to work to make repairs. Putting
these resources to work in a concerted way makes it look like
progress...but you’re really only getting back to where you were in the
first place.
Besides, the resources must be taken away from other things. The demand
for snow-blowers displaces the demand for motorcycles or jet-skis.
Workers who move snow might otherwise be making pizzas or delivering
newspapers. And the fuel that goes into the salt trucks and
loaders...that too, would have been used for something else – something
people wanted to do, not something they had to do.
The early French economist, Frederic Bastiat, figured this out a long
time ago. He called it the ‘broken window fallacy.’ Even then, some lazy
economists thought that breaking a window actually boosted economic
activity. Of course, it was nonsense...
If you could really improve an economy by breaking windows...or having a
tornado pass through down...why not just blow up a whole city?
And this...a message from our Dear Reader in the South
Pacific:
“Ok, you posed an interesting question... Why would someone – me, for
instance – living on a private island in the middle of the South Pacific
concern myself with the insane world of macroeconomics? Good question. I
think I have a good answer.
“First, islands are very expensive. Somewhat like a boat, buying them is
just the beginning. Second, if you are a highly motivated individual
brought up in the Western world, money is like meat to a tiger. It’s
what you like, it’s what you are used to, it’s what you understand. I
don’t want my rooms to be rat-infested, insect-ridden places like they
would be without money. I want something fantastic; the island is
fantastic. I want the rooms to match.
“As you know, one of the ways I’ve made money is by buying gold from the
people that pan it out of rivers. The gold business is why I started
reading the DR in the first place. I was reading lots and lots
of interesting information about money and gold, and then I read The
Daily Reckoning. That changed me. It did two things for me. One, it
made me laugh; two it made me the smartest person in the room. Yeah,
it’s true, I was hanging out in some places where that wasn’t all that
difficult, still, even the local bankers still talk about me calling the
financial crisis before it happened. Bill, you of course tipped me off,
but being human, I took full credit.
“Now I’m bone tired as I write this. I did something today that Indiana
Jones would have been impressed by. I just took my corpulent, over
indulged, out of shape, one glass of wine too many, sorry ass up a
mountain to visit a group of men, women and children living in the most
difficult circumstances that you could possibly imagine. These people
were...absolutely real! You would have loved the eyes of the women with
their corn cob pipes. I would rather spend ten minutes with any one of
them than have an opulent lunch with Ben Bernanke. I guess Ben and Tim
and Henry or any one of those fat cats on Wall Street would faint at the
very idea of living the way I just saw these people living. They hike up
this trail that would kill a camel and they live with almost nothing.
When they want to come to town they start at 2 in the morning and walk
for 8 hours on a nearly impossible path knee deep in mud. They work hard
getting the little flecks of gold out of the river. They have only
kitchen pans, and an old spring from a truck is their only tool for
moving the big rocks. They may deserve it but nobody gives them a bonus.
“I took a local doctor with me, along with my great crew, and we all
struggled to make it up the mountain to their village, this after the
worst 2-hour drive on the planet; it could not be classified as a road,
more like a muddy river we attempted to drive up.
“I am not a do-gooder. I don’t like do-gooders and probably never will,
but I have to admit that today it felt good to alleviate a little human
suffering. We treated the fungal infections that are just rife in the
village. People whose skin is covered with a itchy scale akin to ring
worm that just makes their lives miserable. You could not look at little
children whose entire bodies were a mass of sores and not feel for them!
For the equivalent of 20 US dollars each, we could dramatically improve
their lives.
“So in a long-winded way, I’m trying to say that money matters, that
macroeconomics matter, no matter where you are on this planet. We are
all connected in one way or another and when one group thinks that it’s
got a special place in the world, a place where they don’t even want to
know how most people on the planet live, well, I’m not so sure that
makes it special or just blind. I think these blind people have weaseled
their way into positions of power, where they make decisions that affect
a lot of people. People who don’t know anything about and apparently
don’t want to know.
“In one of your pieces you wrote something I have never forgotten. You
said you were not really an economist, but more of a philosopher who
uses economy as a platform. I loved that idea, Bill. Any of us that are
fortunate enough to have time not spent struggling to stay alive, have
an obligation to think about the whole, not just our own little world
where we think nothing of pushing buttons to get what we want.
“If you stand back and look at the macro of life, (sweat dripping of
your chin clears things up!) we are all part of the whole, and when we
lose that perspective, we lose more than money. Somehow I think that is
really what this financial crisis is about. Loss of perspective. Just
look at who they’ve put in charge of important things!
“I will sign off with a saying I heard as a child... This is for good
old Ben: ‘Those that can, do. Those that can’t, teach.’”
-Pamela
Regards,
Bill Bonner,
for The Daily Reckoning
End Note: Last week we brought you the winner of our
Financial Darwin Awards, celebrating those companies who – through their
own stupidity – were kind enough to eliminate themselves from the
corporate gene pool. Well, in case you missed it, we put together a
little slide show, depicting a few of our favorite entries and
culminating with this year’s winner.
Take a look at it here. Oh... And don’t be afraid
to pass this on to your friends and colleagues... We’d love it if this
one went viral. Enjoy!
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Here at The Daily Reckoning, we value your questions and
comments. If you would like to send us a few thoughts of your own,
please address them to your managing editor at
joel@dailyreckoning.com
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