A Torrent of Darkness, Part II

The Daily Reckoning PRESENTS: The Daily Reckoning PRESENTS: First there was Peak Oil, and now, especially with the release of Al Gore’s Inconvenient Truth, the phenomenon that has many people worried is global warming. While it is easy to brush this off as gloom and doom, Byron King explains that just because there are problems in our future, it doesn’t mean there are no viable solutions – or even ways to make a little money…

A TORRENT OF DARKNESS, PART II

As I have mentioned before in articles in Whiskey & Gunpowder, gloom and doom is our stock in trade at Agora Financial. But our distinction at Agora Financial is that we like to think we do gloom and doom better than anyone else. That is because not only do we present you with the problem, we offer you some semblance of a solution, even if it is just investment advice. (Hey, don’t knock it just because you can only make money off of it.)

Up until lately, it has been easy for a large segment of the political and intellectual leadership in the developed world to look down their collective noses and to dismiss the “global warming crowd” as a bunch of fringe kooks. For example, for many years, it has been possible for some segment of the respectable scientific community to say that increased levels of carbon dioxide were not a major threat because the world’s oceans would absorb most of the excess CO2 molecules. But on this subject, the scientific jury has in recent times been walking back into the courtroom, and those jurors do not look happy. Pretty soon, the accepted scientific verdict will be that global warming is real and that carbon dioxide buildup is among the guiltiest of guilty parties.

Thus, I believe that in the not-too-distant future, the big leadership of the world is going to awaken to the seriousness of what I have just told you about global warming in the previous few paragraphs. What do I mean when I say “big leadership”? I mean all of it, the top honchos, whether U.S. or Chinese or Russian or European, or whomever. The government of Sweden is already there, with its active commitment to eliminate Sweden’s dependence on oil within 20 years. The other side of that eliminate-oil-dependence coin is an overt Swedish commitment to mitigate global warming.

When this new consciousness dawns, almost overnight, the collective national policies of reducing, mitigating, and controlling carbon emissions are going to cause some sectors of global manufacturing to become the leading growth industries in the history of mankind. Why? Because it will have to be this way. Not controlling carbon dioxide emissions will be tantamount to endorsing the inundation of large swaths of the Earth’s dry land, and the destruction of large segments of mankind. Like I said before, gloom and doom.

So if you are an investor, can you spot the trend? Very simply, within the next few years, we will see distinct movements in world energy markets. There will be less investment opportunity in the growth of energy supplies from sources that emit carbon dioxide and other greenhouse gases. And there will be more investment opportunity in the growth of energy supplies from sources that do not emit greenhouse gases. As one particular example, the production and installation of windmills in the not very distant future will simply explode.

The current worldwide production of electricity from windmills breaks down along lines that over 86% of world generation capacity is split between Europe (72%) and the United States (14%). But wind power still generates only 0.7% of the world’s electricity. This will have to change, and change dramatically, as it dawns on leadership cadres and entire populations that global warming is a reality.

Already, nations as diverse in traditional energy sources as Iran and Costa Rica are investing in wind power. A nation such as Jamaica, favored by year-round trade winds, could reduce its use of imported oil by as much as 80% or more if it made an aggressive effort to install a base of wind power for electricity generation. And as another example, and according to figures in the recently published 2006 edition of the BP Statistical Review of World Energy, in China, wind power generates less than 1% of electricity, but use of wind power has increased by over 28% a year since 1995.

The overall targets in Europe for wind power growth are substantial, even without taking into account Sweden’s ambitious program to move away from fossil fuels. By 2010, wind power is projected to deliver 33% of all new electricity generation capacity and provide electricity for over 86 million people.

The offshore wind turbines currently on the market can operate at a higher efficiency than their land-based counterparts. With blade rotors that sweep an area as large as a football field and an overall reach as tall as a 30-story building, these offshore wind turbines can be developed in large-scale ” wind farms.” These wind farms can provide power for large coastal population centers, where available land area is limited. A 100-megawatt wind farm over the course of 20 years will displace the need for nearly 1 million tons of coal or nearly 600 million cubic meters of natural gas.

Using the installed windmill base of one manufacturer alone as a basis for comparison, using wind turbines, versus traditional fuel generation, provides the benefit of keeping more than 11 million tons of greenhouse gases from being emitted each year. This company’s installed base of wind turbines provides the same amount of electricity annually needed to power about 1.5 million U.S. households. These turbines can generate an amount of electricity comparable to the energy produced by 9.5 million barrels of oil.

Thus, there is no question but that wind power, with its ability to reduce the need to emit carbon dioxide into the atmosphere, is an investment opportunity for the future. We will be discussing this in greater detail in future articles in Whiskey & Gunpowder, and in other Agora Financial publications.

Until we meet again…in Vancouver, best regards,

Byron W. King
for The Daily Reckoning
June 28, 2006

P.S.: The title of this article comes from the first line of the classic romantic poem by Alfred Noyes, “The Highwayman,” published in 1906. “The wind was a torrent of darkness among the gusty trees,” wrote Noyes, in telling the tale of a mounted man who robbed people on the roads of England. The poem has nothing to do with burning coal or harnessing wind power, but I liked the ring and flow of the words in the context of this topic.

Editor’s Note: Byron King currently serves as an attorney in Pittsburgh, Pennsylvania. He received his Juris Doctor from the University of Pittsburgh School of Law in 1981 and is a cum laude graduate of Harvard University. He is a regular contributor to the free e-letter, Whiskey and Gunpowder, which covers resources, oil, geopolitics, military history, geology and personal freedom.

Frederick the Great was once asked why it was that he chose his officer corps only from the Junkers of Prussia, rather than other groups. Why not a clever baker’s son from Dresden? What’s wrong with a solid farmer from Pomerania?

“Nein,” he replied, explaining his preference for the Junkers, “Because they will not lie and cannot be bought.”

Great empires depend on a reliable professional class of military officers, administrators and businessmen. Britain had them when it ruled the waves. They came out of the public (we would call them private) school of “Tom Brown’s School-days,” and were packed off into the Her Majesty’s civil service. Many were incompetent. But few were dishonest.

America never really had a specific class of civil servants; the place was always too big and too mobile. As good a military man might spring from the coalmines of West Virginia as from the citadels of the East Coast elites. So might a good businessman arise from the cattle ranches of Texas as from the counting houses of San Francisco. The history of World War II, for example, is the tale of how they came together and got the job done. They too were often hopelessly naïve and incompetent – compared, say, to the more experienced Germans. But very few stole. Very few lied. Very few shirked, ducked, or jived.

But now, more than half a century later, they have all got the scent of the dollar floating in their nostrils. The fumes of it seem to intoxicate them; they’ll say anything to catch the smell of the green. A heavy whiff…and they’re ready for an offer.

There are so many dollars around; the odor of money is overpowering.

Thus, we hear the stories of outrageous executive compensation in America. They are no Junkers. Instead, they pack “compensation committees’ with cronies and crooks who throw them juicy contracts. They juggle quarterly earnings and pull out bigger bonuses from the hat. They twist the numbers so much you’d think they worked for the U.S. Labor Department – where, in the throes of what once was quaintly called “public service,” we find other figure-benders at work, bamboozling the public.

And even out on the periphery of empire, where U.S. soldiers risk their lives, the incorruptible Junkers have died out. According to the press reports, the lure of money is irresistible. Billions of dollars are being squandered. Sweetheart contracts with Bush supporters, bids that are rigged or jigged, products never delivered, jobs never completed…or even begun. It is as if the money-grubbers realize that the war were not real, and use it only another chance to get something for nothing.

Back in the homeland, the common man has picked up the scent, too. He has sniffed his way to Wealth Without Work in the form of housing price increases. He does not have to build a better mousetrap. He no longer needs to work harder or save more. Honesty doesn’t seem to help him. Can he be bought? Are you kidding? It is just a question of price. As long as house prices keep rising 10% per year, anyone can have his vote. And so, house prices rise, and he takes the money and binds himself – like slave to master, like knave to lord – to mortgage payments, Social Security and federal handouts. He is no sturdy, independent Junker. He cannot afford to be. Instead, he too has become a Fed-watcher, for he knows that another couple of rate-rises will wipe him out.

But every bad thing finally comes to an end. That this too will pass we don’t doubt. How it will pass and what will pass with it, we wait to find out.

More news from the Desidooru Saloon…

———————

Justice Litle, reporting from Reno, Nevada:

“The takeaway from this rambling is that private enterprise developments are sowing the logistical seeds for the next evolutionary step in the global financial system.”

———————

And more views from Mr. Bonner…

*** Has it been four years ago already? Are we really that old?

It seemed so simple back then. We watched the bubble in Japan pop at the beginning of the ’90s. Then, we watched as the U.S. stock market, led by techs, repeat the same pattern. Every excess, absurdity, and extravagance that had made fools of the Japanese made cretins in America – only 10 years later.

Come the year 2000 and we thought we knew what would happen next. In fact, we were so sure of it we wrote a book arguing that the United States would follow Japan’s example…with a long, slow slump that would take stock prices down 80% and make consumer prices fall and push the economy into recession.

Everything that should happen eventually does. But fortunes are lost betting when and how. The market can fail to do what it is supposed to do longer than you can stay solvent.

In the event, tech stocks did fall 80%. The Dow was going down, too, and the U.S. economy went into a recession. But then, peculiar and irregular commandos struck the World Trade Center towers in New York with commercial jets and the American public with panic. George W. Bush and Alan Greenspan joined forces to unplug the biggest gush of liquidity the world has ever seen. Taxes were cut. Spending was increased. And the Fed cut the price of money to below the prevailing rate of consumer price inflation. The resulting tide of cash and credit swirled all boats up.

But did the feds actually side step the correction the country needed? Or, did they just postdate it and make it worse? Inflation is now the big worry, say the papers. We say, don’t believe it.

*** Robert Reich, Labor Secretary under Clinton, seconds us.

“Deflation, not inflation, is what Ben Bernanke should be worried about,” Reich says.

“Each generation, in its determination to avoid the nightmare it does remember, runs the danger of over-reacting, and thereby bringing on the opposite trauma. A generation ago, economic policy makers paid too little attention to inflationary forces then building in the American economy. Eventually, Paul Volcker had to break the back of inflation by raising interest rates sky high. That put the economy into a severe recession. Now Bernanke and company are paying too little attention to deflationary forces building in America and the global economy.

“Bernanke fears that today’s economy resembles the one that began to overheat the 1970s. But he’s wrong. Labor unions today don’t have nearly the power they did then to get wage increases. Big companies don’t have nearly the power they did then to raise prices. Global wage competition is keeping a lid on American wages, just as global price competition is pushing down on American prices. Meanwhile, fancy computer software is allowing rivals all over the map to erode almost anyone’s market share. Who’s going to raise prices in this environment?

“What’s more, there’s no reason to raise prices. Productivity has been soaring over the last five years while the median wage has been stuck in the mud. Wages, remember, constitute about 70 percent of the cost of doing business. So how can price pressures be building? Bernanke and company worry the U.S. labor market is heating up. They’re wrong here, too. Despite what look like rosy employment numbers, a smaller proportion of the American labor force is employed today than it was in 2000. Millions of people don’t show up on the unemployment rolls because they’re too discouraged even to look for work.

“The price increases we’re now witnessing are not due to excess demand over limited productive capacity, which causes inflation. They come mainly from soaring prices for energy and raw materials. These commodities are being bid upward because of China’s rapid growth, but take a closer look and you see something else going on. Much of the increase in commodity prices is being driven by speculators who expect prices to continue to rise. In other words, part of what we’re seeing are speculative bubbles. Such bubbles can burst any time. The fact is, the global market is glutted with productive capacity, and that’s not chiefly because of the huge gains in American productivity. If you really want to see a glut, take a look at China.

“If anything, there’s too much capacity relative to demand. This is a recipe for deflation. Prices can begin to drop because buyers hold off, expecting further price decreases. It happened in Japan in the 1990s. It’s already starting to happen in certain housing markets in the United States that had been red-hot but are now cooling so fast home prices are dropping. Deflation is often accompanied by stagnant or falling wages, which make it harder for consumers to afford to buy. Look what’s been happening to American wages.

“The Fed and other central bankers around the world are raising interest rates because they’re fighting the last war. But they already won that war. Inflation is no longer our biggest threat. They ought to be worried about the war before the last one, and the specter of deflation. They’re in danger of losing that war even before they know they’re in it.”

Maybe we were not wrong, just early. Pushing up interest rates to fight inflation and “load the gun,” the Bernanke Fed could help trigger the Japan-style slump we saw coming five years ago.

*** A dear reader offers a look into the not-so distant future…

“A bit of clarity seems to be boiling out of the soup,” he writes.

“The fed bares its chest to fight inflation (hasn’t anyone noticed-inflation is already here, how can they be hiding it in reports, anyone who buys anything must certainly see huge inflation in everything that is purchased).

“They raise rates two or three times more (almost stalling the economy). U.S. debt, and thus U.S. dollar become much in demand as ’emerging markets’ looking for some Rock of Gibraltar flock to the U.S. dollar and the relatively high rates.

“Now as the economy starts grinding sideways at best…the Fed prints a few trillion dollars to ‘pay debt’ and then everyone in the world is left holding a bunch of dollar denominated instruments that are now suddenly worth 20% to 30% less due to dilution.

“Of course, they go on another round of interest rate drops to spur the economy, dropping demand for T-bills, and increasing demand for stocks…but of course, the E part of P/E is already challenged. So now what? Excess liquidity going into art?

“Nearly simultaneously, ARMs are up, people start struggling and defaulting on loans and being just tight on money. Now housing begins being sold by banks and in fire sales to avoid bankruptcy. Those who don’t default will be upside down on their mortgage, and even the remaining ‘value’ of the too big house, too quickly depreciating and too expensive to maintain, will have lost 20% to 30% of its value (related to U.S. dollar)

“Looks like a great plan to me, I think it can work. It gets the rest of the world to share in some of our costs as world policeman, also cost shares our excesses of living beyond our means, and then puts the middle and lower class into 30 years of indentured servitude as they are locked into an upside down house.

“Only trouble is turning all my USD denominated stuff into other stuff, and quickly.”