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Gregor Macdonald

Image | What Radical Measures to Expect in the Post-QE Era
What Radical Measures to Expect in the Post-QE Era
 PREVIEW

Executive Summary

  • Expect the 'benefits' of QE 3 to be short-lived (<9 months)
  • Expect more radical solutions to be rolled out by Capitol Hill (not the Federal Reserve) within 90 days after QE 3, including:
    • Infrastructure build-out on a massive scale
    • Military resource redeployment to civilian projects
    • Debt jubilees
    • Tax holidays
  • A weaker dollar will be pursued
  • Capitalism will be compromised for populist gain

If you have not yet read Part I: When Quantitative Easing Finally Fails, available free to all readers, please click here to read it first.

Had every US homeowner with a mortgage also held 100 ounces of gold through the rise and fall of the housing bubble, the balance sheet of US homeowners would already be repaired. Gold has at least tripled, if not quadrupled, through that time period.

We state this to illustrate a point. Quantitative easing (QE) and other reflationary policies benefit gold, global growth outside the United States, and the earnings of corporations — not US workers.

QE largely benefits the continued dollarization of the world, as the dollar has now fully joined the yen as a cheap funding currency. But QE does not improve wages and does not help the private sector deleverage. Indeed, despite the amount of deleveraging that has occurred in the private sector, the asset side of the private sector’s balance sheet has fallen. To put this in plainer terms, Americans have indeed been paying down their credit cards and mortgages. The problem is that their assets, primarily homes and other investments, have concurrently fallen in value. (The Federal Reserve’s Z1 Report is pretty clear in this regard; see the B.100 Table on page 120 of the 7 June, 2012 FED Flow of Funds PDF).

This lack of progress will eventually express itself in a kind of exhaustion. Either America is going to have to accept much lower levels of consumption and permanently low levels of labor participation, or the country will have to explore more innovative ways to shock its economy back to life.

Let’s take a look at a few of these possibilities:

What Radical Measures to Expect in the Post-QE Era
 PREVIEW

Executive Summary

  • Expect the 'benefits' of QE 3 to be short-lived (<9 months)
  • Expect more radical solutions to be rolled out by Capitol Hill (not the Federal Reserve) within 90 days after QE 3, including:
    • Infrastructure build-out on a massive scale
    • Military resource redeployment to civilian projects
    • Debt jubilees
    • Tax holidays
  • A weaker dollar will be pursued
  • Capitalism will be compromised for populist gain

If you have not yet read Part I: When Quantitative Easing Finally Fails, available free to all readers, please click here to read it first.

Had every US homeowner with a mortgage also held 100 ounces of gold through the rise and fall of the housing bubble, the balance sheet of US homeowners would already be repaired. Gold has at least tripled, if not quadrupled, through that time period.

We state this to illustrate a point. Quantitative easing (QE) and other reflationary policies benefit gold, global growth outside the United States, and the earnings of corporations — not US workers.

QE largely benefits the continued dollarization of the world, as the dollar has now fully joined the yen as a cheap funding currency. But QE does not improve wages and does not help the private sector deleverage. Indeed, despite the amount of deleveraging that has occurred in the private sector, the asset side of the private sector’s balance sheet has fallen. To put this in plainer terms, Americans have indeed been paying down their credit cards and mortgages. The problem is that their assets, primarily homes and other investments, have concurrently fallen in value. (The Federal Reserve’s Z1 Report is pretty clear in this regard; see the B.100 Table on page 120 of the 7 June, 2012 FED Flow of Funds PDF).

This lack of progress will eventually express itself in a kind of exhaustion. Either America is going to have to accept much lower levels of consumption and permanently low levels of labor participation, or the country will have to explore more innovative ways to shock its economy back to life.

Let’s take a look at a few of these possibilities:

Image | When Quantitative Easing Finally Fails
When Quantitative Easing Finally Fails

While markets await details on the next round of quantitative easing (QE) — whether refreshed bond buying from the Fed or sovereign debt buying from the European Central Bank (ECB) — it's important to ask, What can we expect from further heroic attempts to reflate the OECD economies?

The 2009 and 2010 QE programs from the Fed, and the 2011 operations from the ECB, were intended as shock treatment to hopefully set economies on a more typical, post-recession, recovery pathway. Here in 2012, QE was supposed to be well behind us. Instead, parts of Southern Europe are in outright depression, the United Kingdom is in double-dip recession, and the US is sweltering through its weakest “recovery” since the Great Depression.

It wasn’t supposed to be this way.

Recently-released data from all these regions now confirm that previous QE, at best, merely bought time against even more grueling outcomes.
When Quantitative Easing Finally Fails

While markets await details on the next round of quantitative easing (QE) — whether refreshed bond buying from the Fed or sovereign debt buying from the European Central Bank (ECB) — it's important to ask, What can we expect from further heroic attempts to reflate the OECD economies?

The 2009 and 2010 QE programs from the Fed, and the 2011 operations from the ECB, were intended as shock treatment to hopefully set economies on a more typical, post-recession, recovery pathway. Here in 2012, QE was supposed to be well behind us. Instead, parts of Southern Europe are in outright depression, the United Kingdom is in double-dip recession, and the US is sweltering through its weakest “recovery” since the Great Depression.

It wasn’t supposed to be this way.

Recently-released data from all these regions now confirm that previous QE, at best, merely bought time against even more grueling outcomes.
Image | The Dawn of the Great California Energy Crash
The Dawn of the Great California Energy Crash

California, which imports over 25% of its electricity from out of state, is in no position to lose half (!) of its entire nuclear power capacity. But that’s exactly what happened earlier this year, when the San Onofre plant in north San Diego County unexpectedly went offline. The loss only worsens the broad energy deficit that has made California the most dependent state in the country on expensive, out-of-state power.
The Dawn of the Great California Energy Crash

California, which imports over 25% of its electricity from out of state, is in no position to lose half (!) of its entire nuclear power capacity. But that’s exactly what happened earlier this year, when the San Onofre plant in north San Diego County unexpectedly went offline. The loss only worsens the broad energy deficit that has made California the most dependent state in the country on expensive, out-of-state power.
Image | California: The Bellwether for the Rest of America
California: The Bellwether for the Rest of America
 PREVIEW

Executive Summary

  • Escalating energy costs (direct and indirect) create a vicious cycle in the economy that further hinders growth/recovery
  • Overspending and other poor capital allocation decisions by state governments are compounding the problem
  • California spends $1 on public transit vs. $10 on automobile-related investment, a gap that energy costs will soon painfully reverse
  • Solutions are hard to come by and harder to fund, but without investment, alternative systems won't ever achieve scale
  • California's future is increasingly easy to predict; individuals and other state governments better take notes or suffer the same fate

If you have not yet read Part I: Dawn of the Great California Energy Crash, available free to all readers, please click here to read it first.

A key feature in the post-war industrial success of countries like South Korea and Japan, given that they had virtually no domestic energy supplies, was the ability to turn a profit from manufacturing powered by imported energy. This favorable equation relied on three key factors:

  • That imported energy remained a cheap input cost compared to the high margin value of exported goods
  • That energy producing countries had cheap energy to export
  • That purchasers of the exported goods were growing, and were running their own economies on cheap energy

These are the exact same assumptions still being made — and extrapolated into infinity — about California's economy.

Are we really to believe that California's GDP can forever deindustrialize, requiring fewer and fewer energy inputs, while growing in profitability, thus providing the capital to access/import energy — at any price?

California: The Bellwether for the Rest of America
 PREVIEW

Executive Summary

  • Escalating energy costs (direct and indirect) create a vicious cycle in the economy that further hinders growth/recovery
  • Overspending and other poor capital allocation decisions by state governments are compounding the problem
  • California spends $1 on public transit vs. $10 on automobile-related investment, a gap that energy costs will soon painfully reverse
  • Solutions are hard to come by and harder to fund, but without investment, alternative systems won't ever achieve scale
  • California's future is increasingly easy to predict; individuals and other state governments better take notes or suffer the same fate

If you have not yet read Part I: Dawn of the Great California Energy Crash, available free to all readers, please click here to read it first.

A key feature in the post-war industrial success of countries like South Korea and Japan, given that they had virtually no domestic energy supplies, was the ability to turn a profit from manufacturing powered by imported energy. This favorable equation relied on three key factors:

  • That imported energy remained a cheap input cost compared to the high margin value of exported goods
  • That energy producing countries had cheap energy to export
  • That purchasers of the exported goods were growing, and were running their own economies on cheap energy

These are the exact same assumptions still being made — and extrapolated into infinity — about California's economy.

Are we really to believe that California's GDP can forever deindustrialize, requiring fewer and fewer energy inputs, while growing in profitability, thus providing the capital to access/import energy — at any price?

Image | Coal: The Ignored Juggernaut
Coal: The Ignored Juggernaut

Oil, natural gas, and alternatives dominate the headlines when it comes to energy. But there's a big and largely-overlooked revolution occuring with the energy source likey to become the most preferred fuel for a world in ecomomic decline: coal.

The United States coal sector has been hit very, very hard this spring. Demand has been crushed by over 10%, as warm weather and bountiful supplies of cheap natural gas have induced power plant operators and all other users where possible to switch away from domestic coal. The rapid change in fortune has sent the stock prices of big, listed names such as Peabody and Arch down by double digit percentages, as the Dow Jones US Coal Index has fallen below 160 from above 225 at the start of 2012.

Coal: The Ignored Juggernaut

Oil, natural gas, and alternatives dominate the headlines when it comes to energy. But there's a big and largely-overlooked revolution occuring with the energy source likey to become the most preferred fuel for a world in ecomomic decline: coal.

The United States coal sector has been hit very, very hard this spring. Demand has been crushed by over 10%, as warm weather and bountiful supplies of cheap natural gas have induced power plant operators and all other users where possible to switch away from domestic coal. The rapid change in fortune has sent the stock prices of big, listed names such as Peabody and Arch down by double digit percentages, as the Dow Jones US Coal Index has fallen below 160 from above 225 at the start of 2012.

Image | Coal is the Fuel for a World in Decline
Coal is the Fuel for a World in Decline
 PREVIEW

Executive Summary

  • Coal is priced very attractively on a BTU output basis
  • Developing countries, where energy demand is growing greatest, are much more dependent on the power grid to run their economies
  • Coal is on track to reclaim its postion as the world's top energy source (possibly as early as this year)
  • What are the implications of a global resurgence of coal-usage?

If you have not yet read Part I: The Global Coal Juggernaut Rolls Onward, available free to all readers, please click here to read it first.

As the global economy once again moves through an acute phase of the ongoing financial crisis, it is natural that energy prices should decline. West Texas Intermediate Crude (WTIC) is once again back nearly below $80 a barrel. And coal prices, both thermal and for steelmaking, have also declined. Central Appalachian Coal, rich in thermal content, was mostly steady near $80 per short ton for much of last year. (This translates to about $3.20 per million BTUs).

However, 2012 has seen a pricing decline as the world economy once again slows down on the back of persistent debt problems — and the persistently elevated price of oil.

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One of the pernicious dynamics about coal pricing is that thermal coal is nearly always able to reset at a low enough level to compete against all other forms of BTUs.

As previously mentioned, that has recently not been the case in the United States, where a million BTUs of natural gas is now cheaper to burn than a million BTUs of coal — especially after coal’s higher regulatory costs are factored into the equation. But if the new and grim reality of oil is that world recession no longer brings oil prices down meaningfully, it is still the case that any global industrial slowdown does indeed bring coal prices low enough to outprice other energy sources. And while rich, thermal coal from Appalachia is currently cheap at around $3.00 per million BTUs, Powder River Basin coal is even cheaper, at an amazingly low $0.52 per million BTUs.

It’s not surprising, therefore, that each time the global economy weakens and then rebounds, its hunger for coal advances more strongly.

Coal is the Fuel for a World in Decline
 PREVIEW

Executive Summary

  • Coal is priced very attractively on a BTU output basis
  • Developing countries, where energy demand is growing greatest, are much more dependent on the power grid to run their economies
  • Coal is on track to reclaim its postion as the world's top energy source (possibly as early as this year)
  • What are the implications of a global resurgence of coal-usage?

If you have not yet read Part I: The Global Coal Juggernaut Rolls Onward, available free to all readers, please click here to read it first.

As the global economy once again moves through an acute phase of the ongoing financial crisis, it is natural that energy prices should decline. West Texas Intermediate Crude (WTIC) is once again back nearly below $80 a barrel. And coal prices, both thermal and for steelmaking, have also declined. Central Appalachian Coal, rich in thermal content, was mostly steady near $80 per short ton for much of last year. (This translates to about $3.20 per million BTUs).

However, 2012 has seen a pricing decline as the world economy once again slows down on the back of persistent debt problems — and the persistently elevated price of oil.

src=

One of the pernicious dynamics about coal pricing is that thermal coal is nearly always able to reset at a low enough level to compete against all other forms of BTUs.

As previously mentioned, that has recently not been the case in the United States, where a million BTUs of natural gas is now cheaper to burn than a million BTUs of coal — especially after coal’s higher regulatory costs are factored into the equation. But if the new and grim reality of oil is that world recession no longer brings oil prices down meaningfully, it is still the case that any global industrial slowdown does indeed bring coal prices low enough to outprice other energy sources. And while rich, thermal coal from Appalachia is currently cheap at around $3.00 per million BTUs, Powder River Basin coal is even cheaper, at an amazingly low $0.52 per million BTUs.

It’s not surprising, therefore, that each time the global economy weakens and then rebounds, its hunger for coal advances more strongly.

Image | The Cruel Math of the Marginal Barrel
The Cruel Math of the Marginal Barrel
 PREVIEW

Executive Summary

  • Why oil price vulnerability is growing 
  • Why the marginal cost of oil is rising higher at an accelerating rate
  • Why the marginal cost of oil for non-OPEC regions is now above $90
  • The hard math explaining why an increase an output from OPEC will no longer reduce the world price for oil
  • The new rules that will govern the price of oil from here
  • The alarming growing risk of large-scale war for oil

Part I: OPEC Has Lost the Power to Lower the Price of Oil

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II: The Cruel Math of the Marginal Barrel

An unpleasant megatrend that has affected global oil production the past decade has been the quickly escalating cost of production. However, prices have finally risen high enough to stabilize declines in regions like North America.

This actually makes for a new and emerging vulnerability: the risk that prices fall at some point through levels that remove the new oil supply.

Given that world oil production has been trapped below 74 mbpd since 2005, and that the cost of the marginal barrel keeps rising, this vulnerability is growing.

The Cruel Math of the Marginal Barrel
 PREVIEW

Executive Summary

  • Why oil price vulnerability is growing 
  • Why the marginal cost of oil is rising higher at an accelerating rate
  • Why the marginal cost of oil for non-OPEC regions is now above $90
  • The hard math explaining why an increase an output from OPEC will no longer reduce the world price for oil
  • The new rules that will govern the price of oil from here
  • The alarming growing risk of large-scale war for oil

Part I: OPEC Has Lost the Power to Lower the Price of Oil

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II: The Cruel Math of the Marginal Barrel

An unpleasant megatrend that has affected global oil production the past decade has been the quickly escalating cost of production. However, prices have finally risen high enough to stabilize declines in regions like North America.

This actually makes for a new and emerging vulnerability: the risk that prices fall at some point through levels that remove the new oil supply.

Given that world oil production has been trapped below 74 mbpd since 2005, and that the cost of the marginal barrel keeps rising, this vulnerability is growing.

Image | OPEC Has Lost the Power to Lower the Price of Oil
OPEC Has Lost the Power to Lower the Price of Oil

There’s been a lot of excitement in the past year over the rise of North American oil production and the promise of increased oil production across the whole of the Americas in the years to come. National security experts and other geo-political observers have waxed poetic at the thought of this emerging, hemispheric strength in energy supply.

What’s less discussed, however, is the negligible effect this supply swing is having on lowering the price of oil, due to the fact that, combined with OPEC production, aggregate global production remains mostly flat. 

But there’s another component to this new belief in the changing global landscape for oil: the dawning awareness that OPEC’s power has finally gone into decline. You can read the celebration of OPEC’s waning in power in practically every publication from Foreign Policy to various political blogs and op-eds. David Ignatius of the Washington Post wrapped up nearly all of the recent claims in a nice bundle in his May 4, 2012 piece, An Economic Boom Ahead?, when he quoted PFC Energy’s David West:

“This is the energy equivalent of the Berlin Wall coming down,” contends West. “Just as the trauma of the Cold War ended in Berlin, so the trauma of the 1973 oil embargo is ending now.” The geopolitical implications of this change are striking: “We will no longer rely on the Middle East, or compete with such nations as China or India for resources.”

(Source)

While it’s true that the Americas hold great promise to convert natural gas resources to higher production levels, that is not the case with oil. The celebration of a geo-political swing in energy power therefore misses a crucial point: No region — from OPEC to Non-OPEC, from Africa to Russia — has the single-handed ability to lower the price of oil now, because none can bring on new supply quickly enough for a long-enough sustained period of time.

OPEC Has Lost the Power to Lower the Price of Oil

There’s been a lot of excitement in the past year over the rise of North American oil production and the promise of increased oil production across the whole of the Americas in the years to come. National security experts and other geo-political observers have waxed poetic at the thought of this emerging, hemispheric strength in energy supply.

What’s less discussed, however, is the negligible effect this supply swing is having on lowering the price of oil, due to the fact that, combined with OPEC production, aggregate global production remains mostly flat. 

But there’s another component to this new belief in the changing global landscape for oil: the dawning awareness that OPEC’s power has finally gone into decline. You can read the celebration of OPEC’s waning in power in practically every publication from Foreign Policy to various political blogs and op-eds. David Ignatius of the Washington Post wrapped up nearly all of the recent claims in a nice bundle in his May 4, 2012 piece, An Economic Boom Ahead?, when he quoted PFC Energy’s David West:

“This is the energy equivalent of the Berlin Wall coming down,” contends West. “Just as the trauma of the Cold War ended in Berlin, so the trauma of the 1973 oil embargo is ending now.” The geopolitical implications of this change are striking: “We will no longer rely on the Middle East, or compete with such nations as China or India for resources.”

(Source)

While it’s true that the Americas hold great promise to convert natural gas resources to higher production levels, that is not the case with oil. The celebration of a geo-political swing in energy power therefore misses a crucial point: No region — from OPEC to Non-OPEC, from Africa to Russia — has the single-handed ability to lower the price of oil now, because none can bring on new supply quickly enough for a long-enough sustained period of time.

Image | The Looming Dislocation Risks Posed by Resource Scarcity
The Looming Dislocation Risks Posed by Resource Scarcity
 PREVIEW

Executive Summary

  • Why many entrepreneurial ventures addressing resource scarcity have less time than they imagine
  • Why understanding the unintuitive economics created by resource scarcity is key
  • Copper is serving as a case study in how peak supply is putting upward pressure on world prices
  • The approaching "dead end" for millionaries
  • Why physical networks will trump the importance of digital ones in tomorrow's economy

Part I: 'Cornucopians in Space' Deliver a Dangerously Misguided Message

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II: The Looming Dislocation Risks Posed by Resource Scarcity

One of the most stunning and repeated patterns seen in the 2000-2010 timeframe is that, right as many natural resources experienced phase transition to much higher prices, the production rate of those resources either slowed, stalled out, or in some cases fell.

This is the real reason, in my opinion, why so many writers and thinkers are grappling with the problem of creating future wealth and obtaining (or recapturing, if you will) the kind of abundance we once enjoyed.

It’s positive, actually, that the news story about mineral mining in space has been so popular and covered in just about every major newspaper, because it unintentionally articulates the very long timeline to the solution of resource scarcity now facing human economies. To Peter Thiel’s point, therefore, it would be better to solve our problems in ways that actually serve humanity on relevant timescales, than to delude ourselves into thinking that miracles are just around the corner.

The Looming Dislocation Risks Posed by Resource Scarcity
 PREVIEW

Executive Summary

  • Why many entrepreneurial ventures addressing resource scarcity have less time than they imagine
  • Why understanding the unintuitive economics created by resource scarcity is key
  • Copper is serving as a case study in how peak supply is putting upward pressure on world prices
  • The approaching "dead end" for millionaries
  • Why physical networks will trump the importance of digital ones in tomorrow's economy

Part I: 'Cornucopians in Space' Deliver a Dangerously Misguided Message

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II: The Looming Dislocation Risks Posed by Resource Scarcity

One of the most stunning and repeated patterns seen in the 2000-2010 timeframe is that, right as many natural resources experienced phase transition to much higher prices, the production rate of those resources either slowed, stalled out, or in some cases fell.

This is the real reason, in my opinion, why so many writers and thinkers are grappling with the problem of creating future wealth and obtaining (or recapturing, if you will) the kind of abundance we once enjoyed.

It’s positive, actually, that the news story about mineral mining in space has been so popular and covered in just about every major newspaper, because it unintentionally articulates the very long timeline to the solution of resource scarcity now facing human economies. To Peter Thiel’s point, therefore, it would be better to solve our problems in ways that actually serve humanity on relevant timescales, than to delude ourselves into thinking that miracles are just around the corner.

Image | ‘Cornucopians in Space’ Deliver a Dangerously Misguided Message
‘Cornucopians in Space’ Deliver a Dangerously Misguided Message

Once a year the very chic and exclusive TED conference takes place in Southern California, bringing together entrepreneurs, inventors, and thought leaders from every corner of the world.

There, gathered around a stage, a kind of hive mind begins to unfold in which the most cutting edge ideas in healthcare, energy, social development, and behavioral psychology are shared from a very plugged-in, big-screen podium. It’s extremely well done.

And despite the reflexive criticism from outside the conference — that the gathering is inward-looking and elitist — TED usually does manage to disturb the zeitgeist, a little, with its unveilings in technology and innovation. It is plainly good that next-step advances in solar technology, data collection, and developing world health initiatives are explained and broadcasted from TED. Especially given that policy makers, or those who have the ear of policy makers, are also often in attendance.

A better charge to level against the TED conference, however, is that it’s routinely, if not unfailingly, optimistic.

 

‘Cornucopians in Space’ Deliver a Dangerously Misguided Message

Once a year the very chic and exclusive TED conference takes place in Southern California, bringing together entrepreneurs, inventors, and thought leaders from every corner of the world.

There, gathered around a stage, a kind of hive mind begins to unfold in which the most cutting edge ideas in healthcare, energy, social development, and behavioral psychology are shared from a very plugged-in, big-screen podium. It’s extremely well done.

And despite the reflexive criticism from outside the conference — that the gathering is inward-looking and elitist — TED usually does manage to disturb the zeitgeist, a little, with its unveilings in technology and innovation. It is plainly good that next-step advances in solar technology, data collection, and developing world health initiatives are explained and broadcasted from TED. Especially given that policy makers, or those who have the ear of policy makers, are also often in attendance.

A better charge to level against the TED conference, however, is that it’s routinely, if not unfailingly, optimistic.

 

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