China Bubble

Adam Sharp makes the most telling comment when he asks if you would rather have the us investment in AIG or the developing equivalent investment in China’s high speed rail network been built to serve over a billion people.

That is what makes merely looking at the numbers such folly.  China’s growth surge will not truly end until China’s economic demographics match that of the western world and by that standard they have plenty more to do. 

There will still be shake outs along the way, but the objective is clear and attainable.

The true bubble will only burst when they get there and they have to manufacture a system driven by creative growth as finally occurred in Japan.

We should have learned by now that sustainable growth is simply a matter of finance when all you have to do is repeat what succeeded elsewhere.

Ideology and elitist greed held back global development everywhere while the West recovered from the Second World War yet proved their economic case for economic development.

Today, almost everyone has taken the lesson to heart and is applying its lessons successfully.  Even the lesson that a globally integrated economy makes war rather difficult has been accepted in strange places.  It isn’t all working yet, but it is now a majority position and that certainly was not the world I grew up in.

The China Bubble Debate

Stock Valuations and Growth Projections

By Adam Sharp

Monday, January 18th, 2010

http://www.wealthdaily.com/articles/china-stock-valuations/2272

China is still a growth machine, averaging around 9% GDP lately. But a growing chorus of bears thinks they're cooking the books, and that the whole thing is a huge bubble waiting to pop.

I think Shanghai stocks are a bit pricey here, trading at a P/E of around 30x. So while I consider myself a long-term China bull, it's always good to examine the other side of the argument...

China: Bear Case

Jim Chanos is probably the best-known China Bear out there. He's one of the few guys who saw the Enron collapse coming, so people tend to listen to his warnings.

He thinks China's economy is only being propped up by massive stimulus spending. He points out that their $900b program represents nearly 1/4 of their $4.3t GDP.

It's also not clear how wisely the money is being spent. In some cases, it looks like it's being flushed down the toilet. The empty city in Inner Mongolia is a good example...

China spent billions to build a huge city in the middle of nowhere. It has a huge luxury mall, Venice-like canals, and thousands of empty houses. You can watch an amazing video about the projecthere. Some see this type of project as a clear sell signal.

Questions are also being raised about how real China's growth is. For example, official numbers show excellent growth in auto sales. But sales of gas are anemic. Are they fudging the numbers? Chanos suspects they are, and plans to short auto and infrastructure stocks.  

A government-controlled economy will always be full of waste and inefficiency — that's the nature of socialist markets. Bureaucrats generally make awful businessmen. With hardly any stake in the outcome, workers inevitably get careless and make bad decisions. Corruption also tends to creep in.

But there are some promising projects taking place in China. And compared to the prospects of developed markets, China is one of the better long-term bets.

The Bull Case

Jim Rogers is probably the most well-known China Bull. He dismisses talk that China is a bubble. He recently made a not-so subtle dig at Chanos, saying, "I find it interesting that people who couldn't spell China 10 years ago are now experts on China."

Rogers thinks that selling Chinese stocks today would be like selling American stocks in 1905. I agree. It might be a bumpy ride, but if I had to put money somewhere for the next 10 years, China'd be near the top of the list.

And while some stimulus money is clearly being wasted, some projects look good. One of the more impressive is a $200b high-speed rail network, scheduled to be complete in 10 years.

Efficient public transportation is a no-brainer for China. Combine rising energy costs with 1.3 billion citizens in need of transportation, and you have a socialist's dream-project. If well-executed, it'll provide superior transportation and a lower cost of living for hundreds of millions.

Here's a map of how it'll look like when it's done:

http://www.wealthdaily.com/articles/china-stock-valuations/2272

Now consider the fact that the U.S. has spent around $180b bailing out AIG. For about the same price, China will have a huge high-speed rail network in 10 years. I doubt our investment in AIG will look so good.

The China bull case comes down to growth. Even if they're cooking the books a little to hit their goals, it's still growing faster than 90% of the world.

Time to Invest?

Chinese stocks have historically traded at a premium due to their growth. However, I would probably wait for a pullback to pull the trigger. With the near 100% run Chinese stocks had in 2009, it's prudent to wait at this point.

At 30x trailing earnings, Shanghai stocks are priced for extremely strong growth going forward. And the China bears do have some good points, especially the dependence on stimulus spending.

That said, if we do get a big pullback, I'll be looking to add to my Chinese ETFs — PGJ in particular.

There are a few stocks that are worth a look, but I'm steering clear of the broad-based index funds for now. I recently found a small-cap stock that looks great here. It's China Security & Surveillance Tech, and trades under CSR. It's dirt cheap, trading at a 10x P/E with strong growth prospects. 

Until next time,

Adam Sharp

Analyst, Wealth Daily

Chris Nelder on Seven Energy Futures

Chris Nelder outlines his take on our options for energy production and conversion over the next few years. Take a look at the chart linked a couple of paragraphs into the article.

However we wish it to be anything but, that is the shape of global fossil fuel utilization over the next century. It really cannot be postponed.

Let me make this as stark as possible. If we lost several millions of barrels of production tomorrow, were do we get it from? The immediate answer is nowhere. We have reached the point in which replacement is not an option. We have actually been there for a long time.

Thirty years ago. We had the Saudi Safety Cushion. It is no longer an option.

The market is responding by releasing a torrent of money on the wind and Solar industries and yes even the nuclear industry. It needs a torrent of money.

Those that have read my many posts on this subject know that I am not despairing and that many options are been explored that will respond well to capital. I personally like the use of cattails for ethanol in particular manly because it employs farming and promises to employ millions throughout the world, even if ethanol is used mostly for transportation fuel.

Chris makes the point that core to our future is for renewables to grow from the present two percent to 86% of the global energy system. This sounds daunting, however present capacity can be doubled every five years of so. What this means is that we will reach 4% in 2015 and 8% in 2020. Yet this also means 16% in 2015, 32% in 2025, and 64% by 2030. This is no trick. Renewables are not limited by fuel availability, and the sheer demand for power makes this technology the easiest to finance business in the world.

Early modest returns that discipline capital spending are eventually replaced by decades of free cash flow against no debt.

The other point that I just made is that every operating facility can replicate itself every five years or so. This gives us the benefit of redoubling. This is not possible with Nuclear so far because we quickly hit the limits of our uranium supply.


7 Paths to Our Energy Future

By Chris Nelder Friday, June 26th, 2009

http://www.energyandcapital.com/newsletter.php?roi=echo3-4306473423-3175351-0d0756612326b6cce8863c3353aea5cf&date=2009-06-26ve

I have dished out a healthy share of criticism about the paths we are taking into the energy future, so perhaps it's time I offered some paths of my own. I will outline them as simply as possible, since the data and thinking behind them could fill a book.

First we must know where we're going.

Credible models show that by the end of this century, essentially all of the fossil fuels on earth will be consumed—oil, natural gas, and coal. Presumably, whatever fuels do remain at that point will be reserved for their highest and most valuable purposes like making crude oil into plastics and pharmaceuticals, not burning it in 15% efficient internal combustion engines.

Consider the following world model for all fossil fuels:

http://images.angelpub.com/2009/26/2401/6-26-09-nelder-chart-1.jpg


Source: "Olduvai Revisited 2008," The Oil Drum, by Luís de Sousa and Euan Mearns. Cumulative peak is Data sources: Jean Laherrère for natural gas, Energy Watch Group for coal and The Oil Drum for oil.

[This is an exceptional study and I recommend it to my readers!]

By the end of this century then, a mere 90 years from now, we'll need to have an infrastructure that runs exclusively on renewably generated electricity, biofuels, and possibly nuclear energy. That's where we're going.

Fortunately, there is more than enough available renewable energy to meet all of our needs, if we can harness it. Unfortunately, we're starting from a point at which less than 2% of the world's energy comes from renewables like wind, solar and geothermal.

Hydro provides about 6%, and nuclear about 6%, but for reasons too numerous to get into here, some of which my longtime readers have already heard, I don't believe either source will increase much in the future, and both could actually decline.

Our challenge then is to make that 2% fraction grow to replace about 86% of the world's current primary energy, in 90 years or less.

We are currently at peak oil, a short, roughly 5-year plateau which goes into terminal decline around 2012. All fossil fuel energy combined peaks around 2018, less than a decade from now.

All strategies for accommodating the fossil fuel decline require decades to have any significant effect. The now-iconic study "Peaking of World Oil Production: Impacts, Mitigation, & Risk Management" (Hirsch et al., 2005) demonstrated that it would take at least 20 years of intensive, crash-program mitigation efforts to meet the peak oil challenge gracefully. Another study, "Primary Energy Substitution Models: On the Interaction between Energy and Society," (C. Marchetti, 1977) showed that it generally takes decades to substitute one form of primary energy for another, and 100 years for a given source of energy to achieve 50% market penetration.

Therefore, we are going to have to accomplish most of the renewable energy revolution in a scenario of ever-declining fuel supply. In just 50 years, we'll be working with about half our current energy budget. So in fact we may only have about 50 years to build most of the new renewable energy and efficiency capacity we will need to get us through the end of the century.

Another important factor is that exports will fall off much faster than total supply. (See my article on the oil export crisis from last year.) Foucher and Brown (2008) have shown that the world's top five oil exporters could approach zero net oil exports by around 2031. Net energy importers like the US could be increasingly starved for fuel as decline sets in and accelerates, and net energy exporters could wind up shouldering much of the burden of new manufacturing. This factor means that we will have to front-load as much of our development as possible.

The final and most important factor is population. The few population models that actually take fossil fuel depletion into account assume that global population increases roughly out to the global fuel peak, and then stabilizes at that level or declines naturally while economic development promotes lower fertility rates and renewables and energy efficiency increase to fill the gap of declining fossil energy. I understand why this assumption is made—because the alternative is too ghastly to contemplate—and for the immediate purpose of this article I will go along with it. I will note however that history and scientific observation of populations suggest some sharp episodes of decline are more likely, and in my estimation we will end this century with a considerably smaller population than anyone forecasts, at some level well below today's.

How, then, can we replace or offset through efficiency at least 40% of our current energy supply with renewables in the next 50 years, while fuel prices are rising and the global economy is flat or shrinking due to a lack of fuel?

Seven Paths to Our Energy Future

A proper model for achieving this goal would be a very large undertaking, the sort of thing that should be done by a team of experts with a budget. (Is anybody at the Department of Energy listening?) But I can identify some key pathways that are, in my estimation, no-brainers. Because the solutions going forward will be quite different for each country, I will limit my recommendations to the US.

1: Rail. Rail should be Priority 1, and should be granted the largest portion of public funding. We should begin as quickly as possible with light urban rail, and work over the next 40 years to build a comprehensive high-speed long-distance rail system.

Rail is by far the most efficient form of overland transportation we know, and moving people out of their cars and freight off the roads will yield real and immediate savings in liquid fuel consumption. Not only will this help alleviate America's need for rapidly declining oil exports, it is a proven, fairly low-tech, sustainable and workable solution that would allow renewably generated electricity to be phased in over time with minimal disruption.

2: Rooftop Solar PV. Utility scale projects like giant solar farms in the desert and giant wind farms in the Midwest (or offshore) all face serious hurdles in siting, permitting, environmental impact, and transmission capability. Rooftop photovoltaic (PV) solar systems face no such issues and can be deployed right now, building capacity incrementally over time. PV has been proven in the field commercially for over 30 years and, speaking as a former residential and small commercial solar designer, I know that it can provide 50-100% of the needs of most small buildings.

Rooftop PV also has a capital advantage. Whereas utility-scale solar and wind projects need to secure large power purchase agreements in order to raise enormous amounts of capital that will be tied up for decades, small rooftop PV systems are purchased outright by the end-users, assisted by ratepayer-funded incentive systems. Simply getting projects done is considerably easier.

From a funding perspective, rooftop PV is arguably one of the easiest sources we can develop, and options are proliferating. Cities like Berkeley and San Jose are offering municipal bonds to finance local projects, which keeps the financing small, local, and low-risk. Third-party financing companies are springing up all over the country, making it possible for home and business owners to put solar on their roofs with no out-of-pocket expenses and pay them off at the same rates or less than they're already paying to utilities, with nearly zero risk to all parties. End-users enjoy an additional benefit of having a known, fixed cost for their future power, even as fossil fuel prices skyrocket.

Another very important advantage is that rooftop PV is distributed, which contributes to the resiliency and robustness of the grid. In most modern neighborhoods, no grid upgrading is needed to support rooftop solar systems. More distributed power generation also means fewer points of failure: a cloud over here is compensated by clear sky one mile away. It also enables micro-islanding, which would allow most of the grid to stay up when there is an outage, instead of taking vast chunks of the country's grid down along with it as we have seen in the recent past.

Utilities also win with rooftop PV, because it means they don't have to spend an enormous amount of effort and money in search of enough clean, green kilowatt-hours to meet their renewable portfolio standards, nor spend it on beefing up their grids. It essentially costs utilities zero to take up energy produced this way; in fact it can be a net benefit to them because the homeowner ends up paying for the new smart meters they plan to deploy across their grids anyway (at a cost of tens of millions of dollars).

Feed-in tariffs (FiTs) that pay a premium for kilowatt-hours generated by rooftop PV have been employed with great and immediate success in Germany and Japan, to the point where both programs will be largely phased out within the first decade. Support for a national FiT in the US is still weak, but I believe it could become a reality if the public were educated about the success it has enjoyed elsewhere in the world.

3: Alternative Vehicles. Since reconfiguring our urban topology around transit and deploying light rail will take decades, we will need some transitional solutions that still allow us to get around in cars for a good many years. All-electric and plug-in hybrid electric vehicles are a two-fer: They can take advantage of growing renewable electricity supply, and they can function as a giant, distributed battery for intermittent renewable sources using vehicle-to-grid (V2G) technology. In time, V2G could provide the final link that allows renewable energy to fully displace fossil fuels.

We will need to begin building the electric vehicle charging infrastructure as quickly as possible to accommodate these new vehicles, but it needn't be any more complicated than deploying a new row of parking meters. This I think is a good and proper use of public funding. The automakers themselves should be able to find adequate funding via the private sector, with perhaps a modicum of federal support for research to jump start next-generation development of batteries and propulsion systems.

Compressed natural gas vehicles are another transitional solution that would take advantage of domestic gas supply while cutting demand for imported crude.

Biofuels may also play a role, although I continue to be skeptical about how much they can truly achieve once net energy (EROI) and food-vs.-fuel tradeoffs are taken into account. Corn ethanol fails these tests, but to the extent that cellulosic biofuels pass them, they could take a substantial bite out of our demand for petroleum. Still, it will take a decade or more to scale it up to significant levels.

Before the global economic downturn, our replacement rate was about 14 million new cars and light trucks per year. We have about 250 million such vehicles now. At that rate (we're well down from it now), it would take 18 years to replace the fleet, but we probably won't maintain that rate while the economy shrinks and fuel prices rise. Therefore we should concentrate on a rapid, near term deployment of alternative vehicles, before it gets prohibitively expensive and difficult to do so, even if they wind up having all the sex appeal of a mass produced WWII Jeep.

Ideally, we will only have to replace a fraction of the current fleet, with the rest of the traffic having been moved to rail.

4: Efficiency. Most of the efficiency gains we can make are thermal: reducing the energy it takes to heat and cool buildings. These gains ultimately translate into less coal and natural gas demand, so they will do little to reduce our demand for oil, which must be our first priority. In the long run however, efficiency must make up for any shortfall in renewable energy production, so it must be pursued continually over many decades.

More efficient regular gasoline and diesel vehicles also belong in this category, and may reduce our dependence on oil if they are sufficiently efficient and the gains aren't nullified by the Jevons paradox. In my view, anything under 25 MPG is simply pathetic at this point, and undeserving of any federal support. Incentives for more efficient ICE vehicles should be geared to produce the greatest possible gains in fuel economy, not the watered-down "Cash for Clunkers" bill we got, which will ensure another several years' worth of inefficient SUV production.

5: Utility Scale Renewables. Rooftop PV may be able to fill the short-term supply gap if aggressively pursued, but in the long term we'll need every renewable kilowatt-hour we can get. We'll need large solar plants across the Southwest, and huge wind farms in the Midwest and offshore. Geothermal and marine power can also make major contributions in time, but they're babies now, and will need public guarantees and funding to reach the level where they are commercially viable technologies.

6: A Beefier, Smarter Grid. In order to carry all the new renewable power, we're going to need a bigger, more resilient, and smarter grid. The good news is that we already have most of the technologies we need in this area. All that we lack is the will and the funding to put it in place. In the same way that it took federal funding and initiative to create the interstate highway system, the grid will also probably need to be nationalized and its enhancement funded publicly in order to meet this challenge.

A key element of the new grid will be long-distance high-voltage direct current (HVDC) power lines to transmit the power from the large utility scale projects to the cities where it's needed. This must be on the short- to medium-term agenda since it must be ready to take on real capacity within 20 years and be nearly full-blown within 40 years.

7: Keep Drilling. If we back off too much too soon from oil and gas production, it could leave us without adequate or reasonably priced fuel to accomplish this transformation, and sink the entire effort. I think we'll need as much oil and gas (and to a lesser extent, coal) as we can possibly produce in order to pull it off. Just imagine how difficult it will be to produce a solar panel or a large wind turbine using only renewably generated electricity to mine the raw ores, crush them, transport them, smelt them down and turn them into stock, transport them again and turn them into end-products, then transport them a final time and install them. I think it's safe to say that we have no idea how to do all that without liquid petroleum fuels.

The twilight years of hydrocarbon fuels are essentially upon us, but we'll need them more than ever as they peak out and decline. We will have to keep drilling, and the oil business will have to be able to turn a fair profit.

At the same time, I have long maintained that after a nearly a century of commercial operation, the petroleum businesses should be able to get by on its own, without public subsidies of any kind. If that means the price of fuels goes up, then so be it. We're going to have to start paying a fair value for those finite, rapidly disappearing resources some day, and price increases will only encourage efficiency and alternatives.

Just Do It

Turning these conceptual pathways into action will not be easy, and we may be forced into action before we have perfect clarity about where we're going and what it's all going to cost. Yet I have no doubt that if we move on these seven pathways as quickly as possible, we will make progress in the right direction. There will be time to fine-tune it later.

Over the long term, the economics of energy are clearly in favor of renewables. The costs of producing and burning fossil fuels can only increase, and the costs of renewable energy will fall for decades before stabilizing.

Finding the money to rebuild so much of our infrastructure will no doubt be a challenge. But if we're willing to put a $2.5 trillion debt burden on the future to bail out the financial system, and untold trillions more to provide military protection for the oil resources that remain, perhaps it's just a question of priorities. I have no doubt that the money would be better spent on building an energy infrastructure that will actually sustain us.

The successful pathways are the profitable pathways. Think rail, small solar PV, alt vehicles, efficiency, utility renewables, grid, and drill, baby, drill.

Until next time,
Chris

High Speed Freight Handling

I have recently been invited to commence the publication of an investment advisory letter focused on renewable energy. something that my readers know is dear to my heart. This is of course, early days, and we have to see were it goes. I have given the area some fair thought of course and I am sure that I will not lack content for a monthly newsletter. I will keep you informed.

It inspired me to think of one of my favorite sources of renewable energy. It is called wasted energy. We are skilled at producing plenty of that. That reminded me that one of the great opportunities to save huge amounts of energy exists in the rail transport industry. Yet here is an industry that has still to make the conversion to disc brakes.

The investment question is who will lead the change to a low energy system.

The energy question is how. And it is really quite simple. All those freight cars need to be converted over to air pads for frictionless movement. At the moment, it is fair to say that I have worked out how to do this while retaining and improving existing infrastructure.

We combine this with a direct current wheel motor and dynamic braking system and we have the core of a revolution. I foresee a power takeoff used on the downhill leg to charge cheap track side batteries and that stored power used to haul a train going in the opposite direction back up the grade.

Eliminating most rolling losses and possibly a lot of weight, will slash the cost of moving goods anywhere. even more important, the speed can be maintained as high as 80 to 100 mph with some modification along an entire route. This means that a mile long train can be 2000 miles down the track inside a twenty four hour period. Long haul truckers, eat your heart out!

And of course, that is who the rail companies need to beat. Not each other.

I have thought through the technical aspects sufficiently so as to believe that it can be done.

Moving freight cross country at 80 mile per hour is awesome and doable. Who is going to be the leader?