Category Archives: Economy

Is OPEC Calling Peak Oil? Producers Shifting to Solar as Oil Price Slump Endures and Reserves Adjusted Downward

More than ever its clear that an oil based economy is not sustainable from a variety of perspectives, both ecologically and economically. Perhaps counterintuitively, these domains are not obverse to each another, but are interlocked facets of the how the earth sustains lifecycles. They are also twin indicators of humanity’s role in the stewardship of them.

Last week we saw the somewhat mind boggling announcement by Saudi Arabia that it planned to partially wean its economy from oil sales by 2020 and do so completely by 2030.  From Reuters on April 25:

The powerful young prince overseeing Saudi Arabia’s economy unveiled ambitious plans on Monday aimed at ending the kingdom’s “addiction” to oil and transforming it into a global investment power….His “Vision 2030” envisaged raising non-oil revenue to 600 billion riyals ($160 billion) by 2020 and 1 trillion riyals ($267 billion) by 2030 from 163.5 billion riyals ($43.6 billion) last year. But the plan gave few details on how this would be implemented, something that has bedeviled previous reforms….The 31-year-old prince gave assured answers to questions on the plan, and appeared to pitch his comments to appeal across the Saudi social spectrum, and in particular to young people, who face unemployment and an economic downturn despite their country’s oil wealth.

Many were of course skeptical. And while few details were given, the Saudi markets seemed to like the news as they rose by ~2.5% that day. Presumably this is because of publicly announced plans to sell public stakes in the Saudi state run Aramco. Do the Saudi’s think we are in Peak Oil?

Their neighbors in Dubai might think so as well. They are about to bring the world’s largest solar plant online which will provide electricity at 3 US cents per Kilowatt hour.

According to industry analyst Apricum:

All three lowest bids by themselves clearly set a new world record for the unsubsidized cost of solar electricity. A recent bid of 3.6 cents/kWh by Enel Green Power in Mexico did not include the value of additional green energy certificates. Solar tariffs in the USA now regularly dip below 3 cents/kWh, but these include a 30% tax incentive and other subsidies.

Phase 1 Mohammed bin Rashid Al Maktoum Solar Park 13-MW Source: First-Solar
Phase 1 Mohammed bin Rashid Al Maktoum Solar Park 13-MW Source: First-Solar

Twist number two was in an Oilprice.com post covering a scientific analysis of the the recent Global Energy Assessment by the International Institute of Applied Systems Analysis which finds that proven reserves are 50% lower than decades old conventional wisdom would have it:

According to Professor Michael Jefferson [of the ESCP Europe Business School] who spent nearly 20 years at Shell in various senior roles from head of planning in Europe to director of oil supply and trading, “the five major Middle East oil exporters altered the basis of their definition of ‘proved’ conventional oil reserves from a 90 percent probability down to a 50 percent probability from 1984. The result has been an apparent (but not real) increase in their ‘proved’ conventional oil reserves of some 435 billion barrels.”

Global reserves have been further inflated, he wrote in his study, by adding reserve figures from Venezuelan heavy oil and Canadian tar sands – despite the fact that they are “more difficult and costly to extract” and generally of “poorer quality” than conventional oil. This has brought up global reserve estimates by a further 440 billion barrels.

Predictions about the exact nature and timing and of the phase-out process for fossil fuels are premature. Yet, as the the developments above indicate, the pace of the transition away from fossil fuels to renewable energy sources continues to accelerate.

Earth Day 2016 — Beyond Paris & Accounting for All Carbon Emissions

Economist Paul Krugman, while referencing an upcoming carbon pricing piece by David Roberts (@drvox) writes that:

Econ 101 tells us that if you want to reduce emissions of a pollutant, the most efficient way to do that is to put a price on emissions, so that all possible routes to reduction are taken, and the marginal cost is the same for all routes. It’s a real insight, and has had positive impacts on real-world policy — cap-and-trade has worked very well at reducing acid rain.

Krugman goes on to argue that pricing may not be the only solution, it may even be even sub-optimal in some cases, and that regulatory solutions may well develop sooner than robust international carbon markets. He concludes a few paragraphs later:

The point is that just because Econ 101 makes a smart, counterintuitive point doesn’t make that point of central importance….

Yet, we know ex-post from acid rain cap and trade plans that cap and trade regimes deliver results. And we also know that regulatory capture undermines many anti-pollution rules with solar being among the biggest targets. Next, there is the fact that massive amounts of Carbon Pollution remain unaccounted for. So both market making and regulation must be moved forward deliberately.

Door to Door Cover: The Magnificent, Maddening, Mysterious World of Transportation
Door to Door
Cover: The Magnificent, Maddening, Mysterious World of Transportation

Continue reading Earth Day 2016 — Beyond Paris & Accounting for All Carbon Emissions

How much will income inequality matter if the world’s oceans cannot produce food?

From the article titled “Climate-Related Death of Coral Around World Alarms Scientists” that appeared in the April 9th Edition of the New York Times:

This is a huge, looming planetary crisis, and we are sticking our heads in the sand about it,” said Justin Marshall, the director of CoralWatch at Australia’s University of Queensland.

Bleaching occurs when high heat and bright sunshine cause the metabolism of the algae — which give coral reefs their brilliant colors and energy — to speed out of control, and they start creating toxins. The polyps recoil. If temperatures drop, the corals can recover, but denuded ones remain vulnerable to disease. When heat stress continues, they starve to death.

It seems unimaginable that future generations may not be able to experience the beauty of these incubators for the majority of sea-life. The graphic provided is, to say the least, eye-opening:

Source: NOAA, GEBCO as published in The New York Times
Source: NOAA, GEBCO as published in The New York Times

Plastic Pollution On Track to Surpass Fish By 2020 while ALEC Derails Legislation to Curb the Problem

Fund Balance has covered the damage done to the world’s ocean’s by discarded plastic at great length. Based on World Economic Forum projections more pieces of plastic will contaminate the world’s ocean than there are fish within it by 2050. Only about 5% of plastic is recycled. There is no system in place takes these plastic materials back. So after their use they pollute the ocean. Freshwater systems suffer as well. Plastic pollution interferes with every aspect of the world’s water ecosystem.

Screen Shot 2016-03-21 at 1.50.40 PM
Photo Credit. The US Environmental Protection Agency.

 

All countries to one extent or another experience effects from the way plastic damages fish by filling up their stomachs causing them to starve or killing them by ensnaring them and causing serious injuries and even early death. Nations like the US and China, whose livelihood and or protein sources are highly dependent on the ocean worry.

The World Economic Forum argues that innovation will be essential for the world’s oceans. Yet we all have reason to wonder if such innovation will be choked off before its can be launched. The shadow governance group American Legislative Exchange Council (ALEC) promotes model legislation to prevent local governments from banning plastic bags. Such moves run counter to innovation and seek to create and coddle ALECs corporate backers and their monopolies, particularly the Petroleum Marketers who provide substantial funding for ALEC. Petroleum is used to make plastic. The authors the World Economic Forum study argue that plastic manufacturing should be decoupled from fossil fuels. This will require doable and currently in process innovation. Such efforts will create many new economies and industries, as opposed to protecting one from the competition such innovation would bring. Apparently ALEC is not interested in the health and well being of future generations. If it did, it could use its abundant resources to help innovation of healthy ways to manufacture plastic materials.

Source: World Economic Forum
Source: World Economic Forum

How can such groups claim to be focused on the future when they seek to continue to sell products that make the leave behind a badly damaged ocean for future generations? And what is the impact of such efforts to stifle common sense legislation to ban plastic bags on the drivers for innovation our way out of the plastic trap?

How much of climate change is our fault: Exxon and the marketing of doubt

By Walter Borden

Astrophysicist Adam Frank recently commented on NPR that climate change really is not really humanity’s fault. The crux of his argument is that while the science is settled that human activity has caused climate change, we really could not have known better. Clearly there is some real truth in this assertion. To quote from the article:

But here’s the crux of the issue: 150 years ago when we started building that fossil-fuel based civilization, we had no idea of what we were doing. We’d found this black goo seeping up from the ground and it turned out you could do awesome things with it. In the winter, you could burn it in a furnace and keep your house warm. In the summer, you could burn it in a power plant and use the electricity to keep your house cool. You could also burn it in an internal combustion engine and travel hundreds of miles in a single day. And all that electricity you were generating from the power plant? You could use that to keep the lights on at night and watch moving pictures of stuff happening on the other side of the planet.

 New Mexico's largest electric provider — the coal-fired San Juan Generating Station near Farmington — has been defending a plan to replace part of an aging coal-fired power plant with a mix of more coal, natural gas, nuclear and solar power. Susan Montoya Bryan/AP & NPR website.

New Mexico’s largest electric provider — the coal-fired San Juan Generating Station near Farmington — has been defending a plan to replace part of an aging coal-fired power plant with a mix of more coal, natural gas, nuclear and solar power.
Susan Montoya Bryan/AP & NPR website.

At the outset of large scale fossil fuel utilization and into the 20th century this point is fair. But we must consider the case of Exxon, for example has worked to undermine climate science including widespread dissemination of both its own scientific findings as well as those of other groups. According to the New York Times:

So, even as one in-house memo stated that “fossil fuels contribute most of the CO2” that was turning the earth into an overheated greenhouse, another memo showed that the company would seek to “emphasize the uncertainty in scientific conclusions.

 

Other major players in Big Oil very likely done same. And quite naturally politicians in the House Science Committee (under the chairmanship of Lamar Smith, R-TX) who take large contributions from Big Oil are using sweeping new congressional protocols modeled on the open-ended Benghazi hearings, to harass and intimidate climate researchers. Dr Frank argues that its time to go beyond narratives of greed. Maybe not quite yet. While we all strive to avoid ad hominem, it seems greed driven attacks risk damaging the basic process by which our nation funds basic research. As David Roberts points out in an very thorough post at Vox:

To be clear, Smith has not alleged any corruption, wrongdoing, or even bad science. He hasn’t alleged anything. Nor has he offered any justification for why he needs access to NOAA internal communications. The new rules mean that he no longer has to explain or justify himself to anyone. He’s just hoping to find something he can use.

So, while Dr. Frank’s point has merit, and invective isn’t likely to help much its important we understand its not other factors, and indeed putting profit before future generations apply now as well as to the late 20th century. Because as he stated:

That’s because the real truth is this: While triggering climate change might not be our fault, not doing everything we can about it now that we know it’s happening — that would be our fault. Worse, it would be our failure as a species.

Gulf of Mexico Dead Zone Much Larger than Forecast While Agriculture Industry Leaders Succeed With Sustainable Business Praxis

By Walter Borden

Evidence continues to mount. The time for a rapid transformation away from Industrial Agriculture methods towards Sustainable ones is now. The size of an hypoxic ‘dead zone’ that disrupts and destroys marine life and fishing lifeways in the Gulf far exceeds this year’s forecast, NOAA scientists report. The dead zone — areas in red to deep red that have far too dissolved oxygen to support marine life other than often toxic algal blooms— is the size of Rhode Island and Connecticut combined.

Source: Tech Times and NOAA
Source: Tech Times and NOAA

From Tech Times: ”

The Gulf of Mexico’s “dead zone,” a region depleted of oxygen to the point where fish and other marine life can die, covers 6,474 square miles this year, federal scientists say.

That is above the yearly average and much larger than had been forecast for 2015, the National Oceanic and Atmospheric Administration says.

A “dead zone,” also known as an hypoxia area, is the result of the runoff of nutrients from agriculture and other human activity carried by rivers into the ocean. There, those nutrients accelerate an overabundance of algae that then sinks to the bottom where it decomposes, consuming the oxygen needed to support marine life, the agency explains.

This year’s dead zone in the Gulf is the size of Rhode Island and Connecticut combined, scientists say, with nutrients flowing from the Mississippi River affecting coastal resources and marine habitats in the Gulf.

The good news is that companies on many fronts continue to make considerable advances in sustainability. Coca-Cola Company is years ahead of schedule in its efforts to replace the water that it uses around the world to make its beverages, it recently announced, as reported in the New York Times. Another consumer staple is the beverage market The Bacardi unit, The Rothes CoRDe, a John Dewar & Sons distillery part-owned by The Combination of Rothes Distillers is:

the latest facility under the Bacardi umbrella to produce energy through a biomass boiler fuelled by Scotch whisky distillery by-products. The Dewar’s facility produces enough energy to power entire communities of neighboring distilleries — along with about 8,000 homes….We generate 8.3 megawatts of electricity every hour of every day. We use some onsite and export the rest — enough for 20,000 people in 8,000 homes,” said Frank Burns, Managing Director at Rothes CoRDe….Converting pot ale (the residue from copper whisky stills) into organic feedstock is another technique used to divert waste from the distilleries. Local farmers use it for their animals. Each of these initiatives helps the company get a little closer to creating a “closed loop” lifecycle for their whisky products.

As oft-noted here before, sustainable business practices and principles are not a fad or fringe aspect of modern management and fiduciary practice. Rather, they are essential for planning for long term success in the 21st Century.

Excellent Video (2:51) On How CO2 is Acidifying & Warming Oceans

Without healthy oceans the food supply for future generations and their very existence are at risk. And we know that even if all carbon being released today from fossil fuels were to halt, the climate would continue to warm for some time. Kind of like how just because you see an iceberg it doesn’t mean that you have time to steer the ship clear.

Coal Bubblenomics: Bank of America Backs Away From Coal Financing

Yesterday Reuters reported:

Bank of America announced Wednesday it will reduce its financial exposure to coal companies, acknowledging the risk that future regulation and competition from natural gas pose on the industry.

The bank announced its new coal policy at its annual meeting, saying it would cut back its lending to coal extraction companies and coal divisions of broader mining companies.

“Our new policy reflects our decision to continue to reduce our credit exposure over time to the coal mining sector globally,” said Andrew Plepler, head of corporate social responsibility at Bank of America.

The announcement comes amid a growing fossil fuel divestment movement, in which universities, churches and large asset owners are being pressured to abandon or curb their investments in high-carbon energy.

Global bank HSBC said in a client research note in April that the recent drop in energy prices has put a spotlight on “stranded” fossil fuel assets, making them a risk to investors.

Screen Shot 2015-05-07 at 10.15.16 AM
Source: New York Times

Here we see CSR and Climate Change considerations making their way into one our nations systemically important and indispensable banks. More work is to be done, though, as BofA shareholders also rejected a resolution requiring the bank to report on its impact on climate change from financing fossil fuel projects.

And while many claim that renewables are only competitive due to subsidies. Setting aside the fact that fossils also are heavily subsidized, solar along with other renewable energy technologies, have also seen a dramatic fall in costs, in the range of more than 60 percent over the last five years. This why nations like Britain that have scoffed at renewables now feature investors and developers actively bringing it online as an energy source.

Nonetheless, despite efforts by various groups like the Alabama Wind, an anti-clean energy group with a notably Orwellian title and whose logo on its Twitter page states “Defend Your Property Rights”, the horse is out of the barn. Or as one solar installer put it in a quote in the New York Times:

The lumbering big utilities that are so used to taking three months to study this and then six months to do that — what they don’t understand is that things are moving at the speed of business. Like with digital photography — this is inevitable.

Renewable Energy & Climate Change Mitigation: 2014 Milestones, 2015 Challenges

By Walter Borden

The Executive Branch took the lead for the US Public in addressing Climate Change amelioration in 2014 with both EPA actions as well as international diplomacy. By any standard the US China Agreement on Climate Change is, as The Guardian wrote:

A historic milestone in the global fight against climate change

Christmas Tree of Recycled Plastic Bags made by artists Luzinterruptus.
Christmas Tree of Recycled Plastic Bags made by artists Luzinterruptus.

Solar and wind energy are now price competitive with conventional fuels and installations, especially in the Northeast and Southwest. The US military maintained its tremendous foresight as it advances with solar installations as well as developing equipment for the field.

Stock traders have been bullish (though recently skittish to bearish). Nonetheless, the Guggenheim Solar ETF (NYSEARCA:TAN) vs. the S&P 500 showed huge swings to the upside again marked by very high volatility. Observations that low oil prices will harm solar lack coherence as the main competitor to solar and wind is coal in the world’s energy marketplace. Furthermore oil accounts for less than 10% of the input costs of solar manufacturing and de minimus amounts in plants presently online.

Divestiture from fossil fuel concerns now stretches from the offices of the Rockefeller Foundation to those of the Stanford University endowment, among a great many other institutions.  In other areas of finance, firms like Generate Capital have rolled out innovative methods for providing capital for renewable energy and fresh water infrastructure.

Challenges lie ahead in 2015 to be sure. Many states such as Ohio and Florida are rolling back programs to encourage adoption of clean energy. The incoming U.S. Congress will be controlled by policymakers quite hostile to climate change mitigation, clean energy, and the EPA. Worse still, they are more committed to corporate welfare for the fossil fuel industry than ever. While jobs have been created (and destroyed) in the boom-bust cycle of shale extraction, in a handful of states the notion of the industry undertaking retraining assistance is never mentioned. Thus any hope of 21st Century Public Works project to build our climate friendly infrastructure hinge on the outcome of the Presidential election some two years out.

Many journalists in covering New York State’s ban on fracking missed a central point. For example, Andrew Revkin at Dot Earth wrote:

….even though I felt (and still am convinced) that gas extraction from shale can be done safely and cleanly if properly regulated.

In our current environment regulatory capture — the revolving door between regulators and the industries they are tasked to regulate by the electorate — continues to intensify. So expecting ‘proper regulation’ to protect our water supply and atmosphere is an inviable approach in the Citizen’s United era. (As an aside Journalists Charlie Rose and Cory Johnson, both of Bloomberg TV, have recently professed ignorance as to what regulatory capture is. Yet, its well known many key regulators are paid bonuses to leave their jobs for government all the while expecting to be hired by the same industry that they regulated. Who is going to regulate and fine firms for which they expect to work?) Quis custodiet ipsos?

Utility scale solar in particular presents legitimate concerns due its water requirements for keeping sand and dust off the panels. Though as the World Bank notes many Concentrated Solar Power plans have managed to cut water usage by 90%.

Nonetheless, fossil fuel is still the primary threat to supplies of fresh water, whether from fracking, coal mining, or aquifer depletion. Rampant plastic pollution injures our hydrosphere and climate change continues to change the ecology of the world’s oceans via acidification. Such changes are dangerous, and the one’s still under study are worrisome in the uncertain nature of their long term effects.

Meanwhile confusion and weak logic reign when it comes to the Keystone XL pipeline. Economist John Cochrane calls it “infrastructure” yet its only purpose is to ship oil from Canada for export and usage in other nations. And, the profits will largely accrue offshore. The hope is that the President will veto this boondoggle — which will create comparatively few jobs, the majority of which will be temporary.

However, it is worth ending on a positive note. Increasing numbers of people recognize the threat of climate change and are integrating ecology into economy. The picture at the beginning of this post is one of a Christmas Tree made entirely of recycled plastic bags. A realization is spreading that the natural world, the source of all life and profits, needs to be given as high a priority as national defense for it is essential to the general welfare.

A False Choice: Either Jobs or Clean Water, Air, and Healthy Forests

Robert F. Kennedy presents a strong case that King Coal is by and large criminal given the massive amounts of regulatory violations and thus damage to local water, air, and geologic resources it wrecks. To this all one must add coal mining concerns’ repeated and ongoing attempts to mislead and falsely report low to no violations of numerous federal and state laws.

As usual several commenters complain about loss of jobs caused by efforts to restrict and ultimately ban strip-mining. Oh, and subsidies for renewable energy are bad. These arguments are nothing more than a bunch of hot, soot-filled air.

Most mining has been automated over the last decade or so — by the coal mining concerns (which receive tax subsidies and other benefits themselves). So we’re talking about very few jobs — that King Coal would happily eliminate if it could. They should be required to pay for re-eduction/re-location for miners as opposed to plying the line that its a choice between jobs and clean water, air, and intact forests. Its not, at all.

As Paul Krugman wrote the war on coal mining jobs was fought by the mining firms themselves:

“There used to be a lot of coal miners, but not any more — strip mines and machinery in general have allowed us to produce more coal with very few miners. Basically, it’s a job that was destroyed by technology long ago, with only a relative handful of workers — 0.06 percent of the US work force — still engaged in mining.”

Here is the key graph in the Paul Krugman post cited above:

Arguments Against Decarbonization Crumble, Fossil Fuel Divestment Momentum Builds

By Walter Borden

Two recent reports challenge the conventional wisdom that decarbonization via carbon taxes or other methods in concert with divestment from fossil fuel marketers means diminished prosperity. Both reports were widely covered and come from authoritative international groups. Both the New Climate Economy Project  and a working paper from the International Monetary Fund (IMF) find that robust policy action reducing carbon emissions would have very limited negative effects on economic growth and shared prosperity. They also advance substantive arguments and analysis that such policies may indeed accelerate growth.

Notably and not without a soupçon of irony, economist and vocal climate change climate skeptic Richard Tol, argued in 2013:

In sum, there is no carbon bubble. If there were a carbon bubble, it would not be about to burst. If it would burst, the economic impact would be minimal.

Coal Stocks Lag S&P and its getting worse as momentum builds for divestment
Coal Stocks Lag S&P and its getting worse as momentum builds for divestment

So interestingly, there is agreement from distinct and opposite quarters that decreased use of fossil fuels poses limited economic risk. For example, as Paul Krugman wrote earlier this week in reference to the two reports from the New Climate Economy Project and the IMF:

This might sound too good to be true, but it isn’t. These are serious, careful analyses….

On one side, there has been dramatic progress in renewable energy technology, with the costs of solar power, in particular, plunging, down by half just since 2010. Renewables have their limitations — basically, the sun doesn’t always shine, and the wind doesn’t always blow — but if you think that an economy getting a lot of its power from wind farms and solar panels is a hippie fantasy, you’re the one out of touch with reality.

On the other side, it turns out that putting a price on carbon would have large “co-benefits” — positive effects over and above the reduction in climate risks — and that these benefits would come fairly quickly. The most important of these co-benefits, according to the IMF paper, would involve public health: burning coal causes many respiratory ailments, which drive up medical costs and reduce productivity.

And we may be in later stages of divestiture than some opine. For example, Fund Balance has created  an ETF  on the Motif Platform that tracks Coal Stock prices. It was initiated after Stanford University’s signal move to divest from coal stocks. This ETF is down 32% since inception in May 2014 vs. 5.9% return for the S&P 500 and down 77% over the past five years vs. a 109% return for the S&P.

Coal stocks have fallen even further since major Universities began divesting.
Coal stocks have fallen even further since major Universities began divesting.

What of the argument that China and India will continue to rapidly increase their respective carbon emissions even as US and EU emissions fall? We can see now that there are many health benefits and hence productivity gains from cleaner air and water. Factor in the inevitable pressure such efforts will put on these two nations to curb emissions as well as their budding sustainability movements (not to mention pollution so bad that major cities must be shuttered and entire rivers cleaned ever more frequently), and such arguments suddenly reveal their superficiality.

So, critical mass for decarbonization is ever closer as the World Council of Churches, Rockefeller Foundation, Google among many other large scale organizations join in with major universities in their divestment commitments. As Eric Schmidt said when asked about Google’s withdrawal from fossil fuel promoters/renewable energy policy antagonists, The American Legislative Council a.k.a. ALEC:

“The facts of climate change are not in question anymore. Everyone understands climate change is occurring, and the people who oppose it are really hurting our children and our grandchildren and making the world a much worse place,” Google Chairman Eric Schmidt told NPR’s Diane Rehm in explaining the decision. “And so we should not be aligned with such people — they’re just, they’re just literally lying.”

 

American Infrastructure Improvement: A Job for 21st Century Labor

By Walter Borden

There are many reasons to celebrate Labor in the U.S. as well as to consider what its role in the 21st Century can be. The American Society of Civil Engineers, when they graded our nation’s infrastructure, assigned a startling D+.

Firstly, our nation’s infrastructure has in most areas been allowed to decline.

Secondly, large public works projects, the W.P.A., NASA, The Internet, and the Interstate Highway system result from the type of investment and resources only the U.S. Government can bring to bear. Wal Mart and Amazon disproportionately use the highway around their distribution systems and drive great financial benefit, Google and Apple have built entire new markets with mobile app GPS driven ecosystems thanks to NASA and its innovations in satellite technology, and the WPA built up everything from Libraries to the Hoover Dam. So even while well established fossil fuel marketers continue to enjoy subsidies, lets apply some to Solar. (The same can be said for large agri-businesses  and our water treatment and delivery systems which I will address in a later post).

Screen Shot 2014-09-01 at 11.44.11 AMThirdly, all these industries need large volumes of energy from electrical power. With Solar now on parity with coal in many areas, now seems the opportune time for a nationwide solar public works initiative. Solar has much to offer, from energy independence, low carbon emissions and thus greenhouse gas/pollution reductions, and resiliency. This resilience proved itself in the Sandy storm and flooding, as the solar stations at work there stayed online even while diesel ones went down due to flooding and the frequent inability to get diesel to the necessary places. Its important to note that claims that such programs will hurt coal miners are false and misleading; the coal mining industry cut its employment numbers by more than 2/3’s over the last thirty years via the automation of strip mining.

Lastly, a large investment in solar will very likely bring about entire new class of technologies and market opportunities. This is key as start-ups, the traditional engine of the American Economy,  continue to experience more and more difficult times. For example, as Robert Litan of the Broookings Institution and Hatan Hathaway, Ennsyte Economics recently showed:

And its important to note here that its not simply a result of an aging population, as Ben Casselmen of fivethirtyeight.com shows:

 

casselman-datalab-startup

 

 

 

 

Microdgrids Remained Online During Sandy — The New Jersey Government Noticed

By Walter Borden

Its been well documented that solar network power generators held-up during hurricane Sandy in New York and New Jersey. This was true for PSG&E systems as well as those supplied by start-ups. As Walter Meyer of Power Rockaway Resilience pointed out:

“While gas generators sat idle without gasoline in Rockaway Beach, solar generators that David cobbled together have been producing power nonstop from the second they hit the ground. Like a renewable Hail Mary into the impact zone, these devices have already been clutch.” 

Microgrid Growth Across the US. Source: GTM Research
Microgrid Growth Across the US. Source: GTM Research

Now the state of New Jersey is taking steps to further assist the Solar and broader renewable energy industry to deploy in New Jersey. Renewable Energy reports:

“Increasing energy resilience, whether through the [ERB], the [state Board of Public Utilities (BPU)] approved resiliency improvement measures implemented by utility companies or NJ’s Clean Energy Program, will minimize the potential impacts of future widespread power outages due to major storms like Superstorm Sandy,” Dianne Solomon, president of the BPU, said in the statement.”

Noting that Sandy caused extensive damage to the state’s energy infrastructure, the BPU said that distributed energy resources, including combined heat and power, fuel cells and off-grid solar inverters with battery storage, allowed some critical facilities, including hospitals, to remain operational while the electric grid was down. Launching the ERB will allow more such facilities to remain operational during future outages.

Solar Microgrids continue to come online across the United States as well as across the world. Several factors drive their emergence: addressing carbon pollution, the need for uninterrupted power supply during severe weather and other crises, and the need for low-pollution, accesible power in remote areas. Diesel fuel after all must be shipped in.

Another popular feature in urban areas is the ability to sell spare power back to the grid. This is a feature consumers love but many utilities resist. And they are now on the march to charge distribution fees to consumers that generate power for the grid.

Nonetheless, many states are moving to scale back renewable energy support (curiously while leaving fossil fuel subsidy and policy support in place). So there is a long way to go for the U.S. to gain energy independence and ensure that our air and water supplies are safe for future generations.

 

Solar Power Usage in US and EU Builds, Policy Innovation Falters

By Walter Borden

Here at the midpoint of 2014, solar power technology continues its advance while its marketplace momentum builds. Economic policy and commercial efforts designed to induce commercial innovation must keep apace.  And there are pockets of progress in the political economics of deploying solar. Take for example this post from Clean Technica: “Solar Energy’s Quiet Invasion Into Professional Sports“. Or consider the Regional Greenhouse Gas Initiative (RGGI), a market-based regulatory program in the United States that reduces greenhouse gas emissions.

And in Germany, one of the world’s most important economies, phys.org reports, “The Fraunhofer ISE research institute has announced that Germany set a record high for solar use on June 9—on that day the country’s solar power output rose to 23.1 GW—50.6 percent of all electricity demand. The record occurred over a holiday, which meant less demand, but it still marks a major step forward for the world’s solar power leader.”

Key aspects of the report from our perspective:

  • Despite not having a generally sunny climate, Germany has been pushing solar energy, but not from the huge solar farms as seen in other countries. Other nations, like the United Kingdom, report the same.
  • The German government is on track to reduce greenhouse emissions from electric power generation from coal fired power plants while at the same time retiring its fleet of nuclear power plants (scheduled for closure by 2022).
  • The FRG aims for an energy mix of solar, wind and biomass; though solar has become the national leader according to most reports.

041514krugman1-blog480

Yet challenges remain, as phys.org also notes:

The move to solar has not been without its problems, of course. The government plans to lower or remove subsidies as soon as possible, and the demand for batteries to store all that home-grown electricity is outstripping supply causing a rise in prices. Also, it’s not clear what sort of role utilities will play going forward. Currently, many homeowners are reporting surplus energy production on sunny days which they sell to electric companies, which now find themselves having to store it for use during cloudy stretches.

There’s another problem though it’s not as obvious: the German government noted recently that almost seven million households in the country are living in energy poverty (defined as having to spend more than 10 percent of income on energy bills). The national energy program, Energiewende, has resulted in some transfer of wealth. Economists note that even with subsidies, it’s generally the wealthy and sometimes the middle class who can afford to put solar panels on top of their houses.  The poor continue to live off the grid paying taxes that provide the funds for the subsidies. There’s also some evidence that the country’s energy program is pushing energy costs higher overall, resulting in more electricity being produced by cheaper fossil fuels.

Energy poverty is also a problem in the US.  As states like Ohio abruptly suspend widely popular solar power policies, working poor, middle class families, and businesses see expenses rise. Manufacturers like Honda and Whirlpool joined consumers in opposing Ohio Governor Kasich’s executive order to freeze its program. Additional side-effects weigh on taxpayers.  As more coal is used public health suffers resulting in rising health care costs, and water treatment costs increase too which is also true of  fracking for natural gas. These costs are passed along disproportionately to small businesses hurting them as well as working families. Continue reading Solar Power Usage in US and EU Builds, Policy Innovation Falters

Thank You: US Military Leads in Action on Climate Change Mitigation and Low-Carbon Fuel Innovation

We honor the sacrifice and dedication of the women and men of the United States Military. The Fund Balance team takes great reassurance from their collective recognition of the realities and risks for our shared peace, security, and prosperity posed by climate change. The US Military’s determination indicates the urgency for a steady, determined transition to green and renewable energy sources. Its organizational and technological expertise as comprised of active and former service members will play a singular and essential role in planetary deployment of renewable fuels.  Leadership in delivering renewable energy and power in the 21st century on mission-critical scales will help us all avoid economic, social, and ecologic entrapment by the carbon-intense fuels of the 20th. We urge our elected representatives to continue to support the United States Military in these efforts.

After a Marine company began using solar panels while deployed abroad, they reported that their diesel fuel usage dropped by a whopping 90 percent. Source: http://solar.calfinder.com/blog/solar-contractors/solar-power-saves-lives-taxpayer-dollars-on-the-battleground
After a Marine company began using solar panels while deployed abroad, they reported that their diesel fuel usage dropped by a whopping 90 percent. Source: http://solar.calfinder.com/blog/solar-contractors/solar-power-saves-lives-taxpayer-dollars-on-the-battleground

Protecting the Hydrosphere From The Generational Theft of Pollution

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By Walter Borden

There is a canon among many policy makers and their financial backers holding that essentially all regulations diminish prosperity. Yet, evidentiary support for it is sparse. For example, a recent study Aggregate Demand and State Level Employment published by the Federal Reserve Bank of San Francisco finds:

What explains the sharp decline in U.S. employment from 2007 to 2009? Why has employment remained stubbornly low? Survey data from the National Federation of Independent Businesses show that the decline in state-level employment is strongly correlated with the increase in the percentage of businesses complaining about lack of demand. While business concerns about government regulation and taxes also rose steadily from 2008 to 2011, there is no evidence that job losses were larger in states where businesses were more worried about these factors.

Why is it important to make note of failures to link regulatory action and weakened job markets? And, why so for a sustainable economics blog? Firstly, widespread adoption of this view has been  annointed with the great advantage of conventionality: policy makers can’t be evaluated per se as acting irresponsibly in terms of managing labor market health, or so-called job creation, when they have the same extreme hands-off bias towards regulation (particularly in the environmental category) as the industries they are meant to oversee. Hence real concerns of lack of oversight. Continue reading Protecting the Hydrosphere From The Generational Theft of Pollution

LED Sector Q1 2014 Performance

By Walter Borden

Light Emitting Diode (LED) demand continued in the first Quarter of 2014. LED fab utilisation rates have improved to high levels and LED adoption is happening faster than many had expected. LED customers are also reporting increased market demand for LED backlighting products. Many leading customers are placing orders for capacity expansions. Across the industry Q1 was a significant improvement over the last quarter of 2013 with higher revenues, better margins, and falling operating costs. Our work with privately held early stage start-up firms echoes what we hear from publicly trading firms and their coverage by leading analysts.

  • We believe that higher LED consumer usage combined with new and lower cost products, cost reductions, and higher factory utilization will help increase LED usage in residential and commercial real estate.
  • Unfortunately, stock prices in the sector generally have increased much more rapidly than earnings so investors may want to wait for a dip before entering the public market for LED stocks.

A look at Phillips N.V. is instructive. The Dutch conglomerate has reported flat earnings and generally lackluster revenue growth in the Q1 of 2014 with one exception. At Lighting, while sales were flat on a comparable basis, LED-based sales climbed 37 percent, and now represent 33 percent of total Lighting sales for the Dutch conglomerate.

Notably, then,  Phillips had a flat quarter while its LED unit continued to outperform rising 37% in the first Quarter of 2014.

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Source: http://www.usa.lighting.philips.com/

Meanwhile LED and Solar Panel Manufacturer Veeco saw healthy increases in revenue, gross profit, operating and net income in Q1 2014. Continue reading LED Sector Q1 2014 Performance

Section V: LED Market Overview

Note: This is the final excerpt from our 2013 Review/2014 Outlook

Section V: LED Market Overview

The LED lighting market is hot and very competitive. From relative newcomers like Cree, Acuity Brands, and OSRAM, to well-known brands Koninklijke Philips and GE Lighting, the fight for market share is intense.  Growth potential is high. We project the LED market’s CAGR (compound annual growth rate) around 45% through 2016. Consequently, risks of oversupply and subsequent profitability declines in the face of downward price pressures bear watching for investors in smaller firms and/or firms with slim margins.

One of the key factors contributing to this market growth is the declining Average Sales Price (ASP) of LEDs. The global Chip on Board LED (COB LED) market has also been witnessing the increasing demand of COB LED in general lighting applications. However, fluctuating global economic conditions could pose a challenge to its CAGR, as well.

The key vendors within the COB LED market space are Citizen Electronics Co. Ltd., Cree Inc., Nichia Corp., Osram Opto Semiconductors GmbH, Philips Lumileds Lighting Co., Samsung Electronics C o. Ltd., and Seoul Semiconductor Co. Ltd.

Demand for LED lighting will surpass that of LED backlight during the beginning of 2014, according to a recent report by J.P. Morgan:

  • LED product ASP drops have contributed largely to increased consumer usage.
  • Current payback time for commercial luminaries A19 and PAR28 has already been reduced to a year or less while LED bulb price has room to drop 30 percent by 2015.
  • Penetration rate in 2013 will reach around 11 percent up over 5 percent last year, projected at LED 20 percent before 2015.
  • The LED lighting market is more dispersed than the LED backlight market where consumers are highly concentrated. The top three global lighting manufacturers Philips, Osram, and GE make up 30 percent of the global market share.
  • This dispersed nature of the LED lighting market will bring more revenue and bargaining space than LED backlight products in the past.

This is sure to attract more consumers to replacement LED bulbs via its economic and ecologic benefits.

  • Specifically we see LED lighting market development trends and lighting product strategy and the market share situation in different areas.
  • 3030 LED has highest lm/$ and is widely distributed in the market and most preferred.
  • 5630 LED: high current spec applied in bulbs and downlight products
  • 5630 LED: limited room for further price cuts as 5630 LED price closes to production costs
  • LED Manufacturers will continue to speed up COB product development.


A Brief Case Study Revolution Lighting Technologies 

Revolution Lighting Technologies (RVLT) is a firm emblematic of the wider LED narrative for new entrants. With revenue of $15 m, net income loss -S19.53m and their market cap is $259.96m the market for their shares appears way ahead of itself. Yet this new firm is wisely using its pricey stock to make acquisitions to challenge bigger players with market caps measured in the billions of USD.

Sales momentum proceeds unabated. New York’s largest commercial property company, SL Green Realty (SLG) is one of the company’s key customers. SL Green has awarded two orders this year – an order for 1,000 LEDs  for a Times Square commercial property in March followed by an 8,000 LEDs order in December after large purchases in 2012.

RVLT started 2013 with an acquisition of California-based LED solutions provider, Seesmart Technologies for $20 million. Revolution’s bankers liked Seesmart’s distributor count of more than 50 and potential project value exceeding $1 billion.

As one of the smallest players in the industry, RVLT’s exposure to any potential price war could hurt the already vulnerable stock value. And, signs of one are already visible, with both Cree and Philips now offering sub-$10 LED lamps. As prices fall, RVLT has few good options but to follow suit, which will directly hit its strong gross margins from 2013.

As awareness about energy efficiency ever-growing in nations across the globe, the LED lamp investment thesis has great prospects. RVLT may be well poised to capitalize on these trends. But, with nil profits and cash flows, shareholders need to be wary of dilution from additional equity issue to raise capital for funding growth. In sum, at the outset we thought that valuation was fanciful for the long and mid-terms and still do which is why we did not add it to our Leading the LED Motif over 2013. Though we did miss the tremendous upside in 2013, we think the fundamentals make the probability of a pullback in 2014 very high and a strong sell-off not unlikely.

  • Revolution YTD return: 470.83%
  • Cree YTD return: 88.31%
  • Acuity YTD return: 65.16%
  • Koninklijke Philips: 42.3%

Fund Balance sees excellent opportunities in the private equity, early stage space LED manufacturers. One start-up firm we work with closely  projects $19 mil net income in its first year. Our Year 3 sales are projected to be $19 mil with net income of $700K on a $ 2.5 mil raise.

The OLED Market:

Light-emitting materials will encounter rapid change in 2014.  From Smartphones to touchscreens they are key to the future of human-computer interaction. These materials are consistent with sustainable investment and business development goals as these materials consume less power than standard LED products and share in the durability.

Active matrix organic light-emitting diode (AM-OLED) entered the display panel market when Samsung Display started operating its large-scale mass production facilities in 2008. Since then, Samsung Display has been the leader in the AM-OLED market expansion. In particular, AM-OLED displays have been well received by smartphone manufacturers, achieving noticeable growth in products ranging from the high end of 3 inch to 4–5 inches.

By 2014, Samsung Display but also LG Display, AUO and Japan Display Inc. (JDI), are set to boost AM-OLED panel production or initiate mass production. Given that, light-emitting material makers are expected to compete in a more advanced market environment with increased demand and a broader base of customers, after the first part of this decade where they had depended wholly on demand from Samsung Display.

In 2013, the AM-OLED light-emitting material market stood at around $350 million based on demand from mass production lines. In 2014, the market size is forecast to rise by about $100 million to $450 million thanks to demand growth from the existing and new AMOLED mass production lines.

Three main points are of interest for sustainable investors in 2014:

  • Organic light-emitting layer structures and development plans of AMOLED panel makers are on schedule for 2104

  • Market trends and forecasts of the 10 main individual materials are very encouraging

  • Supply chains are strong an and market share will expand by material/company and in 2014 based on orders and vendor forecasts

Conclusion:

The LED/OLED market will grow and expand in 2014. Opportunities will abound for established markets and technological innovators that can compete on price and power consumption reductions. The Fund Balance Leading The LED ETF outperformed the S&P, and we are not currently looking to make additions or rebalances, though we will continue to look closely at start-ups and monitor industry wide ASP trends.

Leading the LED 2013 performance for 2013:

Leading The LED

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Section III Solar Stocks 2014

Note: This is an Excerpt from the Fund Balance 2013 Review/2014 Outlook  — Section III: Solar Stocks 2014.

By Walter Borden

Fund Balance Here Comes The Sun ETF Performance for 2013:

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One of the most widely held ETFs, the Guggenheim Solar ETF (TAN in the chart above), returned 131.3% YTD and –54.96% over the last 5 years.

Solar power investments performed tremendously in 2013. Commercial users of solar power such as WalmartGM, Staples, and Walgreens are just now scratching the surface of what is possible in terms of balance sheet energy cost saving and carbon footprint reductions. Current installed solar production is minimal compared to overall energy consumption, though a paucity of data which is closely held by most suppliers and users, makes gauging returns on capital and cost efficiencies inexact.

From an asset management point of view, as the solar power industry matures buying opportunities become more difficult to spot. We urge growth investors to hold and build positions in companies with long term stable cash flows and to keep some powder dry for nascent prospects in smart-grid, storage, and supporting software and services such as Power Secure International which returned ~130% in 2013. Investors with short time horizons are advised to explore capturing some profit in the first quarter of 2014.

As 2014 unfolds, potential interest rate increases from reduced monetary stimulus as well as policy uncertainty stemming from upcoming expiration dates for tax credits early in 2016 will guide discrimination between long term positions and short term ones in solar power.

New solar Photovoltaic (PV) installations grew at a rapid pace in 2013 to 36 GWs. The cost competitiveness of this electric power source shows rapid improvement as well. While utility-scale PV installations are not yet cost competitive with fossil fuel power plants, commercial-scale installations have attained cost parity in that generation costs of power from solar PV is comparable to the retail electricity prices that commercial users pay in key economic regions.

DC Solar Calc

In the US, demand will continue to pick up in 2014.  Still just 5 states have 82% of all US solar installs. In immature markets in the Southeast, with Georgia showing leadership in both its initiatives as well as its withdrawal of tariffs, which are still in place in other states. We see large opportunities here. Their tariffs on solar generation amount to a penalty on home based solar power generation while voters and stakeholders are taking notice. Leading markets in the Northeast and Western United States remain robust and highly competitive. Hawaii also has stuck with its plan for widespread solar usage in order to wean itself from fossil fuels for residential and many types of commercial power. All of this reinforces a key trend: Over 2014 consistent growth will continue as the cost of solar comes down and the cost of other energy sources goes up.

California continues to lead the solar PV charge, installing 455 megawatts in Q3; North Carolina moved into the No. 3 spot in total PV installations with 23 percent growth.  Nevada moved from 17 to 5 and Vermont from 21 to 12 in the rankings.

Commercial-scale installations could reach ‘‘grid parity’’ in about ten years, if the current federal tax incentives for solar power were to expire at that point rather than sooner.

Impact investors should look to solar stocks in 2014 that are performing well at its outset. Fund Balance expects a continuance of 2013 trends in the near and mid-term. The same can be said for the broader array of underlying macroeconomic conditions. Throughout 2014 demand driven by system prices will slow somewhat after market absorption of significant 2013 price reductions on the heels of the  industry wide buffeting in 2012.

The Price Story

Price stability helped solar market growth while capacity and supply shrunk as companies went out of business (Suntech Power and LDK Solara are two examples). Demand however steadily picked up. A long awaited EU-China solar trade agreement bodes well for international price stabilities. Chinese manufacturers are not signaling plans for expanding or upgrading solar plants until at least 2015 as even its best manufacturers continue to shrink bloated balance sheets.  As Chinese banks appetite for solar risk subsides after the three voracious years shrinks, we expect steady mostly unchanged supply levels from China in 2014.

In the a US in 2013, increasing demand for solar power and stable pricing in the second half of 2013 provided strong support to manufacturers. Once struggling to break even, SunPower (NASDAQ: SPWR), Canadian Solar (NASDAQ: CSIQ), JinkoSolar (NYSE: JKS), and Trina Solar (NYSE: TSL) are now profitable and richly valued.

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Trends look in their favor though volatile short interest is highHas the market priced this trend into their asset prices and valuations?

Overall then, gross margin trends over the past year for these companies improved rapidly as a result of the aforementioned better pricing as did cost reductions from 2012 when the industry was in a far worse position.

If demand hits many analyst’s upper range of 46 GW in 2014 and as little new capacity is scheduled to come online in 2014, these growth trajectories will continue upwards. For example, SunPower’s 350 MW expansion will not come online until 2015. Margins for producers with scale will continue to improve and sustain market valuations albeit attached with worries of irrational exuberance.

The highest quality suppliers have seen the biggest benefit so far and we think that is where the gains will be this year as well. We think the smart bet is on a profitable company making even more money as the industry improved than a high risk debt ridden company turning things around.

The Bear Case for Solar

On the risk side, at present and into 2014, the primary risk factors for the sector are three fold:

Firstly, standardization and securitization will continue to improve in the financing of new solar assets. Tax equity will remain in place for residential installations. Utility scale investments will get more competitive. Complex deal structures which result from legal and consulting costs along with an absence of standardization will continue to increase costs of capital.  Financing will primarily be available to utilities that can roll-out new solar power capacity at large scales. Technical risk while ever present, has lessened as well in the present innovation cycle, though we project it to continue as a cost driver. Continue reading Section III Solar Stocks 2014

Section II: 2014 Asset Market Overview — General

Section II: 2013 Asset Market Overview — US Markets Finish Strong, Asian and EU Weaknesses Persisted

In 2014, higher economic growth rates with inequality effects via persistent constrained spending power of the US consumer will exact a noticeable fiscal drag in the US, while positive developments from 2013 in US equity markets are mostly priced into valuations and a correction should be on investor’s radar screens; uneven growth will be the trend in the EU; China addresses banking and credit market instabilities; the developing world sees demand for its resources continue to grow. Uncertainty around regulatory and tax policy will impact markets less than opacity about public sector investment levels.

Absent exogenous geopolitical shocks, US investors should expect continuity in build up of momentum from 2013 into 2014 but with more volatility, sideways directionality, and perhaps a correction. This momentum will be further dispersed via diminished purchasing power for US consumers whose wages are not reflecting the wealth effects seen in asset price surges or low interest rates available to the luxury class and blue-chip corporations, and so will not be able to fully participate in robust economic activity. Minimum wage gains will not impact the economy meaningfully until 2015. At the outset of 2014, the expiration of long-term unemployment insurance in US is predicted to shave .3% off the US economy according work by Mark Zandi, Robert Schiller, and others. Home price increase rates are slowing. This can be seen as an example of the velocity of money, or M2V, from the invaluable St. Louis Federal Reserve’s datassets and tools. M2V Stocks indicate persistent decreases in economic transactions in the US Economy.

Graph of Velocity of M2 Money Stock

2013:Q3: 1.571 Ratio; Last 5 Observations; Quarterly, Seasonally Adjusted, Updated: 2013-12-20 2:01 PM CST

Note: The velocity of money is the frequency at which one unit of currency is used to purchase domestically- produced goods and services within a given time period. In other words, it is the number of times one dollar is spent to buy goods and services per unit of time. If the velocity of money is increasing, then more transactions are occurring between individuals in an economy. Source: Federal Reserve Bank of St. Louis.

The broader energy market will continue to be characterized by abundant LNG, tight oil, the arrival of renewables as key components of the US energy mix meaning self-sufficiency for North America and making it a more attractive place to invest. Upward pressure on the USD will be counterbalanced by low interest rate biases for at least the first two quarters. Yet, here again is a bright spot, as we point out in our solar section and broadly speaking for the sustainable category, falling prices for renewable energy and green consumer goods which provide very significant, if mostly overlooked benefit, to an ever larger percentage of the US population.

Companies that focus on smart cost cutting with renewable energy, investing in product and market research, hiring new people, and advocating for smart regulation aimed at targeted reductions of dependency on fossil fuels will be poised to benefit their investors into 2015. All the while acting in the best interest of their respective nations and as good corporate citizens.

Asset Market Outlook 2014

Asset markets have positive price momentum at the threshold of 2014. That momentum helps identify assets that are performing well now. Conditions and measures indicate that the underlying trends for these specific subsets of these assets will continue into 2014.  Our analysis also comports with the findings of the Pew Foundation: acute income inequlaity negatively impacts economic growth. Like the hangover from sugar rushes, ambient toxicity is the result of short term economic choices that ultimately sacrifice the long term resiliency of economies’ basic foundation, our shared ecology.

destroying.jobs_.chart1x910_0-1

Global financial markets posted mixed performance in  2013. Gains in US were offset by mixed performance across Europe, Asia, and other Emerging Markets.  Technology IPOs including Twitter posted strong gains  while US corporate fixed income issuance remained robust in continuance of 2012 record levels.  Broad-based  US equity gains were led by technology, renewable energy, healthcare, and small caps, offsetting weakness in Fossil Based Energy, REIT and commodity-sensitive assets.

In Europe equities posted mixed performance, with gains in Germany, Sweden, and the Netherlands offset by weakness  in the UK, Italy, and Russia. Asian equities were also mixed, where strong gains in Japan, China and Hong Kong were countered by weakness in Australia, India and the Philippines.

US yields rose across most maturities on the improving US economic outlook. Curtailment of US Federal Reserve stimulus efforts now seems imminent by 2016 even with the Fed’s plan to measure tapering bond purchases with continued downwards tweaks on interest rates.

European yields were little changed following recent ECB policy action of lowering rates. The US dollar posted mixed performance, gaining against the Japanese Yen while falling against the British Pound Sterling. The Dollar was little changed against the Euro though this could change if interest rates in Europe fall on expected enduring faiblesse. Though we believe the contrarian case that France will surprise on the upside in terms of economic strength.

The Dollar’s strong gains against Emerging Market currencies including the Indian Rupee, Australian Dollar and Brazilian Real may be partially responsible declines in metals and commodities. Moderating expectations for inflation will ensure fixity for this trend of modest declines into 2014 across silver, aluminum, gold and platinum. Recent sharp gains in LNG will moderate somewhat in 2014, but we do not foresee the beginning of a bust cycle in the US until at least 2015. These is due to continued expectations of tight oil combined with economic growth and lower costs for feedstock. We expect more pressure to be exerted on developing nations to extract resources with little regard for the well being of their natural capital, i.e. fresh and and clean water supplies, as they race to build out electricity infrastructure and earn export income with international trade.

We expect pronounced volatility for oil as political developments to ease sanctions in Iran impact its price which in turn will drive increases in US natural gas exports. Agricultural commodity gains were led by soybeans, rice and coffee, which were offset by declines in sugar, hogs and corn.

Hedge funds gained in late 2013, with a November 2013 gain in Global Hedge Fund Index (HFRX) posting a gain of +0.55% for month, while the HFRX Absolute Return Index rose +0.45%.

In 2013 much was made of so-called policy uncertainty, yet the fiscal cliff met with a collective shrug from the world’s markets, despite public hand-wringing on the part of US creditors nations such as China.

Whither Policy Uncertainty?

Fund Balance does not see impending consequences for policy uncertainty in bond prices and in the stock market. Nor are entrepreneurs demonstrating a reluctance to invest due to lack of clarity regarding future tax and regulatory events. If such uncertainty was so grievous, liquidations by entrepreneurs of their current stock positions for a song should be the norm, and they instead shift assets to the Cayman Islands and the like. Thus, under hypotheses invoked by austerians and bond vigilantes, one would expect the stock market to be low when uncertainty regarding government policy is high while the opposite was true in 2103.  Furthermore, this internal logic would entail expectations of interest rates on government bonds trending high as well since one way uncertainties about future policies get resolved is via inflation.

The events of the last three years has refuted these hypotheses and their logic.  Rather, most business decision makers indicate that considerable business uncertainly stems from the amount of chaos inherent to the US budgeting process in 2014 and 2105. After all, Walmart acknowledges that SNAP reductions hurt its bottom line, telecommunications firms earn revenue from the surveillance state, and the military is the world’s largest procurer of oil, the production of which itself is heavily subsidized by US Taxpayers.  As Economist Bradford DeLong points out:

The markers that would indicate that enterprise was being hobbled by uncertainty about government policy per se—those markers just are not there. This seems to me to be a side issue—another argument that is based on political wishes rather than on economic evidence.

A Note on the Role of China in Relation to the US Economy.

The Peoples Republic of China faces the self-imposed generational challenge of moving over three million people a year from subsistence farming in the countryside to industrial and service employment in the cities. Apart from the questions of how to integrate sustainability into this process, consistent with sustainable investment goals, how might this impact their appetite for US debt? The only way to do this is to purchase U.S. government bonds so that the Bond sellers will have renminbi which are used to buy exports from China.

Contrary to conventional wisdom, this is not a pure free-market transaction. China’s State Council is not acting for profit-maximizing economic reasons although its actions are completely plausible and realistic. As one observer noted, “China’s State Council wants, more than anything else, to maintain full employment in Shanghai. Otherwise their heads are likely to end up on pikes.”

In short, no acceleration of the State Council’s planned shift to reliance on domestic demand from exports in maintaining near full employment in Shanghai is at hand. China is not going to suddenly or even meaningfully reduce U.S. government bond purchase in 2014. The risk is far too high for the Chinese economy and to the futures of its leaders within the Council than it would be to the US economy. For the PRC seems keen to embrace the monetary policy management principals (measured by their actions, not words) of the its trading partners in the EU and US. As the New York Times, in coverage of China’s shadow banking system and internal tensions between vested interests and the Council’s desire to deleverage with higher interest rates, wrote:

That approach involved the central bank’s turning to posts on China’s Twitter-like social messaging service, Sina Weibo, to chasten banks to “make rational adjustments to the structure of their assets and liabilities, and improve their liquidity management using a scientific and long-term approach….

While policy makers say they are worried about upsetting the delicate mechanisms of the current banking system, public criticism continues to grow, even within China’s elite. That suggests further market-oriented experiments could be coming soon.

“Banking in China has become like a highway toll system,” Yao Jingyuan, the former chief economist at the state statistics agency, said late last week during a speech at Nanjing University, according to numerous Chinese news reports. “Banks charge every time money goes through them.”

“With this kind of operational model,” Mr. Yao added, “banks will continue making money even if all the bank presidents go home to sleep and you replaced them by putting a small dog in their seats.”

A Note on Technology and Labor Markets In The US

Fund Balance holds that increased inequality in the US economy, 70% of which is comprised of consumer spending will continue to be a drag on sustainable growth in 2104. Moreover, can the US economy remain vital and growing in the face of inequality and its doppelganger, automation? Oxford researchers found that 45 percent of America’s occupations will be automated within the next 20 years implying that nearly half of U.S. jobs are vulnerable to computerization. 

While many hiring managers argue that there is a fundamental skills mismatch between employers and job applicants in the US, the story is more complex, with inequality and regional differences being key plot lines. For example, Economist Paul Krugman pointed to unemployment by occupation

looking at changes in unemployment rates from the 2007 business cycle peak to the unemployment peak in 2009-10, and then the subsequent decline; it looks like this:

It’s the same as the geographical story: the occupations that took the biggest hit have had the strongest recoveries.

Still, rapid advances in technology do represent a serious potential threat to many jobs historically performed by people. Google’s Eric Schmidt eerily talks of humans needed to prepare to compete with machines for jobs as the firm has been on an acquisition spree for robotics firms.

A recent report from the Oxford Martin School’s Programme on the Impacts of Future Technology attempts to quantify the extent of that threat. It concludes that 45 percent of American jobs are at high risk of being taken by computers within the next two decades.

The authors expect this replacement in two phases. First, computers begin to replace  in vulnerable fields like transportation/logistics, production labor, and administrative support. Jobs in services, sales, and construction sectors may also vanish in this first phases. Then, the replacement rate will decelerate due to bottlenecks in harder-to-automate fields such engineering. This “technological plateau” will precede a second wave of computerization, driven by deep learning. Systems derived from these innovations will compete for jobs in management, science, engineering, and the arts. They conclude that the rate of computerization depends on several other factors including regulation of new technology and access to cheap labor.

Utilizing standard statistical modeling techniques the researchers analyzed more than 700 jobs on an online career network including the skills and education required for each.  They noted:

Our findings thus imply that as technology races ahead, low-skill workers will reallocate to tasks that are non-susceptible to computerization—i.e., tasks that required creative and social intelligence….For workers to win the race, however, they will have to acquire creative and social skills.

Established estimates are that one in four private-sector jobs in the US  now pays less than $10 per hour, well below a standardized living wage for the US. Compared to better-paying positions, these jobs rarely feature regular schedules,  health care coverage, paid vacation time or sick leave — the essentials of middle-class work. In other words, employment increasingly is not a guarantee of life above the poverty line in the US. Indeed, according to census data, more than one in 10 Americans who work full-time are still poor.