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By Walter Borden

Solar power stocks have shone over the past year. After four years of decline the industry experienced vigorous growth in 2013. The first growth spurt in the early 2010′s was propelled in large part by European incentives which induced component and material shortage in 2007-2008. This pushed solar stocks to record  highs and to a subsequent bust the next year. The main driver for the market-wide collapse was significant state-level investments in China that led to a large surplus from output from some 500 Chinese companies that produce modules, wafers, and cells. The Chinese investments fostered an overcapacity in production, which hit the the majority of manufacturers in the space. Most non-Chinese manufacturers were then quickly eliminated from the industry. Weaker Chinese companies also fell to price pressures while other participants wanted out of the business. All the while, start-up manufacturers flooded the market with an ever lower priced inventory predictably spurring the aforementioned bust.

Solar Module Costs Q1 2014

Yet now the solar power industry is poised for another solid year in 2014. Many doubtful observers look to the expiration for tax credits in 2016 as the next great shake out for the solar industry. As the National Geographic Energy Blog explains:

Farther down the timeline but perhaps more ominous is the scheduled expiration of the federal investment tax credit (ITC) that solar enjoys. Implemented in 2006, the ITC can be worth as much as 30 percent of the cost of a project, large or small, and it’s due to expire at the end of 2016. The Obama administration’s 2015 fiscal year budget would replace the investment tax credit with a production tax credit at the end of 2016, meaning that a solar project would benefit only after it is built and producing power.  The production tax credit  “simply can’t address the upfront costs of fuel-free solar projects,” said the SEIA in a statement, “and we believe the Administration’s sudden, 180-degree shift in tax policy could have devastating consequences on the future development of solar energy in America.” continue reading…

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

Screen Shot 2014-01-01 at 1.31.13 PM

Note: This is an excerpt from the Fund Balance 2013 Review 2014 Outlook.

Section VI: Protecting Our Vital Resource — Water Resource Management: Fund Balance Coverage In 2014

The water understands
Civilization well;
It wets my foot, but prettily,
It chills my life, but wittily,
It is not disconcerted,
It is not broken-hearted:
Well used, it decketh joy,
Adorneth, doubleth joy:
Ill used, it will destroy,
In perfect time and measure
With a face of golden pleasure
Elegantly destroy.
– Ralph Waldo Emerson

Fund Balance now covers water management and services firms with our Water, Water, Everywhere proprietary ETF.

Screen Shot 2013-12-31 at 6.28.31 PMScreen Shot 2014-01-01 at 1.36.29 PM

A world population on track to surpass to 8 billion by 2030 fixes global demand for fresh water as a tremendous challenge. Factoring in climate change, aging infrastructure and contamination issues yields projections for a 40% rise in water demand by 2030 hardly seem a stretch. With 71% of all water withdrawal used for agriculture, potential shortages and mismanagement would result in acute impairment of food production and trade.

The growing strain of our shared fresh and saltwater resources is clearly making its way into the public consciousness. Household consumer brand Brita points out in recent advertisements that using its products dramatically reduces the number of plastic bottles than end up in the ocean and fresh watersheds. A key point since such low rate of plastic are ever reused or recycled, rather they end up disrupting the foundations of the global food web.

Sustainable and integrated management methods will be needed to balance those of  private interests that own the rights to water resources and stewards publicly held natural capital resources, which are themselves vital to the common future for private interests as well. In addition, developers of waste-reducing irrigation systems, as well as creators of more potable water such as sea-water dad_061esalination technologies, will require thoughtful capital sourcing and

deployment in order to scale up. Here, as in the renewable energy efforts, fossil fuel extraction zones and their attached ambient toxification of fresh water sources further indicate growing conflict between dirty energy and the essential component of all life and thus economic activity.

The two dominant economic/ecologic complexes in the U.S, Texas and California, while states like Georgia are in conflict for resources with neighbors both due to issues of drought and water rights. The world’s largest soon to be consumer/producer, China, struggles with drought and flooding. Another key linkage between the water resources industry and energy is that by 2035, the International Energy agency predicts that global electricity generating capacity will reach 9,481 GW to meet accelerating demand.  There will thus be huge opportunities and requirements in integrating sustainability with water management and wastewater treatment.

In 2014 Fund Balance will cover and track the following group of firms:

  1. Consolidated Water Co. Ltd. –  develops and operates seawater desalination and water distribution systems
  2. Ecolab — manufactures and distributes cleaning and sanitizing products, and provides pest elimination services
  3. Energy Recovery Inc. — Energy Recovery develops and manufactures energy efficient recovery devices and pumps used in desalination plants
  4. Watts Water Technologies — designs and manufactures water control, conservation, and quality checking systems
  5. Parker Haneffin – Parker has long recognized the connection between the health of our company and economic, environmental and social factors.
  6. Siemens – Sustainability commands an established basis in their business culture and planning and is a key pillar of its corporate culture.
  7. Xylem designs, manufactures and markets applications for water and wastewater management and recycling

We will work to understand and show our partners where the biggest opportunities are in water and wastewater treatment and provide clarity on regulatory variables and higher reuse targets, and power plant operators in the key markets. These are fast growing markets with distinct treatment solutions geographical requirements/microflucuations, market drivers, and technology trends, so you can pinpoint the regions with the best prospects for your business. As such they are significant opportunities for application of integrated management, sustainable financing, natural capital stewardship.

 

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:

Screen Shot 2013-12-31 at 6.17.18 PM

Screen Shot 2014-01-01 at 1.44.54 PM

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.

o

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 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.

fund-balance-logo-smallSustainable Economics and Ecologics

At The Outset of 2014

 

Section I: Impact Investing 2013 Overview/2014 Outlook

THE Intergovernmental Panel on Climate Change reported in September 2013 that it is “extremely likely” that human activity was the dominant cause of global warming or about 95 percent certain — typically the standard of rigor in scientific accuracy.

Accordingly, in 2014 the principle that environmental and development issues are inseparable from business will continue to integrate with global commercial and social functions. Impact investing in 2013 was characterized by a sense of urgency for adapting precepts of wealth creation and stewardship to 21st century realities. This matched up with the year’s abundant, rational exuberance in asset markets. We expect a cautious optimism to persist in 2014 though much of the reality based upside from 2013 is likely already priced into market values.  A correction then should not be ruled out, and those with short term objectives should consider capturing some profit. Looking further ahead, markets and society will increasingly reject notions that a Faustian bargain holds between employment and shared prosperity on the one hand and fresh air and healthy water supplies on the other.

There is, of course, more work to do. It became clear to many in 2013, in Shanghai, China for example, that regions with little to no regulation of pollution suffer poisoned water, air, and thus economic inefficiency. Wholesale deregulation of energy extraction then are at best short term fixes to long the term economic challenges of mitigating climate change and renewable resource stressors within the context of exploding energy demand across the globe. More troubling news issued from China at the turn of 2014 where the results of the world’s largest natural experiment in unsustainable economics are coming in, and they are nothing short of tragic.

An alarming glimpse of official findings came on Monday, when a vice minister of land and resources, Wang Shiyuan, said at a news conference in Beijing that eight million acres of China’s farmland, equal to the size of Maryland, had become so polluted that planting crops on it “should not be allowed.”….

One-sixth of China’s arable land — nearly 50 million acres — suffers from soil pollution, according to a book published this year by the Ministry of Environmental Protection. The book, “Soil Pollution and Physical Health,” said that more than 13 million tons of crops harvested each year were contaminated with heavy metals, and that 22 million acres of farmland were affected by pesticides.

A signal moment came in May, when officials in Guangdong Province, in the far south, said they had discovered excessive levels of cadmium in 155 batches of rice collected from markets, restaurants and storehouses. Of those, 89 were from Hunan Province  {, where Ms. Ge farms.}

Given the above outcomes and outlooks we share the that view bringing electricity to developing nations is a key goal for sustainable economics for a host of reasons. Xi Chen and William Nordhaus have found that luminosity is a strong predictor and proxy of economic growth rates. As GDP per capita rises quality of life improves and more often than not environmental degradation lessens. Fund Balance sees such considerations as essential for economic planning and maintenance in the US and EU as well.
US vs. China CO2Carbon Footprints: US vs. China
With these principals in mind we look back on the Fund Balance practice in 2104 and its plans for 2014. continue reading…