The New Nuclear Age

Here is an excerpt of a Caloen Report published two years ago on the boom in demand for nuclear energy. If anything, this boom has accelerated since then.

February 19, 2009
The Nuclear Energy Boom
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The nuclear energy lobby should build a shrine to Mr. Putin.
And he should share it with the president of Ukraine who once survived a mysterious poisoning for which Putin is totally innocent.
Their standoff last month over payments for natural gas supplies was a blessing for the nuclear industry.
By letting the Europeans freeze for two weeks, Putin managed to wake them up.
Europeans have now a good reason to abandon their opposition to nuclear power that dates back to the Chernobil accident in 1986.
Nuclear energy is good for the alleged global warming and it helps energy independence.
Astonishingly, even the Swedes are now looking to reverse their 30 year ban on building new nuclear plants.
Poland, ever sensitive to any dependency on their Russian neighbors’ goodwill, is planning to build two new nuclear power plants.
Ten European countries have for the first time decided to give nuclear energy a “serious consideration.” These are Italy, Portugal, Norway, Turkey, Ireland, Albania, Belarus and the Baltic states.
Spain is considering an 11% increase in its nuclear capacity by “uprating” nine reactors, while Finland and Romania are already building new plants.
And it does not end there. E.ON and RWE have announced the creation of a 50:50 JV that plans to build new nuclear plants in the UK.
Only Germany and Denmark are dragging their feet.
The latter made a strategic decision to promote wind energy instead.
Twenty percent of Denmark’s electricity is now originated from windmills which are crowding this small and densely populated country.
Unfortunately, today’s windmills have little in common with those painted by Breughel. They are a sore for the eye, especially since they always come in large numbers. Ted Kennedy, who does not want a wind farm off the coast of his beloved Cape Cod, seems to share my aesthetic prejudice. Renewable energy is a good thing, but not in his back yard.
We are undoubtedly experiencing a nuclear rebirth in Europe.
My colleague at du Pasquier, John Eills, wrote in a recent paper, “Only nuclear power can provide the consistent, non-polluting, high density base-load energy to power a modern industrial society.” He points out that “the solar panels necessary to produce electricity equal to the capacity of a typical 600 megawatt generating plant would cover about five square miles of the earth’s surface. And as every sailor knows, the wind is inconstant.”
Global demand.
Today, there are 436 nuclear reactors in operation worldwide.
The U.S. has 104 of them (which accounts for 20% of our electricity).
France comes second with 59, just ahead of Japan (53).
Many of these reactors were built a long time ago and are approaching their original design life span.
Reactors under construction today amount to 43, with a full quarter of those in China.
The number on order globally is 108. Here again a quarter of the orders come from China.
Then there are a number of “proposed” reactors according to the world nuclear association.
266 of them globally and more than a quarter of these are in China, again.
So, adding these numbers up, the world is about to double its nuclear capacity.
China alone is projected to add 109 new nuclear plants to the 11 in operation today.
And this is before we start seeing the ripple effects of the Russians’ strong arming the Ukrainians.
Process.
One can invest at four different levels in the nuclear energy process: mining of uranium, enrichment of that uranium, engineering of nuclear plants and the recycling of nuclear fuel. Only one publicly traded company is active at all levels: Areva.
The largest uranium mining company is the Canadian Caneco.
Enrichment is being done by USEC in the U.S., but the Europeans Areva and Urenco (government consortium between the UK, Holland and Germany) have a more efficient technology. Areva has also announced its intention to build an enrichment facility in the U.S. to circumvent a likely import tax engineered by USEC.
Iran too is trying to become a player…
On the engineering side, the two best plays outside the U.S. market are Toshiba (with the acquisition of Westinghouse) and Areva.
However Toshiba is not exactly a pure play.
Finally, recycling is not done in the U.S. out of concern that the plutonium that comes with nuclear fuel could fall in the wrong hands and be developed into nuclear arms. The Europeans think this is manageable and they have thus developed a nice monopoly.
Even the Japanese get their used fuel reprocessed in Europe.
One would think this is a highly profitable activity for Areva.

Bernanke’s New House of Cards

Friday February 18, 2011.

The Fed’s double mandate is under attack by conservative congressmen.
They want to reduce it to a single one.
Bernanke disagrees.
Two, contradictory mandates is fine with him.
Actually, he singlehandedly added a third one.
On top of full employment and stable prices, the Fed’s responsibility now extends to managing the stock market.

“Our policies have contributed to a stronger stock market just as they did in March 2009.”
The Fed’s Chairman proudly declared in January.
Indeed, the last stock market rally started on September 1, the day after the announcement of QE2.
Unfortunately, so did the rally in commodities.
The Rodgers International Index, which was down 5.5% for the year at the end of August, has been going up ever since.
It is now up 30%, outperforming the S&P.
But that is a coincidence.
Bernanke does not think it is an unintended consequence of QE2.

So, why does the Fed think they need to manage the stock market?
Let’s listen to the Oracle himself:
“Higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending.”
Not so long ago, he would have said “higher housing prices will boost consumer wealth etc..”

At least Ben Bernanke is not hiding his intentions.
Most observers have it wrong.
They think asset inflation is an unfortunate byproduct of the Fed’s loose policies.
Well, think again.
Asset inflation IS the Fed’s policy.
They call it the wealth effect.
It gives people the illusion of being materially comfortable.
This, in turn, stimulates consumption, which becomes the engine of growth.

The wealth effect indeed.
Putin feels it even more.
He may even go on a buying spree for his beloved military.

Can anybody see the flaw in this Houdini-like economic strategy?
Why are there so few people seeing this for what it is:
A house of cards.

Investors learn early in their career that there is no gain until it is realized.
Paper gains are just that.
Many more people learned this the hard way in the last financial meltdown.
The housing bubble made them feel the wealth effect all right.
So they used plastic to spend their paper profits.
We know what happened next.
The profits vanished.
Debt, unfortunately,is more sticky.

Yet, the Fed is at it again!
This time, the assets to be inflated are stocks.
As stocks go up, Ben Bernanke hopes consumers will spend again.
This is the policy.
The implementation is, of course, the harder part.

I tried to imagine myself in Mr. Bernanke’s shoes.
How would I achieve this?
The answer is to create the impression that stocks always go up.
Remember, the wealth effect worked last time because house prices were believed to go only one way: up.

The main tools available to the Fed are the printing presses, interest rates and propaganda.
The printed money could be used to buy Treasuries and thus keep rates low at the long end.
Low interest rates are good for stocks.
But why not use this free money to prop up the market indices?
At the present time, the Fed buys mostly bad mortgages and depreciating Treasuries.
I would also buy stocks.
There are precedents for this in Asia.

So, let’s assume macroeconomic news is bad and there is selling pressure.
I would let the market drop, wait, and slowly push it back up at the end of the trading day.
There is turmoil in the Middle East?
Let the market drop a bit, stabilize and make sure the index ends up on the day.
Inflation is accelerating? Emerging markets are tightening? gridlock in DC?
The market will always come back if I were in charge of the Fed.
Imagine the headlines:
“Stocks Poised For the Longest Winning Streak Since 1936″.
“Chinese Growth Pushes International Markets Up”.
“The Market Looks Past the Chinese Meltdown”.
The sentiment would be that nothing can stop this train.
Prosperity is around the corner.
Join the party.

For the narrative to be supportive, some creativity could help.
Sometimes economic news may be disappointing.
To counter that, I might have to come up with new ways to look at the economy.
If job creation is too slow, for example.
Why not create a new concept, like saved jobs?
I could go in front of Congress and brag about 3 million jobs created or saved.
Even if it is mostly the latter.
That number can be boosted at will, but coming from the Fed’s Chairman it seems legitimate.

Of course, this is just me.
A serious central bank would never do such a thing.
It could be too damaging to his credibility.
Not unlike the way I lost credibility with my wife when I told her I had lost or not gained 50 lbs.

Growth At All Cost – A Faustian Bargain

Here is an introduction to my coming report on a Federal Reserve Bank’s overreaching.
I wrote it last summer, but it seems even more relevant today.

Wednesday June 16, 2010.

America is unique.

It is the only country in the world that goes full speed in one direction, turns on a dime and then goes unapologetically in the exact opposite direction with the exact same conviction.

I learned this decades ago from Roland Leuschel, the flamboyant global strategist at BBL.

This amused the German-born Roland.

Although he also understood that this was often America’s strength.

The upside of this flexibility is that we, in America, do not get stuck in a rut for very long.

If something does not work, we change it.

Unfortunately, sometimes we also change things that work perfectly well.

But change we do.

When I came to this country, the government was not the solution.

We made fun of the French nationalizations.

Yet, today we renamed it too-big-to fail and implement it at a rate that would make Mitterand envious.

Even one of the most laissez-faire administrations, when confronted with the possibility of a recession, did not hesitate much to bail out banks, AIG and the major car companies.

A recession had to be avoided.

At all cost.

This, at least, has been a constant in recent US policies.

And it has pushed us into a Faustian Bargain:

Our soul for a few more quarters of growth.

To avoid the dreaded recession, we gave up free markets, fiscal restraint and monetary discipline.

One can argue about the many motivations for this abjuration.

Fear of a nineteenthirties-style depression, the ultra short political cycles, the low tolerance for pain among the baby boomers all played a role.

But most of all, the main culprit is the Fed’s dual manadate of low unemployment and low inflation.

This is like having our cake and eating it.

Unfortunately “to promote effectively the goals of maximum employment” as well as “stable prices and moderate long-term interest rates” can at times be contradictory.

How can one continuously promote growth AND keep inflation under control?

Greenspan, to his credit, did just that.

But his actions also sowed the seeds of asset and credit bubbles of unimaginable proportion.

The Fed’s response?

Well, Ben Bernanke decided to double down.

As we are now entering the second phase (dixit Soros) of the crisis, the Federal Reserve system will come under severe pressure.

Giving the best and the brightest unelected Maestros too much unchecked power was a mistake in the first place.

Asking them to perform uninterupted miracles was pushing it.

Inevitably the cruxification has to come.

I actually believe it is on its way.

We have entered the post-Fed era.

By that I mean the era when the Fed was the solution to everything and its octogenarian chairman a rockstar.

The end result is anybody’s guess, but already Ron Paul is no longer ridiculed.

I doubt we will go back to Jacksonian policies of no public debt and the abolition of the central bank.

A return to gold standard does not seem in the cards either.

Rather, a scaled-down Federal Reserve Bank could be the answer.

One with only one mandate: keep inflation under control.

This may sound too German for anybody’s comfort.

But we can adopt what is working overseas without turning into a social-democracy.

The latter is very unlikely, anyway.

Germans, unlike Americans so far, are attached to their welfare system.

They have been ever since Bismarck introduced it in the 19th century and never wavevered.

Germans do not waver.

Even the conservative Chancelor Helmut Kohl was unmoved by Reaganomics.

He was also irritated by Bill Clinton’s lectures on the need for more labor flexibility at a G7 in Denver.

The toughest reforms came after him, implemented by the socialist Gerhard Schroders.

That’s because the Germans like their entitlements so much they make sure not to kill the goose that lays the golden eggs.

Then they distribute the egggs.

Call it Realsocialism.

There is no need to emulate them on everything.

But maybe we can learn from the ECB!

The Federal Reserve was, after all, the child of the 1907 run on the banks.

Its main raison d’etre at the time was to prevent such an event.

But, somehow, its mission has evolved into the guarantor of economic expansion.

This is unfortunately not possible.

Neither is it desirable.

Recessions, preferably short ones, play a role in capitalism.

Avoiding creative destruction is what socialism was made for, not the Fed.

Fighting these cycles is often a way of prolonging them.

Ask the Japanese.

At the end of the day, our reaction to the latest asset bubble burst is not very different from what the Japanese did two lost decades ago.

The only real difference is that we went all the way.

Shock and awe.

We threw all our chips on the table.

If it works, we’ll look brilliant.

If it does not work, our children will not be happy.

Sadly, we did not use the last crisis properly.

Instead of rethinking our economy thouroughly, we again kicked the can down the road.

The tyranny of short-termism is still with us.

It has not left our industry either.

Performance is still dominated by the surprise factor, not companies’ long term performance.

A 1998 McKinsey study is still valid today.

That study showed that share prices largely reflect differences between a company’s actual performance and the market’s expectations about it.

Not the company’s performance in itself.

While waiting for the necessary crisis, defensive stocks and gold stocks look good to me.

Shorting high beta stocks too.

After that we will go full speed in the right direction again.

What is a Socialist Economy?

Here is a report I wrote a few months ago about European socialist systems.
It may help understand the slowly unfolding European crisis.

Thursday October 14, 2010

What is a socialist economy?
Ayaan Hirsi Ali, a Somali-born former Dutch MP, gives us a hint in her latest book Nomad.

In Holland, Mrs. Ali’s maverick friend Pim Fortuyn used to refer to the elite class as the “regenten” – the regents.
“The regenten form an elite triangle: the upper class and royalty, leaders of the unions and directors of corporations.
These three groups have divergent interests, but their prominent leaders gather in five-star hotels, elite clubs and government institutions, and once in a while the queen opens her palace to them.”

A socialist economy is one that is managed from the top down.
It is an economy run by a very visible hand.
It has one overriding purpose: keeping social peace.
By doing so, the elite can comfortably continue to enjoy its prestige and many little perks.
Workers get a good deal too.
They form the majority of voters, after all.
Growth and its engine, entrepreneurs, are at the losing end of this social deal.

Of course, social peace comes at a price.
Government expenditures average a whopping 50% of GDP in Euroland, for example.
Now, that is a lot of money that is being transferred from the real economy to the bureaucrats.
Economists do not seem to have paid attention to this when forecasting still quite bullish growth in the near future.
Today’s austerity plans will hurt more than they want to believe.
How can it be otherwise when these plans are directly affecting 50% of GDP?
In the US, by contrast, that number still hovers around 23%.

So, to keep a socialist economy going, entrepreneurs have to be kept alive.
They are being milked, but just enough.
Byzantine regulations and heavy taxes are the norm.
But the elites that live on entrepreneurs’ production know how not to go too far.
The goose that lays the golden eggs needs to be kept alive.
Today, however, austerity in Euroland makes it inevitable for the decision makers to try to squeeze a few more eggs out of the poor goose.

A socialist economy is all about preservation.
During the financial meltdown, preservation of jobs was the focus.
Hence, Europe has weathered the latest crisis pretty well.
At least so far.
Unemployment did not budge.
People went on with their lives.
Investors bought stocks again and the economic cycle resumed.
It was very simple: corporations were told not to lay off workers.
The cost of preserving jobs was to be dealt with at a later stage.

The automobile industry illustrates this very well.
Even with our expensive bailouts here in the US, eighteen factories have been closed since 2008.
None were shut in Europe.
Fiat now operates a plant in Pomigliano that produces a paltry 7 cars per employee per year.

Socialism is all about preservation.
Even unemployment benefits are designed to preserve one’s buying power.
If one loses her job in a socialist economy, that person is entitled to get a – high – percentage of her previous salary.
This is designed so that no one has to suffer a change in status or life style.
No wonder that a majority of Europeans love the system.

After WW II, European socialism blossomed during the reconstruction years.
Times were easy and politicians very generous with other people’s money.
Then, it reached its first major crisis in the 1970s.
Stagflation led to Eurosclerosis which led to the reinvention of socialism.
A new generation, influenced but not impressed by the Reagan revolution, worked hard to refine the system.
The new generation of national elites proved to be on average more competent than their predecessors.
Corporations bounced back, unions became less confrontational and politicians kept budgets under control.

Some have done a better job than others.
The Northern European countries have shown restraint and moderation in the redistribution of the shrinking wealth.
The Club Med countries, on the other hand, are still learning the craft.
And then there is France.

France has elevated the defense of the status quo to a religion.
It was fine while times were good.
With austerity, though, we are now seeing the consequences.
Highschool kids are today in the streets of Paris…to fight for their pensions!
This is just breathtaking.
In most countries, young people want a good job, a career.
French youth is different.
It has a longer horizon.
Kids in France look beyond that transition phase in their lives when they have to be productive.

This is Sarkozy’s Thatcher moment.
But then again, every French president has had his Thatcher moment.
All have walked away.
All have caved in to the pressure of the street.
Is the present man at the Elysee different?
We will see.
I am afraid that, as they say in America, plus ca change, plus c’est la meme chose.

France matters.
The importance of the growing unrest in France should not be overlooked.
France is only at the forefront of the coming confrontational business environment.
The tyrany of the status quo is in full display.

Because, ultimately, a socialist economy is about confrontation.
It is inherent in the idea of sharing a stagnant pie.
When the pie grows, most people can be given enough to not feel left out.
Not so in difficult times.
Every group or individual will now fight harder to get what they think is their deserved share.
Investors are pooh-poohing the growing number of strikes in Europe at their own risk.

Economists Do Not Live in a Darwinian World

I continue to be surprised by the market’s confidence in economic growth based on borrowed money.

It did not work in Europe in the 1970′s.

Nor did it work in Japan for the past twenty years.

Both of these economic powers have now sub-par economic growth and a stubbornly huge financial burden.

Actually, the Japanese public debt will reach a quadrillion yens next summer.

I looked it up, quadrillions is what comes after trillions.

Trillions are already so last decade.

Debt and money printing has not worked well in the US either.

Consider that from 2006 to 2010, the US monetary base expanded by 134%.

Total public debt has grown 60%.

And how much GDP growth did that buy us in those 4 years?

A paltry 7.6%.

Some fiscal restraint will have to come at a certain point.

With the changing political winds, it could come a bit sooner than later.

In this, the UK is showing us the way.

The country is dealing with problems Americans can relate to:

High debt, double digit deficits and an accommodating central bank.

And now stagflation induced by the announcement of the inevitable austerity program.

Already GDP growth was negative in Q4 and inflation reached 3.7%.

But Great Britain is not alone.

Inflation has now emerged in most emerging markets.

It is forcing countries like Brazil, China, Indonesia or India to seriously tighten their monetary policies.

This will slow down global growth.

Can we really solve today’s economic woes without pain?

Can we grow out of the financial crisis merely by printing money?

Have economists fooled us into a global debt trap?

If we lived in a Darwinian world, economists would already be extinct says the economist David McWilliams.

Indeed, economics looks at times more like a religion than a science.

Beliefs prevail over facts.

Here is a case in point:

Prominent economists still talk about the unbearable cost of the “Bush tax cuts”.

Now, one can have a legitimate debate about the moral or political implications of these cuts.

One may be shocked by the low taxes on bonuses paid with taxpayers’ money to some lucky bankers.

However one cannot debate the fact that the Bush tax cuts have substantially increased government’s revenues.

The “cost” was a 35% increase in revenues from 2003 to 2006.

That is much more than GDP’s growth over that period.

Receipts as a share of GDP went from 16.5% to 18.4%, not exactly a burden to the Treasury.

Federal revenues are difficult to debate.

But what about the unemployment rate which is twice the official number?

The more people get discouraged, the better the unemployment rate.

What about CPI?

What about GDP numbers if the CPI deflator is wrong?

Inflation is now rampant around the world.

But not in the US.

The CPI is not budging.

Are we so different or is the CPI underestimating the inflation?

It is for economists to debate this, but some skepticism from investors should apply.

The CPI’s largest component, owners’ equivalent rent (OER), accounts for 42%.

I don’t know how this OER is calculated, but it sure will keep the index down while the real estate bubble deflates.

This component of the index will justify QE3.

But why did the CPI not go up during the housing bubble??

Greenspan and co kept interest rates artificially low based on the lack of inflation then too.

Medical care prices account for only 6.5% of the index and we are told these costs were up only 3.3% last year…

Food and energy are small components too.

But if they have too big an impact, we are told to ignore them.

Now, low CPI has many advantages.

It allows the government to overprice its debt instruments.

It allows for more money printing. (Since it is not creating any inflation)

It also transforms nominal GDP growth into real growth.

American Innovations

The President’s ambitions in research and innovation reminds me of a report I wrote a year ago on the subject.

Tuesday March 23, 2010.
Chiclets, The Model T, Coca Cola, Mc Donald’s, Apple, CNN, Pampers, Disney, Gillette, Nike, Levi’s, eBay, Kleenex, VISA, Microsoft, Google, Amazon, Kindl, iPad, Facebook. What do these icons have in common? Yes, they are all American. But each of these iconic brands also transformed people’s life styles. Before Coca Cola, there was no soft drink industry. Before McDonald’s, the world had never heard of fast food. All these companies started totally new industries. They all created needs we did not know we had. As a result, every time, a new wave of consumption and investments was initiated. Many foreign brands also reach global iconic status. But they are seldom new, transformational concepts. BMW is a great and well recognized global brand. But BMW is just another car. So is – was ? – Toyota. Louis Vuitton may be fashionable in China, but does not qualify as a transformational product. The company was started in 1854 and already then most people in France knew what luggage was. In Europe, only Nokia, which is at the origin of the mobile phone industry, qualifies as a transformational company. Japan created the walkman. But that’s about it. Even video games are not a Japanese novelty. We all remember the first home video game launched by Magnavox Odyssey in 1972. Or do we? At the end of the day, the Japanese took the baton and ran with it. I suspect one would have made more money holding Nintendo stocks than Phillips (who bought Magnavox in 1974 before doing what Phillips does best, i.e. destroying the brand). Here lies the reason why I never bought the argument that the US economy’s growth is solely due to population growth. European apologists have it wrong when they use demographics as an excuse for the comparatively pedestrian growth in Euroland. The real engine of growth in the US is and remains innovation. It is similarly a mistake to expect emerging markets to take over US’s role in the world economy. We have seen it before. Western Europe after World War II rebuilt its economies at breathtaking pace. Then stalled. Japan was the new inevitable economic power in the 1980′s. Then it stalled. China is the new flavor of the day. But one has to be realistic about the long term potential of economies built on exports to the American consumer. They tend to hit a wall because of lack of innovation. Michael Pettis (China Financial Markets) is right: consumption tends to drive innovation, not production. An economy overly focused on production, like the German or Chinese ones, will always lag the US in innovation. But consumption is not the only factor. When comparing the US with other economies one is also struck by the difference in attitudes towards risk and success. In cultures of entitlements, risk taking is a dirty word. One would have a hard time explaining to Mr Sarkozy, for example, that the economy needs more – not less – “speculators”. Especially the venture capitalist type. Furthermore, in rigid societies, professional success is usually not measured through wealth creation. Rather, ambitious young people spend all their energy climbing the hierarchical ladder for social recognition. Be it in government or in large oligopolistic companies, what matters most is to get to the top of the pyramid. Just ask a French white collar about his job. He will inevitably tell you how many people are “reporting to him”. He will also praise the smarts of CEOs of CAC 40 companies. And make fun of vulgar entrepreneurs like Bernard Tapie. So, how do foreign countries try to improve their innovation deficits? From the top down. The French created Sophia Antipolis in Provence, supposedly to compete with Silicon Valley. The difference, of course, is that Sillicon Valley just happened, it was not “created”. The Japanese bureaucrats twenty years ago decided to make Japan the world leader in the software industry. Hmmm. Wonder what happened. In the year 2000, Eurocrats signed the Lisbon Agenda. Its aim was to “make Europe, by 2010, the most competitive and most dynamic knowledge-based economy in the world.” As of March 2010, I am not aware of coming victory celebrations. Creativity is a bottom-up thing. It cannot be dictated. No bureaucrat or politician ever invented the internet. Even if they make a living claiming credit for everything. Every politician wants to have his “man-on-the-moon” moment. So, today, the great vision-du-jour is alternative energies. I suppose that if governments throw enough money at the problem, it may eventually bear fruit. So far, however, the returns on investments are not obvious. Consider Spain’s generous incentives to develop a solar energy industry. Half the solar power installed globally in 2008 was in Spain. It unfortunately did not help innovation much. Instead, low-quality solar plants sprang up on Spain’s plateaus, The New York Times reports. Officials came thus to realize that they would have to subsidize many of them indefinitely… with taxpayers’ money. We know governments do not allocate money efficiently because the returns they seek are measured by voters, not accountants. Yet, that has never stopped them. Inevitably, as they spend the money, some companies will benefit. That’s why I am holding on to my underperforming solar and wind energy plays. It is also a long term love affair. My first failed entrepreneurial venture dealt with the promotion of alternative energies. Back in 1981, my vision was ahead of its time. It does not pay to be too early.