Fareed Zakaria GPS – CNN 04-19-15

Salient to Investors:

Fareed Zakaria said:

  • Lee Kuan Yew said America will remain the world’s dominant power in the 21st century only if it is the dominant Pacific power.
  • Global stability will be shaped by how the US handles China.
  • Graham Allison at Harvard said that since 1500, war resulted in 11 of the 15 cases where a transition of power took place.
  • China is the second-largest economy, but first when measured by purchasing power parity: yet its IMF voting share is only equivalent to that of Holland and Belgium combined.
  • Washington should turn its energies, attentions, and effort to Asia.
  • Turkey will be an illiberal democracy for the foreseeable future. It is one of the strictest Internet sensors in the world and President Erdogan has called social media the worst menace to society. Erdogan has built a palace which is >30 times the size of the White House.

Henry Paulson said:

  • China will overtake the US as the world’s largest economy. China now builds more than half of the buildings on earth, consumes half the cement, half the coal, half the steel.
  • Xi Jinping wants and needs a good relationship with the US.
  • The US economy is growing but not quickly enough and with tremendous income disparity.
  • The greatest threat to US long-term pre-eminence is not China but our political inability to strengthen and revitalize our economy and competitiveness.

Larry Summers said:

  • The US economy is growing, but not creating jobs, while productivity is not rising anywhere near levels in the past. The cause is a global phenomenon of the industrial world, namely a surplus of savings due to increasing inequality, developing countries accumulating reserves, and people paying down debt versus much less demand and investment.
  • Despite record low interest rates and near-high non-employment we are investing less in infrastructure than in any time since WWII on a net basis.
  • Borrowing money at 1% or less on average to finance the federal government is not the real problem; which is not making investments that offer very high rates of return for our children – instead, we are deferring maintenance and leaving them with a large liability.
  • The US should raise the minimum wage and allow unions a way to organize, which has been unavailable due to the enforcement, or not, of labor laws for the last quarter century.
  • The fundamental objective should be to raise middle-class incomes.
  • The US federal deficit has gone from 11% of GDP to below 3% of GDP, lower relative to the economy than the average over the last 40 years.

Musta Akyol said power has corrupted the ruling party in Turkey – certainties to win the upcoming election – though President Erdogan is no Putin and Turkey will not impose Sharia law and become Saudi Arabia any time soon.

David Brooks at The New York Times said:

  • Marco Rubio is the best of the Republican presidential candidates – creative and intellectually smart. Scott Walker is very practical and very sharp and, unlike all of his competitors, was a governor.
  • We underestimate international trends and electoral tastes. Tough people are winning, including Netanyahu and Merkel.
  • 53 percent of the electorate will probably be women.
  • Politicians who have a deep inner voice, like Abraham Lincoln, are few. Most are busy all the time, lack an inner voice, and are all me, me, me.  The age we live in selects out those with an inner life.

Jeffrey Sachs said:

  • 2015 is our last chance to act on climate change. The earth is warming – 2014 was the hottest year in instrument record – and the climate is becoming more unstable.
  • The population of 800 million people in 1750 has increased to over 7 billion today, while each person now uses ten times the resources.
  • Technology can accelerate the disaster or solve it. While solar is clean and much less expensive, the fossil fuel industry is now much more productive.
  • If China and India continue to completely depend on coal then it does not matter what you and I do.

Watch the video at http://globalpublicsquare.blogs.cnn.com/category/gps-episodes/ or read the full transcript

at http://transcripts.cnn.com/TRANSCRIPTS/1504/19/fzgps.01.html

Greenlight’s Einhorn Said to Back Solar Stocks at Robin Hood – Bloomberg 10-20-14

Salient to Investors:

David Einhorn at Greenlight Capital is believed to have recommended renewable power companies on the declining cost of solar energy and rising price of electricity, while betting against French sovereign debt.

Read the full article at http://www.bloomberg.com/news/2014-10-20/greenlight-s-einhorn-said-to-back-solar-stocks-at-robin-hood.html

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Trina Drops as Japan Outlook Sinks Chinese Solar Makers – Bloomberg 10-01-14

Salient to Investors:

  • Concern is growing that a potential change in Japan’s incentives for clean energy may lower demand from the world’s second-largest solar market, amid a glut of panels.
  • Gordon Johnson at Axiom Capital Mgmt said all of the Chinese module companies rely heavily on Japan. He is concerned about the new Trina convertible note and ADR offerings because they are using equity investors to finance the build-out of solar farms amid uncertain demand.

Read the full article at http://www.bloomberg.com/news/2014-10-01/trina-drops-as-japan-outlook-sinks-chinese-solar-makers.html

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Fareed Zakaria GPS – CNN 09-14-14

Salient to Investors:

Fareed Zakaria said:

  • The purpose of ISIS’ execution videos was to provoke the US and it worked.
  • Al Qaeda tries to appeal to all Muslims while ISIS is distinctly sectarian and anti-Shiite and hostile to Kurds, Christians and many others in the Middle East – if they all fight in a coordinated fashion, ISIS would lose ground.
  • Large parts of supposed territories shown on TV that ISIS controls are vacant desert.
  • This means that it has large numbers of foes in the region who will fight against it not because the United States wants them to but in their own interests.
  • ISIS is a direct outgrowth of America’s invasion of Iraq and the ruinous political decisions to disband the Iraqi Army and de-Baathify its democracy.
  • It is impossible to battle ISIS without strengthening Assad.
  • Sanctions have a poor track record – one study found that sanctions only succeeded a third of the time between 1945 and 2005.
  • Unlike Iran, sanctions against Russia are not coupled with the threat of force and is far less isolated from the global economy. Russia supplies a third of the EU’s gas supply, which is why EU sanctions have been largely toothless.
  • Cutting Russia off from Swift, the network used by more than 10,500 banks, would have far-reaching consequences – it was profoundly damaging to the Iranian economy in 2012.
  • Without a solution to the Ukrainian crisis, Europe’s outlook looks grim; mired in recession, facing a secessionist vote from Scotland with anti-European populists rising in every column.

Henry Kissinger at Kissinger Associates said:

  • In 5 wars since 1945, the US has only achieved its objectives in the first Iraq war and, in a limited way, the Korean War.
  • The West provoked Russia in Ukraine, which can never be just another country.
  • Putin believes he is head of a potentially weak country with a 3,000 mile frontier with China, a strategic nightmare, and thousands of miles with Islam, an ideological nightmare.
  • We are in for an extremely difficult period.

Vinod Khosla at Khosla Ventures said:

  • Solar and wind solutions are naive and simplistic because they only produce power when the wind is blowing or the sun is shining.
  • Like black swans, our solution is some unknown improbable path.
  • It is impossible to innovate without screwing up – innovation means risk, and risk means failure.

Watch the video at http://globalpublicsquare.blogs.cnn.com/category/gps-episodes/ or read the full transcript

at http://transcripts.cnn.com/TRANSCRIPTS/1409/14/fzgps.01.html

Four Numbers Say Wind and Solar Can’t Save Climate – Bloomberg 09-20-13

Salient to Investors:

Robert Bryce at the Manhattan Institute writes:

Any transition away from our existing energy systems will be protracted and costly. Energy transitions occur over decades, even centuries. Coal use in the US is declining, but it is soaring in the developing world and booming in Europe.

Global carbon dioxide emissions have increased 32 percent since 2002, nearly all in the developing world – 86% in Asia, 61% in the Middle East, 35% in Africa, minus 8% in the US (largely due to shale gas reducing coal use), and flat in Europe. Coal use, more than any other factor, is the driver.

Developing countries, particularly fast-growing economies such as Vietnam, China and India, cannot continue to grow if they limit the use of hydrocarbons. Roger Pielke Jr. at the University of Colorado says economic growth wins out over policies focused on emissions reduction every time.

Carbon dioxide emissions have soared because 2.6 billion people still live in dire energy poverty, with more than 1.3 billion having no access to electricity.

The power density of wind is 1 watt per square meter, meaning enormous tracts of land must be set aside to make it viable, along with a backlash from rural and suburban landowners who don’t want 500-foot wind turbines near their homes. To replace the power the US got from coal in 2011 would require placing wind turbines over an area the size of Italy and in which no one could live because of the noise. Offshore wind turbines cost about 3 times as much as turbines on land.

Global production of electricity from wind in 2012 was a 5-fold increase over 2005 output, and more than 5 times the contribution made by solar.

Global energy use is about 250 million barrels of oil equivalent per day, or the output of 30 Saudi Arabias.  On a scale of 30, 10 comes from oil, 9 from coal, 7 from natural gas, 2 from hydro, 1 1/2 from nuclear, and 1/2 from all renewable sources, not counting hydropower. We get 50 times as much energy from coal, oil, natural gas, nuclear and hydropower as we do from wind, solar, geothermal and biomass.

The only sources of electricity production that can compete with coal on price and can be deployed all over the world fairly rapidly and not take up too much land is natural gas and nuclear.

Read the full article at  http://www.bloomberg.com/news/2013-09-20/four-numbers-say-wind-and-solar-can-t-save-climate.html

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China’s Economy Strengthens With Factory Gauge at 16-Month High – Bloomberg 09-01-13

Salient to Investors:

Lu Ting at Bank of America said China’s recovery is being driven primarily by domestic demand but international demand is picking up too, and will boost market confidence in China’s recovery amid the turmoil in some emerging markets.

Zhu Haibin at JPMorgan raised estimates for China’s growth to 7.6 percent for Q3 and to 7.5 percent for Q4 on strength in infrastructure and real-estate, a pickup in exports, and the mitigated downside risk to growth in the near term.

Deutsche Bank lifted its Q3 growth estimate to 7.7 percent. Credit Suisse increased its 2013 forecast to 7.6 percent.

Helen Qiao at Morgan Stanley said input prices are usually a good tracker of the strength of aggregate demand relative to supply so the latest reading suggests demand has strengthened notably.

China’s top solar-panel makers are returning to profitability following two years of losses as higher demand and prices drive up margins.

Ding Shuang at Citigroup said the current rebound in China’s growth is still benefiting from loose monetary and credit conditions earlier this year, but since May, conditions have tightened considerably and that will weigh on investment and growth toward the end of 2013.

Read the full article at  http://www.bloomberg.com/news/2013-09-01/china-aug-manufacturing-pmi-beats-estimates-with-51-0-reading.html

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A Funny Thing Happened on the Way to Equilibrium – GMO Quarterly Letter 04-26-13

Salient to Investors:

Ben Inker writes:

Capitalism should cause the return on capital to be in line with the cost of capital, and assets with similar risks should offer similar long-term returns. Equities should trade at replacement cost, and the long-term return to equities should be approximately the same as their normalized earnings yield. Assets without long return histories should have similar valuations and equilibrium returns as related assets with longer histories.

US companies’ persistently high profit margins is a concern because they should not persist in a mean-reverting world. Yet profitability in the US has been higher than long-term averages for most of the past 20 years, about the same time that the US market has been trading above replacement cost.

Most other stock markets around the world also show elevated profit margins. Global profits are almost certainly near all-time highs as a percent of global GDP.

It does not seem prudent to assume a non-equilibrium situation will persist indefinitely. There are ways for profits to stay high indefinitely, but society may not be willing to put up with them.

Today’s profitability makes perfect sense in the current economy.

The Kalecki equation states: Profits = Investment +Dividends – Household Savings – Government Savings – Foreign Savings

Up until 1987, there was a correlation of 0.75 between investment and profits. But from 1987-99, there was a marked deterioration in the correlation, and since 2000 it has been -0.48. The Kalecki equation states that, all else equal, lower investment should lead to lower profitability, so since 1987 all else has not been equal and very few things have been equal since 2000.

The last few years of the 1990s saw the extraordinary wealth transfer in the form of stock options on tech companies. From a national income account perspective, money that employees received from the exercise of stock options is counted as a cost to corporations, and therefore to shareholders who wound up giving away untold billions to the option holders.

Since 2000, investment has fallen to the lowest levels ever seen, apart from the Great Depression, while profitability has risen to an all-time peak. This was possible because the sum of household and government savings as a percent of GDP has fallen to -5%, versus the average of 3-7% of GDP excluding the Great Depression and late WWII.  Relative to the last 60 years, household and government savings were responsible for profits being 10% of GDP higher than they would otherwise be – so virtually accounting for all corporate profitability since the financial crisis.

The fall-off in investment has really been just since the financial crisis. Profits are just off their all-time high relative to GDP, but companies are investing less than at any point since the Great Depression. Andrew Smithers of Smithers & Co. says this unwillingness to invest is a symptom of the “bonus culture” in which CEOs who realize their tenure may be short, focus on activities that boost stock prices up in the short-term so they can get rich quickly, and ignore the long run as it is unlikely to come about on their watch.

The predominant stores of wealth for the middle class are home equity and savings in the bank, while dividends accrue overwhelmingly to the rich, who have been doing very well in the past 30 years.

Social mobility in the US is increasingly being proved to be a myth.  Rising savings, all else equal, hurts profits. Negative savings rates for the bulk of households in the 1990s were the result of people spending on the assumption that the stock market would always go up, and in the 2000s on the assumption that home prices would always go up.

Read the full article at  http://www.gmo.com/websitecontent/GMO_QtlyLetter_1Q2013.pdf

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The Race of Our Lives – GMO Quarterly Letter 04-26-13

Salient to Investors:

Jeremy Grantham writes:

  • The world, in its reckless use of resources and natural systems, shows many of the indicators of potential failure that brought down many prior civilizations. However, we have two saving graces that may save us – declining fertility rates and progress in alternative energy.
  • People, especially investors, prefer good news and wishful thinking to bad news. Good news is an easier sell, especially in investing.
  • There is near complete control of government by the powerful beneficiaries of the current system.
  • Malthus observed that population had always kept up with food supply, meaning even successful societies were only a few bad growing seasons away from starvation.  Malthus predicted this would always be the case but was wrong on two counts since. Coal and oil, and declining fertility.
  • Our hydrocarbon interlude will end either when economic resources are exhausted or when we have ruined our climate and environment.
  • Nobody before 1960 ever dreamed we would voluntarily decide to have fewer children even as we became richer.  The  remarkable decline in fertility is our last best hope for our civilization and the well-being of all life and I believe we succeed on this front.
  • Our second great hope is renewable energy – solar, wind, etc, plus electric grid efficiencies and improved energy storage.
  • By 2025 to 2030, both solar and wind power will be cheaper than coal, a hopeless choice for electricity generation in 20 years, especially when fully costed for externalities like pollution and climate damage.
  • Personal average wealth and income has been rising only 1% to 3% a year for the last 30 years. Solving our long-term energy problems may not only be the most critical economic problem, but one of two most critical inputs into our future viability as a civilization.
  • Once the capital is found and the project is built, a wind or solar farm delivers far cheaper energy than a coal-fired utility plant, at around one-third of the marginal cost of coal.
  • California gets almost twice the amount of sunshine as London.
  • Energy storage is now being worked on by scores, if not hundreds, of research teams. Caution, a lack of expected progress in energy storage could materially slow down the rate at which alternative energy is adopted.
  • Expect China to set a brilliant example on alternative energy. They could smooth out their potentially dangerous transition from 50% capital spending to a more reasonable 35% over the next 20 years or so by managing a giant program of alternative energy. This would potentially give them global dominance in the most important industries of the future, relieve them of their greatest single worry, energy security, and lower the chronic air pollution of their major cities. Such a program would leave them as the low-cost energy player in global trade, which when added to their lower labor costs, rising educational standards, rapidly improving infrastructure, and capital deepening, should put the fear of God into US capitalists.
  • Our population is likely to start declining in a few decades, slowly but surely, and the fertility rate of 1.8% or less would allow global population to fall back more or less gracefully by 2200 to a probably sustainable level of 4 billion.
  • Natural gas in 5 years will rise to  $6 to $7 mcf.

Read the full article at  http://www.gmo.com/websitecontent/GMO_QtlyLetter_1Q2013.pdf

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Biggest Solar Collapse in China Imperils $1.28 Billion – Bloomberg 03-21-13

Salient to Investors:

Angelo Zino at S&P Financial Services said there is no way the Suntech shareholders are going to get anything. Zino said a host of companies have gotten billions of dollars from Wall Street investors, who will ultimately get nothing.

Risks to investors in solar have spread after the collapse of Solyndra and bankruptcies in Germany.

James Millar at law firm Wilmer Cutler Pickering Hale & Dorr said it’s unclear how the Chinese filing will affect U.S. creditors.

Aaron Chew at Maxim Group said investors may lose everything in a nasty fight between Western bondholders and Chinese banks over assets not enough to go around. Chew said the Bank of China is one of the last companies he’d pick a fight with over an asset in China.

Christopher Peterson at law firm Kaye Scholer said US creditors’ fundamental disadvantage is they need the consent of a Chinese court to get action in China, which the Chinese lenders don’t have to face.

Gordon Johnson at Axiom Capital Mgmt said Suntech remains in production so its failure won’t alleviate the global panel glut.

Four of the six top panel manufacturers are based in China.

Alex Morris at Raymond James said if you’re an investor and did not see this coming, it’s on you.

Read the full article at http://www.bloomberg.com/news/2013-03-20/biggest-solar-collapse-in-china-imperils-1-28-billion-energy.html

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