Renewable Energy Base Increases in 2010

In 2010, there where some big increases in the usage of renewable energy to generate electricity. Between 2009 and 2010, solar base increased 70% while wind base increased 24%. Asia experienced the biggest increase in renewable energy projects.

Rising Production Costs of Oil

In the IEA's latest edition of their World Energy Outlook, global oil consumption is expected to rise from 88 million barrels of oil per day to 99 million barrels of oil per day in 2035 (an average annual growth of about 0.5% per year). Most of the increase in oil consumption will come from emerging economies while most of the increase in production will come from the Africa and the Middle East. The costs of oil production are expected to rise in most places in the world. Latin America is expected to experience the largest increase in breakeven costs due to their deep water oil projects. Breakeven costs in North America are not expected to increase that much which seems odd considering the high costs of producing from non-conventional sources like tar sands and shale deposits.

China's Foreign Exchange Reserves

Due to strong exports and foreign investment into China, China has been piling up an enormous amount of foreign exchange reserves (currency, gold and special drawing rights with the IMF). Approximately 2/3 of these reserves are in US dollar assets (US treasury bills, US treasury bonds). A linear regression model indicates that China is accumulating an average of $33 billion per month.At the end of September 2011, China held $3.2 trillion in foreign exchange reserves.

A High CARBS Diet for Economic Growth

Thanks to Richard Park for bringing this important new acronym to my attention. Citigroup analysts have defined a new group of countries Canada, Australia, Russia, Brazil, and South Africa (CARBS).

"

What are the CARBS? They are the countries that combine very large commodity assets with high stock market liquidity. In many ways, they have exhibited similar characteristics so far over the course of the commodity cycle.

What have they got. The five CARBS economies have some 29% of the global landmass, inhabited by only 6% of the world’s population, and are thus disproportionately important as exporters of commodities. They produce between a quarter and a half of most key commodities."

The CARBS have a large share of the world's resource assets and a large share of global production of these assets. The increasing importance of resource scarcity and population growth indicates that resource exporters like the CARBS should do well in terms of economic growth.

Here are how the CARBS compare on a number of different indicators.

Global House Prices for 2011 Q3

The Economist's global house prices indicator shows housing in Australia, Canada and France as  looking overvalued on several  measures (house prices, prices against income, prices compared to renting).

Euro North vs Euro South

The great divide between Euro countries in areas like unemployment, productivity, competitiveness, and investment makes it seem rather obvious why a common currency makes little sense.

Investing in 5 Year US Government Bonds

With so much uncertainty affecting global financial markets, it is difficult to find good investment opportunities. The response has been a flight to safety. If you cannot make money at least try to preserve what you have. In the recent 5 year government bond auction the yield fell below 1% for the first time ever. With these record low yields, negative returns are becoming the norm.

Swiss Monetary Base

In a recent post I presented a chart showing how the US monetary base has been increasing dramatically. Under normal situations, an increase in monetary base expands broader money supply measures like M2  because of fractional reserve banking. If banks hoard the money and don't loan it out, then increases in the monetary base have little impact on the broader money supply measures. In other words, the money is not getting into the hands of consumers and businesses. Now, the Swiss central bank is doing the same thing.
Well, at least there is no fear of inflation.

On Goldman Sachs

Here are two interesting posts about Goldman Sachs. First, it is harder to get into GS than it is to get into Harvard. 300,000 people applied to GS in the past 2 years and only 4% were hired. Harvard's acceptance rate is 6.2%. Second, with the appointment of Mario Monto as Italy's new Prime Minister GS may be ready to take over the world.

Be Fed Chairman for a Day

The San Francisco Fed has a neat interactive game that tests your ability to be a Fed Chairman. Try running the model with a low federal funds rate (which the Fed has been doing over the past few years).

Game Theory Tells Us the Euro is Dead!

Tyler Durden has a very nice post showing how game theory can be used to analyze the current euro zone disaster (see here). This is a very interesting must read for followers of game theory. Here is the game. Question: is there a dominant strategy?

Skiing in Dubai

For BSUS 6600 students. Did you know that you can ski in Dubai? While it may be 100 degrees F outside in the desert, it is a cool 28 to 30 degrees F inside. The facility has 5 runs varying in difficulty from beginner to expert. The energy requirements are huge. Jeff Rubin writes in his book that it takes an energy requirement equal to approximately 3,500 barrels of oil per day to run the complex.

A Big Jump in CO2 Emissions

An interesting post from Clean Break about a big jump in CO2 emissions.

"The bad news: Emissions from the United States, China, India and other developing countries took a giant leap in 2010, bringing total global emissions 6 per cent higher than the previous year, according to the latest data from the U.S. Department of Energy."

A 6% increase in CO2 from one year to the next is a huge increase. Reducing CO2 emissions down to 350 ppm, a level deemed safe, becomes increasingly difficult when emissions are growing so fast.

A Shakeout in the Solar Industry

Thanks to Tej Kumar for sending me these two interesting stories (here and here) about how the solar industry is going through major restructuring. One challenge facing solar makers is that the price of polysilicone (a key ingredient in the manufacturer of solar panels) has fallen dramatically since 2008. The low price of polysilicone is knocking smaller less competitive companies out of the market place. Polysilicon accounts for one quarter of the cost of a finished solar panel (see here). While lower prices are good for consumers and should help to spur wider adoption of solar power, low prices eat into profit margins and this puts pressure on companies to find ways to increase competitive advantage. For large well organized companies, reducing costs might be enough. Sunpower, a large US company that we study in week 3 of BSUS 6600 is looking to cut next years operating costs by 10%. First Solar, the other big US solar company is looking for ways to consolidate its manufacturing. For other companies, vertical integration or horizontal integration are obvious choices to remaining in business. For some companies, survival through M&A activity may be the only option. Lower prices for polysilicone also puts pressure on governments to reduce or eliminate generous feed in tariffs. Germany and Spain have already cut subsidies for solar power and Ontario is currently reviewing its micro FIT program. On top of this,  the euro debt crisis is slowing solar panel installation in Europe.

The impact on the share prices of publicly traded solar companies has been a disaster. Over the past 6 months, for example, a  basket of solar stocks (in blue, grey is the S&P 500) has lost 50% of its value.

Greece Buying More Oil from Iran

Given the Greek financial mess, one wonders who is selling oil to Greece. Here is a story from Reuters about where Greece is buying oil.

"More than two dozen European traders contacted by Reuters at oil majors and trading houses said the lack of bank financing has forced Greece to stop purchasing crude from Russia, Azerbaijan and Kazakhstan in recent months.

Greece, with no domestic production, relies on oil imports and in 2010 imported 46 percent of its crude from Russia and 16 percent from Iran. Saudi Arabia and Kazakhstan provided 10 percent each, Libya 9 percent and Iraq 7 percent, according to data from the European Union.

"They are really making no secret when you speak to them and say they are surviving on Iranian stuff because others will simply not sell to them in the current environment," one trader in the Mediterranean said."

Imports of Iranian oil into the US are subject to sanctions but oil imported from Iran is fully legal in Europe and Asia.

PIIGS and their Bond Yields

The yield spread on 10 year Greek bonds over 10 year German bunds has attracted a lot of attention of late, and with good reason now that the yield on Greek bond yields is 32% higher than on German bunds. The spread between Portugal 10 year bonds and German 10 year bunds is also in double digits. The spreads on Italian and Spanish debt are around 5%. Not too shocking except that, in the case of Italy, Italy has $2.6 trillion dollars of debt outstanding (which is more than all of the other PIIGS combined). In order to save the euro, the European Central Bank is going to have to crank up the printing presses to print massive amounts of euros although German's and any students of the Weimar Republic would resist this.

Gold Price Seasonality

There have been lots of analysts suggesting that now is a good time to buy gold because gold prices exhibit seasonal patterns and returns are highest in November and December. As the chart below shows, November and September are the best months while October, June and March are the worst months.

Sector Rotation for October 31, 2011

At the end of each month, I rank a selection of  Canadian ETFs according to their price strength. The ranking is based on a simple average of three month returns, six month returns and twelve month returns.

Canadian size portfolios

iShares S&P/TSX 60 Index (XIU.TO)

iShares S&P/TSX Completion Index (XMD.TO)

iShares S&P/TSX SmallCap Index (XCS.TO)

Canadian industry sectors

iShares S&P/TSX Capped REIT Index (XRE.TO)

iShares S&P/TSX Capped Energy Index (XEG.TO)

iShares S&P/TSX Global Gold Index (XGD.TO)

iShares S&P/TSX Capped Financials Index (XFN.TO)

iShares S&P/TSX Capped Info Tech Index (XIT.TO)

iShares S&P/TSX Capped Materials Index (XMA.TO)

International portfolios

iShares S&P 500 Index C$-Hedged (XSP.TO)

iShares MSCI EAFE Index C$-Hedged (XIN.TO)

iShares MSCI Emerging Markets Idx (XEM.TO)

Claymore BRIC (CBQ.TO)

Commodities

iSHARES GOLD TRUST (IGT.TO) Ticker XCS XEM IGT XEG XFN XGD XIT Rank 9 12 1 13 6 3 10 Above ma(10)? No No Yes No No Yes No Ticker XMA XRE XIU XMD XSP XIN CBQ Rank 7 2 8 5 4 11 14 Above ma(10)? No Yes No No No No No

US Money Supply and Bank Excessive Reserves

For ECON 2000 students, here is a graph showing how US M2 has responded to an increase in base money.

 Here is a graph showing excess reserves at banks.

QE2 and Foreign Banks

Here and here are interesting posts about where the money from QE2 went. Much of the QE2 money went to foreign banks, which is not too surprising, given the way the Fed operates.

Big Government Defaults Since 1999

Here is a nice chart showing economic growth before and after some big government defaults.The economies of Argentina, Uruguay, Russia and Indonesia grew faster in the years after the default. An orderly default allows countries to wipe the sleight clean and re-organize economic priorities in an orderly manner. Default should only used as the last option, but sometimes it is a necessary step to take for countries to rebuild themselves. How the situation in Greece plays out is currently an unanswered question but financial markets have already priced in a partial default with the expectation that holders of Greek government debt are likely to get between 10 and 20 cents on the dollar. This is much lower than the 50% writedown that EU leaders recently agreed to.