Monday 25 February 2013

Muse, Energy & High Speed Train Lines

If you bought the last Muse album 'The 2nd Law' you may have noticed the recurring theme of energy deficiency and the sustainability of our current way of life that runs deeply through most of the tracks.

The title of the album refers to the 2nd law of thermodynamics, which states that 'the entropy of an isolated system never decreases, because isolated systems spontaneously evolve toward thermodynamic equilibrium- the state of maximum entropy. Equivalently, perpetual motion machines of the 2nd kind are impossible.'

This is put into an economic context in the track 'Unsustainable' which says:
''All natural and technological processes proceed in such a way that the availability of the remaining energy decreases. In all energy exchanges, if no energy enters or leaves an isolated system, the entropy of that system increases. Energy continuously flows from being concentrated to being dispersed, spread out, wasted, and useless. New energy cannot be created and high-grade energy is being destroyed. An economy based on endless growth is unsustainable.'' 

The main flaw in this argument is calling the global economy an isolated system. We receive a certain amount of energy from the sun and other renewable sources that is potentially unlimited (on our time frame anyway) also some technological processes/progression may lead to great reductions in energy demand and may also (nuclear fission?) solve many of our long term energy problems.

The trouble at present is that these renewable sources account for an incredibly small percentage of the total energy used, and most energy consumed is still derived from the burning of fossil fuels, which are becoming increasingly scarce, difficult to source, and expensive.

The world struggles to feed 7bn people under current conditions. How will we fare decades down the line when oil is in much shorter supply, and probably vastly more expensive than it is now?
New oil drilling techniques such as fracking may provide us with a temporary respite, but in the end we will consume these supplies as well (probably at an ever increasing rate) and be left with renewables alone. Will we be able to run our agricultural and manufacturing industries on solar power and other renewables? It certainly wouldn't be possible at the moment.

Tullett Prebon recently published a report called 'Perfect Storm'. In this paper they describe the global economy as a surplus energy equation, i.e. the more energy/resources left over after providing the essentials of life (food/water/shelter) the higher the potential GDP can be. They argue that the massive GDP growth we have seen over the past 200 years has been made possible because of access to cheap and abundant energy, mainly from fossil fuels. They argue this point fantastically well with graphs/diagrams etc and I recommend reading their explanation. The report is 84 pages long but they only really start talking about the energy side of things on page 59 so I advise you start reading there. Here is the link.

Economists in the UK are currently scratching their heads about why our employment levels have increased dramatically since nadir of the credit crunch, yet GDP levels remain stagnant. A continuing lack of credit will not be helping this, but also I wonder if we might have reached a tipping point in terms of our surplus energy equation? Is it possible to grow in the face of rapidly rising oil prices?

One thing is for certain, countries with the best energy policies going forward will be the most competitive on the global scene in the future. Sourcing cheap reliable energy should be the corner stone of UK government policy. With this in mind I find the latest idea of squandering billions on a high speed train line (HS2) preposterous.


Friday 22 February 2013

T. Boone Pickens - The Future of USA Manufacturing is Bright

Great 5 minute video on CNBC yesterday where T. Boone Pickens is asked about his thoughts on energy prices and US manufacturing. Check it out.

Thursday 21 February 2013

Bubbles - Gold & Government Bonds?

I've written before on a few occasions that I'm quite bearish long term on gold and gov't bonds. In case you missed that check out these links.

To briefly sum up the situation; Western governments have pushed bond markets to 300 yr highs by pumping them full of QE money. Investors fearing that this strategy will cause hyper inflation and lead to currency collapse have fled into 'safe haven' assets such as gold etc thus also driving the price of these assets into orbit as well.

At some stage the QE policy will have to be reversed or at least abstained, thus sending bond prices through the floor. Also if/when the current debt/Eurozone crisis blows over and a shred of optimism returns, the price of gold will be spiralling the same way.

It would be nice to be able to profit from short selling these assets when they finally give. I have a CFD (Contract For Difference) trading account that enables me to bet on prices falling, it is a risky strategy, and more akin to day trading than investment. Furthermore because CFDs are essentially leveraged it's quite easy to lose more than your initial stake if you get it wrong. The main issue is timing. Gold has fallen 13% since October's highs around the 1800 level. Could this be the start of the collapse or just a temporary pullback? I'm not really willing to bet either way just yet, better to miss the boat than get on it at the wrong time.
I am however keeping a close eye on these markets and may make a move when I think the time is right.


Friday 8 February 2013

Market Update - February 2013

January brought with it some bumper stock market gains. The FTSE100 rose by 6.4% which is the best performance for this month since 1989. Will the old adage - 'As goes January, so goes the year.' prove correct for 2013? Fingers crossed!

My personal portfolio has performed very well. Leading the pack has been my sector bet on the house builders (Barratt/TaylorWimpey/Persimmon/Redrow/TelfordHomes), which have more than doubled now since purchase. The reason I bought these holdings was that they were all trading at a significant discount to Net Asset Value (NAV). With the exception of Barratt this is no longer the case so I'm starting to think about a possible exit strategy from these companies should they rise much higher.

Lloyds Banking group have also risen quite a bit over the last few months, they are making good progress repairing their balance sheet and deleveraging to meet the new banking criteria. I'm confident that once the PPI mess has blown over that this company will return to a healthy profitable situation and drag the share price up at the same time.

My last purchase back in September of Fidelity's Special Situations China fund has done very well, rising from 75p to around 95p, a gain of almost 30% in under 5 months. I may add to this position soon if the price remains below 100p.

My other holdings have generally risen with the tide, apart from BG Group which has been suffering quite a bit from various set backs (down about 10% from purchase price) and a few others like Vodafone, Astra Zeneca and Polo Resources that seem content to tread water for the time being.
Notably Tesco are making a decent recovery after taking a bit of a hammering early in January last year.