Bear Market

Short Term Gain For Long Term Pain

March 31, 2011 by · Leave a Comment 

The Daily Reckoning

Well, March was a pretty wild month for the Aussie market. There was a whole lotta shakin’ for not much action. After the dust settled, the ASX200 had advanced just 0.4 per cent. The quarterly performance was not much better, with the index rising just 1 per cent.

But that’s OK. Investing in the stock market is all about the long term. Let’s have a look at returns over the past 12 months. What… minus 0.9 per cent…it went backwards?

How about two years, that’s long term, right?

35 per cent…that’s more like it.

Now, gimme 5 years…it’s all about holding and riding the ups and downs.  Buy and be patient, and come out on top.

Minus 5.6 per cent.


That’s right. Since 31 March 2006, the ASX200 has fallen by 5.6 per cent. Now to be fair once you add in dividends you’d be in the black. But only just, and in risk-adjusted terms the long-term return is positively awful.

We’re sure that investing back in March 2006 looked like a sensible, low risk thing to do, especially if you were ‘investing for the long term’. After all, everyone else was doing it. But this type of thinking reveals the lie perpetuated by the financial industry.

Peddlers of financial products will tell you it’s always a good time to invest, as long as it’s for the ‘long term’.


It’s only rewarding to invest aggressively for the long term when stocks are cheap and perceived risk is high. That’s because the perceived risk is actually priced in. It’s what makes stocks cheap.

Right now, perceived risk is low. Investors think there is greater risk in being out of the market than being in the market. They think the crisis is over and we’re ‘recovering’. Sure, there’s lots of talk about risk but little evidence that it is actually priced in. The market has managed to rally through just about every impediment thrown at it lately. That’s not exactly discounting risk.

Are there any similarities between March 2006 and March 2011? Perhaps. Superficially the global economy looks robust. There is a credit boom going on. But this time the boom is in China and in government debt.

The effects are broadly the same though. Inflationary pressures are building and again we are hearing talk about the need to tighten monetary policy. (Although in 2006 we were still in the ‘sweet spot’…y’know, Goldilocks and all that?) So unless you’re a nimble trader, think about the long term here and how your portfolio might look, five years out after investing in a seemingly low-risk environment.

We’re not the only ones thinking about the long term.

Strangely enough, Thomas Hoenig, (outgoing) President of the Kansas City Federal Reserve, talked about the ‘long term’ in a speech he gave a few days ago at the London School of economics.

Hoenig is one of the few Presidents of the Federal Reserve System that actually realises there is a difference between short-term goals and long-term consequences. He has been a critic of the Fed’s prolonged low interest rate regime, and was the lone dissenter against QEII.

Here’s what he reckons should happen with US monetary policy.

‘The FOMC should gradually allow its $3 trillion balance sheet to shrink toward its pre-crisis level of $1 trillion. It should move the U.S. federal funds rate off of zero and toward 1 percent within a fairly short period of time. Then, after evaluating the effects of those actions, it should be prepared to move the funds rate further toward a level that could be reasonably judged as closer to normal and sustainable.’

We’ll show you why such an eminently sensible policy move is not going to happen in a moment. But first, let’s check out some more choice quotes from Mr Hoenig’s speech:

‘…the longer exceptionally accommodative monetary policies remain in place, the greater the danger that resources will be misallocated within and across world economies.’

‘The monetary policy being implemented currently within the United States and much of the world is more accommodative now than at the height of the crisis.’

‘A Swiss central banker once advised me that the duty of a central banker is to take care of the long run so the short run can take care of itself.’

‘Following this action, (1 per cent interest rate in 2003/04 – Ed) the United States and the world began an extended credit expansion and housing boom. From July 2003 to July 2006, the monetary base in the United States increased at an average annual rate of 4.9 percent, credit increased at an annual rate of 9 percent, and housing prices increased at an annual rate of about 14 percent. The long-term consequences of that policy are now well known. The United States and the world have just suffered one of the worst recessions in decades.’

‘The world for some time now has been experiencing rapidly rising commodity prices. While some of the increase may reflect global supply and demand conditions, at least some of the increase is driven by highly accommodative monetary policies in the United States and other economies.’

‘Central bankers must look to the long run. If current policy remains in place, we almost certainly will stimulate the growth of asset values and inflation. This may temporarily increase GDP and employment, but in the long run, we risk instability, damaging inflation and lost jobs, which is a dear price for middle and lower income citizens to pay.’

Unusually for a central banker, Mr Hoenig’s speech hit the nail squarely on the head. Attempts to make the short run look good always screw things up over the long run. And we are clearly heading down that path now. The trick is in working out the arrival date of the long run.

Mr Hoenig’s remedy is to quickly normalise interest rate settings in the US. He is obviously under the illusion he is meant to serve Main Street, not Wall Street.

Normalising interest rates, quickly, would crash the markets in the short term. Despite this being good for the long-term health of global economic growth, there is no way Bernanke will do that.

To understand why, you have to consider what ‘raising interest rates’ actually entails. We’ll have a crack at a simple explanation.

First, a definition. Another word for ‘the official interest rate’ in the US is ‘the fed funds rate’. That’s because the currency of the US is emitted by the Federal Reserve, and banks deal in ‘fed funds’.

The fed funds rate is the interest rate charged between banks for overnight funds. At the end of each day, for example, banks calculate all their deposits and withdrawals. Some banks end up with excess reserves (more money than they actually need, which earns no interest) while others suffer a net drain on their funds and are in need of overnight cash to balance the books.

So they borrow from the surplus banks, with the interest rate being the fed funds rate. In this way there tends to be very little in the way of excess reserves in the system. The less excess there is, the higher the fed funds rate. When there is an abundance of reserves, the fed funds rate is very low.

Since the onset of the credit crisis, the Fed has lowered interest rates by pumping a huge amount of reserves into the banking system. So much, in fact, that excess reserves are approaching now US$1.5 trillion.

So before you can start to even talk about raising interest rates, the Fed needs to shrink its balance sheet by US$1.5 trillion. That means selling LOTS of assets back into the market.

That is not going to happen. Not under Bernanke’s watch.

Bernanke has talked about raising the fed funds rate by paying interest on excess reserves. While that might sound OK from an ivory tower in Princeton, gifting the banks even more money, by paying them interest on the reserves you created for them, might not work out well.

The bottom line is the global monetary system is so screwed up it’s not funny. Talk about the possibilities of QEIII is quickly followed by this question: when will the Fed tighten?

The probability of QEIII is much greater than the Fed even having a 2-minute chin wag about shrinking its balance sheet.

Here’s how we see it. QEII will end. Markets will tank. Bonds will rally. After a few months, the Fed will announce another round of asset purchases (QEIII). There will be a knee-jerk rally. Then markets will realise that all this stupidity will lead to inflation, which – contrary to popular opinion – is not good for equities or bonds.
Inflation is a tax on everything. And as Mr Hoenig points out, it’s the middle and lower income citizens that will pay the higher price.

Greg Canavan
For Daily Reckoning Australia

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The Real Victims of Fed Monetary Policy

March 31, 2011 by · Leave a Comment 

The Daily Reckoning

Last night, we went to a fancy restaurant in LA. What a place. There were beautiful women. There were sleek young men in Italian suits. And there were men who just looked like they walked out of a lumber camp. More below…

Back to the world of money…

The Dow went up more than 70 points yesterday. The higher it goes, the more dangerous it becomes.

What’s the matter with this downturn? Shouldn’t it lower stock prices? Shouldn’t it empty tables at fancy restaurants? Shouldn’t it close down some of these luxury shops and make it easy to upgrade to business class?

Nah… The Great Correction is a failure. At least so far. It’s correcting only the people at the bottom.

Last week, we went shopping for a birthday present. We went around Bethesda, to Bloomingdales…to Saks…even to Tiffany’s. In one shoe store there were five middle-aged clerks, ready to help us. How could there be enough profit in a pair of shoes to support so many clerks? Then we found out…when Elizabeth bought a pair. Leaving the store, she picked up the wrong bag… The clerk called her. He offered to meet her to exchange bags. “Just look for me. I’ll be in my black Mercedes,” he said.

What? How can shoe clerks afford Mercedes?

Then, we went to Tiffany’s, where there were so many Asian customers, the clerks barely gave us the time of day.

Everywhere we went we found shockingly high prices – and people paying them.

Here in LA too…the numbers show typical families are poorer – thanks largely to falling house prices. But there are still many people at the top…with expensive cars…expensive habits…and the money to keep at it. And despite all the talk of downsizing chic – we don’t see much evidence of it.

At the upper income levels, there doesn’t seem to be much correction happening. And why should there be? The feds give them money.

Stocks have recovered most of their losses. Bonds – which should be worthless by now – still trade hands at par. Corporate profits are at record levels.

Where’s all this money coming from? You guessed it, the feds.

But pity the poor lumps at the bottom. The official unemployment rate has gone down…but most of the improvement in the numbers comes from dropping people off the list of those who are looking for work.

So, what happened to those who didn’t find jobs? They’re getting food- stamps (42 million of them at last count). Or, they’re living hand to mouth.

Many of them have now been out of work for so long they’ll probably never work seriously again.

In this case, the leftists are right. The feds have re-flated the rich folks’ bubble…largely at the expense of the poor. Even Fed governor Thomas Hoenig says so. From Bloomberg:

The Federal Reserve’s “highly accommodative” monetary policy is partly to blame for rapidly increasing global commodity prices, said Kansas City Fed President Thomas Hoenig, who called on colleagues to raise the benchmark interest rate toward 1 percent soon.

“Once again, there are signs that the world is building new economic imbalances and inflationary impulses,” Hoenig, the central bank’s longest-serving policy maker and lone dissenter at meetings last year, said in a speech today in London. “The longer policy remains as it is, the greater the likelihood these pressures will build and ultimately undermine world growth.”

Those “inflationary impulses” are making it hard for the middle classes to make ends meet.

Hershey’s is raising prices 10%. At least it’s being honest about it. A New York Times article tells us that many consumer brands are passing along “stealth inflation” by reducing sizes or lowering quality.

You go to the grocery story. You’re given opportunities to buy new “healthy” items – smaller, and more expensive. Or they are “green” – which makes you think that maybe they are better for the environment in some way. What they are for sure is more expensive.

Not that we blame the companies. They’re caught in a squeeze too. The Fed has driven up prices for their raw materials. Sugar, wheat, cotton, oil – almost all their costs are higher.

The big exception is labor. The cost of employing people has barely budged. Too bad. Because customers are also employees. If they don’t earn more in wages, how can they keep up with the inflationary cost increases?

And more thoughts…

Neil Barofsky has given up his job as chief auditor of the TARP stimulus program. He had this to say about how the program worked:

“The basic idea of a well-run government program is to have clear goals; have a plan to meet those goals; measure progress along the way against those goals; change your program when necessary so you can still achieve those goals.”

But that’s not how it worked at TARP. Instead, the modus operandi:

“Set goals. Ignore goals entirely. Hope for the best. When the best is different, change your goals, and say you never really meant it when you had those goals. Pretend that the program is a success even though it is not meeting those goals.”

Just what you’d expect, in other words.

*** This must be the latest style. Or maybe it’s an LA thing. The “boulevardiers” are dressing up like working men. They’re wearing clothes…and beards…that make them look like real men. We saw one young man in a railroad cap – something we haven’t seen in years. He also had on a pair of steel-toed work boots.

We were having dinner at a fancy restaurant in Hollywood, with two of the most beautiful women in LA. One was our own daughter. The other, her friend, an Australian actress.

“Acting isn’t all glamour,” the girl from Down Under explained. She’s come to LA to broaden her career, she says, after completing filming of a new TV series in England, called Camelot.

“It’s pretty miserable some times. And it’s not all about being the center of attention. In fact, it’s surprisingly lonely some times. I go to do a film. Unless I have a major role, I’ll only be there for a few days. And then, I do my part…and spend the rest of the time in the trailer. It’s not very nice, really.

“And on low-budget projects, you never know what they’ll want you to do. I did one film in England. It was all very improvisational. We had to make it up as we went along. And most of the filming was at night, because it was a horror movie – naturally.

“A lot of the shooting was outside too. And it was below freezing. In one scene, I had to cross a river…and almost drown. My clothes were literally freezing when I got out of the water… and, remember, it was the middle of the night.

“And then, the director said he didn’t like it. He wanted to do it again. So, I did it again. But this time, I almost really did drown. They had to pull me out of the river…and I went into shock and nearly died.”


Bill Bonner
for The Daily Reckoning Australia

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Welcome to Colombia!

March 31, 2011 by · Leave a Comment 

The Daily Reckoning

“Would you invest in Brazil 15 years ago if you had the chance?” our Colombian host asked me one night, in an effort to frame the opportunity here.

“Of course, that would’ve been a home run,” I said.

“Welcome to Colombia.”

We were sitting in a comfortable restaurant in Medellin’s downtown area. Medellin is a pretty city that spills out across a river valley and creeps up the walls of the surrounding mountains. Medellin’s nickname is the City of Eternal Spring, thanks to its temperate weather. If you have an image of Medellin (and Colombia) as a violent place, a visit here would change your opinion. We could have been in any number of cities around the world. I never felt unsafe. (As with any city, there are good and bad areas.) The bars and restaurants were full at night. The skyline was lit with tall buildings. The sidewalks busy with people. It was not always so, as Medellin was once a notoriously dangerous city.

Security issues have been a huge problem in Colombia’s past, but it is much improved, and most of the remaining issues are deep in the jungles, near the porous borders with Venezuela or Ecuador. (In fact, while we were here, rebels snatched 23 Talisman workers doing seismic work near the Venezuelan border. Even these occurrences, however, are now rare.)

Today, Colombia is a young and growing emerging market that has a lot of catching up to do – and that is the core of the investment opportunity here.

For example, one day, we visited Cementos Argos, the largest cement company in Colombia, with a 51% market share. It is an asset-rich company. In addition to its cement operations, Argos owns a huge land bank of 5,000 hectares and a portfolio with stakes in three other listed Colombian companies worth $3.3 billion and 600 million tons of coal reserves.

We met with Ricardo Andres Sierra, the CFO, who told us in the bad old days, plants could work only from 6 a.m. to 6 p.m. And there were parts of the country where the company simply did not go. But today, the plants run 24/7. “We can go wherever we want,” he said.

Argos has a huge opportunity in Colombia. As is often the case when a boom arrives, the building of the infrastructure to support the boom comes later. Colombia is way behind in infrastructure. It needs miles and miles of roads. It needs bigger ports, expanded airports and railroads. This has been a recurring theme on our trip, something we heard everyone mention.

Sierra gave us an arresting statistic. He said Colombia consumes about 220 kilograms of cement per capita annually, compared to 500 kilograms for Vietnam. The point being that Colombia is well below the consumption rates of comparable developing economies. There is lots of room to grow.

We talked about new road projects, such as Ruta del Sol, which will connect Bogota, the capital in the Andes, with Santa Marta, a port city on the Caribbean Sea. We talked about the Cartagena Refinery expansion. Both are huge projects, “as big as the Panama Canal expansion,” Sierra said. There is also a tunnel project that will connect Bogota to the Pacific port at Buenaventura. There are projects for hydropower plants, bus systems, pipelines and much more.

“Infrastructure is the key to growth in Colombia, that’s for sure,” Sierra ventured.

This has also been one of the surprises of the trip. We had heard and read, of course, about the relative lack of good infrastructure in Colombia. But it is another thing to be down here and see it firsthand.

Traffic in Bogota, for example, is impossible – or nearly so. The roads are choked with small cars that go nowhere fast. It seems to take forever to go even short distances. One of our contacts here told us that Colombia has only 300 kilometers of two-lane two-way roads.

The government knows this, and there is a lot of money slotted for infrastructure development in the coming years. Argos is in a great position to profit from the build-out of Colombia’s infrastructure.

So infrastructure is one of the big investment themes we’ve found here.

Another is oil, which is not surprising, as oil makes up 40% of Colombia’s exports and is one of the headline-grabbing investment stories in Colombia. The years of violence in the country hampered exploration and development of Colombia’s oil assets. The easing of security issues has brought back the oil companies in a big way. Also, Hugo Chavez has chased out a lot of the talented oilmen from Venezuela. Many came to Colombia and used their expertise in heavy oil to tap Colombia’s rich Llanos Basin, in the east, which shares a similar geology with Venezuela’s prolific fields.

What may surprise you is just how quickly it’s all happened. Much of the acreage is already locked up. When new blocks come up for bid, they are heavily contested. We met with Charles Gamba, president and CEO of Canacol Energy. He told us there were 67 bidders on their latest block. This industry is developing very, very quickly.

In 2003, Colombia licensed only 4% of its available acreage. Today, that’s 60%. So there are several companies here that have stocked up an enviable portfolio of prospects to explore. And oil and gas will be an important driver of Colombia’s economy for years to come as it develops further.

In any case, there are, as in any market at any time, opportunities. And there are certainly opportunities here.

Stay tuned!


Chris Mayer
For Daily Reckoning Australia

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More Relentless BS From The BLS (And Princeton) Forces Santelli To Snap

March 31, 2011 by · Leave a Comment 

Zero Hedge

From John Lohman

As usual, the Department of [no] Labor did not fail to deliver its usual Thursday morning humor: yet more upward revisions to initial and continuing jobless claims (initial were revised upward by 8,000, while continuing were revised 12,000 higher).  But the unexpected round two of laughter came from Rick Santelli’s instantaneous description of the report.  For those that missed it, his FTMFW quote is below, followed by a visual of the claims cluster:

Of course, this is old news and has been pointed out ad nauseam on ZH (2010 summary here, and longer-term view here).  It’s already known, based on the percent of up revisions vs. down, that the binomial probability of the initial report being unbiased (either statistically or otherwise) is precisely 0.000000004% (which incidentally is rumored to also be the probability of Cramer’s foundation making money this year). 

What was news, however, were the annual revisions that were released with the report.  More humor: they were larger than the first revisions and contained comparable levels of upward bias.  While free entertainment is always welcome, one can’t help but wonder why the DOL doesn’t borrow one of the FRBNY’s interns to adjust the specs in their model.  It’s not like removing a predictable bias in a model is rocket science.  The only legitimate explanation could be, well, Rick’s.

And for those who may have missed it, here is Rick Santelli’s latest moment of insanity when confronted with monumental bullshit (link in case CNBC decides to take the embed version down):

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IceCap Asset Management – Kudlow’s Foot Meets His Mouth

March 31, 2011 by · Leave a Comment 

Zero Hedge

From IceCap Asset Management:

Of today’s major events, our biggest concern lies with the uncertainty in the Middle East & North Africa. Most Westerners, ourselves included, do not understand the complexities of these societies. What we do (and need to) understand is that the situation today is at its most strenuous in any of our lifetimes. This region produces over 35% of the World’s oil supply. Since current global production is about 88 millions of barrels/day, and current global consumption at close to 86 millions of barrels/day, the slightest disruption of production from anywhere, especially the Middle East, will have profound effects on this delicate equilibrium. In response to these unusual times, we are holding healthy allocations to gold bullion, crude oil and other commodities. We continue with our neutral  allocation to stocks and will do so until our trend models signal otherwise.

Full report:

IceCap-Asset-Management-Limited-Global-Markets March 2011

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Looking Like You Know What You’re Talking About Doesn’t Mean That You Do

March 31, 2011 by · Leave a Comment 

Zero Hedge


Enough is


mainstream financial media always tries to offer fundamental reasons for why
stocks do what they do. If stocks rally it’s because on good earnings or
improved consumer confidence or some other development.


On the
surface, this approach is valid: the markets are meant to react to economic and
financial developments. However, the problems with the mainstream media’s
attempts to explain the market’s actions today are:


1)   These
people are journalists, NOT investors
or businesspeople.

2)   None
of them know what they’re talking about.

3)   The
markets haven’t moved based on fundamentals since 2008

4)   Most
if not ALL of the data coming out of the US is massaged at best or fraudulent
at worst.


Let’s start
of with the first two points. The people on the mainstream financial media
channels talking about investing aren’t investors themselves. They’re not
entrepreneurs or businesspeople either. As such they have little if any actual
experience in the markets other than as observers (on the outside I might add).


this doesn’t mean that they’re not very good at acting knowledgeable or convincing on camera. And this is where
things become confusing for viewers. Oftentimes the people speaking on camera
is so good at looking confident and
knowledgeable that you are tempted to believe what they say.


However, if
you listen closely to what they’re actually saying, it’s clear they do not
actually understand what they’re talking about. Yes, they have the right
vocabulary and have some basic grasp of the terms and relationships they’re
describing, but that’s as far as it goes.


Case in
point, when was the last time ANYONE reporting for a mainstream financial media
outlet pointed out that the US’s GDP, employment, and inflation numbers are an
absolute crock?


Name one
time a talking head addressed the fact that the Federal Reserve is chaired by a
guy who has absolutely NO understanding of finance or economics. Or that he’s
committed perjury, fraud, and outright theft.


I could go
on for another 12 pages, but you get the general idea. These people are nothing
more than front-people for large corporations that make their revenue from
advertising dollars (usually from the financial sector). Their salaries and
income are directly related to how
much money Wall Street wants to spend on advertising. That, and their
viewership, which is directly related to how high the market is (and the US
Government’s bailout of their bankrupt parent companies… which of course
results in them being objective in their reporting).


So don’t
expect to ever hear any of these folks tell the truth, which is that that the
market’s moves are in fact controlled by just three factors:


1)   The
Fed’s money pumps

2)   High
Frequency Trading Programs

3)   The
suspension of accounting standards and permission of endless fraud in the
financial system


else is simply peripheral issues at this point. Indeed, if you remove any of
these three key market props we’d be at sub-1000 on the S&P 500 in a matter
of days (if not hours).


We’ll go
there again at some point regardless, but don’t expect any of the guys on TV to
let you know it’s coming in advance. Did they warn about it in 2008?


On that
note, if you’re getting worried about the future of the stock market and have
yet to take steps to prepare for the Second Round of the Financial Crisis… I
highly suggest you download my FREE Special Report specifying exactly how to
prepare for what’s to come.


Make no
mistake, the Financial Crisis is not over. Not by a long-shot. Europe’s banking
system is collapsing, the Middle East is literally going up in flames, the
Japanese nuclear disaster is likely far worse than anyone’s admitting, and the
US stock market is showing a great deal of similarities to its performance
pre-the Crash of 2008.


My report
detailing how to prepare for another 2008 type event is called The Financial Crisis “Round Two” Survival
. And its 17 pages contain a wealth of information about portfolio
protection, which investments to own and how to take out Catastrophe Insurance
on the stock market (this “insurance” paid out triple digit gains in the Autumn
of 2008).


Again, this
is all 100% FREE. To pick up your copy today, got to
and click on FREE REPORTS.


Prepare Now!




publish a FREE Special Report on Inflation detailing three investments that
have all already SOARED as a result of the Fed’s monetary policy.

You can
access this Report at the link above.











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Up, Up And Away (Part 2)

March 31, 2011 by · Leave a Comment 

Zero Hedge

…But before people begin panicking that the radioactive printer plant housed in the Marriner Eccles building has melted down and is now releasing radioactive money straight into the liquidity system, recall that $195 billion of this is simply from the unwind of the Supplementary Financing Program, which feeds into the Adjusted Reserves, which together with currency in circulation feeds into the Adjusted Monetary Base. Therefore, with the unwind of SFP completed, we expect this growth to taper off materially, although by the end of June the Adjusted Reserve balance alone will hit $1.7 trillion, implying another $200 billion or so in growth, although at a slightly slower pace.

The chart below once again (since we show it each week), shows the cumulative change in Excess Reserves and Fed Assets since the start of QE2. In an ideal world these two should offset each other (ideal in as much as banks don’t lend out Excess Reserves and simply keep the fungible monetary electrons as substitutes for Discount Window access), and other change means a migration in(+) or out(-) of currency in circulation (inflationary or deflationary). While until February excess reserves lagged securities held dramatically, this has since flipped, assisted in part by the SFP unwind, which pushes the scales in the excess reserve balance favor. In other words, there is another $150 billion or so before equilibrium is reached, all else equal. Keep a close eye on this cumulative (in)quality as it is the most direct indicator of marginal monetary pressure imbalance (Fed assets less net currency) in the system currently.

Or, in English, the cumulative differential plunge recently is hella inflationary (as the imminent subsequent reversion to the mean means money going out of reserves and into currency).


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Things That Make You Go Hmmm – On Silver Conspiracy Theories And Other Oddities

March 31, 2011 by · Leave a Comment 

Zero Hedge

From Grant Williams: “There are many commentators for whom I have the utmost respect, who completely discount any silver conspiracy theories. They cite the fact that it would be impossible for the manipulation to be conducted in the way that the conspiracy theorists allege or that there are corresponding longs for every short, but yet answers from either the regulators or those supposedly involved in the manipulation are conspicuous by their absence. Let’s face it – if this were a simple case of a misunderstanding it wouldn’t take much in the way of  evidence to clear it up now, would it? Over the past several months, each time a futures contract has expired since the price break in silver began in earnest, the delivery situation has gotten progressively tighter until progressively closer to the wire and talk of a commercial signal failure has become progressively louder. The number of people opting to take warehouse receipts for delivery on first notice day has been climbing and stocks in the various warehouses have been declining to the point that it has been touch-and-go as to whether there would be enough physical silver on hand in the warehouses to satisfy demand for delivery. If, at some point in the (near?) future, time runs out and enough people stand for physical delivery, we will find out once and for all whether there is any truth to the manipulation/massive short position stories, and we will CERTAINLY discover how much physical metal there is available for delivery.”

Full report:

Hmmm Mar 30 2011 (2)

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The Market Ticker – Let’s Talk About An ACTUAL Energy Policy

March 31, 2011 by · Leave a Comment 

By Karl Denninger, The Market Ticker

Ok, if you’ve listened to Pickens and the Ratigan show, you know that they seem to think that we can fix things with natural gas and perhaps with some renewables.

That will never work.  Nor will drilling here – we can replace some of our demand, but not all of it.  Further, the amount of oil we have is finite.

Indeed, all of the various energy resources are finite.  Even The Sun is finite.  It will eventually run out of fuel and "die."  It just won’t happen for a very, very long time.

We have about ten years of natural gas supplies in proved reserves at present rates of consumption.  But "growth" is a nasty thing; it’s a compound function, and I discuss this often – compound functions cause trouble, and usually quickly.

Pickens wants to move trucks (at minimum) to natural gas.  Nice sentiment.  But he’s talking his book and pushing something that, if we double our consumption – and if we replaced gasoline and diesel we would – the "solution" would only last five years, make him filthy rich, and still leave us screwed.

There has to be a better way.  We need a solution that will last at least fifty years.

What if I told you that there is one?

It’s coal.

But not how you think of coal.

We think of coal as going into a power plant that makes electricity.  But that’s wasteful, believe it or not.

Here’s the math on gasoline, diesel and coal.

1 lb of gasoline contains about 2.2 x 10^7 Joules of energy.
1 lb of coal contains about 1.6 x 10^7 Joules of energy.

These are reasonably-comparable; another way to look at this is that you need about 137% of coal (in pounds) as you do in gasoline for the same energy content.

We currently consume 378 million gallons of gasoline a day.  At 6lbs/gallon (approximately) this is 2,268 million pounds.  Reduced to short tons (2,000 lbs) this is 1.134 million short tons of gasoline/day, or 414 million short tons a year.  Converted to coal, this is 579 short tons.

The most-current value I can find for distillate (diesel fuel) is 3.794 million barrels a day.  At 42 gallons to the barrel, this is 159 million gallons of diesel fuel.  Diesel contains about 20% more BTUs per gallon than gasoline, but is about 17% heavier at 7lbs/gallon, so if we convert simply based on weight we get close.  So we have 1,113 million pounds of diesel daily; reduced to short tons that’s 0.557 million short tons of diesel daily, or 203 million short tons a year.  Converted to coal, this is 284 million short tons.

Add these two and we get 863 million short tons a year of coal equivalent.

Why is this important?

Because according to the EIA, again, we consume about 1,073 million short tons of coal a year, virtually all of it being burned to produce electrical power.

How much coal do we have?  According to the EIA the total reserve base – the reasonable commercially recoverable coal, is about 489 billion short tons.  That’s roughly four hundred years worth of supply at current rates of use.  If we assume our population will grow at about 1% a year and per-capita energy use remains roughly constant, we should have enough coal to last at least 200 years.

Now stay with me a minute.

Remember, we consume less than that amount in coal-equivalent between both gasoline and diesel.

Consider this: There is 13 times as much energy in coal in the form of Thorium as there is available by burning the coal, and right now we literally throw it away in the ash pile!

What is Thorium?  It’s a fertile material.  That means that when struck by a neutron in a reactor it transmutes via a nuclear process to an element that is capable of fission.  Note that Thorium itself is not fissionable – that is, it will not (directly) split and release energy.  Instead it captures thermal neutrons and turns into Uranium-233.  U-233 is fissile.

There is a type of nuclear reactor that utilizes this fuel cycle.  Instead of the traditional nuclear reactor which uses water as a moderator and coolant (either a boiling or pressurized water reactor) these reactors use a liquid salt.  In the vernacular they’re called "LFTR"s, pronounced "Lifter." 

You’ve probably never heard of them.  But they’re not pie in the sky dreams.  Our nation ran one for nearly four years in the 1960s at the Oak Ridge National Laboratory.  It was scrapped in favor of the traditional uranium fuel cycle we use today because the fuel it produces is very difficult to exploit for nuclear weapons, and it breeds fuel at a slow rate.  The natural process of the nuclear reactions in the core of such a unit produces a byproduct that is a very strong gamma emitter that is difficult to separate from the other reaction products.  For this reason – and because we wanted both nuclear power and nuclear weapons – we built the infrastructure for uranium and plutonium rather than thorium.

Thorium-based reactors have several significant advantages and a few disadvantages.  We have much less experience with LFTRs than traditional nuclear power, simply because we stopped working with them for political and war-fighting reasons.  They use a fluoride salt which is quite reactive when in contact with water, but the reactivity is a bonus in all other respects, because it tends to encapsulate the reaction products (the nasty fission products that you don’t want in the environment) through that same chemical process.  It runs at a much higher temperature (typically 650C) than a traditional reactor and unlike a traditional reactor the fuel and the working fluid is the same – there are no fuel rods that can melt and release their nasty fission product elements, as the fuel is dispersed in the coolant.

Finally, the unit is intrinsically safe.  It does not require high pressure; the working fluid and coolant is a liquid at ordinary atmospheric pressure.  This gets rid of the need for high-pressure pumps, pipes and similar materials.  Without the moderator the reactivity is insufficient to sustain a chain reaction, and the moderator is in the reactor vessel itself through which the fuel/coolant is pumped, so criticality is impossible outside of the reactor vessel and inside the vessel the fuel and coolant are the same, and a liquid.  The working fluid is contained in the reactor loop by an actively-cooled plug.  If power is lost cooling ceases and the plug melts; the working fluid then drains into tanks by gravity under the reactor and cools into a solid, as it cannot maintain criticality outside of the reactor itself (there’s no moderator in the tank or the plumbing.)  As the fuel is in the fluid, there is no core to melt as occurred in Japan and being dispersed over a much larger area the working fluid naturally cools from liquid to solid without forced pumping and cooling.  This safety feature was regularly tested in the unit at Oak Ridge – they literally turned off the power on the weekends and simply went home!

There are some downsides.  The working fluid requires special metals made out of Hastelloy.  But these are no longer particularly-special materials, being used in other chemical plants where highly-corrosive material is commonly handled.  They are expensive, but then again so are traditional reactor pressure vessels which require high-pressure integrity and thus special welding and inspection techniques.

Why did I just spend all this time talking about LFTRs?

Let’s remember two facts from up above:

  • There is 13 times as much energy in coal in the form of Thorium as there is available by burning the coal.


  • We use 863 million short tons a year of coal equivalent in gasoline and diesel fuel which is less than the amount of coal we burn now.

One final piece of information: The Germans figured out how to turn coal into synfuel – gasoline and diesel – before WWII.  This process, called Fischer-Tropsch, requires energy to drive it and is currently in commercial use in some places that have a lot of coal but little or no oil, such as South Africa.  Malaysia also has an operating plant.  Typical operating temperatures for this process are in the neighborhood of ~350C.

This light bulb should be coming on about now: We can replace our gasoline and diesel consumption, plus replace the coal-fired plant electrical generation, and have lots of energy left over – all while completely eliminating the requirement for foreign petroleum from anyone!

Now let’s put the pieces together.

We’ll start with the same amount of coal we burn today.

We have the fuel energy in the coal, and we have 13x that much energy which we are going to extract from it in the form of the thorium naturally contained in the coal.

Let us assume we consume twice the fuel content of the coal extracting the thorium.  We have 11x the original energy left (once in combustion of the coal, and 10x in thorium energy content.)

We will then use the Fischer-Tropsch process to turn the coal into synfuel – gasoline and diesel.  We will be rather piggish about efficiency (that is, presume we’re not efficient at all) and assume we put in twice as much energy as the coal contains in fuel content converting it.  Since the process heat from the reactor is of higher quality (higher temperature) than the Fischer-Tropsch reaction requires by a good margin, we can do so directly without first converting to electricity (which would introduce more losses.)

We now have all of our gasoline and diesel fuel, and we also have 8x the original BTU content of the coal left in thorium energy content.

We will then use the remainder to generate electricity.

So what we do we have out of this?

A nuclear and physical technology that:

  • Replaces all of our gasoline and diesel fuel requirements.  This ends our foreign oil imports.  It also allows us to remove all foreign military activity related to securing that foreign oil.  It is essentially a lock that we can drop $200 billion a year off our military budget this way, and it’s not unreasonable to expect that we might be able to cut the DOD in half.  Over 20 years this is at least $4 trillion in budget savings, and might be as much as double that.  Those funds should do nicely to build the plants involved.

  • Continues to use liquid hydrocarbons for light and moderate transport needs.  Sorry folks, there’s nothing better.  I wish there was too.  There isn’t.  Some day there might be, but that day is not today.  The problems with the alternatives are all found in thermodynamics as a consequence of energy density and those are laws, not suggestions.  The energy and money required to produce a plug-in vehicle or hybrid is, for most users, greater than the incremental cost of the fuel over the entire lifetime of the car.  Hybrid and all-electric vehicles make no sense unless you have no rational way to produce the liquid hydrocarbons.  We do have the ability using the above.

  • Reduces our carbon emissions by the amount of the former oil imports that were burned.  We still burn the gasoline and diesel, but that’s in the form of the converted coal.  Since we’re only using half the hydrocarbons we used before between coal and oil, our CO2 emissions go down by the amount of the formerly-burned petroleum.  I’m not an adherent of the global warming religion but if you are you have to love this plan for that reason alone.

  • Provides us dramatically more electrical power than we have now, and more-efficiently on a thermal-cycle basis.  Conventional nuclear power uses Rankine-cycle turbines.  This is one reason why they need access to large amounts of water.  Due to the higher temperature of operation these reactors can run combined-cycle generating turbines, which makes practical siting them in places where they are air-cooled yet they can still achieve reasonable thermal efficiency.

  • Is sustainable for two full centuries, even assuming our historical 1% population growth rate and no decrease in per-capita energy use.  Within 200 years we should be able to get fusion figured out.  200 years is a long time for technology to advance.  This much is absolutely certain: There is no other option that is reasonably feasible with today’s technology and which has an exhaustion horizon of more than 100 years available at the present time, allowing for our historical population growth and no dramatic reductions in per-capita energy consumption.

  • Is not subject to the same constraints and risks that exist for today’s reactors, even though this has nuclear power at its core.  The accident in Japan, for example, cannot occur with these units because they do not require active cooling after being shut down to remain safe.  The working fluid also tends to bind any reaction products, which inhibits the spread of any material if there is a pipe break or other release into the environment.

  • Produces much less high-level nuclear waste than conventional reactors.  Most waste is burned up in the reactor via continual reprocessing on-site.  The final waste product produced is a tiny fraction in volume of that from conventional plants.  It is not zero to be sure, but these units present a much-smaller waste profile than do traditional uranium/plutonium cycle nuclear plants.

The biggest disadvantage is that we’ve only built one of these reactors, at Oak Ridge, and then we stopped because a decision was made to pursue "conventional" plants due to their dual-use capability.  But the challenges presented by LFTR technology are known, and the ability to build and operate such a plant is not "pie in the sky"; we’ve performed all of the necessary technical parts of assembling this alternative individually and ran one of these reactors for four years.

Are their engineering challenges in this path?  Yes.  Is it "free energy"?  No.

Can this be made to work given what we know now, at a reasonably-competitive price?  YES.

If you’re going to propose something else then show me the math. If you can’t, then get on board, because this is the bus that will work.

Incidentally, China and India appear to have figured this out as well; I’m not the only one with a brain.

We had better lead on this or we’re going to get trampled.

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