Monday, May 21, 2007

Stocks, the economy and carbon credits

I have been somewhat distracted lately by a number of investment related things, and thought I might share some insights that have bubbled up from looking at economic trends.

Firstly, the state of the world's economies today seems to be puffed up by debt and unlimited money supplies. The US dollar is near the bottom of its trading band in terms of other global currencies because the growth of the money supply in the US (unsupported by any real asset such as gold) has been faster than that of its major counterparts in Europe or Asia. Household debt (rolled into mortgages) is at the top of its historic range. The pessimist would argue that a painful day of reckoning is coming for both households and the US economy in general as circumstances conspire to bring these two measures back towards their historic medians.

Secondly, the market for carbon credits has opened and has undergone some speculative ebbing and flowing. It is too early to tell yet whether there is a lasting demand for an instrument which has no intrinsic value other than what a collection of governments declare necessary due to their current beliefs about global temperature trends and their causes.

Thirdly, there seems to be a resurgence in the demand for Uranium, whose spot price has risen 20-fold in the past 8 years. Electricity generated by nuclear power plants is likely to provide an increasing share of world supply for all sorts of reasons including the above-mentioned carbon credit issue.

If the IPCC can portray scenarios as predictions, then why can't we? So here are a few:
1) Economic crisis defeats Carbon Credits
Household debt and a currency crisis spurs the US government to set aside restrictions on industrial development. Carbon credits are recognized as adding cost without adding value to the US economy and plunge in value to zero.

2) Carbon Credits spur Nuclear Power Development
The cost of carbon credits gets so high that society demands cheaper alternatives to super-critical coal fired power plants, and nuclear power plants become a common feature across the developed world. (Traditional environmentalists wonder where they went wrong!)

3) Economic crisis defeats global warming theorists
Some sort of economic crash drops the production of carbon dioxide worldwide, and temperatures continue to do whatever it was they were previously doing, ie fluctuating within broad trend bands. People notice that this is not what the AGW folks promised, and wonder whether there really was a link between atmospheric CO2 and temperatures. However people are too busy worrying about surviving the cold winter to put much thought into what might have gone wrong.

There are plenty of alarmists out there in the world of environmental issues, but I promise you that there is a similar concentration of alarmists out there in the financial world. However the institutions of the financial world are somewhat more interested in their own long-term survival than many environmentalists seem to be, so it is hard to imagine a truly catastrophic extended financial debacle. It is much easier to imagine a financial debacle with governments reacting in ways that are not sustainable in the long run but which keep the mobs from the gates of the palace, as it were.

My conclusion out of this analysis has been to buy shares in good companies that deal with energy conservation, because every scenario includes consumers preferring to spend less to heat, cool and light their lives. I am not alone in this - check out the performance of Color Kinetics (CLRK) on the NASDAQ this week.

I am also into good quality uranium explorers here in western Canada, with TXM, JNN and PXP at the top of my list. The producers (eg Cameco, Denison/IUC and SXR) have had their run-ups, thank you very much.

Gold belongs in every portfolio and the price is inversely proportional to the strength of the US dollar. Hard to make a call on this one, but the ratio between the price of gold stocks and the price of bullion favors buying gold stocks these days. Harder to imagine a plunge in the price of gold than a plunge in the price of the US dollar.

Those are your Halfwise Stock Tips of the Month, or Year. Let me know if this stuff is interesting. Thanks


David Wozney said...

Re: “Gold belongs in every portfolio and the price is inversely proportional to the strength of the US dollar.

A “Federal Reserve Note” is not a U.S.A. dollar. In 1973, Public Law 93-110 defined the U.S.A. dollar as consisting of 1/42.2222 fine troy ounces of gold.

Halfwise said...

"Public Law 93-110 defined the U.S.A. dollar as consisting of 1/42.2222 fine troy ounces of gold."

Thanks for the comment and the informative links.

But surely when it takes 660 of the pieces of paper that people refer to as US dollars to buy an ounce of gold, you aren't arguing that the buyer is deluded and should be paying only 42.22 of those pieces of paper. The market clearly behaves otherwise.

Where does one acquire the currency that buys 1/42nd of a troy ounce of gold? And who accepts that currency for trade and commerce?