On Target Newsletter
2022.01.01
In this issue:
- War dangers,
- 2022 investment risks,
- Climate change,
- Pandemic craziness,
- Investing in China,
- Coal,
- Black swans,
- Food crisis,
- Moonshots,
The Threats of War
My life experience has been that the pessimists are usually wrong. But maybe no longer. I’ve an uneasy feeling that 2022 is going to be a bad year. Three serious potential military crises, any of which could erupt, perhaps simultaneously, constitute the biggest challenge to America and its allies in decades.
The three are… Ukraine, Iran and Taiwan.
Russia is planning an invasion of Ukraine early this year, the US believes. Its previous invasion was a success. It annexed the Crimean peninsula and established a zone of control by pro-Russian rebels – two self-declared republics — in the important Donbas region. The US knows that it has built an armed force on the border that would be strong enough to overwhelm the Ukrainian army in a second invasion and extend the rebels’ zone of occupation, perhaps enough to establish a land link to Crimea.
The Russians’ fear is that the Ukraine will succeed in securing membership of the NATO anti-Russian military alliance. It’s unlikely to achieve that because NATO won’t welcome any additional risk of precipitating a nuclear war between the West and Russia. But NATO is building the Ukraine’s armed forces with training (Canadians and Brits) and modern weaponry such as drones and anti-tank missiles.
This has been magnifying Russian fears, which in turn is hardening Moscow’s language of hostility and demand for concrete commitments from NATO not to increase its military ties with Ukraine.
How will the West react if Russia does invade? Not with military involvement robust enough to elevate a limited conflict to a major war. Instead America is threatening Russia with major sanctions such as financial warfare.
The threat to punish Russia by refusing to allow operation of its Nord Stream 2 sub-Baltic pipeline is an empty one as the new government in Berlin is already threatening to do that anyway. Which is more likely to have the opposite effect of encouraging Moscow to invade Ukraine as a way to punish Germany. In any case, how can Europe risk a tit-for-tat conflict over energy resources, given that it depends on Russia for 40 per cent of its natural gas supplies?
If Russia does decide to invade, both sides are likely to pay a high price. But with Moscow probably emerging the winner on balance.
Another nasty prospect of armed conflict is in the Mideast. Iran is only weeks away from producing enough enriched uranium to start making nuclear weapons. That’s an outcome the US and Israel have spent decades trying to stop.
As even tough sanctions have failed to work, the only remaining option would seem to be destruction of Iran’s nuclear facilities by aerial bombardment. They are widely dispersed and some are deeply underground. Even with the enormously powerful “bunker-buster” conventional bombs the Americans have developed, it’s doubtful that this would be completely effective.
It would delay significantly the amount of time – several years – that Iran would need to develop nuclear warheads and the missiles to deliver them. But the country would react fiercely to an aerial bombardment. It has formidable anti-aircraft defences, drone weapons and military reach far beyond its borders. For example, its Hizbullah ally in Lebanon could rain thousands of rockets on Israel’s cities and sensitive infrastructure such as power stations and desalination plants. It has threatened to close the strait of Hormuz, through which much of the region’s oil exports pass to world markets, if attacked.
The costs to the US, Israel and their allies of going to war with Iran would be formidable. But delay increases the risk of its emergence as a nuclear-armed regional power.
America’s chaotic withdrawal from Afghanistan, acknowledging its biggest military failure since Vietnam, is a dangerous encouragement to China to initiate its threatened seizure of Taiwan. Growing assertiveness by president Xi Jinping in his words and actions suggest that he sees it as his manifest destiny to conquer the rebel island.
Thanks to sustained massive investment in China’s armed forces they have the capacity not only to reduce Taiwan but also to resist whatever counter-measures the US takes. The Chinese navy has launched 90 major vessels in the past five years – four to five times as America has stationed in the western Pacific. More than 100 advanced fighter planes are added each year to its air force. China has deployed space weapons and its coasts bristle with ballistic and cruise missiles able to rain down on Taiwan, US Navy vessels and American bases in the Pacific.
There is speculation that China could successfully invade Taiwan. That would be a major challenge, given the 180-kilometre of waters between the mainland and the island. But there are easier alternatives that can be used to subdue the rebel province. Aerial bombardment could destroy the factories of its world-leading semi-conductor industry (it makes 84 per cent of the thinnest and most advanced microchips). The island could be cut off from the outside world by a sea and air blockade.
We cannot judge how far America would go in supporting Taiwan. A conflict with China using nuclear weapons seems unthinkable. But a major clash of arms leading to Chinese victory is not. It’s reported that in the war games held regularly at the Pentagon, America has started to lose.
The Greek historian and general Thucidydes said the drivers of war are fear, honour and advantage. All are escalating – in Europe, the Mideast and the Orient — as we enter 2022.
Investment Risks for 2022
The outlook for investment markets this year looks good. Economies are growing nicely; household savings are high; unemployment is low. But there are three risks that most investors seem to be ignoring, says MoneyWeek’s Merryn Somerset Webb…
► Policy risk: Inflation may slow down – but no one is really sure how inflation works. It is entirely possible that low inflation over the past 20 years has been mainly the effect of the wave of globalization and cheap labour that followed China’s entry into the World Trade Organization in 2001 and the expansion of the European Union. If that is true, the idea that central banks can sort out the problem with the odd quarter-point interest-rate rise is laughable. It may be that central banks will have to either accept higher inflation or raise interest rates properly high to contain it.
► Markets are fragile, as they mostly are, now. We all know that future returns are a function of today’s investment prices. That’s fine when we can kid ourselves that earnings will rise so much without our’s having to lose any money. But it isn’t fine when confidence takes even the slightest of knocks. For example, if another Covid variant arrives that turns out to be a bad one.
► Then there is the capital cycle. You should look at how much capital is flooding into a sector rather than focusing on price alone. The more capital there is, the more likely it is that the sector will see over-supply and price collapse.
Right now it is easy to see those sectors in which capital seems both free and unlimited (renewable energy being the obvious example), and where it has been neither for some time (for instance old energy and mining). This is a combination that should make investing both harder (the risks are high) and easier (there are obvious opportunities).
What should the 2022 outlooks really say?
Merryn concludes that markets are fragile and set to be very volatile. That there might be good times ahead – but that many prices already discount 20 years of partying. And perhaps that investors should bias their holdings towards cheaper services; towards the capital-starved ones that it turns out we need as much as ever.
Eoin Treacy’s view is that financial conditions will tighten this year. That’s inevitable because the vast fiscal deficits run by most countries will contract. At the same time, a significant new crisis, worse than Covid, will be required to re-ignite central bank QE programmes on the scale seen in 2020.
With the semiconductor shortage likely to be solved by the middle of the year and oil prices less likely to surge, there is significant scope for inflation to surprise on the downside. That’s an obvious prediction for 2022. However, the broader inflationary trend will remain. Prices are not going to back down… the pace with which they are rising will just moderate for a while.
The globalization model is facing its biggest challenge in years. Optimizing supply chains to avail of China’s one-stop shop for manufacturing contributed to lower consumer product prices for the last 20 years. Rising geopolitical tensions and the need to replicate production capacity in alternative locations is inefficient. That will push up prices. Globalization is not going away, but the trend of ever-lower consumer prices is probably over.
Rising worker activism is pushing up wage demands everywhere, but it also inhibits governments from clamping down on deficit spending. No one is in any mood to go back to fiscal austerity. Wages in China are rising quickly and potentially faster than in more developed economies.
Central banks are in a tight spot because of the scale of the debt mountain. The pressure that would come to bear on their respective governments from rising debt servicing costs would be too much to accept. That suggests interest rates will peak at significantly lower levels in this cycle.
The next time we have a recession, central banks won’t have interest rates to cut significantly. They will have to delve even further into the toolbox of previously unimaginable policy options to monetize the debt.
Controversial Views on Climate Change
Climate change has become the new religion. Millions of people believe it should be the most important factor shaping our lives. Trillions of dollars are now committed by governments to fighting it. The most extreme activists are convinced that it threatens human existence. Every day it is blamed for disasters such as floods, fires and hurricanes.
What is the truth?
It’s true that the Earth is warming, and it’s true that human activity is one of the causes. But much of what climate scientists tell us is far from certain, Steven E Koonin argues in his important and controversial new book Unsettled*.
Koonin is professor at New York University’s Center for Urban Science. His credentials are impeccable. He has been a student, consultant and policymaker in climate science for decades, including a spell as a top adviser to the Obama administration. But he has become a focus of intense controversy as he is a climate contrarian.
He produces evidence, all from official sources, showing that some of the “facts” – for example that hurricanes are becoming fiercer and more frequent – are plain wrong. Heat waves are no more common in the US now than they were more than a century ago. Models used to predict the future are failing because they are manipulated to ignore unwelcome aspects of the past.
Governments are basing their policies on what the experts tell them about certainties when in fact many aspects of climate science are far from settled. The failure of models to explain the past “erodes confidence in their projections of future climates.” In particular it complicates sorting out how warming has been caused by human influences rather than natural factors such as greenhouse gas emissions, volcanic aerosols.
Television forecasters commonly blame a “broken climate” for many of the severe weather events that they report on. But “observations extending back over a century indicate that most types of extreme weather events don’t show any significant change. And some such events have actually become less common or severe… even as human influences on the climate grow.” The World Meteorological Organization states categorically that no single event, such as a severe tropical cyclone, can be attributed to human-induced climate change, given the current status of scientific understanding.
Human activity is blamed for rising sea levels. But they have been rising for 22,000 years. Human influences have only increased dramatically since 1950.
The IPCC claims that climate change is “hurting the availability of food because of decreased yields” and “it’s going to get a lot worse.” But agricultural yields and food supply have surged during the past century even as the globe has warmed. 2020 saw record high grain production.
CO2 is the main greenhouse gas bugging climate activists and blamed for global warming. But increasing CO2 in the atmosphere has been a significant factor in plant yield improvements. Crop failures happen, but not on a persistent, catastrophic scale. And satellite measures show that the proportion of the world’s vegetated areas covered by leaves has “greened” markedly, by 25 to 50 per cent, over the past four decades.
Koonin says: “It’s clear that media, politicians, and often the assessment reports themselves, blatantly misrepresent what the science says about climate and catastrophes. Those failures indict the scientists who write and too-casually review the reports, the reporters who uncritically repeat them, the editors who allow that to happen, the activists and their organizations who fan the fires of alarm, and the experts whose public silence endorses the deception. The constant repetition of these and many other climate fallacies turns them into accepted ‘truths’.”
Those who work in institutions such as government, a corporation or an NGO are under pressure to support and promote the message about coming catastrophe. Academics are under pressure to secure press coverage and attract grants. Climate contrarians suffer public opprobrium and diminished career prospects for publicizing data that doesn’t support the “broken climate” meme. There is mounting pressure to silence them. One outrageous example was the 2019 introduction in the US Senate by Democrat leader Chuck Schumer of a Bill to prohibit the use of federal funds in any way “to challenge the scientific consensus on climate change.”
Balancing the certainties and uncertainties
Long ago the American writer H L Mencken said: “The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, most of them imaginary.”
Koonin says that, all else being equal, it might be a good thing to eliminate or even just reduce CO2 emissions. But all else isn’t equal. Decisions must balance the cost and efficiency of measures to mitigate climate change against the certainties and uncertainties of climate science.
The balance of outcomes differs from country to country. Prosperous nations can reduce their emissions while maintaining their prosperity. Developing nations have to give greater priority to raising living standards. That’s why China and India cannot easily abandon coal, the dirty fossil fuel on which they depend for electricity and economic growth.
To be effective, climate policies must have a number of features…
► They must be consistent. For someone to invest an extra billion dollars to ensure that a new power plant lasting for 50 years will be emission-light requires knowing that the reductions will be worthwhile for decades.
► They must be significant. Something or somebody will have to accept major change – which always means political costs.
► They must be focused on reducing emissions. Policies get diluted by other issues such as trade protectionism. For example, the US imposes tariffs that increase the cost of solar panels.
► They must be systematically cohesive. Having a high fraction of electricity generation that depends on rapidly-changing weather (wind turbines and solar panels) that threaten the grid’s reliability requires reliable back-up such as batteries; vehicles using a different fuel (electricity, hydrogen) need a new or greatly expanded system to produce and distribute the stuff. Koonin does favour the electrification of road transport… but doesn’t seem to worry about the immense costs of transforming vehicle manufacturing and power generation relative to the economic benefits.
► Changes must be technically practical. There are powerful physical constraints that any technology must respect. There are only 44 hydrogen filling stations in California. Hydrogen-powered cars are double the cost of those fuelled by gasoline. And hydrogen is currently made from a fossil fuel, natural gas. “So much for ‘zero emissions’.”
► Changes must promote conservation. The only sure ways to do that are through regulation or price increases. Either of those is difficult for governments to implement.
Choices that nations face
“Creating an emissions-free energy system will be broadly disruptive, both economically and behaviourally. The question is whether the country will choose to invest the financial and political capital needed to bring that about.”
Koonin doesn’t think that’s likely to happen soon. “Even if such a transformation did come to pass, it would make very little direct difference, if any, to the climate; the US accounts for only some 13 per cent of global greenhouse gas.” And it’s unlikely the rest of the world would follow America’s lead, when their energy needs are so pressing “and the benefits of reducing emissions are “so murky.”
Koonin concludes that the many certain downsides of trying to fight climate change through mitigation outweigh the uncertain benefits. “The world’s poor need growing amounts of reliable and affordable energy. Widespread renewables or fission [nuclear power] are currently too expensive, unreliable, or both…”
We should “wait until the science becomes more settled – that is, until the climate’s response to human influences is better determined. Or failing that, until a values consensus emerges or zero-emissions technologies become more feasible – before embarking on a programme to [seek to] tax or regulate greenhouse gas emissions out of existence, or to capture and store massive amounts of carbon dioxide from the atmosphere.
“The socio-technical obstacles to reducing CO2 emissions make it likely that human influences on the climate will not be stabilized, let alone reduced, in this century. Advocating that we make only low-risk changes until we have a better understanding of why the climate is changing, and how it may change in the future, is realistic and prudent.”
*Unsettled by Steven E Koonin, pub. by BenBella Books
A Contrarian View on Fighting the Pandemic
Spanish commentator Fernando del Pino Calvo Sotelo says of governments’ pandemic policies in his newsletter fpcs: “This utter craziness must end”… Mass vaccination programmes “with vaccines and gene therapies that are largely experimental, in order to combat a disease that is mild for the vast majority of the population, is becoming a public health scandal, and its extension to healthy children and teenagers is simply immoral.
“Contrary to what is repeated by the political/media/pharmaceutical collusion, vaccination at this age does not protect children from anything, because for them Covid is milder than the ‘flu.” The American immunologist Robert Malone, co-inventor of mRNA vaccines, says: “The reason you are being given for vaccinating your children is a lie: your children present no danger to their parents or grandparents.”
Instead these vaccines expose children to “potential low-probability… adverse effects that can, however, be serious, such as myocarditis.”
The Japanese government is so worried about this and other diseases that it says that vaxxing in Japan is not compulsory, may not be mandated, and may only be given to patients who have been warned about their side-effects.
Sotelo says a myriad of recent studies and epidemiological data confirm that the vaccines and gene therapies do not prevent Covid infection or transmission, and that their effectiveness in reducing severity has greatly diminished. The surprising third dose is being required in governments’ state of panic in response to the vaccine fiasco.
“The inordinate lust for profit of Big Pharma, the despicable media terror campaign and obscure political interests led from the beginning to focus on reducing the number of infections, not the number of deaths – something absurd in a disease that is mild for the majority of people.”
The revelation of cheap, promising and largely innocuous treatments – he does not say so, but clearly means medicines such as Ivermectin — “was systematically torpedoed,” making people believe that their only hope was in the form of lucrative vaccines that were poorly tested.
Yet even high vaccination rates are not working. In September a study conducted in 68 countries found that, contrary to expectations, “areas with higher percentages of fully-vaccinated populations had more cases of Covid-19 per million inhabitants.”
Sotelo quotes data from sources such as the eminent medical journal The Lancet, and official sources in Britain, Germany, Israel and Spain, that “completely dismantle the sham” of Covid passports, “the persecution of the unvaccinated” and children’s virus vaccination programmes.
The health authorities must tell the truth about “the limited effectiveness and safety issues of these vaccines.”
Investing in China
There are three reasons to expect China to become increasingly important in international portfolios, argues Pascal Blanqué, chief investment officer at Amundi Asset Management…
► Policy aims to rebalance from exports to domestic demand, with emphasis on supply chain independence and security.
► The renminbi is to be internationalized as a key currency for trade, capital, reserves and savings. In Asia the renminbi is taking on a regional role similar to that of the Deutchemark four decades ago. Central banks already monitor the levels and volatility of most regional currencies versus the yuan. This nascent currency bloc will provide some insulation against US-related headwinds and further strengthen commercial ties within the region.
Around 30 per cent of central banks worldwide are planning to raise their allocations to the renminbi in the next couple of years.
► Chinese assets, cash and government bonds will probably be the main havens for positive real investment returns.
The greater autonomy of the Chinese business cycle will provide better diversification benefits and exposure to areas of higher future growth. Advances up the manufacturing chain will provide opportunities in strategic sectors such as semiconductors, artificial intelligence, quantum computing, clean technologies, automation and robotics.
Chinese growth stocks are largely Internet giants at present. As local champions develop, a broader set of growth companies will become available for investors looking to diversify risks.
Tailpieces
Coal: The overwhelming consensus of investment advisers has been to avoid investing in coal, the nastiest of the fossil fuels. They couldn’t have been more wrong. Global power generation from coal soared 9 per cent last year to an all-time high of 10,350 terawatt-hours. The International Energy Agency predicts an even higher level this year.
The problem has been that a rash of green policies and stupid political choices such as decommissioning oil- and gas-fired power plants and discouraging fossil fuel projects have produced a worldwide energy crisis. Dramatic rises in natural gas prices have forced power plants to source coal as a cheaper alternative.
The recent ESG mania has deprived fossil-fuel companies of much-needed capital (not just growth capex but even maintenance), which has instead flown to virtue-signalling projects, usually unreliable sources such as wind.
Black swans: Almost nobody predicted the pandemic, the biggest global shock since the world war. Could something else as unexpected be lurking in wait for us?
Gillian Tett, US Editor of the FT, suggests that cultural shifts can sometimes produce dramatic changes in consumer behaviour. Her example is how attitudes to debt changed. Historical data suggested that when consumers ran out of money they would typically default first on credit cards, then auto loans… only lastly on mortgages. In the Noughties the process went into reverse. Cash-strapped consumers defaulted on home loans first. Loans that lenders thought would be least at risk turned out to be the opposite.
“Rarely has the state of the economy been so fascinating… But so hard to read.”
Food: The spreading global crisis in supplies of fertilizer will mean sharp reductions in crops such as feed corn, wheat, rice and coffee this year.
There has been a five-fold rise in prices of natural gas, the main material used to make nitrogen fertilizers, which account for three-quarters of all commercial fertilizers.
The main cause of the explosion in gas prices is the anti-carbon policies of the US and Europe, which have discouraged investment in gas production at the same time as anti-coal policies have boosted replacement demand for gas, a low-carbon fossil fuel.
The explosion in costs of gas have shut fertilizer factories in Europe and America. China, a major supplier as well as consumer of fertilizers, has banned exports. As has Russia.
Investing in fossil fuels: Shell’s decisions to pull out of its 30 per cent stake in the Cambo project, the most promising undeveloped oil and gas deposit in British waters, is a clear signal of the intensity of the pressure of the carbonatics’ lobby on major oil companies to abandon their commitment to fossil fuels. They are clearing the way for private equity businesses, which largely escape the noisy clamour from activist shareholders and regulators on publicly-listed companies, to focus on low-yielding and intermittent renewables.
The FT says that private investors are attracted by the capital returns such as 20 per cent from traditional assets compared to those of about 5 per cent on offer from renewables.
Europe’s energy crisis: By shutting down nuclear and coal-fired power stations, Europe is increasingly dependent on imported natural gas to sustain base-load electricity, says Eoin Treacy. But the heavy reliance on intermittent wind and solar creates volatile demand profiles.
Meanwhile, the automotive sector is increasingly migrating to batteries. That means there will be significant demand growth for electricity, which will introduce even greater volatility in electricity supplies if no plan is made to reduce reliance on intermittent sources of power. In other words governments are increasingly forcing development in the wrong direction.
Fake news: The reason I’ve long been suspicious of the way social media condemn Trumpians for telling lies is the consistency of their reporting. Only Right-wingers tell lies. Those on the Left always tell the truth. But commonsense tells us that cannot be true.
Now the facts are out. Facebook’s legal team have admitted in defending a legal suit in America that its “fact check” system doesn’t check facts at all; it merely expresses the company’s OPINION about claimed facts.
I assume that “checking” systems promoted by other mainstream media are no more reliable.
As their opinions consistently support “facts” coming from the Left, only trashing some of those from the Right, you can draw your own conclusions about the reliability of reported facts.
Climate change: China’s president Xi Jinping says it aims to achieve zero-emissions of carbon by 2060… but the costs are going to be mindboggling. Its government estimates they’ll amount to $14.7 trillion, or an average of $490 billion a year. In today’s values the entire cost of the Marshall Plan that built Europe’s recovery after the Second World War as $135 billion.
Of course investing so much money in climate change – if it happens – would seem to make China a world leader in new industries.
Banks: Australia’s securities commissioner says it will fine Westpac, one of the country’s biggest banks, for wrongly charging fees from more than 11,000 customers – already dead – for financial advice services.
Electric cars: These are so unprofitable that the US administration wants to introduce a tax credit of up to $12,500 for buyers of vehicles that are assembled in America by union labour.
Sex workers: Britain’s Durham university is offering students on-line courses on how to work safely as a prostitute as there is an “emerging trend” of its graduates to join the sex industry.
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