Big Europe Makes The Move…Hopelessly

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This weekend, the Eggs Benedict Presidency himself, Mr. Francois Hollande, is calling for a new government to unite all of Europe. This is the last ditch effort of redlining welfare states to avoid change. If they can create a unified government, the Greeks, Spanish, Italians and French can have a fair shot of papering over their floundering social nets without being forced to undertake any meaningful reforms.

And they have no chance of pulling it off. The mood has decidedly swung against “Europe”. Plus Germany isn’t that stupid.

But it’s quite amazing that we’ve gotten to this point at all and it’s worth spending a few minutes talking about the progression itself. Because just fifty years ago, it would have been unthinkable for an elected leader of a European country to call for full integration of the continent.

It’s worth starting the narrative after the end of World War 2; mostly because so many people were dead at that point that it was essentially a complete reset of the culture anyway. History before World War 2 exists as a sort of odd, discolored picture in time…one who’s inhabitants are almost forgotten.

And as Europe began to pick up the pieces, ghastly images began to emerge of a culture that did unspeakable acts. The death and carnage was so pervasive that it had the almost singular effect of destroying one of the more popular scientism movements – eugenics – practically overnight. As word of the concentration camps that the Axis had erected spread, very uncomfortable associations between our own work with forced sterilizations and gene and culture control here at home began to creep up, and almost instantaneously no one had ever believed in eugenics (despite it being almost blasphemy to argue against it just years early). Michael Crichton had a very excellent speech on this subject and if you haven’t read it, I recommend it in its full form.

And a major knock off effect of this self reflection was a Europe which had become more afraid of its own citizens than ever. I recently read another article (I couldn’t track it down, leave a link if you know the one) that I feel convincingly argued that much of the current EU form was erected to overrule democracy in favor of technocratic decision making by an “enlightened” class. If you want an example of how this plays out, consider that in the UK upwards of half of all new laws originate from Brussels. Lawmaking of this variety clearly denies basic rights of representation; and indeed that is the whole point.

Per this argument, the EU’s terror of its own citizens – which is at the heart of the EU rule making process – is a cultural development in response to the acts of populist movements across Europe in the prior generation.

But this is something of a contradiction. It wasn’t exactly democratic actions that committed those atrocities. Certainly a very vocal and nationalist undercurrent of supporters set those things in motion. But talking to the survivors of those years, one fairly consistent theme is that the common citizens that formed the backbone of the democracies had almost no idea of what was going on.

Rather, it was the very same form of technocrats, withholding information and utilizing propaganda, that had carried out the worst human rights violations. A lack of information stifled the ability of democracy to react, until much later, after the veil of ignorance was lifted by warfare, and the sights and accounts were allowed to flow through the populace.

And so it is also worth considering that it would be exceedingly difficult for any atrocity on the scale of the early 20th century to happen again in our history, so long as the information sharing which is reshaping our society is allowed to spread unhindered. With so much access to free information, even unwilling participants accessory to such crimes would be able to anonymously spread the word.

Which leaves the EU in its current form of stifling, undemocratic processes. And one has to wonder, “what’s the point of this?”

The EU is predominantly about the euro, which is the second layer of trouble. The modern welfare state also evolved in response to the end of the World Wars; a period of time when starvation and economic poverty was running rampant across war torn nations and when modern political movements were asking how they could avoid letting events like that ever replay themselves. The proposed solution was to directly aid citizens, which would have the secondary effect of giving everyone an incentive not to participate in forms of political upheaval or risk losing those benefits.

But the heart of the welfare state is a type of nationalism; open borders and free moving populations make for trouble when trying to run national benefits.

Which makes it so odd that welfare states in the 90’s decided to adopt a common currency that they have no direct control over. The welfare state de facto playbook is to address any inevitable economic stagnation, recession or depression with new economic equilibrium, rather than economic reform. The entire point of practical political welfare is to entrench interests of a political majority and avoid challenges. The other guys get to deal with economic variability. See public sector labor unions for an idea of how that works.

By switching to the euro, perhaps unknowingly, the welfare state model sold out its most powerful tool to achieve that outcome. Modern problems are very much a product of adopting the euro. Pro-welfare commentators in the media take it a step further by pinning the fault of those problems on the euro as well. That belies a bias towards a welfare model of government. You could easily argue that the welfare model is itself the problem and that the euro was just a monumentally stupid strategic move on the part of the major players. In either case, the common currency without political union is causing fissures to form across Europe, for the better part of 5 years now. We’ve sort of beat this theme to death by now, so I’ll cut more commentary short here.

And so now, in 2015, we have the president of France actually considering a political union with old cultural enemies Germany and the UK, and Greece immediately trying to undo the effects of a referendum they themselves wanted to have. It’s almost preposterous, if not for the desire to preserve the welfare programs. That’s the only driving force holding this thing together at this point.

So on a warm weekend in July, Francois Hollande is making a last ditch and desperate appeal that amounts to selling out everything French about France, just to avoid the discomfort of some relatively modest cuts and the bravery required to trust his own citizens.

You have to wonder if even Friedman would have seen that coming.

In short order, as the euro collapses towards dollar parity, this call will be picked up by the globalists here in the US as well. It will be their one chance, for perhaps hundreds of years, to stitch the US into the European framework. God willing we crush them without much trouble when that happens.

The Big Question Then: How To Play EU QE?

1,532 views

The Swiss bank just announced that the ceiling they have been maintaining against the euro is to be dropped. That would make sense, since the euro is now trading below 1.17, down from almost 1.40 just earlier. In terms of the exchange rate, that had to be getting very expensive.

But the timing here should be viewed as a sign that the ECB is really about to start QE. This should be the stance because if they don’t, the impact would be minimal, but if they do you can’t be on the wrong side of the trade.

In terms of what this QE will look like…well, that is the question. What is the ECB going to buy? Not public debt, surely. How much more financing can these governments stomach with yields already negative in many countries. Even the worst countries, like Greece, are borrowing at rates that an average citizen would envy.

My guess here is two fold: (1) they buy up private financial assets similar to the mortgage program the Fed had in place, but that it will center on short term bonds, while also working with banks to create a long term financing window (EU companies and banks in particular have notoriously short term financing arrangements) and (2) they take the opportunity to absorb whatever mechanisms exactly they have been using, before now, to hide the massive debt loads that should have been coming due over the past three years.

If you forgot, Europe ended up pulling some master BS, using a combination of trade accounts to gobble up the garbage so that the markets wouldn’t have to see it default. I’m hazy on the exact specifics, but I would gamble that those imbalanced accounts are still outstanding; and my guess is they’re about to get totally monetized.

So the big question now is, where do you park money? I think that it would be very stupid to try and be short right now with central banks making big noise and seemingly readying the cannons.

If this is like past central bank action, then any longs will do – equity, commodities, debt, whatever you like. Oil could get a huge boost since it’s been so ravaged. ECB action will give the Fed room to play, especially if deflation keeps up. Yellen is no Bernanke…yet, but she also hasn’t been tried either. If the Fed coordinates, all boats get lifted.

But the safest low key play is probably just to hug U.S. dollars until things are a little more clear.

I am ~78% cash, with positions in CCJ, BAS and VOC, down roughly 3% in the first two weeks of the year.

This Changes Nothing

430 views

What a dumb reason to sell off. Israel began a ground invasion and Russia probably smoked an airliner full of children. So what, I ask you, outside of the obvious moral quandaries posed there?

How does this effect US business?

If I thought for a minute the US was about to go to war, this might change something. But we’re not. Look at our chief executive – the man ate barbecue and “had a conversation” with Putin. Is that the posturing of a man itching to enter a war (or possessing a spine)?

I say to you, “no”.

These global events are fascinating to watch, and I’ve been having quite the time on Twitter watching Vox make complete asses of themselves.

But I seriously question any lasting impact either of this has on the US stock market.

A Global Power Shift Is Emerging

568 views

Short term cautions not withstanding, we are on the precipice of something great.

The entire structure of the global economy is shifting, slightly and slowly. But like all great change, the most striking of the movement comes all at once, at the end.

The United States is driving this assault of the balances of power, globally, as the energy revolution progresses on our shores. This country is set to become the biggest oil producer in the world – and we are now slowly removing the export restrictions that are the last remaining barrier to this end.

This isn’t just about US trade balances and deficits. Those numbers games matter, but they always matter less than you think.

This game is about power. Oil has been the source of power to our enemies for too long. Russia and the Middle East have fed well on global consumption of this product, erecting their cartels around the flow oil to global industry. It has made them powerful and a threat.

The move by the US to become the world’s largest producer of oil and gas can be viewed through a different lens than financial gain alone: this is also going to completely upend our adversaries. What wars and weapons and diplomacy and cooperation could not possibly have accomplished, given the entrenched interests we faced, this one mighty push on our part will quickly bring about.

This is a once in a lifetime opportunity. You must get invested in it, and stay invested in it. All US leadership sees the goal, and no one objects to it. The days of getting beat about by monarchies in Saudi Arabia, needing to cut backroom deals that undermine our own morals with foreign militant groups, having to sit through endless meetings while Russian oligarchs threaten our allies with gas supply shortages…these days are coming to an end.

As the US increasingly becomes energy independent, the argument to even have relations with half these villains becomes non sequitur. We can marginalize them while circling around our true allies and real friends.

I can’t see everything that is going to come from this. Naturally US power will follow. And the North and South American continents should improve, swinging towards democracy and capitalism. Outside of that, while I think US energy independence is a good thing, I wouldn’t be surprised if war also follows. Revolutions surely, but also open war between foreign, former energy exporters who find themselves being boxed into a corner. The Saudi’s days are surely numbered, in particular.

My bet is that Russia will not change much, but they will also have to cut less lucrative deals with China to make it. So at least they will be a less powerful, less interfering Russia. Good riddance there.

Suffice to say, this is unpredictability at its best. While I think I see the theme, I do not yet hear the notes. But I’ll take my chances with it anyway. The old order of things was repulsive. I won’t be crying any tears for OPEC, or for Russia.

A Few Thoughts On The EPA Regs

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Considering the big reaction to these looming EPA regulations on how much sway they’ve already had on coal related investments, I thought I make a short list of my initial thoughts, after reading through this:

1) The real impact from these things is always grossly less than the exaggerated fear – take a look at the automotive companies being forced to raise fleet emissions. They hit those targets easy; it turns out, they already knew how to make more efficient cars, but were being lazy, not wanting to force implementation and get hazed by shareholders worried about cost. The automotive companies still seem pretty profitable right now. I’m guessing a 30% reduction from 2005 levels within three years means they probably already have some technological game plans in place to make it happen with minimal impact.

2) The EPA’s power here really relies on outcomes – if I’m wrong about (1), it will mark the beginning of a complete overhaul of the agency, leading to many many political hacks being dragged out by their hair to the gallows. The ability of the EPA to be the mini-crime syndicate it is, cutting backroom deals with Greenpeace, rests on their victims being small, disenfranchised minorities. If they mess this up and regular Americans feel the burn, it won’t matter who’s president.

3) Speaking of political power, this is basically the “GOP reelection act of 2014″ – since there are three years to go before we even see impact from this, that gives three years of conservatives being able the ram propaganda down the throats of already terrified Red state Democrats (and a few Blue ones). As if they needed the extra firepower…

4) The EPA’s rules seem to possibly interfere with State commerce rights – if you force a small state like Rhode Island to stay within a certain limit of carbon emissions and then let a New York keep a much higher output level, aren’t you basically extending competition restrictions against the small state to preserve the economy of the bigger? While I’m sure Illinois is just ecstatic with another layer of monopoly power, if I were a neighboring state looking to grow my own manufacturing sector to help ease the unemployment level, I’d probably come out swinging. I’m not about to sit down and read a 600 plus page load of trash like an EPA reg., but my guess is there are either loopholes in place to just dance around this, or else this thing is on thin ice. An executive branch agency isn’t going to withstand 46 out of 50 state governors directing state resources to put said agency on ice.

5) The Legislature is coming – after the GOP sweeps November, they will proceed to start ramming countermeasures down the Executive Branches throat. This is obvious and looming. Obama is not going to withstand that for two whole years. This and a dozen other of his measures will visit the dentist, for tooth extraction. The man is just not popular enough to construe a mandate.

6) Modern regulations are federal guarantees of record profits – no new coal companies are forming in this environment. At some point, isn’t that just a monopoly for coal companies already operating? Sure the small fries will all fold, but anybody with a billion dollar budget is going to love that. It’s basically a federal mandate to acquire more assets at fire sale prices through what I can only describe as state sponsored theft. Let’s look at other industries that were “harmed” by government regulations over the past five years. Banks were subjected to new regulations following the recession – they made record profits. The automotive companies were subject to new regulations following the fuel economy standards – they made record profits. Health insurance companies were subjected to the ACA regulations – they made record profits. Can anyone point me to an industry where entrenched interests didn’t make a boatload of money following being gifted what is basically a non-compete agreement in exchange for some regulations? I can’t think of any lately. There’s probably a good reason for this too; the federal government can’t be seen intentionally shuttering industries for what are clearly political reasons. So if they want to make changes to these industries, the cost is…record profits.

The main takeaway is, the government can’t just destroy the power supply for 40% of the grid. They don’t have anything up their sleeve here. I’m not scared of environmentalists at all…even when they worm their way into powerful agency positions way above their competencies. Check out the last 50 years of environmentalist history, then tell me one major success they’ve had at curbing emissions or conservation or rolling back human activity.

When I think of emissions reduction, I think of natural gas. The US energy sector has reduced US emissions more in 5 years than environmentalists have done in 50…which I guess isn’t hard when environmentalists have never demonstrated an ability to reduce emissions at all.

When I think of conservation, I think of presidencies like the end of George W Bush’s, setting aside huge swaths of land as part of legacy building, or state conservation mostly at the local level. There’s no indication that the Sierra Club has had any influence in those choices at all.

Most of recorded history is industry smacking down doomspitters and terrorsayers warning of humanities looming demise. Every time population hits a new modulo 1,000,000 milestone, new generations of fear mongers feel compelled to give us the good word, casually ignoring the endless masses of false warnings and pontifications issued before them (because you know, they’re so much smarter than their countless predecessors).

At this moment, I have no reason to believe that the EPA regulations will be anything less.

First The Good News, Then The Bad

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Most of my portfolio is now solidly shrugging off Yellen’s slip of the tongue. Our good bankster friends over at JPMorgan said it best – Yellen is fresh and inexperienced, and she still needs to learn how to speak without actually saying anything.

It will come. It will come.

Despite my state of shock at watching Yellen crack the market like an egg yesterday, I didn’t react. I want to watch a few more days before I make a move, even if they should lose me money. With a +14% year going, I have buffer room.

Now, the good word here is that CCJ and BAS are both moving higher. I suspect HCLP will join in soon as well (that position can be rewarded a little breather, it’s come a long way). The energy themes are solid and intact.

The bad side of the coin is that fear/reality of higher interest rates is going to just ravish the REIT and associated housing space. Check out VNQ over a five day period, and you can almost sink the cracking point up with Yellen’s comments. My current position AEC is breaking down again this morning, and an old position MAA is following.

This has to be treaded carefully. If you’re juggling garbage like NLY, I’d say you’re one four day panic away from another round of 30% losses.

I’ve said well before today, back when I never imagined Yellen would spook interest rates higher, that I was interested in rebuying MAA. This is sort of a blessing in that regards. I’d venture a guess that long term damage to multifamily REITs from higher interest rates will hover somewhere between “negligible” and “not damaging, actually positive”.

But well before that point, there will probably be a lot of indiscriminate selling from emotionally driven fund managers. The climax of that, if it should materialize, is the buying opportunity.

Between then and now, it’s important to keep a wary eye on reform efforts to Fannie and Freddie. There’s been some “bipartisan chatter”. Mortgage origination is >70% dominated by the government backed mortgage giants, and the entire housing market is totally dependent on them. A poorly thought out reform effort could rain chaos. But there’s no sense even having a discussion about that just yet. First things first, interest rates.

Big Europe Makes The Move…Hopelessly

934 views

This weekend, the Eggs Benedict Presidency himself, Mr. Francois Hollande, is calling for a new government to unite all of Europe. This is the last ditch effort of redlining welfare states to avoid change. If they can create a unified government, the Greeks, Spanish, Italians and French can have a fair shot of papering over their floundering social nets without being forced to undertake any meaningful reforms.

And they have no chance of pulling it off. The mood has decidedly swung against “Europe”. Plus Germany isn’t that stupid.

But it’s quite amazing that we’ve gotten to this point at all and it’s worth spending a few minutes talking about the progression itself. Because just fifty years ago, it would have been unthinkable for an elected leader of a European country to call for full integration of the continent.

It’s worth starting the narrative after the end of World War 2; mostly because so many people were dead at that point that it was essentially a complete reset of the culture anyway. History before World War 2 exists as a sort of odd, discolored picture in time…one who’s inhabitants are almost forgotten.

And as Europe began to pick up the pieces, ghastly images began to emerge of a culture that did unspeakable acts. The death and carnage was so pervasive that it had the almost singular effect of destroying one of the more popular scientism movements – eugenics – practically overnight. As word of the concentration camps that the Axis had erected spread, very uncomfortable associations between our own work with forced sterilizations and gene and culture control here at home began to creep up, and almost instantaneously no one had ever believed in eugenics (despite it being almost blasphemy to argue against it just years early). Michael Crichton had a very excellent speech on this subject and if you haven’t read it, I recommend it in its full form.

And a major knock off effect of this self reflection was a Europe which had become more afraid of its own citizens than ever. I recently read another article (I couldn’t track it down, leave a link if you know the one) that I feel convincingly argued that much of the current EU form was erected to overrule democracy in favor of technocratic decision making by an “enlightened” class. If you want an example of how this plays out, consider that in the UK upwards of half of all new laws originate from Brussels. Lawmaking of this variety clearly denies basic rights of representation; and indeed that is the whole point.

Per this argument, the EU’s terror of its own citizens – which is at the heart of the EU rule making process – is a cultural development in response to the acts of populist movements across Europe in the prior generation.

But this is something of a contradiction. It wasn’t exactly democratic actions that committed those atrocities. Certainly a very vocal and nationalist undercurrent of supporters set those things in motion. But talking to the survivors of those years, one fairly consistent theme is that the common citizens that formed the backbone of the democracies had almost no idea of what was going on.

Rather, it was the very same form of technocrats, withholding information and utilizing propaganda, that had carried out the worst human rights violations. A lack of information stifled the ability of democracy to react, until much later, after the veil of ignorance was lifted by warfare, and the sights and accounts were allowed to flow through the populace.

And so it is also worth considering that it would be exceedingly difficult for any atrocity on the scale of the early 20th century to happen again in our history, so long as the information sharing which is reshaping our society is allowed to spread unhindered. With so much access to free information, even unwilling participants accessory to such crimes would be able to anonymously spread the word.

Which leaves the EU in its current form of stifling, undemocratic processes. And one has to wonder, “what’s the point of this?”

The EU is predominantly about the euro, which is the second layer of trouble. The modern welfare state also evolved in response to the end of the World Wars; a period of time when starvation and economic poverty was running rampant across war torn nations and when modern political movements were asking how they could avoid letting events like that ever replay themselves. The proposed solution was to directly aid citizens, which would have the secondary effect of giving everyone an incentive not to participate in forms of political upheaval or risk losing those benefits.

But the heart of the welfare state is a type of nationalism; open borders and free moving populations make for trouble when trying to run national benefits.

Which makes it so odd that welfare states in the 90’s decided to adopt a common currency that they have no direct control over. The welfare state de facto playbook is to address any inevitable economic stagnation, recession or depression with new economic equilibrium, rather than economic reform. The entire point of practical political welfare is to entrench interests of a political majority and avoid challenges. The other guys get to deal with economic variability. See public sector labor unions for an idea of how that works.

By switching to the euro, perhaps unknowingly, the welfare state model sold out its most powerful tool to achieve that outcome. Modern problems are very much a product of adopting the euro. Pro-welfare commentators in the media take it a step further by pinning the fault of those problems on the euro as well. That belies a bias towards a welfare model of government. You could easily argue that the welfare model is itself the problem and that the euro was just a monumentally stupid strategic move on the part of the major players. In either case, the common currency without political union is causing fissures to form across Europe, for the better part of 5 years now. We’ve sort of beat this theme to death by now, so I’ll cut more commentary short here.

And so now, in 2015, we have the president of France actually considering a political union with old cultural enemies Germany and the UK, and Greece immediately trying to undo the effects of a referendum they themselves wanted to have. It’s almost preposterous, if not for the desire to preserve the welfare programs. That’s the only driving force holding this thing together at this point.

So on a warm weekend in July, Francois Hollande is making a last ditch and desperate appeal that amounts to selling out everything French about France, just to avoid the discomfort of some relatively modest cuts and the bravery required to trust his own citizens.

You have to wonder if even Friedman would have seen that coming.

In short order, as the euro collapses towards dollar parity, this call will be picked up by the globalists here in the US as well. It will be their one chance, for perhaps hundreds of years, to stitch the US into the European framework. God willing we crush them without much trouble when that happens.

The Big Question Then: How To Play EU QE?

1,532 views

The Swiss bank just announced that the ceiling they have been maintaining against the euro is to be dropped. That would make sense, since the euro is now trading below 1.17, down from almost 1.40 just earlier. In terms of the exchange rate, that had to be getting very expensive.

But the timing here should be viewed as a sign that the ECB is really about to start QE. This should be the stance because if they don’t, the impact would be minimal, but if they do you can’t be on the wrong side of the trade.

In terms of what this QE will look like…well, that is the question. What is the ECB going to buy? Not public debt, surely. How much more financing can these governments stomach with yields already negative in many countries. Even the worst countries, like Greece, are borrowing at rates that an average citizen would envy.

My guess here is two fold: (1) they buy up private financial assets similar to the mortgage program the Fed had in place, but that it will center on short term bonds, while also working with banks to create a long term financing window (EU companies and banks in particular have notoriously short term financing arrangements) and (2) they take the opportunity to absorb whatever mechanisms exactly they have been using, before now, to hide the massive debt loads that should have been coming due over the past three years.

If you forgot, Europe ended up pulling some master BS, using a combination of trade accounts to gobble up the garbage so that the markets wouldn’t have to see it default. I’m hazy on the exact specifics, but I would gamble that those imbalanced accounts are still outstanding; and my guess is they’re about to get totally monetized.

So the big question now is, where do you park money? I think that it would be very stupid to try and be short right now with central banks making big noise and seemingly readying the cannons.

If this is like past central bank action, then any longs will do – equity, commodities, debt, whatever you like. Oil could get a huge boost since it’s been so ravaged. ECB action will give the Fed room to play, especially if deflation keeps up. Yellen is no Bernanke…yet, but she also hasn’t been tried either. If the Fed coordinates, all boats get lifted.

But the safest low key play is probably just to hug U.S. dollars until things are a little more clear.

I am ~78% cash, with positions in CCJ, BAS and VOC, down roughly 3% in the first two weeks of the year.

This Changes Nothing

430 views

What a dumb reason to sell off. Israel began a ground invasion and Russia probably smoked an airliner full of children. So what, I ask you, outside of the obvious moral quandaries posed there?

How does this effect US business?

If I thought for a minute the US was about to go to war, this might change something. But we’re not. Look at our chief executive – the man ate barbecue and “had a conversation” with Putin. Is that the posturing of a man itching to enter a war (or possessing a spine)?

I say to you, “no”.

These global events are fascinating to watch, and I’ve been having quite the time on Twitter watching Vox make complete asses of themselves.

But I seriously question any lasting impact either of this has on the US stock market.

A Global Power Shift Is Emerging

568 views

Short term cautions not withstanding, we are on the precipice of something great.

The entire structure of the global economy is shifting, slightly and slowly. But like all great change, the most striking of the movement comes all at once, at the end.

The United States is driving this assault of the balances of power, globally, as the energy revolution progresses on our shores. This country is set to become the biggest oil producer in the world – and we are now slowly removing the export restrictions that are the last remaining barrier to this end.

This isn’t just about US trade balances and deficits. Those numbers games matter, but they always matter less than you think.

This game is about power. Oil has been the source of power to our enemies for too long. Russia and the Middle East have fed well on global consumption of this product, erecting their cartels around the flow oil to global industry. It has made them powerful and a threat.

The move by the US to become the world’s largest producer of oil and gas can be viewed through a different lens than financial gain alone: this is also going to completely upend our adversaries. What wars and weapons and diplomacy and cooperation could not possibly have accomplished, given the entrenched interests we faced, this one mighty push on our part will quickly bring about.

This is a once in a lifetime opportunity. You must get invested in it, and stay invested in it. All US leadership sees the goal, and no one objects to it. The days of getting beat about by monarchies in Saudi Arabia, needing to cut backroom deals that undermine our own morals with foreign militant groups, having to sit through endless meetings while Russian oligarchs threaten our allies with gas supply shortages…these days are coming to an end.

As the US increasingly becomes energy independent, the argument to even have relations with half these villains becomes non sequitur. We can marginalize them while circling around our true allies and real friends.

I can’t see everything that is going to come from this. Naturally US power will follow. And the North and South American continents should improve, swinging towards democracy and capitalism. Outside of that, while I think US energy independence is a good thing, I wouldn’t be surprised if war also follows. Revolutions surely, but also open war between foreign, former energy exporters who find themselves being boxed into a corner. The Saudi’s days are surely numbered, in particular.

My bet is that Russia will not change much, but they will also have to cut less lucrative deals with China to make it. So at least they will be a less powerful, less interfering Russia. Good riddance there.

Suffice to say, this is unpredictability at its best. While I think I see the theme, I do not yet hear the notes. But I’ll take my chances with it anyway. The old order of things was repulsive. I won’t be crying any tears for OPEC, or for Russia.

A Few Thoughts On The EPA Regs

565 views

Considering the big reaction to these looming EPA regulations on how much sway they’ve already had on coal related investments, I thought I make a short list of my initial thoughts, after reading through this:

1) The real impact from these things is always grossly less than the exaggerated fear – take a look at the automotive companies being forced to raise fleet emissions. They hit those targets easy; it turns out, they already knew how to make more efficient cars, but were being lazy, not wanting to force implementation and get hazed by shareholders worried about cost. The automotive companies still seem pretty profitable right now. I’m guessing a 30% reduction from 2005 levels within three years means they probably already have some technological game plans in place to make it happen with minimal impact.

2) The EPA’s power here really relies on outcomes – if I’m wrong about (1), it will mark the beginning of a complete overhaul of the agency, leading to many many political hacks being dragged out by their hair to the gallows. The ability of the EPA to be the mini-crime syndicate it is, cutting backroom deals with Greenpeace, rests on their victims being small, disenfranchised minorities. If they mess this up and regular Americans feel the burn, it won’t matter who’s president.

3) Speaking of political power, this is basically the “GOP reelection act of 2014″ – since there are three years to go before we even see impact from this, that gives three years of conservatives being able the ram propaganda down the throats of already terrified Red state Democrats (and a few Blue ones). As if they needed the extra firepower…

4) The EPA’s rules seem to possibly interfere with State commerce rights – if you force a small state like Rhode Island to stay within a certain limit of carbon emissions and then let a New York keep a much higher output level, aren’t you basically extending competition restrictions against the small state to preserve the economy of the bigger? While I’m sure Illinois is just ecstatic with another layer of monopoly power, if I were a neighboring state looking to grow my own manufacturing sector to help ease the unemployment level, I’d probably come out swinging. I’m not about to sit down and read a 600 plus page load of trash like an EPA reg., but my guess is there are either loopholes in place to just dance around this, or else this thing is on thin ice. An executive branch agency isn’t going to withstand 46 out of 50 state governors directing state resources to put said agency on ice.

5) The Legislature is coming – after the GOP sweeps November, they will proceed to start ramming countermeasures down the Executive Branches throat. This is obvious and looming. Obama is not going to withstand that for two whole years. This and a dozen other of his measures will visit the dentist, for tooth extraction. The man is just not popular enough to construe a mandate.

6) Modern regulations are federal guarantees of record profits – no new coal companies are forming in this environment. At some point, isn’t that just a monopoly for coal companies already operating? Sure the small fries will all fold, but anybody with a billion dollar budget is going to love that. It’s basically a federal mandate to acquire more assets at fire sale prices through what I can only describe as state sponsored theft. Let’s look at other industries that were “harmed” by government regulations over the past five years. Banks were subjected to new regulations following the recession – they made record profits. The automotive companies were subject to new regulations following the fuel economy standards – they made record profits. Health insurance companies were subjected to the ACA regulations – they made record profits. Can anyone point me to an industry where entrenched interests didn’t make a boatload of money following being gifted what is basically a non-compete agreement in exchange for some regulations? I can’t think of any lately. There’s probably a good reason for this too; the federal government can’t be seen intentionally shuttering industries for what are clearly political reasons. So if they want to make changes to these industries, the cost is…record profits.

The main takeaway is, the government can’t just destroy the power supply for 40% of the grid. They don’t have anything up their sleeve here. I’m not scared of environmentalists at all…even when they worm their way into powerful agency positions way above their competencies. Check out the last 50 years of environmentalist history, then tell me one major success they’ve had at curbing emissions or conservation or rolling back human activity.

When I think of emissions reduction, I think of natural gas. The US energy sector has reduced US emissions more in 5 years than environmentalists have done in 50…which I guess isn’t hard when environmentalists have never demonstrated an ability to reduce emissions at all.

When I think of conservation, I think of presidencies like the end of George W Bush’s, setting aside huge swaths of land as part of legacy building, or state conservation mostly at the local level. There’s no indication that the Sierra Club has had any influence in those choices at all.

Most of recorded history is industry smacking down doomspitters and terrorsayers warning of humanities looming demise. Every time population hits a new modulo 1,000,000 milestone, new generations of fear mongers feel compelled to give us the good word, casually ignoring the endless masses of false warnings and pontifications issued before them (because you know, they’re so much smarter than their countless predecessors).

At this moment, I have no reason to believe that the EPA regulations will be anything less.

First The Good News, Then The Bad

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Most of my portfolio is now solidly shrugging off Yellen’s slip of the tongue. Our good bankster friends over at JPMorgan said it best – Yellen is fresh and inexperienced, and she still needs to learn how to speak without actually saying anything.

It will come. It will come.

Despite my state of shock at watching Yellen crack the market like an egg yesterday, I didn’t react. I want to watch a few more days before I make a move, even if they should lose me money. With a +14% year going, I have buffer room.

Now, the good word here is that CCJ and BAS are both moving higher. I suspect HCLP will join in soon as well (that position can be rewarded a little breather, it’s come a long way). The energy themes are solid and intact.

The bad side of the coin is that fear/reality of higher interest rates is going to just ravish the REIT and associated housing space. Check out VNQ over a five day period, and you can almost sink the cracking point up with Yellen’s comments. My current position AEC is breaking down again this morning, and an old position MAA is following.

This has to be treaded carefully. If you’re juggling garbage like NLY, I’d say you’re one four day panic away from another round of 30% losses.

I’ve said well before today, back when I never imagined Yellen would spook interest rates higher, that I was interested in rebuying MAA. This is sort of a blessing in that regards. I’d venture a guess that long term damage to multifamily REITs from higher interest rates will hover somewhere between “negligible” and “not damaging, actually positive”.

But well before that point, there will probably be a lot of indiscriminate selling from emotionally driven fund managers. The climax of that, if it should materialize, is the buying opportunity.

Between then and now, it’s important to keep a wary eye on reform efforts to Fannie and Freddie. There’s been some “bipartisan chatter”. Mortgage origination is >70% dominated by the government backed mortgage giants, and the entire housing market is totally dependent on them. A poorly thought out reform effort could rain chaos. But there’s no sense even having a discussion about that just yet. First things first, interest rates.

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