Will China Pop the Global Everything Bubble?

Just as the US, the most dynamic economy at the time, popped the 1929 bubble, it will be China's turn in 2022. But can it recover faster too? 

The line of dominoes that is already toppling extends around the entire global economy and financial system. Plan accordingly.

That China faces structural problems is well-recognized. The list of articles in the August issue of Foreign Affairs dedicated to China reflects this:

Xi's Gamble: the Race to Consolidate Power and Stave Off Disaster

China's Economic Reckoning: The Price of Failed Reforms

The Robber Barons of Beijing: Can China Survive its Gilded Age?

Life of the Party: How Secure Is the CCP? (Chinese Communist Party)

These are thorny, difficult issues: a demographic cliff resulting from the one-child policy, soaring wealth-income inequality, pervasive corruption, public health issues (diabesity, etc.), environmental damage and a slowing economy.

What the conventional analysts do not fully grasp, in my view, are 1) the existential threat to the CCP and China's economy posed by its unprecedented, metastasizing credit-asset bubble and 2) its incipient energy crisis.

As I explained in a recent blog post, What's Really Going On in China?, the CCP and the government informally institutionalized moral hazard (the disconnection of risk and consequence) as a core economic policy.

Every financial loss, no matter how risky or debt-ridden, was covered by the state (via bail-out, refinancing debt, new loans, etc.) as a "cost of rapid development," a reflection of the view that some inefficiency and waste was inevitable in the rapid development of industry, housing, infrastructure and a consumer economy.

What China's leaders did not fully understand was this implicit guarantee of bail-outs--the equivalent of "The Fed has our backs"--incentivized debt-funded speculation as the lowest-risk, highest-return "investment," especially when compared to low-profit, risky investments in low-margin export industries. (Recall the average profit margins of Chinese exporting enterprises is 1% to 3%.)

This is the hidden driver of China's sagging productivity and economy: debt in all sectors is skyrocketing to fund speculation, not productivity.

This institutionalization of moral hazard has incentivized the least productive and highest-risk gambles--not just for large conglomerates like EverGrande, but for middle-class households who've invested in the shadow-banking system (unregulated private-sector pools of capital lent out to risky borrowers at high rates of interest) and bought second, third and fourth "investment" flats.

The contradictions in this mass investing of savings in empty condos are systemic and dangerous: 1) once a flat is rented, it loses value due to being "used" and 2) the vast majority of the market for "investment" flats is illiquid, as most new buyers want a new flat, not an old one, so the market for old flats is extremely thin outside the most desirable inner rings of Beijing and Shanghai.

This mass investment in illiquid empty flats has generated social and financial perversities: now that flats in desirable areas cost 30-40 times an average white-collar salary, young people must vacuum up the entire extended family's savings in order to afford a flat. Those young men who are unable to buy a flat find their marriages prospects are dismal.

One result of the marriage of state control and private-sector Wild-West speculation is a truly vast wealth-income divide that is bound up with corruption in a mutually reinforcing feedback: the richer you become, the closer to power you get, and vice versa.

Since China's informal shadow-banking system is opaque even to state regulators, it's quite possible that China's leaders do not have a full grasp of the extent of systemic risk bound up in the excesses of shadow banking. To paraphrase Donald Rumsfeld's famous dictum, this is an unknown unknown for China's policy makers.

This truly monumental accumulation of debt and speculation is now an existential threat to the Party on two levels:

1) since all bubbles pop regardless of any other conditions, when this bubble pops, the economic blow will be severe enough to threaten the Party's control of the economy

2) the crushing of phantom wealth will cause people to seek a scapegoat, and the Party is Target #1 since it coddled the well-connected and wealthy but did not protect the 99% from the dire consequences of the bubble bursting.

Having engineered the bubble's expansion by creating mountains of debt and implicit promises of bail-outs, the CCP and government have backed themselves into a corner: there is no pain-free way to deflate a speculative bubble of such astounding proportions.

Considering the life history of President Xi (especially his first-hand experience of the Cultural Revolution 1966-1976), his writings and his consolidation of power, it is very clear to me that Xi understands the bubble is close to escaping his control and so time is short and the policy options are limited to triage, that is, saving the healthiest and letting Nature take care of those closest to expiring.

I also see evidence that Xi grasps the absolute need to break the near-universal confidence that the state will bail out everyone who borrows and speculates so wildly that their gambles go bad.

The general assumption is that "China can't afford to let Evergrande fail" because this enormous conglomerate will obviously topple many dominoes, generating great financial pain.

I think the that President Xi's view is the opposite: "we can't afford to bail out Evergrande" because that would open the floodgates of moral hazard that Xi is trying to close.

The state bailing out private-sector gamblers (and state-owned enterprises) is what led to the massive moral hazard-debt bubble that Xi is determined to pop now while he still can control the process.

In other words, President Xi understands this is the do-or-die moment to regain control of an out-of-control moral hazard driven financial bubble, and the only way to do so is to push the losses onto everyone with exposure, the driver being the stark choice to either regain control by popping the bubble now or letting it expand and implode in an uncontrolled (and hence Party-threatening) fashion.

Xi concluded that the first step to being able to push the losses onto everyone with exposure to speculative bets was to consolidate power to such a degree that the usual self-interested factions that would use their power to evade the consequences could be forced to accept their share of the losses.

Given the history and structure of the Party, this required Xi to extend his control to levels not seen since Deng or Mao.

In my view, Xi correctly concluded the hour was getting late and the institutional resistance to the end of the implicit promises of state bailouts and endless debt expansion could only be overcome if his political power was near-absolute.

The popping of moral hazard and the debt-speculation bubble are necessary to preserve CCP and state power; half-measures that protected corrupt cronies would only increase the public's outrage when the bubble finally burst.

In this light, Xi's multi-year campaign against the most visible corruption and his recent touting of "common prosperity" have set the stage for his forcing the end of moral hazard and the controlled demolition of the excesses of debt and speculation that have harmed the economy and threatened the control of the CCP.

Now comes the grand ironies. China's ability to generate stupendous amounts of new debt basically bailed out the global economy in 2008-09, 2015-16 and 2020. Yes, the Federal Reserve bailed out the global banking sector (to the tune of $16 trillion in backstops and credit lines) in 2008-09 and inflated a speculative bubble in the U.S. by creating $3.5 trillion in quantitative easing, but China's expansion of debt was an equally important source of global demand, which is what stopped global economies from sinking into recession.

The cost of these "saves" were not understood at the time: the elevation of moral hazard to quasi-religious status in the U.S. and China and the expansion of debt-funded speculative bubbles to unprecedented heights.

There are only two policy options:

1) Grasp the nettle and refuse to bail out debt-funded speculative excesses, thereby popping the Everything Bubble, or

2) play the game of keeping the bubble expanding until it implodes on its own, an end-game made inevitable by the systemic instabilities intrinsic to bubbles.

Xi has correctly chosen Policy #1, and to do so has positioned the Party as the defender of the people, i.e. anti-corruption, shackling the Big Tech billionaires like Jack Ma, and announcing that the state will not bail out EverGrande.

The Federal Reserve and the political leadership of the U.S. have foolishly chosen Policy #2, inflating the bubble while letting the consequences of this moral hazard bubble--wealth-income inequality and corruption--explode higher, fatally undermining the credibility of both the Fed and America's political class.

As the supply chain disruptions have revealed, the global economy and financial system are tightly bound systems, and as such are extraordinarily exposed to the risks of cascading collapses as key nodes become chokepoints or break down.

While the Federal Reserve prints trillions to further inflate the bubble, the global energy shortages are already crippling key sectors in the economies of China and the EU. Reality is about to intrude on the Fed's fantasy that speculative bubbles can remain disconnected from the real-world economy forever.

In summary: the popping of the global Everything Bubble is not Xi's goal; it is the inevitable second-order effect (collateral damage) of China's debt-speculation bubble popping.

Given the tightly-bound financial system, the collapse of EverGrande is far more the story of dominoes toppling rather than direct losses: it's not the direct losses that will bring down the global financial system, it's the dominoes toppling as those who take the direct losses implode and become insolvent, missing their loan/bond payments, being unable to meet their counterparty obligations, and so on.

The consensus in the West is that China cannot afford to let its bubble pop because the pain will be so severe. Those who believe this have a poor grasp of Chinese history, especially in the 20th century.

If crashing China's bubble is the nuclear option, Xi has reason to be confident he can push the pain level to 11 and most will accept it, and those who don't will join Jack Ma in forced retirement.

I reckon Xi views ending moral hazard and popping the bubble in China as a situation that will only get worse the longer he puts it off.

The grand irony now is that rather than saving the global economy by expanding its own debt bubble, China will pop the global Everything Bubble. To state the obvious, being a linchpin in the global economy makes China a consequential domino. Anyone who thinks the Fed's speculative bubble in the U.S. can magically become immune to the collapse of tightly-bound dominoes is indulging in magical thinking.

China's extreme excesses of debt and speculation are already unraveling, and Xi is backed into a corner. There is no cost-free escape, only triage, and Xi has charted a path to preserve the Party's control by forcing everyone with exposure to absorb the inevitable losses when unprecedented bubbles pop.

 

Letter from Great Britain- [10-30-21]

 This post is only part of a document, "Letter from Great Britain" (see link below) concerning energy and how the world elites control the global agenda. These are two extremely important concepts to grasp in order to understand the headwinds we are facing. 

The energy transition is both a necessity and an absurdity. A necessity because we are facing depletion of fossil fuels and must move to renewables but an absurdity because the fanatical ideology which support the transformation is blinding us to absurdities. Base loads will never be provided by Solar or wind nor will batteries store any meaningful amount of electricity. It goes against physics! Conversely, gas is much less polluting than coal and nuclear ideal for base load. Ignoring reality can only accelerate social decline.

The second part concerning the GPPP is unrelated but just as interesting. Forget about conspiracy theories. We live in the 21st Century. The illuminati belong to the Middle Ages. Understanding how "power" really works is key to understanding what is currently going on in the world.

Letter from Great Britain- [10-30-21]

Gail Tverberg has a very well explained essay on how and why the global economy is facing unprecedented headwinds.  History tells us that when oil prices spike, recessions follow as witnessed in the 1970s and 2008.  This time will be no different – here are Gail’s conclusions if you do not wish to read the complete work:

“At this point, it seems as if complexity has gone too far. The pandemic moved the world economy in the direction of contraction but prices of fossil fuels tend to spike as the economy opens up.

            The recent spikes in prices are highly unlikely to produce the natural gas, coal and oil that is required. They are more likely to cause recession. Fossil fuel suppliers need high prices guaranteed for the long term. Even if such guarantees could be provided, it would still take several years to ramp up production to the level needed.

The general trend of the economy is likely to be in the direction of the Seneca Cliff (Figure 1). Everything won’t collapse all at once, but big “chunks” may start breaking away.

The debt system is a very vulnerable part. Debt is, in effect, a promise of goods or services made with energy in the future. If the energy isn’t there, the promised goods and services won’t be available. Governments may try to hide this problem with new debt, but governments can’t solve the underlying problem of missing goods and services.

Pension systems of all kinds are also vulnerable. If fewer goods and services are being made in total, they will need to be divided up differently. Pensioners are likely to get a reduced share, or nothing at all.

Importers of fossil fuels seem likely to be especially affected by price spikes because exporters have the ability to cut back in the quantity available for export, if total supply is inadequate. Europe is one part of the world that is especially dependent on oil, natural gas and coal imports.

            The combined production of hydroelectric, wind and solar and biofuels (in Figure 9) amounts to only 19% of Europe’s total energy consumption (shown in Figure 8). There is no possible way that Europe can get along only with renewable energy, at any foreseeable time in the future.

European economists should have told European citizens, “There is no way you can get along using renewables alone for many, many years. Treat the countries that are exporting fossil fuels to you very well. Sign long term contracts with them. If they want to use a new pipeline, raise no objection. Your bargaining power is very low.” Instead, European economists talked about saving the planet from carbon dioxide. It is an interesting idea, but the sad truth is that if Europe takes itself out of the contest for energy imports, it mostly leaves more fossil fuels for exporters to sell to others.

China stands out as well, as the world’s largest consumer of energy, and as the world’s largest importer of oil, coal and natural gas. It is already encountering electricity shortages that are leading to rolling blackouts. In fact, rolling blackouts in China started almost a year ago in late 2020. China is, of course, a major exporter of goods to the rest of the world. If China has major energy problems, the rest of the world will no longer be able to count on China’s exports. Lack of China’s exports, by itself, could be a huge problem for the rest of the world.

I could continue speculating on the changes ahead. The basic problem, as I see it, is that we have reached limits on oil, coal and natural gas extraction, pretty much simultaneously. The limits are really complexity limits. The renewables that we have today aren’t able to save us, regardless of what the models of Mark Jacobson and others might say.

In the next few years, I am afraid that we will find out how collapse actually proceeds in a very interconnected world economy.”  https://ourfiniteworld.com/2021/10/18/spike-in-energy-prices-suggests-that-sharp-changes-are-ahead/

BUT – we all know who is behind this contrived crisis except that the great majority have no wish to acknowledge what is going on now.  It will be too late when they wake up and we will all be exposed to extreme global totalitarianism. Iain Davis has written many articles explaining how the global elite are planning our future.  This one is well worth reading as it explains much about our present dilemma.  Here is the start of his explanations.

“The Global Public-Private Partnership (GPPP) is a world-wide network of stakeholder capitalists and their partners.

This collective of stakeholders (the capitalists and their partners) comprises global corporations (including central banks), philanthropic foundations (multi-billionaire philanthropists), policy think-tanks, governments (and their agencies), non-governmental organisations, selected academic & scientific institutions, global charities, the labour unions and other chosen “thought leaders.”

The GPPP controls global finance and the world’s economy. It sets world, national and local policy (via global governance) and then promotes those policies using the mainstream media (MSM) corporations who are also “partners” within the GPPP.

Often those policies are devised by the think-tanks before being adopted by governments, who are also GPPP partners. Government is the process of transforming GPPP global governance into hard policy, legislation and law.

Under our current model of Westphalian national sovereignty, the government of one nation cannot make legislation or law in another. However, through global governance, the GPPP create policy initiatives at the global level which then cascade down to people in every nation. This typically occurs via an intermediary policy distributor, such as the IMF or IPCC, and national government then enact the recommended policies.

The policy trajectory is set internationally by the authorised definition of problems and their prescribed solutions. Once the GPPP enforce the consensus internationally, the policy framework is set. The GPPP stakeholder partners then collaborate to ensure the desired policies are developed, implemented and enforced. This is the oft quoted “international rules based system.” 

In this way the GPPP control many nations at once without having to resort to legislation. This has the added advantage of making any legal challenge to the decisions made by the most senior partners in the GPPP (it is an authoritarian hierarchy) extremely difficult.”

He ends his excellent article with the following observations: “While, in theory, governments do not have to implement GPPP policy, the reality is that they do. Global policies have been an increasing facet of our lives in the post WW2 era. The mechanism of translating GPPP policy initiatives, first into national and then regional and eventually local policy, can be clearly identified by looking at sustainable development.

In 1972 the privately funded, independent policy think-tank the Club of Rome (CoR) published the Limits of Growth. As we saw with the roll-out out of the pseudopandemic, the CoR used computer models to predict what they decreed were the complex problems faced by the entire planet: the “world problematique.”

Their offered opinions derived from the commissioned work of the Massachusetts Institute of Technology’s (MIT’s) system dynamic “World3 model.” This assumed global population would deplete natural resources and pollute the environment to the point where “overshoot and collapse” would inevitably occur.

This is not a scientific “fact” but rather a suggested scenario. So far, none of the predictions made have come to pass.

The scientific and statistical to-and-fro on the claims made in the Limits to Growth has been prolific. However, ignoring all doubts, the World3 model was firmly planted at the centre of the sustainable development policy environment.

In 1983 the Brundtland Commission was convened by former Norwegian Prime Minister Gro Harland Brundlandt and then Secretary General of the UN Javier Pérez de Cuéllar. Both were Club of Rome members. Based upon the highly questionable assumptions in the World3 model, they set about uniting governments from around the world to pursue sustainable development policies.

In 1987 the Commission published the Brundtland Report, also known as Our Common Future. Central to the idea of sustainable development, outlined in the report, was population control (reduction.)  This policy decision, to get rid of people, won international acclaim and awards for the authors.

The underlying assumptions for these policy proposals weren’t publicly challenged at all. The academic and scientific debate raged but remained almost completely unreported. As far as the public knew, scientific assumption and speculation was a proven fact. It is now impossible to question these unproven assumptions and obviously inaccurate models without being accused of “climate denial.”

This resulted in the Millenium Development Goals and eventually, in 2015, they gave way to the United Nation’s full adoption of Sustainable Development Goals (SDGs), In turn, these have been translated into government policy. For example, the UK government proudly announced their Net Zero policy commitment to sustainable development goals in 2019.

SDGs were already making an impact at the regional and local level in counties, cities, towns and boroughs across the UK. Nearly every council across the country has a “sustainable development plan.”

Regardless of what you think about the global threats we may or may not face, the origin and the distribution pathway of the resultant policy is clear. A privately funded, globalist think-tank was the driver of a policy agenda which led to the creation of a global policy framework, adopted by governments the world over, which has impacted communities in nearly every corner of the Earth.

SDGs are just one among numerous examples of GPPP global governance in action. The elected politician’s role in this process is negligible. They merely serve to implement and sell the policy to the public.

It doesn’t matter who you elect, the policy trajectory is set at the global governance level. This is the dictatorial nature of the GPPP and nothing could be less democratic.”

https://off-guardian.org/2021/10/20/what-is-the-global-public-private-partnership/

Waiting Upon Structures to Crack

This article presents a fairly accurate depiction of what's wrong with the current ideology and not only why it won't work but why the professed solutions will systematically be to do more of what doesn't work until it does which it won't. But it won't matter as success will always seem within grasp while chaos descends upon us. Such is the power of ideology!

Guest Post by Alastair Crooke

Jeffrey Tucker, in a piece entitled How Close Is Total Social and Economic Collapse?, writes, “Economies and societies fall apart slowly, then a bit more, then all at once. We seem to be in the middle period of this trajectory [in the U.S.]. The slow part began March 2020 when politicians around the world imagined that it would be no big deal to shut down the economy and restart it once the virus went away”. What a beautiful display of the power of ‘science-driven’ government it would be – Technocracy on a war-footing.

But, “[n]one of it worked. You cannot turn off an economy and normal social functioning and then turn them back on like a light switch. The attempt alone will necessarily cause unpredictable amounts of long-term breakage, not only of economic structures but also of the spirit of a people. Everything going on now reflects the disastrous presumption that doing that would be possible – and not cause dramatic and lasting damage. It was the greatest failure of politics in a century”.

Everything works until suddenly, it doesn’t. As Minsky said, stability breeds instability. The problem is that complex systems are inherently fragile. The optimization that makes them cost-effective also removes the redundancies that make them resilient. Things can fall apart quickly when some unforeseen event occurs. Not only things; the collective public psyche is a fragile complex system too – it cannot be restored to what it was simply by jabbing the re-set button.

Tucker views this essentially as a failure of judgement. Maybe it is, and maybe it isn’t – which is to say, a judgement failure in the way he means it. Yes, the supply-chain debacle may not adequately have been foreseen; or the self-harm that has resulted from attempting to de-couple from an intertwined economy as ubiquitous as that of China (i.e. microchip disruption).

But perhaps the reason the vaccine strategy is not being reconsidered, but has become cult doctrine on which the Establishment has doubled-down, is that it was conceived at the outset, not just as a means to an end – i.e. creating herd immunity via vaccines – but also an end in, and of itself.

Looked at in this way, we can perceive not just ‘one failure’ – that a V-shaped recovery on re-start, was presented as gospel – but rather, a series of related judgmental ‘failures’. These may give the appearance of being a troupe of wandering errors of well-intentioned, yet flawed analysis, though in fact, they were always connected by being conceived at the outset as ends in, and of themselves.

The commonality to these ‘errors’ lies with their being of ‘one project’ – being of one ‘genus’ – and not simply being a string of accidents of error.

The ostensible logic is that by ‘nudging’ almost everyone to get vaccinated, it will help achieve herd immunity, and thereby eliminate the virus. Is the Tucker-like flaw here that it was assumed that the vaccines were not ‘leaky’ in respect to variants; or that the vaccinated would not be vulnerable to infection; or that the vaccinated would not carry, shed and transmit the virus; or that any protection would not degrade in weeks or months? Perhaps they misunderstood the history of the SARS family of virus (to be not particularly susceptible to vaccines, from their tendency to slide sidewise into variants); or then again, maybe mass vaccination is also an end in itself?

No vax, no job? The unvaxed have become ‘the enemy’, in exactly the way that philosopher Carl Schmitt said that casting an ‘enemy’ is supposed to work: the assignment of a label so black and so unremittingly ‘other’ that mediation with such ‘monsters’ ‘who put the lives of others at risk’ becomes inconceivable. Such black and white Manicheanism is the essence of politics, Schmitt wrote approvingly. In Italy, for example, representatives of the political, medical and media establishment have openly accused the unvaccinated of being “rats”, “subhumans” and “criminals”, who deserve to be “excluded from public life” and “from the national health service” and even deserve to “die like flies”.

Is this another failure of thinking clearly? The inability of leaders to comprehend how such language tears society apart; that a society will not return to normal social and functioning, directly on the Green Pass ‘switch’ being turned off (if it ever is)?

Or, is it an end in itself? – Vaccination as a proxy for political loyalty – the majority defining itself in polar opposition to a demonized minority: ‘Holding the wrong political ideology makes you unclean’. You should be purged. Perhaps that is why the Biden administration is also not concerned about mass firings (and its economic disruptions) – because It helps purify the country of Trump-supporting recalcitrants?

Most obviously, the rushed ‘greening project’ tied to a declared climate ‘emergency’ is a counterpart to the shut-down and vaccine flaw. It seems that this similarly was imagined as straight-forward: the world would pirouette away from dirty to clean energy, through carbon ‘mandates’ that would shut-down both personal and collective carbon profligacy. And the economy then would be re-booted after $150 trillion had been spent on green renewables. Another display of the power of ‘science-driven’ governments, run by experts, supposedly untainted by partisanship, or expectations of personal gain.

Again, it’s not working: You cannot just ‘turn off’ a fossil-fuel based economy, and then turn it back on, a short-while later, as a green-washed ‘net zero’ one.

We may, on the one hand, perceive this as a simple failure to appreciate the practical impediments that have given the world its energy crunch, and its concomitant huge cost-hikes for consumers – albeit triggered, we are told, out of a pure concern to save the planet.

Or, on the other hand, is the carbon mandate also an end in, and of itself? i.e. the transition to a global technocratic managerial class, and the transfer of key policy tools away from the national level to the supranational? If so, this too, is not working. The social costs of the energy price shock will ripple across politics and cause further breakages in the economy.

And, is the associated shift from traditional economic management to Modern Monetary Theory (MMT) – which happened to overlap with the pandemic shut down – a simple coincidence arising out of the need to act to protect people during the Covid crisis? One that has witnessed the Central Banks’ ‘creation’ of $30 trillion of liquidity injected into economies, as pandemic support. Was this then, just an unfortunate misappreciation of the risks of generating (non-transitory) inflation that would impoverish consumers, and possibly provoke economic recession?

Or, was it an end in itself, too – conceived at the outset as the jet-fuel that would finance the transition from hyper-financialised individualist capitalism (that is acknowledged even by the technocrats) to be no longer sustainable, to a stockholder corporate managerialism that would largely displace individual property rights, in favour of broader ESG, social, environmental, and diversity visions of stockholder corporatism?

As long ago as 1941, James Burnham in The Managerial Revolution, was making the case that the old paradigm of labour versus capitalism was passé; that progressive evolution would transition the world away from the capitalist-socialist dialectic to a new synthesis – an organizational structure made up of an élite managerial technocratic class – a type of society that was both ‘socialist’ (ESG and woke), yet also corporate entrepreneurial. It would be led by experts that understood problems beyond the ken of the public. Burnham believed this was in process to replace capitalism on a world scale (‘Davos’ calls it stockholder corporatism today).

Does this have an end in itself? Of course – the elite oligarchic class is preserved, and controls money and credit, albeit now at a supranational level, (i.e. the ECB practicing strict credit rationing for companies, according to its own Green doctrines). But this isn’t working so well either: We are experiencing both an energy ‘price-shock’, and disruptive inflation (more breakages).

At the international geo-political plane, things don’t seem to be working either. Team Biden says it wants a ‘managed competition’ with China, but why then send Wendy Sherman (who is not noted for her diplomatic skills) to China as Biden’s envoy? Why has there been this continuous chip-chipping away at the 1972 ‘One China’ policy with a series of small, seemingly innocuous moves on Taiwan if Team Biden wants contained competition (what he said he wants in a recent call with President Xi), but falters, time after time, to instigate a serious relationship?

Does the Team not understand that it is not ‘containing’ competition, but rather playing-with-fire, through its’ opaque hints that the U.S. might support Taiwan independence?

And then, why of all people, despatch Victoria Nuland to Moscow, if the competition with Moscow was to be quietly ‘balanced out’ as Biden’s face-to-face with Putin in Geneva seemed to signal? Like Sherman, Nuland was not received at a senior level, and her ‘Maidan arsonist’ reputation of course preceded her in Moscow. And why decimate Russia’s diplomatic representation at NATO HQ, and why have Secretary Austin talk in Georgia and Ukraine of NATO’s ‘open door’?

Is there some hidden logic to this, or were these envoys intentionally sent as some kind of ‘kick-ass’ provocative gesture to underline who’s boss (i.e. America is Back!)? This is known in Washington as ‘capitulation diplomacy’ – competitors are presented with only the terms of their capitulation. If so, it didn’t work. Both envoys effectively were sent packing, and Washington’s relations with these key states are degraded to near zero.

The Russia-China axis have come to the conclusion that polite diplomatic discourse with Washington is like water off a duck’s back. The U.S. and its European protégés simply do not hear what Moscow or Beijing says to them – so what is the point to talking to ‘tin-eared’ Americans? Answer: None.

Tucker wrote in respect to pandemic lockdowns that “everything going on now reflects the disastrous presumption that [continuing] doing that [which it was already doing] would be possible, and not cause dramatic and lasting damage. It was the greatest failure of politics in a century”. Is this true for America’s foreign policy too (i.e. capitulation diplomacy)?

Is it assumed that the way for America to retain global primacy is to continue coat-trailing China on Taiwan and its One China policy; and to coat-trail Russia on NATO membership for Ukraine? And that repeated hints at bilaterals with a folksy Biden are all that is necessary to stop events spiralling out of control?

Is all this coat-trailing and provocation simply Team Biden misjudging how serious China and Russia are about their Red Lines ‘meaning it’, or, is it an end in itself? (As an aside, Burnham was clear that many wars would have to be fought before a managerial society could fully take hold. These wars would lead to the destruction of sovereign nation states, such that only a small number of great nations would survive, culminating into the nuclei of three ‘super-states’. Burnham believed that “sovereignty will be restricted to the few super-states”.)

Tucker’s initial question, we should recall, was How Close Is Total Social and Economic Collapse? Our point in this piece is that this litany of failures are linked by being conceived at the outset, as ends in, and of themselves. And to one extent or another, none are working. So is a perfect storm gathering?

The commonality to these distinct ‘errors’ lies with their being ‘one project’ – a stealth coup of the policy tools and structures of public accountability, at the national level, and their transfer to the supranational plane (also known as the Re-Set). They derive, all, from the cult of technocratic managerialism. In the last analysis, Tucker is right: In the pursuit of this project, and its failing flock of subsets, “the attempt alone will necessarily cause unpredictable amounts of long-term breakage, not only of economic structures but also of the spirit of a people”.

Cults historically are dismissive of fragility in complex systems. They are focussed on the means to ‘ends’. They would not necessarily see Tucker’s ‘breakages’ even as breakage. Human attitudes and behaviour – i.e. people – are seen as an obstruction, and as Biden repeatedly warns, “if people won’t help, they must get out of the way of vaccine rules … get out of the way of people doing the right thing”.

It seems that Russia and China, seeing all this, will remain aloof and patient – waiting upon structures to crack.

Green energy: A bubble of unrealistic expectations!

 As an oil and gas specialist in London 30 years ago, I analyzed models which clearly indicated a breakdown of supply after the year 2020. Here we are today, facing an uncertain future with no clear workable policies. The article below outlines the dilemma most clearly. There will be no free lunch! Energy is complex and requires tradeoffs.  Our green energy policies are pulling us straight into a third major energy crisis. We urgently need intelligent and knowledgeable leaders to solve such a difficult conundrum. Where are they?

Authored by David Hay via Everegreen Gavekal blog,

“You see what is happening in Europe. There is hysteria and some confusion in the markets. Why?…Some people are speculating on climate change issues, some people are underestimating some things, some are starting to cut back on investments in the extractive industries. There needs to be a smooth transition.”

- Vladimir Putin (someone with whom this author rarely agrees)

“By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of its citizens.”

– John Maynard Keynes (an interesting observation for all the modern day Keynesians to consider given their support of current inflationary US policies, including energy-related)

Introduction

This week’s EVA provides another sneak preview into David Hay’s book-in-process, “Bubble 3.0” discussing what he thinks is the crucial topic of “greenflation.”  This is a term he coined referring to the rising price for metals and minerals that are essential for solar and wind power, electric cars, and other renewable technologies.

It also centers on the reality that as global policymakers have turned against the fossil fuel industry, energy producers are for the first time in history not responding to dramatically higher prices by increasing production.  Consequently, there is a difficult tradeoff that arises as the world pushes harder to combat climate change, driving up energy costs to painful levels, especially for lower income individuals. 

What we are currently seeing in Europe is a vivid example of this dilemma.  While it may be the case that governments welcome higher oil and natural gas prices to discourage their use, energy consumers are likely to have a much different reaction.

Summary

• BlackRock’s CEO recently admitted that, despite what many are opining, the green energy transition is nearly certain to be inflationary.

• Even though it’s early in the year, energy prices are already experiencing unprecedented spikes in Europe and Asia, but most Americans are unaware of the severity.

• To that point, many British residents being faced with the fact that they may need to ration heat and could be faced with the chilling reality that lives could be lost if this winter is as cold as forecasters are predicting.

• Because of the huge increase in energy prices, inflation in the eurozone recently hit a 13-year high, heavily driven by natural gas prices on the Continent that are the equivalent of $200 oil.

• It used to be that the cure for extreme prices was extreme prices, but these days I’m not so sure.  Oil and gas producers are very wary of making long-term investments to develop new resources given the hostility to their industry and shareholder pressure to minimize outlays.

• I expect global supply to peak sometime next year and a major supply deficit looks inevitable as global demand returns to normal.

• In Norway, almost 2/3 of all new vehicle sales are of the electric variety (EVs) – a huge increase in just over a decade. Meanwhile, in the US, it’s only about 2%. Still, given Norway’s penchant for the plug-in auto, the demand for oil has not declined.

• China, despite being the largest market by far for electric vehicles, is still projected to consume an enormous and rising amount of oil in the future.

• About 70% of China’s electricity is generated by coal, which has major environmental ramifications in regards to electric vehicles.

• Because of enormous energy demand in China this year, coal prices have experienced a massive boom. Its usage was up 15% in the first half of this year, and the Chinese government has instructed power providers to obtain all baseload energy sources, regardless of cost. 

• The massive migration to electric vehicles – and the fact that they use six times the amount of critical minerals as their gasoline-powered counterparts –means demand for these precious resources is expected to skyrocket.

• This extreme need for rare minerals, combined with rapid demand growth, is a recipe for a major spike in prices.

• Massively expanding the US electrical grid has several daunting challenges– chief among them the fact that the American public is extremely reluctant to have new transmission lines installed in their area.

• The state of California continues to blaze the trail for green energy in terms of both scope and speed. How the rest of the country responds to their aggressive take on renewables remains to be seen.

• It appears we are entering a very odd reality: governments are expending resources they do not have on weakly concentrated energy. And the result may be very detrimental for today’s modern economy.

• If the trend in energy continues, what looks nearly certain to be the Third Energy crisis of the last half-century may linger for years. 

Green energy: A bubble in unrealistic expectations?

As I have written in past EVAs, it amazes me how little of the intense inflation debate in 2021 centered on the inflationary implications of the Green Energy transition.  Perhaps it is because there is a built-in assumption that using more renewables should lower energy costs since the sun and the wind provide “free power”. 

However, we will soon see that’s not the case, at least not anytime soon; in fact, it’s my contention that it will likely be the opposite for years to come and I’ve got some powerful company.  Larry Fink, CEO of BlackRock, a very pro-ESG* organization, is one of the few members of Wall Street’s elite who admitted this in the summer of 2021.  The story, however, received minimal press coverage and was quickly forgotten (though, obviously, not be me!). 

This EVA will outline myriad reasons why I think Mr. Fink was telling it like it is…despite the political heat that could bring down upon him.  First, though, I will avoid any discussion of whether humanity is the leading cause of global warming.  For purposes of this analysis, let’s make the high-odds assumption that for now a high-speed green energy transition will continue to occur.  (For those who would like a well-researched and clearly articulated overview of the climate debate, I highly recommend the book “Unsettled”; it’s by a former top energy expert and scientist from the Obama administration, Dr. Steven Koonin.)

The reason I italicized “for now” is that in my view it’s extremely probable that voters in many Western countries are going to become highly retaliatory toward energy policies that are already creating extreme hardship.  Even though it’s only early autumn as I write these words, energy prices are experiencing unprecedented increases in Europe.  Because it’s “over there”, most Americans are only vaguely aware of the severity of the situation.  But the facts are shocking… 

Presently, natural gas is going for $29 per million British Thermal Units (BTUs) in Europe, a quadruple compared to the same time in 2020, versus “just” $5 in the US, which is a mere doubling.  As a consequence, wholesale energy cost in Great Britain rose an unheard of 60% even before summer ended.  Reportedly, nine UK energy companies are on the brink of failure at this time due to their inability to fully pass on the enormous cost increases.  As a result, the British government is reportedly on the verge of nationalizing some of these entities—supposedly, temporarily—to prevent them from collapsing.  (CNBC reported on Wednesday that UK natural gas prices are now up 800% this year; in the US, nat gas rose 20% on Tuesday alone, before giving back a bit more than half of that the next day.)

Serious food shortages are expected after exorbitant natural gas costs forced most of England’s commercial production of CO2 to shut down.  (CO2 is used both for stunning animals prior to slaughter and also in food packaging.)  Additionally, ballistic natural gas prices have forced the closure of two big US fertilizer plants due to a potential shortfall of ammonium nitrate of which “nat gas” is a key feedstock. 

*ESG stands for Environmental, Social, Governance; in 2021, Blackrock’s assets under management approximated $9 ½ trillion, about one-third of the total US federal debt.

With the winter of 2021 approaching, British households are being told they may need to ration heat.  There are even growing concerns about the widespread loss of life if this winter turns out to be a cold one, as 2020 was in Europe.  Weather forecasters are indicating that’s a distinct possibility.  

In Spain, consumers are paying 40% more for electricity compared to the prior year.  The Spanish government has begun resorting to price controls to soften the impact of these rapidly escalating costs. (The history of price controls is that they often exacerbate shortages.) Naturally, spiking power prices hit the poorest hardest, which is typical of inflation whether it is of the energy variety or of generalized price increases. 

Due to these massive energy price increases, eurozone inflation recently hit a 13-year high, heavily driven by natural gas prices that are the equivalent of $200 per barrel oil.  This is consistent with what I warned about in several EVAs earlier this year and I think there is much more of this looming in the years to come.

In Asia, which also had a brutally cold winter in 2020 – 2021, there are severe energy shortages being disclosed, as well.  China has instructed its power providers to secure all the coal they can in preparation for a repeat of frigid conditions and acute deficits even before winter arrives.  The government has also instructed its energy distributors to acquire all the liquified natural gas (LNG) they can, regardless of cost.  LNG recently hit $35 per million British Thermal Units in Asia, up sevenfold in the past year.  China is also rationing power to its heavy industries, further exacerbating the worldwide shortages of almost everything, with notable inflationary implications.

In India, where burning coal provides about 70% of electricity generation (as it does in China), utilities are being urged to import coal even though that country has the world’s fourth largest coal reserves.  Several Indian power plants are close to exhausting their coal supplies as power usage rips higher.

Normally, I’d say that the cure for such extreme prices, was extreme prices—to slightly paraphrase the old axiom.  But these days, I’m not so sure; in fact, I’m downright dubious.  After all, the enormously influential International Energy Agency has recommended no new fossil fuel development after 2021—“no new”, as in zero. 

It’s because of pressure such as this that, even though US natural gas prices have done a Virgin Galactic to $5 this year, the natural gas drilling rig count has stayed flat.  The last time prices were this high there were three times as many working rigs. 

It is the same story with oil production.  Most Americans don’t seem to realize it but the US has provided 90% of the planet’s petroleum output growth over the past decade.  In other words, without America’s extraordinary shale oil production boom—which raised total oil output from around 5 million barrels per day in 2008 to 13 million barrels per day in 2019—the world long ago would have had an acute shortage.  (Excluding the Covid-wracked year of 2020, oil demand grows every year—strictly as a function of the developing world, including China, by the way.)

Unquestionably, US oil companies could substantially increase output, particularly in the Permian Basin, arguably (but not much) the most prolific oil-producing region in the world.  However, with the Fed being pressured by Congress to punish banks that lend to any fossil fuel operator, and the overall extreme hostility toward domestic energy producers, why would they? 

There is also tremendous pressure from Wall Street on these companies to be ESG compliant.  This means reducing their carbon footprint.  That’s tough to do while expanding their volume of oil and gas. 

Further, investors, whether on Wall Street or on London’s equivalent, Lombard Street, or in pretty much any Western financial center, are against US energy companies increasing production.  They would much rather see them buy back stock and pay out lush dividends.  The companies are embracing that message.  One leading oil and gas company CEO publicly mused to the effect that buying back his own shares at the prevailing extremely depressed valuations was a much better use of capital than drilling for oil—even at $75 a barrel.

As reported by Morgan Stanley, in the summer of 2021, an US institutional broker conceded that of his 400 clients, only one would consider investing in an energy company!  Consequently, the fact that the industry is so detested means that its shares are stunningly undervalued.  How stunningly?  A myriad of US oil and gas producers are trading at free cash flow* yields of 10% to 15% and, in some cases, as high as 25%.

In Europe, where the same pressures apply, one of its biggest energy companies is generating a 16% free cash flow yield.  Moreover, that is based up an estimate of $60 per barrel oil, not the prevailing price of $80 on the Continent.

*Free cash flow is the excess of gross cash flow over and above the capital spending needed to sustain a business.  Many market professionals consider it more meaningful than earnings. 

Therefore, due to the intense antipathy toward Western energy producers they aren’t very inclined to explore for new resources.  Another much overlooked fact about the ultra-critical US shale industry that, as noted, has been nearly the only source of worldwide output growth for the past 13 years, is its rapid decline nature. 

Most oil wells see their production taper off at just 4% or 5% per year.  But with shale, that decline rate is 80% after only two years.  (Because of the collapse in exploration activities in 2020 due to Covid, there are far fewer new wells coming on-line; thus, the production base is made up of older wells with slower decline rates but it is still a much steeper cliff than with traditional wells.) 

As a result, the US, the world’s most important swing producer, has to come up with about 1.5 million barrels per day (bpd) of new output just to stay even.  (This was formerly about a 3 million bpd number due to both the factor mentioned above and the 2 million bpd drop in total US oil production, from 13 million bpd to around 11 million bpd since 2019).  Please recall that total US oil production in 2008 was only around 5 million bpd.  Thus, 1.5 million barrels per day is a lot of oil and requires considerable drilling and exploration activities.  Again, this is merely to stay steady-state, much less grow. 

The foregoing is why I wrote on multiple occasions in EVAs during 2020, when the futures price for oil went below zero*, that crude would have a spectacular price recovery later that year and, especially, in 2021.  In my view, to go out on my familiar creaky limb, you ain’t seen nothin’ yet!  With supply extremely challenged for the above reasons and demand marching back, I believe 2022 could see $100 crude, possibly even higher. 

*Physical oil, or real vs paper traded, bottomed in the upper teens when the futures contract for delivery in April, 2020, went deeply negative. 

Mike Rothman of Cornerstone Analytics has one of the best oil price forecasting records on Wall Street.  Like me, he was vehemently bullish on oil after the Covid crash in the spring of 2020 (admittedly, his well-reasoned optimism was a key factor in my up-beat outlook).  Here’s what he wrote late this summer:  “Our forecast for ’22 looks to see global oil production capacity exhausted late in the year and our balance suggests OPEC (and OPEC + participants) will face pressures to completely remove any quotas.” 

My expectation is that global supply will likely max out sometime next year, barring a powerful negative growth shock (like a Covid variant even more vaccine resistant than Delta).  A significant supply deficit looks inevitable as global demand recovers and exceeds its pre-Covid level.  This is a view also shared by Goldman Sachs and Raymond James, among others; hence, my forecast of triple-digit prices next year.  Raymond James pointed out that in June the oil market was undersupplied by 2.5 mill bpd.  Meanwhile, global petroleum demand was rapidly rising with expectations of nearly pre-Covid consumption by year-end.  Mike Rothman ran this chart in a webcast on 9/10/2021 revealing how far below the seven-year average oil inventories had fallen.  This supply deficit is very likely to become more acute as the calendar flips to 2022.

In fact, despite oil prices pushing toward $80, total US crude output now projected to actually decline this year.  This is an unprecedented development.  However, as the very pro-renewables Financial Times (the UK’s equivalent of the Wall Street Journal) explained in an August 11th, 2021, article:  “Energy companies are in a bind.  The old solution would be to invest more in raising gas production.  But with most developed countries adopting plans to be ‘net zero’ on carbon emissions by 2050 or earlier, the appetite for throwing billions at long-term gas projects is diminished.”

The author, David Sheppard, went on to opine: “In the oil industry there are those who think a period of plus $100-a-barrel oil is on the horizon, as companies scale back investments in future supplies, while demand is expected to keep rising for most of this decade at a minimum.”  (Emphasis mine)  To which I say, precisely! 

Thus, if he’s right about rising demand, as I believe he is, there is quite a collision looming between that reality and the high probability of long-term constrained supplies.  One of the most relevant and fascinating Wall Street research reports I read as I was researching the topic of what I have been referring to as “Greenflation” is from Morgan Stanley.  Its title asked the provocative question:  “With 64% of New Cars Now Electric, Why is Norway Still Using so Much Oil?” 

While almost two-thirds of Norway’s new vehicle sales are EVs, a remarkable market share gain in just over a decade, the number in the US is an ultra-modest 2%.   Yet, per the Morgan Stanley piece, despite this extraordinary push into EVs, oil consumption in Norway has been stubbornly stable. 

Coincidentally, that’s been the experience of the overall developed world over the past 10 years, as well; petroleum consumption has largely flatlined.  Where demand hasn’t gone horizontal is in the developing world which includes China.  As you can see from the following Cornerstone Analytics chart, China’s oil demand has vaulted by about 6 million barrels per day (bpd) since 2010 while its domestic crude output has, if anything, slightly contracted.

Another coincidence is that this 6 million bpd surge in China’s appetite for oil, almost exactly matched the increase in US oil production.  Once again, think where oil prices would be today without America’s shale oil boom.

This is unlikely to change over the next decade.  By 2031, there are an estimated one billion Asian consumers moving up into the middle class.  History is clear that more income means more energy consumption.  Unquestionably, renewables will provide much of that power but oil and natural gas are just as unquestionably going to play a critical role.  Underscoring that point, despite the exponential growth of renewables over the last 10 years, every fossil fuel category has seen increased usage. 

Thus, even if China gets up to Norway’s 64% EV market share of new car sales over the next decade, its oil usage is likely to continue to swell.  Please be aware that China has become the world’s largest market for EVs—by far.  Despite that, the above chart vividly displays an immense increase in oil demand. 

Here’s a similar factoid that I ran in our December 4th EVA, “Totally Toxic”, in which I made a strong bullish case for energy stocks (the main energy ETF is up 35% from then, by the way): 

“(There was) a study by the UN and the US government based on the Model for the Assessment of Greenhouse Gasses Induced Climate Change (MAGICC).  The model predicted that ‘the complete elimination of all fossil fuels in the US immediately would only restrict any increase in world temperature by less than one tenth of one degree Celsius by 2050, and by less than one fifth of one degree Celsius by 2100.’  Say again?  If the world’s biggest carbon emitter on a per capita basis causes minimal improvement by going cold turkey on fossil fuels, are we making the right moves by allocating tens of trillions of dollars that we don’t have toward the currently in-vogue green energy solutions?”

China's voracious power appetite increase has been true with all of its energy sources. 

On the environmentally-friendly front, that includes renewables; on the environmentally-unfriendly side, it also includes coal.  In 2020, China added three times more coal-based power generation than all other countries combined.  This was the equivalent of an additional coal planet each week.  Globally, there was a reduction last year of 17 gigawatts in coal-fired power output; in China, the increase was 29.8 gigawatts, far more than offsetting the rest of the world’s progress in reducing the dirtiest energy source.  (A gigawatt can power a city with a population of roughly 700,000.)

Overall, 70% of China’s electricity is coal-generated. This has significant environmental implications as far as electric vehicles (EVs) are concerned.  Because EVs are charged off a grid that is primarily coal- powered, carbon emissions actually rise as the number of such vehicles proliferate. As you can see in the following charts from Reuters’ energy expert John Kemp, Asia’s coal-fired generation has risen drastically in the last 20 years, even as it has receded in the rest of the world.  (The flattening recently is almost certainly due to Covid, with a sharp upward resumption nearly a given.)

The worst part is that burning coal not only emits CO2—which is not a pollutant and is essential for life—it also releases vast quantities of nitrous oxide (N20), especially on the scale of coal usage seen in Asia today. N20 is unquestionably a pollutant and a greenhouse gas that is hundreds of times more potent than CO2.  (An interesting footnote is that over the last 550 million years, there have been very few times when the CO2 level has been as low, or lower, than it is today.) 

Some scientists believe that one reason for the shrinkage of Arctic sea ice in recent decades is due to the prevailing winds blowing black carbon soot over from Asia.  This is a separate issue from N20 which is a colorless gas.  As the black soot covers the snow and ice fields in Northern Canada, they become more absorbent of the sun’s radiation, thus causing increased melting.  (Source:  “Weathering Climate Change” by Hugh Ross)

Due to exploding energy needs in China this year, coal prices have experienced an unprecedented surge.  Despite this stunning rise, Chinese authorities have instructed its power providers to obtain coal, and other baseload energy sources, such as liquified natural gas (LNG), regardless of cost.  Notwithstanding how pricey coal has become, its usage in China was up 15% in the first half of this year vs the first half of 2019 (which was obviously not Covid impacted).

Despite the polluting impact of heavy coal utilization, China is unlikely to turn away from it due to its high energy density (unlike renewables), its low cost (usually) and its abundance within its own borders (though its demand is so great that it still needs to import vast amounts). 

Regarding oil, as we saw in last week’s final image, it is currently importing roughly 11 million barrels per day (bpd) to satisfy its 15 million bpd consumption (about 15% of total global demand).  In other words, crude imports amount to almost three-quarter of its needs.  At $80 oil, this totals $880 million per day or approximately $320 billion per year.  Imagine what China’s trade surplus would look like without its oil import bill!

Ironically, given the current hostility between the world’s superpowers, China has an affinity for US oil because of its light and easy-to-refine nature.  China’s refineries tend to be low-grade and unable to efficiently process heavier grades of crude, unlike the US refining complex which is highly sophisticated and prefers heavy oil such as from Canada and Venezuela—back when the latter actually produced oil.

Thus, China favors EVs because they can be de facto coal-powered, lessening its dangerous reliance on imported oil.  It also likes them due to the fact it controls 80% of the lithium ion battery supply and 60% of the planet’s rare earth minerals, both of which are essential to power EVs.    

However, even for China, mining enough lithium, cobalt, nickel, copper, aluminum and the other essential minerals/metals to meet the ambitious goals of largely electrifying new vehicle volumes is going to be extremely daunting.  This is in addition to mass construction of wind farms and enormously expanded solar panel manufacturing.

As one of the planet’s leading energy authorities Daniel Yergin writes: “With the move to electric cars, demand for critical minerals will skyrocket (lithium up 4300%, cobalt and nickel up 2500%), with an electric vehicle using 6 times more minerals than a conventional car and a wind turbine using 9 times more minerals than a gas-fueled power plant.  The resources needed for the ‘mineral-intensive energy system’ of the future are also highly concentrated in relatively few countries. Whereas the top 3 oil producers in the world are responsible for about 30 percent of total liquids production, the top 3 lithium producers control more than 80% of supply. China controls 60% of rare earths output needed for wind towers; the Democratic Republic of the Congo, 70% of the cobalt required for EV batteries.”

As many have noted, the environmental impact of immensely ramping up the mining of these materials is undoubtedly going to be severe.  Michael Shellenberger, a life-long environmental activist, has been particularly vociferous in his condemnation of the dominant view that only renewables can solve the global energy needs.  He’s especially critical of how his fellow environmentalists resorted to repetitive deception, in his view, to undercut nuclear power in past decades.  By leaving nuke energy out of the solution set, he foresees a disastrous impact on the planet due to the massive scale (he’d opine, impossibly massive) of resource mining that needs to occur.  (His book, “Apocalypse Never”, is also one I highly recommend; like Dr. Koonin, he hails from the left end of the political spectrum.)

Putting aside the environmental ravages of developing rare earth minerals, when you have such high and rapidly rising demand colliding with limited supply, prices are likely to go vertical.  This will be another inflationary “forcing”, a favorite term of climate scientists, caused by the Great Green Energy Transition.

Moreover, EVs are very semiconductor intensive.  With semis already in seriously short supply, this is going to make a gnarly situation even gnarlier.  It’s logical to expect that there will be recurring shortages of chips over the next decade for this reason alone (not to mention the acute need for semis as the “internet of things” moves into primetime). 

In several of the newsletters I’ve written in recent years, I’ve pointed out the present vulnerability of the US electric grid.  Yet, it will be essential not just to keep it from breaking down under its current load; it must be drastically enhanced, a Herculean task. For one thing, it is excruciatingly hard to install new power lines. As J.P. Morgan’s Michael Cembalest has written: “Grid expansion can be a hornet’s nest of cost, complexity and NIMBYism*, particularly in the US.”  The grid’s frailty, even under today’s demands (i.e., much less than what lies ahead as millions of EVs plug into it) is particularly obvious in California.  However, severe winter weather in 2021 exposed the grid weakness even in energy-rich Texas, which also has a generally welcoming attitude toward infrastructure upgrading and expansion.

Yet it’s the Golden State, home to 40 million Americans and the fifth largest economy in the world, if it was its own country (which it occasionally acts like it wants to be), that is leading the charge to EVs and seeking to eliminate internal combustion engines (ICEs) as quickly as possible.  Even now, blackouts and brownouts are becoming increasingly common.  Seemingly convinced it must be a role model for the planet, it’s trying desperately to reduce its emissions, which are less than 1%, of the global total, at the expense of rendering its energy system more similar to a developing country.  In addition to very high electricity costs per kilowatt hour (its mild climate helps offset those), it also has gasoline prices that are 77% above the national average. 

*NIMBY stands for Not In My Back Yard.

While California has been a magnet for millions seeking a better life for 150 years, the cost of living is turning the tide the other way.  Unreliable and increasingly expensive energy is likely to intensify that trend.  Combined with home prices that are more than double the US median–$800,000!–California is no longer the land of milk and honey, unless, to slightly paraphrase Woody Guthrie about LA, even back in the 1940s, you’ve got a whole lot of scratch.  More and more people, seem to be scratching California off their list of livable venues. 

Voters in the reliably blue state of California may become extremely restive, particularly as they look to Asia and see new coal plants being built at a fever pitch.  The data will become clear that as America keeps decarbonizing–as it has done for 30 years mostly due to the displacement of coal by gas in the US electrical system—Asia will continue to go the other way.  (By the way, electricity represents the largest share of CO2 emission at roughly 25%.) 

California has always seemed to lead social trends in this country, as it is doing again with its green energy transition.  The objective is noble though, extremely ambitious, especially the timeline.  As it brings its power paradigm to the rest of America, especially its frail grid, it will be interesting to see how voters react in other states as the cost of power leaps higher and its dependability heads lower.  It’s reasonable to speculate we may be on the verge of witnessing the Californication of the US energy system. 

Lest you think I’m being hyperbolic, please be aware the IEA (International Energy Agency) has estimated it will cost the planet $5 trillion per year to achieve Net Zero emissions.  This is compared to global GDP of roughly $85 trillion. According to BloombergNEF, the price tag over 30 years, could be as high as $173 trillion.  Frankly, based on the history of gigantic cost overruns on most government-sponsored major infrastructure projects, I’m inclined to take the over—way over—on these estimates.

Moreover, energy consulting firm T2 and Associates, has guesstimated electrifying just the US to the extent necessary to eliminate the direct consumption of fuel (i.e., gasoline, natural gas, coal, etc.) would cost between $18 trillion and $29 trillion.  Again, taking into account how these ambitious efforts have played out in the past, I suspect $29 trillion is light.  Regardless, even $18 trillion is a stunner, despite the reality we have all gotten numb to numbers with trillions attached to them.  For perspective, the total, already terrifying, level of US federal debt is $28 trillion.

Regardless, as noted last week, the probabilities of the Great Green Energy Transition happening are extremely high.  Relatedly, I believe the likelihood of the Great Greenflation is right up there with them. 

As Gavekal’s Didier Darcet wrote in mid-August:  ““Nowadays, and this is a great first in history, governments will commit considerable financial resources they do not have in the extraction of very weakly concentrated energy.” ( i.e., less efficient)  “The bet is very risky, and if it fails, what next?  The modern economy would not withstand expensive energy, or worse, lack of energy.” 

While I agree this an historical first, it’s definitely not great (with apologies for all the “greats”).  This is particularly not great for keeping inflation subdued, as well as for attempting to break out of the growth quagmire the Western world has been in for the last two decades.  What we are seeing in Europe right now is an extremely cautionary case study in just how disastrous the war on fossil fuels can be (shortly we will see who or what has been a behind-the-scenes participant in this conflict).

Essentially, I believe, as I’ve written in past EVAs, we are entering the third energy crisis of the last 50 years.  If I’m right, it will be characterized by recurring bouts of triple-digit oil prices in the years to come.  Along with Richard Nixon taking the US off the gold standard in 1971, the high inflation of the 1970s was caused by the first two energy crises (the 1973 Arab Oil Embargo and the 1979 Iranian Revolution).  If I’m correct about this being the third, it’s coming at a most inopportune time with the US in hyper-MMT* mode.

Frankly, I believe many in the corridors of power would like to see oil trade into the $100s, and natural gas into the teens, as it will help catalyze the shift to renewable energy.  But consumers are likely to have a much different reaction—potentially, a violently different reaction, as I noted last week. 

The experience of the Yellow Vest protests in France (referring to the color of the vest protestors wore), are instructive in this regard.  France is a generally left-leaning country.  Despite that, a proposed fuel surtax in November 2018 to fund a renewable energy transition triggered such widespread civil unrest that French president Emmanuel Macron rescinded it the following month.

*MMT stands for Modern Monetary Theory.  It holds that a government, like the US, which issues debt in its own currency can spend without concern about budgetary constraints.  If there are not enough buyers of its bonds at acceptable interest rates, that nation’s central bank (the Fed, in our case) simply acquires them with money it creates from its digital printing press.  This is what is happening today in the US.  Many economists consider this highly inflationary.

The sharp and politically uncomfortable rise in US gas pump prices this summer caused the Biden administration to plead with OPEC to lift its volume quotas.  The ironic implication of that exhortation was glaringly obvious, as was the inefficiency and pollution consequences of shipping oil thousands of miles across the Atlantic.  (Oil tankers are a significant source of emissions.)  This is as opposed to utilizing domestic oil output, as well as crude from Canada (which is actually generally better suited to the US refining complex).  Beyond the pollution aspect, imported oil obviously worsens America’s massive trade deficit (which would be far more massive without the six million barrels per day of domestic oil volumes that the shale revolution has provided) and costs our nation high-paying jobs.

Further, one of my other big fears is that the West is engaging in unilateral energy disarmament.  Russia and China are likely the major beneficiaries of this dangerous scenario.  Per my earlier comment about a stealth combatant in the war on fossil fuels, it may surprise you that a past NATO Secretary General* has accused Russian intelligence of avidly supporting the anti-fracking movements in Western Europe.  Russian TV has railed against fracking for years, even comparing it to pedophilia (certainly, a most bizarre analogy!). 

The success of the anti-fracking movement on the Continent has essentially prevented a European version of America’s shale miracles (the UK has the potential to be a major shale gas producer).  Consequently, the European Union’s domestic natural gas production has been in a rapid decline phase for years. 

Banning fracking has, of course, made Europe heavily reliant on Russian gas shipments with more than 40% of its supplies coming from Russia. This is in graphic contrast to the shale output boom in the US that has not only made us natural gas self-sufficient but also an export powerhouse of liquified natural gas (LNG). 

In 2011, the Nord Stream system of pipelines running under the Baltic Sea from northern Russia began delivering gas west from northern Russia to the German coastal city of Greifswald.  For years, the Russians sought to build a parallel system with the inventive name of Nord Stream 2.  The US government opposed its approval on security grounds but the Biden administration has dropped its opposition.  It now appears Nord Stream 2 will happen, leaving Europe even more exposed to Russian coercion. 

Is it possible the Russian government and the Chinese Communist Party have been secretly and aggressively supporting the anti-fossil fuel movements in America?  In my mind, it seems not only possible but probable.  In fact, I believe it is naïve not to come that conclusion.  After all, wouldn’t it be in both of their geopolitical interests to see the US once again caught in a cycle of debilitating inflation, ensnared by the twin traps of MMT and the third energy crisis?

*Per former NATO Secretary General, Anders Fogh Rasumssen:  Russia has “engaged actively with so-called non-governmental organizations—environmental organizations working against shale gas—to maintain Europe’s dependence on imported Russian gas”.

Along these lines, I was shocked to listen to a recent podcast by the New Yorker magazine on the topic of “intelligent sabotage”.  This segment was an interview between the magazine’s David Remnick and a Swedish professor, Adreas Malm.  Mr. Malm is the author of a new book with the literally explosive title “How To Blow Up A Pipeline”.   Just as it sounds, he advocates detonating pipelines to inhibit fossil fuel distribution. 

Mr. Remnick was clearly sympathetic to his guest but he did ask him about the impact on the poor of driving energy prices up drastically which would be the obvious ramification if his sabotage recommendations were widely followed.  Mr. Malm’s reaction was a verbal shrug of the shoulders and words to the effect that this was the price to pay to save the planet.

Frankly, I am appalled that the venerable New Yorker would provide a platform for such a radical and unlawful suggestion.  In an era when people are de-platformed for often innocuous comments, it’s incredible to me this was posted and has not been pulled down.  In my mind, this reflects just how tolerant the media is of attacks on the fossil fuel industry, regardless of the deleterious impact on consumers and the global economy.

Surely, there is a far better way of coping with the harmful aspects of fossil fuel-based energy than this scorched earth (literally, in the case of Mr. Malm) approach, which includes efforts to block new pipelines, shut existing ones, and severely restrict US energy production.  In America’s case, the result will be forcing us to unnecessarily and increasingly rely on overseas imports.  (For example, per the Wall Street Journal, drilling permits on federal land have crashed to 171 in August from 671 in April.  Further, the contentious $3.5 trillion “infrastructure” plan would raise royalties and fees high enough on US energy producers that it would render them globally uncompetitive.)

Such actions would only aggravate what is already a severe energy shock, one that may be worse than the 1970s twin energy crises.  America has it easy compared to Europe, though, given current US policy trends, we might be in their same heavily listing energy boat soon.

Solutions include fast-tracking small modular nuclear plants; encouraging the further switch from burning coal to natural gas (a trend that is, unfortunately, going the other way now, as noted above); utilizing and enhancing carbon and methane capture at the point of emission (including improving tail pipe effluent-reduction technology); enhancing pipeline integrity to inhibit methane leaks; among many other mitigation techniques that recognize the reality the global economy will be reliant on fossil fuels for many years, if not decades, to come. 

If the climate change movement fails to recognize the essential nature of fossil fuels, it will almost certainly trigger a backlash that will undermine the positive change it is trying to bring about.  This is similar to what it did via its relentless assault on nuclear power which produced a frenzy of coal plant construction in the 1980s and 1990s.  On this point, it’s interesting to see how quickly Europe is re-embracing coal power to alleviate the energy poverty and rationing occurring over there right now - even before winter sets in.  When the choice is between supporting climate change initiatives on one hand and being able to heat your home and provide for your family on the other, is there really any doubt about which option the majority of voters will select?

EcoHealth Throws NIH Under The Bus Over Wuhan Gain-Of-Function Report

 What is interesting is not that the more you dig the more proof of "bio-engineering" you find (although you do) but the more dirt you bring back to the surface.

 Is our system rotten to the core?

 

The question over whether the NIH funded risky gain-of-function research in Wuhan, China was officially 'answered' last week, after the agency claimed that one of their partners - EcoHealth Alliance, failed to report that they had 'accidentally' created a chimeric coronavirus that was able to infect humanized mice.

To review, in a Wednesday letter addressed to Rep. James Comer (R-KY), NIH Principal Deputy Director Lawrence A. Tabak admits to funding a "limited experiment" to determine whether "spike proteins from naturally occurring bat coronaviruses circulating in China were capable of binding to the human ACE2 receptor in a mouse model." According to the letter, humanized mice infected with the modified bat virus "became sicker" than those exposed to an unmodified version of the same bat coronavirus.

The letter claims that EcoHealth CEO Peter Daszak failed to report this finding, and gave Daszak five days to submit "any and all unpublished data from the experiments and work conducted" under the NIH grant.

If true, it would mean Dr. Anthony Fauci, who runs the NIH's National Institute of Allergy and Infectious Diseases, wasn't lying when he told Sen. Rand Paul in July when he denied the agency was conducting GoF research.

Except, according to Vanity Fair, EcoHealth did report their findings in a timely manner.

"These data were reported as soon as we were made aware, in our year four report in April 2018," said New York City-based EcoHealth in a statement.

If that's the case, Fauci is either incompetent for not knowing, or lying.

And so - the left-leaning Vanity Fair admits Rand Paul 'might have been onto something' when he accused Fauci of lying over GoF research.

What's more, VF connects more dots that mainstream outlets pretend don't exist - namely a revelation from a leaked grant proposal which reveals that Daszak attempted to obtain DARPA funding for "the kind of research that could accidentally have led to the pandemic."

As scientists remain in a stalemate over the pandemic’s origins, another disclosure last month made clear that EcoHealth Alliance, in partnership with the Wuhan Institute of Virology, was aiming to do the kind of research that could accidentally have led to the pandemic. On September 20, a group of internet sleuths calling themselves DRASTIC (short for Decentralized Radical Autonomous Search Team Investigating COVID-19) released a leaked $14 million grant proposal that EcoHealth Alliance had submitted in 2018 to the Defense Advanced Research Projects Agency (DARPA).

It proposed partnering with the Wuhan Institute of Virology and constructing SARS-related bat coronaviruses into which they would insert “human-specific cleavage sites” as a way to “evaluate growth potential” of the pathogens. Perhaps not surprisingly, DARPA rejected the proposal, assessing that it failed to fully address the risks of gain-of-function research. -Vanity Fair

According to the article, the leaked documents 'struck a number of scientists and researchers as significant for one reason' - namely that a distinctive segment of SARS-CoV-2's genetic code is a 'furin cleavage site' which makes the virus more infectious because of its ability to enter human cells - exactly the feature EcoHealth proposed modifying in the leaked proposal.

"If I applied for funding to paint Central Park purple and was denied, but then a year later we woke up to find Central Park painted purple, I’d be a prime suspect," said Jamie Metzl, a former executive vice president of the Asia Society, who sits on the World Health Organization’s advisory committee on human genome editing and has been calling for a transparent investigation into COVID-19’s origins (via Vanity Fair).

As one member of the DRASTIC coalition, New Zealand data scientist Gilles Demaneuf told Vanity Fair: "I cannot be sure that [COVID-19 originated from] a research-related accident or infection from a sampling trip. But I am 100% sure there was a massive cover-up."

On Sunday, Fauci appeared on ABC News with trusted softball-thrower George Stephanopoulos, where he hid behind semantics - claiming that the NIH's contract with Daszak adhered to a 'framework' that didn't constitute Gain of Function research.

Of course, we also know that the NIH shielded one of Daszak's grants from review under said framework.

Meanwhile, we'd still love to know what was said on that call between Fauci and NIH Director Francis Collins right after ZeroHedge reported that Indian researchers found "HIV-like insertions" at the furin cleavage site of SARS-CoV-2 in a now-retracted paper.

Related:

• Fauci In 2012: Gain-Of-Function Research 'Worth Risk Of Lab Accident Sparking Pandemic'
• Fauci-Funded EcoHealth Refuses To Give Wuhan Documents To Congress
• 'EcoHealth Alliance' Orchestrated Key Scientists' Statement On "Natural Origin" Of SARS-CoV-2
• Video Of Live Bats In Wuhan Lab Reveals Daszak Lied In Now-Deleted Tweet
• "Sadly, It Starts With Two Lies": Peter Daszak's Latest Wuhan Screed Shredded