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  • Climate Sceptics Should Buy Carbon Credits

    Last week, we discussed why the world needs emission-free oil. Green energy in the form of electricity isn’t really going to cut it.

    But for today, what is emission-free oil?

    It’s better known as hydrogen.

    Now you probably can’t think of anything worse than sitting on a hydrogen tank attached to four wheels going down a highway. Isn’t that what the Hindenburg had on board?

    But there are plenty of busses outside our office here in London which run on hydrogen. And you’ll see plenty more of them promoted during the Tokyo Olympics. The fourth and final refuelling station those busses will use was completed this week.

    There are now more than 100 hydrogen refuelling stations in Japan. And some of their hydrogen is set to come from Australia in the next few years.

    The world’s first hydrogen transporting ship was also recently launched in Japan. It’s called the Suiso (hydrogen) Frontier.

    Here in Europe, they’re adding hydrogen to the gas pipelines which supply homes with heating and cooling. In Italy they’re testing a 10% blend. In the UK, 20%. Supposedly you can’t tell the difference. But the climate can.

    The list of hydrogen projects is getting mighty long, all around the world.

    Why is the world going mad for hydrogen? Because it cuts emissions drastically, or eliminates them altogether. Hydrogen-powered fuel cells emit water vapour, heat, and electricity. No carbon emissions or other harmful gasses.

    In Japan, some homes feature hydrogen fuel cells advanced enough to capture both the heat for heating and the power for electricity too. This is especially surprising given the lack of insulation in the country…

    But there is one gigantically large fly in this climate change ointment. Producing hydrogen in the first place is not very emissions friendly. Yet.

    There are a few methods to produce hydrogen and they all require a lot of power. The Aussie company set to ship hydrogen to Japan does it by burning coal. The hydrogen ship is powered by diesel…

    In other words, hydrogen just shifts the problem of emissions. It only solves the problem I highlighted last week — it creates an emission-free oil. Creating the hydrogen itself is the new problem. A problem Japan seems happy to outsource to other countries…

    But it’s far from insurmountable. Carbon offsetting is up and running, allowing hydrogen to be carbon neutral…at a cost. The Olympics busses will have their hydrogen production emissions offset with carbon credits, for example. According the Shell, anyway.

    Burning fossil fuels to produce something described as emission-free isn’t really going to cut it though. And there’s a better way than paying someone to offset your carbon footprint.

    Renewable energy is famous for producing energy at precisely the wrong time. The excess capacity could be used to produce hydrogen, without adding hardly any marginal cost. Hydrogen made using excess renewable and clean energy really is close to carbon neutral.

    Now you might think that my focus today is on hydrogen. But you’re wrong.

    What if carbon offsetting is the real boom in all this?

    Think about it. All the pledges we’ve seen on climate change are about going carbon neutral. This involves a combination of green stuff and emissions offsetting for anything that isn’t green enough. The focus of investors seems to be on the former. But what about the latter?

    I’ve criticised the ‘grubble’ plenty in the past — the green bubble. And carbon offsetting is part of that grubble. But maybe that’s a mistake.

    If green energy fails to live up to its silver bullet hopes, will carbon offsetting become the investor paradise as a result? I think so.

    If nations are compelled to go emissions neutral, but green energy doesn’t work out so well, then traditional energy combined with carbon offsets may be the way to go instead.

    Solar and wind energy deliver disappointing and unreliable energy, in my view. They need backups. And those backups will need offsetting. The worse solar and wind perform, the more offsetting will be in demand.

    So, perhaps a bet on carbon offsetting is the best way to bet on the grubble’s failure. Perhaps sceptics should be buying carbon credits!

    If Tokyo’s showpiece of emission-free oil relies on carbon offsetting to work, that’s a rather big hint I’m onto something.

    Until next time,

    Nick Hubble Signature

    Nick Hubble,
    For The Daily Reckoning Australia

    The post Climate Sceptics Should Buy Carbon Credits appeared first on Daily Reckoning Australia.

    Posted: by Daily Reckoning Australia

  • Dangerous Central Bank Plans Grow…

    Rate cuts are on the table says the media one day.

    Rate cuts are off the table, they say the next.

    Then we hear from our own central bank.

    Negative rates are ‘unlikely’, says Reserve Bank of Australia top brass Philip Lowe.

    Nonetheless, Lowe has said that all options are on the table when it comes to stimulating the Aussie economy.1

    The RBA says they have an effective set of tools to help guide Australia through turbulent economic times.

    The problem with that school of thought, is that central bankers have the misguided belief that they can manage the economy, rather than allow the free markets to work.

    Central banks and governments are obsessed with measuring growth gross domestic product.

    A rather blunt tool, which simply captures the total value of money spent and received. And much of our $1.7 trillion economy relies on ever-increasing amounts of credit to achieve GDP growth.

    Further to that — much like US central bankers — our own RBA has a dismal track record of predicting growth.

    The thing is, we could all let these calls slide.

    But the boffins refuse to accept that perhaps certain things are beyond their control.

    Major economies around the world are seeing their economic growth splutter.

    As a result, once dismissed economic school of thought is being looked at as a way to get growth back on track.

    Central banks and governments are desperate to end natural boom and bust cycle.

    As Jim points out today, modern monetary theory (MMT) and helicopter money are becoming popular ideas in the US.

    For now they are being dismissed here as dangerous, but just how long will it be before we start copying central bank decisions from the US?

    Read on for more.

    Until next time,

    Shae Russell Signature

    Shae Russell,
    Editor, The Daily Reckoning Australia

    The ‘Last Hurrah’ for Central Bankers

    Jim Rickards

    We’ve all seen zombie movies where the good guys shoot the zombies, but the zombies just keep coming because…they’re zombies!

    Market observers can’t be blamed for feeling the same way about former Fed Chair Ben Bernanke.

    Bernanke was Fed chair during 2006–14, before handing over the gavel to Janet Yellen.

    After his term, Bernanke did not return to academia (he had been a professor at Princeton), but became affiliated with the centre-left Brookings Institution in Washington, DC.

    Bernanke is proof that Washington has a strange pull on people.

    They come from all over, but most of them never leave.

    It gets more like Imperial Rome every day.

    But just when we thought that Bernanke might be buried in the DC swamp, never to be heard from again…like a zombie, he’s baaack!

    They keep getting it wrong…

    Bernanke gave a high-profile address to the American Economic Association at a meeting in San Diego on 4 January.

    In his address, Bernanke said the Fed has plenty of tools to fight a new recession.

    He included quantitative easing (QE), negative interest rates, and forward guidance among the tools in the toolkit.

    He estimates that combined, they’re equal to three percentage points of additional rate cuts.

    But that’s nonsense.

    Here’s the actual record…

    That QE2 and QE3 did not stimulate the economy at all; this has been the weakest economic expansion in US history. All QE did was create asset bubbles in stocks, bonds, and real estate that are yet to deflate (if we’re lucky) or crash (if we’re not).

    Meanwhile, negative interest rates do not encourage people to spend as Bernanke expects. Instead, people save more to make up for what the bank is confiscating as ‘negative’ interest.

    That hurts growth and pushes the Fed even further away from its inflation target.

    What about ‘forward guidance’?

    Forward guidance lacks credibility because the Fed’s forecast record is abysmal.

    I’ve counted at least 13 times when the Fed has flip-flopped on policy because they couldn’t get the forecast right.

    So every single one of Bernanke’s claims are dubious.

    There’s just no realistic basis to argue that these combined policies are equal to three percentage points of additional rate cuts.

    And the record is clear: The Fed needs interest rates to be between 4% and 5% to fight recession.

    That’s how much ‘dry powder’ the Fed needs going into a recession.

    Dangerous economic thought bubble gains traction

    In September 2007, the federal funds rate was at 4.75%, toward the high end of the range.

    That gave the Fed plenty of room to cut, which it certainly did.

    Between 2008 and 2015, rates were essentially at zero.

    The current fed funds target rate is between 1.50% and 1.75%.

    I’m not forecasting a US recession this year, but if we do have one, the Fed doesn’t have anywhere near the room to cut as it did to fight the Great Recession.

    I’m not the only one to make that point. Here’s what former Treasury Secretary, Larry Summers, said:

    [Bernanke] argued that monetary policy will be able to do it the next time. I think that’s pretty unlikely given that in recessions we usually cut interest rates by five percentage points and interest rates today are below 2%… I just don’t believe QE and that stuff is worth anything like another three percentage points.

    Summers goes on to call Bernanke‘s speech ‘a kind of last hurrah for the central bankers’.

    He’s right.

    But if monetary policy isn’t the answer, what does Summers think the answer is?

    Fiscal policy.

    The government is going to have to spend money directly into the economy instead of relying upon some trickle-down ‘wealth effect’ to stimulate the economy.

    Here’s what Summers said:

    We’re going to have to rely on putting money in people’s pockets, on direct government spending.

    Remember the term ‘helicopter money’?

    Milton Friedman coined the term 50 years ago when he made the analogy of dropping money from a helicopter to illustrate the effects of aggressive fiscal policy.

    That’s essentially what Summers is advocating.

    It might sound a lot like the idea behind Modern Monetary Theory, or MMT, but it’s not necessarily the same thing. MMT takes helicopter money to a whole new level, and Summers has actually been highly critical of MMT.

    But the idea of direct government spending to stimulate the economy is the same, and it’s gaining traction in official circles.

    There’s good reason to believe it’s coming to a theatre near you. And maybe sooner than you think.

    All the best,

    Jim Rickards Signature

    Jim Rickards,
    Strategist, The Daily Reckoning Australia

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    The post Dangerous Central Bank Plans Grow… appeared first on Daily Reckoning Australia.

    Posted: by Daily Reckoning Australia

  • The Rise of the Financial Warrior

    Just last week I made the case that there would be three key subjects we’d be looking at in 2020.

    Gold, interest rates, and the increasing economic impact of climate instability.

    However, I realise I’ve left off a fourth.

    And this topic could be the most divisive of all…

    That is, the rise of the financial warrior.

    Are they out to do good, or really just interested in protecting their bottom line?

    A multitrillion-dollar weapon

    I first noticed the rise of the financial warrior last year.

    Australia’s super funds started making noise not investing in fossil fuels. I wrote early last year that financial activism essentially turned Australia’s $2.8 trillion super industry into a financial weapon.

    The thing is, they aren’t the only ones waiving their financial might.

    By the middle of the year, Norway’s $1.45 trillion sovereign wealth fund was well on the way to selling $8 billion of their stocks in fossil fuels.1

    Around the same time, BHP Group Ltd [ASX:BHP] announced they were selling their coal assets.2

    It should be noted though, BHP were following their competitors.

    Rio was completely out of coal by the end of 2018, as was Japanese-owned Mitsubishi, to name a few.3,4

    Come the New Year, we have another pretend do-gooder in our presences.

    This morning Black Rock announced that their $10.1 trillion assets under management will move away from coal-related investments completely. Somehow over the next year the company will sell out of around three quarters of a billion of coal-related stocks.5

    To compound all of this, major banks are pulling money out of coal.

    All four major Australian banks have said they won’t fund new coal projects.

    And major banks in Singapore announced a similar thing last year.6

    Although I suspect they were really just playing catch up to European and US banks, who all stopped offering credit to new coal mines a couple of years ago.

    And insurance companies? Nope, they won’t touch a new coal mine. 35 major insurance firms are even working out how to un-insure the existing coal projects they are in.7

    My problem isn’t what these companies choose to invest in.

    That’s their business and their choice. And as an investor you can choose to invest in companies that invest in areas that interest you.

    My issue, is that every single company is using the environmental angle as the reason for ‘divesting’ their coal-related products.

    And no doubt they’ve been met with a cheer by environmental advocates.

    But in the process, they make themselves financial warriors, appearing to be on the right side of climate instability…

    …but in reality, moving out of coal is less about environmental concerns, and more likely about the fact that the dollars don’t stack up anymore.

    Discover the easiest way to start investing in gold in Australia. In fact, it’s as easy as buying a book on Amazon! Click here to read the FREE report.

    Prices have halved in a decade

    It’s not about climate activism nor about forcing a green view on investors.

    The reality is, if there was money in coal, companies and banks would be in it.

    Remember, these banks and investment firms are multitrillion behemoths.

    They don’t invest for their conscience.

    And given how divided the world is on carbon emissions, ditching coal will only win you support on one side — but have you looking like a sell out to the other.

    Not only that, if there was money to be made, all of the above would’ve dived in head first.

    You have to remember these are the institutions that created, enabled, supported, and then benefited from central banks’ handouts during the financial crisis.

    I find it impossible to believe they’ve found a collective conscious.

    The simple fact is, the price and demand of coal is falling. Meaning there are fewer and fewer profits to be had.

    Australian coal prices are down 50% since 2011.

    A broader global coal index reflects a similar price fall over the same time.

    Coal stocks around the world are down to all-time lows.

    The Van Eck Vectors Coal ETF [NYSEARCA:KOL] — which tracks the performance of global coal companies — has fallen a whopping 79% since April 2011, from US$49.50 to today’s US$10.04.

    Not only that, but since President Trump has taken office in January 2017 — he has shut 50 coal plants.

    Why? Because the economics of keeping them open any longer doesn’t stack up.8

    Simply put, the fracking revolution that took place over the 2010s means extracting oil and gas is cheaper than coal.

    According to one report from CoalTrans, the effects of all these plants shutting are yet to filter through to the price of coal, as closing down plants takes some time.9

    Which suggests that global coal prices are going to fall further in the next couple of years.

    Companies and banks aren’t moving from coal because of environmental concerns, it’s because the profits aren’t there.

    All of these companies are feigning environmental concern.

    When really these pretend financial warriors just can’t turn a buck from the industry anymore.

    But that doesn’t sound as good in the PR statement.

    Until next time,

    Shae Russell Signature

    Shae Russell,
    Editor, The Daily Reckoning Australia

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  • The Two Biggest Trends for 2020: Mining and Exploration

    Towards the end of last year, I explained what I think are the two biggest trends for 2020: More mining merger activity and more exploration.

    Now, this isn’t just some idea I whipped up out of thin air.

    It’s a conclusion I came to after speaking with many experts in the industry throughout the year.

    Whether it was a mining boss, geologist, investment analyst, or some overworked PR rep, everyone was telling the same story.

    Money for exploration has been almost non-existent and as a result confirmed resources are falling…

    Exploration has halved

    In several of the interviews I’ve conducted recently — from Rick Rule, Adrian Day, and other geologists and top brass mining CEOs — they’ve all said similar things.

    That is, the lack of money spent on exploration means future consumption of minerals is on the edge.

    Big mining companies have seen their ore reserves fall because they haven’t been actively looking for more.

    Falling reserves have been a contributing driver of all this merger activity as well.

    This isn’t just Australian miners either. The amount of money spent on exploration globally has halved since 2012.

    Check this out…

    Aussie miners halve spending on exploration

    Source: Geoscience Australia

    So let’s put this in perspective.

    In 2012, it was estimated that Aussie miners spent $3.6 billion on exploration…

    Yet two years later exploration spending sank…and spending has struggled to recover since.

    Except for gold.

    The yellow metal is one of the few commodities that saw a resurgence in exploration spending a few years ago.

    And in 2018, some $2.2 billion was spent on exploration.

    Gold took up a whopping 41% ($891 million) of Aussie exploration budgets.

    The problem with this, is that the money is being spent on brownfield sites.

    That is, digging deeper or wider with existing old, historic mines that have been out of production for some time.

    However, the annual Geoscience Australia minerals report recently noted that miners need to start spending more on greenfield sites (a site that has never been explored), as that’s really what will drive long-term value for the industry.

    If that’s the key to remaining a serious global miner, why don’t more companies do it?

    Simply because it means more risk…and higher costs.

    All of which impacts the price of a stock.

    See, every late-stage explorer has a one in 300 chance that it will become a mining development.

    Yet those odds get smaller for the early-stage explorers.

    An early-stage explorer (one that might have done some airborne studies, but no drilling for example) has a one in 660 chance of becoming a top-tier discovery.

    In other words, finding a high-quality, low-cost, long-life potential mine.

    But when it comes to a greenfield site, the odds of finding a top-tier mine are even more unlikely…

    One in 1,000 chance

    This means the odds of an undiscovered patch of dirt turning into a mine are even more remote.

    In fact, a genuine greenfield plot that has had no exploration has a one in 1,000 chance of resulting in a mine.

    Not only that, more often than not, on average it takes about 12 years from the first shovel going into the ground to an operational mine.

    So if it’s obvious that more money needs to be spent on greenfield sites…

    And it’s obvious that more money needs to be spent on exploration period…why aren’t more companies just doing it?

    Two words: risk and shareholders.

    See, shareholders are a fickle bunch.

    They want to make money…but they don’t like losing money.

    No one does.

    But some sectors of the market carry more risks than others.

    Most shareholders love the promise of a hunt, or the suspense that comes before drill results. There are some investors that really enjoy the high-risk reward trade of speculative stocks.

    The thing is, you don’t buy into blue chip mining stocks for high risk…

    Chances are if you’re buying into blue chip mining stocks, you’re after a less risky way to benefit from the underlying commodity price.

    And big miners know that shareholders don’t come to them for a high-risk, high reward punt.

    Plus, big miners know the odds.

    Finding a high-quality, low-cost, long-life potential mine is a long shot.

    Big mining companies are aware of these odds and have no intention of adding that risk to their share price shareholders.

    Simply put, exploration means more risk and higher costs. All of which impacts the price of a stock.

    This mentality has filtered through mining firms globally.

    Leaving the little guys to do all the grunt work.

    What does this mean for investors?

    Given the high risk of finding quality deposits, just taking a punt on tiny exploration stocks isn’t enough. You need to be talking to people in the know.

    The sort of people that are already working on the big gold find…or finding the people in the room who are funding it.

    That means, it’s one thing to interview the biggest gold analysts in the world. But you’ve got to have the geos, engineers, and money men on speed dial too.

    And that’s exactly what I’ve been working on over here.

    Until next time,

    Shae Russell Signature

    Shae Russell,
    Editor, The Daily Reckoning Australia

    The post The Two Biggest Trends for 2020: Mining and Exploration appeared first on Daily Reckoning Australia.

    Posted: by Daily Reckoning Australia

  • Think the Data’s Bad Now? It’s about to Get Worse for the Australian Economy

    Around this time last year, a former colleague and I made a bet…

    …using the most enduring form of currency in Australia — a slab to the winner.

    We put our economic forecasting skills on the line over Twitter.

    Because, if it didn’t happen on social media, then it didn’t really happen, right?

    This bet has been made from opposite sides of the world.

    And by its end it will have taken almost 14 months to play out.

    So, what’s the bet?

    The economic fortunes of Australia.

    My call was that Australia’s gross domestic product (GDP) would be negative in either the third or fourth quarter of GDP. Whichever was negative first, the next one would also be negative, triggering acknowledgement of a technical recession.

    My mate on the other side of the world said nup, there may be one negative quarter of GDP, but not two back to back.

    So far, we’ve both been wrong.

    Fourth quarter data comes in March…that means there’s still a couple of months for it to play out.

    But things don’t look good…

    The retail graveyard

    We are 17 days into the New Year, and already seven Australian retailers have entered administration.

    Then news came yesterday that electronics retailer Bose was closing its retail stores worldwide.

    All this bad news only halfway through January.

    Importantly, the retailers tanking isn’t just one type of store. It’s a mash-up of clothing, electronics, wine, and bookshops.

    The thing is, this January is similar to the start in January 2019, where three household names went under. Followed by another 10 major brands going broke over the year.1

    But then, 2017 and 2018 weren’t great news for retailers either.

    In fact, data from Smart Company shows that more than 100 major Aussie retail brands tanked between 2010 and 2019.

    More than 100 brands bankrupt in Australia

    Source: Smart Company

    Here’s the thing.

    The stores above are the brands we know about. Major retailers with some sort of chain store presence in Australia.

    None of that data reflects the single store small business type of retailer.

    And no, the worst isn’t over yet…

    Data to watch

    The severity of the decline in the Aussie retail sector doesn’t surprise. I’ve been analysing consumer behaviour for years.

    Long-time readers of the Daily Reckoning Australia would know that I call the retail sector my ‘crystal ball’ when it comes to understanding the Aussie economy.

    Arguably the stores falling under now are a reflection of shopping habits that showed up five years ago…and only now are we seeing the impact.

    Private consumption growth as a proportion of gross domestic product has been falling since 2016.

    In 2016 58.9% of all GDP came from private consumption. The most recent quarterly data for 2019 has seen that number fall to 54.8%.2

    That’s a slow and steady decline in personal spending.

    But this pattern was also evident in Australia’s trade surplus.

    There’s a lot of noise made about the trade surplus being a good thing for the Aussie economy. The high amount that the exporting side of Australia is benefiting from higher commodity prices and a weaker Aussie dollar.

    Yet, the export side of the Aussie economy only benefits a few. Falling imports means that we as consumers aren’t buying as much. We’ve had a persistent trade surplus since late 2017.

    However, monthly trade surpluses began to appear occasionally as far back as October 2016. Watching this play out, coupled with falling private consumption in GDP, pointed to a weaker Aussie retail sector in the long term.

    To compound all of this, is the reduction in credit card spending. New data from the Reserve Bank of Australia shows that the total value of credit card transactions in Australia has been falling since 2014.3

    One million jobs on the line

    The thing is, the years-long pattern of discretionary spending decreasing in Australia is being ignored.

    Lazy analysis is blaming the retail woes on all the invasion of ‘foreign’ brands.

    That’s nonsense.

    Brands like Uniqlo, Zara, and H&M are the scapegoats for the failing Aussie retail industry.

    Yet, combined they rake in $700 million from Aussies. A collective 3.6% of the total $19 billion Australians annually spend on clothing.4

    International retailers are essentially fighting over the scraps of our business.

    But there are structural problems with the retail sector that management has been either too lazy or too arrogant to accept as consumer spending slows.

    At the start of last decade, expansion for business growth was the attitude many retailers adopted. That is, increase the footprint of the business (how many stores they have) and then grow the business that way.

    But by putting stores in every major shopping centre in Australia, they were canbalising their own business.

    This is coupled with the fact that shopping centre rents have been increasing even though in-store sales are falling.

    The persistent sale cycle means that retail margins have been falling since 2017.5

    Throw in sinking consumer spending, and the inability to adapt quickly to consumers rapidly shifting shopping habits — you see they’ve dug a hole so deep, now they can’t get out.

    The thing is, the past five years of slowing spending is only just beginning to be felt.

    Consumer spending has been falling for a considerable amount of time and retail stores falling over is a lag effect to the problems the retail industry faces.

    More than one million people work in the Australian retail industry. Slightly less than 10% of our entire workforce.

    What we are seeing in the collapse of retail is the reflection of the private recession affecting Australians.

    Not only that, but the worst is yet to come.

    Until next time,

    Shae Russell Signature

    Shae Russell,
    Editor, The Daily Reckoning Australia

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    The post Think the Data’s Bad Now? It’s about to Get Worse for the Australian Economy appeared first on Daily Reckoning Australia.

    Posted: by Daily Reckoning Australia

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