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Small Is Beautiful - So Go Nuclear - My thanks to a subscriber for this informative article which may rattle a few perceptions (may require subscription registration, PDF also provided) on how biofuels and wind power squander land and other resources, by Robert Bryce for The Wall Street Journal. Here is the opening:

Nearly four decades ago, British economist E.F. Schumacher stated the essence of environmental protection in three words: Small is beautiful. As Schumacher argued in his famous book by that title, man-made disturbances of the natural world-farms, for example, and power plants-should have the smallest possible footprints.

But how can that ideal be realized in a world that must produce more and more food and energy for its growing population? The answer, in just one word, is density.

Over the course of the last century, human beings have found ways to concentrate crops and energy production within smaller and smaller areas, conserving land while meeting the ever-growing global demand for calories and watts. But this approach runs counter to the entrenched beliefs of many environmental activists and politicians, whose "organic" and "renewable" policies, as nature-friendly as they sound, squander land and other resources.

Food cultivation exemplifies the virtues of density. During the second half of the 20th century, hybrid seeds and synthetic fertilizers, along with better methods of planting and harvesting, produced stunning increases in agricultural productivity. Between the mid-1960s and mid-2000s, global production of all cereal crops doubled, according to U.N. data, even though the amount of cultivated acreage remained about the same.

Indur Goklany, a policy analyst for the U.S. Department of the Interior, estimates that if agriculture had remained at its early 1960s level of productivity, feeding the world's population in 1998 would have required nearly eight billion acres of farmland, instead of the 3.7 billion acres that were actually under cultivation. Where in the world-literally-would we have found an extra 4.3 billion acres, an area slightly smaller than South America?

Meanwhile, a recent analysis of U.S. Department of Agriculture data, by plant pathologist Steve Savage, found that land devoted to organic farming produces about 29% less corn and 38% less winter wheat than the same acreage conventionally farmed. Since world population is growing and food prices are already at near-record highs, mandates for organic farming could be disastrous. For example, low-density agriculture could increase deforestation as farmers desperately seek more farmland-a result that should disturb environmentalists.

My view - Not everyone will like the conclusions in this intelligent article, because they clash with our romanticised fantasies of what life on our planet should be like... that is... if we could downsize to the global population of the 18th century while retaining our more comfortable technology.

However this does not seem very fair on the people we would have to lose. A more enlightened alternative might be to pay more attention to EF Schumacher and keep on developing our wonderful technologies and use them to improve the planet.

Gavyn Davies: How the Fed defeated President Truman to win its independence - The economist author provides an interesting chapter in the Fed's history, in this column (may require subscription registration) published by the Financial Times. Here is the opening:

In 1951, an epic struggle between a US president who stood on the verge of a nuclear war, and a central bank that was seeking to establish its right to set an independent monetary policy, resulted in an improbable victory for the central bank. President Harry Truman, at war in Korea, failed in a brutal attempt to force the Federal Reserve to maintain a 2.5 per cent limit on treasury yields, thus implicitly financing the war effort through monetisation. This victory over fiscal dominance is often seen as the moment when the modern, independent Fed came into existence.

The idea that the central bank should place a cap on the level of bond yields is firmly back on the agenda, at least in the eurozone. This week, Italian prime minister Mario Monti said that he was increasingly optimistic that his country's bond yields might soon be capped. Although he stopped short of saying that this would be done by the European Central Bank, there really are no other viable candidates to achieve this. Furthermore, many economists are arguing that this is the right policy, since Italy is now following a sustainable budgetary policy which deserves to be rewarded by ECB action in the bond market.

I have no dispute with Mario Monti, but this is dangerous territory, which lies right at the heart of a government's relationship with its central bank. Let's go back to the 1940s in the US.

My view - The central banks of established democracies have a great deal of power but none of them, including the US Federal Reserve, has complete independence. This is because in the US instance, the President nominates the Fed Chairman and that choice must then be confirmed by the Senate.

The Fed has independence within the government to the extent that its monetary policy decisions do not require approval by the President or anyone else in the legislature. However, the Fed's authority is derived from statutes created by Congress and the central bank is subject to congressional oversight.

Congressman Ron Paul, a Republican candidate for president, favours abolishing the Fed. This is a bad idea in my opinion as it would presumably hand over control of monetary policy to the legislative and executive branches of government controlled by Congress and the White House.

Meanwhile, the Fed's current chairman, Mr Bernanke, was appointed because of his scholarly papers on how the US could avoid deflation. Interestingly, the ECB's new president, Mr Draghi, faces both deflationary and insolvency problems which is presumably why he is pursuing his own version of quantitative easing.

Interesting reports on uranium - My thanks to a subscriber for these items which are posted in the Subscriber's Area along with my further comments.


Risky assets are set for a rally as recession fears diminish - This is an interesting column (may require subscription registration) by Robert Parker of Credit Suisse, published by the Financial Times. Here is the opening:

Since early October, the MSCI World Equity Index has climbed more than 10 per cent. Does this development in global equity markets represent the start of a more secular improvement? Or, if not, what further catalysts are required to boost markets?

For most of 2011, global investors were concerned primarily about five major risks; the possibility of the US returning to recession, the risk of a Chinese "hard" landing, the combined risks of a failure in the eurozone capital markets and the associated threat to eurozone banks, and finally the negative outlook for corporate earnings.

Consequently, 2011 was characterised by investors running high cash levels and focusing on perceived safe havens such as G4 government bonds.

In the past three months, there has been a slow movement in global capital flows in favour of corporate and high-yield bonds and into high dividend underleveraged cash rich defensive equity sectors. The outperformance of defensive equity sectors relative to cyclical stocks has been significant in recent months. This change in investor behaviour has partly been due to frustration with low money market yields and the perception that official rates will stay low for a sustained period. But it is also due to a changing risk profile in markets.

There has been a clear reduction in recession risk in the US while the probability of a hard landing in China has decreased. The US ISM manufacturing index has improved to 53.9, the non-manufacturing index has recovered to 52.6 and the University of Michigan confidence index for January rose to 74, all data consistent with real gross domestic product growth of approximately 2.5 per cent.

My view - Fullermoney paid-up subscribers will recognise that the market views expressed in this column are generally in line with what this service has been saying since October.

Recognising developing potential, rather than joining consensus gloom when markets were support building from their August lows to early October last year, and monitoring the improvements on a day-by-day basis right up to the present, is Fullermoney's ongoing challenge, enthusiastically accepted.

Occasional visitors to this site can review that analytical process by checking the Archives and listening to the Audios because everything we produce for subscribers enters the public domain four months later.


Quote of the week - On conventional thinking:

"The conventional view serves to protect us from the painful job of thinking."
John Kenneth Galbraith

Additional commentary by Eoin Treacy

The euro-zone crisis: A series of economic policy errors – Thanks to a subscriber for this interesting report from Natixis explain the policy mismanagement that led to the Eurozone's crisis. The full report is posted in the Subcsriber's Area but here is a section:

We believe that the euro-zone crisis would have been less serious without three huge economic policy errors, by governments, the European authorities and the ECB:

from 2002 to 2007, the lack of responsible macro-prudential supervision (of fiscal policies, private-sector indebtedness, real estate prices, the guidelines of monetary policy, etc.);

in 2008-2009, over-expansionary fiscal policies because governments did not understand that there was not a cyclical recession but a trend break in growth due to the halt in stimulation of demand by increased indebtedness;

Since 2010, a continual and erratic confusion between countries faced with a solvency crisis and countries faced with a liquidity crisis and between the economic policy treatments appropriate for these two forms of crisis.

This confusion persists in 2012, because there is almost no instrument to bail out countries faced with a solvency crisis.

My view – A bearish or at minimum cautious attitude towards the Eurozone's crisis is perhaps to be expected from a bank right at the centre of the troubled European financial sector. Nevertheless, the exposition of the problems facing the Eurozone is accurate. However, I would question the assertion that the response to the problems is still uncoordinated. The ECB under Mario Draghi has taken a number of steps aimed at improving investor sentiment towards the response to the crisis.

This section continues in the Subscriber's Area.

Wildcatter Finds $10 Billion Drilling in North Dakota: Energy – This is an interesting article by Bryan Gruley for Bloomberg. Here is a section:

Thanks in part to the success of companies like Continental, the search for crude is making a quiet comeback in the U.S. Lots of attention has been paid to the surge in natural gas exploration, but more rigs are currently drilling for oil than gas: 1,191, up 402 from a year ago and quadruple the number of rigs in 2007, according to the oil services company Baker Hughes Inc. It's happening in Texas, Wyoming, Oklahoma and Ohio.

My view – Unconventional oil and gas wells that depend on fracturing are drill intensive. Hydraulic fracturing results in wells with high initial flow rates followed by a swift decline to somewhat less impressive production levels. The fracturing process occurs within relatively close proximity of the well and initial production is massive because so much gas or oil is released from the fractured rock.

However beyond the fractured zone, porosity is still very poor. This generally requires more wells to be drilled, somewhat further away, to make sure that the field continues to produce at favourable rates. To the best of my knowledge this tendency is as true of shale oil wells as it is of shale gas wells. The result is that more rigs are needed because there is a constant requirement for drilling.

This section continues in the Subscriber's Area.

China's Reflation, Asian “de-coupling”? – Thanks to a subscriber for this interesting, heavyweight 132-page report (10mb) by Ajay Kapur and colleagues at Deutsche Bank. The full report is posted in the Subscriber's Area but here is a section on the Philippines:

Policy and economics: The expected cut in policy rates by Bangko Sentral ng Pilipinas (BSP) was widely anticipated and telegraphed by the BSP itself. Inflation eased considerably to 4.2% in December from a peak of 5.2% earlier in the year. The central bank has communicated the need to “adjust” policy rates to “promote growth” in the face of potential external drags this year. Apart from inflation, government under-spending was a major drag on GDP growth last year. In the first 11 months of 2011, public spending on infrastructure was only half of the full-year budget of P244bn, with the shortfall accounting for more than 1% of GDP. Mindful of this, the government has increased infra budget by 15-20%, and has begun disbursing funds as early as January, hoping to get construction underway before the rainy season begins in July. Moreover, about 15 projects to be conducted via public private partnership (PPP) have been slated for launch this year. These projects could provide a sharp uplift to GDP growth in 2012.

My view – An American friend who has been based in the Philippines for a number of years once remarked that they have learnt to expect a currency crisis once every couple of years and that this propensity deterred inward investment. That contention was certainly justifiable between 1995 and 2004 when the Peso more than halved against the US Dollar in a series of abrupt devaluations.

This section continues in the Subscriber's Area.

Weekend Reading – Thanks to a subscriber for this list of academic reports contributed in the spirit of Empowerment Through Knowledge.

OECD: “Current Issues in Managing Government Debt and Assets”

Fed: "How Inflationary Is an Extended Period of Low Interest Rates?"

IMF: “Central Banks Quasi-Fiscal Policies and Inflation”

SF Fed forecast

IMF: “Bank of Japan's Quantitative and Credit Easing: Are They Now More Effective?”

World Bank: “Global Economic Prospects”
 
ECB: "HAS THE EURO AFFECTED THE CHOICE OF INVOICING CURRENCY?"

IMF: "Clarity of Central Bank Communication About Inflation"

IMF: "Foreign Banks: Trends, Impact and Financial Stability"

Fed: "Supply Constraints and Housing Market Dynamics"
 
RBA: “Australia's Prosperous 2000s: Housing and the Mining Boom”

BoF: "Expectations-Driven Cycles in the Housing Market"

RBNZ: “The information content of central bank interest rate projections: Evidence from New Zealand”

 
Speaking engagements in the USA - I have accepted an invitation to speak to the Los Angeles chapter of the MTA on April 11th. The venue has yet to be confirmed but will be in the Long Beach area. Non-members are welcome to attend. The topic will be "To Hoard or to Horde: risks and opportunities from participating with the crowd."

I have also accepted an invitation to speak to the San Diego chapter of the MTA in the first week of April. A date and time has yet to be fixed but it will take place in the Del Mar area.

I still have some space available on my itinerary. If you would like me to speak to your local chapter or organisation in California or New York please contact your respective chairperson and ask them to contact me.

The Chart Seminar 2012 - Following a sell-out tour to Singapore and Australia last year, The Chart Seminar will be held in San Francisco, New York and London this year. Please be aware that the early booking rate for non- subscribers at the US seminars expires on January 31st.

We are currently taking bookings for our San Francisco and New York dates in April as well as London seminars in May and November. Anyone interested in securing a place at any of our events should contact Sarah Barnes at sbarnes@fullermoney.com.

The date and venues for my seminars so far in 2012 are:

San Francisco - April 16th &17th 2012 Nikko Hotel

New York - April 23rd & 24th 2012 at The Manhattan Club (above Rosie O'Grady's) at 800 7th Avenue

London - May 25th & 25th 2012 at the Radisson Edwardian Hampshire

London - November 22nd & 23rd 2012 at the Radisson Edwardian Hampshire

The full rate is £950 + VAT. (Please note US delegates, as non EU residents are not liable for VAT). The early booking rate of £875 for non-subscribers expires on January 30th for the US seminars. Paid-up Fullermoney subscribers are offered a discounted rate of £850. Anyone booking more than one place can also avail of the £850 rate for the second and subsequent delegates.