The Grand Strategy of Rising Superpower Management

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Munk School Trans-Pacific Partnership Conference: Geopolitics Panel

Revised and Extended: I could now talk about the risks of the Trans-Pacific Partnership. You have already heard a lot about the risks in the previous session here. You have heard about dispute resolution and about intellectual property. You have heard about instituting largely-untested dispute resolution procedures in such a way that they will be very difficult indeed to amend or suspend or replace or adjust in the future.

We all know very well the eurozone’s ongoing experience. We remember that the euro single currency is in its origins a geopolitical project. We remember the origins of the eurozone at Maastricht—the decision of the great and good of Europe that something needed to be done to bind Europe more closely together in the wake of the absorption into the Bundesrepublik of the German East and the collapse of the Soviet Empire. The creation of a single currency was clearly something.

But “we must do something; this is something; therefore we must do this” is a very dangerous syllogism to serve as a basis for any form of technocratic government. The inability of Europe to back itself out of and adjust away from unwise commitments made in the founding of the euro has not been a source of sunny happiness and light in Europe over the past now-eight years.

We all remember that, back in the late eighteenth century, the United States Constitution was at the very forefront of the most advanced intellectual thinking in its ultra-modern and ultra-aggressive innovation policy. The inclusion in the founding constitutional document itself of profound intellectual property protections—the power to by law reserve rights to make and use inventions and discoveries “for a term of years” in order to encourage the useful arts and sciences—was a bold step. But the bold step stopped before writing down the number of years for which rights were to be reserved. The term of intellectual property protection was left to the discretion of the legislature: either none whatsoever, or one day, or seven years, or as long as would encourage inventive and innovative activity—that was for the legislature to decide and revisit and revise as it wished.

We all remember how, back at the end of World War II, John Maynard Keynes and Harry Dexter White at Bretton Woods set about constructing their piece of the international economic institution. Keynes and White, however, did not hard-code policies and quantities into an effectively-unamendable treaty. Rather, they constructed agencies. And they then gave them discretion.

My last trip outside the United States before this trip to Toronto was a trip last December to the Rockefeller villa in Bellagio, Italy, on Lake Como—a trip to discuss Thomas Piketty’s Capital in the Twenty-First Century. Piketty writes about how it is the nature of capitalism that plutocrats and entrepreneurs invest not just in productive capital and beneficial technologies but in political influence in order to rejigger the system of property rights in order to acquire and protect economic rents. How much of what is in the TPP is part of that process rather than a good-faith technocratic effort to construct a better international trade, investment, innovation, and intellectual property-mobilization system for us frogs who live around the pond that is the Pacific Ocean?

All these considerations suggest that the TPP poses considerable risks as a leap into the untested dark. We do not know much about how these dispute and intellectual property provisions will actually work on the ground. And I have no idea how, in a decade, the negotiators of TPP anticipate backing-out of TPP'a mechanisms if on a decade they change their mind about their desirability.

Alternatively to the risks, I could now talk about the potential benefits of the TPP. We heard much less about those in the previous panel.

I could talk about how productivity depends on the division of labor, and the division of labor depends on the extent of the market, and the global trans-Pacific market is the largest we can find—or would, if it included China. I could talk about the benefits of economic integration both in enabling productivity-boosting specialization and incentivizing innovation. I could back up into political economy. I could quote James Madison on how the legislatures of Republican government are always prone to the disease of faction—rent-seeking by special interests—how one important cure for faction is extent of territory that reduces the relative power of each particular faction, and how a set of economic rules that spans an economy the size of the Pacific Ocean will be less vulnerable to rent-seeking by interests that would otherwise merely have to capture the legislature of one national government.

I could talk about how there is $4 trillion in present value in net static economic gains to the trans-Pacific economy from the TPP. And I could point out that those gains are static gains: they do not include the effects of any of the many invention, innovation, investment, spread of ideas, or political-economy virtuous circles that such a $4 trillion productivity boost would produce. I could conclude with observations about how static estimates tend to lowball our assessments of the gains—that the differences between more and less free-trade economies are vastly greater, and the share of those differences plausibly attributable to openness to world trade substantially greater, than estimates produced by the types of calculations that underpin the $4 trillion number.

I could then conclude with reflections on on model building and the estimation of the effects of trade deals. That conclusion would start with a reminiscence of a day in 1994: I was sitting in my office in the US Treasury, just before the start of the lame-duck session that was to pass the Uruguay Round. One of then-Treasury Secretary Lloyd Bentsen's consiglieri walked into my office. He said: "Brad! Your task is to get the Economist to endorse the Uruguay round as a $1 trillion global tax cut! Then no Republican will dare oppose it!” And I found that Robert Cumby and I could indeed do it, and do it relatively straightforwardly.

But this is not a panel on the risks of TPP. This is not a panel on the benefits of TPP. This is not a panel on increasing-returns models and the assessment of trade deals. This is, indeed, not a panel on the political economy of trade policy in the U.S. in the 1990s.

This is a panel on geopolitics.

So let me talk about geopolitics.

And let me talk about the geopolitics of managing our relationship with the immense rising superpower across the great ocean to our west.

(1) Rising superpowers always believe they have the key to the riddle of history. They believe that history is about to reveal that their system is the best, and their elites are extremely unwilling to take even the best-intentioned advice from abroad on how to constitute their internal arrangements. They in fact believe that other countries should learn from them, and adopt their systems—even though, as rising superpowers, they do not or do not yet seek to impose their systems on others.

(2) Rising superpowers have a profound dislike of potentially-hostile bases near their borders, and a profound dislike of other powers’ interfering in what they think manifest destiny has decreed is their sphere of influence. They make their neighbors nervous.

(3) Rising superpowers almost always have territoria irridentia: regions that they believe ought to be under their control, and that only malign manipulations by other powers and historical accidents have left outside their current borders.

(4) Rising superpowers are overwhelmingly focused on making the world economy and society work for them and for their ruling classes.

And (5) managing your relationship with a rising superpower, doing as much as possible to align its and its elite’s core interests with yours, and then appeasing those core interests that cannot be so aligned, is your most important foreign-policy task and objective not just for one but for many generations.

I am, of course, speaking about Henry John Temple and [John Russell2, the third Viscount Palmerston and the first Earl Russell. Lord Palmerston and Lord John Russell were the British Whig mid-nineteenth century grandees who led the multi-generational pivot of the Whig, the Tory, and the subsequent Liberal administrations with respect to the British Victorian-era grand-strategic problem of how to deal with the rising superpower across the great ocean to the west that was the United States.

The mid-nineteenth century United States of America was a rising superpower, aggressively confident of its system. It was, in the words of John Quincy Adams: “the well-wisher to the freedom and independence of all… the champion and vindicator only of her own… [advancing the general cause] by the… sympathy of her example.” Great Britain had nothing to teach, the Americans thought, but rather should admire and learn.

What the rising superpower of the United States would not countenance was hostile bases, or perhaps I should say additional potentially-important hostile bases, anywhere near her borders. The Monroe Doctrine was evolved long before the United States could even begin to enforce it. And the United States certainly did not seek formal empire over Latin America. But it would react aggressively and with hostility to any European power’s intrusion into Latin America. And it would, eventually, seek, in Woodrow Wilson’s words, “to teach the South American republics to elect good men.”

And what rankled the United States in the mid-nineteenth century was the territoria irridentia of Canada—especially British Columbia: “54°40’ or fight!” was the American position on where the northern border of America’s claim to the Oregon Territory should be set. Plus there was the rest of Canada.

But the United States could be guided, and could be very comfortable in a British navy-protected free-trade political-economic order that allowed it to prosper and grow. And the interests of it and its elite could be brought into alignment, in at least major outlines, to the essential strategic interests of Imperial Britain.

In the 1840s, therefore, the Whig government of Lord Palmerston and Lord John Russell did a very unusual thing. The typical way for Victorian Britain to settle a dispute like that of the 1840s over the Oregon Territory would have been to adopt the negotiating strategy of sending a Canadian army and the British navy to burn down the negotiating counterparty’s capital, followed by a dictation of terms. Britain did not do that. It compromised: agreeing to an extension of the latitude line that had previously defined the southern border of Alberta, Saskatchewan, and Manitoba.

In the 1860s, therefore, the Whig government of the Earl Russell and Lord Palmerston did a very unusual thing. Usually Victorian Britain’s commitment to freedom of trade and the seas was lexicographically preferred to all other principles. One could argue over the rights and wrongs of addicting millions of China’s citizens to opiates through the drug trade. But interfering with commerce by seizing and destroying the property of British merchants—even property in the form of opiates—was beyond the pale, and cause for war. Fight first for free trade and protection of property, and deal with the other equities later. But that was not the line taken by the Whig government with respect to the cotton trade during the U.S. Civil War. The line was drawn not at interfering with British ships carrying cotton but at taking Confederate diplomats off of British ships.

And, thereafter, successive British governments, investors, noblemen and noblewomen, merchants, and manufacturers strove mightily to bind the United States to Britain. Material common economic interests and mutual economic interdependence grew. Conflicting political ideal interests fell away. Back in 1775 a core political interest of the United States-to-be was the conquest of Quebec, and Benedict Arnold’s army was sent north. Back in 1812—and for decades thereafter—a core political interest of the United States under James Madison was the conquest of Quebec, and fleets were duly built on the Great Lakes and then duly sunk by Canadian cannon. A very powerful ideal interest back then.

But what U.S. citizen today feels a pain at the thought that Toronto lies north of the U.S. border? I know I do. I look around this room. and it is painful to me that the Rt. Hon. Chrystia Freeland is Her Canadian Majesty’s Minister of International Trade in Ottawa. I wish she were not in Ottawa but in Washington. I wish she were the eloquent and influential Senator Chrystia Freeland (D-South-Central Ontario). U.S. politics would be much healthier were that the case. But I am unusual. And I digress…

The binding of the rising superpower back in the nineteenth century had many policy and non-policy parts, not all of them conscious or deliberate. but whether it was Cecil Rhodes’s offering free acculturation at Oxford to young members of the American elite, British investors entrusting the House of Morgan with their money, the Dukes of Marlborough offering their sons to daughters of plutocrats Consuelo Vanderbilt and Jenny Jerome, it was effective—so effective that just when Nazi Germany attacked the Franco-British army in 1940 the Prime Minister of Britain was a man who, as a natural-born citizen of the United States, was also perfectly well-qualified to be the American president.

This alignment of American interests and values to British took a long time—from 1850 and 1910: economic ties, cultural ties, plus political ties of mutual deference where strategic issues were at stake. But, as a result, by 1910 Americans by and large perceived Britain as their friend, and the British Empire as by and large a force for good in the world, and its interests as closely-aligned with theirs. This is in striking contrast to how Imperial Britain was perceived in 1850: as the cruel and corrupt ex-colonial power, the heartless aristocrats who had just starved a quarter of all Irishmen to death.

This mattered a lot. And this mattered a lot not just for the wave of prosperity produced up through 1913 by the coming of the Second Industrial Revolution and the First Great Globalization.

This mattered a lot for grand-geostrategic reasons as well. This meant that when Britain got into trouble in the twentieth century—as it did, first with Wilhelm II Hohenzollern and his ministers, second with Adolf Hitler, and third with Josef Stalin and his successors—it had wired aces as its hole cards in the poker game of seven-card stud that is international relations. The willingness of the United States to send Pershing and his army Over There, to risk war with and then to fight Hitler, and to move U.S. tanks from Ft. Hood, TX, to the Fulda Gap. These were all powerfully motivated by America's affinity with Britain, its geostrategic causes, and its security. And these allowed Britain to punch far above its economic and military weight from 1917 on.

How does this apply to the TPP?

Just like Lord John Russell and Lord Palmerston in the 1840s and thereafter, we face a rising superpower across the ocean to our west. There is a good chance that China is now on the same path to world preeminence that America walked 130 years ago. Alexis de Tocqueville could project before the Civil War that the U.S. and Russia were likely to become twentieth-century superpowers. We can project today that at least one of India and China--perhaps both--will become late-twenty first century superpowers. We have an interest in building ties of affinity now.

My old Harvard professor Benjamin Friedman’s The Moral Consequences of Economic Growth argues that the wiring of human brains is such that the process of becoming richer relative to the reference point provided by our parents and their peers has a large number of beneficial moral as well as material effects. Modern societies are like bicycles: they move forward, or they fall over. Come 2047 and again in 2071 and in the years after 2075, the NATO powers are going to need China and China’s elite to believe and to have material and ideal interests broadly aligned with those of NATO. Thus there is nothing more dangerous for America's future national security and nothing more destructive to America's future prosperity than for Chinese schoolchildren to be taught in 2047 and 2071 and 2075 that America tried to keep the Chinese as poor as possible for as long as possible. There is little more dangerous to the NATO powers than a Chinese elite whose values and interests are not broadly consonant with those of America. And there is nothing more conducive to aligning the interests of China and its elite with those of the NATO powers than a China which is (a) growing richer, (b) increasingly entranced by the economic and cultural successes of North Atlantic civilization, (c) treated with respect, and (d) incentivized to strive for victory not in negative-sum military power but in positive-sum economic and technological games of international relations.

The big geostrategic danger, I think, is of a Wilhelmine China. Wilhelmine Germany was a rising economic superpower ruled by a class that had lost its social role. Faced with internal dissent, it contemplated busying giddy minds with foreign quarrels as a way to distract popular attention from internal problems and debates. Needless to say, this ended in total disaster for generations of Germans. But is China’s East China Sea Air Defense Identification Zone and its adventurism in the South China Sea an attempt to cheaply accomplish the primacy-of-internal-politics foreign-affairs strategy that Shakespeare’s Henry IV Lancaster recommended on his deathbed to his son the future Henry V? And, if so, how to lead China’s elite to the realization that, in the words of the computer in the movie “War Games”: “The way to win this game is not to play”?

This is the broadest context in which the North Atlantic—and Asian-Pacific Rim, and Australasian—discussion of the TPP ought to be set.

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Get Ready for the Next Golden Age

I believe that the global economy is setting up for a new golden age reminiscent of the one the United States enjoyed during the 1950’s, and which I still remember fondly. This is not some pie in the sky prediction. It simply assumes a continuation of existing trends in demographics, technology, politics, and economics. The implications for your investment portfolio will be huge.

What I call “intergenerational arbitrage” will be the principal impetus. The main reason that we are now enduring two “lost decades” is that 80 million baby boomers are retiring to be followed by only 65 million “Gen Xer’s”. When the majority of the population is in retirement mode, it means that there are fewer buyers of real estate, home appliances, and “RISK ON” assets like equities, and more buyers of assisted living facilities, health care, and “RISK OFF” assets like bonds.

The net result of this is slower economic growth, higher budget deficits, a weak currency, and registered investment advisors who have distilled their practices down to only municipal bond sales.

Fast forward ten years when the reverse happens and the baby boomers are out of the economy, worried about whether their diapers get changed on time or if their favorite flavor of Ensure is in stock at the nursing home. That is when you have 65 million Gen Xer’s being chased by 85 million of the “millennial” generation trying to buy their assets.

By then we will not have built new homes in appreciable numbers for 20 years and a severe scarcity of housing hits. Residential real estate prices will soar. Labor shortages will force wage hikes. The middle class standard of living will reverse a then 40-year decline. Annual GDP growth will return from the current subdued 2% rate to near the torrid 4% seen during the 1990’s.

The stock market rockets in this scenario. Share prices may rise very gradually for the rest of the teens as long as tepid 2% growth persists. A 5% annual gain takes the Dow to 20,000 by 2020. After that, we could see the same fourfold return we saw during the Clinton administration, taking the Dow to 80,000 by 2030. Emerging stock markets (EEM) with much higher growth rates do far better.

This is not just a demographic story. The next 20 years should bring a fundamental restructuring of our energy infrastructure as well. The 100-year supply of natural gas (UNG) we have recently discovered through the new “fracking” technology will finally make it to end users, replacing coal (KOL) and oil (USO). Fracking applied to oilfields is also unlocking vast new supplies.

Since 1995, the US Geological Survey estimate of recoverable reserves has ballooned from 150 million barrels to 8 billion. OPEC’s share of global reserves is collapsing. This is all happening while automobile efficiencies are rapidly improving and the use of public transportation soars.  Mileage for the average US car has jumped from 23 to 24.7 miles per gallon in the last couple of years. Total gasoline consumption is now at a five year low.

OPEC Share of World Crude Oil Reserves 2010

Alternative energy technologies will also contribute in an important way in states like California, accounting for 30% of total electric power generation. I now have an all-electric garage, with a Nissan Leaf (NSANY) for local errands and a Tesla Model S-1 (TSLA) for longer trips, allowing me to disappear from the gasoline market completely. Millions will follow. The net result of all of this is lower energy prices for everyone.

It will also flip the US from a net importer to an exporter of energy, with hugely positive implications for America’s balance of payments. Eliminating our largest import and adding an important export is very dollar bullish for the long term. That sets up a multiyear short for the world’s big energy consuming currencies, especially the Japanese yen (FXY) and the Euro (FXE). A strong greenback further reinforces the bull case for stocks.

Accelerating technology will bring another continuing positive. Of course, it’s great to have new toys to play with on the weekends, send out Facebook photos to the family, and edit your own home videos. But at the enterprise level this is enabling speedy improvements in productivity that is filtering down to every business in the US, lower costs everywhere.

This is why corporate earnings have been outperforming the economy as a whole by a large margin. Profit margins are at an all time high. Living near booming Silicon Valley, I can tell you that there are thousands of new technologies and business models that you have never heard of under development. When the winners emerge they will have a big cross-leveraged effect on economy.

New health care breakthroughs will make serious disease a thing of the past, which are also being spearheaded in the San Francisco Bay area. This is because the Golden State thumbed its nose at the federal government ten years ago when the stem cell research ban was implemented. It raised $3 billion through a bond issue to fund its own research, even though it couldn’t afford it.

I tell my kids they will never be afflicted by my maladies. When they get cancer in 40 years they will just go down to Wal-Mart and buy a bottle of cancer pills for $5, and it will be gone by Friday. What is this worth to the global economy? Oh, about $2 trillion a year, or 4% of GDP. Who is overwhelmingly in the driver’s seat on these innovations? The USA.

There is a political element to the new Golden Age as well. Gridlock in Washington can’t last forever. Eventually, one side or another will prevail with a clear majority. Conservatives may grind their teeth, but if Hillary Clinton wins in 2016, the Democrats will control the White House until 2025. Right now, she is leading by a 60% margin with Republican women.

This will allow the government to push through needed long-term structural reforms, the solution of which everyone agrees on now, but nobody wants to be blamed for. That means raising the retirement age from 66 to 70 where it belongs, and means-testing recipients. Billionaires don’t need the $30,156 annual supplement. Nor do I.

The ending of our foreign wars and the elimination of extravagant unneeded weapons systems cuts defense spending from $800 billion a year to $400 billion, or back to the 2000, pre-9/11 level. Guess what happens when we cut defense spending? So does everyone else.

I can tell you from personal experience that staying friendly with someone is far cheaper than blowing them up. A Pax Americana would ensue. That means China will have to defend its own oil supply, instead of relying on us to do it for them. That’s why they have recently bought a second used aircraft carrier.

Medicare also needs to be reformed. How is it that the world’s most efficient economy has the least efficient health care system, with the worst outcomes? This is going to be a decade long workout and I can’t guess how it will end. Raise the growth rate and trim back the government’s participation in the credit markets, and you make the numerous miracles above more likely.

The national debt comes under control, and we don’t end up like Greece. The long awaited Treasury bond (TLT) crash never happens. Ben Bernanke has already told us as much by indicating that the Federal Reserve may never unwind its massive $3.5 trillion in bond holdings.

Sure, this is all very long-term, over the horizon stuff. You can expect the financial markets to start discounting a few years hence, even though the main drivers won’t kick in for another decade. But some individual industries and companies will start to discount this rosy scenario now. Perhaps this is what the nonstop rally in stocks since November has been trying to tell us.

Dow Average 1970-2012 Dow Average 1970-2012

US Profit Margin 1929 - Q2 2012

'57 T-Bird Another American Golden Age is Coming

2050 Years Of Global GDP History

The chart below shows 2050 years of relative global GDP, during which there was a surprisingly flat distribution of the major economic powers: China, India, and the "West", at least until the mid-1800s, when the "Western" Golden Age began primarily courtesy of the industrial revolution, followed by the arrival of the Fed and virtually endless leverage (i.e., borrowing from the future until such time as no more debt capacity remains at either the public or private sectors), only to end in the late 1900s when the marginal balance of power shifted back to Asia, which became the next nexus of debt accumulation (see our earlier post on The Great Recoupling for some additional perspectives). And while the chart, from Deutsche Bank and PWC, attempts to predict the next 40 years of relative GDP distribution by eventually regressing back to the the long-term trendline, we feel that this is quite an optimistic assumption for a world in which virtually every "developed" country is insolvent, begs for China to ease whenever western inflation sends gas prices soaring making reelection of the incumbent impossible, and is reliant on the indefinite continuation of the USD's reserve status to preserve the last traces of western superiority (not to mention cheap funding of $-trillion deficits as far as the eye can see).

What Will the World Look Like in 100 Years?

George Friedman, geopolitical forecaster and founder of the Austin, Texas based private intelligence firm, Strategic Forecasting (Stratfor) (click here for the link at ), delivers a fascinating list of future political, military, and economic scenarios in his new book, The Next 100 years: A Forecast for the 21st Century. Friedman claims the current Islamic assault on the West is failing, and will cease to be a factor on the international scene within the decade. Russia will take another run at becoming a superpower, which will fail by 2020, and leave the country even more diminished than it is today. When standards of living in China level off or reverse in the 2020’s, chronic resource shortages could cause the Middle Kingdom to implode and break up. China is far more fragile than we realize. Japan may deal with stagnant economic and population growth the same way it did during the 1930’s by invading China as early as 2030. Japan may also take a bite out of indefensible Siberia when it remilitarizes. Poland, a unified Korea  and Turkey will develop into regional military and economic powers in their own right. Friedman then describes a theoretical war by a coalition of Turkey and Japan against the US in 2050, resulting in an American victory, which leads to a new US golden age in the second half of the century. Scramjet engines make possible the development of unmanned hypersonic aircraft which can launch a precision attack any place on the planet in 30 minutes. Warfare will move into space and be fought from “battle stars,” which will also become major energy sources for earth. Friedman kind of lost me when he predicted that the next Pearl Harbor could come from Japan, but not from the sea going aircraft carriers of old, but from caves on the moon. The big challenge towards the end of the 21st century will be the emergence of a Hispanic nation in the Southwest, which is culturally isolating itself by not integrating with the rest of the country. This could lead to the secession of several states, or a new war with Mexico, which by then, will develop into a major power in its own right. I think to avoid a second Civil War and offload some huge state deficits, Washington just might say “¡Adios!” You can argue that someone making many of these predictions is looney. But if you had anticipated in 1970 that China would become America’s largest trading partner, the Soviet Union would collapse, Eastern Europe would join NATO, the US would enter a second Vietnam War in Afghanistan, and oil would hit $150 a barrel, you would have been considered equally nutty. I know because I was one of those people. It does seem that long term forecasters have terrible track records. All in all, the book is a great armchair exercise in global realpolitics, and an entertaining contemplation of the impossible. More than once, I heard myself thinking “He’s got to be kidding.” To get preferential pricing from Amazon on this thought provoking tome, please click here.          


A Natural Gas Reality Check

While T.Boone talks sense and gets to vent his frustration regularly on air, the sad reality is that although the obstacles for substitution to NatGas are not insurmountable, as Michael Cembalest notes we do not get the sense that an NGV fleet is imminent, even with very high gasoline prices. The best shale gas plays are the ones that involve finding liquids in addtion to (or instead of) dry gas. Given the price for coal, natural gas and crude oil per unit of heat/energy humans would stop using oil and gasoline and use more natural gas instead. But in the real world, in which Michael and you and I live oil and natural gas are not frictionless substitutes. As the EIA shows, oil is primarily used for transportation whereas natural gas is used mostly by industry and to create electricity. As a result, there is no substitution effect pulling up natural gas prices, particularly as more natural gas is being found in shale plays. But for shale investors, there are liquids that can be found in shale plays that are worth a lot more than dry gas: shale oil, and natural gas liquids. Shale oil obviously is valued based on oil prices, and natural gas liquids are valued close to oil prices as well. Whether over time natural gas can displace coal or be exported successfully to 'correct' the demand-supply equation is the question that remains but for now it seems a long way off and along with the normal operating risks, there is of course a broader issues of fracking - and what operation safeguards will need to be put in place to allay concerns in the future. The point is that demand possibilities are there but seem far off and while broadly the energy sector has been on a positive ride the last few years, we remember the lost two decades of underperformance during the 80s and 90s but it would seem should we 'dip' again in the global economy that integrated oils, drilling/services will underperform from their elevated levels. The 80s and 90s saw a lost two decades for relative energy stock performance. The 2000s was string but suffered during the Great Recession...and of course the integrated oils and drillers/servicers have massively outperformed the NatGas plays - as NG prices have collapsed. The theoretical 'energy' cost (seen below) suggests all rational humans should substitute from Oil and Gasline to NatGas - but of course in reality the frictions are extreme. However, there are pockets of advantage within the NatGas space as 'Wet Gas' is far better priced than 'Dry Gas'...   And finally the dominant usage of each of our various energy sources (Oil-Transportation and NatGas-more Industrial and resi heating) is clear and 'sticky'...

HBR: The Real Leadership Lessons of Steve Jobs

Walter Isaacson follows up his biography of Steve Jobs with an “insanely great” piece in the April HBR.   He drills down on the factors that helped to catapult the legendary entrepreneur into an elite league of American business leaders, including Thomas Edison, Henry Ford, and Walt Disney. The 14 factors listed below continue at Apple as part Jobs’ legacy, which is helping drive the stock on an epic run,  now up 67 percent since November 25th and adding $240 billion to the company’s market capitalization.  That’s a lot wealth creation — equivalent to 1.6 percent of U.S. GDP.  No wonder the animal spirits are running again. 1)    Focus; 2)   Simplify; 3)   Take Responsibility End to End; 4)   When Behind, Leapfrog; 5)   Put Products Before Profits; 6)   Don’t Be a Slave To Focus Groups; 7)   Bend Reality; 8)   Impute; 9)   Push for Perfection; 10) Tolerate Only “A” Players; 11)  Engage Face-to-Face; 12)  Know Both the Big Picture and the Details; 13)  Combine the Humanities with the Sciences; 14)  Stay Hungry, Stay Foolish. Below are the first few paragraphs of the article with a link to the full article.   This is a must read, folks!

The Real Leadership Lessons of Steve Jobs by Walter Isaacson

His saga is the entrepreneurial creation myth writ large: Steve Jobs cofounded Apple in his parents’ garage in 1976, was ousted in 1985, returned to rescue it from near bankruptcy in 1997, and by the time he died, in October 2011, had built it into the world’s most valuable company. Along the way he helped to transform seven industries: personal computing, animated movies, music, phones, tablet computing, retail stores, and digital publishing. He thus belongs in the pantheon of America’s great innovators, along with Thomas Edison, Henry Ford, and Walt Disney. None of these men was a saint, but long after their personalities are forgotten, history will remember how they applied imagination to technology and business. In the months since my biography of Jobs came out, countless commentators have tried to draw management lessons from it. Some of those readers have been insightful, but I think that many of them (especially those with no experience in entrepreneurship) fixate too much on the rough edges of his personality. The essence of Jobs, I think, is that his personality was integral to his way of doing business. He acted as if the normal rules didn’t apply to him, and the passion, intensity, and extreme emotionalism he brought to everyday life were things he also poured into the products he made. His petulance and impatience were part and parcel of his perfectionism. One of the last times I saw him, after I had finished writing most of the book, I asked him again about his tendency to be rough on people. “Look at the results,” he replied. “These are all smart people I work with, and any of them could get a top job at another place if they were truly feeling brutalized. But they don’t.” Then he paused for a few moments and said, almost wistfully, “And we got some amazing things done.” Indeed, he and Apple had had a string of hits over the past dozen years that was greater than that of any other innovative company in modern times: iMac, iPod, iPod nano, iTunes Store, Apple Stores, MacBook, iPhone, iPad, App Store, OS X Lion—not to mention every Pixar film. And as he battled his final illness, Jobs was surrounded by an intensely loyal cadre of colleagues who had been inspired by him for years and a very loving wife, sister, and four children. So I think the real lessons from Steve Jobs have to be drawn from looking at what he actually accomplished. I once asked him what he thought was his most important creation, thinking he would answer the iPad or the Macintosh. Instead he said it was Apple the company. Making an enduring company, he said, was both far harder and more important than making a great product. How did he do it? Business schools will be studying that question a century from now. Here are what I consider the keys to his success. (click here for full article)
Hat tip to David Jones (not the Aussie retailer)!

Keys To Success

Jim Rogers' Keys to Success (taken from the titles and sub headings of each chapter of the new book, "A Gift To My Children"): 1. Do not let others do your thinking for you 2. Focus on what you like 3. Good habits for life & investing 4. Common sense? not so common 5. Attention to details is what separates success from failure 6. Let the world be a part of your perspective 7. Learn philosophy & learn to think 8. Learn history 9. Learn languages (make sure Mandarin is one of them) 10. Understand your weaknesses & acknowledge your mistakes 11. Recognize change & embrace it 12. Look to the future 13. “Lady Luck smiles on those who continue their efforts” 14. Remember that nothing is really new 15. Know when not to do anything 16. Pay attention to what everybody else neglects 17. If anybody laughs at your idea view it as a sign of potential success Jim Rogers is an author, financial commentator and successful international investor. He has been frequently featured in Time, The New York Times, Barron’s, Forbes, Fortune, The Wall Street Journal, The Financial Times and is a regular guest on Bloomberg and CNBC.

The Great Race for Battery Technology

One hundred years from now, historians will probably date the beginning of the fall of the American Empire to 1986. That is the year President Ronald Reagan ordered Jimmy Carter’s solar panels torn down from the White House roof, and when Chinese Premier Deng Xiaoping launched his secret “863” program to make his country a global technology leader.  

The End is Near for the US

Some 34 years later, the evidence that China is winning this final battle is everywhere.  China dominates in windmill power, controls 97% of the world’s rare earth supplies essential for modern electronics, is plunging ahead with “clean coal”, and boasts the world’s most ambitious nuclear power program. It is a dominant player in high speed rail, and is making serious moves into commercial and military aviation. It is also cleaning our clock in electric cars, with more than 30 low cost, emission free models coming to the market by the end of 2011.

Our only entrant in this life or death competition is the Tesla, little more than a rich man’s toy.  At $100,000 per vehicle production is capped at 1,000 units a year. Its cheaper S-1 sedan isn’t coming out for two more years. General Motors’ (GM) pitiful entrant in this sweepstakes, the Chevy Volt, only just became available in limited numbers, and won’t see true mass production for at least a year. By then it will be easily overtaken by superior, cheaper technologies offered by multiple Chinese models, Japan’s Nissan Leaf, and a third generation Toyota plug-in Prius.


This is all far more than a race to bring commercial products to the marketplace. At stake is nothing less than the viability of our two economic systems. At the moment, China’s state directed socialism is winning. By setting national goals, providing unlimited funding, focusing scarce resources, and letting engineers run it all, China can orchestrate assaults on technical barriers and markets that planners here can only dream about. And let’s face it, economies of scale are possible in the Middle Kingdom that would be unimaginable in America.

Nissan Leaf

The laissez faire, libertarian approach now in vogue in the US creates a lot of noise, but little progress. The Dotcom bust dried up substantial research and development funding for technology for a decade. A ban on government funding of stem cell research, for religious reasons, left us seriously behind in that crucial field. An administration that believed that global warming was a leftist hoax, coddled big oil, and put alternative energy development on a back burner. Never mind that the people supplying us with 2 million barrels of crude a day are trying to kill us through whatever means possible. But Americans are finally figuring out that we can’t raise our standard of living selling subprime loans to each other, and that a new direction is needed.

Toyota Prius

Mention government involvement in anything these days and you get a sour, skeptical look. But this ignores the indisputable verdict of history. Most of the great leaps forward in US economic history were the product of massive government involvement. I’m thinking of the transcontinental railroad, the Panama Canal, Hoover Dam, the atomic bomb, and the interstate highway system. If the government had not funneled billions in today’s dollars into early computer research, your laptop today would run on vacuum tubes, be as big as a skyscraper, and cost $100 million.

Meet My New Laptop

I mention all of this not because I have a fascination with obscure automotive technologies or inorganic chemistry (even though I do). Long time readers of this letter have already made some serious money in the battery space. This is not pie in the sky stuff; this is where money is being made now. I caught a 500% gain hanging on to Warren Buffet’s coat tails with an investment in the Middle Kingdom’s Build Your Dreams (BYDFF) two years ago. I followed with a 250% profit in Chile’s Sociedad Qimica Y Minera (SQM), the world’s largest lithium producer. Next came Xide Technologies (XIDE), with a 70% pop. These are not small numbers. I have been an advocate and an enabler of this technology for 40 years, and my obsession has only recently started to pay off big time.

We’re not talking about a few niche products here. The research boutique, HIS Insights, predicts that electric cars will take over 15% of the global car market, or 7.5 million units by 2020. Even with costs falling, than means the market will then be worth $225 billion. Electric cars and their multitude of spin off technologies will become a dominant investment theme for the rest of our lives. Think of the auto industry in the 1920’s. (BYDDF), (SQM), and (XIDE) are just the appetizers.

All of this effort is being expended to bring battery technology out of the 19th century and into the 21st. The first crude electrical cell was invented by Italian Alessandro Volta in 1759, and Benjamin Franklin came up with the term “battery” after his experiments with brass keys and lightning. In 1859, Gaston Planté discovered the formula that powers the Energizer bunny today.

I Don’t Look 151 Years Old, Do I?

Further progress was not made until none other than Exxon developed the first lithium-ion battery in 1977. Then, oil prices crashed, and the company scrapped the program, a strategy misstep that was to become a familiar refrain. Sony (SNE) took over the lead with nickel metal hydride technology, and owns the industry today, along with Chinese and South Korean competitors.


We wait in gas lines to “fill ‘er up” for a reason. Gasoline has been the most efficient, concentrated, and easily distributed source of energy for more than a century. Expect to hear a lot about the number 1,600 in coming years. That is the amount of electrical energy in a liter (0.26 gallons), or kilogram of gasoline expressed in kilowatt-hours. A one kilogram lithium-ion battery using today’s most advanced designs produces 200 KwH. Stretching the envelope, scientists might get that to 400 KwH in the near future. But any freshman physics student can tell you that since electrical motors are four times more efficient than internal combustion ones, that is effective parity. The additional savings that no one talks about is that an electric motor with five moving parts has no maintenance cost versus the endless bills generated by the 300 overcooked parts in a gasoline engine.

This kind of performance doesn’t come cheap. Lithium-ion batteries currently cost $1,000 per KwH to produce. That means that the 600 pound, 24 KwH battery pack that will power my soon to be delivered Nissan Leaf costs $24,000, more than two thirds of the vehicle’s total $32,000 price tag. Hence, the need for government subsidies to get private industry over the cost/production hump. Nissan, Toyota, Tesla, Fisker, and others are all betting their companies that further progress and economies of scale will drive that cost down to $300 per KwH. That will make electric cars cheaper than conventional hydrocarbon powered ones. Take crude up to $150-$200/barrel, which I believe is a virtual certainty in coming years, and the global conversion to electric happens much faster than anyone thinks.

Yes, it seems to be all over for the US but the crying, unless Nobel Prize winner and Energy Secretary Dr. Steven Chu has anything to say about it. In a desperate attempt to play catch up, President Obama has lavished money on alternative energy, virtually, since the day he arrived in office. His stimulus package included $167 billion for the industry, enough to move hundreds of projects out of college labs and into production. However, in the ultimate irony, much of this money is going to foreign companies, since it is they who are closest to bringing commercially viable products to market. Look no further than South Korea’s LG, which received $160 million to build batteries for the Volt. Also, Finland’s Fisker, which scored $528 million to refurbish an abandoned GM Pontiac and Saturn plant in Joe Biden’s home state of Delaware in order to build its hybrid electric Karma vehicle.


Fortunately, the US, with its massively broad and deep basic research infrastructure, a large military research establishment (remember the Darpa Net), and dozens of still top rate universities, is in the best position to discover a breakthrough technology. The Energy Department has financed the greatest burst in inorganic chemistry research in history, with top rate scientists pouring out of leading defense labs at Los Alamos, Lawrence Livermore, and Argonne National Labs. There are newly funded teams around the country exploring opportunities in zinc-bromide, magnesium, and lithium sulfur batteries. A lot of excitement has been generated by lithium-air technology, as well as much controversy.

In the end, it may come down to whether our Chinese professors are smarter than their Chinese professors.  In 2007, the People’s Republic took the unprecedented step of appointing Dr. Wan Gan as its Minister of Science and Technology, a brilliant Shanghai engineer and university president, without the benefit of membership in the communist party. Battery development has been named a top national priority in China. It is all reminiscent of the 1960’s missile race, when a huge NASA organization led by Dr. Werner Von Braun beat the Russians to the moon, proving our Germans were better than their Germans.

Anything for a Green Card

Consumers were the ultimate winners of that face off as the profusion of technologies the space program fathered pushed standards of living up everywhere. I bet that’s how this contest ends as well. The only question is whether the operating instructions will come in English—or Mandarin.  

Its Easy, Just Read the Manual

Which Type Trader Are You? (by Market Sniper)

This post may offend many and that is not its intention. This is a think piece I have been formulating in my mind for quite some time now.  Its purpose is to get you to think about your trading methodology(s) and setups in a critical light. To my way of thinking, traders who utilize technical analysis all fall into three broad groups (traders who use purely fundamental analysis are excluded from this type of grouping). The Prognosticator In this group I include Elliot Wave traders, Gann traders and astrological traders. These traders trade in the future. Based on what they say may happen and some go as far as to say what WILL happen. When a trade is a failure, they use misinterpretation of past price action as the excuse for the failed trade. It seems that Elliot wave traders (mostly sellers of the system) are in a constant civil war as to "correct" interpretation. Gann followers can spend their entire trading life searching for his "missing" piece. A lot of legend has been created around WD Gann, promulgated by promoters of his methodology. WD Gann was prolific in his writings and covered a multitude of areas. Regardless of what happens next, some part of his work can be given credit for "calling" the "move." Too bad we lack foresight to know which one! He is also been credited to have died with a tidy fortune due to his trading. Interviews with his son (who happened to have been in the banking business) revealed that he died in modest means and made the bulk of his money promoting his ideas over his life time. The foremost (and longest being tracked) in the astrological trading group is Arch Crawford. In over 25 years of his trading service, he has had flashes of brilliance. However, according to Hulbert, his record, overall, has well under performed the market during the long period tracked. Prognosticators rely on interpretation of price. So much for the prognosticators. The Dreamer In this group I include all those traders who rely on lower studies (MACD, STO, RSI, and hundreds of other lower case studies) and upper case studies (such as Bollinger Bands, Keltner Channels, fibonacci ratios, etc.). these traders trade in the past as ALL those studies are based on market driven price information in the past viewed through different lenses. Add to that, very little, if any, are NOT subject to interpretation and therefore, not objective information.  What do I mean by that? They all have variables within them that can be "adjusted" or "tweaked". IF that is the case, then it cannot be objective information you are viewing. Here are some examples: Number of variables in trend tools: MACD=3 and ADX=3. Number of variables in retracement tools: a) Percentage retracements: Fib ratios=4; Harmonic ratios=2; Arithmetic ratios=2 b) Over bought/oversold indicators:  RSI=3; Socastic oscillator=4 Each input can be changed. So let us say, you put together a trading methodology based on these. Here are some example combinations and the variables involved (Dreamer traders LOVE to use these in combination!): System 1: Moving Average=1 and RSI=3 for a total number of variables of 4. System 2: MACD=3 and Stocastics=4 for a total number of variables of 7 System 3: Moving average=1, ADX=3, Fibs=4 and RSI=3 for a total number of variables of 11. If you can massage the variables, then what you see is NOT objective information. This is the problem with the search for an indicator system Holy Grail. The case CAN be made for a ONE variable trading system. However, once you introduce more than one or two, the probable variations become too large to test. Too many moving parts that are interconnected. The last system would be near impossible to stress test successfully. There are simply too many moving, interconnected, parts to have any confidence that you have hit upon the "correct" variable values. This type of analysis leads to the worst cases of curve fitting historical market data as well and that can be absolutely devastating to trading capital. A brief word about fibonacci retracement levels. Numerous studies have shown that they are no better and no worse than any other set of ratios. No magic there, either. In summary, I would suggest that the trader select measures of trend and retracement that have built-in protection against you fiddling with them. The best measures with this built-in protection are ones without parameters or adjustable variables. The best ones are objective and independent of you. The best ones are fixed and NOT subject to any interpretation. Adjustable parameters are just plain unreliable for making trading decisions. This brings us to the third type of trader. The Pragmatist In this group I include Market Profile traders, Pivot traders, single trade setup traders and to a lesser extent, Chart Pattern traders. Chart pattern traders are a different breed and exist in both Dreamer and Pragmatist camps. The visualization of a pattern is subjective and interpretive in nature but can, if correctly used, create a pragmatic conclusion: it either works or it fails on such a manner that is not subject to interpretation in a trade. The Pragmatic trader trades in the now. Not the future or the past. There is no room for any interpretation. It either works or it fails. Support/resistance holds or it does not, etc.  The idea here is to select objective and fixed measures for determining trend direction and retracement levels. There can be NO interpretation in their use. A 12 year old must "interpret" the same way you would or you must discard it! There is no wiggle room and there are no shades of grey here at all. It must be fixed. Simple. It either IS or it is NOT based on price NOW. This can be historically tested without problems. You can determine expectancy for what you are doing and have confidence in that expectancy. Conclusion And Something Else to Ponder Before any devotees of any methodology get all up in a dither based on my views and observations in any of the above material,  here is something for ALL traders to consider. Could it be we are ALL placebo traders? My intent here is not to tell any trader how they should trade. Personally, I am a pragmatic trader as it has much fewer "problems" and resonates with ME. If you are a successful trader (defined as a trader who consistently extracts capital from markets and has a positive, upward equity curve) regardless of methodology use, could it be that we are using our chosen methodology as a placebo? Are we using our chosen methodology to give us the courage to actively engage markets? Could it be that the successful trader is just a superior trader in spite of the chosen methodology? Could it be that the successful trader is NOT giving himself the credit deserved for being that superior trader and giving undo credit to his chosen methodology? This then leads into the field of trader psychology and away from methodology. This is an area, I believe, deserves some serious thought and consideration. Peace, my fellow traders and may your equity curves trend ever higher! Yours in the never end quest of the trading edge. The Market Sniper.

Mongolia – Place Your Bets?

Sometime in the next 12 months, an energy IPO offering in distant Mongolia already has foreign investors salivating. The darling of the international energy community is coal company Erdenes-Tavan Tolgoi ("Five Hills") Ltd., popularly known as TT, which has yet to begin operations. To give an idea of the potential foreign interest, analysts believe that the IPO will be handled by Goldman Sachs Group Inc. and Deutsche Bank AG. What is TT bringing to the market that has caused such interest? A massive deposit located in the east Tsankhi area of the Gobi desert and estimated to hold over 6.4 billion metric tons of coking coal, the world's biggest untapped deposit of its kind. Mongolia’s government is currently selecting an operator for the massive deposit and is expected to be a large, experienced foreign mining company. Heightening investor interest was a successful public offering last fall in the autumn of 2010 by Mongolian Mining Corp., Mongolia's largest privately held domestic producer and exporter of coking coal, whose Ukhaa Khudag (UHG) mine is within the Tavan Tolgoi coal formation in the southern Gobi. Mongolian Mining Corp.’s IPO was floated on the Hong Kong Stock Exchange and raised $651 million. In contrast, analysts are predicting that the TT IPO could raise as much as $10 billion. What makes the TT IPO unique is that the Mongolian government has just given each citizen 538 shares in the Erdenes-Tavan Tolgoi IPO. If the IPO hits its anticipated $10 billion, each Mongolian shares would be worth about $360. The government stock giveaway totaled 1.5 billion shares, equal to 10% of TT and reserved another 1.5 billion TT shares for thousands of Mongolian business enterprises. Besides the 20 percent handed out to local enterprises and citizens, the government aims to retain 50 percent of TT, with the remaining 30 percent to be listed on an overseas stock exchange. The TT stock giveaway is an integral part of a governmental effort to convince its citizens that its decision to pursue large-scale mining in Mongolia will have a direct bearing on their well-being, following several earlier contentious mining deals. Mongolians complained bitterly about the arrangements surrounding the $6 billion Oyu Tolgoi project, jointly owned by Canada’s Ivanhoe Mines , Rio Tinto and the Mongolian government, which will be the world's biggest copper mine outside Chile once full operation starts in 2013. Underwriting Mongolia’s mining boom, two years ago the Ulsyn Ikh Khural (State Great Hural, or Parliament) finally repealed the 68 percent windfall profit tax on foreign mining operations, which came into effect in January, setting the stage for massive foreign investment. Even Russia has gotten into the act. Earlier this month, Mongolian President Tsakhiagiin Elbegdorj visited Moscow and met with Russian President Dmitrii Medvedev, who commented on rising bilateral trade possibilities, “We need new powerful projects such as nuclear projects or Tavan-Tolgoi, which will promote bilateral cooperation.” Besides coal, copper and gold, Mongolia has massive deposits of other materials the world desires, including uranium and rare earth elements (REEs.) As these deposits are developed, analysts predict the economy will flourish, with the International Monetary Fund predicting that Mongolia’s annual economic growth may surge to 23 percent in 2013 as Oyu Tolgoi and other projects begin production. With energy-hungry China next door, a Mongolian energy or mining investment is looking like one of the global economy’s more certain bets, and in the case of TT, one doesn’t need the resources of a Goldman Sachs to buy in – yet. Source: By. John Daly for
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