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Global Warming Not the Only Green Bubble Bursting?

Commodities / Climate Change Nov 18, 2010 - 02:22 PM GMT

By: Andrew_McKillop

Commodities

Writing in the American Thinker (November 5) whose name itself could be a classic oxymoron, the scientific freethinker S. Fred Singer had this to  say about the imploding green energy cleantech asset bubble:


There is a revolution coming that is likely to burst the green global warming bubble...the temperature trend used by the (UN) IPCC to support their conclusion about anthropogenic global warming (AGW) is likely to turn out to be fake....the scientific facts must win out in the long run -- even against the financial interests of favored groups, wind farm profiteers, ethanol refiners, carbon traders, and the investment firms and banks that have placed hundreds of billions of dollars of their clients' money into green projects

Singer fingered the losers from the new reality coursing through climate change:....those who have built their careers on global warming hype and who have made investments in alternative energy or are looking for immense profits from carbon trading.     

More important for the investor and speculator community, the broadly defined "cleantech" sector has lost about US $ 400 billion of nominal asset value in 2010 to date. Marking these assets to market was always somewhat tricky - when it was forced by a fast rising decline of investor confidence, the mark turned out to be fantasy. Without having to find out polar bears have always paddled in slush, and that giant windmills and electric cars are only feasible with big government subsidies, and also need expensive and rare, Rare Earth Elements almost exclusively exported by China, cleantech investors have beaten a strategic retreat from an overpriced, fantasy asset bubble pumped so full of hype it had to burst.

The bad news is that all other assets are also overvalued, in a market where equities, commodities, government debt and currencies are all struggling for credibility. In the new context shaping out, sovereign or government debt in Europe and USA, inflation in China, and flagging economic growth everywhere as quantitative easing is itself eased out, creates a classic moment for asset value implosion - and therefore rebound a decent interval later.

THE COMMODITIES BUBBLE
The commodities sector and its assets are the most inflatable and compressible in the short term, and are fully playing that role at this moment. Through November 12 -17, only 4 trading days, several high flown commodities suffered price retreats of 10 percent or more. What comes after is more important. This cycle can continue, or it will break.

There are only two options after a few more cycles of fear-and-loathing equity value implosion plus commodity price implosion: either there is double dip real economy recession, or increased inflation driven by fast-rising real asset commodity prices, hopefully triggering faster growth of the real economy in a make-or-break of the type Bernanke has set out in deeds if not words.

The choice is really simple. If our central banker friends cannot accept the inflation they openly flirt with in the words as well as deeds of Ben Bernanke, they will have an economic implosion following an asset value implosion. Triggering that chute dans l'abime is real easy: all they have to do is hike base-rates  even a couple of percent above the zero line they are stuck at (quickly raising high street bank interest rates), and completely break the unsure and sluggish "economic paradigm" the OECD countries have been mired in for most of the last 10 years.

Any concerted movement to raising interest rates would trigger an economic crash for which we do have a real world model, in 1979-1981, when the gold price in today dollars attained about US$ 2000 per ounce and oil peaked out and then stuck at a ceiling price around US$ 120 per barrel. We have the references and the antecedents, the role model is there. There is no problem Mr Bernanke. There is no problem Mr Trichet.

From 1983 this agonizing slump bottomed out, despite the fantastic high interest rates operated in all major OECD countries. One main factor was the headlong fall in commodity prices, ruining a string of low income Third World resource exporters. Cheap commodities then subsidized a fitful and volatile recovery process, which by 1985-1986 had already created massive imbalances in world trade - exactly like those of today - and caused the same US response: devalue the dollar.

UNLIKELY A SECOND TIME
A host of factors make it unlikely this old tune can play a second time. Global pressure on energy and resource supply is stronger today, than 25 years back in time. The margin for a Plaza type devaluation of the US dollar is low, and the dollar's only reference currencies to devalue against are themselves almost as overvalued as the dollar - depending on how the value of China's Yuan is seen in its national economy context of inflation running at several percent a month.

Revaluing up energy and commodities is certainly logical, but the process has relatively low margins available, due to many hard assets today at end 2010 being far from Sunset Commodities given away at fire sale prices. The sun is likely not to set, and to keep shining on commodities until, with equities, both fall or both rise.

Chances are the market will see the tough logic of this. Keep inflating asset prices upward until real economy inflation returns - and then wait and see what central bankers do. Recent attempts at generating new asset bubbles, like the cleantech sector, soon imploded as credibility waned, and then fled from a set of fantasy assets. The risk is this process like a cancer will spread to both equities and commodities, right across the asset space generating unstoppable trends towards scrapping existing reserve moneys through making them gold-linked or hard aset-linked. This will be so deflationary the impact on the real economy will be fast and sombre.

By Andrew McKillop

gsoassociates.com

Project Director, GSO Consulting Associates

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

Contact: xtran9@gmail.com

© 2010 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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