The Anti-Peak Case for Commodities

From a paper recently presented at a U.K. mining conference, the anti-peak case for commodities.

Future Rx: Optimism, preparation, acceptance of risk

L. M. Cathles
Cornell University, Ithaca, New York 14853

The world population, presently at 7 billion, will rise to 10.5 billion in the next century, and all 10.5 billion will rightly expect at least a European living standard.  Our great challenge is to provide the energy and mineral resources needed to meet this expectation.  Can we?  I believe we unquestionably can, provided we have optimism, preparation, and acceptance of risk. Considering the oceans, the world is a planet awash in energy and mineral resources.  Raising energy consumption to the European level of 7 kW/p for the current population would require tripling our present total energy production from 15 TW to 45 TW, and accommodating a population growth to 10.5 bn would require 72 TWe.  Growing from 15 to 72 TW over 100 years represents a modest compound growth rate of 1.6%/yr.  With breeder technology, the 4.6x109tonnes of U dissolved in the oceans (not to mention Th which is a better nuclear fuel) can sustain a 72 TW production for 78 centuries.  My estimated seafloor Cu and Zn resources can sustain humanity for 50 and 140 centuries, respectively.  Three percent of the Li dissolved in the oceans could provide ¼ of a hybrid car per person for 10.5 bn. Deep-sea muds contain a resource of the rare earth elements that is at least as abundant as that on land.  The deep ocean could sustain the phosphate needs of world agriculture for 33 centuries.  Thus if we tap the oceans, humanity has the resources needed for a sustainable future. Furthermore, the oceans offer more equitable access to these resources, and the mobility of the ocean mining infrastructure  means these resources can be surgically mined and recovered with less environmental damage and greater safety than is possible on land.  Risk remains, but we need to accept it with the confidence that we can fix any problems that arise and thereby become ever better at mitigating it. This approach is far less risky than trying to avoid all risk.  To move forward we need to accelerate laying the knowledge foundation for recovering ocean resources in the most environmentally and ecologically acceptable way possible, and impress the next generation, not with the immensity of future pain, but the immensity of future gain:  sustaining everyone at a European standard indefinitely with the huge increases in the scientific understanding of natural systems that meeting this challenge will provide.

Microsoft, the Bearish Case

Microsoft has become one of those “Someone else” companies. Someone else buys their products; someone else will always have to buy Microsoft technologies, etc. I have a general view that such companies in technology, which become part of the landscape, are among the best short-selling opportunities out there. They pull in value investors — ooooh, Microsoft is cheap! — and then, suddenly, the business begins falling apart, a process that accelerates until the value trap becomes obvious.

The trouble, as always, is finding a catalyst and timing the thing. I have been thinking a lot about it because I’ve been aching for some time to be short Microsoft. They are spending heavily, with meager results, meanwhile doing some poor acquisitions, with more ahead, and a general sense that growth, having slowed, will never come back. On other other hand, there is no sign that cash flow is tapering off, with the company still increasing monstrous numbers to the bottom line.

So, what might some collective signs & catalysts be?

  • More poor acquisitions. I wasn’t a fan of the Skype deal, but a Yahoo deal would likely make things worse, so that rumored deal is one to watch.
  • Any deceleration in Windows license sales.
  • Inability to increase presence in mobile OS market in next year, which will be a crucial time.
  • Inability to increase presence in cloud services market in next year.
  • Significant improvements in Google Docs, which would further eat into Microsoft Office.

Other thoughts? I’m mostly trying to convince myself here, but I’m open to other ideas, including the idea that I have Microsoft dead wrong and better days are immediately ahead. I think that is a loony idea, but I also have a hard time believing that it is going to continue to flat line much longer.

Flash Un-crash

Colleague of mine wonders why no-one is talking about yesterday’s flash un-crash in the Russell 2000: up 4.4% in 20 minutes.

Flash uncrash

[Update] I mentioned this on twitter, and someone responded with the following chart, which adds context.


News & Noise

New paper:

How Well Do Financial Markets Separate News from Noise? Evidence from an Internet Blooper

Carlos Carvalho*, Nicholas Klagge*, and Emanuel Moench

How efficiently do financial markets process news of unexpected events? This question becomes particularly salient now, as multiple events across the globe drive market movements. Do these gyrations reflect responses to fundamental news or to “noise”? In general, it is very difficult to discern how well markets process information, because there is no objective way for observers to separate fundamental news from noise components when markets react to a news report. In this post, however, we examine an unusual episode involving a false news report that provides a unique look into this question. We find that even when noise can be clearly identified, markets may take as long as a week to fully process the “signal,” or relevant information, component of news.

On September 8, 2008, a six-year-old article about the 2002 bankruptcy of United Airlines’ parent company resurfaced on the Internet and was mistakenly believed to be reporting a new bankruptcy filing by the company. This episode caused the company’s stock price to drop by as much as 76 percent in just a few minutes, before NASDAQ halted trading. After the “news” had been identified as false, the stock price rebounded, but still ended the day 11.2 percent below the previous close. Trading volumes skyrocketed during these extreme price movements. In subsequent days, the stock traded as much as 17 percent below its September 8 closing price, and on September 15 it finally traded above the price level seen just before the false news impacted the market.

…    Our main findings are depicted in the chart below. It shows that after three trading sessions, United Airlines’ stock was still trading significantly below the counterfactual level implied by our model. Only on the seventh day after the episode did the stock trade at levels consistent with the absence of any residual effects attributable to the false news shock.

via How Well Do Financial Markets Separate News from Noise? Evidence from an Internet Blooper – Liberty Street Economics.

Oil Discovery-to-Production Time Shrinking

Interesting graph from EIA showing that the time from oil discovery-to-production in the Gulf is shrinking quickly. You can read that both bullishly and bearishly, but it’s worth pondering either way. [-]

Gulf production

Kyle Bass on Euro Sovereigns

Michael Lewis: Parasites are Killing Their Hosts

Good interview with Michael Lewis:

Lundborg: You say that when confronted with a dark room filled with money, Americans grabbed as much as we could.

Lewis: The common theme between public employee unions, say, and Wall Street bankers is an excessive focus on the short term and a weird blindness about the long term.

It’s unsustainable behavior, parasites everywhere killing their hosts.

via Michael Lewis Slams Wall St., Leadership Deficit – Bloomberg.

Less Stuff

Graham Hill on the merits of less stuff.

Felix Zulauf: Ugliness Ahead

I’m not a huge fan of the interviewer’s approach, but Felix Zulauf is always good fun.

Taffeta, Darling

[Dr. Frankenstein leans in for a kiss]

Elizabeth: Taffeta, darling.

Dr. Frederick Frankenstein: Taffeta, sweetheart.

Elizabeth: [pulling away] No, the dress is taffeta. It wrinkles so easily.

via Young Frankenstein (1974) – Memorable quotes.