Category Archives: General Interest

Eight Days in Cuba—Things are Changing Right Now. The direction of change is not totally clear however.

Posted on by Jack Rivkin
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I recently was part of a humanitarian group originating in Key West that visited Santiago de Cuba and Havana. We brought medical supplies and some writing materials to two clinics run by The Sisters of Charity of St. Vincent de Paul. We did have some free time over the 8 days and were able to experience the people, the nightlife and the culture. The participants in the arts, science, education and other fields are true professionals, having been selected in a classic communist manner at an early age to pursue a path. Although I must say the music and dancing on the street were amazing as well. And the old cars are ever present.Image

We also heard a variety of lectures on history, art, religion, restoration, and “la vida cotidiana.” Most of the lecturers as well as our quite knowledgeable guide, a former history teacher, were born after the 1959 revolution. They have an interesting historical view extending back to 1492, which doesn’t necessarily correspond to the history we in the United States were taught, read about or actually experienced.

While 8 days in a country combined with some reading does not make one an expert I do have some observations. Let’s start with some facts and maybe a few anecdotal factoids:

Cuba, an island nation, 90 miles south of Key West, is about the size of Pennsylvania, 44,000 square miles. The population is about 11.2 million with Havana, the capital and largest city at 2.2 million. The primary sources of revenue would appear to be tourism, sugar, mineral exports and remittances from Cuban-Americans to family members.  About 70%, –a declining percentage–of the work force is employed by the State. The State also provides free medical care, a monthly food allowance (good for about two weeks of the month we were told), and free education. What did happen after the 1959 revolution were the creation of schools throughout the country and the development of a universal health care system. The literacy rate is stated at 99.8%. However, we did run into several members of that 0.2%. The country has the highest ratio of doctors to population in the world, although there is a real shortage of medical supplies and equipment. We were often asked on the street if we had any medicines or soap(!). We were also told that the Universal Health Care primarily applies to the military and the police with long waits and limited supplies for others. Not sure Michael Moore got the full story.

There is a dual currency system. Those employed by the state are paid in Cuban pesos (CUPs). It is not totally clear what the differences in compensation are within this part of the economy, but we were told that doctors are paid about 300 Cuban pesos bi-weekly. In the last 5 or 6 years certain Cubans have been able to start their own businesses, typically on the street or in their homes. Some of these are a part of the Cuban economy, but most are in some fashion related to what is called the CUC (“kook”) economy. A CUC is a unit of currency convertible into a similar unit of the US Dollar, although a 10% tax and a small fee apply. This makes a US Dollar worth about .87 CUC. If one is exchanging any other currency for CUCs there is no tax. The exchange rate between the CUP and the CUC is 24:1. As several Cubans told us, the closer one is to the CUC economy the better off one is, in spite of as much as a 50% tax on reported CUC revenues. Those receiving remittances from relatives in the States or elsewhere are even better off. The Financial Times recently reported that such remittances totaled $2 Billion last year. That is not surprising. According to the US Census there are 1.8 million individuals identified as of Cuban origin living in the US of which 1.2 million are in Florida. The current US administration is allowing unlimited travel by Cuban-Americans to visit relatives and unlimited remittances of funds. This compares to one trip per year and $1200 under the previous administration. Some of the current Republican candidates made noises about returning to the previous policies, but that did not go over too well with the community. We had different types of Cuban-Americans on our flight: some couples who go at least once a month to visit relatives bringing gifts and money; some individuals doing the same but with some specific business ideas in mind; a man who was making his first trip in 43 years to visit his dying godfather.  On the Cuban side there are changes as well. There is now some house trading allowed. Cubans can own their own homes (not the land), many of which were given to them after 1959 or were built by the Russians during their 30 years of support. Available funds can be used to build or improve a home or be used as a part of the swap from a smaller home to a bigger one. Funds can also be used to start or improve a business.  This participation in the CUC economy can make an enormous difference whether it is remittances or income. Let’s take the small example of our guide. Our trip was 8 days with about 20 people as a part of the group. The recommended “tip” was about 2 ½ CUCs per day per person. A guide could walk away with about 400 CUCs for the 8 days and repeat that experience many times during the year. That compares to the doctor getting 7800 CUPs a year or only 325 CUCs at the 24:1 exchange rate. The buying power difference is huge over the course of a year. It is hard to see how this can last. Beyond the tips for the guides, all payments for food, lodging, souvenirs, artwork, etc., were in CUCs and the prices weren’t cheap. My biggest overpayment was for a 3 CUP bill with Che featured on the front. That cost me a CUC.

It is no wonder many of the doctors are happy to be lent out to other countries where there may be some income possibilities. Supposedly, there are 30,000 Cuban doctors in Venezuela now as part of an exchange for oil. Cuba imports about 100,000 barrels per day of high-sulfur oil from Venezuela. This supplements the 56,000 barrels per day produced domestically. This primarily goes to provide not-very-clean power for factories and the utilities.  This is tragic in a way. Cuba has reasonably high sun–DNI (Direct Normal Irradiance), as do most Caribbean islands, which makes solar power a real alternative. We saw a few solar panels out in the countryside, but no real significant use of solar for heating or electricity. Solar may not happen. There could be significant offshore oil and gas, maybe as much as 4.6 Billion barrels and 9.8 Trillion cubic feet respectively, according to the USGS. Apparently, Brazil and Spain are working with Cuba to explore these possibilities.

Wikipedia, provides a concise description of the country, its history, and its structure. I recommend it for those who are interested in learning more. While in Cuba, what was fascinating to me was the view of history held by those of the generations since the 1959 revolution. The view of history is not necessarily wrong, but like most histories, it extends from a very specific point of view.  That view is very much one of the US having an interest in controlling Cuba, extending from George Washington to the present. This view comes complete with quotes and the text of various laws and amendments over the years up to the present–the Platt Amendment seems to come up in most conversations. As the one older historian we heard from said, “It is easy to find in actions and words, proof that the US is not interested in Cuba being an independent country and is doing what it can to ultimately control it. This is reinforced daily. If we have too much rain or no rain the view is the US clearly must have done something to make that happen.”

I wanted to get some sense away from the dialogue of how pervasive this is. I bought three books (in Spanish) which I have been attempting to read: 1) Cuba y su Historia  2) Cuba-USA, Diez Tiempos de una Relación and 3) Obama y el Imperio. This last book purports to be a series of writings by Fidel Castro covering the period from May, 2008, to June, 2010.  These writings all reinforce what was coming from the mouths of almost all of those we encountered during the trip as expressed by the older historian we met. There is a general view that what happened in 1959 was the culmination of a Revolución (with a capital R) that began in 1868, with the true heroes being Cespedes, (not the ball-player who just signed with the A’s) and Marti. It took this long to establish true Independence because of the interference of the US–not much credit to Teddy Roosevelt or Generals Wood and Pershing at the turn of the last century.

All are hopeful that things are changing. It is not clear how quickly those changes will occur in the economy, the political structure and the daily lives of the people. As with many countries this year, there are changes in leadership occurring.  The first signs in Cuba are not encouraging. The Council of Ministers (31 individuals) has changed with the elimination of some of the more liberal members. Raúl Castro’s recent speeches have been somewhat hard-line. His primary speech in the Assembly focused on the US, corruption (with references to the US) and a reiteration of the importance of the Communist Party (about 800,000 members).  He may be catering to the “old white men” (a phrase from the historian about the leadership) in the Congress or he may be pulling back from some of the reforms. There has been an apparent tightening of security with some retentions and restrictions on gatherings. Something is happening. It may simply be a precaution during this period of transition.  It may be a policy shift. It may be some concern about the Pope’s visit in March.

Granted, Cuba is just another Caribbean island. And what happens there is unlikely to change the course of the world. It does have a long history with the US, though, and it is close.  The people, individually, are terrific. Some real talent exists, and maybe things can get better for them. It is worth taking a “humanitarian” trip to see for oneself. Be sure and bring soap.

What Could Happen in 2012 (and Beyond)

Posted on by Jack Rivkin
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Byron Wien, the Election, the Economy, Immigration, China, India, South America, Education–surprises!

Byron Wien does the most thorough job of putting together thoughtful, provocative and useful ideas on possible surprises for each year. I have been fortunate enough to know Byron and to participate in the Third Thursday group on which he draws, in part, to test both conventional wisdom and real surprises. I could not attend the December lunch this year as I was in India. Below is the email I sent Byron in late November. I will use that as the start of my thoughts on surprising things that could happen in 2012 and will then toss out a few additional ideas. Here we go:

“Byron, Am heading to India on Friday. Sorry I will miss your pre-surprise lunch. Am attaching copies of the text and slides I will be using in India. I don’t think they say anything you don’t know, but you might find something in there…My big surprise is that Joe Biden will not be the VP candidate in the coming election. Second surprise would be that the US does better than expected in 2012 given the debacle in Europe. Neither China nor India do as well as currently expected and China steps up to do something in Europe–maybe buy a Greek Island? They need Europe. Brazil starts to look a bit like Argentina–I think they are way understating their inflation rate. Capital flows our way and the RU dips into the 7′s before the election. If so, Obama wins in a walk. The really big surprise would be Huntsman as the Republican candidate–or maybe Obama’s VP candidate? What a ticket that would make. Jack”

The idea of surprises is to get people thinking away from trendlines. I use Byron’s definition, which is a personal belief that there is greater than a 50% chance of something happening where conventional wisdom is less than that. Let’s continue:

1) It is hard to see us getting through the year without an energy crisis of some type where demand significantly exceeds supply and oil prices spike once again. This could stem from trouble in the Middle East, Africa or Asia. It could be brought about by some covert action by the US that has been in the works for some time and comes to fruition within the next 10 months. There are too many possibilities for this not to have greater than a 50% chance of occurring within this calendar year. The combination of a hydrocarbon energy crisis combined with a major climate disaster somewhere in the world will lead to policy actions on the part of the US to accelerate both natural gas development and alternative energy development as well.  Energy efficiency finally begins having its day. Talk of a carbon tax grows particularly as other countries implement implicit and explicit carbon pricing.

2) Contrary to a normally quiet year during a transition of leadership, to some extent forced by an “Asian Spring” throughout the region, China takes several bold steps in response to a more activist populace upset with corruption, the environment, and some areas of economic stress, combined with a desire by Hu and Wen to put more of their stamp on the future.  This includes major acquisitions in the developed countries as well as the opening of manufacturing and service facilities. At home, R&D is accelerated particularly in alternative energy, space and IT processing. Subsidies for hydrocarbons are reduced or eliminated and an explicit carbon tax is put in place. Following Australia’s lead and China’s moves, several Asian countries put in place mechanisms to reduce their use of conventional hydrocarbons for energy–although everyone finds that they have 200 million year-old hydrocarbons in shale formations and begins using the immature  production technologies developed in the US, creating even more environmental disasters.

3) As the US economy grows, corporations find qualified hires difficult to come by. Enlightened corporations, led by GE,  become educational institutions to provide skills and basic knowledge to a work force that has been idle and undereducated by the public systems which were supposed to do the job. Corporations become much more vocal about bringing illegal immigrants into the US system, expanding visa programs and finding other mechanisms to add talented labor to the pool domestically. It becomes clear that a controlled amnesty program for current illegals in the US will add significantly to GDP and to government revenues. The tide begins to shift on immigration issues.

4) The US labor situation is aggravated in the short term by decisions on the part of several US corporations to bring manufacturing operations back into the States.  Labor costs are rising elsewhere and the elements of control, rule of law, productivity and relative safety lead to better economics manufacturing locally. Caterpillar’s actions with its Canadian operations start the ball rolling. As stated above, US corporations take on a significant role in training and general education to meet their labor needs.

5) In spite of the demand for its natural resources, South America finds itself in much more turmoil politically and economically than one might expect. Natural disasters from climate change and it’s young mountain ranges compound economic issues from changes in export markets and a continuing misallocation of financial resources. Led, once again, by problems in Argentina, some degree of turmoil ripples north through the continent into Central America and requires more of the attention of the US than we have been willing to give thus far. Immigration to the US, both legal and illegal, accelerates as the US economy picks up steam.

6) India becomes a focal point. With an economy not growing adequately to provide jobs, upward mobility and political stability, India looks for diversions. Troops move north to “prepare” for confrontation with China, and west to confront Pakistan. Some elements internally are confronted as well. While the numbers show growth, the quality is somewhat problematic. Energy shortages push India toward even more aggressive alternative energy policies.

These aren’t all of the surprises we will find in 2012. I must say I continue to be optimistic about the US in spite of the crazies in Washington and the anger, bigotry and fear manifesting itself during the Republican primary battles. All of those who were planning on moving out of the country if Obama was re-elected–the ABO crowd– or any of the Republican choices–the ABAR crowd, might want to reconsider.

Marcellus Shale:New York::Prudhoe Basin:Alaska. Why Not?

Posted on by Jack Rivkin
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The New York Department of Environmental Conservation has put out a 46 megabyte document with proposed regulations on horizontal drilling and hydraulic fracturing  of the Marcellus Shale formation in the state. The regs together with existing regs cover almost every known possibility of risk with some ways to mitigate the risk.  The DEC has asked for comments. I just posted one which you will see below. I don’t understand why these massive game-changing formations, the Marcellus, the Bakken and others, should not be treated the same as the Prudhoe Basin for the benefit of those states under which the formations exist.  These are depleting assets–and they produce GHG emissions. Why not create Permanent Funds designed to create something lasting beyond the lives of these assets. And why not create some mechanisms to deal with possible unintended consequences from the exploitation of these resources?  These formations and the technology to exploit them are game changers. They have certainly quieted the dialogue on Climate Change as we focus on Energy Independence and that natural gas takes us part way to reduced emissions relative to other fossil fuels. Let’s not forget: it is still a fossil fuel. I can’t solve everything in this post, but take a look at the suggestions for how to deal with the Marcellus. The submitted DEC comments begin below:

The SGEIS of September 7, 2011 provides a very comprehensive review of the risks associated with Horizontal Drilling and High-Volume Hydraulic Fracturing and provides mitigation against many of the known risks either through regulation, approvals or restrictions on where drilling can take place. However, in its work, the DEC with the assistance of Alpha Environmental does recognize that there are substantial risks and actual likelihood of occurrences of damage as indicated by the restrictions on where drilling can take place as well as the substantial amount of requirements necessary to be allowed to drill, to handle the materials and back-flow from the processes, to reduce the GHG emissions and to transport materials and the ultimate hydrocarbons resulting from the drilling. The Marcellus and the Utica formations as well as others that may be exploited represent a significant economic opportunity for New York and other states as well as the United States in general. There will be much comment on the proposals put forth in this document. No doubt, the Oil and Gas Industry will have comments on the costs of the proposals as well as whether the risks highlighted are significant enough to warrant all the proposals for mitigation.  Economics will be a key factor. These formations, the Marcellus in particular, represent a low cost source of domestic energy, in some ways not too dissimilar from the Prudhoe basin, which has been a major economic boon for Alaska and the US.  I would like to suggest that, in addition to the proposals in the SGEIS, that the state of New York, in conjunction with the other states that exist over these formations, consider the following:

1)    Much as the state of Alaska created a Permanent Fund for collection of royalties on the production from the Prudhoe basin and other Oil and Gas activities, there should be a similar Permanent Fund developed for the states where hydraulic fracturing and any other approaches are used to exploit these enormous and game-changing formations. An appropriate royalty (Alaska takes 33%) should be determined. While a small portion of the royalties could go toward the various state operating budgets, the majority would be available for the creation of alternative energy or energy efficiency opportunities to ultimately replace or supplement the production from the formations, as they are depleted. It could also be used for training of local residents in the technical skills required to participate in the manpower requirements for the industry. The royalties could also be used to support the inspection efforts and other mitigating elements in order to support the O&G industry in its exploitation of the formations. The DEC has indicated that drilling approvals will be slow as there are not sufficient resources to meet the likely demand.

2)    While the DEC has proposed many mitigations to avoid problems, specifically with water contamination, there is no certainty that problems, anticipated or unanticipated, will not occur.  The O&G industry is certainly of the view that there are no serious problems that could affect the various water supplies in the state or water that either contains animal life or is important to land-based animals’ survival. It would make sense for the industry to put up a sizable bond to deal with any problems that do arise, requiring treatment plants or other means to correct any such problems. If as the industry states, the occurrence of such problems is remote, such a bond would bear a reasonable price, and could be targeted to specific elements. For example, while the NYC watershed has been excluded from drilling specifically, drilling will be allowed to take place not far from the borders of the watershed area. NYC consumes about 1 billion gallons per day of unfiltered water for which it collects about $1 billion a year. To construct treatment plants and maintain them could cost as much as $30 billion and add about a billion dollars per year to operating costs.  In the event that the unforeseen happens or appears to be happening, it would be good to know that funds are available to insure that sufficient potable water continues to exist.

3)    The DEC has also proposed rules to mitigate GHG emissions, which could be high in the early stages of the process if methane releases are not contained. It is understood that under steady state conditions natural gas produces fewer GHG emissions than coal or oil, but there are still emissions.  And such emissions can exceed those of other hydrocarbons if there are methane releases during the early hydrofracturing activity. A CO2 or CO2e charge per ton above a certain level of emissions would provide an economic incentive for the industry to keep emissions levels in the drilling, production and transportation activity to a minimum. Such a charge could revert to the Permanent Fund.

I leave it to the experts to determine the feasibility of these suggestions and the appropriate economics. Exploitation of the Marcellus and other gas reservoirs in New York and elsewhere in the country can have a major impact on the economics of the United Sates and can serve as a significant interim step toward reduction of GHG emissions if done properly. Much as Alaska, Texas and other states have benefited greatly from the exploitation of resources within the states, New York should as well. I commend the DEC for the thorough review of the risks associated with this method of drilling and production and its proposed rules for mitigation of those risks. I would hope that we use this opportunity to benefit the state and its residents appropriately, and consider the long-term effects of exploiting a depleting hydrocarbon resource.

Steve Jobs….and others

Posted on by Jack Rivkin
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Steve Jobs truly did bring liberal arts to the computer industry.  His vision of how to take the phenomenal technological advances which have been made over the last 50 years and turn them into products that would unleash individual and group creativity was one of his most significant contributions. However tough he was on those he worked with, his empathy for the ultimate user led to advances in design that will continue to push multiple industries in their usage of hardware, software and the internet in general.

The palpable sadness that so many people felt hearing of his death is a testimony to the universality of his impact.

Others will have much more to say about Steve Jobs. He was a special individual. He was also the first one to give credit to some of the giants who preceded him who were critical to developing the enabling technologies that he had the vision to use so effectively. It’s a good time to remember them as well—Bill Hewlett, David Packard, Robert Noyce.  And we’ve got some folks who are still around that deserve to be remembered at this time as well—Gordon Moore, Andy Grove and, of course, Ted Hoff. The combination of hard science and organizational skills set the stage for what Apple, with Job’s vision and the creative folks around him, was able to do. Let’s also give a big nod to Jack Goldman and Steve Wozniak.  We could go on. But, enough said.

A Brief Look at the World—China, the US, Europe and the Lake Forest Investment Society

Posted on by Jack Rivkin
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I am heading out to Chicago for one of the triannual meetings of the Lake Forest Investment Society.  We have been meeting three times a year (yes, triannual can mean three times a year) for many years to talk about the economy and the markets, including providing some specific stocks for a “portfolio.” The best performing security for the period between meetings gets its touter a free lunch. The portfolio, an unaudited, equally weighted hodge-podge of names is actually up  427% vs. the S&P at 130% over the 16 years this group has been meeting.  The Society originated as a group of ex-Mitchell Hutchins employees and some of their favorite clients who wanted an excuse to share some provocative ideas on stocks, the economy, the world and life, eat high cholesterol meals, and maybe play a little golf. Some of the members and their origins have changed over the years, but the dialogue continues. The following are some thoughts I expect to share at the meeting:

China’s Role

This global deficit crisis won’t really be resolved until China enters the picture. China needs an export market to provide sufficient jobs while it tries to move to a consumer economy. It cannot find itself with a slow-growth economy if it wants to avoid political disruption, particularly at a time of leadership change. The developed world, both the US and Europe, needs to be showing some growth in order to be consumers of Chinese goods. With new leadership coming in 2012 there is an opportunity for China to provide some form of quantitative easing through the purchase of longer-dated securities or other mechanisms.  This could be combined with the purchase of real assets and intellectual property as well in both the US and Europe. Until we see some movement by China, the developed world markets will face continued uncertainty, as the resources available to resolve the European crises, specifically, are just not adequate. However, I doubt China will move until both Europe and the US take stronger steps on their own to develop long-term deficit solutions and near-term stimuli.

The US’s Role

Contrary to what has been a continual reduction in GDP forecasts and increasing odds of a double dip by the pundits, I think the US could show decent growth in the second half of this year—not enough to create a lot of jobs, but decent. This does assume that the Super Committee or some variation thereof comes out with a long-term deficit reduction program combined with some near-term stimulus, and Congress actually supports this effort. I think the odds are greater than 60% that they will. This doesn’t necessarily provide a boost for the second half of the year, but it clears the air for next year and eliminates some elements of uncertainty in the minds of business and investors. My guess is we could have one more horrendous scare, probably coming out of Europe, before the world comes to its senses and responds to what could be a real crisis otherwise. What needs to happen long term is a whole ‘nother post, but one could read Friedman’ and Mandelbaum’s new book, “That Used to be Us,” to get a sense of some of what has to happen.

Europe

What a mess. It does not appear that the mechanisms exist to deal with the Greek deficits without putting the European banking system and maybe some other financial entities at grave capital risk. Whatever does come out of Europe as a solution—and I think it will take the Chinese to at least have the appearance of a solution—growth will be slow, as the European banks will not be in a position to lend for some time.  This is an opportunity for the Chinese probably to the detriment of the US, if they choose to pursue it.  China bashing in the US will likely drive China closer to Europe. China can also be more specific in its actions by dealing with individual countries and companies as opposed to the Union.

Other Topics

In spite of what most of the Republican primary candidates say—Jon Huntsman excluded–climate change is happening. We have no coherent policies in place and what was previously there is slowly being dismantled in Congress and by the Administration. Fiscally, we don’t seem to believe we have the resources to tackle this issue now, in spite of the long-term job creation possibilities.  And, the fascination with “fracking” and what that could do for energy independence is in the forefront with massive resources from the energy industry devoted to selling the story. In the meantime the failure of an over-funded science project, Solyndra, has raised issues about government involvement in clean tech.  These are their own topics, which I will deal with separately in other posts. In the meantime, back to the LFIS meeting, I will have a hard time coming up with a good stock idea. My personal portfolio is in cash and private illiquid companies. My compatriots will have some very interesting ideas, particularly at this moment in the market. I am not so sure the public market is as cheap as many opportunities in the private market today, particularly away from some of the frenzy around social media and other Internet related companies. Maybe one more crack in the public markets will get it there if it is combined with some stimulus in response.  In the meantime, real private companies are having a hard time finding funds from the traditional venture capital sources. We appear to be going back to the original sources of capital for venture companies, rich families either in the form of family offices or direct.  They can name their prices.  We are back to the old maxim that one makes the most money on a good price going in vs. the price going out.

Shutting Down Nuclear Power in Germany? This May be the Best Thing for Renewable Energy and Emissions Reductions.

Posted on by Jack Rivkin
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So, Germany is shutting down all of its nuclear plants by 2022. At the peak the plants produced 27.5% of Germany’s electricity. Renewable Energy is now up to 17.5%. There is a big gap to fill in a short period of time and it has German industry and the utilities screaming. This is on the path to have 80% of all its electrical energy come from non-carbon sources by 2050 in addition to a 50% reduction in consumption.  While one could question eliminating Nuclear from the clean energy picture, what Germany is doing will very likely produce an acceleration in innovation, efficiency and the development of intellectual property that will 1) keep Germany’s energy costs from rising, 2) expand Germany’s trade surplus 3) increase Germany’s share of global Intellectual Property and 4) reduce the world’s CO2 emissions more than would have occurred otherwise. This is a bold, audacious step and does require a leap of faith that the German engineers and scientists will accelerate the pace of economic renewable energy development, and German industry and its people will further increase the efficiency of energy usage. I think they will do it, primarily because they have to and they have the talent to do it. This may be one of the most exciting moves by a government to date in the renewable energy field—and a positive move on emissions.

In the meantime, the US is looking for more carbon in less mature formations to fill its energy needs. We’ve basically found all the pooled oil and gas that took 300 million years or more to produce and are now going after “tight” carbon in shale formations as our solution to meet energy demand and produce energy independence. While the shale gas most likely will produce fewer emissions than coal over the 100 year life of a formation, it is still producing carbon and requiring a fairly aggressive use of other resources, primarily water, and some real brute force in liberating the carbon. This, too, is a bold step with some big environmental risks associated with it. It may prove to be a bold step in the wrong direction. We will take a closer look at this in a future blog. The move by Germany is an exciting one, but it saddens me to see the innovation and the aggressive steps to produce the lower carbon world we need taking place elsewhere.

Risk and Opportunity

Posted on by Jack Rivkin
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Mother Nature, the Economy, Intellectual Property & Innovation, Strategic Risk and Private Equity 

The first quarter of 2011 was rather tumultuous to say the least, and we are entering the second quarter with very little of that turbulence fully calmed and the human toll and uncertainty continuing to rise. This has heightened concerns about specific Risks and, more generally, the global economy…  Continue reading the text version →

Or fast forward to the Q&A session in the video below.

Do We Need a Price On Carbon?

Posted on by Jack Rivkin
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In his January 10 Op-Ed piece in the NY Times, http://www.nytimes.com/2010/01/10/opinion/10friedman.html?scp=8&sq=tom%20friedman&st=cse, Tom Friedman makes several points about where things stand in the Energy Technology race and reaches the conclusion that China may be winning and will continue to win unless the US gets serious about energy legislation and carbon pricing. In recent days, starting with the State of the Union address, we have heard a bit more noise from the current administration on the energy front–nuclear power, additional subsidies, no capital gains on start-ups and maybe, a cap-and-trade system or some form of establishing a price on carbon. Maybe it will happen, and, maybe it is necessary for the developed world, where replacement of existing carbon-based energy is the principal requirement. In China, India, and much of Asia, new energy sources can be put in place to meet demand growth—a very different set of economics. And the markets are big enough to drive prices down a volume-related cost curve in addition to cost reductions from new technologies and systems. It allows room for more experimentation. It is a requirement if one really wants to be energy independent. Last year China did import 4.1 million barrels of crude oil a day, a little less than half of what the US imports. But this is likely to grow as auto sales grow, unless… See the April post, “China and Electric Cars—The Stakes Have Been Raised.”
China doesn’t appear to need a price on carbon today to look for alternative energy sources. It understands the relentless energy demand it faces as its economy grows and the pressure that would put on existing energy prices. And it understands, politically,  it cannot continue to pollute its air and water. In my visits there I have even seen some evidence that it understands the Climate Change risks from continuing CO2 emissions.

A brief story: In June, 2008, at a UNEP meeting in New York, I was asked if I could name one thing that one country could do that would accelerate the path toward alternative energy adoption and CO2 reduction. I responded “I guess the expected answer would be that the US should do almost anything. But since I do not think it will, my answer would be for China to institute a $50/Ton Carbon tax. This would accelerate the pace of change in China and would likely shame the rest of the world into responding in kind or with a serious cap-and-trade system.” Immediately the Chinese delegate asked to speak. She started with a very logical argument that China was in the early stages of entering the developed world with a low GDP per capita and such a tax would be a burden on many of the people finding their way into its new economy. However, she closed her statement by saying that China could not institute such a tax unilaterally (my emphasis). An interesting choice of words. The truth is, if China did institute an internal carbon tax, it would dramatically accelerate its alternative energy adoption and innovation. The US would spend way too much time figuring out how to respond and would then be in real trouble in Tom Friedman’s race.

At the moment, it is still a race. We shouldn’t require a price today on carbon to stay in the race. It should be apparent that the present value of tomorrow’s prices for carbon and the cost of climate change would justify alternative energy adoption and innovation today. Unfortunately, our system seems to require that the price be explicit before we really get serious. And, maybe, once the Western World as a whole has an explicit price, Asia will get explicit as well. Then we will see if it stays as a race between countries or simply becomes the race to save the planet.

Why ContraCarbon?

Posted on by Jack Rivkin
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I am not against Carbon per se. Let’s understand that Carbon is important to survival on this planet. It is the fourth most present element in the universe exceeded by hydrogen, helium and oxygen. It is present in all Earth life forms and constitutes about 19% of the human body only surpassed by oxygen.  There is essentially a fixed amount of it on Earth, and it is being converted from one form to another continually as part of what is known as the Carbon Cycle. If you really want to know more about Carbon, Wikipedia currently has 16 pages on the topic of which two are References for those nuts who don’t get enough out of the first 14.  http://en.wikipedia.org/wiki/Carbon

My primary problem is with the incremental change in the Carbon cycle that has been caused by man in one way or another. The poster-child for this change is the increasing amount of CO2 that is being put into the atmosphere.  The primary source of this incremental CO2 is the combination of Carbon, in various chemical forms, with oxygen–typically as a fuel source for transportation, power or chemical transformation.   A secondary problem is the lack of self-sufficiency, nation by nation, of the Carbon,  primarily in a liquid or gaseous form, that will be our main fuel and chemical source for some time .  We ultimately have to become less reliant on Carbon or figure out some way to restore the Carbon cycle to the point where we aren’t putting excess CO2 into the atmosphere.

I don’t plan on spending a lot of time on whether we are experiencing global warming.  In fact, I much prefer to view the problem as one of anthropogenic (man-made) Climate Change. I will comment on the impact and pace of Climate Change on our lives and what we can do about it. I will also try to point readers to other sources for those who want more detail on a particular point made. I came at this topic as critically important to the planet via investing.  While Chief Investment Officer at Neuberger Berman–a role from which I retired in 2008–I created a small unit to do research on paradigmatic issues–paradigm shifts that, if one got them right, could change the risk profile of investments related to the shifts.  The truth is, the traditional role of CIO at Neuberger didn’t really exist. Neuberger consists of several very experienced and successful investment management teams, doing extensive bottoms-up research on specific investment ideas . The last thing they need is someone else telling them what to do.  My primary job was not to screw things up.  What I discovered, though, is that the bottoms-up work actually led to concentrated investing around specific macro themes. I felt that if I could verify or support those themes–those paradigmatic ideas–it would point out and possibly reduce the risks of the investments that were being made.  Thus, the small paradigmatic unit was created.  The work started with Energy demand and supply. That quickly morphed into research on China and India, the major new incremental users of energy as they became part of the global economy.  The work on all three topics naturally morphed into the issue of Climate Change. 

While the initial reason for all this research related to investment opportunities, it was apparent that Climate Change had significantly broader implications for the planet, and, more specifically, for my grandchildren.  Over the last four years I have devoted significant energy (if you will pardon the term) to the topic, on the investment  and the policy front. I have spoken to many groups on Climate Change. I have also been involved with a small group at the UN (UNEP)  focusing on Private Capital and Climate Change.  I don’t believe that the technological solutions to restoring a balanced Carbon cycle have all been determined nor have certain potential solutions been implemented. I believe it is true that conservation could go a long way to solving the problem, but, unless the price of Carbon rises significantly and becomes much less volatile, conservation will be a marginal contributor to the solution.

I am interested in all ideas that can contribute to solutions. I am not interested in a shouting match on whether there is a Climate Change problem.  There is definitely a problem of too much CO2 going into our atmosphere.  Facts and data go a long way to having a healthy and useful dialogue on the issue of Climate Change and the solutions to the CO2 (and equivalent pollutants) problems.  This first posting is pretty basic.  We can get more esoteric as time passes. We can also have some fun as well discussing this serious problem and related problems. And, maybe, we can add something to the debates and the solutions that are useful and profitable.  Let the games begin.