PEIX UPGRADED

Rising Fears of an Ethanol Bust
With some analysts warning of an oversupply of the corn-based fuel later this year, concern is growing among farmers and investors
by Moira Herbst http://www.businessweek.com/bwdaily/dnflash/content/may2007/db20070508_850283.htm?campaign_id=yhoo

President George W. Bush's January, 2006, declaration that the U.S. is "addicted to oil" marked the beginning of a gold rush for corn growers: The government policies the comment helped spur have been a boon for the producers of corn-based ethanol, the all-American fuel that now displaces about 4% of U.S. gasoline supply. Over the past 18 months, farmers have rushed to plant more corn—and are set to produce a record crop this year—while small-time entrepreneurs and agricultural giants alike have built plants to expand capacity. A handful of initial public offerings have fed investors' desire to get in on the action.
But while farmers and producers remain bullish on corn ethanol's prospects, a once-enthusiastic Wall Street is growing skeptical. On May 1, the largest U.S. ethanol producer, Archer Daniels Midland (ADM), reported quarterly earnings that fell short of analyst expectations, citing higher corn costs as a problem. ADM shares tumbled 5.4% that day to close at $36.60 as investor disappointment spread throughout the sector. Shares of U.S. Bioenergy (USBE), Pacific Ethanol (PEIX), Andersons (ANDE), Aventine Renewable Energy (AVR), and VeraSun Energy (VSE) dipped 1% to 2%.
Lurking behind ADM's gloomy news are doubts about the future of corn ethanol. A growing number of analysts, once bullish on the product, are warning that an oversupply may be coming as soon as this year. On Apr. 27, a Lehman Brothers (LEH) report projected that production will outstrip demand in the second half of 2007, measuring the domestic thirst for corn ethanol at 420,000 barrels per day but supply at 445,000 barrels a day, mainly because the U.S. lacks the infrastructure to move the product to market.
"Chicken-and-Egg Problem"
"There's tremendous capacity coming online, but the infrastructure isn't there to keep up with it," says Michael Waldron, an oil markets research analyst at Lehman Brothers who co-authored the report. "We need a nationwide system to pipe it, and until that happens, we'll likely have an excess of product."
Waldron says the problem isn't a lack of demand for ethanol, which remains high, especially given that the federal Renewable Fuel Standard mandates at least 4 billion gallons, or about 3% of all U.S. transportation fuels, to come from alternative sources today, and nearly double that amount, or 7.5 billion gallons, by 2012. Lawmakers are expected to give the mandate a significant boost later this year. Rather, the problem is getting ethanol to consumers in various parts of the country. Ethanol requires a separate piping system from gasoline, and since Uncle Sam hasn't appropriated funds to build such infrastructure, ethanol is now primarily transported by rail. But the rail system extends only to major metropolitan areas—not to mention the dual problems of its high cost and carbon dioxide emissions.
"It's a chicken-and-egg problem," says Waldron. "If the infrastructure were there, the demand would be there. In the end the government would have to play a role to help build out a [national] dedicated pipeline."
Caution to Investors
A growing number of analysts agree with Lehman Brothers' conclusions. "We remain cautious on the ethanol stocks over a 12-month period," wrote Bank of America (BAC) analyst Eric Brown in an Apr. 24 research note. "Looking ahead we continue to believe that an oversupply of ethanol in the second half of 2007 will depress ethanol's premium to gasoline."
A glut of ethanol stuck in the Corn Belt would be unwelcome news for corn growers and the agricultural entrepreneurs who had set their hopes on a bright future for what has since become a controversial fuel (see BusinessWeek.com, 3/19/07, "Ethanol's Growing List of Enemies"). Farmers are beginning to voice their concern.
"We've got an enormous amount of product coming online in a short period of time," says Geoff Cooper, director of ethanol programs for the National Corn Growers Assn. "The market is surprised by all this volume and can't absorb it now."
Evolving Infrastructure
He says the problem of transporting ethanol to parts of the country like the Southeast remains a problem, as does a shortage of storage capacity in these areas. Yet Cooper calls those obstacles "bad news but not disastrous" for corn growers, as a more effective ethanol infrastructure will evolve in the next several years. "The oversupply now is more a bump in the road than a catastrophe," he says.
Plus, not everyone agrees with the emerging consensus among analysts. The Renewable Fuels Assn., an industry trade group for ethanol producers, maintains that the problem is a lack of capacity rather than an excess of it. Using Energy Dept. figures, the RFA calculates that demand now stands at 416,000 barrels a day but production is only 386,000 barrels a day. Even the 80 new ethanol plants expected to be operating by 2009 won't be able to meet the growing demand, according to the association.
"Right now we have ethanol making up 4% of transportation fuels, but we can get to 10% with no changes to cars' engines or retail pumps," says Matthew Hartwig, an RFA spokesman. He acknowledges that transportation is an issue but says rail cars are able to transport the product now, and there are studies under way about a national pipeline.
Short-Term Pain, Long-Term Gain?
In any case, Hartwig says, any oversupply domestically could be exported to other counties, as demand for fuel is growing in all parts of the world, and gasoline prices are increasing.
Waldron of Lehman Brothers sees another outcome to a glut. An ethanol oversupply would make ethanol blends cheaper for consumers, potentially eliminating the need for the 51¢-per-gallon subsidy blenders get from the government. In other words, too much ethanol means cheaper ethanol, which could ultimately extend its longevity in the marketplace.
"Too much supply could hurt ethanol producers' margins, but in the end it may be a good thing for prices to come down," Waldron says. "A short-term problem for the industry could be healthier for it in the long run."
Click here to see a slide show on how ethanol is made.
Herbst is a reporter for BusinessWeek.com in New York.

AM DATA

Wal-Mart same-store sales tumble 3.5%8:18am: Shares of the world's biggest retailer fall more than 1 percent as sales drop in April. (holding shares of WMT since 2000 high has you hurting)

Scene is RIPE for nice sell off, will it materialise?

Unemployment claims drop UNDER 300K.

TRADE Balance (INBALANCE) SOARS!!

D

FED MEETING TEXT

"Economic growth slowed in the first part of this year and the adjustment in the housing sector is ongoing. Nevertheless, the economy seems likely to expand at a moderate pace over coming quarters.
Core inflation remains somewhat elevated. Although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain those pressures.
In these circumstances, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information."

In other words, blah blah blah. The FED is behind continued asset inflation, is lying about inflation pressures and wants status quo, market due for pullback.

D

Dow: Longest bull run in 80 years

Blue-chip gauge matches 1927 record for longest up streak; Alcoa bid for Alcan, falling oil prices help.
By Alexandra Twin, CNNMoney.com senior writer
May 7 2007: 5:50 PM EDT
NEW YORK (CNNMoney.com) -- The Dow industrials ended at another all-time high Monday, closing with gains for the 24th out of 27 sessions - a streak that matched an 80-year-old record on Wall Street.
The Dow Jones industrial average (up 48.35 to 13,312.97, Charts) gained nearly 0.4 percent after briefly hitting an intraday record of 13,317.69. It was the fifth straight record close for the average.
The broader S&P 500 (up 3.86 to 1,509.48, Charts) index rose about 0.3 percent, edging ever closer to its all-time high of 1,527.46. That record was hit in March 2000 at the tail end of the last rally, fueled by the 1990s tech boom.
The tech-heavy Nasdaq composite (down 1.20 to 2,570.95, Charts) fell a few points after ending last week at a six-year high.
Stocks have been on a roll lately, thanks to a mix of strong earnings and buyout news.
"We haven't had many gigantic up days, we're just nickel and diming our way up the ladder," said Ron Kiddoo, chief investment officer at Cozad Asset Management. "People are more tempted to take profits one day after the Dow went up 200 points, than one day after it gained 30 points."
The 30-share Dow has now risen 24 of the last 27 sessions, matching its longest bull run in history, hit during the summer of 1927, according to Dow Jones. Should the Dow end higher on Tuesday, it would set a new record.
Kiddoo said the run was partly in response to the positive earnings and merger news, but also partly since the market's gains have been mostly modest and volatility has been limited.
Blue chips managed gains from the get-go Monday as investors welcomed the day's merger news, including Alcoa's $27 billion hostile bid for Canadian rival Alcan.
Treasury prices slipped, the dollar and oil prices fell while gold rose.
"The market improvement we've seen over the last few months is a result of higher-than-expected corporate profits," said Richard Hoyt, portfolio manager at KDV Wealth Management. "The profits are a result of the still-strong market fundamentals."
Hoyt said investors are looking beyond any short-term questions about the strength of the economy and focusing on longer-term expectations.
With the Dow at an all-time high and the S&P 500 nearing one, the impact on investor sentiment is twofold, said Hoyt. Investors who've been on the sidelines will have a new reason to jump in for fear of missing out. But investors who've been burned when the market was at new highs will have a reason to step back.
No major economic reports were released Monday, but investors will be keeping an eye on the Federal Reserve's next policy meeting Wednesday.
Central bank policymakers are widely expected to keep a key short-term interest rate steady at 5.25 percent for the seventh meeting in a row, with a statement expected in the afternoon. As always, investors will be focused on what the statement means for the economy and Fed rate policy.
Ahead of that, investors take a look at the March wholesale inventories report Tuesday and the weekly crude oil inventories report Wednesday morning.

DISCUSSION OF PE EXPANSION

http://briefing.com/GeneralContent/Investor/Active/ArticlePopup/ArticlePopup.aspx?SiteName=Investor&ArticleId=NS20070507083346TheBigPicture

DOOMSDAY OR NEW DAY?

I have seen a lot in my investing years, I have not seen anything like I have seen during this bull phase. Let us take a closer look.

From 2002 lows market is up around 5,000 points! New highs in MOST of the indexes except the NAZ which lags badly. New highs in Dow , Transports, Utilities and others, new highs appear a forgone conclusion for the SPX.

A recent poll by AAII had respondants rather Bearish??!!!! around 54% compared to 24% Bulls!!??? does this make any sense with market making new highs every day? Is this the contrarian stuff which allows this market to reach higher ground than almost anyone thought possible? The occurance of such a reading while the market plows ahead is quite extroadinary.

FED has blown one bubble into another, while holding interest rates down to historic low of 1% for a year it finally took hold and the animal juices took off, yes after 2 years of rate cuts "don't fight the FED" came true. BOOMING housing led to across the board spending and the economy took off, corporate profits began to set records.

Home owner used thier homes as ATM machines and took out BILLIONS and consumed which fed the economy even more. Rising home values led to record HELOC'S and refi's never seen before. Some cashed out and sold their homes and then plowed that into market.

This led to RAMPANT CONDO etc real estate specualtion which drove prices artifically through the roof. Which led finally to lending money to anyone who could stand, we got the sub prime debacle which has and will lead to much pain.

Many are now CAUGHT upside down on their mortgages, having wither paid too much or extracted more than house is now presently worth, hard to tell as lenders STIFFEN lending criteria and make it harder to get a loan, harder to sell. Near record home inventory still gluts market, it is a buyers market. I think this is still in early stages as many feel worst is over.

ALL you see around you is ASSET inflation, nothing more, our manufacturing base destroyed by cheap Asian labor, mostly low paying jobs being added the US is not in a good position to compete globally. Watch OIL and GOLD if commodities begin to FALL would be warning sign that global liquidity could be drying up.

In last 5 years the hedge funds have become strongest force in markets, they are now borrowing 2.5X their assets to invest in markets, this is unprecedented.

Yields on the UTES and SPX dividends are near record LOWS, this is what you usually see at a MAJOR MARKET TOP not a BOTTOM!!! The SPX low yields near 2.2% (tops under 3% !!!) have existed for a few years running, so yes it is not easy to call a top, not all components are in place.

Are we at another 1998? or closer to another 2000? No one can know, but when one considers how we got HERE, it gives some indication of what will get unwound and IMHO will become a global meltdown at some point.

Duratek

MAY CONTRARY INVESTOR

http://www.contraryinvestor.com/mo.htm

BUSH HAS NOT CUT TAXES

Bush has NOT cut taxes

By Mark BrandlyPosted on 4/30/2007 from ludwig von mises . com

While the occupation of Iraq is the major topic of debate in the 2008 presidential race, the candidates have also taken positions on George Bush's fiscal policies. We see Republican candidates supporting Bush's tax "cuts" and being asked to sign a pledge, a pledge they will all, except for Ron Paul, violate, promising not to raise taxes, while Democrats decry Bush's tax "cuts" and promise to at least consider rolling back the tax cuts should one of them take power.

In short, there is general agreement that Bush, and the Republican Party in general, is in favor of tax cuts. Let's consider the validity of this assumption. Do Bush's policies demonstrate that he's in favor of reducing taxes?
First, in order to consider how Bush's policies have affected tax burdens, I need to define the term "taxes." Taxes are a revenue source for the state and the state is the entity that has a monopoly, or at least claims the right to a monopoly, over the use of coercion within its political borders. Therefore, Hans Hoppe's explanation of taxation as "a coercive, non-contractual transfer of definite physical assets" (Economics and Ethics of Private Property, p. 28) provides us with a sound definition of taxation. Taxes are the takings of private property in order to fund the state. They are a form of aggression against private property.
We normally think of taxes as coercive non-contractual transfers that are based on the sale price of some exchange, such as excise taxes on the sale of goods or services, tariffs on imports, or income taxes on the sale of labor. Our federal government's largest revenue sources are due to taxing workers for showing up to work and earning incomes. In 2006, the federal government collected $1,044 billion and $838 billion, respectively, in income taxes and payroll taxes, which are a form of income taxes.
In addition to what we normally think of as taxes, the state also has the option of borrowing money by selling government securities in order to finance its spending. This is a significant form of finance as the federal debt, including intragovernmental debt, increased $574 billion in fiscal year 2006. Budget deficits are generally not considered to be a form of taxation and it's oftentimes useful to distinguish between revenues generated by taxing the sale of a good or service and revenues generated by selling securities. However, government debt is a coercive transfer of property from private hands to government coffers.
Those who lend the government money are purchasing a promise to take someone's property in the future in order to repay the loan. If the securities that are issued are to be repaid, then the state is simply shifting tax burdens away from current taxpayers on to future taxpayers. We should recognize that there is a current burden from government borrowing and that is the opportunity cost of the resources the state commands due to the revenues resulting from the sale of securities. However, we must also recognize that government securities are simply promises to take someone's property in the future and give it to the bondholder. This future aggression against private property is a tax. Deficit spending is simply another way of shifting tax burdens.
What about the case where the state incurs debt but later repudiates that debt? Suppose that the state borrows $100 from me with the promise to take $100 plus interest from someone in the future and use those funds to repay the debt. However, when the time comes, the state refuses to tax the future taxpayer and declares that the debt is repudiated. In this case, the state has taken $100 of my property as assuredly as if it had taken $100 from me in direct taxes. In fact, debt repudiation is another coercive non-contractual transfer of assets, in other words, it's a method of taxation.
There are also minor revenue options that we could consider. One method of generating revenues is for the state to sell its assets. The federal government owns a tremendous amount of property, including land. It owns 84.5% of the land in Nevada, 69.1% of the land in Alaska, and 57.5% of the land in Utah. The sale of Nevada could generate a significant amount of revenue. However, the federal government needed a revenue source when it originally acquired these assets. The government used tax revenues to purchase Alaska and the lands that are referred to as the Louisiana Purchase. If we trace the revenues generated through the sale of assets back to its original source we see that this is simply another form of taxation.
Suppose the state acquired the assets, say land, by laying claim to previously unowned resources? If the government claimed the right to own previously unowned property and then sold this property, would this be a case of government revenue that was not ultimately due to taxation? No. The state needs a form of revenue to enforce its claim on this property and to manage and maintain the property, and that revenue is generated by some form of taxation. Ultimately, the sale of assets involves a coercive transfer of physical assets.

"Those who lend the government money are purchasing a promise to take someone's property in the future in order to repay the loan."
Given the promises made before the war on and occupation of Iraq, promises that revenues from Iraqi oil sales would fund US spending on the war, we might consider the conquest and occupation of other countries as a form of public finance. But this is also a form of taxation. Instead of taxing domestic targets, the government is simply taxing the populace of the conquered state.
If the US government claims the right to the funds from the sale of Iraqi oil, this is no different than the government demanding to be paid from the sale of oil revenues in Alaska. In addition, tax revenues are required to initially achieve the conquest. Taxpayers may, in some cases, be able to shift their tax burdens onto others when the state conquers new territories, but this is an example of tax shifting, not an instance of government finance that is separate from taxation.
Other than revenue options that have already been discussed, the state, at least at the national level, may also have the option of creating new money. The price inflation resulting from the increase in the money supply decreases the purchasing power of incomes and savings. Printing money is a hidden form of taxation. Look at it this way, the state can take $100 of a taxpayer's money by taxing his income or the state can create money and reduce the purchasing power of that taxpayer's monetary assets by $100. In either case, the taxpayer has had $100 taken from him. Price inflation is a coercive transfer of assets, and printing money, therefore, fits the definition of taxation.
In 2006, the federal government collected $30 billion in "earnings" from the Federal Reserve. According to the CPI, the 2006 inflation rate was 2.5%. Given that the money supply, defined as M3, is about $11 trillion in this country, inflation decreased the value of our monetary holdings roughly $260 billion. We were taxed $260 billion and this hidden tax only generated $30 billion of federal revenues over and above the cost of funding the inflationary agency itself. Not only is price inflation a form of taxation, it's an inefficient way to fund the state. Given the current goals of federal spending, expanding the empire and the domestic welfare state, maybe we should be thankful for inefficient methods of taxation. Maybe inefficiencies like this decrease the government's ability to expand its reach.
Since all forms of government revenue are generated by a coercive, non-contractual transfer of assets, it would be accurate to refer to all government spending as some form of taxation. Now, what can we say about Bush's tax-cutting reputation? Simply put, it's undeserved.

$28
Taxes are a form of aggression against private property.
Including the estimates for the 2007 budget, in the first six years of Bush's term in office, federal income tax revenues have increased 18% and payroll tax revenues have increased 26%, the money supply, defined as M3, increased 41% in just the first five years since Bush took office, and the federal debt has increased 52%, and is approaching $9 trillion, since the beginning of fiscal year 2002.
The most appropriate measure of the level of taxation is government spending. In seven years, from fiscal year 2001 to the proposed budget in fiscal year 2008, federal spending will increase from $1,863.2 billion to an estimated $2,901.9 billion, an increase of 55%. Actual spending in 2008 will probably top $3 trillion, so it's likely that federal spending will increase more than 60% in the first seven years of Bush's reign. The president has supported these spending increases and is pushing for even higher levels of spending.
Bush should not be credited with cutting our tax burdens. He has engaged in tax shifting and in hiding the burdens of his expansions of the welfare and warfare state, and he has demonstrated that he's opposed to lowering our tax burdens. Deep into his second term, we have plenty of evidence to show that Bush should be blamed for increasing our tax burdens at a phenomenal pace.
The Republican Party claims to be the party of limited government and economic freedom. Don't believe it. Republicans have shown that when they are in power they are even more fiscally irresponsible than their Democratic counterparts, and that takes some doing.

M3 is BACK

http://www.nowandfutures.com/key_stats.html Thanks ELva for finding this site.

M3 up 12% Bernanke is talking out of ALL sides of his slippery bearded mouth.

D

GRIM REAPER

Not sure 2007 will be down year, but all bets are off after that. What will the market finally see down the road? A DEM victory and higher taxes? Hillary?

WEak GDP data out this AM growth at 1.5% !!!

Interest rates still historically low. FED meets this month, I am interested to see how the market reacts to their commentary. I expect to see them leave things status quo.

Housing market is in the shitter, crushing growth. SO how is it the stock market doesnt show any worry whatsoever?

There is a flood of money out there, it fled the housing market and is now flowing into the stock market. Imagine the GDP without recent stock market gains?

IF ANY rumblings from ASIAN markets, could be start of trouble.

There is NO credable candidate running for PResident IMHO. A NO win in IRAQ, the US is in danger of losing its status

D

WHY EXXON DOESN'T GIVE A HOOT ABOUT ALT FUELS

http://money.cnn.com/magazines/fortune/fortune_archive/2007/04/30/8405398/index.htm?postversion=2007042306

THEY ARE GOING WHERE THE PROFITS ARE!

Now to the markets: Looks like all isin synch, world markets making new highs, Dow new highs, SPX closing in on new all time high, Transport avg new highs, what is NOT to like?

A US base that has LOST over 3 million manufactruing jobs since 2003, a US that has a negative savings rate from which to borrow for capital investment, and one which is beholding to Japan and CHina to subsidize a Trillion $$ a year debt habbit. We are to assume this can go on indefinately?

The FED has been buying ever increasing amounts of the funny paper being issued, at some point an accident could occur which blows the top off interest rates. I believe the areas to watch for trouble is a 10 year rising above 5% and a sudden rise in unemployment that is sustained.

My sources tell me there is continuing trouble in the real estate sector, with near record inventory of homes to sell and more coming on line, we still have not had the pressure on prices in general one would think would occur, except in ares like MIami condos. SUBPRIME WOES have hurt big time resulting in plunging profits for most mortgage companies. Credit standards are rising making it harder for some to get loans.

BUT, without a real estate sector to attract funds away from the stock markets, I find it hard to predict an end to this bull market cycle. Our debtors and the US are tied to the hip in mutual need.

AMAZON jumps over 20% on better than expected earnings, the bubble has returned. EBAY reports tonight, it is my guess should they excite and raise guidance, possible repeat on their share price.

80% plus upside volume yesterday, until some 80% plus downside volume arrives, trend is firmly UP intermediate term. IMHO

Call me stubborn, I do not feel it PRUDENT to put NEW MONIES into the US stock market at these levels.

Calling A TOP is not an easy business, the usual signs of one are not currently present, though a correction could occur at any time.

D

HOUSING HOSE DOWN

AP
D.R. Horton 2Q Orders Fall 37 PercentTuesday April 10, 10:24 am ET

D.R. Horton 2nd-Quarter Net Sales Orders Decline, Hurt by Sagging Market

FORT WORTH, Texas (AP) -- D.R. Horton Inc., the nation's largest homebuilder by deliveries, said Tuesday its second-quarter sales orders fell 37 percent, led by even steeper declines in California and the Southwest.

**I feel stock market could hold up for various reasons thru the summer or trade net sideways, but I have feeling come next OCT, OCT is going to be OCT this time around.

D

BILL BUCKLER of THE PRIVATEER

BEST OF BILL BUCKLER (source http://www.investmentrarities.com/archives.html )
March 28, 2007

After the initial uproar over the US subprime mortgage sector debacle, things have gone rather quiet, at least in the US major financial news media. But the contagion is spreading, affecting numerous other areas. In the background lies this. Between 2000 and 2006, US house prices climbed by 75 percent as counted in constant US Dollars. There is no US historical precedent for such a climb in the last 120 years! Further behind this housing bubble stand two huge US financial institutions, Freddie Mac and Fannie Mae. They specialise in buying mortgages originated by banks and other lenders which they re-package into mortgage-backed securities (MBS) which they re-sell to pension plans, fund managers and investment banks inside and outside the US. US subprime and Alt A (the credit category above subprime) mortgages accounted for 26 to 30 percent of outstanding US mortgages and about 40 percent of total US securitised mortgage issuance.

How To Blow Financial Bubbles:

From the start of 1991 until the beginning of 2004 (the last year the books of these two institutions were in some kind of order) the self-owned mortgage portfolios of Fannie and Freddie grew from $US135 Billion to $US 1.56 TRILLION. Their holdings of US mortgages grew from about 5 percent of the total US mortgage market to more than 20 percent. To buy all these mortgages, Fannie and Freddie have to borrow. Their combined debts have climbed as they issued $US 3 TRILLION in new debts. They have total debts of $US 5.2 TRILLION. Behind them stands an "implicit" Federal Government guarantee.
For themselves, Fannie and Freddie have $US 79 Billion in capital but they have guaranteed $US 3.8 TRILLION in US mortgage loans. That is nearly 30 percent of the US Gross Domestic Product (GDP).

US Mortgage Belt Update:

In the last three months of 2006, US lenders began foreclosure proceedings on about one out of every 200 mortgages, the highest rate on record dating back 37 years, according to the US Mortgage Bankers Association. Some 1.5 million American homeowners will face foreclosure this year, RealtyTrac says.

The US housing market is now beset by falling prices with too much inventory and now foreclosure sales will arrive. In January, there were 4.09 million new and previously owned homes for sale, up from 3.41 million a year earlier, according to data from the National Association of Realtors and the US Commerce Department. US initiation of foreclosures on homeowner loans accelerated in the fourth quarter to the fastest pace since the US Mortgage Bankers Association began its own survey 37 years ago.
Ó 2007 – The Privateer
http://www.the-privateer.com
capt@the-privateer.com

**We cannot see the future, but one can guess from looking at history, what possible, more probable outcomes might be ahead of us. The credit expansion we have been witnessing, blowing almost every asset class up with it, is unsustainable in perpetuity. How it deflates will determine living standards for many years to come.

I am IN CASH because I believe assets are over priced, and I will wait with BUYING power to scoop them up. I have rid myself of debt. But if we get a defaltionary spiral from the unwinding of these credit excesses, the winners will be those who lose the least as RR likes to say.

D

RENEWABLE FUELS ORG

http://www.ethanolrfa.org/ an Industry view point.

A reader was earlier PO'D by my post on Ethanol subsidies, it really is not the main point as to WHO gets it, is that TAX PAYERS are footing the bill to produce it. It was argued that OIL COMPANIES, the blenders are the main beneficiaries of this 51 cent per gallon give away.

And that wouldn't surprise me at all.......nor did the $10B profit per qtr at Exxon. (yet Valediz spill not settled?)

D

ETHANOL DEBATE

http://www.ncga.com/ethanol/debunking/

http://www.mndaily.com/articles/2006/12/07/70211
Corn isn't the best when it comes to making ethanol, despite what publicity may say.
here's something Farmer John doesn't want you to know about. His friends in the corn lobby don't want you to know either. The secret? Making ethanol from sugar is cheaper and can produce eight times more energy than corn. Chevy ads and E85 publicity would lead you to believe otherwise, but corn isn't the best when it comes to making ethanol.

http://www.businessweek.com/technology/content/may2006/tc20060519_225336.htm ethanol myths and realities

http://seattletimes.nwsource.com/html/nationworld/2003612429_ethanol11.html?syndication=rss truth about ethanol

http://www.kxmc.com/getARticle.asp?ArticleId=33815

http://www.taxpayer.net/energy/ethanol.htm

http://www.ncpa.org/pd/monthly/pd1195b.html

http://jdo.org/foxman/and.htm ADM corporate welfare?

http://www.ethanol-news.com/archives/ethanol_subsidy.htm

http://beef-mag.com/mag/beef_bursting_ethanol_bubble/

The debate will rage on,

47 YEAR DOW CHART

*(click to enlarge)

Scotty, when the engines of credit halt, this will collapse like the Hindendburg. We are seeing the beginnings in the sub prime markets, there is danger of trickle down or domino effect.

The housing ATM is SHUT DOWN folks, where ELSE is there to steal from ? Our country is bankrupt, sold out to CHINA! and the special interest groups andanyone with a fing connection to a politician.

OK, I cant go any further with this today, acid churning in my stomach.

D

ONE BAD ASS BASS PLAYER

http://davedemarco.com/ My instructor, amazing artist.

D

BIOFUELS

How Biofuels Could Starve the PoorBy C. Ford Runge and Benjamin Senauer
From Foreign Affairs, May/June 2007
Summary: Thanks to high oil prices and hefty subsidies, corn-based ethanol is now all the rage in the United States. But it takes so much supply to keep ethanol production going that the price of corn -- and those of other food staples -- is shooting up around the world. To stop this trend, and prevent even more people from going hungry, Washington must conserve more and diversify ethanol's production inputs.
C. Ford Runge is Distinguished McKnight University Professor of Applied Economics and Law and Director of the Center for International Food and Agricultural Policy at the University of Minnesota. Benjamin Senauer is Professor of Applied Economics and Co-director of the Food Industry Center at the University of Minnesota.
THE ETHANOL BUBBLE
In 1974, as the United States was reeling from the oil embargo imposed by the Organization of Petroleum Exporting Countries, Congress took the first of many legislative steps to promote ethanol made from corn as an alternative fuel. On April 18, 1977, amid mounting calls for energy independence, President Jimmy Carter donned his cardigan sweater and appeared on television to tell Americans that balancing energy demands with available domestic resources would be an effort the "moral equivalent of war." The gradual phaseout of lead in the 1970s and 1980s provided an additional boost to the fledgling ethanol industry. (Lead, a toxic substance, is a performance enhancer when added to gasoline, and it was partly replaced by ethanol.) A series of tax breaks and subsidies also helped. In spite of these measures, with each passing year the United States became more dependent on imported petroleum, and ethanol remained marginal at best.
Now, thanks to a combination of high oil prices and even more generous government subsidies, corn-based ethanol has become the rage. There were 110 ethanol refineries in operation in the United States at the end of 2006, according to the Renewable Fuels Association. Many were being expanded, and another 73 were under construction. When these projects are completed, by the end of 2008, the United States' ethanol production capacity will reach an estimated 11.4 billion gallons per year. In his latest State of the Union address, President George W. Bush called on the country to produce 35 billion gallons of renewable fuel a year by 2017, nearly five times the level currently mandated.
The push for ethanol and other biofuels has spawned an industry that depends on billions of dollars of taxpayer subsidies, and not only in the United States. In 2005, global ethanol production was 9.66 billion gallons, of which Brazil produced 45.2 percent (from sugar cane) and the United States 44.5 percent (from corn). Global production of biodiesel (most of it in Europe), made from oilseeds, was almost one billion gallons.
The industry's growth has meant that a larger and larger share of corn production is being used to feed the huge mills that produce ethanol. According to some estimates, ethanol plants will burn up to half of U.S. domestic corn supplies within a few years. Ethanol demand will bring 2007 inventories of corn to their lowest levels since 1995 (a drought year), even though 2006 yielded the third-largest corn crop on record. Iowa may soon become a net corn importer.
The enormous volume of corn required by the ethanol industry is sending shock waves through the food system. (The United States accounts for some 40 percent of the world's total corn production and over half of all corn exports.) In March 2007, corn futures rose to over $4.38 a bushel, the highest level in ten years. Wheat and rice prices have also surged to decade highs, because even as those grains are increasingly being used as substitutes for corn, farmers are planting more acres with corn and fewer acres with other crops.
This might sound like nirvana to corn producers, but it is hardly that for consumers, especially in poor developing countries, who will be hit with a double shock if both food prices and oil prices stay high. The World Bank has estimated that in 2001, 2.7 billion people in the world were living on the equivalent of less than $2 a day; to them, even marginal increases in the cost of staple grains could be devastating. filling the 25-gallon tank of an SUV with pure ethanol requires over 450 pounds of corn -- which contains enough calories to feed one person for a year. By putting pressure on global supplies of edible crops, the surge in ethanol production will translate into higher prices for both processed and staple foods around the world. Biofuels have tied oil and food prices together in ways that could profoundly upset the relationships between food producers, consumers, and nations in the years ahead, with potentially devastating implications for both global poverty and food security.
THE OIL AND BIOFUEL ECONOMY
In the United States and other large economies, the ethanol industry is artificially buoyed by government subsidies, minimum production levels, and tax credits. High oil prices over the past few years have made ethanol naturally competitive, but the U.S. government continues to heavily subsidize corn farmers and ethanol producers. Direct corn subsidies equaled $8.9 billion in 2005. Although these payments will fall in 2006 and 2007 because of high corn prices, they may soon be dwarfed by the panoply of tax credits, grants, and government loans included in energy legislation passed in 2005 and in a pending farm bill designed to support ethanol producers. The federal government already grants ethanol blenders a tax allowance of 51 cents per gallon of ethanol they make, and many states pay out additional subsidies.
Consumption of ethanol in the United States was expected to reach over 6 billion gallons in 2006. (Consumption of biodiesel was expected to be about 250 million gallons.) In 2005, the U.S. government mandated the use of 7.5 billion gallons of biofuels per year by 2012; in early 2007, 37 governors proposed raising that figure to 12 billion gallons by 2010; and last January, President Bush raised it further, to 35 billion gallons by 2017. Six billion gallons of ethanol are needed every year to replace the fuel additive known as MTBE, which is being phased out due to its polluting effects on ground water.
The European Commission is using legislative measures and directives to promote biodiesel, produced mainly in Europe, made from rapeseeds and sunflower seeds. In 2005, the European Union produced 890 million gallons of biodiesel, over 80 percent of the world's total. The eu's Common Agricultural Policy also promotes the production of ethanol from a combination of sugar beets and wheat with direct and indirect subsidies. Brussels aims to have 5.75 percent of motor fuel consumed in the European Union come from biofuels by 2010 and 10 percent by 2020.
Brazil, which currently produces approximately the same amount of ethanol as the United States, derives almost all of it from sugar cane. Like the United States, Brazil began its quest for alternative energy in the mid-1970s. The government has offered incentives, set technical standards, and invested in supporting technologies and market promotion. It has mandated that all diesel contain two percent biodiesel by 2008 and five percent biodiesel by 2013. It has also required that the auto industry produce engines that can use biofuels and has developed wide-ranging industrial and land-use strategies to promote them. Other countries are also jumping on the biofuel bandwagon. In Southeast Asia, vast areas of tropical forest are being cleared and burned to plant oil palms destined for conversion to biodiesel.
This trend has strong momentum. Despite a recent decline, many experts expect the price of crude oil to remain high in the long term. Demand for petroleum continues to increase faster than supplies, and new sources of oil are often expensive to exploit or located in politically risky areas. According to the U.S. Energy Information Administration's latest projections, global energy consumption will rise by 71 percent between 2003 and 2030, with demand from developing countries, notably China and India, surpassing that from members of the Organization for Economic Cooperation and Development by 2015. The result will be sustained upward pressure on oil prices, which will allow ethanol and biodiesel producers to pay much higher premiums for corn and oilseeds than was conceivable just a few years ago. The higher oil prices go, the higher ethanol prices can go while remaining competitive -- and the more ethanol producers can pay for corn. If oil reaches $80 per barrel, ethanol producers could afford to pay well over $5 per bushel for corn.
With the price of raw materials at such highs, the biofuel craze would place significant stress on other parts of the agricultural sector. In fact, it already does. In the United States, the growth of the biofuel industry has triggered increases not only in the prices of corn, oilseeds, and other grains but also in the prices of seemingly unrelated crops and products. The use of land to grow corn to feed the ethanol maw is reducing the acreage devoted to other crops. Food processors who use crops such as peas and sweet corn have been forced to pay higher prices to keep their supplies secure -- costs that will eventually be passed on to consumers. Rising feed prices are also hitting the livestock and poultry industries. According to Vernon Eidman, a professor emeritus of agribusiness management at the University of Minnesota, higher feed costs have caused returns to fall sharply, especially in the poultry and swine sectors. If returns continue to drop, production will decline, and the prices for chicken, turkey, pork, milk, and eggs will rise. A number of Iowa's pork producers could go out of business in the next few years as they are forced to compete with ethanol plants for corn supplies.
Proponents of corn-based ethanol argue that acreage and yields can be increased to satisfy the rising demand for ethanol. But U.S. corn yields have been rising by a little less than two percent annually over the last ten years, and even a doubling of those gains could not meet current demand. As more acres are planted with corn, land will have to be pulled from other crops or environmentally fragile areas, such as those protected by the Department of Agriculture's Conservation Reserve Program.
In addition to these fundamental forces, speculative pressures have created what might be called a "biofuel mania": prices are rising because many buyers think they will. Hedge funds are making huge bets on corn and the bull market unleashed by ethanol. The biofuel mania is commandeering grain stocks with a disregard for the obvious consequences. It seems to unite powerful forces, including motorists' enthusiasm for large, fuel-inefficient vehicles and guilt over the ecological consequences of petroleum-based fuels. But even as ethanol has created opportunities for huge profits for agribusiness, speculators, and some farmers, it has upset the traditional flows of commodities and the patterns of trade and consumption both inside and outside of the agricultural sector.
This craze will create a different problem if oil prices decline because of, say, a slowdown in the global economy. With oil at $30 a barrel, producing ethanol would no longer be profitable unless corn sold for less than $2 a bushel, and that would spell a return to the bad old days of low prices for U.S. farmers. Undercapitalized ethanol plants would be at risk, and farmer-owned cooperatives would be especially vulnerable. Calls for subsidies, mandates, and tax breaks would become even more shrill than they are now: there would be clamoring for a massive bailout of an overinvested industry. At that point, the major investments that have been made in biofuels would start to look like a failed gamble. On the other hand, if oil prices hover around $55-$60, ethanol producers could pay from $3.65 to $4.54 for a bushel of corn and manage to make a normal 12 percent profit.
Whatever happens in the oil market, the drive for energy independence, which has been the basic justification for huge investments in and subsidies for ethanol production, has already made the industry dependent on high oil prices.
CORNUCOPIA
One root of the problem is that the biofuel industry has long been dominated not by market forces but by politics and the interests of a few large companies. Corn has become the prime raw material even though biofuels could be made efficiently from a variety of other sources, such as grasses and wood chips, if the government funded the necessary research and development. But in the United States, at least, corn and soybeans have been used as primary inputs for many years thanks in large part to the lobbying efforts of corn and soybean growers and Archer Daniels Midland Company (adm), the biggest ethanol producer in the U.S. market.
Since the late 1960s, adm positioned itself as the "supermarket to the world" and aimed to create value from bulk commodities by transforming them into processed products that command heftier prices. In the 1970s, adm started making ethanol and other products resulting from the wet-milling of corn, such as high fructose corn syrup. It quickly grew from a minor player in the feed market to a global powerhouse. By 1980, adm's ethanol production had reached 175 million gallons per year, and high fructose corn syrup had become a ubiquitous sweetening agent in processed foods. In 2006, adm was the largest producer of ethanol in the United States: it made more than 1.07 billion gallons, over four times more than its nearest rival, VeraSun Energy. In early 2006, it announced plans to increase its capital investment in ethanol from $700 million to $1.2 billion in 2008 and increase production by 47 percent, or close to 500 million gallons, by 2009.
Adm owes much of its growth to political connections, especially to key legislators who can earmark special subsidies for its products. Vice President Hubert Humphrey advanced many such measures when he served as a senator from Minnesota. Senator Bob Dole (R-Kans.) advocated tirelessly for the company during his long career. As the conservative critic James Bovard noted over a decade ago, nearly half of adm's profits have come from products that the U.S. government has either subsidized or protected.
Partly as a result of such government support, ethanol (and to a lesser extent biodiesel) is now a major fixture of the United States' agricultural and energy sectors. In addition to the federal government's 51-cents-per-gallon tax credit for ethanol, smaller producers get a 10-cents-per-gallon tax reduction on the first 15 million gallons they produce. There is also the "renewable fuel standard," a mandatory level of nonfossil fuel to be used in motor vehicles, which has set off a political bidding war. Despite already high government subsidies, Congress is considering lavishing more money on biofuels. Legislation related to the 2007 farm bill introduced by Representative Ron Kind (D-Wis.) calls for raising loan guarantees for ethanol producers from $200 million to $2 billion. Advocates of corn-based ethanol have rationalized subsidies by pointing out that greater ethanol demand pushes up corn prices and brings down subsidies to corn growers.
The ethanol industry has also become a theater of protectionism in U.S. trade policy. Unlike oil imports, which come into the country duty-free, most ethanol currently imported into the United States carries a 54-cents-per-gallon tariff, partly because cheaper ethanol from countries such as Brazil threatens U.S. producers. (Brazilian sugar cane can be converted to ethanol more efficiently than can U.S. corn.) The Caribbean Basin Initiative could undermine this protection: Brazilian ethanol can already be shipped duty-free to CBI countries, such as Costa Rica, El Salvador, or Jamaica, and the agreement allows it to go duty-free from there to the United States. But ethanol supporters in Congress are pushing for additional legislation to limit those imports. Such government measures shield the industry from competition despite the damaging repercussions for consumers.
STARVING THE HUNGRY
Biofuels may have even more devastating effects in the rest of the world, especially on the prices of basic foods. If oil prices remain high -- which is likely -- the people most vulnerable to the price hikes brought on by the biofuel boom will be those in countries that both suffer food deficits and import petroleum. The risk extends to a large part of the developing world: in 2005, according to the un Food and Agriculture Organization, most of the 82 low-income countries with food deficits were also net oil importers.
Even major oil exporters that use their petrodollars to purchase food imports, such as Mexico, cannot escape the consequences of the hikes in food prices. In late 2006, the price of tortilla flour in Mexico, which gets 80 percent of its corn imports from the United States, doubled thanks partly to a rise in U.S. corn prices from $2.80 to $4.20 a bushel over the previous several months. (Prices rose even though tortillas are made mainly from Mexican-grown white corn because industrial users of the imported yellow corn, which is used for animal feed and processed foods, started buying the cheaper white variety.) The price surge was exacerbated by speculation and hoarding. With about half of Mexico's 107 million people living in poverty and relying on tortillas as a main source of calories, the public outcry was fierce. In January 2007, Mexico's new president, Felipe Calderón, was forced to cap the prices of corn products.
The International Food Policy Research Institute, in Washington, D.C., has produced sobering estimates of the potential global impact of the rising demand for biofuels. Mark Rosegrant, an ifpri division director, and his colleagues project that given continued high oil prices, the rapid increase in global biofuel production will push global corn prices up by 20 percent by 2010 and 41 percent by 2020. The prices of oilseeds, including soybeans, rapeseeds, and sunflower seeds, are projected to rise by 26 percent by 2010 and 76 percent by 2020, and wheat prices by 11 percent by 2010 and 30 percent by 2020. In the poorest parts of sub-Saharan Africa, Asia, and Latin America, where cassava is a staple, its price is expected to increase by 33 percent by 2010 and 135 percent by 2020. The projected price increases may be mitigated if crop yields increase substantially or ethanol production based on other raw materials (such as trees and grasses) becomes commercially viable. But unless biofuel policies change significantly, neither development is likely.
The production of cassava-based ethanol may pose an especially grave threat to the food security of the world's poor. Cassava, a tropical potato-like tuber also known as manioc, provides one-third of the caloric needs of the population in sub-Saharan Africa and is the primary staple for over 200 million of Africa's poorest people. In many tropical countries, it is the food people turn to when they cannot afford anything else. It also serves as an important reserve when other crops fail because it can grow in poor soils and dry conditions and can be left in the ground to be harvested as needed.
Thanks to its high-starch content, cassava is also an excellent source of ethanol. As the technology for converting it to fuel improves, many countries -- including China, Nigeria, and Thailand -- are considering using more of the crop to that end. If peasant farmers in developing countries could become suppliers for the emerging industry, they would benefit from the increased income. But the history of industrial demand for agricultural crops in these countries suggests that large producers will be the main beneficiaries. The likely result of a boom in cassava-based ethanol production is that an increasing number of poor people will struggle even more to feed themselves.
Participants in the 1996 World Food Summit set out to cut the number of chronically hungry people in the world -- people who do not eat enough calories regularly to be healthy and active -- from 823 million in 1990 to about 400 million by 2015. The Millennium Development Goals established by the United Nations in 2000 vowed to halve the proportion of the world's chronically underfed population from 16 percent in 1990 to eight percent in 2015. Realistically, however, resorting to biofuels is likely to exacerbate world hunger. Several studies by economists at the World Bank and elsewhere suggest that caloric consumption among the world's poor declines by about half of one percent whenever the average prices of all major food staples increase by one percent. When one staple becomes more expensive, people try to replace it with a cheaper one, but if the prices of nearly all staples go up, they are left with no alternative.
In a study of global food security we conducted in 2003, we projected that given the rates of economic and population growth, the number of hungry people throughout the world would decline by 23 percent, to about 625 million, by 2025, so long as agricultural productivity improved enough to keep the relative price of food constant. But if, all other things being equal, the prices of staple foods increased because of demand for biofuels, as the ifpri projections suggest they will, the number of food-insecure people in the world would rise by over 16 million for every percentage increase in the real prices of staple foods. That means that 1.2 billion people could be chronically hungry by 2025 -- 600 million more than previously predicted.
The world's poorest people already spend 50 to 80 percent of their total household income on food. For the many among them who are landless laborers or rural subsistence farmers, large increases in the prices of staple foods will mean malnutrition and hunger. Some of them will tumble over the edge of subsistence into outright starvation, and many more will die from a multitude of hunger-related diseases.
THE GRASS IS GREENER
And for what? Limited environmental benefits at best. Although it is important to think of ways to develop renewable energy, one should also carefully examine the eager claims that biofuels are "green." Ethanol and biodiesel are often viewed as environmentally friendly because they are plant-based rather than petroleum-based. In fact, even if the entire corn crop in the United States were used to make ethanol, that fuel would replace only 12 percent of current U.S. gasoline use. Thinking of ethanol as a green alternative to fossil fuels reinforces the chimera of energy independence and of decoupling the interests of the United States from an increasingly troubled Middle East.
Should corn and soybeans be used as fuel crops at all? Soybeans and especially corn are row crops that contribute to soil erosion and water pollution and require large amounts of fertilizer, pesticides, and fuel to grow, harvest, and dry. They are the major cause of nitrogen runoff -- the harmful leakage of nitrogen from fields when it rains -- of the type that has created the so-called dead zone in the Gulf of Mexico, an ocean area the size of New Jersey that has so little oxygen it can barely support life. In the United States, corn and soybeans are typically planted in rotation, because soybeans add nitrogen to the soil, which corn needs to grow. But as corn increasingly displaces soybeans as a main source of ethanol, it will be cropped continuously, which will require major increases in nitrogen fertilizer and aggravate the nitrogen runoff problem.
Nor is corn-based ethanol very fuel efficient. Debates over the "net energy balance" of biofuels and gasoline -- the ratio between the energy they produce and the energy needed to produce them -- have raged for decades. For now, corn-based ethanol appears to be favored over gasoline, and biodiesel over petroleum diesel -- but not by much. Scientists at the Argonne National Laboratory and the National Renewable Energy Laboratory have calculated that the net energy ratio of gasoline is 0.81, a result that implies an input larger than the output. Corn-based ethanol has a ratio that ranges between 1.25 and 1.35, which is better than breaking even. Petroleum diesel has an energy ratio of 0.83, compared with that of biodiesel made from soybean oil, which ranges from 1.93 to 3.21. (Biodiesel produced from other fats and oils, such as restaurant grease, may be more energy efficient.)
Similar results emerge when biofuels are compared with gasoline using other indices of environmental impact, such as greenhouse gas emissions. The full cycle of the production and use of corn-based ethanol releases less greenhouse gases than does that of gasoline, but only by 12 to 26 percent. The production and use of biodiesel emits 41 to 78 percent less such gases than do the production and use of petroleum-based diesel fuels.
Another point of comparison is greenhouse gas emissions per mile driven, which takes account of relative fuel efficiency. Using gasoline blends with 10 percent corn-based ethanol instead of pure gasoline lowers emissions by 2 percent. If the blend is 85 percent ethanol (which only flexible-fuel vehicles can run on), greenhouse gas emissions fall further: by 23 percent if the ethanol is corn-based and by 64 percent if it is cellulose-based. Likewise, diesel containing 2 percent biodiesel emits 1.6 percent less greenhouse gases than does petroleum diesel, whereas blends with 20 percent biodiesel emit 16 percent less, and pure biodiesel (also for use only in special vehicles) emits 78 percent less. On the other hand, biodiesel can increase emissions of nitrogen oxide, which contributes to air pollution. In short, the "green" virtues of ethanol and biodiesel are modest when these fuels are made from corn and soybeans, which are energy-intensive, highly polluting row crops.
The benefits of biofuels are greater when plants other than corn or oils from sources other than soybeans are used. Ethanol made entirely from cellulose (which is found in trees, grasses, and other plants) has an energy ratio between 5 and 6 and emits 82 to 85 percent less greenhouse gases than does gasoline. As corn grows scarcer and more expensive, many are betting that the ethanol industry will increasingly turn to grasses, trees, and residues from field crops, such as wheat and rice straw and cornstalks. Grasses and trees can be grown on land poorly suited to food crops or in climates hostile to corn and soybeans. Recent breakthroughs in enzyme and gasification technologies have made it easier to break down cellulose in woody plants and straw. field experiments suggest that grassland perennials could become a promising source of biofuel in the future.
For now, however, the costs of harvesting, transporting, and converting such plant matters are high, which means that cellulose-based ethanol is not yet commercially viable when compared with the economies of scale of current corn-based production. One ethanol-plant manager in the Midwest has calculated that fueling an ethanol plant with switchgrass, a much-discussed alternative, would require delivering a semitrailer truckload of the grass every six minutes, 24 hours a day. The logistical difficulties and the costs of converting cellulose into fuel, combined with the subsidies and politics currently favoring the use of corn and soybeans, make it unrealistic to expect cellulose-based ethanol to become a solution within the next decade. Until it is, relying more on sugar cane to produce ethanol in tropical countries would be more efficient than using corn and would not involve using a staple food.
The future can be brighter if the right steps are taken now. Limiting U.S. dependence on fossil fuels requires a comprehensive energy-conservation program. Rather than promoting more mandates, tax breaks, and subsidies for biofuels, the U.S. government should make a major commitment to substantially increasing energy efficiency in vehicles, homes, and factories; promoting alternative sources of energy, such as solar and wind power; and investing in research to improve agricultural productivity and raise the efficiency of fuels derived from cellulose. Washington's fixation on corn-based ethanol has distorted the national agenda and diverted its attention from developing a broad and balanced strategy. In March, the U.S. Energy Department announced that it would invest up to $385 million in six biorefineries designed to convert cellulose into ethanol. That is a promising step in the right direction.

PAUL REED SMITH

TITANIC

http://money.cnn.com/2007/03/30/news/economy/china_trade/index.htm Well, is this just for show? with NO real bite to it? They hold a $$trillion hammer over our head.

Now maybe I'm DAFT? but how does TRADE TARRIFS benefit anyone? (many think tarrifs helped create 1st depression) in my case? It IS the same stupid?? US companies of whom are BUYING all this crap, some US companies like DMI and MARTIN NO longer have much in way of factories and import almost ALL of what they sell under their name. A TARRIF will not help them nor me? because these same US companies have NO interest in investing in plant and equipment to build these things.....when someone else can do it for them CHEAPER. And the quality of some of it is EXCEPTIONAL. Now raising tarrifs would make ALL of these goods and MOST of what we buy much higher fueling inflation!

I WOULD LOVE to buy AMERICAN and do when I can, but they don't seem interested in making what we need. INTC is building a $2.5 B plant in China, the unwinding of the Ponzi scheme FED recklessness that has created the shitpile we are getting stormed under cannot end well. While we print money to pay for the ongoing war of which I guess wont find its way into any published budget....wouldnt it be nice to have that extra $100 B or so?

AT some point (next election?) something has to give....taxes must go up, how else can we hope to pay for the $70 Trillion IOU? I Just thought of something sickening.....JUST the INTEREST on our debt must be a mind blower....and a huge SUCK to any REAL economy.

Sub prime is TIP of iceberg, it seems to me not many have been scared.....or even know the Titanic has been hit....

Duratek

MUSHROOM CLOUD

RUNNING OUT OF GAS

The Central Bank under Greenspan lowered interest rates from a high of 6.50% in 2001 to an historic low of 1.00% by 2003. Similarly the Bank Of England only lowered their rate to 3.5% to accomplish same end, which was to revive consumer spending.

We know it worked.We also know that worlwide inflation has ticked up regardless of whatthe feckless gov data shows, in the real world we experience inflation, and eroding of the ability of the dollar's purchasing power.

The value of the dollar in the world markets has sunk from a high near 120 to where it is now near 83. It had a bounce from IMPORTANT support at 80, ran to 90 ish and has since resumed its downtrend and has been hovering near current support. Should that support give way and we then break 80, the descent could accelerate rapidly.

A dollar that loses all support will have DIRE consequencess. All those FOREIGN investors, mainly ASIA that buy our Bonds (DEBT), CHina holds a TRILLION $$$ now, with Japan near that amount......as the $$ falls so does thevalue of thier enormous holdings.

A cascading fall of the US $$$ would most likely mean rising interest rates at home, so to attract the same money, as it loses value we will have to offer higher rates to keep attracting it. Of course that would CHOKE OFF our economy,and destroy those who hold bonds with much lower yields. The stock market could crash, and there would be nothing the Fed Reserve could do.

Already businesses are trimming workers as costs to retain workers has been rising, pressure on profits picking up. The run of double digit earnings gains are OVER for most S and P 500 companies, the main thrust of the recent Bull Market. Earnings had hit record performance for years running, that would not last forever.

My conclusion is not that the stock market will collapse next week or even next month, and maybe not this year, but it is clear to me, that the SWEET SPOT is gone, comparisons will be tough, we have seen the best and any additional gains from here will be sporadic, and in this man's opinion not worth the risk.

History says year after mid-term elections is one of the best times to be invested, that losses are RARE, and few and far between and minimal at worst. History repeats until it doesn't. The market is DOWN for the year so far, we are approaching the end of the BEST 6 months and beginning of the worst 6 months.

CASH OUT HOME EQUITY LOANS when the price of housing was rising at RECORD Paces was a NO BRAINER (so to speak), I could borrow $100K at LOW rates on a $450K house, because a year later the same house would be worth at least $550K or more, or perhaps when I borrowed, the house I purchsed for $300K was already worth $600K so I had TONS of APPRECIATION to borrow from.

Now what did the average person do with their LOOT? CONSUMED!!!!!!!! $100's of BILLIONS of $$$$ taken out as EQUITY and spent like drunken sailors.

For the most part NO DEBTS were PAID OFF, NO 30 yr mortgages were REDUCED to 15 year mortgages, and NO SAVINGS were had. We are still at a negative savings rate not seen since.....(I must say it) last DEPRESSION.

AT ZERO savings, NOW and heading into retirement, most of the 80 million or so BABY BOOMERS are ill prepared to meet their needs, so is this country with $40 TRILLION or so of UNFUNDED liabilities like Medicare and SS.

WILL many of these BOOMER be FORCED to LIQUIDATE ASSETS, like their 401K's stocks etc to meet their needs and consumption desires?

WHAT do we have NOW to make up for the near $1 TRILLION dollars poured into economy from these CASH OUT refi's, and HELOC'S????? AS NOW home property value at BEST has stopped RISING at worst is falling.

WE have near RECORD unsold inventory of over 8 months of homes, more being built, MANY MORE not on the market because of lack of interest, as soon as it perks up, they will flood the market.

MANY of the default properties, the banks are so far UNWILLING to take a massive hit, so when they realize there is no other way, prices could fall dramatically. I mean who wants to sell or admit the house they bought for $600K with NO MONEY DOWN is now worth lets say $550K.....certainly there is NO room to TAKE OUT ANY EQUITY!!!!!!!!

THis EQUITY LEECHING has been about the SOLE provider for this economy, WHAT WILL TAKE ITS PLACE????? GOV SPENDING? You know Bush's war has pumped BILLIONS into economy VIA the WAR MACHINE.

How has the economy been dealing with OIL prices holding ABOVE $60??? and ETHANOL production (subsidised by OUR TAX DOLLARS)putting pressure on CORN PRICES????

Inflation, even though reduced by GOV manipulation of the data, is "uncomfortably high" and defending the dollar with stable or rising interest rates puts the FED in a no win scenario.

WOULD falling interest rates revive the economy? maybe not this time......

Business has not collapsed, the economy is managing to muddle through so far, so we must be on the watch for a rising unemployment trend.

I will be monitoring the weekly employment figures for such a trend, with other eye the value of our currency. Stay tuned, this is getting interesting.

Duratek

STEPHEN ROACH

Global
Asian Decoupling Unlikely
March 26, 2007

By Stephen S. Roach | New York

As the US economy slows, most believe that Asia’s growth machine will fill the void. Don’t count on it. Policy makers in China and India are shifting toward restraint, tilting growth risks in the region’s fastest-growing economies to the downside. Nor is an externally-dependent Japanese economy likely to provide much compensation. To the extent the case for global decoupling is dependent on an Asian offset, prepare to be disappointed.After years of doubt, convictions are deep that both China and India will stay the course of hyper-growth. There has been talk for years about the coming Chinese slowdown, but so far the downshift has failed to materialize. The 10.7% increase in Chinese GDP in 2007 was the fastest since 1995, when the size of the economy was less than one-third what it is today. Moreover, with India now showing impressive improvement in its macro foundations of growth – especially saving, infrastructure, and foreign direct investment – there is good reason to believe that there may be considerable staying power to the recent acceleration in economic growth that averaged 9% during the 2005-06 interval.
Incoming data give little reason to doubt the staying power of the Asian growth machine. Chinese industrial output growth has reaccelerated to an 18.5% y-o-y pace over the January-February period – up from the sub-15% comparison in the final period of 2006 and only a shade slower than the 19.5% gains recorded last June. While India’s industrial production growth is certainly not as brisk as China’s, the 10% y-o-y comparison in early 2007 remains well above the 7¼% pace that was evident in late 2005 and early 2006. Needless to say, if China and India stay their present course, the global economy would barely skip a beat in the face of a US slowdown. Collectively, China and India account for about 21% of world GDP, as measured by the IMF’s purchasing power parity framework – essentially equal to the 20% share the statisticians assign to the United States. Add in the recent acceleration in the Japanese economy – a 5.5% annualized increase in the final quarter of CY2006 for an economy that accounts for another 6% of PPP-based world GDP – and there is good reason to believe that the impact of America’s downshift could well be neutralized by the ongoing vigor of the Asian growth machine.

The Asian offset, in conjunction with a modest cyclical uplift in a long sluggish European economy, is the essence of the case for global decoupling – a world economy that has finally weaned itself from the great American growth engine. A key presumption of that conclusion is that Asia can stay its present course. There are two flaws in that argument, in my view – the first being that internal pressures are now building in Asia’s fastest-growing economies that could be sowing the seeds for slower growth ahead. In particular, both the Chinese and Indian economies are now displaying worrisome signs of overheating. In China, the symptoms have manifested themselves in the form of imbalances in the mix of the real economy, widening disparities in the income distribution, and a large and growing current-account surplus – to say nothing of the negative externalities of environmental degradation and excess resource consumption. In India, the overheating has surfaced in the form of a cyclical resurgence of inflation, with the CPI running at a 6.8% y-o-y rate in early 2007 – a sharp acceleration from the 3.8% pace of 2002-05.

In recent weeks, I have met with senior policy makers in both China and India. It is clear to me that in both cases the authorities are in the process of shifting their policy arsenals toward meaningful restraint. In China, the direction comes from the top in the form of growing concerns expressed by Premier Wen Jiabao about a Chinese economy that he has explicitly characterized as “unstable, unbalanced, uncoordinated, and unsustainable” (see my 19 March dispatch of the same name). Since those words were first uttered at the end of the National People’s Congress on 15 March, Chinese authorities have been quick to respond. There was a monetary tightening the very next day and the securities industry regulators have issued new rules that prevent companies from purchasing equities with proceeds from share sales. The former move is aimed at cooling off an overheated investment sector while the latter move is addressed at dealing with a frothy domestic stock market that increased by 100% in the six months ending in late February. I am more convinced than ever that Beijing is now deadly serious in attempting to regain control over its rapidly growing economy in an effort to shift the focus from the quantity to the quality of growth. This is good news for China but could be disappointing for the decoupling camp that expects rapid Chinese economic growth to remain resistant to any downside pressures.

India is similarly positioned. The Reserve Bank of India does not take overheating and cyclical inflationary pressures lightly. I was actually in Mumbai the day the RBI tightened monetary policy last month (13 February), and it was clear to me in my discussions at the central bank that it meant business. The RBI’s official statement following that action said it all: “(A) determined and co-ordinated effort by all to contain inflation without unduly impacting the growth momentum is not only an economic necessity but also a moral compulsion.” Our Indian economics team underscores the risk of another monetary tightening prior to the 24 April policy meeting. At the same time, the government’s annual budget contained measures that would cut tariffs on food and other price-sensitive manufactured products. Indian authorities are fixated on a mounting cyclical inflation problem and appear more than willing to take a haircut on economic growth to achieve such an objective. Our current economic forecast reflects just such an outcome – a downshift to 6.9% GDP growth in 2008 following average gains of 8.7% over the 2005-07 period.

There is a second factor at work that is also likely to challenge the view that hyper growth is here to stay in Asia – the region’s persistent reliance on external demand as a major driver of economic growth. This is less a story for India, with its relatively small trade sector, and more a story for the rest of Asia. China is at the top of the external vulnerability chain. Its export sector, which rose to nearly 37% of GDP in 2006, surged at a 41% y-o-y rate in the first two months of 2007. Moreover – and this is an absolutely critical point in the decoupling debate – the United States is China’s largest export market, accounting for 21% of RMB-based exports. As the US economy now slows, the biggest piece of China’s export dynamic is at risk. So, too, are the large external sectors of China’s pan-Asian supply chain – especially Taiwan, Korea, and even Japan. Lacking in self-sustaining support from private consumption, the Asian growth dynamic remains highly vulnerable to an external shock. That’s yet another important reason to be very suspicious of the case for global decoupling.

Decoupling and global rebalancing go hand in hand. A decoupled world is very much a rebalanced world – and vice versa. Recent trends admittedly lend some support to the decoupling thesis – especially a booming Asia economy but also a seemingly remarkable cyclical revival in Europe. The European upsurge is a welcome development, but perspective is key. At most, it will add 0.2 to 0.3 percentage point to our baseline case for world economic growth. Asia, especially China and India, is a very different story. This is a much larger segment of the global economy and is growing at rates that are three times as fast as those in the developed world. An Asian economy that only barely widens its growth multiple relative to the rest of the world could well drive global decoupling on its own.

That’s unlikely to be the case, in my view. Not only does Asia remain vulnerable to a US-centric external shock, but the region’s two most powerful growth stories – China and India – are now both very focused on matters of internal sustainability. The Premier of China has put his reputation on the line in attempting to bring an unstable, unbalanced, uncoordinated, and unsustainable Chinese economy under control. The Indian government is equally focused on an anti-inflationary policy tightening. Looking backward, both of these economies have been on an exceptionally strong growth path that – if left to its own devices – could play an increasingly important role in powering a decoupled world. Looking forward, however, it’s likely to be a very different story. With growth prospects in China and India tipping to the downside at the same time the US economy is slowing, the global economy is likely to be a good deal weaker than the decoupling crowd would lead you to believe.

THE HAVE NOTS

Subprime losses lead to drop in home ownership
Despite the mortgage industry's claims to the contrary, an advocacy group says that subprime foreclosures will leave 1 million fewer homeowners.

By Les Christie, CNNMoney.com staff writer

March 27 2007: 4:28 PM EDT
NEW YORK (CNNMoney.com) -- About 2.4 million holders of subprime mortgage loans made between 1998 and 2006 will lose their properties to foreclosure, according to a report from the Center for Responsible Lending, a non-profit policy and advocacy organization for home owners.
Worse, that will result in a net home ownership loss of one million households.
CRL's analysisrebutted the mortgage industry's claims that the increase in subprime loans has opened up home ownership for millions of low income buyers. Instead, CRL contends, relatively little subprime lending is used for first-time home buying.
Testifying before the House Finance Committee today, CRL's president, Michael Calhoun, said the primary reason for the jump in foreclosures is "the abandonment of underwriting standards."
The report criticized both lax underwriting - noting in particular a disregard for the ability of borrower's ability to repay loans - as well as dangerous loan vehicles, such as "exploding ARMs," which have low rates for the first two or three years before resetting at much higher rates.
CRL contends that few subprime loans went to first time buyers, a notion that was seconded by Emory Rushton, chief national bank examiner for the Office of Comptroller of the Currency, in his testimony before the Finance Committee. He pointed out that Mortgage Bank Association figures revealed only 11 percent of subprime loans went to first-time buyers last year.
CRL says the record going back to 1998 is even worse; only 9 percent of subprime loans went to first-time buyers in the nine years through 2006.
The bulk of these loans actually went to refinance existing mortgages, incurring additional fees. And many of these refinancings involved cash back deals which increased the size of the original mortgages. When all was said and done, borrowers owed more on their homes after refinancing.
Because of the lower teaser rates, however, the new loans were affordable - at first. But when they reset at the higher, fully indexed rates, many borrowers could no longer make their payments.
Often that forced home owners to refinance yet again, extracting even more equity from their house. Since home prices kept rising, there was home value to draw on.
But now that prices are stagnant, even falling in some areas, many owners find themselves tapped out or even underwater, owing more on the mortgage than the house is worth and unable to make their monthly mortgage payment.
Borrowers in this kind of a bind are likely to find themselves in foreclosure, and that's what's going to lead to the decline in home ownership that CRL is predicting.

WED FED MEETING

http://www.hussman.net/rsi/fedfundscut.htm stocks and Fed Reserve

KRAKATOA THEORY

OK OK, we have all the implications of the SUBPRIME TIME BOMB and ALL the trickle down potentials (Some laid out by normally sedate John Mauldin Mr Muddle Thru)

SO it is ultimate demise time right? time to get short right? End of bull right?

But we have the CONTRARIAN PUT/CALL RATIO at levels normally indicating some kind of bottom? some near historic readings of pessimism?

But let's say I live on an Island, with a VOLCANO named KRAKATOA....and I see it is spitting out plumes of fire and smoke and I FEEL the ground SHAKING.....is this a case I need to WAIT to see the MOLTEN LAVA FLOWING down its side, it's TOP blown off to run for cover?

It is a known fact once I see LAVA flowing it HAS ERUPTED......WHO WOULDN'T thnk so?

If I am ON TITANIC AFTER it hits the iceburg, what are my chances on BETTING (PUTS) the f'er will sink?

Has the market erupted? has it HIT the TITANIC...is it SO OBVIOUS that buying PUTS is the right thing to do? Given MANY other ways we can guage complacency (lemmings sitting tight)

SMACK BETWEEN THE EYES

Subprime woes, where it ends nobody knows. Greenspun telling any fool who'll listen this will spill over to broader economy, which is SURELY SLOWING DOWN. This from the idiot who started it all spinning money like gold from wheat?

Avg Joe holding tight, money flow still going into 401K's and foreign purchases of our funny money debt goes unabated. Game on!

Meanwhile the grumpies are lining up in front of the PUT money machine ready to CASH IN on a frumpy dumpster market slump coming to a front page near you. Not so fast?

When has the market made it easy to know where it's headed? NAZ continues to underperform. Bond yileds stiffened up at near 4.5% the 10 year.

Market has been following the action of the YEN, whenit goes up the market goes down, further evidence of weakening of carry trade liquidity drain?

Consumer confidence is falling, reaction to all this? Economic indicators in the crapper......put/call ratio near a hist0ric leaning meaning VERY PESSIMISTIC

VIX is rising, weaker market until this trend reverses IMHO

D

HEDGE FUNDS TAKE A HIT

http://money.cnn.com/2007/03/16/markets/hedge_subprime.reut/index.htm?source=yahoo_quote

SUBPRIME WOES. WATCH THE VIDEO! The markets do NOT reflect the reality of what is happening on the ground. A MAJOR shakedown is coming IMHO, even if somehow someway this market recovers to new highs ( never say never LOL) a TEST of the 2002 lows in the books down the road IMHO

D

MAESTRO SPEAKS

http://money.cnn.com/2007/03/15/news/economy/greenspan_subprime.reut/index.htm?postversion=2007031517

CRAMER EXPOSED ON UTUBE

http://www.youtube.com:80/watch?v=708wDFX28lc

This you gotta hear. Now MULTIPLY his Millions by tens of tens of millions controlled by Goofman Sax and 1,000's of hedge funds plus the FED manipulation machine et al PPT and you will (or maybe you won't) understand how markets get mannipulated.

Below please find a rant posted by CIVIL BEAR:

CivilBear - Thu, Mar 15, 2007 - 03:00 PM
If Wall Street had any connection to economic fundamentals and the realworld, the markets would be down big-time today.But with options expiration coming up tomorrow, Da Boyz, The PPT, TheWorking Committee on The Markets and every market manipulator on the face ofthe earth are doing their darndest to make sure there is no market drop.
Fact is, today's economic reports were as ugly as Abby Jo in a thong bikini!The Philly Fed report is awful.The Empire State numbers are terrible.The Producer Price Index showed that wholesale prices are rising a helluvalot faster than expected.Consumer confidence is down significantly.Two more subprime lenders are folding their tents.
Yet the market aren't allowed to drop.Gotta love dem "free markets."Not surprising that yesterday, the Fed and the Treasury Department combinedto supply more than $27 BILLION for the buying of stocks.No action is too drastic when it comes to propping up the markets.What a stench-ridden, steaming pile of Kudlow!Ah, that feels better.

Rant completed.

Duratek

90% DOWNSIDE VOLUME DAY ALERT!!!

How's it going lurkers?

This could negate the importance of the 90% upside day after the first 2 90% downside days which began in Feb 27th with 99% downside volume day, one of if not worst on historic market data.

That was taken lightly as the VIX melted back away but SHOT up again today. Of note the VIX stayed about its now rising 20 EMA and a rising trend in the VIX is VERY BEARISH if it continues.

Tomorrow I think is a CRITICAL day for the markets. Many think if 12,000 is broken
(it should be) and that break holds, then we will work our way back to 11,000, any 20% correction is considered a Bear Market. (somewhere near 10,200) 11,475 ish is the 10% NORMAL correction many were "hoping" for.

There is MORE at stake here, we have RECORD MARGIN DEBT BEYOND EVEN 2000 BUBBLE TOP!!! WTF???? and some never learn?

We have subprime lender crisis. Long in tooth bull market. Interest rate inversion (Recession indiactor) WE have DOA housing market and trickle down effects on busineses. Many housing stocks hitting new 52 week lows.

25 year uptrend line from 1982 bull lows is near 11,000, this must NOT be broken o maybe back to 4,000-5,000 on Dow IMHO.

Home Equity loans supporting spending done! Housing NOT affordable to most.

Inventories are building, consumer demand not strong. Price pressure to salaries, prfoit miracle done IMHO, most likely string of double digit SPX earnings growth OVER.

NO leadership in market. Defensive stocks stronger, appetite for risk on decline?

Avg Joe has done NOTHING, sold NOTHING, while he watches and begins to ask what is going on, gets a little nervous, but hasnt sold anything. ALL those gains in jepeordy IMHO

BULL MKT IS INTACT however according to my TA on moving averages, but if we get a cross from 20 week through 50 week, to me that is bear cross, and LOTS of damage would already be done.

As I said before I am IN CASH 100%, I am in effect shorting stocks by being able to buy them MUCH cheaper then they were, when time is right. QID fund is on upswing (inverse naz 2X)

WHAT of potential MARGIN CALLS? FORCED LIQUIDATION, selling of securities.....is possible, and makes matters worse, as bears tag on.

rally off lows was weak, on weaker volume, todays selloff on HUGE VOLUME. NYSE near DOUBLE the NAZ!!! that is a sign also I think.

Hey, I do my thing, I try to reach out, I try to keep open mind to any outcome, but I was ONE LONELY BEAR!

I may write in vaccum, not sure how many read, I have heard from a few readers from around the globe, but I'll keep my blog going, no matter what.

When I think of it I will post my 25 yr Dow chart

Duratek

YHOO FINANCE MKT UPDATE

4:20 pm : Stocks tumbled Tuesday as an overly pessimistic market exaggerated everything from the implications of an unwinding in the yen carry trade to potential defaults by subprime lenders spilling over into an economy that again showed signs of slowing.

Before the bell, February retail sales rose just 0.1% (consensus 0.3%) while the more closely-watched sales, ex-autos, unexpectedly fell 0.1% (consensus 0.3%). Both figures pressured a market already extremely sensitive to signs of potential economic weakness even though unseasonably cold weather was a likely cause for the soft report. It is also worth noting that the data won't alter expectations of about 2% real GDP growth in Q1.

However, with subprime mortgage worries acting as an overhang for weeks now, more negative developments in the space took a weak stock market and made it even weaker as sellers found another excuse to take some money off the table following three straight days of gains for the Dow and S&P 500.

Accredited Home Lenders (LEND 3.97 -7.43) was the latest company in the subprime lineup to warn of such difficulties, saying it needs to raise new funds to cover the risk of default. The stock lost nearly 70% of its value. Adding insult to injury was Countrywide Financial's (CFC 33.49 -1.65) CEO saying on CNBC that the subprime issue is becoming a "liquidity crisis."

But the straw that broke the backs of the bulls today was a report midday from the Mortgage Bankers Association which showed delinquencies among subprime borrowers hit 13.3% in the fourth quarter. That was the highest rate in more than four years!!

AM THOUGHTS

**Data, retail sales come in WEAK***

I am getting that feeling this AM, but I will say this for us.......we have been LOOKING for the TOP and stayed true to that yesterday (Yes P) as one of my targets held (came to within a few points)

AS MANY disregard subprime trouble, this will be THE scandal of 2007.....and its effects hardly felt yet.HOV BZH TOL now falling AGAIN to NEW LOWS, remember how many hopped aboard at the lows, bet they are still holding (THE BAG)

SO OK< we have GS etc nowhere near 52 wk highs, home builders falling to new lows, subprime crisis, consumers pulling back, SPX profits predicted 5% growth (dbl digit string broken), I believe we have enough info as to which side to LEAN on, I will let you know any action I take.

I am hoping on an initial SLOW opening...that doesnt GAP down to the lows...maybe even some GREEN (fake out) there I would prefer to lay my shorts using QID, why QID? because NAZ has lagged all the way.....NEVER confirmed SPX move

STEPHEN ROACH WEIGHS IN

Global Green China? March 09, 2007 By Stephen S. Roach New York

Pollution is invariably one of the first impressions visitors form of China. From bicycles to cars in 25 years, urban China rarely sees much in the way of blue sky anymore. Rapid and large-scale industrialization only compounds the problem. The Chinese government knows full well it must take prompt and forceful actions to avoid an environmental crisis. There are encouraging signs it is now rising to the occasion. Can China pull it off while, at the same time, staying the course of its remarkable economic development strategy?

On a per capita basis, China’s pollution problem hardly jumps off the page. Its ratio of carbon emissions per person is less than half the global average and less than one-tenth that of the world’s biggest polluter – the United States. China’s enormous population, of course, distorts those comparisons. On an absolute basis, it’s a different story altogether. China’s total carbon emissions are more than double those of Japan and Russia, fractionally behind the European Union, and a little more than half those of the US. The essence of the Chinese environmental degradation problem is both its scale and growth. Over the 1992–2002 period, CO2 emissions in China have expanded at a 3.7% average annual rate – more than two and a half times the global average of 1.4%. At that rate, according to a recent report issued by the International Energy Agency, China will surpass the United States as the global leader in carbon emissions by 2009.

In terms of sulfur dioxide, China’s current rate of discharge is already double its so-called environmental capacity – responsible for an acid rain that now covers about one-third of China’s total land mass. According to SO2-based measures of air pollution, seven of the ten most polluted cities in the world are in China. With respect to the emissions of organic water pollutants, China leads the world by more than three times the number two polluter – the United States. Moreover, fully 90% of China’s urban rivers are polluted, and 90% of its grassland has been degraded. (Data cited above are from Al Gore’s Inconvenient Truth [2006], Nicholas Stern’s The Economics of Climate Change [2007], and a recent paper prepared by the Development Research Center of China’s State Council, “China: Accelerating Structural Adjustment and Growth Pattern Change” [2007]).

China’s environmental moment of truth is now at hand. The problem is twofold, in my view: It is not just an issue of moving from dirty to clean technologies that drive production, distribution, and transportation platforms, but it is also a matter of shifting the macro structure of the Chinese economy from a pollution-intensive to an environmentally-friendly mix. This latter point is a key and often overlooked aspect of China’s environmental challenge. It is also a crucial element of the rebalancing challenge that shapes China’s macro debate. The issue, in a nutshell, is that the Chinese economy is heavily skewed toward exports and fixed investment – two sectors that now collectively make up over 80% of China’s GDP. This concentration represents the most lopsided mix of a major economy in modern history. It is not sustainable from a macro point of view in that it threatens to produce the twin possibilities of a deflationary overhang of excess capacity and a protectionist backlash to an open-ended export boom. And it is not sustainable from an environmental point of view because the industrial-production-driven export and investment booms have a natural bias toward excessive carbon emissions.

This latter conclusion is key but, unfortunately, difficult to quantify in light of the paucity of data on the carbon intensity of the various sectors of the Chinese economy. Bear with me as I take you through a brief, but important, digression that uses the United Kingdom production model to illustrate what China is up against. The Stern Review contains a detailed breakdown of the carbon intensity of 123 production sectors in the UK economy. Not surprisingly, services are at the low end of the UK spectrum in terms of carbon emissions – averaging around 0.3 on the carbon intensity scale; for manufacturing industries, the range is wide – motor vehicles ( 0.5) and sporting goods/toys (0.8) are at the low end while the paper (2.4) and steel (2.7) industries are at the high end. A comparable dispersion is evident in the energy share of total UK business costs – with non-transportation services at the low end of the spectrum and manufacturing industries at the high end.

OK, China is not exactly England. But I strongly suspect – and this is my key analytical leap of faith – that the relative dispersion of the carbon- and energy-intensity of the major sectors of the Chinese economy is comparable to that of the UK. In other words, just as manufacturing is more carbon-intensive than services in the UK, the same ranking is likely in China. Under that presumption, consider the following: The latest data put China’s industrial sector at around 52% of its GDP – well in excess of the 32% share of the average developed economy and considerably higher than the 37% average of the low- and middle-income countries of the developing world. That means the manufacturing-intensive Chinese economy is most likely highly skewed toward a pollution- and energy-intensive model of economic activity.

In the case of China, there is an important twist – it is the heaviest consumer of coal of all the major economies in the world today. According to China’s Development Research Center, coal-driven power accounted for fully 79% of total electricity generated in 2003 – eight percentage points higher than in 1990 and essentially double the 40% share of coal-powered electricity for the world as a whole. The adverse environmental implications of coal power are well known; according to the Stern Review, the CO2 emissions of coal per unit of energy generation are twice as much as those associated with the combustion of natural gas and about 50% more than those generated by oil-burning technologies. Inasmuch as UK coal consumption – fueling 34% of the country’s total energy generation – is less than half the share in China, there is actually good reason to believe that the pollution implications for the Chinese economy per unit of GDP would be a good deal worse than those implied by the British results cited above.

The India comparison is also an interesting one in putting Chinese environmental issues in perspective. India’s per capita carbon emissions are only about half those in China and its total emissions are about one-third those of the Chinese. But the 4.3% average annual growth rate of Indian CO2 emissions over the 1992-2002 period is more than 15% faster than the rapid growth evident in China over the same period – suggesting that if India stays its current course, its environmental threats will quickly get out of hand. Even so, the structure of Indian GDP – a much smaller industrial portion (28%) than China (52%) and a much larger services share (53%) than China (34%) is biased toward a less pollution- and energy-intensive growth trajectory. That’s not to let India off the hook on environmental issues but only to stress that China is very much in a league of its own.

China has a rare and important opportunity to kill two birds with one stone. A successful rebalancing of the Chinese economy – moving away from excess reliance on investment and exports and embracing more of a pro-consumption growth model – would be a huge plus in dealing with two key issues: On the one hand, it would enable China to avoid the capacity excesses and protectionist risks that might arise from a continued irrational expansion of a severely unbalanced real economy. But it would also have the advantage of tilting the mix of Chinese output away from a pollution- and energy-intensive growth trajectory.

The latest statements from official Beijing are quite encouraging in addressing this conjoined problem. Premier Wen Jiabao’s 5 March “Work Report” to the National People’s Congress strongly endorsed a strategy of macro rebalancing, energy conservation, and environmental remediation. Just as China has had the will and determination to deliver on the reform front over the past 28 years, I am hopeful that it will rise to the occasion and deliver on the rebalancing front. In the end, there is no other choice.

TIME IS RUNNING SHORT

D