The Dangers of Cap and Trade

We have begun an analysis of the Cap and Trade model that the Administration is proposing. Simply, it works as follows:


















1. The Administration places a cap on CO2 emissions by region.
2. Emitters are adjudged as contributing emissions based upon the amount of fuel the use. Thus there are a certain amount of CO2 in metric Ton, mTn, emitted per X BTU of coal or the like.
3. Emitters can then determine what their cap is on some pro rata basis.
4. Then an emitter is either in excess or surplus, namely they emit too much or emit too little.
5. Then we assume some exchange to swap these credits and debits, at a small fee of course, and there is some guru who has established and profits from the exchange, possibly an Al Gore. Perhaps if you create the problem you may profit from it.
6. If the emitters exceed the cap they then pay the Government for this excess, say at $50 per mTn of CO2.

Simple, yes but it is the dynamics that catch you.




















1. You may think wind and solar and nuclear will win, since they emit no CO2.
2. Wait, environmentalists object to each. Wind makes the Cape and the waterfront in New Jersey look bad or kill birds or the like. Nuclear, well we all know nuclear, everyone hates it. And solar, well there are crowds who oppose that as well. Thus the zero emitters are blocked while the cap decreases each year to 20% of the 1990 number, which is about 10% of now! Get used to living on a single light bulb. At that point London in 1599 emitted more CO2 than all the earth at that point.
3. But Oops, we forgot, the population keeps getting larger and each person demand more BTU per person and thus the total demand is exploding.
4. Coal being the greatest emitter and taxed the most is displaced by gas and oil, increasing the demand on gas and oil, driving the price of gas and oil higher and higher.
5. Since the environmentalists stopped all zero emitters, the excess emissions are now taxed at more than $50 per mTn thus exponentially adding to the cost of a BTU.
6. The combined emission tax and costs of gas and oil drive the cost of BTU into an unstable mode.
7. Total collapse of civilization occurs!

The developers of this have failed to account for the dynamics and instabilities in this process. This is deadly.

First, the exchange for a Cap and Trade will have its own options and Credit Default Swap markets as well and these may be extra-territorial since we are taxing the heck out of everything here. It will be an unregulated market for better or worse.

Then second the dynamics of the process are not well understood. The model we present shows growing exogenous population and the demands per person are unbounded.

However the exogenous effectors of delay such as the environmentalists will allow for reduction in caps while delaying the introduction of alternative means. The market distortions will result in uncertainties and shortages each reflected in explosive prices.

The Obama Market - You Break It You Own It

Another day and we are now down below 7,000 well on our way to 5,000. As Secretary Powell said, "You break it you own it!" Well it sure looks broken! Thank God I am not near Wall Street, they may soon start jumping, the few left behind.



















You could not make this up! Do they give Nobel Prizes in Economics for destroying an economy. Let's take a look at our "Obama Portfolio", yes we know things are bad and getting worse but having a new set of cheerleaders driving the lemmings over the cliff does not help! The portfolio of core good we have been tracking is now looking at an annualized drop of almost 80%. Now for those concerned about a Depression, welcome it has arrived.



















As to inflation, the Dividend yield curve above shows what we expect, in excess of 20%. Thus with 20% inflation, 80% market collapse, 12% unemployment, in three years they can bring back the Ronald Reagan phrase, "Are you better today than four years ago?" and it will evoke a drastically different answer.

To add to this we have been analyzing the Cap and Trade scams. If you like the CDS, the swaps, then this one will far exceed the gains we made there. We have heard, unverified however, that Al Gore has financial interests, in the markets for CO2 caps. The trades themselves will generate billions amongst a few. Then there is the massive added costs to Americans, residential electricity we estimate will treble in ten years, or sooner, production costs with also double, and the case goes on and on. We also see multiple points of economic instability in this system as the financial geniuses that brought you the current mess get into CO2 derivatives. We hope to have our analysis complete in a month.

Now for a dreadful scenaroi:

1. Market collapses totally
2. Unemployment hits 20% and taxes drives out money
3. Liquidity disapperas
4. Cap and Trade explodes energy prices
5. Healthcare unbridled under Government overhead collapses
6. Eastern Europe falls economically
7. Russia collapses financially and moves to Easter Europe to protect borders
8. Western Europe starts to collapse
9. Election season of 2012 starts!

Where is Value Created?

There is one term missing from the Administration's Budget and Stimulus package, the entrepreneur, the value creator. Just what is an entrepreneur. Well simply put, it is that person, who despite all odds, has an idea, works alone until they can convince a core group of fellow believers, and then endlessly pursues any and all resources necessary to achieve their goal. The entrepreneur eschews Government support, the entrepreneur is driven by the desire to get people to buy his creation. Frequently the drive of the entrepreneur is market acceptance not abject personal wealth accumulation.

The Bankers on Wall Street are wealth accumulators and not value creators. The management of large corporations fall likewise in a similar patch. Both are in many ways the antithesis of the entrepreneur. All too often the entrepreneur's objective is the continuing acceptance of their creation, and the expansion and extension of that creation. Jobs of Apple is an example of the entrepreneur who despite the displacement of the classic corporate type in Scully, managed to expand Pixar, create Next, and then return and reinvent Apple. A similar person was Olsen at DEC, albeit there was an end to his run, failing in a reinvention as the PC came along.

The entrepreneur seeks to get to the other side of the mountain. The entrepreneur will go over the mountain, under the mountain, around the mountain, through the mountain or even turn around and walk all around the earth in the other direction to get to the other side. It is potentially and endless process of goal attainment. The entrepreneur does not demand Government money, there is not a single entrepreneur who has stepped up to the counter with their hand out because the culture, the ethos, of the entrepreneur is against such. Akin to the monks of old, who adhered to the vows of poverty, chastity and obedience, the entrepreneur can readily adhere to the first two, but the good entrepreneur is fundamentally disobedient, they seek what they have been told they cannot do, it is the trend towards disobedience that drives them.

There are few if any entrepreneurs in Russia, a small number in Europe, some in China, but the United States owes its very existence to that spirit. The current Administration takes not only little notice of them, but almost refuses to recognize their existence. Perhaps that is a good thing. Perhaps as this economy goes through its melt down there will be a reawakening of the entrepreneur, not the pseudo-Internet entrepreneur who create wealth by a tweaking of some incremental change, but the true American entrepreneur who strikes out on their own to create something fundamentally new. For American entrepreneurs are fundamentally individuals who flourish in adversity.

It will be the entrepreneurs and only the entrepreneurs who will create new value in this society, not the Government spending programs. I am continually drawn back to the 1960s and the Kennedy Space Program, a massive Government effort which sucked the best and brightest technical people into Government service and then in the early 1970s dropped them all on the street. The result of the 1960s effort was the rise of Japan in the 1980s, since the United States did Government non-value creating work for a decade, the result of the 1970s wilderness was the technological explosion of the 1980s and 1990s.

Regrettably the entrepreneurs in our Graduate schools are almost all foreign nationals, bright and creative, and the fear is that this time, this massive Government effort, will result in the 2010s and 2020s being the upsurge of China's and India's entrepreneurs, raised in the crucible of America and discharged as a result of the current Government Stimulus and Budget social restructurings. The result, if you think we have economic problems now, just wait!

Deja vu, Sarkozy and the Collapse of Hungary

One must follow the European Press to gain a better sense of what is happening. This has become a world meltdown and one can best see it from the French side. Today in Le Monde there is an article discussing how Sarkozy is dismissing the requests of Hungary to support their economy and also not to set up protectionist trade barriers, Specifically it says:

"Malgré les demandes du premier ministre hongrois, les chefs d'Etat et de gouvernements européens, réunis dimanche 1er mars à Bruxelles, n'ont pas cédé. Les dirigeants européens ont rejeté l'idée d'un grand plan d'aide pour l'Europe de l'Est face à la crise. Des aides au cas par cas pour l'Est de l'Europe. Plusieurs pays d'Europe centrale avaient appelé leurs partenaires de l'Ouest à être plus solidaires face aux problèmes de liquidités et de changes auxquels certains - surtout la Hongrie et la Lettonie - sont confrontés. ...... Le premier ministre hongrois, Ferenc Gyurcsany, a ainsi demandé à ses partenaires d'éviter "la mise en place d'un nouveau rideau de fer". Mais il a réclamé sans succès un plan d'aide aux banques de l'Est compris entre 160 et 190 milliards d'euros - bien au-delà des 24,5 milliards annoncés vendredi par la BEI, la BERD et le FMI - impliquant également la Banque centrale européenne."

In effect the Hungarian by ancestry but now French President Sarkozy may become the catalyst for European collapse! One cannot make this up. It will be a great book seventy years from now but at this moment it sets the world on edge. If Central Europe, not truly Eastern Europe, there is still Russia, Ukraine, Georgia, Turkey and Moldova just to mention a few, collapse then this will drag down the west. Sarkozy has along with Merkel taken a position of ego driven control which will collapse Europe totally!

The next month will foretell a great deal. This is what happens with Democratic Socialists and Washington should beware of their tendencies in that direction. This could very well be a repeat of the 1930s!

Strength of Character and A Sense of Duty

Greg Mankiw has posted a link to a Boston Globe article written by an MIT faculty spouse bemoaning the difficulties of their mate's taking a position in Washington in the new Administration. As I read this I thought of a close friend who was just posted to Iraq, she being a senior Naval Officer with two children, no bemoaning, nor pain, with just my advice from having been in that type of situation generations ago, "watch your back, don't sit near a window, and look for shadows" and yes also one more thing, no purple ribbons if you can. As we have hundreds of thousand of men and women going daily into harm's way, the self-centered bemoaning of a faculty spouse of only seeing their mate on a weekend is incredulous. Then I recalled, this was Cambridge, this was the current Administration, this was the way the left responds to a call to duty. The spouse should be thankful that the only flak will be from press releases and not incoming mortars. I am thankful my father, my uncles, my great-uncles did not bemoan being home on weekends with the family. They did return with a few Distinguished Service Crosses and a few purple ribbons. For that we should all be thankful. I am. Everyday!

Lady Isabella Squirrel and the Bard

We have just posted another tale in the Squirrel Chronicles, this is Lady Isabella Squirrel and the Bard. It is a tale about a Lady in Waiting Squirrel to Queen Elizabeth I in the year 1599 when the Earl of Essex was to have quieted Ireland and instead returned to London to stir up a revolt against the ailing Queen. Enlisting Shakespeare to write three plays, Henry V, Julius Caesar and Hamlet, the Queen, with the astute help of Lady Isabella, works with Shakespeare to form these plays to propagandize their Royal views to the people and thus defeat Essex. Politics then and now.