Marketing – Finance

One of our ongoing themes in Australian Small-Cap Investigator is alternative energy stocks. Tiny small-cap stocks that could see you either triple your money stake or lose the lot.

We’re not that fussy over what the alternative energy is, as long as it’s what I like to call a game-changer.

In other words, something like the development of unleaded petrol wouldn’t be considered a game-changer. It’s just taken an existing energy source and modified it slightly.

Funnily enough, we don’t necessarily see solar energy – based on the current technology – as a game-changer either. But more on that later.

No, when I refer to game-changing technology I’m talking about the kind of technology that gives the companies in control of incumbent energy methods cause for concern.

Actually, scratch that, I’d go further. It’s more like the kind of technology that causes incumbent firms to go bust.

And sadly, in a free market, solar energy would be one of the first technologies to fall under a bus. The fact is, if it wasn’t for crazy government subsidies and an irrational obsession by green groups, solar energy would have died at birth.

The fact that the solar industry is kept alive by government subsidies tells you it’s a dog. And it’s also evidence of the massive waste of resources being ploughed into an energy source that may never be commercially viable unless it’s propped up by government handouts.

I know the green lobby won’t like that, but them’s the facts. Even the poweredbysolarpanels.com website admits:

“When it comes to converting that energy to light, the efficiency actually ends up being dramatically lower. Let’s look at what happens if the solar panel efficiency starts at 20%. That energy starts as direct current which must be converted over to alternating current to be used in the home. This conversion process loses another 20% of the resulting energy. This alternating current now goes on to an incandescent lightbulb which is typically only 5% efficient. From all the original solar energy captured, you end up with only a fraction of usable energy.”

Compare that to a real game-changing technology such as the stock we tipped in the February issue of Australian Small-Cap Investigator which has up to 60% energy efficiency, that’s almost twice the efficiency that’s available through the regular electricity grid.

Not only that, but this technology, while it may not be quite as green as solar power, it’s a heck of a lot greener than existing coal-fired power stations and a heck of a lot cheaper than nuclear energy (by the way, we’re keen to tip nuclear related stocks in Australian Small-Cap Investigator too).

The point is, out of the three technologies: solar power, coal-fired power stations, and the technology we’ve backed in Australian Small-Cap Investigator, which gets the government handouts?

Yep, that’s right, solar and coal-fired generation gets a big dollop of government largesse, yet a genuinely game-changing, environmentally friendly technology has to go begging for funds from overseas investors.

It’s madness.

Look, don’t get me wrong, I’m not trying to lobby the government on behalf of this firm. I’m not asking for taxpayer dollars to be thrown at this technology, and I’m not trying to spruik for the stock we’ve tipped.

But what I am saying is that you’ve got perfect proof of why governments will never do anything meaningful to prevent the perceived threat of climate change.

The problems with government interference are many. But the most obvious is that you’ve got government bureaucrats deciding how your money should best be spent. And how do those bureaucrats come to their decision?

Er, lobbyists by any chance? Yep, depending on which industry hires the right lobby group, and which lobby group happens to have the best relationship with either the minister or the top bureaucrat, that’s where the money goes.

If government money was handed out based purely on the viability of a technology and the dollar for dollar positive impact on the environment, solar energy would have been thrown in the rubbish bin years ago.

But because solar energy has the right image, and because it has no greenhouse gas emissions, green groups and dopey coercive (public) sector bureaucrats see solar energy as the perfect way to show-off the government’s green credentials.

Now, you could argue that “at least it’s better than nothing.” But again, that’s only the case if you observe what is seen. If you observe what isn’t seen then the picture isn’t quite so rosy.

But if you’re someone who wants to use alternative energy, but you’ve done your homework and realised solar energy is useless what do you do? There’s no point wasting money on solar power that is only effective for a few hours each day – providing it’s sunny!

What if you instead come across another technology that is at least three-times as efficient but which costs five times the cost of solar energy because there’s no government subsidy?

Chances are you’ll give it a miss.

The fact is the government can’t possibly do anything to help the environment. I mean, think about it this way, the Australian federal government controls about 35% of all money spent in the Australian economy.

Add in State governments and local governments and the number rises to well over 40% of all money spent in the Australian economy.

Now replicate that across Western nations.

Ask yourself this, with all the cash at their disposal – about 50% of all money in an economy – why has it taken fifteen meetings of the UN conference on climate change to achieve… absolutely nothing?

The reason is that it’s not possible for governments to act in the best interests of individuals. Simply because their main focus is on re-election and pandering to lobby groups who fund their re-election.

You’ve seen the opinion polls. The majority of people do believe that something should be done about climate change. Whether climate change is real or not is irrelevant to this argument.

Incidentally, as we’ve mentioned before, we’ve got no idea whether climate change is real. But what we do know is that governments won’t fix it, only the free market can do that.

But what the opinion polls tell you is that individuals would like the opportunity to do something. The only trouble is they can’t afford to. Especially not when the government is taking 30% in taxes and they’re spending half of what remains on housing costs.

Like with everything we rail against, the ultimate culprit is always the government and the central bank. It’s inarguable. And the environment is no different.

You see, here’s the problem. While government is trying to pick winners in the alternative energy sector, it’s also picking losers. For example, companies such as the stock we’ve recently tipped have had to go overseas in order to get funding for the manufacture of their energy efficient product.

A product that is at least three-times more energy efficient that solar energy, yet currently receives no government subsidy. Again, we’re not arguing that the government should throw money at it, what we’d prefer is for the government to get the heck out of the way and stop taxing people so much.

That way, all those individuals that do want to install energy efficient technology can do so. Individuals can pick winners and losers. If it turns out this particular company has inferior technology to another firm then they’ll lose out.

But if the government is swiping 30% of your wages in tax each year, leaving an average household with only about $50,000, spending $12,000 on an energy unit is a big slice.

But in a free market, as you see with all other technology, soon the price comes down. Competition ensures that. Imagine if that same unit through competition was only $1,000 or $2,000, I bet you’d buy one wouldn’t you?

Especially if it provides more than enough electricity to power the entire home, compared to solar energy which can only provide a fraction of the power to a home.

Yet that’s not happening. Instead, government panders to special interest groups about either protecting jobs in the coal sector or pandering to green groups by subsidising inefficient solar energy.

So let’s get back to what isn’t seen, because that’s where the real damage is done.

What isn’t seen are the thousands of jobs that could be created in Australia if viable alternative energy sources were able to develop here rather than being shipped overseas. Thousands of jobs lost in the stinking coal sector would be replaced by thousands of jobs created in the technology sector.

Plus, rather than only a piddly X% of energy being sourced from green fuels, we could have X% times 20 or X% times 50 being sourced from green fuels if other industries didn’t receive favours from politicians and bureaucrats.

But it’s not only that. As I mentioned above, everything can be drawn back to central banking and banks too. The creation of money from thin air by the central bank and retail banks leads to what the Austrian economists call malinvestments.

It’s the truest definition of inflation. More money and credit ultimately leads to higher prices. That means the central bank and banks have to get that money out into the economy as quickly as possible before it becomes too devalued.

What better a way to do that than pouring it into the housing market.

And right now, the biggest malinvestment is housing. Yep, believe it or not, the obsession with investing in housing and government subsidies to the housing industry is another reason why the development of alternative energy is hampered.

Consider how hard it must be for any small company to attract capital when they’re up against competition from the massive housing ponzi scheme. What bank is going to lend money to a company developing alternative energy when it can instead lend money to someone to buy a house?

So you’ve got billions of dollars being spent on a totally unproductive, non-income bearing product (housing), at the expense of capital being made available to other sectors of the economy – including but not exclusively alternative energy.

But as with all ponzi schemes, it’s too late for the banks to change direction. Because the very nature of a ponzi scheme means it requires an ever greater amount of new money to keep the scheme from collapsing. As soon as the amount of new money falls below that required to pay out existing investors and home-owners then the whole thing collapses.

Look, I’m sorry to bring housing into what started off as a non-housing subject. But the fact remains this is a perfect example of how distortion in one part of an economy has both a direct and an indirect impact on other areas of the economy.

Go ahead, feel free to say that your editor is living in the clouds with this theory. But the evidence is there.

It’s irrefutable.

If governments truly were able to do something about climate change and emissions and all the other mumbo jumbo, why has it taken so long for them to do nothing considering they have access to around 50% of all money spent globally?

In contrast, there are tiny companies that have access to probably 0.0000000001% of the money that governments have access to, that are battling against the odds to make headway in the alternative energy market.

Just remember, we’re using the environment and alternative energy companies as just one example. But you can apply the same to any other industry in the Australian market. With over 50% of bank assets being exposed to the residential housing market it’s a massive unsustainable distortion of the Australian economy.

But put that aside, back to the environmental aspect…

The paradox is that if you believe in climate change – or even if you don’t, but you don’t like pollution – the only way to achieve anything is through the entrepreneurial free market.

All those green groups that rail against capitalism and free markets, and beg for more government involvement are actually doing more harm to the environment than they can possibly imagine.

Alternatively, if you don’t believe in climate change and you hate green lobby groups then your best bet of scuppering their plans and making sure nothing is done about it is to actually encourage further intervention by governments!

Ah, it’s a funny old world isn’t it?

32 Bubbles Burst, 2 Remain

We’ll look at this in more detail, but I thought I’d pass on the link that we’ve just received in to the Money Morning mailbag this morning:

“Jeremy Grantham, founder and chief strategist at GMO (the money management firm in Boston) has undertaken extensive research into asset bubbles, defined as an overvaluation so large that it would occur statistically only once in 40 years.

“Only two remain outstanding: the Australian and UK housing markets. Grantham is confident that Australian and UK house prices will eventually fall back to their long-term trend, and this process is likely to be painful. Check out Jeremy Grantham’s interview with the Financial Times.”

You can see the interview with the FT here. The interviewer is a bit hopeless, but try to ignore that and focus on Grantham.

Preposterous Property Spruiking

As you may imagine, we’ve received more emails than we can eat. By close of play yesterday we realised we should have waited until assistant editor Shae had returned from stimulating the American economy before we sent you a request for info.

Ah well, we’ve made our bed, now we’ve got to lie in it. We’ll dig through the mailbag and republish some of the choicest examples over the next few days. If you come across any others feel free to send them in to moneymorning@moneymorning.com.au

In the meantime, Money Morning reader Jim made good on his promise to email us the headline we mentioned yesterday from The Northern Star:

And finally, it’s not necessarily spruiking, but we notice our old pal, Rory Robertson from Macquarie Group has been putting the boot into property bear, prof Steve Keen:

“Reportedly, he’s [Steve Keen] still forecasting economic doomsdays to anyone who has time to waste. Often wrong, never unsure – and good luck to him.”

Then he goes on with the usual Keynesian rubbish. Of course, while Robertson is dishing out the stick, it shouldn’t be forgotten that Robertson is the same “economist” with an unfailing belief in the Output Gap theory.

To put it simply, the Output Gap is the hopelessly illogical and discredited idea that if an economy’s current GDP is operating below the potential GDP then inflation is impossible.

As we’ve pointed out several times, take a look at even what the mainstream considers to be inflation – consumer prices – and you’ll see that consumer prices have risen. And if you consider the real definition of inflation – and increase in the money supply – then it’s gone up even further.

I’m afraid to say that only economic slowcoaches and Keynesians believe in the hopelessly illogical, flawed, discredited, and just plain wrong Output Gap.

Feel free to send more property spruiking newspaper articles to moneymorning@moneymorning.com.au

Cheers,
Kris.