 | | The Daily Reckoning | Monday, October 25, 2010 | - Wine 'n' weed -- a tale of two Californian cash cows,
- Following the energy...and the money...all the way to nuclear power,
- Plus, Bill Bonner on Geithner's unworkable plan and a French-style crisis...coming soon to a town near you...
- .................................................
|  | | California Dreamin'
| A brief look at the Golden State's economy...where policy failures grow like weeds.
| |  | | Eric Fry |
Eric Fry, reporting from Laguna Bach, California…
California's Napa Valley gets the headlines, the wine-tasting awards and the black-tie charity dinners...California's "Emerald Triangle" gets the cash.
That's right, the Golden State's marijuana crop generates about $14 billion in revenue each year, and most of that revenue flows into the three main cannabis-growing counties of Humboldt, Mendocino and Trinity -- aka, the Emerald Triangle. $14 billion may not seem like much, as it is roughly the same sum as the bonus pool at Goldman Sachs. On the other hand, $14 billion is larger than the GDP of Iceland, double the GDP of Nicaragua...and seven times larger than the revenue of the California winegrape industry. A few miles to the south of the Emerald Triangle in Napa and Sonoma counties, an array of deep-pocketed vintners and gentleman-farmers try to squeeze profits from grapevines. Very few succeed. California winegrape production generates only about $2 billion in gross revenue annually, and virtually no profit...on average. Thus, the California "weed" industry produces seven times more revenue than the state's massive winegrape industry. This contrast may not mean anything in particular, but it may not mean nothing either. Up in California's verdant north, cannabis plants flourish as bountifully as liberal politics...and budget deficits. As a result -- of the politics and the deficits -- the Golden State has become a high-tax, quasi-socialist domicile that has become increasingly hostile to private enterprise. Once upon a time, the massive California economy featured shipyards, oil refineries, lumber mills, aerospace factories and many other forms of "heavy industry." Not any more. The modern California economy features a few legacy heavy industries -- that continue to operate only because they had not yet been regulated out of existence -- along with a quirky combination of light industries like tourism and marijuana cultivation. If, as a former Morgan Stanley analyst once observed, "Europe is a vast open-air museum," California is quickly becoming a vast open-air love-in, where the marijuana and good vibes flow freely...as long as Mom and Dad don't forget to send cash. But Mom and Dad are having a hard time paying the bill these days. The longer the good vibrations in the public sector persist, the tougher it becomes to keep the love-in going. Back in 1978, California chose a path that determined much of its ensuing future. The state voted itself a big tax cut. Proposition 13 -- officially titled the "People's Initiative to Limit Property Taxation -- amended the California Consitution in 1978 to limit property taxes to a maximum of 1% per year. This feel-good amendment, which slashed property taxes by an average of 57% overnight - inspired a national "taxpayer revolt" throughout the country. Suddenly, Americans began to believe that they could, in fact, have something for nothing. In 1978, California enjoyed a robust budget surplus. The economy was humming along and there seemed no reason not to believe that benefits could and should increase for everyone, especially for everyone who drew a paycheck from the state itself. Thus began the legendary tales of tenured university professors who work as hard as welfare recipients to receive six-figure paychecks, subsidized housing and a lifetime of generous retirement benefits. Likewise, the outlandish stories of municipal police officers who receive $150,000 in total compensation, or the state lifeguards who "tactically retire" on "disability" so that they may receive lavish lifetime pension and medical benefits, while also generating a second income working somewhere else.
But these are stories for another day... Today's story relates to a different historical footnote from 1978. Republican candidate for governor, Evelle Younger, crafted an election platform that included constructing 30 new nuclear power plants along the California coast. Younger lost the election by a landslide to Jerry Brown, the ultimate feel-good candidate. We did not need nuclear power, Brown countered, anymore than we needed those billions of dollars of property tax revenues that Prop.13 eliminated. This was California, the Golden State...the dreamiest portion of the American Dream. As it turns out, California probably could have used a few extra property tax dollars...as well as a few extra nuclear power plants. Because the state lost half its property tax revenues, it became dangerously reliant upon other forms of taxation, like income and capital gains. Since these latter two forms are uneven and unpredictable -- and tend to drop when they are most in need -- the State's income tax rate steadily increased...which placed an increasing burden on the private sector. Meanwhile, over in the power-generation sector, nuclear energy's share of California energy production has dwindled to a paltry 12%. Three decades of No Nuke sentiment in the state -- epitomized by the Diablo Canyon protests in 1981 -- completely thwarted every effort to increase nuclear power production. One ironic, unintended consequence of the 30-year anti-nuke campaign is that coal-fired power plants now generate more electricity in California than nuclear plants. But political opinion tends to oscillate between extremes. The "bad" policies of one generation become the "good" policies of the next. Thus, "bad" nuclear energy will return to California one day...just like it is returning to the rest of the planet. In fact, nuclear energy is enjoying a global renaissance -- once that will produce numerous profit opportunities for forward-looking investors, as Byron King explains in the column below... | | | American Nuke Bomb LOST Under Ancient Ice Fields
Way back in 1968, an American B-52 crashed in northwest Greenland... Unfortunately, the nuclear bombs on board got forever swallowed by an ancient ice sheet... But there's an unknown penny stock set to rise 2,000% from this sorry situation. Sound unbelievable? Watch this presentation for proof...
|
| |
| The Daily Reckoning Presents
| More Nukes!
| |  | | Byron King |
William "Willie" Sutton (1901–1980) was a notorious American bank robber. According to FBI records, he stole over $2 million during a criminal career that spanned 40 years. To be sure, Sutton got caught on numerous occasions, and thus did he spend over half his adult life in prison.But Willie Sutton was as intellectually honest as he was criminally dishonest. When a news reported asked Sutton, "Why do you rob banks?" Willie answered, "Because that's where the money is." In his biography, Where the Money Was: The Memoirs of a Bank Robber, Willie Sutton expanded upon this perspective. He said, "Go where the money is... and go there often." Similarly, as an investor, I pursue a similar philosophy: Go where the natural resources are...and go there often. In a world with growing population, growing prosperity, increasing demand and decreasing availability of energy and mineral resources, there have to be great investment opportunities in these resources. Indeed, that's where the money is. We should go there, and go there often. In the energy sector, different fuel sources contain different amounts of energy per mass. That is, if you burn a block of wood, you'll get a different amount of energy than if you burn a gallon of gasoline or diesel fuel or a pound of uranium. These differences influence the investment appeal of each fuel source. The table below presents the energy density of various fuel sources in terms of megajoules of energy per kilogram. A megajoule -- MJ -- is 1 million joules, or approximately the kinetic energy of a 1-ton vehicle moving at 160 km/h (100 mph). 
The point is to show that if something has a high energy density, then less physical material will release the same amount of energy. You can see why, for example, old wood-burning locomotives and steam engines gave way to coal-burning equipment. And the coal-burners eventually yielded to diesel engines. You just get more energy from the same volume of material, which matters when you're in the confined spaces of a moving piece of equipment. It's obvious, based on the raw numbers, that uranium -- and by extension nuclear power -- can supply energy with a density that's orders of magnitude more than what you get from carbon-based fuels. With numbers so utterly lopsided like these, the world is going to find it impossible to support massive populations and deal with resource and energy demand without a global nuclear power industry. The long and short of it is that the world is going to move toward nuclear power. That's why I have recommended investments in long-term uranium players like Cameco (CCJ: NYSE), and Denison Mines (DNN: AMEX), as well as direct investments in uranium via Uranium Participation Corp. (U: TSX). What about alternative energy sources, you ask? What about solar and windmills, for example? Every energy method has its uses and attractions. But the energy density of solar and wind is quite low. Sure, solar and wind have a place in many niche energy applications, but not for meeting the looming energy demands of billions of people.
For the next 30 or 40 years, the alternative energy methods will move toward the 5–7% range of overall world energy supply. But for the "big power," you need to keep focused on nuclear energy. Regards,
Byron King,
for The Daily Reckoning Joel's Note: Did you happen to catch the email Byron sent around over the weekend? It was regarding a specific stock Byron had recommended to readers of his Energy & Scarcity Investor. "The whole game just changed," urged Byron. "Bang! Consider this week as your 'before' and 'after' moment." So, what's going on? "A syndicate of MAJOR financial players just pooled $30 million together to buy a piece of this tiny oil explorer," Byron explained. "Luckily, you still have a BIG advantage over these players..." The deal Byron wrote about might take a few weeks to come together, which means you have a fantastic opportunity in your hands, right now. You could, as Byron put it, "get into a very small company sitting on a massive $172.5 billion oil discover -- before the big boys buy 'em out!" Byron has put together the following presentations, detailing the research that led him to this explosive company and your best way to invest. Time is of the essence with this one, so if you are at all interested, be sure to check it out today. Details here. | | | Why Some People DIDN'T Go Broke In The Bust
From 2008 until now, some people watched their gains go UP...as high as 448%, 556%, and even 579%... On what? Not gold or blue chips. And obviously not real estate. Yet they could soon do it - and so could you. Click here to watch the free new video that shows you how. |
| | |
Bill Bonner
| Tiny Tim's Big Fantasy
| |  | | Bill Bonner |
How America's Treasury Secretary is guaranteeing future crises by avoiding the necessary consequences of the current one.
And now over to Bill Bonner, with the rest of today's reckoning from back in Baltimore, Maryland... Markets were mostly flat on Friday. Then, this weekend, US Treasury Secretary Geithner proposed to the world's finance ministers that they cap their current account surpluses at a fixed percentage of GDP. How would that work? Why do it at all? What's the point? Oh...we were going to answer those questions. But then, we said to ourself,
'why bother?' The whole thing is a fantasy. A hallucination. And a scam. It doesn't deserve a serious discussion. Geithner is the secretary of the treasury of the world's largest economy. There is no evidence -- none -- that he has ever actually understood what is going on. If he had understood he certainly never bothered to say anything... ...that is, about the credit crisis...about de-leveraging...about the threat of too much debt...and everything else that has happened over the last three years. Instead, all he has done is REACT to the crisis as it developed...always in the same way, by attempting to avoid any big change or any big losses to the people who most deserve them. Of course, the markets were clearly signaling the need for a major change of direction. The biggest, and formerly most profitable, financial corporations in America were faced with bankruptcy...and millions and millions individuals were in big trouble too.... ...but Geithner didn't understand any of this... Still, he's the guy who's now suggesting HUGE new rules that the whole world will have to live by. Countries capping their surpluses? It is equivalent to individuals putting a limit on how much they save. What's the point of it? It would force the savers to spend...and thereby, presumably, reduce the value of whatever currency they spend (by increasing the demand side of the equation). What currency will they be spending? Easy, they'll spend the currency they are saving -- dollars! Oh that Tim Geithner! What a clever guy. Put a cap on savings and you force people to spend dollars...driving down the value of the dollar and thereby simultaneously decreasing the real value of US external debt...and making US products and services more attractive to foreign buyers. Well, our hat's off to Mr. Geithner. The man has come up with an unworkable plan that no foreign nation will actually implement in any serious way. Actually, it is a nutty plan. Forcing people to spend money? Are you kidding? It just shows how little he really understands. A real economy cannot be ordered around or organized in such a heavy handed way. Price controls, central planning, government management of business and investment -- they all always fail. Still, he's ... at least he's trying, right? Give the man credit for that...the numbskull. And more thoughts... "The French are crazy. What do they think they are doing?" The comment and question came up at a cocktail party. Our youngest son is in the French school in Washington. Occasionally, we are invited to meet other parents. "My wife is French," continued a new friend, a former banker with the IMF. "We live there part of the year and have a house near the Swiss border. But I'm thinking of selling everything in France and moving all my assets out of the country. "There is no way that this is going to end well. I mean, they're shutting down the country because Sarkozy is proposing to increase the retirement age from 60 to 62. They must be dreaming. Sarkozy is not increasing the retirement age because he is a mean fellow. He's doing it because he knows the country can't afford not to do it. "It's such a modest little reform. They actually need to do much more. Like they're doing in England. But the French are so funny. At the smallest provocation they take to the streets. They set cars afire. They think that if they are politically active and powerful enough, the money to finance these things will magically appear. But it won't. And they'll have to come to grips with reality sooner or later. "The real problem is that the promises made by the welfare state are just too ambitious. As long as the economy is on the up and up people think they can afford to expand these benefits. Each generation thinks it deserves more than its parents, because it is richer. But the trouble is that the politicians can expand the claims on wealth faster than wealth itself can expand. "And then, when it becomes clear that wealth is not expanding as fast as people had hoped, all the forecasts and the projections are shown to be nonsense. The people have been promised things that they can't possibly afford. And sooner or later some government has to come to terms with it. Sarkozy is just the beginning of the story. He's just barely tackling the real problem. He'll have to make much more dramatic cuts in order to make the budget work. "You know, Europe agreed to limit deficits to 3% of GDP. The idea was the countries would lose their voting rights in the European Union if they went over that limit. France is now at 8%. There is no question that they're going to take away France's votes. It just isn't going to happen. "But France is in trouble. And if it can't deal with its problems in a reasonable way, the problems will just get worse and worse...until they finally explode. How? When? I certainly don't know. But I do know that there is no way France can continue spending money the way it is now. "And I also know that the US is not that different. It actually has more debt than France. The average Frenchman doesn't have nearly as much debt as the average American. And at least the average Frenchman knows there is a problem. He just doesn't understand it well enough to do anything serious or smart about it. "But the average American doesn't even know he has a problem. And while Sarkozy is at least beginning to trying to bring government spending into line with likely revenues, in America that conversation really has not even begun. "In some ways, the US is much worse off than France. Neither its leaders nor its voters seem to have any idea of the problem that awaits them. "Maybe I should sell all my assets in the US too." Regards, Bill Bonner,
for The Daily Reckoning ................................................................................
Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor atjoel@dailyreckoning.com
|
| |  |  |  | All Signs Point to a Great Correction
What's new in civilization? We went to Cafayate last night. Our old friend Doug Casey hosted an intimate little dinner -- for about 150 people. He's developing a community down there -- the kind of place he wants to live in...surrounded by friends, good food, bright sun, beautiful views...and everything else a man might want.
Plaza II
Money Printing: How Counterfeiters Saved the World
| An Economic Standoff to Save the Neighborhood
I was in the living room, happily reading as the kids quietly watched a show on TV that was even more insipid than their usual choice of mesmerizing mindless pap. I was thinking to myself, "How pleasant! No noise! No strife! No arguing! No social workers telling me I have to do this for the...
Default or Hyperinflation: The US's Only Two Options
An Economic Standoff to Save the Neighborhood
| Zero Hedge Expects Civil War, Does TIME Second It?
Not exactly, but Stephen Gandel, writing for TIME's Curious Capitalist blog, certainly entertains the notion of a Fed-instigated civil war. He remarks that the upcoming November 2nd Federal Reserve meeting could "maybe" be the most important in its history. At issue is round two of quantitative easing, Bernanke's Treasury bonds buying mission -- which is...
Orwell Targets Bernanke: An Unteachable Hole in the Air (Part One of Two) | |
| | The Daily Reckoning: Now in its 11th year, The Daily Reckoning is the flagship e-letter of Baltimore-based financial research firm and publishing group Agora Financial, a subsidiary of Agora Inc. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Published daily in six countries and three languages, each issue delivers a feature-length article by a senior member of our team and a guest essay from one of many leading thinkers and nationally acclaimed columnists. |  |
|
|
|
|
The Daily Reckoning U.S. Edition
Posts
