EUCOM Economic Analysis - Part I

[Surferbeetle]

Energiewende, spare economic capacity, what the heck is FRED, linkages between soft & economic power, Japan, trillion dollar coins, France's economy...

Der zweifelhafte Erfolg der deutschen Stromexporte, Matthias Benz, Berlin, 13.1.2013, NZZ, http://www.nzz.ch/aktuell/wirtschaft...rte-1.17937315

Deutschland hat im vergangenen Jahr so viel Strom ins Ausland geleitet wie nie zuvor. Dies geht aus einer neuen Schtzung des Bundesverbandes der Energie- und Wasserwirtschaft (BDEW) hervor. Demnach exportierte Deutschland 2012 Strom im Umfang von 23 Mrd. kWh. Im Vorjahr war dieser Wert auf 6 Mrd. kWh gesunken. Als Hauptgrund fr das Exportwachstum wird der starke Ausbau der erneuerbaren Energien, vor allem von Windkraft- und Solaranlagen, angefhrt.

Der Chef des deutschen Energiekonzerns E.On, Johannes Teyssen, betont etwa schon seit lngerem, dass man in Polen und Tschechien die Stabilitt des Netzes gefhrdet sehe, wenn die deutschen Windkraftwerke im Norden zu viel Strom lieferten. Beide Lnder wollen deshalb ihre Netze mit sogenannten Phasenschiebern zeitweise abschotten. Dies luft freilich der Idee eines integrierten europischen Binnenmarkts fr Strom entgegen.

How much spare capacity does the world have left?, January 13, 2013 5:12 pm by Gavyn Davies, Financial Times, http://blogs.ft.com/gavyndavies/2013...rld-have-left/

What does all this imply for the future? In the short term, it suggests that any rise in nominal demand, stemming from expansionary policy or a recovery in private spending, is much more likely to be reflected in rising real output than in higher inflation. Demand management policy can be expansionary.

However, in the longer term, it does not support the view that the developed economies can easily return to their pre-2008 trendlines for GDP through demand expansion alone. Perhaps they can never get there, or perhaps there is a speed limit which cannot be safely exceeded [2]. In either case, supply constraints would not be as remote as the use of linear trendlines would imply.

Federal Reserve Economic Data, From Wikipedia, the free encyclopedia, http://en.wikipedia.org/wiki/Federal..._Economic_Data

British tin ears leave EU deaf to demands, By Tony Barber in London, January 13, 2013 4:46 pm, Financial Times, www.ft.com

On January 22 Angela Merkel and Franois Hollande, the German chancellor and French president, will lead celebrations marking the 50th anniversary of the Elyse treaty of postwar Franco-German reconciliation. Only tin diplomatic ears, or minds closed by arrogance, can explain why British policy makers fail to care that Paris and Berlin might be offended if David Cameron, the UK prime minister, were to choose this almost sacred date for his long-awaited speech on Europe.

Notes on Japanese Numbers (Boring), Paul Krugman, January 13, 2013, 11:28 am, NYT Blog, http://krugman.blogs.nytimes.com/201...umbers-boring/

In a way, recent developments can be seen as a demonstration of a point I’ve tried to make about bond vigilantes: even if they show up, they won’t drive interest rates up, they’ll drive the dollar down, which is a good thing. In Japan’s case, you can think of what’s happening as a growing belief on the part of investors that Japan will end up inflating away part of its debt. This has led to a currency drop; it has *not* led to an interest rate spike:

Debt Limit Showdown Spurs Debate On Trillion-Dollar Coin, By Ian Katz - Jan 8, 2013 11:33 AM MT, http://www.bloomberg.com/news/2013-0...llar-coin.html

The proposal for the Treasury Department to mint a platinum coin worth $1 trillion and deposit it at the Federal Reserve to give the U.S. enough money to pay its debts...

The Treasury will run out of funds to pay its bills between Feb. 15 and March 1, the Washington-based Bipartisan Policy Center said in a report yesterday.

IMF Concerned With the Pace of France’s Economic Reform, By: Domenico Lombardi, January 8, 2013, Brookings, http://www.brookings.edu/research/op...onomy-lombardi

While the IMF had hoped for a “competitiveness shock” reform package, Paris has responded with selective and incremental measures to be put in place gradually. On the whole, the Hollande presidency has yet to put forward a convincing reform agenda. And yet, experience teaches us that the first months of government are the most fruitful in terms of reform.

Bloomberg Risk Brief, 01.11.13, http://www.bloombergbriefs.com/files/RiskP1_011113.pdf

The 10 largest U.S. money-market funds’ holdings of French bank securities overtook their British counterparts for the first time in at least 16 months on growing confidence in the euro region and cheap U.K. state funding that lessened the need to issue short-term debt.

The funds’ French bank holdings increased by $9.6 billion to $42.8 billion in December, while British banks were cut by $11.2 billion to $29.4 billion, according to a survey of the funds’ bank holdings by Bloomberg Brief: Risk Newsletter. The bank with the largest increase was Natixis SA, the investment-banking unit of Groupe BPCE, France’s second- largest lender by branches.

[Firn]

Energiewende, spare economic capacity, what the heck is FRED, linkages between soft & economic power, Japan, trillion dollar coins, France's economy...

Der zweifelhafte Erfolg der deutschen Stromexporte, Matthias Benz, Berlin, 13.1.2013, NZZ, http://www.nzz.ch/aktuell/wirtschaft...rte-1.17937315

I will have to drop a couple of questions to my uncle, an engineer, who manages a couple of hydro power plants on this issue which is highly interesting. (Water being a hot topic as a source of potential kinetic energy storage). I personally understand all too little about the issue. It seems to me that an old and quite proven interplay of entities is heavily unbalanced by the influx of this renewable energy revolution. Adaption is necessary to overcome this, but how to do it and who pays for it?

Of course, and needless to say E.on is also one of the players and suffered heavily by the Merkel switch which was partly an expropriation for the owner of it's stock which saw their value go down a great deal. (I invested quite recently in E.On IIRC I also wrote so in this thread) So we have to take everything they say with a pinch of salt. Still the basic problem is, I guess, quite clear: The demand does often not match the (forced) supply.

With wind and solar energy the supply side does get of course determined by exogenous variables which can partly be planned for but not positively influenced. A better interBund infrastructure could spread the shocks better, but much more so a European one. As usual the solution will best come at many levels. For example energy-intensive industries might be attracted by a plain lower price to consume more on sunny and windy hours. This will mean some head-scratching and some € invested but may give a good return on it. Or for example boilers might get increasingly get switched on during the day.

[Surferbeetle]

Firn,

I owe you a thought out reply regarding the energiewende.... perhaps there are some worthwhile comparisons with the economics of hydropower rich countries?

In the meantime, here is a link to an extraordinary article by Herr. Dr. Schauble in the FAZ:

Institutioneller Wandel und Europische Einigung, Wofgang Schaulble, 11.01.2013, FAZ, http://www.faz.net/aktuell/wirtschaf...-12021794.html

Um weitere Integrationsschritte in Europa zu schaffen, werden wir auf pragmatische - also suboptimale, aber derzeit erreichbare - Schritte in Richtung weiterer Integration und damit auch auf Flexibilitt angewiesen bleiben. Das ist in der realen Welt besser als Stillstand und hufig auch Wegbereiter fr knftige systemgerechtere Lsungen

Gotta go do some chores....no rest for the wicked.

[Fuchs]

EON and RWE suffer because they're fossilized.


Energy storage with potential energy stores is very limited for geographic reasons and inefficient anyway.
The real promise lies AFAIK in electrified individual traffic.

Ten million electric cars by 2020 could soak up electric power at night and since the family cars are idle almost all the time they could be plugged into electrical grid and serve as millions of batteries. An electrical grid which can make use of millions of batteries as buffers could be a substantial improvement. The ability to absorb electrical energy at a low price (when there's a lot of wind in the north and sun in the south) and possibly even give it back at a high price (in competition with natural gas powerplants which usually run only at peak demand times) would be attractive to owners.

OK, this was but an example of the kind of non-traditional thinking about energy that fossilised corporations are capable of using for PR and presentations, but not capable of actually exploiting economically.
They're even bad at properly setting up the largest wind power investment projects, the offshore wind parks.

We have asimilar fossilised corporation problem in the automotive sector. German car makers (the big OEM brands) pretend to be innovative, but the French ones have been more innovative since the 1930's.
The real capability to develop novelties other than in internal combustion powerpacks has moved to the tier one suppliers anyway, and the OEMs are too timid in making use of their innovations, pressing for ever lower costs instead (FU Lopez!).

The result is the rise of companies such as Fisker, Tesla.
The Tier Ones could build an electric car easily (they completed functional conventional concept cars at ease), but fear that such a move up the value added chain will incur a boycott by the OEMs. It's basically a rarely described form of market failure.

[Surferbeetle]

Ten million electric cars by 2020 could soak up electric power at night and since the family cars are idle almost all the time they could be plugged into electrical grid and serve as millions of batteries. An electrical grid which can make use of millions of batteries as buffers could be a substantial improvement. The ability to absorb electrical energy at a low price (when there's a lot of wind in the north and sun in the south) and possibly even give it back at a high price (in competition with natural gas powerplants which usually run only at peak demand times) would be attractive to owners

Israel's Shai Aggassi* is someone to watch on this topic. He has been covered in HBR from time to time and it appears that his incremental rollout of a network of battery changing stations is moving forward:

Better Place, From Wikipedia, the free encyclopedia, http://en.wikipedia.org/wiki/Better_Place

Better Place is a venture-backed international company. It is formally based in Palo Alto, California, but the bulk of its planning and operations has been steered from Israel, where both its founder Shai Agassi and its chief investors reside. Better Place develops and sells battery-charging and battery-switching services for electric vehicles. Israel is also the location of the company's first large-scale commercial pilot for battery-switching services, launched to the public in early 2012.

Renault Fluence Z.E., From Wikipedia, the free encyclopedia, http://en.wikipedia.org/wiki/Renault_Fluence_Z.E.

Energy CEO Shai Agassi on recognizing a “sliding-doors” moment, A Conversation with Shai Agassi by Josette Akresh-Gonzales, May 2009, HBR, http://hbr.org/2009/05/energy-ceo-sh...rs-moment/ar/1

Speeding Ahead to a Better Place, by Elie Ofek, Alison Berkley Wagonfeld, Harvard Business School , Publication date: Jan 19, 2012, http://hbr.org/product/speeding-ahea...512056-PDF-ENG

Better Place Plans Electric-Car IPO Within 2 Years, Agassi Says, By Gwen Ackerman & Jonathan Ferziger - Jan 25, 2012 7:34 AM MT, http://www.bloomberg.com/news/2012-0...assi-says.html

Better Place LLC, a U.S. startup developing charging stations for electric vehicles that started putting cars on the road this week, expects to go public in the next two years, Chief Executive Officer Shai Agassi said.

“We’re probably not going to go for another private round between now and the initial public offering,” Agassi, 43, who founded the business, said yesterday at Better Place’s test track and showroom north of Tel Aviv. “We have enough capital to go all the way until then.”

Startup to Capture Lithium from Geothermal Plants, FRIDAY, NOVEMBER 18, 2011, Science, http://science-wired.blogspot.com/20...hium-from.html

As portable electronics get more popular and the market for electric vehicles takes off, demand for lithium—a critical element in rechargeable lithium-ion batteries—could soar. Yet just two countries, Chile and Australia, dominate global lithium production.

The Lithium Rush, By Antonio Regalado on December 21, 2009, Technology Review, http://www.technologyreview.com/phot...-lithium-rush/

In the Bolivian Andes lies a vast salt flat that may shape the future of transportation.

----

*Hmm it seems Shai Agassi is no longer the CEO or on the board of Better Place...

http://www.betterplace.com/Our-Story

[Firn]

The big question is when the economies of scale and networks will kick in with a vengeance on the side fo this revolution. Time seems certainly on it's side, it being not question of if, but when.

Notthetreasuryview discusses the 'excellent' catalogue Employment and Social Developments in Europe 2012 (08/01/2013).

I have so far not read a single line of it, but may give the abstract, the introduction and may a chapter or so a quick view as the time is limited but the pages are many.

[Surferbeetle]

...strategic macro through the prism at Brookings (Hat tip to Ned McDonnell III who shared a link:
http://www.brookings.edu/research/in...ts-black-swans ):

Eurozoned Out, By: Justin Vasse and Thomas Wright, January 17, 2013, Brookings, http://www.brookings.edu/research/pa.../eurozoned-out

The Eurocrisis has been ongoing for three years and the European Union is beginning to get its act together to build a sustainable monetary union. But, the euro is not out of the woods yet. Real dangers remain. The underlying causes of the crisis have not been addressed. The politics are pulling in a different direction from that required for a solution. Populations on the periphery are suffering from austerity measures and see no end in sight. Those in the so-called core (Germany, Northern Europe) feel exploited. The Eurozone is building new structures but they may not be sufficient to protect it against a future major crisis.

As long as an optimal solution remains elusive, the risks of failure will remain. If failure occurs, it could be devastating to the U.S. economy, surpassing the crisis of 2008. Some estimates project that the collapse of the euro would cause an immediate 10 percent loss of GDP for the global economy, with unemployment in the European Union reaching 20 percent and spiraling inflation on the EUs periphery. The United States and European Union are the two largest economies in the world and they are inextricably linked with each other through trade, foreign direct investment (FDI), and financial markets. For instance, 50 percent of U.S. FDI abroad goes to the European Union while 62 percent of FDI into the United States originates in the European Union. The rest of the world would also be adversely affected, particularly the Middle East and China, the worlds second largest national economy, both of which require robust growth to maintain domestic political stability.

A secondary but related danger is that the construction of a new Eurozone could lead to the fracturing of the European Union through a British withdrawal. The United Kingdom is extremely concerned that further integration in the Eurozone will damage its interests as an E.U. member. Public opinion also favors a renegotiation of the United Kingdoms terms of membership even though such a renegotiation would be strewn with difficulty and would likely fail. In this scenario, the Eurocrisis would remove Americas most reliable European ally from the EU and lead to a weakening of Europes capacity to act as a coherent unit in world affairs.

Free Trade Game Changer, By: Mireya Sols and Justin Vasse, January 17, 2013, http://www.brookings.edu/research/pa...e-game-changer

Pursuing and signing free trade agreements (FTAs) with both the Asia-Pacific region and Europe during your second administration will yield considerable economic and political benefits. World trade is expected to have stalled at a mere 2.5 percent growth in 2012, down from 13.8 percent in 2010. Protectionism is on the rise everywhere, especially in the form of non-tariff barriers. The Doha Round is essentially dead. At the same time, the United States and Europe need to stimulate their economies without resorting to fiscal spending. Furthermore, the United States needs to establish a broader and deeper economic presence in Asia, the worlds most dynamic economic region. Achieving both a Trans-Pacific Partnership (TPP) and a Trans-Atlantic Free Trade Agreement (TAFTA) is the most realistic way to reclaim U.S. economic leadership and make progress towards your promised goal of doubling U.S. exports. Moreover, signing both the TPP and TAFTA would have deep strategic implications. Both deals would reaffirm liberal norms and a leading U.S. role in setting the global rules of the road. The TPP would help define the standard for economic integration in Asia, without necessarily antagonizing China. TAFTA would give American and European businesses an edge in setting industrial standards for tomorrows global economy.

...and, arguably, tactical macro:

Are we seeing the great rotation from bonds to stocks?, January 20, 2013 5:07 pm by Gavyn Davies, Financial Times, http://blogs.ft.com/gavyndavies/2013...nds-to-stocks/

The past few weeks have seen a surge of inflows into US equity mutual funds, following many years in which investors have preferred allocating money to bonds rather than stocks. The week ended 9 January saw the fourth largest weekly cash flow into equity mutual funds since 1992, and large investment companies like BlackRock have spoken of a sea change in the opinion of small investors towards equities. Some analysts see this as the start of a great rotation from bonds into stocks, thus reversing the pattern of the last decade.

Others, however, point out that cash inflows from small investors tend to be contrarian indicators, since they are often driven by recent market behaviour, rather than by fundamental valuation, which is what actually determines market returns in the long run.

My conclusions from all this? Recent investor flows into equities, and improving sentiment, are driven mainly by price momentum, which works over short horizons, but says nothing about a longer term rotation from bonds to stocks. In judging medium term returns, we have nothing better to rely upon than fundamental valuation, which also fits better with the theory of finance. At present, valuation indicates that US stocks (though not European stocks) are fairly expensive compared to their own history, while bonds are extremely expensive. Based on valuation, US stocks should therefore out-perform bonds in the medium term, but overall real returns on both assets in the US may be fairly low.

[Surferbeetle]

David Cameron's EU speech - full text, Guardian.co.uk, Wednesday 23 January 2013 03.45 EST, http://www.guardian.co.uk/politics/2...ech-referendum

Seventy years ago, Europe was being torn apart by its second catastrophic conflict in a generation. A war which saw the streets of European cities strewn with rubble. The skies of London lit by flames night after night. And millions dead across the world in the battle for peace and liberty.

As we remember their sacrifice, so we should also remember how the shift in Europe from war to sustained peace came about. It did not happen like a change in the weather. It happened because of determined work over generations. A commitment to friendship and a resolve never to revisit that dark past – a commitment epitomised by the Elysee treaty signed 50 years ago this week.

What Churchill described as the twin marauders of war and tyranny have been almost entirely banished from our continent. Today, hundreds of millions dwell in freedom, from the Baltic to the Adriatic, from the Western Approaches to the Aegean.

And while we must never take this for granted, the first purpose of the European Union – to secure peace – has been achieved and we should pay tribute to all those in the EU, alongside Nato, who made that happen.

But today the main, overriding purpose of the European Union is different: not to win peace, but to secure prosperity.

As Chancellor Merkel has said, if Europe today accounts for just over 7% of the world's population, produces around 25% of global GDP and has to finance 50% of global social spending, then it's obvious that it will have to work very hard to maintain its prosperity and way of life.

Third, there is a growing frustration that the EU is seen as something that is done to people rather than acting on their behalf. And this is being intensified by the very solutions required to resolve the economic problems.

And my point is this. More of the same will not secure a long-term future for the eurozone. More of the same will not see the European Union keeping pace with the new powerhouse economies. More of the same will not bring the European Union any closer to its citizens. More of the same will just produce more of the same: less competitiveness, less growth, fewer jobs.

And that will make our countries weaker not stronger.

That is why we need fundamental, far-reaching change.

We believe in a flexible union of free member states who share treaties and institutions and pursue together the ideal of co-operation. To represent and promote the values of European civilisation in the world. To advance our shared interests by using our collective power to open markets. And to build a strong economic base across the whole of Europe.

And we believe in our nations working together to protect the security and diversity of our energy supplies. To tackle climate change and global poverty. To work together against terrorism and organised crime. And to continue to welcome new countries into the EU.

For an EU without Britain, without one of Europe's strongest powers, a country which in many ways invented the single market, and which brings real heft to Europe's influence on the world stage, which plays by the rules and which is a force for liberal economic reform would be a very different kind of European Union.

And when the referendum comes let me say now that if we can negotiate such an arrangement, I will campaign for it with all my heart and soul.