By Charles Payne, CEO & Principal Analyst
Someone once said that the more things change the more they stay the same. Last week could have signaled a changing of the guard with respect to a gnawing issue, energy. The President’s decision to holdup offshore drilling and the approval of a windmill farm off the coast of Cape Cod delighted many opponents of fossil fuels, but it must have also delighted many in the Middle East, too. Let’s not forget that the Chinese and other nations are looking to supercharge their economic growth. Making the transition to alternative energy is going to be very expensive and very tedious. But, the oil spill hitting shore in the Gulf of Mexico has brought out the propaganda machine in full force. There was nonstop chatter over the weekend about evil oil and the need to make the switch to clean alternatives right now. It would be lovely to flip a switch and magically power our homes and businesses with God’s cleaner gifts but it’s not possible.
Oil crises in the 1970s and in 1980 were the source of my high school yearbook theme: “The Energy Challenge.” We featured illustrations and architectural drawings for solar homes and wind homes. My contribution was the Mighty Well raising into the sky and releasing a torrent of oil soaring toward heaven (see above bottom left panel). The students at Art & Design High School that put the 1980 yearbook together (including yours truly) felt this energy problem was theirs to solve.
Now I talk to my 13 year old son and he feels like all of this stuff like solar and wind is new and revolutionary. I suspect he and his friends will feel compelled to believe that this is their personal challenge as well. I wanted to convey the immense power of oil in my illustration; that power has only been enhanced since then. It’s understandable that we want to mitigate the power of oil and those that control oil, but do we cut our nose to spite our face? Are we going to be so ideological as to lose our place on the world’s economic ladder in our attempt to reach the energy Shangri La that my classmates and I assumed was right around the corner? We really have to be smart about how we get from here to there, acknowledging the sense of urgency, our fragile economic state, and the competitiveness of the nation. We aren’t the first generation to have a sense of urgency.
That’s not the only irony; the would-be solutions have been with us since the dawn of civilization. Greeks and native Americans built dwellings facing the sun to heat their homes, Romans used glass in windows and built glass houses for plants, the first solar collector was developed in 1776, the solar steam engine in 1861, light converting photovoltaic cells built in 1891, commercial solar water heaters patented, and in 1921 Albert Einstein won the Nobel Prize in physics for his work on photoelectric effect. Advances continued to happen, including the Czochralski meter developed for producing highly pure crystalline silicon, but oil was too cheap to care. The 1970s oil crisis sparked the DOE to finance the Federal Photovoltaic Utilization Program, but until the most recent oil spike there has been a pedestrian move toward the adoption of alternatives.
Last week the Administration gave the green light to the first offshore windmill farm to mixed applause on the Left and dead silence on the Right. Some that would have otherwise cheered the decision were angered because the windmill farm is off the coast of Nantucket. Be that as it may, I wonder about the financial angle. Proponents of the $2.0 billion 130 windmill project say that when complete it will provide 3/4 of Cape Cod’s power. Hmm…there are 225,000 people living there so quick back of the napkin math (very rudimentary) suggests if possible to replicate around the nation we could solve our energy problems for something north of $3.0 trillion a year. This doesn’t include what we spend on moving things around like ourselves and goods. I’m glad that the first windmill farm is visible from shore as it takes away one of the most selfish arguments from the “shared sacrifice” crowd. But, this project will show us something else, too.
According to Rep. William Delahunt (D-MA; his district includes Cape Cod) this project will raise the region’s power cost not lower it. As this reality seeps into the public conscience the greens are going to put pressure on the government to change the equation. Oil simply has to be more expensive. Channel surfing Friday night I stopped on Bill Maher to listen to him and his always sycophantic panel layout exactly what’s going to be attempted.
Well known economist and would-be voice of reason on the show this week, Laura Tyson, said that the price of oil must be higher in order for the transition to alternative to happen in a free market society. There is no doubt that a massive oil tax awaits. But, how the heck will such a regressive tax play on Main Street? It will play terribly, of course. The solution is to take the “profit windfalls” from oil companies and redistribute those funds to certain taxpayers or non-payers. This knocks out oil company profits, hastens acceptance of alternative energy sources, and redistributes money away from job creators. I wish that people foaming at the mouth about stopping drilling immediately would walk or ride a horse.
In the meantime, crude oil is on the cusp of breaking out as the fear premium begins to manifest over supply interruptions. A spike in crude to $90.00 a barrel could have dire consequences on the fragile economic rebound.
Greek Rescue
Well it had to happen, and did, but the question now is will it work? I guess from the stock market’s point of view it doesn’t matter at the moment as Greece has only kicked its problems down the road. The bailout drama is going to pass, and while expensive for all observers including America (as the largest contributor to the IMF) it removes one of the darkest and more ominous clouds that spooked the natives last week. Germany is chipping in 28% of the bailout despite 56% opposition by Germans. The $146.0 billion rescue is not only costly and embarrassing but could establish precedence for the situations in Portugal and Spain. Still, the market will exhale.
What the Greeks gave up:
* Government worker bonuses cut by 8%.
* Duties on fuel, cigarettes, alcohol, and luxury goods increased 10%.
* Salaries frozen for three years.
* So-called 13th and 14th month holiday wages eliminated (workers earning less than €3,000 will get €300 for Easter and the summer plus €500 for Christmas).
* So-called 13th and 14th month holiday wages for pensioners eliminated (pensioners receiving less than €2,500 will get bonuses of €200 for Easter and summer and €400 for Christmas).
* Public investment cut by €500.0 million.
* Main sales taxes increased to 23% from 21% and 11% from 10%.
Admitting that the civil service was “the big sick man” of Greece, Prime Minister Papandreou said his government had no choice. Moreover, despite the political cost he feels that “the avoidance of bankruptcy is the national red line.” He has four years to see if the plan works or not. Here’s how it’s intended to be successful.
Economic Data
Personal Income & Spending
Benign, but interesting, captures the essence of this morning’s personal income and spending report. On the one hand, income and spending in March were in line to consensus forecasts. Personal income continues to be in positive territory on a monthly basis, but not exactly at strong rates. How good was the report, however, in light of the following factors?
1. Transfer receipts increased $24.9 billion from +$7.3 billion in February.
2. Emergency unemployment compensation added $12.0 billion to the month (have pointed this out in our color of initial claims reports).
3. The savings rate dipped to 2.7% from 3.0%, opening the debate whether the improvement in economic conditions is leading to the same unsustainable habits by households as in the expansion. Or, are consumers whittling down savings to maintain their everyday needs?
4. Although manufacturing jobs have come back in light of the improved global demand backdrop, wage growth has been muted. In March, wages increased $300.0 million from a $1.1 billion drop in February. It would appear that overtime pay continues to be closely watched and that those returning to the factories are earning less than before.
In Defense of Goldman
Over the weekend at his famed shareholder’s meeting Warren Buffett came out with a spirited defense of Goldman Sachs (GS) and CEO Lloyd Blankfein. When asked his choice if Goldman was forced to take a new CEO, Buffett replied “I’d vote for his twin.” In the meantime, he suggested that Berkshire Hathaway isn’t too big to fail and wouldn’t be exposed to financial regulatory reform as it’s not so “dangerous to the system” to need to put up extra collateral.
Charles Payne is the CEO and Principal Analyst of Wall Street Strategies . This post was republished, with permission, from his company’s column, WStreet Market Commentary.
