What Worries Me in 2023--Part III

 

A major issue which concerns me these days is climate change. My view differs from most in the mainstream. I am neither a climate denier of the “Drill, Baby, Drill” variety nor am I one who feel that we will become carbon neutral in the U.S. by the time some politicians are promising (2045-2050).

 

Let’s back up for a moment with an interesting story about the possible origin of the term “Climate Change.” Frank Luntz has been a long time Republican political strategist and pollster. As a political news junkie, I have seen him in action for a few decades and I must say he moderates focus groups better than anyone whom I have ever seen. In 2002, he is said to have penned a memo about climate science and recommended that candidates stress that there was no consensus about global warming among the scientific community. So, prospective lawmakers should challenge the science but instead of talking about global warming or lack of it, soften the message by using climate change as the topic title. It was felt to be less catastrophic a term than global warming. Interestingly, it has caught on all over the environmental spectrum with even rabid climate activists often saying climate change.

 

Full Disclosure---I began investing in windmill farms in 1985 and solar companies in 2002. Lesson learned was do not get stung in a good cause. Since then, both are producing energy at competitive levels and many mainstream providers and regulated utilities are getting into the game in a big way.

 

So, why do I worry? The plans to go carbon neutral are ambitious, probably unrealistic, and damned expensive (will cost trillions if existing blueprints are followed). Where will that money come from?

 

To me, there are practical approaches that are ignored. A major one is nuclear power which is clean but largely ignored by environmentalists. Even California Governor Gavin Newsom recognized this and extended the state’s last Nuke (Diablo Canyon) to shut down in 2030 instead of 2025. The federal government helped with funding.

 

We have perhaps the world’s largest supply of natural gas which burns twice as cleanly as coal and 34% cleaner than oil. Wind and solar are great, non-depleting and non-polluting but they are intermittent, so they lack 100% reliability. Natural gas is generally used as a backup. However, there is a hold on building natural gas pipelines in the US, particularly in the Northeast. We, as much of Europe, have dodged an energy bullet this year with a mild winter (to date) in the East but next year may be different. Natural gas has been described as a “bridge between fossil fuels and renewables.” Why not build the bridge (gas pipelines) where they do a great deal of good over the next 20 years?

 

Years ago, I thought that the US government would attack the energy issue as they did in World War II with rationing and the Manhattan project. It has not happened perhaps because of strong lobbying by fossil fuel producers. Putting solar panels on all new government buildings, and offering stronger tax incentives for renewables and electric vehicles for citizens would be a great start.

 

Also, many of the carbon neutral plans do not discuss improvements in technology. Again, souped up incentives for battery development, charging stations for personal vehicles that worked quickly, transmitting electricity over longer distances are all discussed but could turn the corner or help slow down climate change.

 

There is also the global human element that does not get enough attention. We seem to be getting more erratic weather patterns with more droughts, high temperatures and freak storms. This is affecting people. As the Colorado river recedes, do you really want to retire to Tucson or other low rain areas?

 

Ever hear of Lampedusa Island, Italy? Probably not. It is a geographical oddity as it is an Italian island that is 80 miles from North Africa but 130 south of Sicily. In recent years, thousands of desperate people leave Libya, Syria, Eritrea, and some west Africa nations in search of a better and/or safer life. The little island cannot handle them and the Italian government, already struggling financially, cannot absorb all the visitors to Lampedusa plus other refugee entry points. Italy is not alone. Many are trying to get access to Spain and parts of eastern Europe and Turkey.

 

Yet, global warming appears to be responsible for the long-term drought in western Africa in particular. Once rich farmland is turning to wasteland and farmers cannot afford fertilizer in many cases. Many millions may have to move north or starve in the years ahead. This is a major humanitarian crisis in the making. Private charities can help people landing in tiny Lampedusa but if it runs into millions of people, Europe cannot absorb the refugees nor afford to feed them.

 

So, yes, I worry about climate change. The US seems hideously naïve about not expanding natural gas usage and Europe faces problems ahead far beyond Vladimir Putin’s energy shutoff after his Ukrainian invasion. Like it or not, anyone reading this will likely still be using some fossil fuels their entire lifetime unless there is some surprising breakthrough with hydrogen-based fuel or battery technology.

 

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

 

 

What Worries Me in 2023--Part II

 

The topic for this post is demographic shifts in the western world. It may not sound exciting, but it is a major, if not THE major economic and social threat facing developed countries over the next 30 years.

 

Historically, the United States has always had a growing population. We were, after all, a nation of immigrants and people came from all over but largely western Europe. Even military conflicts such as the Civil War did not slow population growth much as immigration picked up the slack of young men perishing In the conflict. To maintain a level population, the “average” woman in a society needs to have 2.1 children. That is usually referred to as zero population growth or ZPG. Today, the US stands at about 1.85. So, if we do not have immigrants coming to America, our population will decline.

 

The situation in western Europe is far more serious for two reasons:

 

1)  The fertility rate is not 2.1 but hovering around 1.4. The Nordic nations and France weigh in at approximately 1.8 but Italy and eastern Europe in the 1.2 range.

 

2)  Unlike the US which has a safety net, European nations have what is known as “the provider state” which provides universal health care, low-cost higher education, and often moderate pensions for the entire population.

 

 

So, Europe is in a bind. People are living longer (due to universal health care and perhaps less stress?), but entitlements are very large via American standards. Yet, as the population ages, those still working will have a huge burden to take care of their older citizens as there will be relatively fewer of them to pay the entitlement bills. And, relative to the US, their tax rates are significantly higher.

 

If you look at individual countries, it gets scary. Take Italy, for example.  A few independent studies have said that in order to maintain present services and transfer payments, in less than 20 years, the retirement age will have to be at 77 years old PLUS 2.2 million immigrants will have to settle in Italy  ANNUALLY and work to cover current entitlement programs. Is that going to happen? I doubt very strongly that such a course of action would be politically viable. France tried to raise the retirement age a few years ago as did Greece and both ideas died quickly as the incumbent political leaders faced a massive revolt.

 

Another great example is Spain. In 1970, the then largely Catholic country had a fertility rate of 3.9 with only Ireland having a higher one at that time in all of Europe. Today, it is approximately 1.1. How is Spain going to keep their welfare state intact? After 2008, when they tried austerity to cover budget shortfalls, the government fell after massive protests.

 

So, a declining birth or fertility rate has huge consequences for public expenditure especially when most people have had a provider state covering basic needs. By the way, Japan has a far older population than western Europe and is now facing similar problems including getting young people to become farmers.

 

Okay, if you have stayed with me this far, how does this relate to the United States? Plenty.

 

At the current rate of spend, Medicare is projected to go broke by 2028 and Social Security, as we know it, will dry up somewhere between 2034-35. Social Security would be an easy fix. Raise the retirement age for FULL benefits a couple of years and increase the tax cap above the rate of inflation (currently, only the first $160,200 is taxed) for high income earners. Right now, if someone makes $10 million per year in earned income only the first $160,200 is subject to Social Security taxes. So, taxing Social Security benefits for the affluent and wealthy would help to keep the system solvent longer along with raising the cap for contributions to the fund.  Medicare is much more complicated and is in more urgent need of reform. Such actions could save both entitlements but not many members of Congress would have the political courage to do something meaningful.

 

Separately, we need to bring in more immigrants to cover our employment needs and continue to provide funds to keep Social Security and Medicare viable. This is a tinderbox issue as many Americans do not want to face economic and demographic reality or are simply racists.

 

Why, you might ask, should someone my age care about this issue? Well, I have children and grandchildren and plan to be around in 2035. 

 

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com or leave a message on the blog.

 

 

 

 

 

 

 

What Worries Me in 2023

 

Happy New Year!

 

In the last week of December, I received a few e-mails from people who live thousands of miles apart and I have confirmed have never met. They each asked, “What keeps you up at night as we enter 2023?”

 

Well, family members can confirm that nothing keeps me up at night. Regardless of the situation, I am a world class deep sleeper. At the same time, I do have concerns as we enter this new year and I do not believe that they are covered with much clarity in the major media.

 

They are:

 

1)  The condition of the US and global economy

 

2)  Global demographic trends

 

3)  Reaction to climate change

 

Over the next few weeks, I intend to cover each topic from my own perspective. Today, we touch on the US economy.

 

Candidly, I am surprised how well the economy has held up despite the inflation that we are experiencing. What I find concerning is that in recent years we have been in an “easy money trap” and continue to run huge deficits and also have a Federal Reserve addicted to money printing. Sooner or later, it must end badly.

 

I have been following this trend for 50 years. Each time the “gloom and doomers” forecast disaster. In the 70’s, it was Harry Browne and Harry Schultz. Harvey Peters wrote “America’s Coming Bankruptcy” and Alexander Paris penned “The Coming Credit Collapse.” We did have problems forecast by the gloomsters (milder than their drama but very real) yet they were always literally and figuratively papered over with more debt.

 

So, each time we have a recession or a sizable pullback in the equity markets, I always quietly ask myself—Is this the big one?”  At some point our national credit card will get over the limit. Now, the US government is different than a household. They can print money and tax the public. Yet, the value of the US dollar is based 100% on confidence. As long as people accept it and foreign investors and governments buy our debt, things can go on for a while. If we lose our status as the global reserve currency, then school is out.

 

Financial pundits agree that debt, both public and private, is uncomfortably high in the U.S. but generally mention that most other nations are in worse shape than we are. Comments such as “we are the best-looking house in a seedy neighborhood” or our t-shirt is dirty but Europe’s is filthy” abound.

 

The internet does not help things. Over the years, I have subscribed to many investment advisory and economic forecasting services. Most are not good and I cancel them. They then sell my name to other newsletter writers who fill my e-mail box almost daily with catastrophic forecasts. I rarely open them but, when I do, their predictions are more shrill than the ones I saw in 2008 which gives me pause.

 

Will the world come to an end in 2023? Nope. But we could be headed for a 1970’s style “Stagflation”. What is that? It is a period of slow economic growth, fairly high unemployment, and high inflation. It is difficult to shake as if you fight inflation too hard you kill economic growth and put an upward spike in unemployment.

 

So far, other than some highly publicized tech layoffs, unemployment is historically low. If it starts climbing, we would be in for stagflation which is my biggest fear right now.

 

More to come in the next several days.

 

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com or leave a message on the blog.