George Soros Sees Green
With Turmoil Comes Opportunity
Doomsaying is a tricky business. In the late 1970s, when commodities were king, technical analyst Bob Prechter correctly predicted the implosion of the commodity bull market and a "'super cycle'" bull market in equities. His eerily on-target prediction made him an investing superstar. Unfortunately, he then predicted the 1990s would be a severe bear market for stocks, capped by a prediction that the Dow would fall to 800 at the start of this decade.
Right now, Peter Schiff, president of Euro Pacific Capital, is the doomsayer du jour. Schiff, as you may be aware, takes credit for predicting the market crash of last autumn in his book "Crash Proof: How to Profit From the Coming Economic Collapse."
I don't begrudge Schiff some credit for the prediction (though it did come 18 months early). But like Prechter, one correct prediction from a doomsayer often emboldens them to more outlandish ones. Schiff, for one, is busily telling the business press (and posting videos on YouTube) about his prescience and saying the current stimulus package and greater government regulation of Wall Street mean the worst is yet to come.
I'll admit, there is something tempting about subscribing to bleak predictions when times are tough--after all, even the best investors lost money last year. But there are four reasons I believe Schiff is wrong.
For one, stimulus packages are a proven way of getting the economy out of recession--because Hoover didn't do it and Reagan did are significant reasons why we hold the divergent views we do of those presidents.
The second reason is that the market has actually been pretty stable since the November lows. The technical signs are strong and showing that we're in a base building phase that, at some point, will be the basis of a bull move.
The third reason is one of perspective: we've come out of severe recessions before. It's easy to think the game has changed, but history says that's very likely not the case, especially since people were predicting doom in each of those recessions, too.
The fourth reason is that for all his predictive abilities, Schiff still wasn't able to make his investor clients money in 2008, admitting in a recent article they lost "badly" last year. If someone is negative and still can't make his investors money, maybe he's not so insightful, just lucky once in a while.
Which brings me to George Soros. It's fascinating to me that Soros gets less attention than Schiff, even though Soros is better known, more successful and, in fact, published his own prescient book, "The New Paradigm for Financial Crisis: The Credit Crisis of 2008 and What it Means," early last year.
Soros' prediction was that a huge market bubble had formed thanks to loose government regulation of the financial industry and an ever widening expansion of credit to consumers and to Wall Street, which allowed the explosive growth in risky derivative products. Sounds right on the mark to me.
Not to dismiss Schiff's career, but Soros also has the benefit of an unmatched track record that doesn't rely on luck, most notably a correct bet against the valuation of the British pound that made him $1 billion in profits in one day in 1992. But perhaps Soros doesn't get as much notice because unlike the doomsayers, Soros takes a more nuanced view of the position we're in.
Essentially, his view is that this isn't the end, this is a change. That change, as he told Bill Moyers in an interview last October, is from American consumer spending being the engine of world economic growth to alternative energy and countering global warming being the driver of future growth.
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Soros's notion is this: for the past 25 years, American consumer spending has been the force behind global growth. A lot has changed in that time--25 years ago, the average fixed-rate mortgage was 13.5%, and in all likelihood one couldn't have gotten a mortgage with less than a 20% down payment. Americans also saved about 6% of their income. Lower interest rates, the expansion of mortgage products, an increase in credit cards and a shift away from saving fueled growth globally by encouraging us to spend more. Clearly, that has been played out.
A lot has also changed environmentally, laying the groundwork for Green to drive the next quarter century of economic growth. In 1983, the EPA and National Academy of Science first noted a rapid increase in carbon dioxide in the atmosphere. Since then, NASA climate data shows a sharp spike in the average global temperature, with the warmest 14 years on record occurring since 1990.
While the present economic turmoil has made other concerns more pressing, enough Americans still worry about global warming that 30% of those questioned put global warming as a top priority in a January poll by the Pew Research Center for People & the Press.
What about the price of gasoline? Thanks to the sudden drop in the price of oil, gasoline is actually cheaper now, at a national average price of $1.82, compared to an inflation-adjusted $2.39 average in 1984. That may indicate that the cost of energy is no longer a factor in going Green. That's true only if you're considering the short-term. But, as I noted to Cabot Green Investor subscribers in December, the outlook for energy supply is dire.
The oil importing nations fund the International Energy Agency to gauge oil production and demand. It's the most respected analytical body out there for oil and gas issues and isn't prone to doomsaying. In November, the IEA issued its outlook on world oil supplies. The report was overshadowed by the market crash at the time, but that doesn't make its conclusions less valid.
Even adjusted for the presumed impact of the economic turmoil on demand, the IEA says world oil demand and supply are so out of whack that even if demand doesn't grow from today's levels, by 2030 the world will need to have discovered the equivalent of another four Saudi Arabias (!) to meet demand. And the odds of that happening, the IEA noted, are impossibly low.
Consider that the bulk of global oil production comes from 800 large oilfields. The vast majority of those "giants" were discovered and tapped 40 to 50 years ago and are now producing less and less every few years. Then consider that even the modest 1.6% annual growth that the IEA sees in world oil demand means that by 2030 world demand will be 45% greater than it is today.
"Current trends in energy supply and consumption," IEA executive director Nobuo Tanaka said at the time, "are patently unsustainable--environmentally, economically and socially--they can and must be altered."
A key difference between a doomsayer and an investor is, in my opinion, that a doomsayer sees only the negative, while an investor sees opportunity in change. What about George Soros? Beyond his general belief in alternative energy, we don't know exactly what he is buying and selling right now, but regulatory filings do lend some insight.
One of his significant holdings reported in January is 56,306 shares in a company Cabot Green Investor subscribers learned of last summer--Clean Energy Fuels (CLNE). Clean Energy Fuels distributes compressed natural gas (CNG) and liquefied natural gas (LNG) at 170 gas stations in the U.S. and Canada. Natural gas has two advantages--much of it is domestically produced and it burns much cleaner than diesel or gasoline, emitting just 30% of the carbon dioxide of gasoline.
Right now the biggest customers are fleet operators like UPS, Waste Management and municipalities, as well as airports and seaports that need to reduce their carbon footprint in order to expand. The Port of Los Angeles, for instance, now requires trucks and forklifts to be converted to natural gas. Clean Energy makes money by providing fueling stations at such locations, while also providing funding and expertise in securing government incentives to potential customers.
In total, all of its operations cost Clean Energy about $2.50 a gallon, so the economics don't appear so compelling right now. But consider that national truck emissions standards will tighten in 2010, permitting just one-third of 2007's allowable CO2 levels. That's so strict some conventional engine makers, like Caterpillar, have announced they are exiting the business rather than try and comply. Yet natural gas engines are already inside those 2010 limits.
So even if gasoline prices stay low, there is plenty of demand for compressed and liquefied natural gas (CNG and LNG, respectively). And if gasoline prices surge, as the IEA suggests they should? Then Soros' bet on Clean Energy Fuels will look, well, prescient.
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Editor's Note: Cabot Green Investor is paving the way in the earth-friendly investment trend, recommending excellent growth stocks when the market is soaring and preserving capital when the market is down. The Green sector has the potential to bring even bigger gains than investors saw in the Internet boom of the last decade. Let Editor Brendan Coffey be your guide through the jungle of Green investments. Click the link below to get on board with Cabot Green Investor today.