Magic beans, unicorn blood, and bulls**t on the path to net zero

Saturday, 6 May 2023 — Albert Park

[9 min read]

Dear Reader,

It’s only been a few years since governments worldwide snuck in net zero legislation past us under the cover of a pandemic. And when I mean snuck in, consider that the UK’s House of Commons never even voted on the law! In Australia, former Treasurer Peter Costello points out no thought was given to how the target would be achieved until after it was voted into law:

‘I was in that school that always used to say, “Let’s figure out how we could do something before we announce we’re going to do it”. These days you just announce you’re going to do it and you’ve got not idea.’

Ever since the targets were imposed, net-zero plans have been in for a rough time. You see, governments didn’t figure out how net zero would be achieved. They just made a law saying that it would. Peter Costello explains:

‘For example, in this country, we now know we are going to have to rebuild the new transmission system.’

The absence of a credible plan is something governments worldwide have in common for a simple reason. You can’t come up with one. Net zero simply isn’t plausible. And that’s true for a long list of reasons, including the amount of resources needed, the cost, the reliability, and the time frames committed to.

And yet, it is the law…

If only we had dealt with poverty, homelessness, illness, and HIV in this way!

Heck, why didn’t governments just legislate against COVID instead of imposing lockdowns?

Instead of laying out how net zero would be achieved, governments simply declared the commitment and then left it to a long list of experts to do the maths and figure it out.

Unfortunately, they came to an awkward conclusion: net zero simply isn’t plausible.

Lately, though, something has changed in the public sphere too. Net-zero scepticism has gone mainstream in the media, popping the previously impervious bubble of climate change campaigners, who nobody was allowed to question in any way.

Former Snowy Hydro boss Paul Broad described the government’s 80% renewables target by 2030 as ‘bulls---’ on the radio:

‘The notion that we can have 80 per cent renewables by 2030 is bullshit.

‘Eraring CANNOT close…If the lights don’t go out I’ll be awfully surprised.’

The radio show he said it on went into detail about just how renewable energy projects have been struggling, to put it mildly.

Over in the UK, the government funded university group FIRES has warned the UK is facing the loss of 75% of its energy supply by 2050 because it can’t build the renewables system fast enough to replace the fossil fuel system, which must be shut off to meet emissions commitments.

Previous FIRES descriptions of the UK Government’s net-zero plans included ‘magic beans fertilised by unicorn’s blood’.

The most crucial flaw in net zero is a very simple one: there simply aren’t enough resources to build the energy system that net zero requires, and not even at a significantly lower level of energy use if we crunch our standard of living to save the planet.

We don’t have the copper, lithium, or other resources needed to build a vast energy grid, a vast number of renewable energy plants, a vast amount of carbon capture plants, a vast amount of electric cars, and a vast amount of energy efficient homes.

It simply can’t happen.

So, at this point, it seems clear that the attempt to reach net zero is doomed. We face a choice. Either we crush our living standards back to some lower level of energy demand, which seems unlikely in an age of electrification, or we go back to using fossil fuels.

The outrage against net zero in the media suggests Australians have made their choice: they want to keep the lights on.

What does this mean for financial markets? Perhaps the energy transition is in for a much earlier reversal than expected.

You see, the obvious investment angle of net zero, given its absurd resource intensity, is to invest in the resources needed to try and build a net-zero world. Copper, which I covered here, being the obvious example.

The campaign against mining, which is incredibly energy- and emissions-intensive, not to mention bad for the environment, has constrained the supply of resources. Including, ironically, the supply of those resources which are needed to build a net zero world.

Those mining companies that own permitted reserves of those resources, and mines that produce them with existing permits, face an optimal scenario. A demand so great nobody could possibly hope to satiate it, and a restricted supply.

Unless, of course, new supply is unleashed as climate change campaigners agree to sacrifice the environment in their cause to save it. But even then, it takes a decade to get a mine up and running.

The price spike that a genuine attempt to reach net zero would cause would richly reward the firms with a foothold and their shareholders.

Another angle is to focus on the refining of resources. But the Chinese Communist Party has already bottlenecked that opportunity. China completely dominates refining of the resources needed for net zero, as we looked into here.

But if net zero is doomed, does the investment opportunity in renewables resources still apply? Or did it peter out in 2022?

It comes down to when governments decide to abandon the doomed strategy. At what point do they admit that their targets aren’t plausible, let alone likely to be achieved?

Because whenever they do, they’ll also need to admit that vastly more coal, oil, and gas is going to be needed than previously expected. And that suggests a boom in their prices too. Which means investors need to own those stocks.

The best part that, for investors anyway, is that fossil fuel development has been severely curtailed too. So, if we get falling supply due to climate change concerns, combined with a surprise surge in demand, as renewables fail to deliver, that suggests a boom for fossil fuel producing companies.

And they’re not hard to find given the climate change campaigners love to highlight them for you…

But which should it be in your portfolio? Copper and lithium, or fossil fuels?

The answer lies in the timing as governments reverse their energy transition, or at least delay it.

Estimates from the experts I’ve been interviewing on the topic suggest the delay will have to be decades, if not indefinitely. Technology would have to change rather dramatically to combat net zero’s resource shortages, after all.

But it doesn’t matter how long net zero is rescheduled for. The point is that, at some point in the future, the optimal energy investment mix will transition from net zero’s commodities to fossil fuel producing companies.

What’s an investor to do?

The correct answer, if you ask me, is both. By holding both fossil fuel and metals mining companies, you benefit from both trends.

The biggest risk to this strategy would be a complete abandonment of net zero and renewables, which seems very unlikely, or heightened targeting of fossil fuel companies in the short term.

Right now, as net-zero scepticism grows rapidly and energy security is prioritised, the risk of fossil fuel companies being targeted is falling. That makes this an optimal time to invest in both fossil fuels and resources stocks.

The public’s awareness and opposition to net zero has reduced the risks of such an investment strategy by suggesting the return to fossil fuels will arrive sooner than expected. But it hasn’t undermined the renewable energy resource shortage.

Thanks to supply constraints on both, they could both boom.

Until next time,

Nickolai Hubble,
Editor, The Daily Reckoning Australia Weekend

Dear Reader,

China’s problems with excessive debt, adverse demographics, and decoupling from developed economies such as the US are known.

Still, China’s problems go well beyond these key economic drivers.

Corruption exists in China on a scale not even seen in Africa and the Middle East. It’s a double-edged sword.

On the one hand, you can become immensely rich with the right connections and projects. On the other hand, once you participate in that system, you can be denounced by the Party at any time and disappear into prison or a grave.

This makes senior party officials loyal and paranoid at the same time. It’s the Stalinist playbook with Chinese characteristics. Comrade Xi Jinping has used this system to become the most powerful Chinese dictator since Mao Zedong.

Slow growth for China is baked into the pie because of excessive debt. Even slower growth will prevail in the long run because of China’s radically crashing working-age population and the low productivity (but necessary) demands of eldercare. The real estate collapse is like an albatross around the necks of both consumers and builders.

The developed economies are slowly cutting China off from high-tech imports of semiconductors and equipment. Direct foreign investment is being dissuaded by the de facto expropriation of Alibaba, Ant Group (and other tech giants), and the house arrest of oligarchs like Jack Ma. Major firms like Apple are gradually moving new investment to India while others look to Vietnam, Indonesia, and Malaysia.

China is caught in the middle-income trap and there is no escape.

Escape from COVID

Throughout 2021 and 2022, China’s main approach to COVID consisted of the Communist Party’s zero-COVID policy. In practice, this meant that if a single individual contracts COVID, they are isolated.

If more than a few in one location get COVID, then an entire building or neighbourhood is locked down. No one is allowed to leave or enter the lockdown zone. Some residents are sealed inside their apartments, including steel beams welded to their doors.

An even wider outbreak can result in an entire city being shut down. This happened in Shanghai (population 26 million) and Beijing (population 22 million) in the late winter and spring of 2022.

These extreme lockdowns were ruinous to the Chinese economy. The lockdowns meant no train or air travel to or from the affected city. COVID testing tents were set up every few blocks. Residents were required to have negative test results no more than two days old. This meant continual testing on a mass scale, which was immensely expensive and personally intrusive. Social media apps and the internet are constantly censored to avoid any bad COVID news from spreading.

This inhumane and pointless policy finally pushed people past the breaking point on 24 November 2022.

A fire broke out in an apartment building where residents had been locked down for 100 days. The fire was horrific and made worse because the fire department could not get to the building to fight the blaze due to COVID lockdown barricades. The number of people burned to death has been suppressed by Communist State media but is estimated to be 50 or more.

This tragedy led to mass protests involving hundreds of thousands in Guangzhou, Shanghai, Beijing, Chongqing, and many other cities over the course of 25 November to 2 December.

The Communists resorted to mass arrests, internet censorship, seizure of cell phones, and even dispatched tanks to patrol the streets. The protests died down by early December, but a turning point was reached.

From lockdown to ‘let it rip’

Suddenly, the Communist Party of China did a 180 and decided to end all extreme lockdowns and just let the virus rip through society. In the end, this was the only practical choice.

The virus is respiratory and spreads easily through the air. It is highly contagious. There is no practical way to keep the virus from spreading. Of course, the mRNA vaccines are not real vaccines and do nothing to stop infection and retransmission of the virus.

The result of letting the virus rip is herd immunity. This is exactly how the US and Europe finally got through the pandemic (although mutations of the virus have kept the pandemic alive and could cause more severe outbreaks in future).

The problem is that China was totally unprepared for this swift reversal in public health policy. While the US and Europe may have muddled through to herd immunity, China has nowhere near the amount of medical facilities, ICU beds, oxygen, and clinical treatments needed to deal with the surge.

Already the Chinese medical system is near collapse, as patients die while lying in hallways waiting for hospital beds.

The degree of desperation is revealed by official statements that the population should resort to traditional Chinese medicine (TCM), which involves herbal remedies and other homeopathic approaches using plants and minerals.

TCM may actually be useful, but resorting to neolithic treatments is not a testament to the state of modern Chinese medical preparedness.

With China’s population of 1.4 billion, no effective vaccines, and limited hospitalisation facilities, herd immunity will come at the cost of about two million dead.

That’s not a medical failure. It’s the expected mortality count assuming 30% of the population is infected, and the fatality rate among the infected is about 0.50%. Both rates could easily be higher.

A rolling crisis

The ‘reopening’ cheerleaders on Wall Street point to the fact that the worst of the infections and fatalities may already be over in major cities like Shanghai and Beijing.

That may be true. There is good evidence that major COVID outbreaks peak after about five weeks and return to pre-outbreak levels after about 10 weeks from the initial surge.

However, that 10-week pattern applies to each outbreak in a given locality. There will be many outbreaks on a rolling basis as one city after another gets hit.

This analysis also ignores the aftermath of the outbreaks. The pandemic may wane in a major city like Shanghai but that ignores the costs in terms of the dead, burials, cremations, replacement workers, and family trauma.

The virus does not respect pedigree. Many reports show that China’s best and brightest among university professors, government officials, and entrepreneurs have died in large numbers alongside everyday Chinese people.

Finally, the possibility of new, more lethal mutations or recombination of two existing strains of the virus cannot be discounted. China unleashed the virus on the world. Now they are belatedly paying the price.

In short, the Chinese economic reopening narrative is written in sand. China’s problems are far greater than the pandemic, and there’s no assurance the pandemic itself will fade soon.

China won’t escape the middle-income trap, nor crippling debt, declining demographics, or disruptive decoupling

China is a poor country with a growing middle class and a small slice of the super-rich, many of whom are descendants of Communist Party leaders of the 1930s (so-called princelings) or relatives of the existing Communist Party elite.

China’s economic growth is now stymied by the dynamics of the middle-income trap, which affects many other emerging economies in Asia, Africa, and Latin America.

The only way to escape from the middle-income trap without being a major oil and gas exporter is through technology and high-value-added production.

That path is blocked for China because of China’s lack of an innovative culture, restraints on China’s ability to steal technology, and new prohibitions on exports of high-tech equipment and technology to China.

Other headwinds adversely affecting Chinese growth are excessive debt, demographic decline, real estate collapse, and a return to Maoist principles under Chairman Xi Jinping.

The response to the pandemic has hindered Chinese growth since 2020. Still, China’s economy would be struggling due to the other headwinds mentioned, even in the absence of a pandemic.

The myth of a robust Chinese ‘reopening’ is just that: a myth concocted by Wall Street analysts and asset managers interested in pumping Chinese stocks. This myth has had some short-term success but will soon fail, just as the prior reopening in the spring of 2022 failed.

In the end, China’s real growth will slow to a rate near 3% per annum, perhaps lower, which will not be enough to service dollar-denominated debt or lift 900 million villagers to even modest middle-class living standards.

The Chinese miracle was never a miracle, just an expected outcome for a developing economy starting from a very low base. That phase is over.

The future looks bleak from here.

All the best,

Jim Rickards,
Strategist, The Daily Reckoning Australia

This content was originally published by Jim Rickards’ Strategic Intelligence Australia, a financial advisory newsletter designed to help you protect your wealth and potentially profit from unseen world events. Learn more here.