Korean Investment Blog

The new climate change bill threatens virtually every business, consumer and citizen with higher prices for virtually every product. The new legislation could send energy prices skyrocketing and big business out of the United States. To put it simply, the new climate change bill is a tax on productivity, one we don’t need considering the current state of affairs in the US economy.

Let me begin by saying I never intended to turn InvestingBlog to PoliticalBlog. But in today’s market climate you can’t help but stay up on the idiots on DC, otherwise you might find your investments heavily in the red. With an incredibly active congress and an administration and treasury that feel every US business should be owned by the state, these times are certainly no time to be an investor.

While I typically lean Republican, this legislation has nothing to do with party lines. This legislation is important not because of global warming, but because of the huge tax that will be assessed on American’s and American businesses.

The Carbon Credit System

To understand this bill, we must first understand how the carbon credit system works. Basically the United States will issue a certain amount of carbon credits that can be bid on by businesses and people. If you want to emit a ton of CO2, you’ll have to buy a credit for that ton of carbon released.

Since the carbon credit market will work like any other free market, prices will fluctuate depending on the supply and demand for carbon credits. The Congressional Budget Office, which is one of the best economic analysis centers in DC, and likely the most worthwhile government institutions, estimates that 1 ton carbon credits will sell for around $28 each.

Gasoline generally runs about 20 pounds of c02 for each gallon. 100 gallons would make a ton, and require the purchase of one carbon credit. Under this legislation, you’d have to pay an extra $.28 a gallon for gas. But that’s just the beginning for the consumer.

Gas prices will be passed on to virtually every other good. Food prices will explode, and virtually everything at the grocery store will go up in price.

Impact is Biggest on Factories

The manufacturing base is the most important piece to any modern economy. Unfortunately these industries are often the most polluting, and as such, their goods will go up in price as factories look to offset the carbon credit cost.

Even worse is that many of these businesses may find it better to go offshore. Neither Mexico nor China have any carbon credit legislation but offer very cheap labor as well. What will ultimately happen is companies will find it cheaper to produce overseas, eliminating Americans’ off their payrolls and further expanding the US trade deficit.

Little to no climate gain

American’s will be left with little change in the economy. Our pollution will be exported to far-away places without such climate change legislation, and we’ll ship in more goods, using more gas along the way. Any way you cut this bill it looks like the worst bill ever passed by Congress.

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It was announced today that State Street Bank, manager of the pension fund at General Motors, has liquidated 100% of the equity positions in General Motors stock. GM employees no longer have a single dollar invested in the well-being of the company, and they’re the only ones talking the company up.

If this isn’t a complete sign of failure I don’t know what is. There is even less reason now for the government to keep GM afloat and financed, but this could be a breakthrough in getting some positive results for the company.

At present the company has until June 1 to get renewed and deepened concessions from bondholders and UAW members. Without an agreement, the company will face bankruptcy as it struggles to make payments without cash nor a line of credit.

I think the stock dives even lower on this news. The hourly and salaried workers at General Motors have little motivation, and now zero vested interest, in keeping the company afloat. This is really the beginning of the end, and though I’m glad GM employees were able to liquidate and get SOMETHING for their shares, the ride is over.

Move on, folks. There’s nothing to see but a huge unemployment report coming this summer.

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Just a few days ago I posted here regarding the systematic explosion of cash in the ETF industry. I wondered that as more and more people piled money into exchange-traded funds that the trackers could eventually lead. That the ETF would set the price rather than the index or commodity market, essentially stealing the market from the original and bringing it to the stock market.

Now word has been released that the USO Oil Fund, which now houses more than 18% of all NYMEX front month futures, will change its operations to rollover its positions over four days of each month. Previously the ETF had simply done the flip on one day but when 18% of all volume for the day gets sold at one time, prices swing violently.

This ETF is massive, it started with just $7 million and has since grown to encompass more than $3.8 Billion worth of oil and that is only set to go up as oil prices rebound.

Should oil move to $75 again on speculative demand I would first look to USO as the main culprit. At a reasonably small valuation of $3.8 Billion it represents 18% of all contracts. With time I could easily see where the oil fund moves to hold every contract on the NYMEX, if not even more on the foreign markets.

I can’t wait to see how the ETF industry really develops, in a few short years they’ve grown to 38% of Wall Street’s volume by dollars and number at 843. This time next year that will probably be something like 1500 ETFs with 50% of all stock market volume. I really hope not.

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While the rest of the world is piling their cash into ETFs I begin to wonder what kind of effect this might have on the market just a few years from now. Think back to 1992, when the housing market was plummeting and the Asian Financial crisis was reaching its peak. The Asian bust was largely the result of huge derivatives holdings, and what are ETFs? Nothing but derivatives.

I have to wonder where the ETF scene will take the stock market. At present you can buy into hundreds of sectors, commodities and even indices.

But with many of these ETFs you never truly own what you think you do. Usually your money is thrown into a basket, complete with futures and other complex instruments meant to artificially replicate the returns of hard assets. But to do so is nearly impossible and no one on the planet can perfect natural volatility.

Look at the most popular ETFs on Wall Street right now. They’re precious metal ETFs, iShares Silver Trust (ETF) and SPDR Gold Trust (GLD). Both of these ETFs do maintain gold and silver so they are not a derivative. But what they do is track the return of gold on the open exchange. However there is a problem with that, with each ounce put into either of these trusts it takes one ounce from the open market.

Simply, ETFs lock up supply. When you sell SLV, you’re selling shares of a trust and are unlikely to get any silver in return. This silver does not trade on the market, is not calculated in the metals markets and does not affect supply.

Let’s consider that these funds get even bigger. What if we get to the point where ETFs are all the rage, that investors focus only on exchange traded funds and forget the smaller stocks that make them up. Stocks would become nearly irrelevant, as the only price changes would come from ETFs buying and selling to eachother. And exactly how many ETFs make frequent trades, well, that number is just about zero.

So at what point is the tracker bigger than the lead? I mean, at what point do ETFs become bigger than the market they seek to track. And if this happens, does the ETF set the price for say, gold and silver, or does the ETF merely track a smaller market. Does that make any sense?

I fear what we’re doing now is going down a path of inefficient prices set by increased speculation. If ETFs continue their growth, which they should considering their many advantages particularly at tax time and when annual fees are due, they could easily grow to lock up supply of the daily commodities we need to get things going.

At this point I see ETFs as a phase that will naturally select itself out. If growth in the ETF industry continues as it has, they’ll exceed the value of the stock market in just a few years.

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