Fundmastery Blog

Kurt Brouwer November 12th, 2009

Jason Zweig asks a very good question in a Wall Street Journal column:

ETFs Causing Bubble in Emerging Markets? (Wall Street Journal, November 10, 2020, Jason Zweig)

U.S. investors have pumped roughly $26 billion into emerging-markets funds so far this year. Of that, $15 billion came in through exchange-traded funds — portfolios that hold every stock in a market benchmark with utterly no regard to price.

…As money pours into the ETFs, they must mechanically match their holdings to those in the emerging-market indexes. That forced buying drives up stock prices, attracting still more new money into the ETFs, spiraling stock prices even higher.

…Consider Brazil. The iShares MSCI Brazil Index ETF has nearly tripled in size over the past 12 months. Now at $10.9 billion in assets, it has vacuumed up $2 billion in new money this year. Fully 38% of the fund is invested in only two firms: oil giant Petrobras and mining company Vale do Rio Doce.

Yikes.  U.S. regulations limit ETFs from huge concentrations in a given emerging market stock, but that limitation is still a matter of perspective because 38% in two stocks seems pretty concentrated. Unfortunately, the nature of many emerging market economies is that there are only a few large, publicly-traded companies in which to invest.  When a country specific ETF or mutual fund gets a flood of new cash, the only practical way to put that money to work quickly is to invest in large companies.

The Wall Street Journal continues:

…Thanks to obscure provisions of the U.S. Internal Revenue Code and the Investment Company Act of 1940, which governs how mutual funds are organized, ETFs can’t allow their assets to become over-concentrated in a handful of holdings. In general, they can’t keep more than 25% of their money in a single stock, and at least half of their assets must be in securities that each account for no more than 5% of total holdings.

Having 25% of an ETF’s entire portfolio in one stock can lead to problems at the fund level too.  Let’s say investors tire of Brazil and want to pull out 25% of the ETF’s assets.  The ETF (or mutual fund) has to sell shares in order to raise cash.  Ideally, the ETF would sell shares across its portfolio, but problems can ensue.

With only two very large holdings that together add up to 40% or 50% of the fund, it’s not practical to raise the 25% cash needed just by selling Vale and Petrobras.  The reason is that the fund’s selling of large amounts of stock would almost certainly put pressure on the share price of those companies, thus hurting the ETF’s net asset value and precipitating more sales of the ETF by rattled investors.

To avoid too much selling pressure on the two main holdings, the ETF might want to raise cash by selling smaller company shares.  Unfortunately, the same problem occurs.  Sales of even modest shares in thinly-traded small company stocks would probably lead to lower prices, leading to a lower NAV, which leads to more selling of ETF shares…You get the idea.

The Wall Street Journal continues:

…So what does all this mean for investors? ETFs probably haven’t caused a bubble, and they might even help a bit to prevent one from forming. But many will remain superconcentrated bets on very risky markets. If you invest in an ETF with most of its assets in a few stocks and think you have made a diversified bet, the real bubble is the one between your own ears.

The answer is that ETFs and mutual funds do not pump up emerging market stock markets all by themselves.  But, they do exacerbate the market mood swings, both on the way up and the way down.

My takeaway from this piece and from my experiences with emerging markets over the past 30 years is that the long-term returns from an investment in emerging markets should be higher than returns from investments in developed economies.  Therefore,  it may make sense for a diversified investor to have a stake in these rapidly-growing economies.

Like shark’s teeth…

However, the boom and bust cycles in emerging economies are far more pronounced too, so you have to patient. Like shark’s teeth, getting in is easy, but getting out unscathed can be more difficult…and more painful.

• Business , ETF , Energy , Geopolitics , Investing
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Kurt Brouwer November 2nd, 2009

What happens when we enter high inflation?

My experience with inflation dates back to the 1970s and early 1980s.  Inflation averaged almost 8% for the entire decade of the ’70s, but it cranked up into double digits in 1979.  Let’s head back to those days of yesteryear — the early 1980s — and compare some key indicators to the situation back then.

Here is a good chart showing key interest rates plus inflation and unemployment, then and now:

Source: Carpe Diem

I suspect you could win some bets with some of these statistics.  How many folks remember that home mortgage rates hit 18% back then?  Or, another statistic that is not shown in the chart is that home mortgages rates averaged 12% from 1979 through 1985?

Is inflation an immediate problem?

Inflation is not a huge problem now as it was throughout the 1970s and early 1980s.  For example, inflation is now running in the Fed’s sweet spot of 1-2%.  However, given all the monetary stimulus and government spending we have seen, inflation is definitely a threat, but one that has not really manifested itself yet. I do not expect us to get back to the inflationary climate we saw in the 1970s, but none of us knows what lies ahead.

If you believe inflation is on the way, you also need to figure out where in the inflationary process we are.  If, like the early 1970s, you think inflation is underway and the Federal Reserve will not attack it for quite a while, then inflation hedges make some sense.  However, if you think the Fed might be planning to raise interest rates soon in order to counteract inflation, then inflation hedges could be a problem.  Here’s why.

If inflation went quite a bit higher, the Fed would eventually be forced to raise short-term interest rates.  Long-term interest rates would certainly go up and that would be bad for those holding long-term bonds.  Once interest rates begin moving up, then economic activity would probably slow down, bringing us into recession and that would hurt most other assets such as real estate and stocks.

For example, in 1979, the Federal Reserve (under Chairman Paul Volcker) decided to really attack inflation by raising the Fed Funds rate (short-term interest rates).  As you saw in the chart above, interest rates on home mortgages went way up.  As rates went up, economic activity fell off and we entered a recession.  In that environment, most assets fell (real estate, stocks, bonds).  Gold prices lagged the decline in other assets, but they also fell.

Gold  in 1980 — from darling to dog in two years

In fact, gold hit a high point in 1980 of $875 per ounce, but it fell as low as $463 within a few months.  Gold prices went back up into the $700 range, but by 1982, gold prices had fallen to a low of $298 per ounce.  That’s right.  From a high of $875, the price of gold fell to around $300 within a couple of years. Beginning in 1982, inflation fell quickly from the double digit level, but gold prices fell much more quickly as gold had a 60% price decline.

Now, gold is hitting new prices highs due, in my opinion, largely to the weakness of the U.S. dollar.  There are other factors at work in the price of gold, but for U.S. investors the dominant issue at work is the falling dollar.  The point here is that you need to make sure you are buying gold — or any other asset — for good, solid, long-term reasons.  A little further on I’ll give you my thoughts on the best way to buy gold.

What should I do about inflation?

If you believe high inflation is coming our way, how do you protect your portfolio? This piece from the Wall Street Journal covers some solutions and we add a few more ways to protect your portfolio from the ravages of high inflation.

However, be careful out there, because it is not as easy or straightforward as some would have you think.  The key takeaway I have for you is that you should seek investments that you believe are undervalued and likely to go up in value.  That’s how you keep your portfolio growing:

Inflation-Protection Strategies Offer Investors No Guarantees (Wall Street Journal, October 5, 2020, Jeff D. Opdyke)

Worried investors have been looking for insurance in the form of assets such as mutual funds and exchange-traded funds focused on gold, commodities and Treasury inflation-protected securities, or TIPS. In the past year, interest in TIPS funds in particular has been running at record levels, with some weeks recording more than $400 million in sales.

But many of these investments have never been tested during a bout of meaningful inflation. The last time inflation ramped up significantly was three decades ago. Yet TIPS have been around only since the late 1990s, and commodity funds are of even more recent vintage, as are the gold funds that invest in bullion or track the metal’s market price.

This is a really important point.  Wall Street is great at coming up with new and complex investment opportunities.  However, the track record on Wall Street innovations is not good.

Be cautious with new or untested investments

I think of it just like new operating systems for a computer.  I never rush to upgrade my computer with the latest, groovy operating system because I know there will be bugs.  I wait a few years usually before upgrading so that the bugs will largely be fixed before I make the switch.

I view innovations from Wall Street with even more skepticism than I do new operating systems for my computer.  In general, if it is new — and complex — and it’s from Wall Street, I pass.

As an example, consider commodity-oriented exchange-traded funds (ETFs).  They are new and relatively untested, so be cautious.  One critical issue with commodity mutual funds or ETFs is whether or not they actually hold commodities or just a basket of futures contracts for a given commodity.  With precious metals, it is possible to actually hold a commodity such as gold.  However, some commodities such as agricultural products or even oil or gas are less likely to be owned directly by a given fund.  In many cases then, an ETF or mutual fund just holds future contracts or notes redeemable by a bank.

There are some mutual funds such as Pimco Commodity Real Return Fund (PCRDX) that seek to benefit from investments in commodity-related securities.  Here’s how Pimco describes the investment strategy:

PIMCO manages CommodityRealReturn Strategy by combining a position in commodity-linked derivative instruments backed primarily by a portfolio of inflation-indexed securities…Other fixed income instruments may also be used tactically in the portfolio. The commodity-linked derivatives capture the price return of the commodity futures market, while our active management of the fixed income assets seeks to add incremental return above those markets, along with additional inflation hedging…

This type of fund can give you exposure to commodity-related investments, but it is no walk in the park.  We use this fund a bit, but we do so knowing it can be very volatile.  For example, in 2008, it fell over 43%.

Tracking error

Commodity mutual funds or ETFs have the potential to go up in value due to inflation, but they are inherently volatile.  And, as we saw above, they often also invest in futures contracts and other so-called derivatives that can lead to unintended consequences as shown by this piece from MarketWatch.  It illustrates the point with examples of commodity or precious metals ETFs that had results wildly divergent from the actual commodity or metal they are tracking:

…The United States Natural Gas Fund (UNG) , for example, has tumbled 50% this year while natural gas prices are down about 12%…

Natural gas prices go down so you expect the fund to go down, but a loss of 50%? Ouch.

…PowerShares DB Oil Fund’s flexible strategy helps it navigate market conditions…Since the fund’s inception in early 2007, it has gained about 16% while oil prices have risen about 40%…

Nothing wrong with a gain of 16% since 2007, but that return significantly lags the actual increase in oil prices.  As long as you understand what a commodity or precious metal mutual fund or ETF does, then that’s fine.  I suspect many investors in UNG are a bit mystified though.

If you are interested in investing in precious metals, I would simply just own them directly.  That is, buy some gold coins or silver coins and hold them in a safe deposit box.  If you do go that route, you have the coins and there is no muss or fuss. As a second best choice, I would buy an ETF such as the SPDR Gold Trust (GLD), which, by its prospectus, actually buys and holds gold at its custodian in London.

Other ETFs or mutual funds investing in precious metals or commodities may simply be putting together a basket of futures contracts on the commodity in question.  That’s fine if you have faith in the ETF or fund provider, but how exactly those contracts will perform in volatile markets is a bit of a question mark.

The Wall Street Journal continues:

…Though long heralded as a hedge against inflation, gold hasn’t always gone along for the ride when U.S. consumer prices are rising. Consider data from Morningstar Inc.’s Ibbotson Associates research and consulting unit: The correlation of spot gold prices to an Ibbotson-tracked inflation benchmark is just 0.096. (Correlation is perfect at 1; the closer to 0, the less the correlation.)

Certainly, gold has done well in some inflationary periods, like the late 1970s, when the metal spiked above $800 an ounce. Still, investors would do better to view gold as an international currency that hedges against weakening paper currencies, particularly the dollar. For instance, the U.S. dollar index, tracking the greenback’s performance against a basket of currencies, has slipped more than 13% since March, when the index hit its peak so far for this year. Gold prices, meanwhile, are up more about 14% so far this year.

…But there’s another issue: What does your gold fund own?

Exchange-traded funds such as SPDR Gold Shares and related trust products such as Canada’s Central GoldTrust own physical bullion, held in secure bank vaults and regularly audited.

Others don’t own physical gold and instead seek gold exposure through derivatives. PowerShares DB Gold, for instance, tracks an index of gold-futures contracts…

In mutual funds or ETFs that invest through futures contracts on gold or silver, there are a number of risks.  The obvious one is that spot prices for a given precious metal and futures contracts for that metal have very different prices as we saw from the examples above.  In a rising market, the fund would often underperform spot prices.  That can be very disappointing if you bought a fund and the precious metal followed the trajectory you anticipated, yet the fund lagged far behind.

So, there is the issue of the internal structure and strategy of the fund or ETF.  But, there are also other issues.  The Wall Street Journal continues:

…Many commodity-based securities are exchange-traded notes, or ETNs, which pose a different risk. Unlike ETFs, which generally own a pool of hard assets or securities, ETNs own nothing. They are promissory notes issued by a bank, meaning they’re unsecured debt; the return you earn is calculated based on the movement of an underlying commodity index.

“You’re loaning money to a bank, and the bank pays you the return of the underlying index,” Morningstar’s Mr. Burns says…

Hmmm.  Loaning money to a bank.  What could go wrong?

Going beyond precious metals or commodity funds, here are some thoughts on different asset classes of funds and how they might fare during inflationary times:

Money market mutual funds: One very good investment in times of high inflation is cash in a money market funds.  Assuming interest rates go up due to inflation, the return on the money market fund should go up too.  In a money market fund, interest rates are variable, so your money will begin earning higher interest as soon as rates go up.

Short-term & intermediate-term bond funds:  If you have some fixed income investments, as a first step for an inflation conscious investor, I would shorten the maturity of any bonds or bond funds you own and use short-term and intermediate-term bond funds primarily.  You could also put some assets in a fund that invests in Treasury Inflation Protection securities as mentioned above.

U.S. stock mutual funds: Stocks can do quite well in a moderate inflationary environment, in particular stocks of companies that have pricing power.  However, if inflation really takes off, eventually the Federal Reserve would have to raise interest rates and that would result in a recession in all likelihood.  Recessions are not generally good for stocks.

International stock mutual funds:  The points made above about U.S. stock funds apply generally to international stock funds too.  In addition, there is the currency issues.  That is, most international funds hold stocks in currencies other than the U.S. dollar.  As such, if inflation has a negative impact on the dollar, then those funds should benefit.  The flip side is true also though.  That is, if the dollar strengthens, then most international funds would suffer a bit due to their non-dollar exposure.  Right now, international stock funds are benefiting from higher share prices plus currency gains from the falling dollar.

Real estate mutual funds:  Real estate has been struggling for a couple of years now.  Residential real estate started falling first and now commercial real estate is taking a big hit.  Assuming you are a long-term investor and assuming you are worried about inflation, real estate funds are worth a look.  It may be premature at this point because real estate is still weak, but historically real estate has done pretty well during inflationary times.  I would wait a bit on this though.

In closing, I’ll make a couple of points.  First, there is no guarantee that we will go through a high inflationary period.  There is pretty solid evidence that inflation will be moving up at some point, but that does not mean we will get back to the type of inflation we saw in the 1970s.  Also, as you know, disinflation, not to mention, deflation, is still a possibility although probably a much lower one than inflation.  But, if the economy fails to re-ignite, we could drift into another recession in a year or two and that would mean most inflation-centric investments might suffer.

When it comes to investing, I believe a diversified portfolio works best because the future is not knowable.  That is, do not bet all your assets on one specific scenario such as high inflation.  You can certainly do things to lessen the impact of inflation on your portfolio, but do not put all your assets in one narrow strategy.

Disclosure:  Kurt Brouwer owns shares of Pimco Commodity RealReturn Fund (PCRDX)

• ETF , Economy , Energy , Geopolitics , Investing , Money , Mutual Funds , Personal Finance , debt , inflation
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Kurt Brouwer October 19th, 2009

In a post on the Cash for Clunkers program, I joked about a similar program for appliances.  But, I should not have joked because such a program was included in the economic stimulus program passed earlier this year.  CNBC reports [emphasis added]:

Dollars for Dishwashers? Appliance Rebates on the Way (CNBC, August 20, 2020, Christina Cheddar Berk)

…The government’s so-called “Cash for Clunkers” program has been grabbing headlines, but it’s not the only federal program putting money back into consumers’ pockets. A new government program is poised to help appliance manufacturers the same way “Clunkers” gave a jump start to auto manufacturers.

As part of the Obama Administration’s economic stimulus bill, nearly $300 million was set aside to fund a state-run rebate program for consumers purchases of Energy Star-qualified home appliances.

Like the “Clunkers” program, the plan takes aim at energy guzzlers. However, unlike in the popular auto program, consumers will not have to turn in their old appliances in order to buy a more efficient one and qualify for the rebate. However, the exact criteria remain unclear because states are still drafting their individual plans, with the hope of having the programs up and running by the end of this year…

Great line that says so much, ‘…the exact criteria remain unclear…’  It really is impossible to parody Congress anymore.  And, of course, the fact that Cash for Clunkers has been a fiasco will not stop implementation of Dollars for Dishwashers.

Now, we find that even Dollars for Dishwashers was not the end of the government’s effort to subsidize our purchases.  We also have Cash for Golf Carts.

Cash for Golf Carts 

As part of the American Recovery & Reinvestment Act of 2009 (ARRA), there is a stimulating program that is helping golfers buy electric golf carts.  I am not knocking golfers with this post, in fact, I play golf from time to time.  I even spent several years of my wayward youth caddying at a tony country club.

However, I really don’t see why we need to borrow money — that’s what economic stimulus really means at this point — to subsidize golfers who want to buy a cart, do you?

One problem with very large government programs is that there are always unintended consequences.  I suspect the legislators who worked on this program did not really intend to give electric golf cart sales a boost, but who knows what evil lurks in the heart of the vast golf cart lobby? This editorial from the Wall Street Journal describes  program [emphasis added]:

Cash for Clubbers (Wall Street Journal, October 17, 2020)

…Uncle Sam is now paying Americans to buy that great necessity of modern life, the golf cart.

The federal credit provides from $4,200 to $5,500 for the purchase of an electric vehicle, and when it is combined with similar incentive plans in many states the tax credits can pay for nearly the entire cost of a golf cart...which is typically in the range of $8,000 to $10,000. “The purchase of some models could be absolutely free,” Roger Gaddis of Ada Electric Cars in Oklahoma said…

Free.  When it comes to almost any consumer product, if you make it free, you can in fact stimulate demand. That’s not exactly news though.

The golf-cart boom has followed an IRS ruling that golf carts qualify for the electric-car credit as long as they are also road worthy. These qualifying golf carts are essentially the same as normal golf carts save for adding some safety features, such as side and rearview mirrors and three-point seat belts. They typically can go 15 to 25 miles per hour.

…The IRS has also ruled that there’s no limit to how many electric cars an individual can buy, so some enterprising profiteers are stocking up on multiple carts while the federal credit lasts, in order to resell them at a profit later…

Great.

This golf-cart fiasco perfectly illustrates tax policy…politicians dole out credits and loopholes for everything from plug-in cars to fuel efficient appliances, home insulation and vitamins…then insist that to pay for these absurdities they have no choice but to raise tax rates… 

This is kind of funny in a way.  We don’t generally think of golfers who tootle around in golf carts as needy, but they are just responding to incentives, so you can’t really blame them.

However, if you think of this as a wasted and misguided use of our money, then it’s not so funny.  And, if you multiply this sort of idiocy thousands of times in many different industries, then it starts to get infuriating.

Congress & the vast golf cart industrial complex

I doubt if anyone in Congress is in thrall to the vast golf cart industrial complex, but the American Recovery & Reinvestment Act is now funding well-to-do golfers who want a FREE personal golf cart.  I shudder to think of what’s next.

See also:

50 Ways the Feds Waste Our Money

CRASH for Clunkers

Clunking toward health reform

Convicts Cash In On Fed Stimulus

We’re in the best of hands

Clunk

Collateral Damage From Cash for Clunkers

• Business , Economy , Energy , Geopolitics , debt , deficit , income taxes
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Kurt Brouwer September 9th, 2009

Two pieces from the Los Angeles Times illustrate the crazy state of politics when it comes to going green.  On the one hand, we have this report about a state mandate to utility companies that they produce more and more power from wind, solar and other alternative sources:

…boosting the use of solar power, wind generators and other renewable energy sources is seen as a boon for both the environment and the economy in electricity-hungry California.

But with two weeks left in the legislative session, Democrats are hustling to fulfill a commitment they made to Gov. Arnold Schwarzenegger to pass a law to require all utilities to get a third of their power from “green” sources by 2020...

Then there is this conflicting report, also from the LAT, about Senator Feinstein’s opposition to alternative energy development on vast swathes of land:

…In a move that could pit usual allies — environmentalists and the solar and wind industries — against each other, Sen. Dianne Feinstein (D-Calif.) is preparing legislation that would permanently put hundreds of thousands of acres of desert land off limits to energy projects. The territory would be designated California’s newest national monument…

And people wonder why it is hard to get things done these days.  Assuming developing major sources of alternative energy is a worthwhile goal, then it would seem to follow that those projects have to be built somewhere.

(LA Times pieces via Small Dead Animals Blog)

As we have pointed out before, there are a lot of significant issues that have to be addressed if we are really going to produce meaningful amounts of electrical power from alternative energy sources such as wind, solar, biofuel and so on.

Powering the Electrical Grid

This piece from the New York Times was published last year, but it ably covers the issues facing us.  In the photo below, we see kids splashing around in their backyard pool overlooking the Maple Ridge Wind farm near Lowville, N.Y. [emphasis added below]:

Source: New York Times / Mike Groll / AP

Wind Energy Bumps Into Power Grid’s Limits (New York Times, August 26, 2020, Mathew L. Wald)

When the builders of the Maple Ridge Wind farm spent $320 million to put nearly 200 wind turbines in upstate New York, the idea was to get paid for producing electricity. But at times, regional electric lines have been so congested that Maple Ridge has been forced to shut down even with a brisk wind blowing.

That is a symptom of a broad national problem. Expansive dreams about renewable energy, like Al Gore’s hope of replacing all fossil fuels in a decade, are bumping up against the reality of a power grid that cannot handle the new demands.

The dirty secret of clean energy is that while generating it is getting easier, moving it to market is not.

These are the hard, technical limitations on energy and on switching to alternatives.  Our energy infrastructure has been built up over decades and it will be expensive and time-consuming to make significant changes.  I think we need to do so, but we should avoid the assumption that this will be easy or that it can be done without other environmental tradeoffs.

The NY Times continues:

The grid today, according to experts, is a system conceived 100 years ago to let utilities prop each other up, reducing blackouts and sharing power in small regions. It resembles a network of streets, avenues and country roads.

“We need an interstate transmission superhighway system,” said Suedeen G. Kelly, a member of the Federal Energy Regulatory Commission.

…The grid’s limitations are putting a damper on such projects already. Gabriel Alonso, chief development officer of Horizon Wind Energy, the company that operates Maple Ridge, said that in parts of Wyoming, a turbine could make 50 percent more electricity than the identical model built in New York or Texas.

…Transmission lines carrying power away from the Maple Ridge farm, near Lowville, N.Y., have sometimes become so congested that the company’s only choice is to shut down - or pay fees for the privilege of continuing to pump power into the lines.

Politicians in Washington have long known about the grid’s limitations but have made scant headway in solving them. They are reluctant to trample the prerogatives of state governments, which have traditionally exercised authority over the grid and have little incentive to push improvements that would benefit neighboring states.

I think we know what this last paragraph really implies, which is that our political leaders in Washington really don’t have the desire or the motivation or even the statemanship to move a project like this along.  As the two LA Times pieces noted above point out, state leaders are not on the same page either.  They seemingly want to pass bills, but not to actually do anything.

The Interstate Highway System As A Model

Make no mistake, we’ve done much bigger and more difficult things — such as building the Interstate Highway System — so we can do this too.  Have you ever driven on our interstate highway system? You know, I-80, I-75 I-95, I-40, I-75 or H1 (Hawaii).  Here is a map that illustrates how extensive it is:

INTERSTATE HIGHWAY SYSTEM

Source: Wikipedia

Well, this highway system was made possible by Federal spending beginning in 1956 under President Eisenhower and continuing on for decades. The actual cost was about $135 billion, give or take a few billion. But, the cost in current dollars would be several hundred billion dollars. Actually, it would be much more because building this today would involve buying out all the property owners along the way at today’s real estate prices.  Now, we may need a similar system for interstate electrical transmission.  Fortunately, the current estimate for the cost of this system is only about $60 billion or so, which is just pocket change compared to the cost of building our highway system today.

Anyone who lives in Northern California has seen windmills dotting the hills east of San Francisco. And, anyone who lives in or has traveled in the western U.S. knows that the wind in that region is steady and strong. So, producing energy from the wind is feasible, but the real issue is can you get the power from where the wind blows (or where the sun shines) to where people live and use energy.  And, that requires a major commitment to a modernized energy grid:

The New York Times article continues:

Enthusiasm for wind energy is running at fever pitch these days, with bold plans on the drawing boards, like Mayor Michael Bloomberg’s notion of dotting New York City with turbines. Companies are even reviving ideas of storing wind-generated energy using compressed air or spinning flywheels.

Yet experts say that without a solution to the grid problem, effective use of wind power on a wide scale is likely to remain a dream.

…Unlike answers to many of the nation’s energy problems, improvements to the grid would require no new technology. An Energy Department plan to source 20 percent of the nation’s electricity from wind calls for a high-voltage backbone spanning the country that would be similar to 2,100 miles of lines already operated by a company called American Electric Power.

…A handful of states like California that have set aggressive goals for renewable energy are being forced to deal with the issue, since the goals cannot be met without additional power lines…

As we have seen, California has set aggressive goals and requirements, but it has not done much to actually get anything done. Enthusiasm for alternative energy is running high now, but there is a huge gap between theory and practice.  Many politicans are announcing grandiose plans, but as the last line above points out, the grid is the ultimate bottleneck for getting serious wattage from the wind.  Fortunately, there are no major technical problems that would prevent us from building a better grid.  It’s simply a matter of finding a way to get it done.

Unfortunately, those who ‘love’ alternative energy may not actually understand the real world implications of actually producing significant amounts of power from wind, solar and other means.  The reality is that we would have to put up vast windmill farms and enormous solar installations.  In addition, we would have to build a much larger energy grid.

As we saw from Senator Feinstein’s opposition to building alternative energy projects in the desert, producing power from alternative sources could well fail due to opposition from an unlikely source: environmentalists.

But, if we do not build large alternative installations and if we do not upgrade the electrical grid, then all this talk about alternative energy sources is just blowing in the wind.

• Business , Economy , Energy , Geopolitics , Money , debt
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Kurt Brouwer August 20th, 2009

In a post on the Cash for Clunkers program, I joked about a similar program for appliances.  But, I should not have joked because such a program was included in the economic stimulus program passed earlier this year.  CNBC reports [emphasis added]:

Dollars for Dishwashers? Appliance Rebates on the Way (CNBC, August 20, 2020, Christina Cheddar Berk)

…The government’s so-called “Cash for Clunkers” program has been grabbing headlines, but it’s not the only federal program putting money back into consumers’ pockets. A new government program is poised to help appliance manufacturers the same way “Clunkers” gave a jump start to auto manufacturers.

As part of the Obama Administration’s economic stimulus bill, nearly $300 million was set aside to fund a state-run rebate program for consumers purchases of Energy Star-qualified home appliances.

Like the “Clunkers” program, the plan takes aim at energy guzzlers. However, unlike in the popular auto program, consumers will not have to turn in their old appliances in order to buy a more efficient one and qualify for the rebate. However, the exact criteria remain unclear because states are still drafting their individual plans, with the hope of having the programs up and running by the end of this year…

Great line that says so much, ‘…the exact criteria remain unclear…’  It really is impossible to parody Congress anymore.  And, of course, the fact that Cash for Clunkers has been a fiasco will not stop implementation of Dollars for Dishwashers. After all, Cash for Clunkers has only set a new land speed record for a failed government program [emphasis added below]:

NY dealers pull out of clunkers program (Breitbart / AP, August 19, 2020, Dan Strumpf)

Hundreds of auto dealers in the New York area have withdrawn from the government’s Cash for Clunkers program, citing delays in getting reimbursed by the government, a dealership group said Wednesday. 

…The program offers up to $4,500 to shoppers who trade in vehicles getting 18 mpg or less for a more fuel-efficient car or truck. Dealers pay the rebates out of pocket, then must wait to be reimbursed by the government. But administrative snags and heavy paperwork have created a backlog of unpaid claims. Schienberg said the group’s dealers have been repaid for only about 2 percent of the clunkers deals they’ve made so far.

Many dealers have said they are worried they won’t get repaid at all, while others have waited so long to get reimbursed they don’t have the cash to fund any more rebates, Schienberg said…

Cash flow.  It’s an exciting new concept.  Apparently, the bureaucrats in DC are unfamiliar with it though.  On the other hand, maybe they get it.  Improving cash flow means slowing down the checks you write.  Here’s another example from New Mexico:

Dealers Stiffed As Clunkers Pile Up (KRQE News, August 20, 2020, Alex Tomin)

Some New Mexico auto dealers have backed out of the cash-for-clunkers program and more may do so as the federal government takes its time providing cash reimbursements.

Dealers across the state are owed more than $3.6 million, according to a dealers’ group which says that so far Uncle Sam has only written three checks totaling about $14,000.

Cash for clunkers–officially its the Car Allowance Rebate System–allows consumers to trade their gas guzzlers for a more fuel-efficient rides while earning up to $4,500 toward the purchase price.

Dealerships put up the cash for the rebates after being told by the Obama administration they would be paid back within 10 days of the sale.

With that much cash in limbo they’ve called in reinforcements.

“You simply can’t ask businesses to front $200,000, $300,000 for any period of time,” Rep. Martin Heinrich, D-N.M., told KRQE News 13. “These applications are simply not being processed fast enough.

“So we are going to be on the phone today to the White House and to the feds in DC to try and get this moving.”

Don Chalmers’ dealership received the most reimbursement so far.

“I pay my bills,” Chalmers said. “If I was three weeks or four weeks late on paying my taxes I suspect that they would be in my office real quick…

The so-called Cash for Clunkers program has been an eye opener for many people because it illustrates the many problems with government programs.  And, it has done this in a very short time span, so Americans have seen firsthand how it has gone off the road.

What’s wrong with government rebate programs?

They don’t work as advertised.  They are bad economics.  And, they waste taxpayer money.

Let’s look at Cash for Clunkers as the poster child for how not to do things.  The original Cash for Clunkers authorization was for $1 billion.  The program has already - in a couple of weeks - run through that $1 billion.  Did that stop anyone?  Not at all.  An additional $2 billion was quickly authorized.

First, Congress and its actions are frequently based on political opportunism and crackpot economics.  Next, the regulations are absurdly complicated.  Also, in crafting this legislation, Congress devoted little or no effort to find out what happened to similar programs in other states or countries.   And, the very folks who created the program seem to be surprised at the strong public demand for government giveaways.  Finally, the solution is, as always, give away more money.  And, as we saw above, the program is rife with mismanagement such that retailers end up holding the bag.

What could be more perfect as an example of how not to do something.  The liberal-leaning economics blog, Econbrowser, made these points about Cash for Clunkers and the disturbing historical parallels to failed programs from the Great Depression [emphasis added]:

Cash for Clunkers (Econbrowser.com, August 2, 2020, Professor James Hamilton)

A victim of its own success?

One of the more embarrassing features of the New Deal was the Agricultural Adjustment Act of 1933, which paid farmers to slaughter livestock and plow up good crops, as if destroying useful goods could somehow make the nation wealthier. And yet here we are again, with the cash for clunkers program insisting that working vehicles must be junked to qualify for the subsidy. Economist Mom laments the tragedy and waste, as only an economist and mother could:

I don’t think I can do it…. I mean, look at all the time and money (and love) I’ve poured into the (already) old beagle I adopted almost two years ago. It just seems very wasteful (and somehow “heartless”, even with a car) to prematurely end a “life” that still could be valuable to someone- doesn’t it?

But, why stop with Dollars for Dishwashers?  How about Stimulus for Students?  Parents could get government cash to take their children out of underperforming schools and put them into better schools?  No?  Okay, how about Cash for Congressmen?  Voters could get rebates to use towards funding a more responsive Congressional representative.

Or, how about Funding for Freezers? It’s a two-fer.  We could combine a rebate for an appliance along with Funding for Food.  Consumers could get a brand new energy efficient freezer and funding for government-approved food to fill it up.  I mean the possibilities are endless.

For more on how unwise all this is, see Government: It ain’t broken yet, but just wait and Collateral Damage From Cash for Clunkers.

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