Why waste heat is the problem and not CO2 – go long carbon price

In an attempt to preamble this post with qualifications on not being pro this or that, not anti this or that, an anarchist or muppet media cheerleader, I might try to convince you this is not a promotion of anything else but free thinking. But somewhere within that preamble you would form an expectation of what this post may (or may not) contain and you would end up disappointed in some way, shape or form. So f*ck it, I’ll save you the time and me the effort. You see I don’t care if the planet is getting hotter by 1 degree every 10 years. Why? Because there is nothing I can personally do about it if it is, except adapt myself and my family to it as it changes my life. Since supposedly intelligent and morally attached representatives are forcing this change onto me, I may as well have a say in how I deal with it.

Now that might sound like resignation to you, but the reality of life after $5Trillion in bailouts following the collusion and fraud of 2008 has woken me up to my own opinions. This is simply an extension of that realisation.

Intuitively, 380ppm (or more correctly 0.038%) of CO2 does not sound like a whole lot. In economic terms, 0.038% expressed as a growth rate of anything is pretty small. But it is not a rate of change, it is the measured value of CO2 in the atmosphere. I’ve tried to put thoughts on this previously with little success –
a) Commentary: On the hypocrisy over climate change
b) AGW and accurate global population distributions

The end result is truly the trade of the millennium – a one way sure thing. That is, go long carbon prices, and stay long. Pass the trade certificates onto your children and them onto theirs. It’s about the concept of ‘heat rate’ (thermal efficiency) and the reality that in the US in 2011, 63% of all the energy used to generate electricity was waste, and mostly as waste heat. Waste heat sources can be measured as kW(th) thermal, as equivalent references to other kW units of energy and power. But get the 63% number – that means greater than half of all energy converted as ignited/burnt/combusted was waste heat.

Some further background
You would understand the kilowatt unit ‘kW’ for your metered electricity, call this kWe (for kilowatts of electricity). When electricity is run through a filament light (typical incandescent bulb), almost all of this kWe is converted to heat through the resistance of the filament – it gets hot. The same for toasters, kettles, element stoves etc. The kilowatt hour (kWH) is the measure of 1 kilowatt run continuously for 1 hour.

Most simply, a 1000watt (1 kW(e)) bar heater running for 1 hour uses 1 kWH(e) producing 1 kW(th) thermal heat. Converting kW(e) back into kW(th) thermal produces heat you can feel with your hands at home, every day.

The verification data comes from the EIA’s latest US electricity summary data. The US EIA has recently published this graphical representation that virtually no-one would fully appreciate -http://www.eia.gov/totalenergy/data/annual/pdf/sec8_3.pdf

The graphic (with my markups below) showing the reality of the US electricity industry
(note: this is not a fossil fuel love/hate)

US EIA electricity generation - click image
– don’t let the green colour fool you, it’s from the EIA
– might not include secondary or tertiary heat recovery technologies
– most electricity conversion losses are at thermal power plants (as heat);
– metered electricity = net generation + T&D losses ; (transmission and distribution)
– approx 63% of all energy used for US electricity generation in 2011 wasn’t converted to electricity;
(very diplomatic of the EIA to say the least; some well chosen words)

So the 63% that “wasn’t converted to electricity” was what then? … and why would it be left shaded green? I have nothing against green per se, or monochromatic graphics. The thermal power plants would be coal, fuel oil, syngas, natural gas, bio fuels, bio mass and nuclear. 65.5% of the total energy used to generate electricity in the USA is fossil fuel derived. To be fair on the EIA data, waste heat recovery systems and cogen/trigen/CHP technologies are probably not included in the above stated conversion losses. At best, heat recovery technologies are still not very widespread and might lift the total average heat rate up a few percentage points – certainly would not lift the network heat rate higher than 50%.

The bottom line – the heat rate of the US electricity industry is a mere 37%. This is the residual (left over) output of kWe generation of the total energy needed to generate it. It means that thermal waste (as kW(th)) is almost DOUBLE this, but substantially more than all combined metered electricity generated in the US is wasted as heat.

BUT WAIT! This is a global phenomenon not restricted to borders of the US. You might argue the US would be a leading example of high efficiency power generation, without naming names. So using a heat rate of 37% for total global electricity production would not be unfair. Globally, 63% of all energy consumed to generate electricity is heating up the atmosphere. Again, the best case is slightly less wasted heat using heat recovery cogen/trigen/CHP technologies.

Thought experiment – imagine a heating element running 24hours 7 days (24/7/365) doing nothing but heating up the local area? This thermal waste heat element is equal to the total amount of electricity being generated and delivered to homes and factories 24/7/365.

For you own verification – a far better current statistical summary of global trends is from the iea.org

Alteratively World Energy Outlook 2012 (also from the iea)

IEA world statistics 2012 - click image
– critical to understand this increasing trend
– no indication or mention of efficiencies or heat rates
– no indication or mention of heat recovery technologies
– the heat rate of the global system is not likely to change appreciably on current (increasing) trends
– the heat rate (and waste heat) is greatly unaffected by any treatments targeting CO2 of existing/future generation units

Conclusion (the controversial bit)
I am hopeful that more intelligent people than I read this with direct experience in the climate argument. I don’t think the ICC reports acknowledge heat rate and the waste heat content as per above. Instead, they opt for the CO2 content of the waste, and not the enormous amounts of heat wasted in generating electricity around the world. Which is a gaping flaw in the AGW debate in my humble opinion. By my back of the envelope calculations, this heat alone (when adding it up globally) accounts for more immediate and measurable climate change than the contribution of 380ppm (0.038%) of CO2.

This previous article (link) has a more estimates for global heat rates including motor vehicles. It is a much larger problem globally.

Directing environmental policy towards addressing this glaring oversight on efficiencies and waste heat (and NOT C02) would be an impossible mission. I cannot get myself past CO2 being the lesser of 2 evils and a massive financial opportunity for those who stand to benefit from trading CO2. Far worse would be that addressing CO2 fails to do anything at all to reverse the temperature trends – this would be a human travesty of epic proportions should the environmental conditions worsen as predicted.

Food for thought while everyone is hell bent on solving the Al Gore CO2 problem. If Al had used this argument while on the scissor lift to heaven artificially scaled J-curve CO2 chart, I might have listened to his whole argument. While the current CO2 policies will have an impact to reduce the gross levels of waste heat above, it won’t be significant simply because it is not the focus. Yes, cogen/trigen/CHP plants offer a partial solution – you are not going to know how much until it’s too late, or the carbon price is $2500/ton – whichever occurs sooner. Certainly less of an impact in developing/emerging markets, even if they use CO2 scrubbers. The reality is that only those few people who read this, or something similar to it will even be aware of a larger issue going unaddressed, much less understand it.

Regards, … and try to stay cool for fellow southern hemisphereans, it’s gonna get warm out there!

p.s. the above is limited to just electricity generation heat rates. My previous (un)controversial article estimated a much bigger heating problem. Long carbon prices – it really is the trade of the millennium if this is how they think they are going to solve it.

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AGW and accurate global population distributions

You can always tell when mainstream media (MSM) catches the first sniffs of a bull trend. It is when all the unfinished tired and worn out meme’s get dragged back out of storage. Global warming is one of them. For a subject that is just ‘one’ of many potentially life altering issues, the consistency to which it gets paraded out for public viewing is deliberate and boring. But I digress … this post is about global population distribution, which no-one includes in the many discussions on how to fix the man-made story of AGW. It’s also about the World Energy Outlook (WEO) reported 450scenario solutions.

On that, it still amazes me how little press, media citation or acknowledgement there is of the WEO 450 scenario, by every local and international pundit and political aspirant. Highlights of the 450 scenario (‘if’ it is achieved) – are GLOBAL implied maximum limits on the following
1. 6% global increase in energy related CO2 emissions by 2020
2. Power generation CO2 intensity decreasing by 21% in 2020 relative to 2007
3. 3% increase in emissions from buildings and 9% increase in industry relative to 2007
4. Additional investment in low-carbon and energy efficiency

WEO 2011 Report http://www.worldenergyoutlook.org/publications/weo-2011/
Link to WEO statement “Steps in the right direction, but the door to 2°C is closing” [page 4 of 11] – in short “If we don’t change direction soon, we’ll end up where we’re heading”. As always, only time will deliver the truth on this.

There has been no clearly stated implementation strategy by anyone on just how the cogs of carbon taxes and carbon trading will turn to achieve the above, assuming that greater than 450ppm is the fear-mongerer’s end of days. But lets put the horse before the cart. If you are going to peddle climate change, then it is LONG OVERDUE to agree globally on what the global limit framework is to work towards AS A COLLECTIVE. Here, a primary global institution charged with trending global energy statistics (the WEO) is using a published 450ppm scenario. Via the WEO report (since 2009), it has clearly indicated a consistent methodology that caters for climate change and forecasting impacts of this fixed limit. So what is everyone else doing? The AGW rhetoric is both easy and cheap.

This minimal framework is neither tangential, nor is it misdirectional (it is not even confusing), but here the WEO report already proposes at least the basic fabric of quantified necessary controls in response to the purported need to control CO2 using real global consumption data. So why in 2012 is STILL no-one making reference to it? For example – what if efficiency targets are not met for instance, which are a huge portion of the necessary abatements? Moreover, exactly WHO is most responsible for wearing the burden of liability for achieving these abatements?

So here I’ll drag out something I did in 2010 and sent it off to all the local pollies. I’m not saying that I don’t agree with the probability of real AGW climate effects, but it needs to start at the top …. literally at the top of the world. First with some warm up exercises –

Pop'n by latitude c.2000 - click image

Pop'n by longitude c.2000 - click image

The northern hemisphere is where all this is going to change … or not. While Australia might be seen to be inefficient gross pollutants in the eyes of the world, we are an insignificant part of the total problem. I’m not sure if anyone has linked the actual numbers (populations) of the North and South Hemispheres with the purported climate statistics. Otherwise one might be inclined to suggest the Northern Hemisphere gets it’s act together LONG before Australia sinks itself into the depths of burden with attempting ANY meaningful climate altering strategy.

Using the top 62 most populated countries from largest to smallest – this represents 91.1% of the global population (there are 230 countries – I haven’t sorted them all yet, more below part 2)

Top 62 most populated countries = 6.22Bn = 91.1% of 6.83Bn (2009 global population data)

Of these 91.1% –
5.31Bn live north of the equator = 85.4% of this 91.1% (remember only using the top 62)
0.91Bn live south of the equator = 14.6% of this 91.1%

Therefore, it might be reasonable to place the more onerous responsibility on cleaning up the world’s climate problems with the majority? Australia will continue to take a moral high ground, and conduct itself morally and ethically of course. Further, someone might get a bit more scientific about this and exclude the equatorial regions, or perhaps weight the 3 different zones (north, equatorial, south) differently.

So then I got a bit more clever using all 230 countries, defining –
NORTHERN = north of 10deg north latitude
EQUATORIAL = within +/- 10deg LAT (either side of the Equator) =
SOUTHERN = south of 10deg south latitude

Roughly by my summations, using the 2009 total population of 6.83Bn people, Google earth and an afternoon of geography –

Northern pop = 82.7% of total world population (5.66Bn)
Equatorial pop = 7.2% of world population (0.49Bn)
Southern pop = 10.1% of world population (.69Bn)
(using all 230 countries and Google Earth)

CLEARLY THEN – the problem is 8 times WORSE for the Northern Hemisphere, as there is 8.1 times North population than South. How about some diplomatic lobbying of the Northern Hemisphere counterparts – IN TOTALITY. While you can’t afford to single anyone out, even a 3 year old would know that if China and India are not on board with it, then forget it.

China and India alone are 37.2% of global population. Australia is ranked 52 and is only 0.3%. 51 Other countries have more of an obligation to participate. But how many actually are?

2005 Population by latitude - click image

2005 Population by latitude - click image
– majority of the southern hemisphere is ocean
– redistribution of population is restricted
– again pointing to the northern hemisphere to be the principal driver
– again driven by population and growth rates

Selfishly (being a proud Aussie), to suggest climate change comes at some considerable burden and (more importantly) legal obligation upon Australia, then expect people to get upset (and reticent) once they understand more of the truth. The inconvenient truth is really that it’s NOT EVERYONE’S PROBLEM to solve. What are the real political and commercial fiscal undertones behind this ‘movement’ (to call it that).

Good luck with it all, I think it is noble. It will become more of an inflationary burden because it is a money spinner for market derivatives that will be used by commercial traders to skim returns (more rent seeking opportunities) – just like was done with CDO’s and CDS’. Now the environment is traded at the expense of the rest of the world. ETS schemes will penalise the end user via inflated costs and higher costs of production, and not contribute to climate improvement in any traditional sense. This manifests itself as a financial penalty to be planned for and managed only. Those already positioned to establish and fix (read: rig) yet another trading exchange mechanism for private commercial gain are the largest hypocrits having no vested interest in the climate whatsoever.

As night follows day, costs will rise to the point that competing technology becomes profitable. But the financial penalty is paid by the entire consumer population, not proportionately by the root cause of the pollution that has created all this nonsense. It can be shown that recessions will save the environment with far more efficiency and immediacy than anything else. But what this does is create missed opportunites in real currency literally being wasted (not properly allocated/distributed) to developing better, more appropriate, more sustainable primary (base load) energy production methods and consumer products.

One lasting piece of the economics of AGW/population/CO2 burden lies in the growth rates of populations. On this score, the reducing growth rates is a positive for AGW.

Selected population growth rates - click image
– the funny reality of this chart is that declining population growths have much more worth as political, economic and commercial data than anything to do with the AGW climate debate. You see, any nations monetary stock per capita is of principal consideration to forecasting and (mis) managing economic opportunities. Instead of being primarily concerned with addressing AGW head on, we will address climate change indirectly via our guestimated financial capacity to deal with the problem.

That is, unless the WEO Report is correct and it really does become too late to do anything about it.
Cheers, and regards to all.

p.s. While hypocrisy knows no bounds, I am happy to do my bit with a domestic 4kW solar PV array already installed. It probably won’t save anything, but has specific economic benefits for now.

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Economics and physical sciences … herd behaviour part 2

I have got to thinking about how ultimately applicable physical sciences are to the backwards stochastic (statistics of randomness) approach put forwards by economics. Armed with a few neodymium rare earth magnets, some iron filings and two of my daughters lunch boxes (sorry honey, thank you) I was pontificating the application of polarity and magnetic attraction to the field of Economics and the role of agents. This at-home ad-hoc experiment introduces 6.1 Billion people (the iron filings) to 2 agents – the home video is linked below. The 2 agents are first polar opposites, and then like polar (same polarity). The outcome is then the distribution (grouping) of the people (filings) in the presence of just 2 agents. Hopefully it is simple enough to imagine what would happen with just one agent (one magnet).

Excuse the format, each is a 1 minute home video captured via an Android phone. Simplistically, the filings are intended to represent the motion/grouping of people in respronse to applied influences.

1. Filings introduced to a field of 2 polar opposite magnets
Video1: 2 magnets, polar opposites 1 min 12.9MB (allow time to load)
– resulting distribution between 2 magnets (agents), then shaken (volatility)

2. Filings introduced to a field of 2 polar same magnets (same polarity), resulting distrituion
Video2: 2 magnets, same polarity 1 min 15.6MB (allow time to load)
– resulting distribution between 2 magnets (agents), then shaken (volatility)

A few observations to both that have obvious applications to herd behaviour and economic theory –
a) a distribution of location/distance occurs in both scenarios in response to the forces/influence of each agent
b) minor grouping/clustering before asssociation (movement) to one or the other magnet creates crowding at one or the other
c) friction plays a very large role on rate of movement, and the final distribution (e.g. glass vs plastic vs paper)
d) introducing volatility forces closer attachment (to magnet); creates group segregation => reduces broader distribution
e) if aluminium filings where introduced (non-ferrous), these filings (people) would be unaffected by either polarity. i.e. Some filings (like people) would remain unaffected by the application of 2,3, … 1000 magnets.
f) the more violent the shaking, it forces all filings (people) to cling to the nearest magnet (agent), eventually reducing the distribution down to the number of magnets (agents).
g) the magnets can represent religions, opinions, beliefs, political/sexual/social preferences etc. Volatility (my shaking) can represent shocks whether natural or man made interference.
h) the magnets can represent competitions, choice, and field are the forces of the resultant global environment.
i) friction/stiction would make the distribution less responsive to applied volatility (shaking)
j) even though strongly attached to a particular agent, there is a sub-distribution of position within each agency (magnet)
k) regardless of polarity/bias, each agent (magnet) attracted it’s own group dependent on it’s strength/influence

I then thought of the ‘Field of Dreams’ and the modern day economic metaphor “If you build it, they will come” … maybe. Like the filings, they (people/muppets) must first be ‘attracted’ to the idea/commodity/agent. Are they then sufficiently removed/detached from existing agency/consumption influence to freely migrate/move to the newly introduced agency? What influences/forces currently bind them or otherwise restrict them? Are they able to be influenced in the first place? All of these considerations have some tangible similarities to physical reality in electromagnetism and ferro/nonferro magnetic interractions.

3. Introducing a 3rd agent, moving it, then removing it
Video3: 2 magnets same polarity + introduce a third magnet 1 min 15.6MB
– excuse me for not being more scientific, it is Sunday and we were playing at the time
– the new agent (magnet) altered the distribution within and around of the existing 2 magnets, it added a 3rd influence
– even though all agents were identical, the 3rd magnet (agent) did not attract 1/3 of all the filings (people/muppets)
– the distribution was not 1/3 to each agency (magnet), but the 3rd agent could draw some muppets away from the existing 2 creating a bigger local 3rd group only by positioning itself properly.
– when removed, the muppets attached to the 3rd agent were redistributed back to the remaining 2 depending on proximity and where the 3rd agent departed from

[post-edit] Removing a magnet is the equivalent of a major bankruptcy or insolvency. Once everything has been shaken up (shocked) and forced into tighter groups, then only by reducing the number of agencies (via liquidation) forces the redistribution of those muppets attached to the liquidated agent. Too Big Too Fail also works in this instance. Combining 2 agencies clearly combines the 2 groups into 1 larger group. All in all, the distribution is affected by volatility into tighter groups. I for one can see the events of 2008/2009 in this very simple experiment via the combination of some banks and the failure of others. If I had a larger area and 10 sets of hands I could simulate a larger experiment of motion, interaction, regrouping while adding and liquidating agents of various size, position and alignment.

So James Clerk Maxwell and his theory of electromagnetism (among other physical sciences) have very relevant applications to economics as far as I am concerned. An agency has physical influence similar to the laws of attraction and repulsion. Introducing volatility would increase stochastic distribution only in the presence of very weak existing attraction, affecting only those not influenced or not subject to attachment. Those who are already strongly attached will remain more so in the presence of volatility (ala the magnets).

Hence I concluded from this very simple Sunday playtime, that giving things a good shake up reduces choice and reduces economic distribution thus creating monopolies. Which is funny since ‘monopolies’ is related to ‘monopole’, which is a singular bias/influence/force. Agents, like magnets, are attractors. More agents and their resultant interactions do not create more even distribution. Volatility reduces distribution, not increasing it, and creates tighter grouping. That is volatility forces closer association. But of course there are more than 2 or 3 inflluences (agencies) within our current global society.

Food for thought … but there is an utter lack of application of proven and well established physical science that is clearly missing from the field of economics. Stochastics and statistics is the cheats way of (not) explaining that which you don’t understand by associating ‘randomness’ to orderly influences. QED: Economics. Imagine for a second if Sir Isaac Newton had associated a stochastic function to gravity? NASA would not have been be able to land 3 rovers on a planet over 100 million kilometres away with any degree of certainty. Instead, it would be ‘probable’ that ‘in all likelihood’ that the $500Billion budget allocated will result in ‘at least some’ rovers landing on the correct planet, but only after launching 100 of them. That a particular rover will land in an exact place and time is the outcome of a probability distribution. Sadly, the latter approach allows people to claim status as being a Nobel recipient and afforded some kind authority on the mechanics of economagic.

Imagine yourself one of the filings within a field of multiple attractors. Are you ferrous, and influenced by the strongest local magnet? Are you non-ferrous and totally unaffected by the presence of all and any agent? What associations/agencies do you most closely associate/group with or are attracted to? Is this a strong or weak attraction?

As directed, I had to stop to clean the lunch boxes and return them to their rightful owner.

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Like having an almanac of the future

The early results on the USDx long period analysis of underlying trend are in, as shown below. It is like having an almanac of the future to allow narrow highly tuned trading options prepared well in advance. Another high accuracy high correlation result with more coming available across all asset classes and more timeframes. The methodology incorporates a well developed adaptive dynamic analysis that can be to tuned to daily/intraday movements depending on your time horizon.

USDx long period trend
USDx dollar index daily - click image
(long period only, no higher order/high frequency trend shown)

Consider the value of having this analysis available for the FX pair/pairs you trade? What if you could plan for anticipated changes in trend and positions as reported in the CFTC COT reports that could verify your trading plan? But since nothing in guaranteed, and not even I can offer that, if the unexpected did happen you have the full context of history to assess what your options where within any given timeframe.

Consider the highly publicised and constantly referenced “Crash of 1987” that put many people unnecessarily into the wall financially. If you knew this was a blip on a longer horizon, you would have seen the opportunity, not the disaster.

The ‘blip’ of 1987
DJIA daily, 1987 trend - click image

The same goes for ‘seeing’ the top in 2007 and the low in 2009. What if you could better anticipate a trend high or low in order to reallocate your portfolio? Or better still, be better equipped to align your portfolio with your own internal redemptions/endowment timetable without any emotional attachment to the underlying trend? Perhaps you might want to question that overly optimistic or pessimistic analyst report that was put together by the brokers intern while he/she was courting you to lunch? Did you factor in the cost of bad advice into your free lunch?

All assets are covered providing highly accurate results without any preconceived bias or emotion – FX, Equities, Commodities, Indexes, Energy, Bonds, GDP, Balance of trade, Flow of funds … the lot! Do you honestly think the future will change so dramatically from the past simply because some self-interested current generation graduate of the ‘feel good fellowship’ says it will?

I doubt it … and I have the full weight of history on my side.
“Numquam imparatus” is Latin for “Never unprepared”!


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Find out what is behind the green door

People who understand risk, will understand this great offer.

This is a special release edition (in large hi resolution computer file .png format) of my updated data trend model for the Dow Jones Industrial Average (DJIA, see sample below). In the package on offer is similar to the chart shown below, and includes –

  • Overall chart of trend model from May1896 to Dec2015, with maxima and minima
  • Zoomed chart of trend model from 1966 to Dec2015, with maxima and minima
  • Chart showing reverse model back to actual DJIA trend with forecast overlay
  • Chart showing correction of trend back to actual DJIA values with forecast overlay
  • Important legal disclaimer (pdf file)
  • an electronic file containing the data points (daily data) for each of the data ranges as plotted on each chart above (delimited text or CSV file format), including model maxima and minima.
  • Formal receipt of payment for tax/expense purposes
  • Personal support to answer specific questions you may have

– all four (4) charts above in large format 1920×1200 hi resolution .png file format based on daily data with model maxima and minima shown. An additional (fifth) chart will be provided showing the largest underlying trend out to 2025. In respect to the DJIA I can assure you many of the major periods have not made it into mainstream analysis.

I can tell you the trend model is based on advanced analysis techniques incorporating proven mathematical principles using proprietary methods developed over time. The result shown has better than RSQ>90% (MSexcel) for the entire actual data series, and the correlation is higher than that for the latter half of the data series up to the last data point of 09Jul2012. Not bad for over 29,000 data points covering the 116 years of Dow history.

From reading extensively over the last 3 years on brand name broker/dealer analysts and over several hundred economic papers, nothing of the kind offered here has been previously made available. Certainly nothing I have seen to date comes close in method and detail in modelling the DJIA trend to such a high level of accuracy. No fancy footwork is involved in the making of this analysis and the results will surprise many, if not everyone who accepts my offer.

The cost is AUD$1,210.00 (incl GST) for one complete set as per above. Initiate formal contact via blog comment which will be treated ‘commercial in confidence’. A real human being (me) will then contact you with payment details ($AUD in ANZ Bank, Australia). You will be sent the necessary legal disclaimer prior to payment to understand the terms of supply.

Please note, all proceeds of sales will be donated to our daughters disability carers. She is 3 and is unable to walk from birth due to a cervical spinal defect, requiring specialised equipment and continuous support. The cost is simply the value I place on the effort, expertise and result in providing information aimed at assisting you to gauge future potential risk based on analysis of the past.

SAMPLE CHART (actual size will be 1920×1200 px) – click for larger window
DJIA trend model - SAMPLE - click image


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New modelling of old models

Since starting this side project (recently) in Jan2012, I have developed a much more refined and accurate method of analysis and modelling of asset trends. As examples, below is the first pass low level output for SPX and XAO using long periods for broad trend overview. The methods developed now provide very pleasing results with surprising accuracy when drilling down into shorter time frames (months/weeks) and higher frequencies (weekly/daily). Several spinoffs from this has been a better method of filtering and assessing overbought/oversold asset prices within a more dynamically conforming trend. The resulting analysis is a truly directionless assessment that contains no trend bias or favour. It simply is what it is for decision making with far less emotional involvement. A distinct advantage for when a repeat of 2008 arrives since the methods are reliable and repeatable across all assets.

SPX composite model (S&P500)
SPX S&P500 index - click image

XAO composite model (asx all ordinaries)
XAO All Ords index - click image

Make of them what you will.

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Australia’s 3 speed economy (but not what you’re thinking)

In continuing the abuse of worn out clichés, Australia is constantly promoted as having a 2 or 3 speed economy by various media pundits. Predominantly these speeds are variations on the rates of moving forwards. I’ll use the latter reference in a slightly more realistic manner, whereby the 3 speeds are in fact forwards, nowhere (neutral) and backwards (reverse). Using the latest trade figures from the Australian Bureau of Statistics (5206 Series, Australian National Accounts: National Income, Expenditure and Product) it is clear to which Australian States each applies.

The assessment below is particularly relevant in this current environment of declining and negative (deficit) Balance of Trade while many broader global manufacturing indicators (PMI’s) decline into contraction. All the while the ‘Great Debt Debate’ rages on challenging the neo-non-neo imaginations and procyclic prohibition of disequilibrium instability. However, in regard to the Australian Balance of Trade, there is a dominant 2yr 20week peak to trough (Pk-Tr) period in the Goods and Services balance of trade that very clearly cycles in and out of surplus. I identified this cycle in mid 2010 and used it to forecast a peak in the Aus BOT around Jun/Jul 2011 at the time. Optimism says the negative cycle (probably) won’t be as low (negative) as the previous low. However the volatility observed in the demand for Australian Goods and Services is nothing short of tremendous. This is a bad thing, since it places Australia in a precarious Current Account/Terms of Trade position given our highly concentrated dependency on the demand for just 2 critical commodities in just 4 local export markets. None of this could come at a surprise, as it has been readily available since 2010. Eventually, some of the trade burden will be shared by the increasing NatGas LNG export trade out of WA and QLD.

(click all images for full size)
Australia - Balance of Trade - Monthly - click image
– dominant 2yr 20week peak to trough, breaking up recently into higher frequencies
– next cyclic minima expected Aug/Sep 2013 (yes, NEXT year)
– previous analysis of trade in 2010 showed highly dependent on coal and iron-ore
– previous analysis of the export markets in 2010 showed highly dependent on China, Japan, Korea, India

The linear regression average of the trade balance is obviously trending negative. Based on the most recent higher frequency high volatility cycles, it is suggesting volatility is going to continue while trending into the next minima. So large swings in monthly trade balances about a declining central average would be very likely into Aug/Sep 2013. This is indicative of the uncertainty and volatility in the policy debates ongoing around the world. The 2yr20wk period will remain dominant as a pk-pk higher frequency max/max and min/min forecast. Next 3-4months into end 2012 to remain small positive trade surplus based on this, then dropping below zero in 2013.

Australia - Balance of Trade - Monthly - click image
– note the recent higher frequency reversals with very high volatility

Australia - Aggregate demand (total) - quarterly

In no particular order, there is an abyss between performances from top to bottom with the best performing (WA, QLD, SA) and the worst performing (NSW, VIC) dependent entirely on how you view deficit spending and debt accumulation.
(NOTE: Throughout the following charts, the distinction in what contributes growth or the lack of)

NSW total demand and international trade - quarterly
– “reverse” on slowing output, flat private capital, households are providing all the growth
– large (largest) and increasing deficit on rising imports with flat exports
– doing nothing to address the trade deficit

Victoria total demand and international trade - quarterly
– “reverse” on slowing output, flat private capital, households are providing all the growth
– large and increasing deficit on rising imports with flat exports
– doing nothing to address the trade deficit

QLD total demand and international trade - quarterly
– “forwards” (only just), slowing output with declining surplus
– recent surge in private investment (?can it hold?)
– NatGas (LNG) exports yet to come online, heavily coal dependent surplus
– declining surplus on rising imports, needs to trim waste to increase net output

WA total demand and international trade - quarterly
– “forwards” (at full speed in top gear), increasing output with increasing surplus
– NatGas (LNG) exports to come online, heavily iron ore dependent surplus
– the powerhouse of Australia, private capital increasing

SA total demand and international trade - quarterly
– “neutral” slowing output with small flat surplus (ok, maybe it is crawling along)
– several resources based projects yet to come online
– at least it is not a bourden

TAS total demand and international trade - quarterly
– “reverse” on declining output with declining surplus
– has stalled, is in need of help

NT total demand and international trade - quarterly
– “forwards” (only just) in a choppy/wayward manner, recent surge in output on decreasing surplus
– resources focus with several projects yet to come online
– decline in existing resouces production

ACT total demand and international trade - quarterly
– “neutral” (being polite) is Australia’s federal state and only ever as good as the prevailing political bandwagon
– 1 step forward, 2 back, 1 forward (not necessarily in that order)
– contributes headaches and heartache to Australia’s declining output elsewhere
– has neither planning nor solution to the above forecast worsening situation

In any case, the laggards within the tiny and marginal Australian economy should be mildly appreciative of the remaining surplus provided by surplus exports of other states while trying to reverse their growing imbalances, and better address their balance sheets into the future. As luck would have it, coal and iron ore are 2 commodities among the most likely to suffer (and by the most reduction) in a global policy shift on climate change, specifically if carbon intensive industries are penalised. Delays in policy implementation, improved technology and advanced materials/production methods would mitigate some of the reduced demand coal and iron ore demand.

It is most clear from above that Australian State and Federal policies are not anticipating nor preparing for the eventual long term reduction in Australian balance of trade. That lack of preparation has only one conclusion. Hope you like (imported) bananas. If greed is good, then debt is better!! There is zero doubt that funding increased activity in the future is going to be an issue.

Refer: http://www.abs.gov.au Australia Bureau of Statistics
No smoke, mirrors, slights of hand or especially untechnical deceit was used in the making of this post.


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