Political Calculations
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April 24, 2014

On Tax Day 2014, the U.S. federal government owed its lenders over $17.577 trillion. Our chart below reveals who Uncle Sam's biggest creditors are:

Tax Day 2014: To Whom Does the U.S. Government Owe Money?

The biggest surprise in this edition of our chart (compared to the previous edition) is the appearance of Belgium on the list, which jumped ahead of several other nations by more than doubling the amount that is being lent to the U.S. government from the small European nation over the last six months. Since Belgium is a major international banking center, what this really represents is the accumulation of U.S. debt by other foreign entities through Belgium's banks in much the same way as London's banks have historically served this role for countries such as China.

Here though, it appears that Russia-based interests may be behind the apparent surge in the nation's holdings of U.S. government-issued debt, with the driving factor being the desire to avoid losing access to the holdings from economic sanctions. Much of the increase in holdings through Belgium took place in the several months preceding Russia's 23 February 2014 actions to seize control of the Crimea peninsula from Ukraine, which indicates the very premeditated nature of the action.

Meanwhile, the U.S. Federal Reserve continues to accumulate the share of the U.S. government's debt, having gone from accounting for 1 out of every 8 dollars lent to the U.S. government to now account for nearly 1 out of every 7 dollars.

Data Sources

Federal Reserve Statistical Release. H.4.1. Factors Affecting Reserve Balances. Release Date: 17 April 2014. [Online Document]. Accessed 23 April 2014. [Data through 16 April 2014].

U.S. Treasury. Major Foreign Holders of Treasury Securities. Accessed 23 April 2014. [Data through February 2014].

U.S. Treasury. Monthly Treasury Statement of Receipts and Outlays of the United States Government for Fiscal Year 2014 Through March 30, 2014. [PDF Document]. [Data through March 2014].


April 23, 2014
Normalized Wind and Solar Energy as Percent of Maximum Production, Consumer Energy Consumption as Percentage of Maximum Consumption

Why won't wind energy power the future?

In our original analysis, we considered why wind energy producers are unlikely to ever become independent of government subsidies that currently sustain them and stand on their own as a reliable source of power for ordinary consumers.

But today, we're going beyond that, because we're going to directly address the single most important issue that will physically prevent wind energy producers from ever being more than a niche producer of energy consumed across the globe.

That single issue is the relative energy return on investment for wind energy with respect to the technologies that are needed to make operating wind farms a viable business proposition and a genuinely reliable source of energy for consumers.

Right now, wind energy producers have the problem that they can only generate power when the wind is blowing. That would be great for them if the wind would reliably blow the most at the times that consumers demand the most power, but unfortunately for wind producers, there is often a considerable mismatch between when their facilities produce the most power and when people actually need it.

That is evident from the image above, which shows the times that show when and how much power could have been produced by wind (blue) and solar (gold) energy on each day during a single month (April 2010) compared with when and how much power consumers actually demanded (red) on each of those days. In this chart, in which all the data is normalized to show its percentage of maximum energy production or demand, we observe that the normalized amount of wind energy produced is often well out of sync with the normalized power demands of consumers.

In fact, there are times when wind energy producers actually have to shut down their operations rather than to dump the power they produce onto the power grid at times when there is not enough demand for it. Here, if the wind power generating facilities are not shut down in these situations, they could negatively impact other, more reliable methods of energy production that cannot be arbitrarily shut down to compensate for the unnecessary surge of power, risking considerable disruption and damage to the power grid.

But if the power produced by wind energy could be stored however, that operational issue would go away. And that's where the matter of energy return on investment now comes into play.

To generate electricity using wind power, it doesn't take much of an energy investment to produce the equipment and things needed to generate quite a lot of power from wind. For every unit of energy that goes into the production of wind power, today's established technology generates, or returns, about 18 times that amount. Along with the large government subsidies made available to wind energy producers, which they require to be profitable, the relatively large energy output for energy input to create wind energy producing facilities is what has allowed the rapid growth of wind's share of U.S. energy generation over the last two decades.

But the energy return on investment for the technologies that might be used to cleanly store the energy produced by wind power is far lower, which makes them undesirable to use with wind energy production. For for most of those options, it would actually make more sense, both environmentally and economically, to shut down production from wind energy rather than use these power storage technologies, like batteries, to store the energy produced from wind power.

Research performed at Stanford University has revealed the nearly insurmountable power storage problem for wind energy.

As more and more renewables come online, large batteries have become more and more attractive as an energy storage option. But as with most developing technologies, they're often expensive, and thus Stanford's research focus.

The Stanford scientists examined the energy return on energy investment (EROI) ratios of using several technologies to store solar and wind energy. The EROI calculation is relatively simple – the amount of energy produced by a technology divided by the amount of energy required to build and maintain a storage system.

"Batteries with high energetic costs consume more fossil fuels and therefore release more carbon dioxide over their lifetime," said lead author Charles Barnhart. "If the battery's energetic cost is too high, its overall contribution to global warming could negate the environmental benefits of the wind or solar farm."

Based on this formula, many battery technologies may not provide a positive EROI when used for wind energy. "Both wind turbines and photovoltaics deliver more energy than it takes to build or maintain," said co-author Michael Dale. "The overall energetic cost of wind turbines is much lower than conventional solar panel."

Stanford’s EROI found the energy demands of solar power installations comparable to the energy demands of the five leading battery technologies. But wind farms, since they require less energy to build and maintain, significantly reduce EROI from 20-50% depending on the energy storage technology.

That's a problem for wind power, because curtailment – shutting off the turbines when they’re generating too much power – only reduces EROI by 10%. "For wind farms, the energetic cost of curtailment is much lower than it is for batteries," said Dale. "It would actually be more energetically efficient to shut down a wind turbine than to store the surplus electricity it generates."

As for what technology might work to make storing energy produced by wind turbines both environmentally and economically desirable, Stanford's researchers identify one technology that exists today:

Pumped-hydro energy storage performs best of all the available options, providing an EROI 10 times better than conventional batteries, but with limited deployment options.

Basically, pumped-hydro energy storage would involve using surplus power produced by wind turbines to pump water uphill into to an elevated reservoir, where it could then be released back down through a water turbine to produce energy at the time its actually needed.

Taum Sauk Reservoir - Overtopping in 2005

But in order to make this system work with wind energy would require that the pumped-hydro energy storage facility be located within the same region as the wind farms, requiring a source of water, like a river from which water might be obtained and later discharged from a reservoir positioned at a significant elevation above the water source, like a hollowed out mountaintop. To pull off that combination of features with viable wind energy production requires a lot of fortunately located geography, which is what really rules out this option for many wind farms, which are often located offshore at near sea level or on the relatively flat plains that coincide with relatively predictable winds over land.

The problem for wind energy producers then turns out to be somewhat of a paradox. Because it is too easy and environmentally clean to generate energy from the wind, almost every method that might be used to store that energy to make wind a more reliable source of power for utility consumers is too relatively wasteful to consider.

Curiously, that problem doesn't exist for the considerably more energy intensive option of producing power from solar power generating technologies. Because the technologies that might be employed to store power produced from solar use a similar level of energy as what it does to generate solar power, it is much more technologically and economically feasible to use these methods to store surplus solar power to be used when consumers actually demand it.

But for wind energy, those options just don't make much technological, environmental or economic sense. In the end, it's not politics that will prevent wind energy from ever becoming a reliable source of power for utility consumers. It's physics.


Murphy, D. J. and Hall, C. A. S. (2010), Year in review—EROI or energy return on (energy) invested. Annals of the New York Academy of Sciences, 1185: 102–118. doi: 10.1111/j.1749-6632.2009.05282.x [Ungated version].

Barnhart, Charles J., Dale, Michael, Brandt, Adam R. and Benson, Sally M. The Energetic Implications of Curtailing Versus Storing Solar- and Wind-Generated Electricity. [PDF Document]. Energy Environ. Sci., 2013, 6, 2804. 14 August 2013.

National Weather Service Forecast Office. High Winds Impact West Texas and Southeast New Mexico. [Online Article]. 8 December 2009.

Wind Turbine Down - Source: NOAA.gov

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April 22, 2014

Following our analysis that median new home sale prices in the U.S. have begun to contract, we decided to dig deeper to find out more. We'll begin with the Wall Street Journal's description of the general climate in the U.S. real estate industry throughout the first quarter of 2014:

Reports from local real-estate agent groups in some of the markets that were the first to rebound, including Las Vegas, Phoenix and San Diego, show year-over-year declines in March home sales. February data for pending home sales nationally—a barometer of early-spring activity—show a decline of 11% from a year ago.

And in markets around the country, fewer people are showing up at open houses. An index of home-buyer traffic in 40 U.S. markets compiled by Credit Suisse was down a little more than a third from March of last year. In some parts of the country, cold weather has put a damper on traffic.

New construction of single family homes is also increasing slowly, according to new data released Wednesday. New building permits for single-family homes in March fell 1.2% below the year-earlier level, the Commerce Department said Wednesday. New single-family home starts rose 1.9% from a year earlier.

"Overall, even after adjusting for weather, it has been worse than what most people expected," said Tom Lawler, an independent housing economist in Leesburg, Va.

The WSJ goes on to confirm one of our earlier observations that the sudden increase in mortgage rates is a major factor behind the deceleration that appears to be taking hold:

The sluggish start to the spring home-buying season—a crucial period for sales because families typically want to lock into a school district by the end of summer—comes as investors cut back on purchases of homes that can be rented or flipped for a quick profit. Meanwhile, potential buyers are still adjusting to a sharp rise in both home prices and borrowing costs over the past year. With prices and mortgage rates up, the nation's median monthly home payment—including principal and interest—has risen 20% in the past year to about $900, according to John Burns Real Estate Consulting.

The WSJ then went on to identify the recent cost trends for a number of local real estate markets that were seeing rapid price increases in 2013:

WSJ: Trends in Home Prices in Selected 'Hot' Local Real Estate Markets

Here, we see that the increase in home prices is decelerating for a number of markets, and that they have actually begun to fall in the Phoenix metropolitan area. Based on that, we decided to drill down into local news coverage to see the factors at work in that market. Here, we found a good description of the trends in Phoenix' home sales since the beginning of 2014:

A drop in home sales and an increase in listings helped pull down metro Phoenix home prices in February.

The Valley's median home-sales price fell to $195,000 in February, the lowest since August, according to Arizona State University's W.P. Carey School of Business.

The median also fell in January, to $196,500. The median sales price was $205,000 in December. That means median prices have dropped almost 5 percent since the start of 2014.

The number of sales in February also was a concern for the real-estate analyst who prepares the report.

"Home-sales activity was a startling 26 percent below February 2013," said Mike Orr, director of the Center for Real Estate Theory and Practice at W. P. Carey School of Business. "Despite the large price gains since last year, this is the weakest February in four years."

He said metro Phoenix home sales typically climb in spring, but the market is still on track to see little or no appreciation this year.

What makes what's happening in Phoenix' local real estate market particularly interesting is that the region was completely unaffected by the winter weather that would appear to have negatively impacted other regional real estate markets in the United States.

Phoenix was also one of the markets most negatively affected by the deflation of the first U.S. housing bubble, which subsequently benefited from the influence of investors who bought up large quantities of distressed and foreclosed properties from July 2012 through July 2013 - the primary inflation phase of the second U.S. housing bubble.

Having drained the supply of inexpensive properties, the same investors that drove the recovery of home prices in the Phoenix metropolitan area have begun to exit the market:

The house-flipping frenzy is over in metro Phoenix, though a few investors are still able to make it work if they can find the right house.

The dramatic drop in foreclosures across the Valley means there are few houses to be bought cheaply, fixed up and resold quickly for a profit.

"There was the point where we had 11,000 foreclosures in one month," said Marty Boardman, a real-estate business owner who began investing in Valley houses in 2002. "From what I understand, today the average is around 500 or 600."


"Last year I just decided that enough is enough," said Boardman. "The profit margin was just too thin in Phoenix, and there were too many investors in the market."

Now, let's zoom out and see how the #1, #2 and #3 national investment firms in residential real estate are now playing the markets:

Blackstone’s acquisition pace has declined 70 percent from its peak last year, when the private equity firm was spending more than $100 million a week on properties, said Jonathan Gray, global head of real estate for the New York-based firm.

American Homes 4 Rent and Colony American Homes, the second- and third-largest single-family landlords, also have been scaling back as bargains dry up. Home prices have risen 24 percent since a post-bubble low in March 2012, which was about when corporate buyers started their buying spree, according to the S&P/Case-Shiller index.

Note that Blackstone, the largest player, really didn't get started buying up available residential real estate until July 2012, marking the beginning of the inflation phase for the second U.S. housing bubble.

With investors having run up home prices enough to effectively price themselves out of the market, the inventory of homes for sale in Phoenix and other markets has begun to rise. But because mortgage rates also rose sharply in the second half of 2013, the remaining consumers in the market, who are primarily people who are seeking to buy homes to live in themselves, are at a financial disadvantage. The typical prices of homes available for sale in the market, when translated into the monthly payments of a mortgage, are simply too far above what these ordinary home buyers can support on their household incomes.

Annual Expenditure for Owned Dwellings vs Annual Income Before Taxes for Various Income Ranges Reported in the Consumer Expenditure Survey, 1984-2011 [Current Year U.S. Dollars]

But don't just take our word for it. Others have noticed that effect as well:

"People are coming out and shopping [for new homes], but they're not buying," said Brad Hunter, chief economist for home-construction analysis and consulting firm Metrostudy, a division of Hanley Wood LLC. "My analysis is that a lot of this has to do with sticker shock."

Mr. Hunter and other housing-market observers theorize that sales volumes won't pick up markedly until builders rein in their price increases and first-time buyers and less-affluent buyers are ushered back into the market by better job and wage growth and a slight loosening of mortgage-qualification standards.

That state of affairs is not a sustainable situation, so something has to change so more transactions can take place. That something is the price of homes for sale, which are now responding to the increase in supply and the decrease in demand by either decelerating their rate of increase or by falling outright, depending upon the local real estate market in question.

That dynamic, played out in varying degrees in all the real estate markets across the country, but especially in the markets that had seen the most volatility in prices during the years of the first housing bubble and the most investor activity in the second, is what is now causing the second U.S. housing bubble to enter into its deflation phase.

U.S. Median New Home Sale Prices vs Median Household Income, 1999-Present, through February 2014

And that's how the U.S. real estate market entered into such a state of malaise in early 2014, with housing prices stalling out or falling in enough local markets to show up as an outright decline in the trailing twelve month average of median new home sale prices in the preliminary data for February 2014.


April 21, 2014

Perhaps because it was so uneventful, the trading week ending 17 April 2014 was a positive one for stock prices.

The relative lack of fireworks allowed investors to focus on the earnings news being reported during the week, much of which was positive. That, in turn, positively affected stock prices - so much so that it's somewhat of a tossup at this point whether what we observe is the result of simple noise or if the positive earnings reports led investors to shift their forward-looking attention to the more positive-looking quarter of 2014-Q4 in setting today's stock prices.

That latter possibility is hinted at in our chart showing the changes in the year-over-year growth rates of stock prices with respect to the trailing year dividends per share for the S&P 500.

Change in Growth Rates of Expected Future Trailing Year Dividends per Share with Daily and 20-Day Moving Average of S&P 500 Stock Prices through 2014-04-27

Here's how that played out in our alternative futures chart, where stock prices would appear to be falling between the futures defined by the expectations associated with 2014-Q3 and 2014-Q4:

Alternative Futures for S&P 500, 31 March 2014 - 30 June 2014 (With Echo Effect), through 2014-04-17

We'll find out soon if there's more to the uptick in stock prices than positive noise.

Analyst Notes

If you're looking closely at our chart showing the accelerations of stock prices with respect to the expected trailing year dividends per share in future quarters, you'll see that the acceleration of daily stock prices would appear to have reached the level of 2014-Q4. But if you look at the alternative futures chart, which is in part based on that data, the level of stock prices is below the level that would match what we project for 2014-Q4.

The difference has to do with how we project the alternative futures trajectories. Throughout the period shown on this chart, we assume a "typical" basic size for the echo effect associated with the fiscal cliff deal rally from early 2013, because we cannot precisely project the actual size of the combined echo and current day noise that will be measured on any given future date.

Meanwhile, our accelerations chart shows the actual recorded combined value for both echo and noise. If we were to substitute those values with the ones we use in our projections, we would see a considerably better match between the two.

But since we work in the future, there's not much point in doing that because predicting the past is only useful when you don't remember it.

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April 18, 2014

Maybe not as good as the alternate ending for Gravity, but not bad either....

Have a great weekend!

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