Subject: Another Don Quixote Thanksgiving
From: "Mason, Christopher W" <[email-masked]>
To: "Mason, Christopher W" <[email-masked]>
Date: Mon, 21 Nov 2011 17:29:46 +0000

Another Don Quixote Thanksgiving.  Every year at Thanksgiving, we look in-depth at an issue that affects markets and portfolios.   Last year, we examined the unraveling situation in Europe.  Unfortunately, most concerns we expressed last year have been borne out, and are getting worse (I spent the weekend reading legal documents on a Eurozone break-up, just in case).  Like Don Quixote, Europe went on its journey for all the wrong reasons, adopting a half-pregnant monetary union to support a political objective that had arguably already been achieved by 1955.    This year, a look at something just as worrying in the long run as the fiscal problems of the West: the search for energy solutions.   This journey has been fraught with similarly quixotic dead ends, fairy tales and blunders ignoring economic (and thermodynamic) realities.  This is important to us, since energy cost and availability is central to how we think about growth, profits, stability and our portfolio investments.

As part of this effort, I made a pilgrimage to Manitoba to spend a day with Vaclav Smil.  Vaclav is one of the world's foremost experts on energy, and has written over 30 books and 300 papers on the subject (he's #49 on Foreign Policy's list of the 100 most influential thinkers).  Vaclav's book "Energy Myths and Realities" should be required reading for politicians or regulators impacting energy policy.  We start in the attached document with an unflinching look at these realities before turning to solutions, and some potentially encouraging developments, which have less to do with how electricity is generated, and more to do with how it might be stored.

As for the U.S. Super Committee failure and distress in European sovereign and bank debt markets, these are topics we have addressed in prior weeks in painful detail.  There is not much new to report right now, other than the inexorable slide towards massive money-printing and credit risk taken on by the European Central Bank, taking place in slow motion as Germany wrestles with its own past, and the depth of its real commitment to the monetary union.  As seen in the U.S., even when money-printing arrives, there are a lot of problems it still doesn't solve.

Michael Cembalest
Chief Investment Officer

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