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There are two meetings going on today – one is short and for the world’s most powerful leaders, while the other runs 12 days and it’s mostly for poor nations to make their needs known to the rich. It’s obvious that these two national groups are meeting a world apart and not talking much to each other! One is the Group of 20 (G20) major economies meeting on the Indonesian island of Bali today and tomorrow (November 15 and 16), and the other is called the Conference of the Parties to the Convention on Biological Diversity (COP27), which focuses on climate change, running November 7-18 in Sharm el-Sheikh, Egypt, where a big theme is how rich countries must pay for the poor countries to reduce their carbon dioxide emissions.
The weather is expected to be in the upper 80s in Bali all week and sunny and the lower 80s in Egypt.
First, let’s look at the G20, where China’s newly established three-term President Xi Jinping will be the clear leader, since America is still counting its disputed ballots this week and European leaders are in a state of flux amidst an economic recession due to high energy prices and now-fast rising interest rates.
By contrast, prices are falling in China. Last Wednesday, China’s Bureau of Statistics announced that its producer prices declined 1.3% in October, which is indicative of weak domestic demand. Also, China’s exports declined by 0.3% in October, so Chinese exports are becoming less dominant and certainly less reliable. In October, China’s exports declined 9% to Europe and 13% to the U.S. However, a backlog is building, so exports could surge in upcoming months, plus President Xi is expected to wind down zero-Covid lockdown policies.
I should add that Apple (AAPL) has reactivated its plan to build the iPhone 14 in India, not China, through its contract manufacturer Pegatron, due to China’s zero-Covid policy interrupting its iPhone production.
Nvidia (NVDA) just introduced a new graphics processing chip, the A800, that can be exported to China under the new U.S. export restrictions on AI (artificial intelligence) chip sets. The A800 has the same processing power of its flagship A100 chip, but it has narrower interconnect bandwidth to receive data from other chips, which is critical for AI applications. Specifically, while the A100 can send data at 600 gigabytes per second, the A800 can only transmit data at 400 gigabytes per second. I suspect China will try to figure out if it needs more A100 chips to speed up AI applications. In the meantime, Nvidia is the AI winner.
Crude oil prices initially rose early last week in anticipation that China’s demand will pick up as its zero-Covid policies come to an end. Further complicating crude oil prices, the Biden Administration is anticipated to stop draining the Strategic Petroleum Reserve (SPR) later this year, especially in the wake of the mid-term elections and the likely leadership change in Congress. A big surge in crude oil prices to $120 per barrel is expected to occur by February and March when seasonal demand picks up.
In other G20 countries, Germany’s factory orders contracted 4% in October and have fallen 12.8% in the past eight months. Orders from outside the eurozone remain especially weak, so Germany is leading the eurozone into a recession. I should add that Germany’s industrial production has declined 1.2% this year.
Interestingly, Europe likes to say that their natural gas reserves are “full,” but they have limited storage facilities due to their previous pipeline dependence. As a result, there are many LNB tankers in the Baltic Sea waiting to unload more natural gas as soon as a cold front hits and natural gas demand surges. These LNG tankers should help Germany and other countries keep their factories running, but natural gas prices are subsidized by governments, since the price of natural gas is cost-prohibitive in many countries.
Poor Nations Need “Carbon Credits,”But Their Currencies Are Weak and Their Debts Are Rising
Amidst global energy woes, the COP27 summit is underway in Egypt. Poor nations like Nigeria and Pakistan recently suffered record flooding and are asking for some of the $100 billion per year that rich nations previously pledged to help poor countries reduce their carbon dioxide emissions. However, most poor countries have weak currencies and high debt burdens, so any aid would likely go into debt service.
Furthermore, after Sir Lanka destroyed its economy by trying to comply with ESG and carbon dioxide emissions by switching to organic fertilizer and away from chemical fertilizer that reduced their crop levels, there is tremendous apprehension at COP27 that rich countries no longer have the means to help poor countries. Knowing this, an obscure carbon credit system is being proposed by climate envoy John Kerry to aid the poor countries – a system so complex that it will likely go nowhere after COP27 ends.
I should add that coal demand is rising in poor countries, and since many rich countries in Europe had to revert back to coal due to the chaos associated with breaking away from Russian natural gas, COP27 is anticipated to be a bust.
Last year, we wrote from on the scene at COP26 in Scotland. The big outcome there, besides the parade of VIP motorcades and hundreds of private jets, was that the world would try to reduce its carbon dioxide emissions by switching to hydrogen, even though most hydrogen is derived from natural gas.
To verify that point, earlier this month, The Wall Street Journal published an article (“Gas Exporter Sempra Infrastructure to Build New U.S. LNG Plant,” November 3, 2022) about how Sempra (SRE) was studying how to “repurpose” its natural gas pipelines in California due to the state’s ban on natural gas furnaces and water heaters in 2030 (many cities have already implemented the natural gas appliance ban).
WSJ said that Sempra was planning on transporting green hydrogen via its pipelines that currently transport natural gas. However, WSJ said that, “Betting on green hydrogen, which is made using renewable energy, isn’t a sure thing. It is expensive to produce, and there isn’t yet a widespread market for it.” Furthermore, WSJ added that, “There are also safety risks and engineering hurdles associated with retrofitting pipelines to carry hydrogen and using it to fuel power plants and trucks.”
The bottom line is there is no such thing as a mass market for green hydrogen, so most hydrogen is derived from natural gas. In other words, I think the switch to hydrogen fuel cells in commercial trucks and other energy applications is at least premature and for now looks pretty “stupid,” as it will just boost natural gas demand, especially in California.
And finally, let me add that The Wall Street Journal reported last Tuesday that Japan is selling short-term Treasury securities in an effort to prop up the Japanese yen, which has fallen 21% against the U.S. dollar this year alone. Essentially, since Japan is one the biggest buyers of U.S. Treasury securities, persistent selling pressure from Japan in the past five months has helped to invert the Treasury yield curve.
This selling pressure makes the Fed’s selling of $95 billion per month in Treasury securities to reduce its balance sheet much more difficult. As I have said many times, the Fed never fights market rates, so if Treasury yields rise, then the Fed has to raise its key interest rates to get in sync with market rates.
Navellier & Associates owns Nvidia and Apple Computer in managed accounts. Louie Navellier and his family personally own Nvidia and Apple Computer via a Navellier managed account, and Nvidia and Apple Computer in a personal account.
All content above represents the opinion of Louis Navellier of Navellier & Associates, Inc.
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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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