Doug Casey on Japan: Something Wicked This Way Came

(Interviewed by Louis James, Editor, International Speculator)

Doug Casey, Chairman

L: Doug, a few weeks ago, you warned of more chaos and turmoil–not just in financial markets, but the fabric of society itself fraying around the edges, maybe even unraveling significantly. You couldn’t know the earthquake would hit Japan and exacerbate our world’s woes, but you did tell us that our world was already teetering close to the edge of an abyss – and now it’s just been given a violent shove in that direction. Many readers have written to ask what you make of the situation. Is the damage in Japan largely a Japanese problem? Or could this be the straw that breaks the global economic camel’s back?

Doug: I’m reluctant to say anything regarding what’s actually happening now over there, because as we sit here speaking in Salta, Argentina, we are literally on the opposite side of the world from Japan – about as far away as we can get. I’ve felt earthquakes here in the past, which are slightly disorienting and disturbing, but that doesn’t make me, or any of these other armchair quarterbacks, an expert. I’m not there, and I’m not a seismologist, and I don’t want to play the role of yet another talking head spouting uninformed opinions. It seems there’s very little reliable information that’s making it into the media. And what is, is reliably distorted.

L: I don’t think anyone expects you to be a fountain of local knowledge, but your take on things is so often different from what we hear anywhere else, I’m not surprised readers want to know your thoughts.

Doug: Well, okay, so this was a 9.0 quake, which makes it among the very worst in recorded history. The Richter scale is logarithmic, so a nine is ten times more powerful than an eight, which is already a big time event. This one’s epicenter was offshore. That created a tsunami, of course, and the world was fairly mesmerized by those images of an unstoppable wave swallowing up the Japanese countryside. That greatly compounded the damage caused by the quake itself. All of this was very bad, but now it seems that an inordinate amount of press ink is being spilled commenting on the nuclear reactors that were damaged.

L: Let’s talk about the earthquake coverage first, because I agree that this nuclear fearmongering seems to be an almost separate thing. I am deeply sympathetic to all the people in Japan who lost their lives – and the living who lost loved ones, the property owners, everyone. But the loss of life is tiny compared to the quake in Haiti last year, which claimed over 300,000 lives; or the tsunami in 2004 that killed 230,000 people in Indonesia; or even the Sichuan quake that hit China in 2008. Is it just me, or does it seem to you that worldwide press coverage is more intense this time?

Doug: It might have to do with economic impact. There were also big quakes in recent years in Iran and Pakistan –remote and poor places. This thing that hit Japan was First World and prime time. This resulted in more live footage and coverage. But Japan – like Chile – was much more able to weather their disaster than places like Haiti, Pakistan, or Iran simply because it’s rich. The solution to natural disasters is not more regulation and more NGOs – it’s more wealth.

The many YouTube videos of tsunami footage have gone viral. The tsunami was much more damaging than the earthquake.

Plus there’s the nuclear angle, which has been blown out of all proportion to the other two disasters, is generating its own hysteria, and is keeping the story atop the news. Or so it seems to me.

L: Okay, well then, let’s talk about that. You hear pretty scary things – the walls and roof of one of the plants affected were blown clear off, the radiation level around the plant has risen to dangerous levels, but the picture remains very unclear. There’s talk of another Chernobyl – could that actually be happening?

Doug: Well, I’m no more a nuclear physicist than I am a seismologist, but most of what I read strikes me as being hysteria. While not an expert – and the real experts in this area are few and far between – I am a technology aficionado… I say that even though I don’t have a cell phone…

L: [Laughs] That’s true, Doug – a bit of a contradiction.

Doug: [Laughs] It is true. I love technology, but don’t like to be bothered with nuisances. I don’t want to be belled, like a cow, and I don’t feel a need to keep up with an endless flow of distracting and trivial Twitter communications.

L: This is actually an aside worth highlighting: you can be a fan of technology without letting that technology dictate your life’s terms to you.

Doug: That’s exactly the way I see it. I am a technophile, but I still prefer to read a book over using a Kindle.

L: Me too. I like paper books, even the way they smell. But back to Japan – what about those explosions? Is it credible to you that the walls and roof of a nuclear power plant can be blown clean off and there be no major release of radiation? And since then, the trouble they’ve had cooling the fuel rods – could there still be a meltdown ahead?

Doug: Well, as I understand it, to begin with, nuclear power plants in Japan are built with earthquakes in mind. They know they live in a tectonically very active place, and plants built there have to be built on bedrock. They also have to be built on shock-absorbing foundations. These precautions seem to have worked quite well, actually, and the plants apparently received very little damage from the quake itself and its aftershocks. Also as designed, the affected reactors shut down automatically. The problems came later, when the primary (grid) power wasn’t there to keep the cooling systems working, and then the backup diesel-powered systems failed when hit by the tsunami, and then the third-tier battery backups ran out of power and things started overheating.

Now, as I understand it, when the reactors shut down, that means the fuel rods were pulled out or shielded. So, even if the reactor core or the cooling water overheats, there’s very little radioactive material in it. Now, I don’t know what caused those explosions – maybe there was some hydrogen being generated – but unless the Japanese and all the media operating in that country are blatantly lying, the shielded reactor core of the blown-up building was not affected. So, it’s unclear why there would be a meltdown. Certainly all this talk about how this is bigger than 100 Hiroshima bombs is silly. I’ve heard that the scare about the water in Tokyo is based on radiation levels that are lower than the safety guidelines in other places, such as the UK.

What happened in Japan was basically a worst-case scenario – Mother Nature threw the Japanese a double-dose of viciousness – and the technology actually worked. A major disaster has been prevented so far.

L: And yet, the press keeps reporting this as a nuclear disaster – the biggest one since Chernobyl.

Doug: That just goes to show you how ignorant and lazy most reporters are. There have only been two serious nuclear disasters in the 60-year history of nuclear energy, and both were Soviet accidents, one being back in the 40s, when no one knew what they were doing. People were handling fissile uranium with their hands – there was a lot people didn’t know or understand back then. The other accident was Chernobyl, of course. There, the plant was –like most Soviet plants –basically junk. It didn’t even have a containment barrier. As far as I can tell, what’s happened in Japan is very, very different from what happened in Chernobyl. Chernobyl was a result of bad design, pure and simple. In Japan, we have good design minimizing the impact of serious natural disaster.

But also remember that the reactors in Japan are close to 40 years old, and designed 50 years ago. That’s ridiculously antiquated – as if the car you were driving today was designed in the 1950s, or your computer was from that era. If the nuclear industry was not a ward of the state, it would have advanced far beyond where it is. But it’s stuck in time, because bureaucracy is always terrified of change. This is true everywhere the state plays a role. It’s why, for instance, the light aircraft industry is still flying Pipers and Cessnas that are basically 70 year-old designs. It’s actually criminal as well as comical. Regulation has made it uneconomic to improve them.

L: I know a Ukrainian engineer who says that the inadequate design elements at Chernobyl were compounded by political stupidity; Moscow ordered the plant managers to exceed designed plant capacity.

Doug: That wouldn’t surprise me in the least. In comparing what’s happening now to Chernobyl, people are just reacting hysterically – as they often do. It’s just like the fear-driven reactions to sodium cyanide, which is used in heap-leaching gold. I hate to see this thing being described as one of the worst nuclear disasters in history, when it was the earthquake and tsunami that were the disasters. It remains to be seen if the problems at the plant kill even a single person. Perhaps that will be the case. But thousands of people die every week, around the world, in industrial accidents. You have to keep this in proportion – something that political hacks, green activists, and the man-bites-dog media have no interest in.

L: What about Three Mile Island?

Doug:That wasn’t a nuclear disaster, it was a nuclear scare. More people got killed in Teddy Kennedy’s car. Nobody even got sick. What we have now, as far as I can tell, is more than a scare – but far from a disaster.

As I’ve often said, if you want everything to be safe you’d still be living in a cave– and likely dead by the time you were 20. Cars kill hundreds of thousands of people a year. When there’s an air disaster everyone goes wild. The only solution to the dangers of life on this little ball of dirt is vastly improved technology, and vastly increased wealth. You will arrive at those things most quickly through a completely free and unregulated society. Mankind’s destiny is – or should be – literally in the stars and on other planets. We’re not going to get there if fear and hysteria dominate on this insignificant little planet where we’re trapped right now.

I’m embarrassed to be surrounded by all these “Henny Penny”chickens, scared kitties, and wild chimpanzees. Of all the problems there are to worry about… Even if this turns more serious, this one is very far down the list. It’s probably even below anthropogenic global warming.

L: So… if the bottom line is that if you can have an earthquake that’s about as big as they come, in a place that’s prone to them, and a tsunami on top of that – and have the nuclear power plants survive and then shut themselves down automatically, as designed, this is actually a vindication of the technology. If anything, people should be reassured by this trial by fire – or water, as the case may be.

Doug: Yes. If you want your lights to go on and your refrigeration to work –at least at this stage of technological evolution –you need mass power generation. And today, that boils down to only a few things. There’s hydroelectric, which has its own set of problems, especially in earthquake-prone areas. There’s natural gas, which has other sets of problems, including highly explosive ones in the case of LNG (liquefied natural gas). There’s coal, which is where about 60% of the world’s electricity comes from today. It’s a very dirty technology, in spite of the huge improvements that have been made – and it kills thousands, perhaps many tens of thousands, of people every year if you include indirect deaths. Most lethal mine accidents you hear about are in coal mines that blow up when methane leaks out of the coal seams. And no matter how you clean the exhaust from burning coal, it inevitably puts a lot of gases in the atmosphere and leaves tons and tons of fly ash, which is itself radioactive. But deaths don’t actually matter to most environmentalists; in point of fact they hate people in general, as well as technology, and would like to “cleanse” Gaia. But that’s another story.

Actually, all power is indirectly of solar origin. But since we’re only 200 years from the start of the Industrial Revolution, our technology is still quite new and primitive from an historical viewpoint. Perhaps direct solar potential will be realized in the future by putting gigantic collectors in orbit and beaming the power to earth. In the meantime, though, solar doesn’t work at night or on cloudy days, and it requires better batteries to be practical – perhaps the next thing greens will start complaining about, in addition to the environmental costs of manufacturing panels. Wind doesn’t work reliably, and when it does it kills a lot of birds. In addition, the devices make a lot of noise, and are considered unsightly NIMBY (“not in my back yard”) objects by the very people – like the Kennedys – who promote them. Geothermal is great, but currently works only where ground conditions are just right. There are many other forms of mass power generation in the works, including harnessing the tides, the ocean currents, and the temperature differentials between differing depths of the ocean. It seems likely that some form of fusion power will be feasible at some point. When the nanotech revolution goes into full flower over the next generation the sky will be the limit – power will be a non-problem, as will most things in the material world. But that’s another discussion for another day.

In the here-and-now there’s nuclear power, which I’ve always said is by far the safest and cleanest form of mass power. And it’s available anywhere you need it, in any quantity you want it, day or night, 24/7/365. It’s also the cheapest, by far – or would be if not for the hysteria-induced delays and excessive regulation. Government has so many subsidies overlapping with so many imposed costs, doing a proper economic calculation is a dog’s breakfast.

L: Hardly anything more NIMBY than nukes.

Doug: . Yes. I hate NIMBY activists. They are without exception people who thrive on using political power to impose inconveniences and costs on others who don’t have political power. They don’t acknowledge property rights. They’re generally small-minded busybodies – as if there was any other kind. I’m very pro-nuclear power, and I’m even more bullish on the new nuclear power designs that have been developed. I’m especially keen on the small-scale, completely self-contained nuclear power generators with no moving parts. You can bury them in a safe place and they can power a large town or small city for ten years, with no service required. These are in the process of going commercial now. Or should be, and would be, if the hysterical Luddite reaction to the unfortunate events in Japan doesn’t delay things for another generation.

L: The famous Casey optimism.

Doug: Well, you know I always like to look on the bright side, but in this case, I’m a bit pessimistic in the short term. Think of how ignorant most of the public is; they’re largely the people who appear on Jay Walking, or on Jerry Springer. The typical voter is like a cast member on Jersey Shore. And most reporters are willfully ignorant, blow-dried non-entities who are mainly interested in seeing themselves on TV – a far cry from the days of H. L. Mencken. There’s a good chance the hysteria we’re seeing will turn into some sort of political backlash – a political tsunami – that will set nuclear power back another 30 years, just as Three Mile Island did –at least in so-called advanced countries.

L: Seems fitting; this vindication of nuclear technology may be the very thing that condemns it in the masses’ eyes.

Doug: Pathetic, actually. Like so much in today’s world, it’s totally perverse. Not just the wrong thing…

L: … but exactly the opposite of the right thing. [Laughs] So… Investment implications? Do you short utilities heavy on nuclear power? Short stocks in uranium companies?

Doug: The uranium stocks have been hit pretty badly in the last few weeks already. I don’t know that they’ve bottomed yet. Something I’d certainly be looking at is the Tokyo Stock Exchange. It got whacked more than 20% in two days, and the Nikkei was already cheap.

L: And it gained half of that back in the next few days. But that economy’s been in trouble for decades – would you really want to invest there?

Doug: Just because the economy’s in trouble doesn’t mean there can’t be distortions for a speculator to take advantage of. In fact, extreme events like this guarantee government stupidity that can have predictable consequences, and therefore be the basis of excellent speculations. My friend Bill Bonner says his trade of the decade is going long Japanese stocks and short Japanese bonds. I think he’s going to make a huge amount of money on that trade, on both sides. And at this point, after the Nikkei has been whacked good and hard, I am considering joining that trade as well. I’d be most interested in small to medium size Japanese companies, which are especially cheap.

L: The Japanese economy just took a major body blow and you want to buy Japanese stocks?

Doug: Sure. It’s a perfect contrarian speculation; what’s the Japanese government’s response going to be?

L: Print lots of money to get the economy going?

Doug: Exactly. Their economists all have worthless degrees from major universities, where they were taught by people like Ben Bernanke.They’ll print trillions and trillions of new yen, and that’s going to simultaneously hurt their bonds and inflate a new bubble in their stocks.

L: But… Remember Bastiat’s story of the broken window. That may seem to create work for the glazier, but the broken glass is a net drain on the economy, because it doesn’t add new value, but rather dissipates value replacing what was already there. So how does Japan’s spending to rebuild its damaged infrastructure turn into a boom? I mean, weren’t they already creating trillions of new yen?

Doug: Bastiat is, of course, 100% right. And, yes, they were – but now they’ll do so with even greater abandon. The slippery slope is about to get much steeper. Japan as a whole will get relatively poorer, but the companies that receive all that new money will get relatively richer. All that spending will boost earnings for many companies, especially Japanese construction-related companies, while it pounds nails into the coffins of both the yen and the Japanese bond market. And that will chase more capital into the stock market, which at least represents the ownership of real, productive assets –in other words, a new stock market bubble. This will hurt a lot of people, but will help those who see it coming. This, I suspect, is the ideal time to get into Bill’s trade.

L: I presume you’ll be following up on that in The Casey Report. Maybe we should take a road trip to Tokyo.

Doug: Maybe we should – I haven’t been to Japan for years. I like the idea. There will be very few tourists, and the U.S. State Department probably has an advisory against it – which is a guarantee that it’s exactly the time to go.

L: Okay, briefly back on the uranium stocks, if things don’t turn out as perversely as you’re expecting, and if the public actually sees that the Japanese nuclear plants show just how reliable the technology is, then maybe the current dip is a buying opportunity?

Doug: Perhaps, but we shouldn’t be too focused on what the hysterical, Western, so-called democracies are going to do. The Chinese will definitely continue building scores of new nuclear power plants. So will the Indians, and so will other countries. Marin says that of the 65 nuclear power plants under construction today, only three are in G7 countries. Nuclear power may be a dead duck in the U.S. for decades to come, but that may not be that important in the big scheme of things. In fact, there simply is no reasonable, sensible alternative to nuclear today.

[Ed. Note: Marin Katusa is the head of the Casey Energy Team.]

L: I just read that there’s renewed concern in Germany about nuclear power, which I can understand, since they have so many tsunamis in Germany…

Doug: [Laughs] I know. I hear Merkel’s government is in real trouble. Those people better start studying Mandarin, because they’re going to need it –at least if they want to work as maids and houseboys for the Chinese, as opposed to being just street-sweepers and streetwalkers.

L: Any other investment implications? Isn’t this exactly the sort of event that people would call a black swan landing on the already shaky global economy?

Doug: Maybe, maybe not. This whole thing in Japan might only cost a few hundred billion, and the U.S. prints more than that in a couple months. This has become chicken feed in the new global economy. Stupid economic ideas will do far more damage than any natural disaster, short of an asteroid hitting the earth – which will happen at some point.

L: You sure are Mr. Cheerful again.

Doug: Outside of my own life, I don’t make the rules, I just play the game – and we have given people a way to turn these lemons into lemonade. Although I’m sure we’ll lose a few concrete-bound, conventional, and technophobic subscribers who have been brainwashed into believing the world should be saved by recycling and bicycling, rather than creating scores of gigawatts of new power annually.

L: Fair enough – until next time, then. Thanks for your insight.

Doug: My pleasure, as always.

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[You can be certain that Marin Katusa is keeping up on energy-market aftershocks as things continue to unfold in Japan. His cautious approach to junior stocks and mathematical expertise has yielded exceptional gains for his subscribers – from 100% up to 1,000% returns within 12-24 months. Try Casey’s Energy Report today risk-free, for 3 full months with 100% money-back guarantee. Click here for more.]

Mar 30, 2011