From: Jeffrey Epstein <[email protected]>

From: Jeffrey Epstein <[email protected]> To: Boris Nikolic Subject: Fwd: Matter over Mind, part 2: March 17, 2011 Date: Thu, 17 Mar 2011 17:38:45 +0000 Attachments: 03-17-11_-_EOTM_-_Matter_over_mind,_part_2.pdf Inline-Images: image003.png; image001.png; image002.png; image005.png; image004.png a good explanation of what and why Forwarded message From: US GIO Date: Thu, Mar 17, 2011 at 10:21 AM Subject: Matter over Mind, part 2: March 17, 2011 To: Eye on the Market, March 17, 2011 (today's version has color pictures and tables better viewed in the PDF) Topics: Japan update, what's next for nuclear power and implications for Asia/US "Matter over Mind, Part 2". In our note from Tuesday, we said that the next 72 hours would be critical. The grid below is an update from the Japan Atomic Industrial Forum as of 10 pm March 17, and there's a lot of red on it. Before getting into the details, I wanted to show a picture, since it gets at why the situation deteriorated so rapidly at the Fukushima Dai-Ichi plant. It's a before and after shot of what happened to the fuel storage tanks which supply power to the back-up generators. By having them on the beach and not under the ground, they appear to have been washed away by the tsunami. It is entirely possible that all subsequent problems (hydrogen explosions, exposure and possible melting of active and spent fuel rods) emanated from the lack of electricity to power cooling systems. Note how other structures just a few hundred yards away from the shore withstood the tsunami. Fukushima's Daini reactors (10 miles from Dai-Ichi) are in normal cold shutdown mode since they did not lose their emergency power fuel source. EFTA01159200 ,.... 4.10.. s$ I'_ . V illhi r e i it_ I i r, je dr / ilhotos reprinted with permission of DigitalGlobe, cropping, boxes and arrows are ours What's happening as of March 17 at 10 pm Japan Standard Time: ** Backup generators not functioning, which is why cooling systems are not working properly (line 9, 10), which led to... ** ...water level pressure falling and exposing uranium/plutonium rods to air, which raises their temperature and makes them more likely to melt (line 12) ** Building integrity (line II) has been compromised due to hydrogen explosions and possible containment or reactor vessel breaches ** Reactor units 1, 2 and 3 are in serious trouble, with sea water injections being attempted on all three (line 15, line 16) to cool nuclear reactions ** Green sections on units 4, 5 and 6 are not "good news", since they were in outage mode when the earthquake hit (line 5) ** In one or more units, there might have been a breach in containment vessels which house the reactor vessels (line 8) ** Spent fuel rods are becoming a serious problem (line 18), a topic worth reviewing in more detail on the next page EFTA01159201 Status of nuclear power plants In Fukushlma as of 22:00 March 17 (Estimated by JAIF) 1 Power Station Fukushima Dandy Nuclear Power Station 2 Unit 1 2 I 3 4 J 5 6 3 Electric / Thema Pow output (MW) 460 /1380 7841 2381 1100 /3293 4 Type Of Reactor BWR-3 BWR-4 I BWR-4 BWR-4 BWR-4 BWR-5 5 Operation Status at the eartrquake occurred tinge Outage ratar 6 7 Core and Fuel Integrity Reactor Pressure Vessel Integrity 1M2r10wn Unknown Unknown No -I rods Not Damaged Not Damaged 8 Containment vessel Integrity Damage Suspected Damage Suspected Not Damaged Not Damaged Not Damaged 9 10 11 Core coding requiring AC power Core coding not requiring AC power Building Wegnty Sever= Slightly Damaged Not sary Not necess. Not necessary Not Damaged Not necess Not necessary Not Damaged 12 Water Lew l of the Rector Pressure Vessel •f the F u. half• - -i- Safe Safe 13 Pressure of the Reactor Pressure Vessel Stable I Unknown (run cut of battery) Stable Safe Safe Safe 14 Contamem \ esse: Pressure Unknovil DM: Unknown, SIP: Atmosphere Stain Sale Sale Safe 15 Water injection to we (Accident Management) Continuing (Seawater) Continuing (Seawater) Continuing (Seawater) Not necessary Not necessary Not necessary 16 water injection to Containment Vessel (AM) Continuing (Seawater) to he decided (Seawater) Continuing (Seawater) Not necessary Not necessary Not necessary 17 Containment venting (AM) Ccntinting Preparing Continuing Not necessary Not necessary Not necessary 18 Fuer Integrity in the spent fuel pod (No info) (No info) Level Stating Water Injection Low, Leer Low, Preparing Water Injection Damage to Fuel Rods Suspected Pool fano Increasing Pod Temp. Increasing nuronmental t NPS bonier. 646.2'3914h at 11:10, Mar. 17 Evacuation 20km from IFS' People Fukushlma wto the between 20km to 30km from the a1NPS are to stay Indoors. once: Japan Atomic Industrial Forum. Inc. Spent fuel pools and what "spent" really means (a) When back-up generators failed, systems which add and cool water to "spent fuel" pools failed as well. There is something important to understand: "spent" does not mean "inert" or "reduced power". In fact, it's kind of the opposite. Nuclear power relies on uranium (b) that behaves in a predictable way, where "predictable" refers to heat generated when rods are placed near other uranium rods. This way, nuclear reactions can be modulated by plant operators using boron control rods. But over time, U-238 accumulates neutrons produced from the fission of U-235, eventually becoming neptunium and then plutonium. Why does this matter? When this happens, rods become more uncontrollable and radioactive. That's what is meant by "spent", in that their USEFULNESS is spent. The fission reaction results in a variety of radioactive elements such as iodine-I31, cesium-137, strontium-90 and gases like xenon and krypton. Spent rods are not harmful if there is no damage to their zirconium casings, but melting of these rods release these isotopes into the environment. Why spent fuel pools can be worrisome: ** There are more radioactive fission products in spent fuel pools than in the operation reactors themselves EFTA01159202 ** Without cooling, spent fuel pool water evaporates and exposes these radioactive materials to the atmosphere. Yet they are not housed inside a containment unit like nuclear reactors are. ** Opinions about the rate of evaporation differ. According to the Nuclear Energy Institute (c), the rate of evaporation at plants like Fukushima is slow, only a few percent a day. But a Brookhaven National Laboratory study (d) on Boiling Water Reactors like those used in Fukushima estimates that within 40 hours, all the water would evaporate, and that plant operators only have 25 hours to address the problem. Furthermore, the Brookhaven study dealt with shutdown plants whose fuel rods were older and less "hot" than the more recently spent rods at Fukushima (implying an even shorter evaporation period). ** Fukushima spent fuel pools are located near the top of the reactors, making them harder to access. Even if plant operators refill emptied spent fuel pools, they may not want to: scientists we spoke with said the behavior of exposed rods to water (if they have begun to melt and lose their zirconium casing) is not predictable; is it like gas on a fire? The spent fuel pool at unit #4 was reported to be out of water by the U.S. Nuclear Regulatory Commission. Either its water evaporated (e), or the pool suffered structural damage during one of the hydrogen-fueled explosions and leaked. Either way, exposed spent fuel rods render the area highly radioactive and less viable for human intervention. As for the nuclear reactor vessels themselves, there is still hope that even if exposed rods (lines 6 and 12) melt, they will be contained inside the vessel (line 7) with cooling powered by emergency pumps. But the I 800-degree melting point of the reactor vessel may be exceeded by the theoretical temperature of molten nuclear materials, which could rise to 2400 degrees. Why on earth are we going into this level of detail in an investments newsletter? What's happening is more than just a tragedy for Japan and its people. It's also a potential turning point in the approach to energy policy. The chart shows how planned nuclear capacity is 40% of the current installed base. Will Fukushima change anyone's plans? The U.S. Nuclear Regulatory Commission generally recommends a 10-mile barrier between U.S. nuclear plants and residential areas. However, the NRC recommended a 50-mile evacuation zone around Fukushima. This may surface questions about safety issues. The Union of Concerned Scientists just released a document entitled "The NRC and Nuclear Power Plant Safety in 2010: Brighter Spotlight Needed" after briefing Congressional staffers. Their conclusion: the chances of a disaster are low, but the NRC gets mixed reviews after 14 "near-misses" at U.S. nuclear plants during 2010. The events exposed a variety of shortcomings, such as inadequate training, faulty maintenance, poor design, and failure to investigate problems thoroughly. The problem: there are not many easy answers for replacing planned nuclear bars in the chart, particularly in China. Generating capacity of nuclear power plants Gigawatts US Iv France Japan Russia Germany South Korea World Canada 0 200 400 600 UK China India • ■ In operation Brazil ■ ■ Underconstruction & planning 0 20 40 60 80 100 120 Source: The Federation of Electric PowerCorrpaniesotJapan. EFTA01159203 17% 15% 13% 11% 9% 7% 5% 3% 17 CIS ed I. % 4 /2 CO `to t (- 10 % .1/4? 444 0 00. e 0 S e % Source: In ternational Trade Centre.2009. Free trade agreements in East Asia Number- concluded. negotiated and proposed FTAs 120 100 80 60 40 20 Whatever the outcome for nuclear power, we have been positioning in various ways for a world with increasing and changing energy needs. We are working with managers who focus on the exploration and development of oil and gas fields, mostly in the U.S., as well as on "midstream" businesses involved in the gathering, storage and distribution of oil and gas products. Other dedicated energy managers we work with focus on renewable energy, primarily in solar, wind and bio-mass power generation. Our generalist private equity managers are involved as well, including a 2009 investment in the Marcellus shale gas field which was subsequently sold to a strategic buyer for a substantial premium. On natural gas specifically, shale gas only accounted for 1% of North American gas supply in 2006. It's currently 20% and is expected to grow to 50% by 2030, which is why it has been an area of focus for our managers. Potential economic impacts in Asia: we remain optimistic on the region's prospects The first chart looks at which countries export a lot to Japan, excluding energy. Asia is clearly the potential loser. However, Southeast Asia is likely to withstand reduced demand from Japan. After all, Japan has only been growing at 1% over the last 5, 10 and 20 years. Furthermore, East Asia entered into a rising number of free trade agreements over the last decade which improved its ability to manage around disruptions to supply chains and production gaps. When you strip out Japan from the Asian trade picture, it's clear that Asian trade has a life of its own. We do not foresee a serious hit to regional growth, outside Japan itself. More evidence of how well-integrated economic regions withstand a crisis: note how Texas became a regional shock absorber after Hurricane Katrina, as some industrial and service sector activities migrated there on a temporary basis. Non-energy exports to Ja pa n as a percent of total exports As an trade has a life of Its own outside of Japan Tril ions 3.0 1994 1996 1998 2000 2002 2004 2006 2008 Source: Asian Development Bank Asia Regional Integration Center. 2.5 2.0 1.S 10 0.5 2001 2002 2003 2004 2005 2008 2007 2008 2000 Source: International Trade Centre Intra-Asian trade Infra-Asian trade assuming 50% haircut to Japanese Imports & exports Texas was the regional shock absorber after Hurricane Katrina, Gross state product in real terms. QoQ % annualized 8% Hurricane Katrina .6% Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Sou ce: MoodisAnalytirs, Bureauot Economic Analysis. Mar-08 Sep-08 As for the US, Japan accounts for around 1.5% of total S&P 500 revenues, with higher numbers (>10%) for multinationals like IBM, Corning, Altera and KLAC (f). The largest sector exposures are civilian aerospace, agriculture, drugs/medical equipment and telecommunications equipment. Mitigating factor: Japan is a relatively stagnant market for U.S. firms EFTA01159204 (U.S. exports to Japan grew just 25% versus 82% to the rest of the world from 2003 to 2008) and tend to generate much lower margins there than elsewhere. After the initial demand shock, we expect some companies to benefit from rebuilding efforts in Japan, particularly those companies focused on heavy equipment, software for engineers and project managers, insurance brokerage, electrical equipment/process controls and construction. I hope to return to normal investment commentary very soon, and if there are financial assets that are indiscriminately oversold, we will be sure to highlight them. We are nor making any changes to our portfolio allocations, which is our way of saying that we do not expect the situation in Japan to tip the global economy into recession. We still believe that the manufacturing and service sector recoveries taking place in the US, Germany and China, coupled with exceptionally easy monetary policy, are strong enough to survive the various obstacles that have surfaced during the worst March I can remember (or at least since 2009). Michael Cembalest Chief Investment Officer Notes [a] This section incorporates conversations with David Walker (Higgins Professor of Earth and Environmental Sciences, Lamont- Doherty Earth Observatory), and a separate source with 40 years of experience in the industry as a Naval and private sector nuclear operations engineer, engineering manager and project coordinator for the construction and operation of nuclear power plants. [b] Not all Fukushima facilities use uranium rods. Some rely on MOx fuel (a blend of plutonium, natural uranium, reprocessed uranium, or depleted uranium). Our understanding is that MOx fuel has a lower melting point; there is less experimental experience with it; and that it may be less sensitive to boron as a reaction moderator. Plutonium is cheaper to use due to the surplus of decommissioned weapons. [c]"Fact Sheet: Used Nuclear Fuel Storage at the Fukushima Dai-lchi nuclear power plant", Nuclear Energy Institute, March 15, 2011 [d] "A Safety and Regulatory Assessment of Generic BWR and PWR Permanently Shut Down Nuclear Power Plants", Brookhaven National Laboratory, August 1997. Our sources inform us that the technology used in spent fuel pools have not changed a lot since that time. [e] It's possible that hydrogen explosions jostled the spent fuel rods or the boron dampers between them, accelerating their rate of evaporation [f] "Japan and S&P 500 EPS", UBS Global Equity Research, March 16, 2011 The material contained herein is intended as a general market commentary. 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