Tesla & The New Economics Of The Coming Renewable Energy Boom

I don’t need to tell anyone of the importance of Tesla’s expansion into home battery technology. A home battery lets you store solar energy to use when the sun isn’t shining, which is a really, really major thing in terms of power distribution. As I’ve been pointing out for years, this is the crucial missing link between photovoltaic cells being a rapidly, rapidly cheapening technology with a lot of rollout potential, and photovoltaic cells being the major source for the world’s power. As I predicted in The Week in 2013:

The promising trends in technology and cost suggest much more than renewable energy becoming the fastest growing energy source in the next 30 years. They suggest that renewables will grow to be the number one energy source in the United States and the world in the next 30 or 40 years.

I’d say that that was actually an overly conservative projection. I now foresee solar to be number one in the next twenty, if not the next ten years.

It’s nice to live in the knowledge that renewable energy will overcome problems posed by diminishing oil reserves and (at least) mitigate anthropogenic climate change. It’s nice to know that as solar efficiencies continue to increase and solar manufacturing costs continue to fall that the long term trend for energy costs is down.

And you can do a heck of a lot of cool things with cheap, decentralized energy, like heating and lighting your home, manufacturing goods and technology and food and tools, and powering computers and artificial intelligence.

This, in my view, is the furnace to power the next fifty or a hundred years of soaring mid-20th century style economic growth. This is the beginning of an energy-driven economic supercycle — which takes us from the era of handheld computing to the era of building asteroid mining space stations and extraterrestrial colonies and maybe even interstellar spacecraft. It’s the main reason why I switched from bearish to bullish in 2013.

But what I really want to know is how to make money out of this trend. If photovoltaic cells and batteries are the new crude oil, coal, gasoline and natural gas (etc), does that mean Musk’s firms (Tesla, SolarCity, SpaceX, etc) are going to be the next Exxon-Mobil or Shell or Gazprom?

Maybe. But I’d tend to see renewable energy and emerging tech index funds as a slightly smarter bet. The trouble is that we’re at a very early stage in the supercycle.

An imperfect analogy: Xerox made an operating system akin to Windows years before Microsoft and Apple did, but Microsoft and Apple were the ones who reaped the bigger rewards. There are a whole load of factors that could dramatically affect which renewable energy systems are the ones that dominate the market: interface, battery-photovoltaic cell integration, price per unit of energy, price per unit of storage, durability and probably some others. And also a slew of more superficial factors such as marketing. If this is going to be as big as I think it is there will be a lot of competition from outside the renewables sector not least from firms like Google, and Apple and Facebook and Samsung as well as from older energy giants like BP, Shell and Exxon-Mobil.

For now, of course, Musk does seem to be establishing himself as the market leader and trendsetter in much the way Steve Jobs once did. But that could all change. It’s even not just a matter of competing firms. Just as the internet decentralized information distribution, and solar is on the cusp of decentralizing energy production, the whole manufacturing and (I’d argue) product design paradigm is edging closer to being transformed by another set of emergent technologies: 3-D printers and home manufacturing. Maybe as home manufacturing begins to become more prominent, open-source collaborative product and component design will beat out the current proprietary model.

The main takeaway here seems to be that this is an incredibly exciting time to be alive. We’re all set to get a lot richer from this, whether or not we bought Tesla at an early stage, just as people in the early 20th century didn’t have to buy Standard Oil shares to do well from that other energy revolution.

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On the Breakdown in the Correlation Between Gold Price And The Federal Reserve’s Balance Sheet

Once upon a time there was a strong correlation. Then it broke:

20130921_gold1_0 (1)

Of course, we know that correlation is not and does not imply causation. But I think there was an underlying causation to the relationship that we saw, but it was not a superficial relationship of more asset purchases, higher gold prices. I think the causation arose out of self-confirmation; people noticed that the Fed was printing money, and believed that expansion of the Fed’s balance sheet would lead to price inflation (in ignorance of the fact that the broadest measure of the money supply was still shrinking in spite of all the new money the Fed was injecting into the economy, and the fact that elevated unemployment, weak demand, and plentiful cheap goods make it very hard for strong inflation to emerge). Many others believed that in the wake of 2008 and the shadow banking collapse, the financial system was fundamentally broken, and that the world might have to return to the gold standard. I myself believed that at the very least the West was in a prolonged Japanese style deflationary depression that in the absence of a return to strong growth might only be broken by very high inflation or a liquidationary crash.

Neither of these predictions — of imminent elevated inflation (or hyperinflation), and of imminent catastrophic financial system breakdown — have come to pass. Core inflation is close to its lowest year-on-year rate in history, and further financial system failures have mostly been prevented. So expectations have been shaken and are adjusting. Gold doesn’t produce any yield other than speculative price gains, but when gold is going up in price by around 20% a year it is still an attractive thing to hold to many, especially in an environment where its year-on-year speculative yield vastly outstrips bond yields and rates on savings. Once gold stopped going up by such a margin, investors had to sell their gold to lock in any speculative gain they might be holding onto, resulting in selling. And once gold started to fall, investors faced negative yields on gold, further spurring selling. This has meant gold has faced strong headwinds, and that is why its price has dropped by over 30% since its all-time high in September 2011, even while the Federal Reserve balance sheet continued to soar. Correlation broken. And in a market where the only yields are speculative gains, lost momentum can spell long-term depression as we saw for almost 20 years between 1980 and 2000.

Where gold goes from here is an interesting question. The main spur that pushes gold as an asset is goldbug ideology — the notions that it is the only real money, that it has intrinsic value, that fiat financial systems — and even modern civilisation in general — are fundamentally unmanageable and unsustainable and prone to collapse. As the technologies of capitalism, energy and production improve and advance, these goldbug views have been allayed and pushed to the margins as occurred in the 1980s and 1990s. In my view, their resurgence in the early 21st century stems almost entirely from the fact that real energy prices were rising, and real incomes falling. These two phenomena and their causes are complex and interconnective but essentially the energy infrastructure that brought the world spectacular growth and pushed all boats higher on a rising tide from the early 20th century to the 1990s began to come under strain — cutting into firms’ incomes, and individuals’ living expenses — and it has taken a long while for the market to even begin to equilibriate away from the increasingly-expensive old energy infrastructure and toward new infrastructures (initially increased U.S. production of shale, but going forward renewables especially solar). And while through financialisation and utilising insider-advantage much of the economic and financial elite managed to keep growing their incomes strongly, the vast majority came under stronger financial pressures and were only capable of sustaining their standard of living through debt-acquisition, which itself became a strain due to debt service costs.

As energy prices begin to fall (in what future economists may call a series of technology shocks), as private deleveraging proceeds strongly (with or without higher inflation) and as new cost-cutting technologies such as 3-D printing become more widespread real incomes will probably begin to rise again for the masses indicating a new supercycle of growth and pushing goldbug and other scarcity-concerned views to the fringes once more. We are, I think, moving inexorably to a world of superabundance, whether we like it or not. (Of course, in such a world assets like gold may still have a popular following to some degree, but that is another story for another day).

So even while the Federal Reserve continues to expand its balance sheet into the future in an effort to keep the US financial system liquid and further lubricate private deleveraging (and simultaneously chasing the elusive unemployment-reducing properties of Okun’s Law), the broken gold-Fed correlation is likely to break down even more.