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.

Advertisements

I Don’t Understand the Apple Watch

In 2006, I was telling anyone who would listen — which, given that I was a nerdy 19-year old, wasn’t many people — to buy Apple stock. Back then Apple seemed to be on the verge of something amazing. I had had an iPod since 2003, and had just bought a Macbook Pro, and was blown away by OS X. The operating system and interface had a crispness and an attention to detail that made Windows PCs seem like a muddled mess.

Turns out I was right about Apple. The past decade has seen Apple blow up bigger than I dreamed they might. The iPhone and iPad have been stunning successes that have allowed Apple to redefine what personal computing is. And now Apple is the biggest company in the world.

And the Apple Watch — their first new product line since the iPad — seems like a step in the wrong direction. Admittedly, I haven’t used an Apple Watch yet. But why bring out a watch when other elements of your product line have made watches obsolete?

I’m happy to have my wrists free. A smartphone already does what a watch used to do — tell the time — plus so, so, so much more. I don’t want another screen, especially not a tiny and hard-to-click one strapped to my wrist that actually requires tethering to a smartphone to work. Interface design has been the key difference between Apple and Apple’s competitors in the past 10 years and to hear complaints about the interface seems pretty damning.

Yes, I can see some point to a biometric data-collection band, especially for athletes and fitness junkies and for hospital patients. Yes, I understand that sooner or later a new model of the Apple Watch will not require a tethered iPhone to work.

But at this point this is a niche product, functionally akin to the Apple Newton in the early ’90s. It does some cool stuff. But it’s not going to change the world.

The trouble is that I think Apple is barking up the wrong tree. This is like a successful band’s dodgy fourth album where they rehash earlier ideas in pursuit of that indefinable thing that made them great in the first place. The trouble is that that thing — the bleeding edge — has moved on. Trying to recapture it by rehashing old ideas in a slightly different form might sell some records. And Apple will sell some watches. But it’s not going to change the world.

The bleeding edge technologies that will change the world immeasurably in the next 20 years are self-driving cars, artificial intelligence, 3-D printers, ultra-efficient solar cells that can produce energy more cheaply than fossil fuels, and battery and energy distribution technology to allow the ultra-efficient solar cells to power things when the sun isn’t out. Apple are actually working on some of these things.

The Watch is — at best —an unworthy distraction. Of course, like most ageing rockstars, Apple has the time and money for unworthy distractions. And that’s why younger, leaner competitors may be the ones to bring the truly revolutionary products to market.

Facebook & the Bubble Mentality

So Facebook keeps falling, and is now floating around the $27 mark.  We’re a third of the way down to my IPO valuation of FB as worth roughly $2-4 a share (or 5-10 times earnings), although I wouldn’t be surprised for the market to stabilise at a higher price (at least until the next earnings figures come out and reveal — shock horror — that Facebook is terrible at making money).

The really stunning thing is that even after all these falls, FB is still trading at 86 times earnings. What the hell did Morgan Stanley think they were doing valuing an IPO without any viable profit model at over 100 times earnings? The answer is that this was an exit strategy. This IPO was about the people who got in early passing on a stick of dynamite to a greater fool which incidentally is precisely the same bubble mentality business model as bond investors who are currently buying negative-real-yielding treasuries at 1.6% hoping to pass them onto a greater fool at 0.5% (good luck with that).

This was achieved by convincing investors to ignore actual earnings and instead focus on projected future earnings. From Bloomberg:

Facebook, with a market capitalization of $79.1 billion, is trading at 29.5 times the company’s projected 2014 profit of $2.69 billion, data compiled by Bloomberg show.

Or much more simply, counting chickens before they hatch.

There’s an interesting comparison to the development of AAPL. Steve Jobs — who went on to do great things — was never fully in charge of AAPL until much later on. AAPL externally recruited CEOs with business experience, and Jobs was eventually thrust out of the company he founded, to continue his journey on his own. Failure is a really valuable lesson. Jobs was lucky to experience it and learn from it early before he ever got a chance to destroy AAPL.

FB isn’t really a bad business, and prospects would look much rosier if it were priced more realistically. It’s generating a profit — just a much smaller one than suggested by the IPO pricing. And management are being swept along by everyone else’s irrational euphoria. Zuckerberg can freely throw away a whole year’s earnings buying Instagram — an App whose functionality FB actually duplicated in-house almost certainly for a tiny fraction of the cash thrown at Instagram. And Zuckerberg — who controls a majority of the voting rights — isn’t going to get thrust out into the cold by shareholders. He can keep wildly throwing cash around so long as it keeps flowing into FB. The problem is, given the steep price falls, it looks like the river is running dry.

As I wrote before FB started falling:

The big money coming into Facebook just seems to be money from new investors — they raised eighteen times as much in their flotation yesterday as they did in a whole year of advertising revenue. For an established company with such huge market penetration, they’re veering dangerously close to Bernie Madoff’s business model.

That’s life. Bubbles get burst; the Madoff bubble, the securitisation bubble, the NASDAQ bubble, the housing bubble, the Facebook bubble, the treasury bubble. The trick is not getting swept up by the irrational euphoria. Better to miss a blow-out top than to end up holding a stick of dynamite.

Global Trade Fragility

Yesterday I got my new iPad.

Yeah, I bought one like millions of other suckers. Apple can take my dollars and recycle them buying treasury bills and so partially fund, at least for a short while, America’s debt.

But really, I bought one to enjoy the twilight of the miraculous system of global trade. An iPad is the cumulative culmination of millions of hours of work, as well as resources and manufacturing processes across the globe. It incorporates tellurium, indium, cobalt, gallium, and manganese mined in Africa. Neodymium mined in China. Plastics forged out of Saudi Crude. Aluminium mined in Brazil. Memory manufactured in Korea, semiconductors forged in Germany, glass made in the United States. And gallons and gallons of oil to ship all the resources and components around the world, ’til they are finally assembled in China, and shipped once again around the world to the consumer. And of course, that manufacturing process stands upon the shoulders of centuries of scientific research, and years of product development, testing, and marketing. It is a huge mesh of processes.

The iPad is an extreme example of the miracle of civilisation. There are less extreme ones. Take, for example, the hamburger. Hamburgers did not exist until the age of regional trade, and refrigeration. The ingredients in a hamburger were not in season at the same time. Cows were not slaughtered at the time when lettuce was harvested. Lettuce was not harvested at the same time tomatoes or onions were typically harvested. For thousands of years previous to this we ate seasonal concoctions, like turkey, yams and cranberries at thanksgiving, as well as smoked and cured foods all year round. In modernity, we have been able to use modern technology to bring about any combination of produce: from greenhouses, to air freighting, to refrigeration, and so on.

I look at the global trade system — which we here in the West rely upon for goods, resources, consumption, etc — and I see something akin to the problem with the financial system in 2006. We abandoned robust and aged local systems, local knowledge, artisanship, etc, in favour of a huge interconnected mesh of trade where all counter-parties are interdependent, and where one failure can break the entire system.

This is a beautiful age. We have truly allowed our imaginations to run wild.

But is it sustainable?

Paul Krugman notes:

The world economy was, to an extent never seen before, truly global. It was linked together by new technologies that made it possible to ship products cheaply from one side of the globe to the other, to communicate virtually instantaneously over huge distances. But it was also, more importantly, linked together by the almost universal, if sometimes grudging, acceptance of a common economic ideology: the belief that free markets, with secure property rights, were the only way to achieve economic progress; and in particular that a nation hoping to make its way forward needed to welcome foreign trade and foreign investors with open arms. And this shared ideology did indeed lead to unprecedented transfers of Western capital and technology to emerging economies – transfers facilitated by the fact that everyone knew that any country that strayed from the path would be punished by financial crisis, and would soon be obliged to accept the harsh austerity prescribed by teams of Western technocrats.

The year, of course, was 1913.

So a truly global trade system has come crashing down before, and we bounced back pretty well from that. But it was a painful time. That particular collapse seems to have arisen from the complex and internecine system of warfare pacts binding great powers to the whims of smaller ones. When small powers went to war, the great powers were dragged in alongside. It was a hyper-fragile system where one small breakdown could trigger a much larger one, just like the problem that led to the present system of financial derivatives. If one counter-party fails, the whole system can be brought down.

Great powers are once again aligning themselves around smaller allies. China and Pakistan and perhaps Russia seem willing to back Iran, while the United States is reluctantly backing Israel.

But there is a new factor at play today: the service economy. While nations in 1913 were freely trading, and while the concept of comparative was widely known, no nation took interdependence to quite the extreme that so many nations have today. And many nations have taken this idea so far that without imported goods and energy, their internal economies might completely collapse, or at very best struggle with the adjustment from supranational back to local.

Here’s the situation in the United States:


And for the United States, this hasn’t been a two-way street. America is importing a lot more than she is exporting. In other words, America is now dependent on international trade.

Here’s the United States’ current account balance as a percentage of GDP, (in other words exports – imports as a percentage of GDP):

Simply international trade has become too big to fail.

The problem is, we know from history that the system of international trade can fail, and as we move deeper into the ’10s, there are a number of obvious threats emerging. The boneheaded answer from certain tenured professors and high-flying MBAs might be that the incentives to keeping the international trade system wide open (and cheap) are enough to force countries to co-operate. Tell that to Binyamin Netanyahu, who seems increasingly fixated on striking Iran, and forcing Iran to retaliate with a closure of the Strait of Hormuz. Tell that to Mitt Romney who seems ever-more intent on starting a trade war with China. Tell that to Barack Obama who — instead of pushing for the United States to mine its own deposits of rare earth minerals has run squealing to the WTO complaining of Chinese price manipulation.

This post is not a prediction. I am not necessarily predicting a breakdown in the global trade system, although there are surely many obvious dangers as well as hidden black swans. I am merely forecasting that the world is extremely fragile to one, and that the consequences to certain countries with a negative current account balance could be, shall we say, painful.

Governments are advised to go out of their way to make sure that back-up systems in terms of medium-to-long-term food supply, fuel supply and medicine supply are in place so that the consequences of a breakdown in the system of global trade can be minimised.

This is an example of a process that the philosopher Nassim Taleb has called robustification.

Unfortunately, governments seem very busy doing other things, which are far less relevant to national security.

Nations ignore figures like Taleb — surely the Nietzsche of our homogenised and manufactured age — at their peril.

The New iPad

Now that Apple’s market capitalisation is larger than $500 billion — and more than the GDP of some developed countries — I have been intending to write an iBubble exposition, going even further into the evidence that Apple is spectacularly overvalued.

But today, Apple provided perhaps the strongest evidence that while I do not expect to see Apple’s share price to collapse any time soon, the company is — in terms of innovation — gradually running out of steam.


Yes: it’s called The new iPad. This is an absurd monicker: clumsy, cumbersome, self-righteous, but most of all incredibly boring. When the name was unveiled I wasn’t even sure that it was the thing’s name. I thought that at the end of the ceremony, there would be a grand unveiling: iPad 3, or even the cliched and technically-inaccurate iPad HD. But no; it is (loathsomely) called The new iPad.

The thing itself is fine; it receives a decent spec-bump, a gorgeous retina display, and of course includes access to the iTunes App ecosystem, which is easily the richest in the world. It will be a popular product, probably even more so than the iPad and iPad 2. But from an investment perspective, all of that is largely irrelevant. I am not trying to analyse the shape of the product; I am trying to analyse the shape of the company making the product, and its shape in years to come. Simply, I think Apple is missing Jobs’ talismanic leadership, and I think Apple’s wackier innovators are being crowded out by slick, corporate management. Tim Cook is a thoroughly corporate managerialist; not an acid-tripping bipolar Renaissance tech-evangelist like Jobs. Being the market leader is entirely different than being an innovative outsider, which is the company Apple was for so long; being the market leader means that the bean-counters become paranoid about not wanting to fix something that isn’t broken, and that kills innovation. Apple are going backwards; or worse Apple is turning into a Microsoft — dominant, but static.

Worse still is Apple’s latest OSX update, Mountain Lion. Gizmodo’s Jesus Diaz writes:

[Mountain Lion is] the antithesis of Jon Ive’s minimalistic design, all essence devoid of artifice. In fact, it goes against everything Apple used to defend when it was king of user interface development: that everything should follow the same language in order to make everything intuitive and familiar to the user. With iOS, Apple backtracked, saying that the application should mimic the real-world item it was to replace. It made a little sense on a phone, but almost none on your desktop. And it opens the door to a fragmented design language that could make the future of Apple design very unappealing. It is a slippery slope heading to a future in which every app has their own interface—a garish clusterfuck of onscreen gadgets.

And that is Apple today in a nutshell — it is going back on being the sleek, elegant and intuitive creature that it once was. Apple has lost its capacity to think different. Perhaps that is Jobs’ fault for promoting the wrong people, or perhaps that is simply the inevitable endpoint of bureaucratic-technocratic managerialism (I tend toward the latter).

The biggest issue, though, is this:

The market is already deeply invested — both emotionally and financially — in Apple: the brand, the products, the process, the people, the mythos.

And while Jobs claimed to have left Apple a little innovative dynamite in the iTV, I think after the iPhone 4s, and the new iPad (see how cumbersome that is?) it is safe to conclude that its launch will be safe and successful, but not industry shattering.

Unlike the NASDAQ, Apple is less likely to crash or to drop precipitously. More likely it will simply stagnate as technology’s have-nots — led by braver and younger minds than Cook — innovate more.

The Changing World

The world is changing, and politicians can’t keep up.

From the New York Times:

When Barack Obama joined Silicon Valley’s top luminaries for dinner in California last February, each guest was asked to come with a question for the president.

But as Steven P. Jobs of Apple spoke, President Obama interrupted with an inquiry of his own: what would it take to make iPhones in the United States?

Not long ago, Apple boasted that its products were made in America. Today, few are. Almost all of the 70 million iPhones, 30 million iPads and 59 million other products Apple sold last year were manufactured overseas.

Why can’t that work come home? Mr. Obama asked.

Mr. Jobs’s reply was unambiguous. “Those jobs aren’t coming back,” he said, according to another dinner guest.

Paul Krugman adds:

“The entire supply chain is in China now,” said another former high-ranking Apple executive. “You need a thousand rubber gaskets? That’s the factory next door. You need a million screws? That factory is a block away. You need that screw made a little bit different? It will take three hours.”

The point is that manufacturing plants don’t exist in isolation; they benefit a lot from being part of a manufacturing cluster, with specialized suppliers and a large pool of workers with the right skills close at hand. This is the kind of stuff I emphasized in my own work on both trade and economic geography.

As I wrote in October:

Looking at global population density — with American taxpayers subsidising the cost of a flat global marketplace — where can we expect productivity to agglomerate?

The high-density zones. But it was not always thus, because the world was not always flat. Technological, intellectual and social infrastructure once dictated that the agglomeration of manufacturing, skills and industry took place in the West. Development spirals into greater development. Alas, the world was flattened under the aegis of American imperial grandeur, and so capital, skills, supply chains, and so forth took off to where the labour was cheaper, the population denser, regulations laxer, and factories clustered:

“Our customers are in Taiwan, Korea, Japan and China,” said James B. Flaws. “We could make the glass here, and then ship it by boat, but that takes 35 days. Or, we could ship it by air, but that’s 10 times as expensive. So we build our glass factories next door to assembly factories, and those are overseas.”

This agglomeration presents a geostrategic challenge to America that I am yet to see other commentators recognise. As America’s productivity has gone overseas, America has not really experienced many negative effects beyond the obvious problem of job migration. That’s because as the originator of the global reserve currency, other nations need dollars. That has meant that the fruits of the Earth, and the world’s labour have flowed and flowed into America irrespective of America’s own productive decline.

America’s internal workings — her agriculture, her internal transport network, her consumption, and indeed even her internal manufacturing (and so forth) — are dependent on a global system of resource extraction, labour, production and shipping. More or less, America is dependent on foreign energy and goods, and her foreign policy is geared toward sustaining the global flow of energy and goods. That’s why America spends more on her military than any other nation, and over 50% of the global total. However this has meant great debt, as America is producing far less than she is spending.

So does that mean globalisation is bad? No — I am all for free trade, and global markets, and that requires a degree of security. But at the same time, free markets require proper pricing mechanisms. American manufacturing has been out-competed in the American market predominantly because Chinese products do not accurately reflect the costs of global security; those costs are reflected not in prices, but in the Pentagon’s budget, and in Federal deficits. Those cheaper Chinese goods might not have put so much American industry — and subsequently industrial infrastructure — out of business without that subsidy; for a start shipping would be costlier and less reliable. With a less obvious advantage in selling to the American market, it is likely that both China’s growth, and America’s decline would have been slower.

So America’s rising government debt burden, and America’s lost industrial infrastructure are in at least one way two sides of the same coin. Less world policeman would not only mean less debt, but more domestic industry.

These concerns are reflected in Obama’s recently announced foreign policy and global defence doctrine:.

From the Washington Post:

President Obama pledged that the $489 billion in defense cuts he has proposed over 10 years would be governed by a concerted strategy, and on Thursday he delivered one. At the Pentagon, Mr. Obama unveiled a “strategic guidance,” which aides said reflected a considerable investment of his personal time and ideas. The president’s thesis is that the need for fiscal austerity coincides with a global “moment of transition,” in which the United States is winding down a decade of land wars in Iraq and Afghanistan and facing the need to turn toward a very different set of challenges, particularly in Asia.

Several previous administrations have tried to shift to Asia from the messy Middle East, only to be dragged back by wars, terrorists, turmoil and the unending need to protect allies and the flow of oil. The Obama strategy acknowledges that history and says this pivot will be different. The means to reduce spending and build capacity in Asia, it suggests, will come not from the Mideast but from U.S. deployments in Europe, benefit and retirement costs, Cold War weapons systems and the U.S. nuclear arsenal.

The trouble is, this is much too little much too late. Had President Bush announced this in 2002 (or President H.W. Bush in 1992) years of fruitless imperialism in the middle east and trillions in debt might have been avoided. American industry, supply chains, technology, industrial infrastructure and skills have already been gutted; as Steve Jobs alluded to, the iPhone will never be made in America. America is still deeply dependent on foreign oil.

More or less, this strategy is trying to close the stable door after the horse has bolted.

The effects of decades of policy will be hard to mitigate. America must face the fact that her most important export — dollars and Treasury bonds — will be blighted by the end of the dollar as the global reserve currency.

A significant number of Eurasian nations — including Japan, India, China, Russia and Iran — have pledged to in future conduct bilateral (and surely soon also multi-lateral) trade in their own domestic currencies, including for trade in oil and other commodities.

The impact of this would be disastrous. Simply, nations would not need to sell their wares and resources to America; a hostile Chinese or Arab regime could foreseeably cut America off from essential resources, components or goods. China already limits exports in rare earth metals. How long before nations feel capable of blackmailing America by withholding or heavily taxing resources, goods and components on which America depends?

Hawks might respond that no nation on Earth would feel capable of doing that, because America has the military clout to bite back. But for all of Obama’s assertions that the military is refocussing on the Asia-Pacific, America is too broke to start a war or proxy war with her great creditor. More importantly, such an event would probably shut down or slow the flow of global goods and energy meaning immediate and disastrous economic consequences for America.

America could be taking every step imaginable to make herself energy independent  (or at least dependent only on North American energy) as soon as possible as a matter of urgent national security. This would be a solid base from which to build. Alas, Obama totally rejected the Keystone XL Pipeline, which could have formed a major plank toward this goal.

No iPhone 5 (Yet)

So the rumours were true and Apple’s iPhone 5 was beset by enough technical difficulties to be canned (for now) and replaced by a souped-up iPhone 4:

Except it is the iPhone 5. Its technical specifications are exactly in line with what was expected of the iPhone 5. The only missing pieces were the bodywork and the title.

I think this is instructive. In the highly superficial world of technology, if your latest product looks exactly like your last product, will anyone but specification-obsessed-geeks care?

How difficult would it have been to tweak the casing, call it the iPhone 5, and watch the hoards flock to it?

In spite of a late-day rally, Apple’s stock is down for the day:

How often is it (in recent history) that Apple stock falls on the day of a major product launch?

The entire episode smacks of mismanagement and reminds me of the market’s disappointed reaction to Operation Twist. Like Apple-junkies, the POMO-junkies wanted their version of the iPhone 5 — QE3.  Just like the iPhone 4s, Operation Twist is what the junkies wanted — a massive money-printing operation (over the yield curve) in all but name. Yet the junkies end up disappointed.

Steve Jobs might have been dictatorial and Machiavellian, but at least he knew how to manage expectations and give the market what it wanted. The fear for Apple is that now Apple has lost its envisioner-in-chief that those same obedient automata who so smoothly executed Jobs’ vision will now fuck-up that last great bastion of American innovation (no Ben — “innovative” monetary policy is not innovation).