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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Genius is Not Educated

The WSJ published an interesting article entitled Educating the Next Steve Jobs:

Though few young people will become brilliant innovators like Steve Jobs, most can be taught the skills needed to become more innovative in whatever they do. A handful of high schools, colleges and graduate schools are teaching young people these skills.

In most high-school and college classes, failure is penalized. But without trial and error, there is no innovation. Amanda Alonzo, a 32-year-old teacher at Lynbrook High School in San Jose, Calif., who has mentored two Intel Science Prize finalists and 10 semifinalists in the last two years—more than any other public school science teacher in the U.S.—told me, “One of the most important things I have to teach my students is that when you fail, you are learning.” Students gain lasting self-confidence not by being protected from failure but by learning that they can survive it.

It’s nice to read about the value of failure, a topic that I have written a few words about.

But really, I don’t think that revolutionary thinking can be educated, and I think it’s foolish (and possibly even counter-productive) to try. School by definition inculcates systematic thinking, methodology and dogma. It inculcates competence. That’s generally a good thing; surgeons, medical researchers, lawyers, engineers, musicians and all manner of professionals need to be competent to function. Innovation is not necessarily inherent in any of those fields. But genius and revolutionary thinking is not really about competence and confidence.

Malcolm Gladwell is famous for formulating the idea that with 10,000 hours of practice, it is possible to master a skill.

The key to success in any field is, to a large extent, a matter of practicing a specific task for a total of around 10,000 hours.

So is 10,000 hours of practice all that stands between incompetence and world-changing greatness?

Gladwell grandly theorises that many famous history-changers (“outliers”) like Bill Gates, Steve Jobs, and the Beatles got to where they did with 10,000 hours of practice. But that ignores a lot of silent evidence; for every Bill Gates programming over a mainframe for 10,000 hours, there is a housewife that we have never heard of who has done 10,000 hours of parenting, and (probably much more than) 10,000 hours of housework. There is a surgeon who has done 40,000 hours of operations. There is a truck driver who has driven for 100,000 hours.

Gladwell is keen to point out, of course, that people’s skills also flourish through the networks they cultivate, and the people they meet, and that (of course) it’s just a little more complicated than 10,000 hours of practice.

My view is that all 10,000 hours of practice (something which of course can be delivered within a traditional educational framework) does is lay down a bedrock of competency.

My theory is that revolutionary thinking is not simply a matter of persistence, but is instead attitudinal, and mostly comes out of people who are forced or who force themselves to take a radically different perspective to the rest of the world. They are — almost by definition — autodidacts, simply because their style of thinking has not yet been pioneered. They have to teach themselves, and iron out the kinks. Being an autodidact of course is not necessarily a matter of choice; very often it is a matter of necessity — people who don’t have access to traditional education, or who are forced to exist outside the system. This can be due to poverty, strong personalities, or a preference for self-teaching (very often expressed as a preference for doing over thinking).

The established system is often very useful for such people, because it gives them a framework from which to hang contrarianism. It gives them something to rebel against and kick out against.

On the other hand there are many examples of professional academics and those within the establishment who pioneer and innovate (although of course it should be noted that the overwhelming majority of academic papers today are masturbatory regurgitation). But such activity forces even the most staid into autodidactic learning; it forces them to make mistakes, and challenge themselves and learn their own lessons.

I suppose it is possible to try to inculcate a love of tinkering, of trial-and-error, and an understanding of the value of failure. It is certainly possible to encourage an interest in self-teaching. But it remains to be seen how many of us will really bite. It strikes me as if most of us do not really want to be innovators; I see far more who want job security, loving families, and plenty of leisure time.

I tend to believe that today’s education system is fit for its own purposes; it churns out competent thinkers, competent doers, people who can analyse to a framework and work to a deadline. True autodidacts and philosophers (in the most literal sense of the word — lovers of thinking, learning and wisdom) will find their own way.

Education is a Bubble

A couple of days ago, Zero Hedge reported that a lot of student loans are delinquent:

As many as 27% of all student loan borrowers are more than 30 days past due. In other words at least $270 billion in student loans are no longer current (extrapolating the delinquency rate into the total loans outstanding). That this is happening with interest rates at record lows is quite stunning and a loud wake up call that it is not rates that determine affordability and sustainability: it is general economic conditions, deplorable as they may be, which have made the popping of the student loan bubble inevitable.

The reality of this — like the housing bubble before it — is that a lot of people who borrowed a lot of money can’t repay. That could be down to weak economic conditions. As I wrote yesterday, an unprecedented number of young people are unemployed and underemployed. These circumstances will lead to delinquencies.

But I think that there is a key difference. Unlike housing — which will probably never be made obsolete — it feels like education is undergoing a generational shift, much like agriculture did prior to the Great Depression, and much like manufacturing did prior to the Great Recession.

Venture capitalist Peter Thiel suggests:

Like the housing bubble, the education bubble is about security and insurance against the future. Both whisper a seductive promise into the ears of worried Americans: Do this and you will be safe. The excesses of both were always excused by a core national belief that no matter what happens in the world, these were the best investments you could make. Housing prices would always go up, and you will always make more money if you are college educated.

But earnings for graduates are stagnant, while costs continue to rise:

However, all this really shows is the (quite obvious) reality that colleges — subsidised by Federal student loans guarantees that act as a price floor — can keep raising tuition fees even while in the real world the economy is contracting.

But education is suffering from a much bigger problem: a lot of what it does is gradually (or quickly) being made obsolete by technology.

While college degrees for vocational subjects like medicine, law, architecture and so forth are still critically important (not least because access to such professions is restricted to those who have jumped through the proper hoops), non-vocational subjects have been cracked completely open by the internet.

Why would anyone realistically choose to pay huge amounts of money to go to university to learn mathematics, or English literature, or computer science or economics when course materials  — and much, much, much more including access to knowledgeable experts and professionals — is freely available online?

The answer is for a piece of paper to “qualify” the holder and “prove” their worth to prospective employers. But with earnings for degree holders at roughly 1997 levels, what’s the point? Plenty of people with good ideas, drive and perseverance are living fulfilling and successful lives without a college degree — including me. There are flashier examples like Zuckerberg, Jobs, and Gates, but that is just the tip of the iceberg.

A real estate agent trying to rent me a flat once said:

Why would people want to go to university? All it shows is that you are lazy, and can’t be bothered to find a proper job, and want to spend three or four years getting up late and getting drunk.

A useful (though not universally true) heuristic. “Education” has been turned inside out. To some employers, a degree (particularly one with a weak or mediocre grade) can in fact be a disadvantage. People without a degree can get ahead with three or four years of experience in industry.

So while we wait to see whether or not a student loan meltdown will lead to a wider financial meltdown (a la Lehman), I think we should consider that this industry may well be on the brink of a systemic meltdown itself. With severely decreased demand for education, a lot of schools and courses may be wiped off the map leaving behind a skeleton of only the most prestigious universities, and vocational and professional courses.

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.

Steve Jobs, Jobs and Reincarnation

Readers will know that my feelings toward Apple are profoundly mixed.

As I wrote back in July:

The notion of well-oiled blue-shirted brigades of lanyard-wielding corporate minions dancing, speaking and thinking in line to the beck and call of Steve Jobs goes beyond running an efficient operation. It’s obsessive-compulsive, and downright creepy. In my view, the sooner a competitor arises that delivers minimalist, solid and sleek computers at a similar price and without all this peculiar control-freakery, without the backdoor surveillance, and without the cultlike undertones, the better. I will jump ship as soon as I possibly can. But right now? Apple has no real competitors.

But there is no doubt Apple has a vast array of good qualities beyond having great products. There are three crucial ones: value creation, job creation and innovation.

From Sovereign Man:

While people like Warren Buffet are pleading with the government to raise their taxes and give away their wealth to sycophantic bureaucrats, Jobs showed time and time again that the best way to improve people’s lives is to create value and be productive.

Steve Jobs was one of the most productive human beings to have ever lived; he started several successful companies which directly employed tens of thousands of people. Indirectly, his businesses improved the livelihoods of millions across the globe, from Chinese factory workers to iPhone app programmers to Apple shareholders.

In building an empire and unimaginable wealth for himself, Steve Jobs enriched the lives and livelihoods of others by creating value. Not by forced redistribution. Not by giving things away. By creating value.

Ironically, just as I write this I am watching President Obama on Bloomberg Television trying to explain how many jobs his new plan will create– 1.9 million in his estimate:

“We’re just going to keep on going at it and hammering away… until… something gets done. I would love to see nothing more than Congres act… so aggressively.”

Politicians would do themselves and their constituents a great service by comparing their own track record for enriching people’s lives against Steve Jobs’ performance, and then kindly stepping out of the way. The path to prosperity is not paved in votes, but rather in freedom: the freedom to create, produce, risk work hard… and be rewarded for your efforts.

Well, amen to that. Our markets sorely need new value, new innovation and new jobs, and the answer to that conundrum — as I painstakingly pointed out here — is creating new wealth, not new taxes as many currently seem to advocate.

In my view, Jobs greatest contribution to the philosophy of economics (and something I have hammered on in recent months) is the importance of failure:

If you can’t succeed or fail, it’s really hard to get better.

The story of Jobs’ life, and the story of free market capitalism is very much one of trying and trying and trying again, learning from experience, and gradually improving. Look at the difference between a Power Cube G4 and a Mac Mini. The difference between a first-generation iPod and the new iPhone. Lisa and Mac OSX.

Sadly, as American Presidents heap praise on Jobs and his innovations, they’re not exactly heeding his advice. As I point out on an almost-daily basis, the highly interconnected global financial system has experimentally shown itself to be fundamentally flawed, and systematically broken. The establishment response — at both a national and global scale — has not been to put failures to one side and try new systems (hopefully ones that allow for less interconnection, less leverage and less risk — and subsequently less fragility) but to pump money and bail out failures to make the same mistakes all over again on a bigger scale.

So as Steve Jobs’ body begins its journey back into nature, back into the oxygen, carbon, nitrogen and hydrogen cycles — to be reborn, as we will all be, as new organisms — perhaps it is time governments started listening to his advice? Perhaps it’s time for the global financial system to die and be reborn…?

Farewell.