This week’s focus is energy policy and how it contributes to energy supply crunch. Simply put, we are attempting the clean energy transition by vilifying traditional sources of energy. This is leading to underinvestment that is likely to cause sustained higher prices to consumers. Despite The Dispatch wanting a cleaner, lower carbon future, it has placed significant bets on higher energy price in client portfolios. This includes nuclear, carbon reduction/credits and, where valuations make sense, renewable energy.
Digital asset markets are buoyant once again, and the media has several narratives to fit the price action. These include SEC possibly approving a bitcoin ETF based on futures contracts, speculation that bitcoin will become legal tender in Brazil and Bank of America publishing a report titled “Only the First Inning”.
Discussion subjects of Dispatch #32 on 8 October 2021 follow:
- Energy policy and structurally higher prices
- Used car prices hit new all-time high. CPI moderation over?
- Another software bug leads to $60m crypto value loss
- Crypto exchanges restrict access to Chinese residents
- Bitcoin/crypto disrupting global money transfer market
- Bank of America Digital Asset Primer – “Too large to ignore”
- Tether allegations recycled on Bloomberg Businessweek cover story
Unrealistic energy policy and future energy supply crunch
The misguided policies are illustrated by President Biden’s statement that the US power sector will be free of carbon by 2025.
Interestingly, the video clip is no longer available on The Hill tweet, but The Dispatch did watch it several times (when the video was first released) and heard the President say “power sector will be free of carbon.” Even a 5th grader shown the current total energy mix will realize that carbon free by 2025 is merely a dream. The EIA estimates that 60% of electricity is generated from fossil fuel sources, less than the total energy mix shown below, but still very high.
Source: EIA 2021 outlook
The government’s Energy Information Administration (EIA) projects that we’ll consume more carbon energy and much more renewable energy in the future. For a more detailed discussion about how current energy policy is likely to exacerbate prices read this post by respected commodity investors Goehring & Rozencwajg.
An aggressive switch to renewables may require lower energy consumption & lower growth to avoid energy supply crunch
We could sharply lower the consumption of carbon energy, but that’ll come with slower growth, which no politician is willing to accept. Instead, all we ever hear is the demand to stimulate consumption at all costs. Monetary policy via the Fed is pushed to print money and the federal government increase spending and transfers to boost aggregate demand. More consumption = more energy use. We have no other growth model than higher consumption driving higher GDP. The world needs to have an honest discussion about the trade off, but we won’t do so as partisan politics dominate.
Energy transition needs to be balanced and well planned
Germany and England are good examples of sharply higher energy costs from a faster transition to renewables. Both countries rely on renewables for a larger portion of their electricity needs and that has led to sharply higher energy prices. The intermittence of renewable power generation and energy density are two factors that need to be considered.
The two charts below from this WSJ story illustrate the long-term wholesale electricity price in each of those two countries. They are up by a factor or 2-3x before the most recent surge.
The electricity price spike is partly driven by gas prices that have surged multiples more, as seen in this chart below.
Source: WSJ
US energy prices are also spiking
The US hasn’t experienced as severe a price spike, but winter heating bills should be notably higher this year following higher energy prices. Here’s a chart of the US natural gas prices from this recent WSJ article
The Dispatch is a supporter of the switch to greener energy, but our politicians need to highlight the potential consequences of this acceleration. The burden of higher energy costs is greatest on the lower 50% of income earners.
Betting on sustained high prices as energy supply crunch worsens
The Dispatch remain notably skewed to higher energy prices in client portfolio. This does not mean purely oil and gas value chain. There’s ignored-for-decades nuclear, the carbon reduction/credit value chain and a handful of alternative energy assets that aren’t valued like SaaS companies like Adobe or Salesforce. This is NOT investment advice.
Shortages are widespread in physical commodities, not just energy
The diversified Bloomberg Commodity Index is hitting all time highs because the same dynamics of underinvestment in energy was also a feature in most commodities. This is going to be a substantial source of future inflationary pressure, even though governments and policy makers ignore food and energy costs when setting monetary policy. Politicians will act once the voters are unhappy. Watch activity in Europe to see if/how the debate changes.
Source: via Twitter
Energy accounts for 30% of the above index weight, grains ~23%, industrial metal ~15% and precious metals 19%. Full details here.
Another Crypto software hiccup leads to value dilution
Compound, one of the largest Defi venues, gave away $80m worth of compound tokens to users due to a software flaw, as Coindesk explains. This is a loss to all the other holders of the Compound token as it dilutes their interest, just like a company issuing new shares. It is not the typical crypto hack where value is stolen directly from individuals by sophisticated software programmers. The initial flaw in the protocol software gave out too many tokens to some users. Since the discovery of the initial bug, additional flaws have been reported. This second heist appears to be actioned by sophisticated programmers. It is eye opening that one of the largest Defi protocols had a software bug. This is another data point guiding The Dispatch on digital asset allocation: The largest positions are matched to the most secure protocols, all else equal.
Used car prices reversed to record high
In July’s Dispatch #23, we articulated that inflation is likely to stays elevated over the long-term, as surging house price feed through into the CPI’s “shelter index”. We did see the possibility of inflation easing in the short term as transitory items like used car and airfare prices ease. The short-term view is likely to be fleeting as used car prices have hit a new all-time high after a brief decline. With the worst of the Delta variant behind, lodging and airfare could also rise. The Dispatch now does not anticipate easing inflation in the next one or two quarters and sees high inflation challenging the Fed’s transitory narrative.
Source: Manheim
Crypto exchange starts offboarding Chinese users
This story follows up on China’s more comprehensive anti-crypto measures announced a few weeks ago (see Dispatch #31). Many exchanges have started restricting new Chinese users and plan to offboard existing Mainland clients. US users are familiar with such restrictions as most offshore exchanges restrict them. Chinese users are now feeling those same restrictions, but without having access to any onshore services. The most sophisticated of Chinese users could trade on Defi venues where there is no centralized authority stopping Chinese users. Using Defi venues will require working around the China firewall. Let’s be clear, though, excluding the Chinese population from crypto assets is a negative to the sector. These articles from Coindesk and WSJ discuss the measures announced by exchanges.
Bitcoin starts to disruption global money transfer industry
Bitcoin/crypto’s ability to disrupt the global money transfer industry might be coming to fruition. The World Bank World Bank estimates 2020 global remittances of $700bn, and it is an industry littered with high fees.
Until now, the efficiency of the bitcoin value transfer technology hasn’t been well advertised, because all the attention has been on bitcoin the asset. That is changing with El Salvador adopting bitcoin and rolling out a national bitcoin wallet. The country received ~ $6bn from remittances in 2020, which is nearly 25% of GDP this CNBC article explains.
Rapid Chivo wallet adoption and rising financial inclusion
This first tweets from President Bukele illustrates the explosive adoption and rising financial inclusion. That’s a one third of the population using the wallet!
Source: via Twitter
The tweet below highlights the disruptive pace. At $2m/day that’s in the vicinity of $600m/yr (assuming just 300 days), which is a 10% of 2020’s transfers into El Salvador. And, this is just one month post the launch of the Chivo wallet, which was marred by technical glitches.
Source: via Twitter
Money transfer companies take anywhere from 5-10% of transfer amount are most at risk. Just to be clear, the lightning payment system is merely using bitcoin’s payment mechanism to move US$. The participants don’t have to take bitcoin price volatility, as the founder of Strike explains in this CNBC interview.
Money transfer company shares may be pricing in the crypto risk
The chart below of Western Union stock shows the weak performance since bitcoin became legal tender in El Salvador. A one-year stock price chart does not provide definite conclusions in the Dispatch’s view, but it’s worth following. Thank you to reader Frank D for flagging the WU move.
Source: Tradingview
Tether allegations make Bloomberg Businessweek cover story
Regular readers of The Dispatch know that we see this stablecoin as the most serious risks to the crypto ecosystem. On July 23rd Dispatch #24 laid out the allegations and the risks of Tether. There’s nothing new in this Bloomberg article that has not been alleged many months previously. It is, however, a well packaged summary of all the allegation with the Bloomberg’s substantial reach. It’s good that a wider audience is aware of the allegation. @BennettTomlin on twitter remains the authority on Tether allegations, in The Dispatch’s view. Follow Mr. Tomlin as he’ll flag any new worries while the Bloomberg reporter would have moved onto the next story in a few weeks.
BofA on digital assets – “only in the first inning” and “too large to ignore”
Despite the headline, the report is not a digital asset primer at all. Instead, it just provides a summary of digital asset exposure of legacy stocks under BofA coverage. The Dispatch, with several decades of institutional equities insights, is skeptical of banks’ digital asset research. They are helmed by overworked analyst trying get up to speed on a new technology and asset in months, which is reach. This report is evidence of the effort to purely drive value into their legacy stock coverage. There’s hardly a dusting of digital asset insights. It’s laughable to see these FOMO research efforts from banks that bashed digital assets for years. FOMO = Fear of Missing Out.
Stay safe, enjoy cooler temperatures and do reach out if you have any questions or comments about the material in this Dispatch.
Asi
Important Disclosures
| This is not an offer or solicitation for the purchase or sale of any security or asset. While the information presented herein is believed to be reliable, no representation or warranty is made concerning its accuracy. The views expressed are those of RockDen Advisors LLC and are subject to change at any time based on market and other conditions. Past performance may not be indicative of future results. |