Energy is the Real Money
Plus: Bear markets in high-yield spreads and careful with the 2000-era Amazons
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The Build: Energy is the Real Money
Two sentences helped me understand energy in a different way:
“Energy is life, standards of living are dictated by access to energy, and these two facts are the undeniable conclusions of the laws of physics. Since all humans everywhere strive for a higher standard of living, energy is the real money.”
If energy is the real money, then creating energy is creating money. Burning oil or gas is like printing money from a press that will eventually decay into permanent dysfunction. No matter your persuasion, fossil fuels can only serve as energy money for some limited period because those fuels are limited. Given a limited supply, fossil fuels must be inflationary long-term and lead to lower standards of living.
Even in the short term, gas prices are making us acutely aware of problems related to energy control and supply.
If burning oil or gas is printing money from a limited supply, then creating energy from renewable sources is like printing money from an unlimited supply (don’t tell the Fed…). Printing money from an unlimited supply of renewables must be deflationary rather than inflationary. Renewable energy at scale should raise the standard of living for everyone given its deflationary nature, just like other technological innovations.
This is the real case for developing renewable energy. It’s not about saving the environment. It’s about printing unlimited deflationary money that raises living standards. That’s an idea we should all be able to rally around.
The big, uncomfortable idea here is that elevating environmental preservation above energy as money is holding back the renewables industry. We don’t need saviors, we need alchemists that want to make money out of sunlight, or wind, or water, or some other environmental factor.
Make renewable energy about printing money, and I bet we’ll get there faster.
Notes and Quotes
Is it Over Yet?
Everyone has an opinion about whether the bear market of 2022 is just about over or just getting started. No one really knows, of course, but money managers are paid to have informed guesses on which to place bets. Many of us inform our guesses on certain data points, some more useful than others.
Johann Colloredo-Mansfeld at Verdad presented their seemingly bearish view based on changes in the high-yield spread (the difference in yield between below-investment-grade corporate bonds and the spot Treasury curve).
In early May, the high-yield spread exceeded its 10-year median value. Historically, this has been a bearish signal.
“Every equity drawdown of -30% or more has occurred within six months of high-yield spreads crossing the 10-year median of 430bps. As Ben Bernanke highlights, credit markets amplify and propagate shocks to the real economy. Within this framework, deteriorating credit market conditions—such as increases in insolvency and rising real debt burdens—feed back into the economy, which in turn worsen credit conditions.”
What happens next, according to the analysis, depends on if spreads continue to rise or retreat.
“Being defensive can be costly in the short term. Indeed, spreads could reverse course and risk assets could see a recovery. And buying at this point has been the correct decision about 45% of the time. If wrong, however, downside losses could be significant, as every major market drawdown event has occurred following a move in spreads to this level.”
It’s consensus to be bearish now. Perhaps wildly consensus, but consensus doesn’t mean wrong.
A friend recently talked about how for the last five or so years it was consensus to be super bullish on tech, then it blew up. Now its consensus to be super bearish.
The important thing to remember is that bullish consensus was right for five years. If you got bearish too early, you missed out on an incredible tech run. Similarly, if you get bullish too early here, you could get carried out.
At Loup, we pay attention to macro, but most of our market perspective is dominated by a company specific approach, looking at valuations across a subset of companies we love, trying to buy them at cheap prices. In a bear market, we believe we should be able to buy companies cheap, not just fair. There are a few things in tech that seem cheap, but much of what we follow still feels fair to expensive.
Finding Amazons in the Tech Wreck
It’s easy, and apt, to compare the tech carnage of 2022 to 2000. In those 2000 vs 2022 comparisons, bulls often point out great companies that survive the carnage can be great long-term investments. Amazon is the canonical example.
Bryne Hobart writing for A16Z’s Future makes an important point about the luck factor for the 2000-era Amazon investor:
“An optimist who bought Amazon in 2000 would have eventually done well, but it would have been partly a matter of luck; no one buying it then would have dreamed of how much of Amazon’s value would come from AWS rather than from selling physical goods.”
In 2000, investors had to underwrite Amazon as a bookseller competing against Barnes & Noble. The most forward-thinking investor maybe saw how Amazon could expand into other categories, especially CDs and DVDs (nostalgia), but no sane investor could underwrite Amazon as the everything store in 2000.
Great long-term investments often require underwriting new and updated theses as the opportunity set changes. Amazon’s opportunity started as a book and media store in 2000, then added the potential of the everything store in the mid 2000s, and then added AWS in the late 2000s.
Coming out of a carnage situation like 2000, the sane investor should have been able to buy Amazon as a bookstore with bookstore-like opportunities for a cheap price.
The same parallels are true for tech companies that come out of 2022. We should be underwriting them on the opportunities in front of them, pay cheap to reasonable prices for that, and rely on great management to expand the opportunity set.
A company’s opportunity set is always driven by the capability and vision of management. See Jeff Bezos in 2000.
Rage Against the Machine
Several artists expressed frustration this past week that they’re being encouraged by labels and managers to focus on viral TikTok content to promote their work.
Here’s the thing: All creative arts are about attention. Creatives are necessarily beholden to platforms where their work can get attention because attention is how they get paid.
If you don’t want to play the attention game, don’t embrace creativity as a profession.
The fundamental purpose of TikTok and other emerging social media platforms is to efficiently distribute creativity. Compelling creativity demands and deserves attention, with more attention comes demand for more compelling creativity.
As with most technology, TikTok is both a blessing and a curse. It’s a blessing for emerging artists who can break out in ways never before possible (see Lil’ Nas X). It’s a curse because they demand a constant stream of content to feed the virtuous cycle of user attention on platform.
Dan Runcie (Trapital) breaks these demands down, highlighting the authenticity that works in new media:
“If TikTok is truly the new MTV, then the same level of creativity and uniqueness needs to be put into each piece of content, especially during the platform’s next phase.
In the 90s, MTV went through its own transition where many artists still found success when they stopped trying to follow the common modality. When Alanis Morissette let go of trying to be the next Paula Abdul, she embraced alternative rock and her career took off. When Jay Z gave up on the shiny suit music videos, he made “Hard Knock Life” and never looked back. The TikTok era is moving faster than MTV ever did. The shift is already happening.”
We live in a golden age for the creator where the most uniquely authentic wins because it can garner the most attention. That won’t change for a long time.
Thanks for reading, and see you next week.
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