Why Oil?

As I’ve been doing my research on energy, I've come more and more bearish on green tech for the foreseeable future. The world will continue to rely on oil and oil companies. The reasons are the following:

1. Russia Out of the Picture. With refined Russian goods out of the picture due to the European price caps, there will be less oil produced reducing availability.
2. Food Security and OPEC. As food prices rise OPEC countries will limit oil production to increase prices so they can reduce food price inflation within their own economies.
3. America the Manufacturing Hub. America is becoming a manufacturing hub again with high amount of cheap energy through natural gas availabile. Anything that requires immense and cheap energy will be manufactured in the US. This means less energy exports.
4. Green Energy, Bootstrapping Problem. To produce solar energy has a huge bootstrapping problem requiring high amounts of energy. This is particularly acute with polysilicon for solar energy. The green energy transition will only be possible through cheap natural gas.
5. Lack of American investment. American oil companies are no longer investing in new oil developments. With the government passing the Inflation Reduction Act to invest in climate change, most oil companies are extracting as much from their existing projects as possible without investing in new oil fields.

All of this leads me to suspect that oil prices will likely just keep going up for the foreseeable future.

Europe, Selling out the Future to fight Russia

Yesterday, the UK announced that they will top off what citizens have to pay and instead will have the government pay for it and then have the government pay the producers. This seems like a bad idea because it will add debt to their country which they know their current major demographic will not be able to pay and who the next major demographic will be straddled with.

The end result being no one in their right mind would purchase or loan any amount of money to europe because the ability for europe to repay by taking on a debt on their economy is a bad deal.

The Europeans are moving the money they borrow to the same pool of money they will use to pay pensions. This means that one their own current generation pays the price by socializing the price of energy across everyone and second the next generation loses too because they will be on the hook for paying this down.

The end result of this is that there is no way to trust the European countries and the measures they will take to sell themselves to go against Russia. In a measure it is a lose, lose situation anyways.

For a US investor this just means one thing. The Europeans are borrowing money to fight Russia that they have no intention of repaying.

Because of this the only thing to do is to pull out completely from the Europe. No one can do this completely as every company has exposure shut any company that has major exposure in Europe will be paying a price with a weaker long term currencies.

Labor Shortage and Depopulation

There are a few undercurrents that are fueling the labor shortages. The first is that baby boomers are retiring. This mostly startedlast year but going head strong this year. If hearing stories of my friends and observing my own parents they are getting out and looking to stop working.

Many Millennials are now taking over for the high paying and upskill jobs that the Boomers are retiring from. This means a lot of service jobs where Millennials have been working are vacating.

Finally, and the reason we have massive labor shortages is there aren’t enough GenZ to replace Millennials and Boomers. The outcome is what happens to a country when it depopulates.

As Boomers continue to retire this year and next the likely outcomes are longer wait times or more of those QR code ordering machines. One likely positive that may happen is that companies may become more lenient with their work schedules to allow retirees to return to work part time once they get the golfing and boat building out of their system.

Indian Manufacturing

India won’t be a great place to manufacture and Apple flirting with the idea seems interesting but likely won’t pan out. The problem is energy costs. India does not produce any major energy. It will not have the capacity to bring energy cheaply enough to be able to do so significantly enough. Second, transport. If energy is expensive then transporting becomes expensive as well. If my my thesis about Russia not being a major producer anymore because of the exit of western technology is true then oil prices will rise a lot in the next few years. Transporting anything long distance becomes less interesting and Mexico looks more and more like a good option for United States manufacturing. India may develop its own local manufacturing but will not get the western capital it needs to support global manufacturing. Not that it needs to as there are enough people in India for India to just focus on its own population.

Europe versus Russia, Mutual Assured Economic Destruction

https://www.wsj.com/articles/vladimir-putins-energy-war-with-europe-seems-to-falter-11663523925

This article portrays the Putin as retreating from the Europeans resolve over the war. But it seems both sides are playing a game of chicken.

Putin is waiting for winter to come to hit the Europeans hard with the expected shortages. Once people start dying from the cold, that will push people one way or another. However, the Nord Stream shutdown is not due to sanctions. The Russians have no idea how to run their pipelines without western expertise. Exxon, BP, and Shell were the companies that made Russian oil productive. With the sanctions and the war those companies exited meaning all the oil drilled out of the crazy Russian permafrost is beyond the capability of the Russians. Their military equipment completely broke down against western equipment, why should we expect their oil drills to fare any better without western equipment. In all likelihood once winter hits Russia will not be able to produce oil at all. Likely, the end of the Russia economy.

The Europeans seem to be just printing money to subsidize energy. Since demographically speaking the Central Europeans are basically at a retirement age and they don’t have a replacement population this printing of money will never get paid. The shutdowns of their manufacturing and agricultural businesses will have a detrimental effect on their economy leading to companies finding alternatives. This war came at the worst time for Europeans. As most of them start retiring and the state prints money, socialism breaks down. The state will not be able to provide resources that it previously has in the future without borrowing/printing more money. Europe is no longer a meaningful place for investments, it will however, be a place to get access to cheap human capital.

If Ukrainians keep pressing for advantage they can likely fully take over the lands they lost to the Russians in 2014. However, once winter approaches this will slow down. Putin likely thought that he could waltz into Ukraine, and win it in a few days. The war would be over with Ukraine falling. The west to prevent bloodshed would appease him. And the Russia would still have access to western oil expertise. All of those things have fallen apart. The Ukrainians may very well win, but in doing so they will have taken down Europe and Russia.

The United States is pretty vested in the Ukrainians winning because if Russia isn’t completely demolished they will attack NATO countries triggering Article 5 of the alliance meaning America has to send troops. America really, really doesn’t want to do this (especially after Afghanistan and a significant decrease in people joining the military). So it is okay with Europe failing as long as it means it doesn’t have to go fight a war over there.

Long story short we are seeing the destruction of the Russian AND European economies not just Russian.

WEAT

I’ve taken a significant position on WEAT, a commodity futures ETF for wheat. Most of the world will experience food shortages next year. The reasons are for the following:

• 1/3 Pakistan under water and likely not able to start their food growing
• Drought in the Western United States
• India banning wheat exports due to food uncertainty.
• Ukraine’s output continuing to dwindle as a result of the war as it is one of the primary producers of wheat.
• Russian fertilizer shortage due to sanctions will affect Brazil, a major producer of food. Also, African countries rely on fertilizer to generate enough food for their population
• China also banning its export of fertilizer as it still deals with the African swine fever which is having China buy all foodstuff from the global market to regrow their herd.

All of these conditions are pointing to a 2023 with conditions set for a famine that will likely be included in the next “Old Testament.” (The thesis for this investment is also based on human misery and for that may the gods have mercy on me.)

The question then becomes why hasn’t WEAT taken off? It seems to have taken off right after the start of the Ukraine war but has fallen back. The reason is that the contracts for wheat for 2022 are based on fertilizer and inputs from 2021. We have not priced in wheat from the inputs of 2022 conditions and in general the crop haven’t even been planted yet (if it will in terms of Pakistan).

I hope I am wrong and maybe the United States will step in but it doesn’t produce enough to feed a billion mouths.

Liquidating Crypto

Crypto no longer seems like a viable investment to me. The reasons are several:

1. The era of cheap Capital is over as we are faced with a tectonic shift is what is happening in the world. Crypto being so volatile while the existing fiat currencies also being volatile doesn’t bode well for it as a currency that will be used.
2. Crypto has no fundamentals. We are returning to an era where fundamentals matter. Crypto not having any fundamentals doesn’t bode well for it to remain relevant.
3. Crypto still isn’t easy to use. I still don’t know how to build or pay for things easily.
4. The value of crypto will continue to drop. The game is up, and the losers are starting to realize they are losers.

It was fun while it lasted but FTX's demise has only accelerated crypto's demise.

What won’t change in a decade?

As we go through a major economic reshuffling, the question that keeps coming to mind is: What won’t change in a decade? We are still on the early side of a major capital, demographic and geopolitical reorientation that will take a better part of a decade to sort out. During this period, companies will be constrained by capital and workers. The Cloud, APIs, and Automation will be a major part of the equation.

As baby boomers retire in significant numbers starting this quarter, we are experiencing a lot of things all at once. The first is that we no longer have workers sufficient enough to replace the retiring baby boomer population, as GenZ is the smallest generation we have. The second is as baby boomers retire and sell their small businesses there is immense room for automation to take foot which has not happened yet. Many SMBs still use on-premise tools that haven’t been updated to take advantage of the current generation of Cloud powered tooling.

As baby boomers retire and move their $79 trillion dollars of wealth to safer asset classes the capital structure is going to change. We are entering an era of expensive capital where interest rates will be significantly high for years. The result of this is there just won’t be enough capital to do any meaningful R&D through VC-based companies. So companies will be driven to efficiency and to make do with less. Automation and APIs will take on major roles at companies. This does not mean additional SaaS tooling but tooling that does work on behalf of companies. In the words of Clayton Christensen, a Job to Be Done.

So what won’t change in a tremulous decade ahead? The Cloud. If anything, the Cloud is still in the early adoption phase and has significantly further to go.

A Shift to Focus on Profit

Capital is going to get expensive if it already hasn’t which means the era of crazy valuations and everyone getting a puppy when they join a tech company are over. This will result in a sizable adjustment as many venture backed companies will just perish as they run out of funding the next few years.

However, this is not going to be peaches and roses for Google, Meta, or Microsoft either. The first two are reliant on the cheap Capital to help startups pay for advertising. Microsoft on the other hand has half its revenue coming from international. As the dollar strengthens relative to the other currencies Microsoft will also face the same headwinds.

In this market Amazon seems to be in the strongest position as they seem to be the most diversified. They will have headwinds on their AWS business but a lot of the startups are playing with credits anyways and haven’t started to pay Amazon. With a focus on healthcare that they seem to be doing with their recent purchases they seem to have the most strength of the big tech companies.

The lack of capital will kill many companies because there is just no way many of them have a way to get to profitability. This will be likely the big focus of the next decade, back to the power of cash flows and balance sheets. This may have unintended consequences on the broader tech ecosystem as the goodwill of these companies has been the primary driver of many of the innovations in tech the last decade.