Climate Change is a Real Problem, but Current Renewable Energy Technologies Can’t Replace Fossil Fuels Without a Huge Nuclear Buildout. Because, Physics.

First, I’d like to stipulate that Climate Change is a real problem and human activities do contribute to it. But while it is a problem with which humanity needs to grapple, it isn’t an existential threat like a massive asteroid strike. Despite the hyperventilating media coverage, it will not end life as we know it in 2030 or in 2100. But we need to find sensible, cost-effective ways to deal with its consequences for the benefit of all. It makes a lot of sense to promote incremental switching to less carbon intensive energy technologies.

But kudos to Mark Mills, a fellow at the Manhattan Institute and a faculty fellow at Northwestern’s McCormick School of Engineering and Applied Science, for his article and his brilliant paper bringing to light a fundamental problem for those who want to attempt to solve the Climate Change issue with only the existing renewable energy technologies of solar, wind, and battery power.

Because of the limits of the laws of physics, it is simply not possible to do so without enforcing energy poverty on mankind through much higher costs, much less energy use per capita, and a lack of reliability of the power grid.

The New Energy Economy Is An Exercise In Magical Thinking

The incredible technological innovation brought to us by the “Moore’s Law” phenomenon in the world of semiconductors has fooled many eminent people into thinking it applies in other areas of research such as renewable energy technologies.

But whereas the physics of shrinking transistors and decreased energy needed to manipulate the idea of the numbers one and zero has enabled breathtaking change, the physics of manipulating and transporting physical matter does not conform to such exponential change.

The physics of energy is instead the realm of asymptotic effects, with big advances getting close to the barriers of physical laws which limit potential further progress greatly.

From The “New Energy Economy:” An Exercise In Magical Thinking by Mark Mills:

The physics boundary for silicon photovoltaic (PV) cells, the Shockley-Queisser Limit, is a maximum conversion of 34% of photons into electrons; the best commercial PV technology today exceeds 26%.

The physics boundary for a wind turbine, the Betz Limit, is a maximum capture of 60% of kinetic energy in moving air; commercial turbines today exceed 40%.

The annual output of Tesla’s Gigafactory, the world’s largest battery factory, could store three minutes’ worth of annual U.S. electricity demand. It would require 1,000 years of production to make enough batteries for two days’ worth of U.S. electricity demand. Meanwhile, 50–100 pounds of materials are mined, moved, and processed for every pound of battery produced.

Current renewable energy technologies cannot approach the energy density, cost, and reliability of fossil fuels and nuclear power. Those who want to do away with fossil fuels, especially without a massive buildout of nuclear power plants, have fallen prey to a fantasy.

The Average Person Won’t Accept Energy Poverty and/or Much Higher Costs for Energy

The Yellow Vest Protests in France began as a rebellion against an increase in the gas tax by average people, before the movement was corrupted by anti-capitalist perma-protesters. Average people the world over cannot and will not accept a purported solution for Climate Change that imposes huge financial costs and energy poverty on them. It is simply a non-starter.

And in the end, whether you are talking about trading carbon credits or instituting a carbon tax, all of the schemes pushed by the left, the media, and the scientific establishment are about raising the cost of energy use and thereby reducing the demand for it. People will simply not tolerate this.

A Way Forward

The scientific community has identified a real problem in Climate Change. But they (and the media and the left) have not done cost-benefit analysis. Their proposed solutions are not effective or acceptable. We should solve the problem with a common sense engineering mindset that takes into account the tradeoffs that real people will actually accept in their real lives.

Fortunately, accepting energy poverty and doing nothing are not our only options. We need a big investment in basic scientific research to come up with more advanced, energy dense, reliable, and economically competitive renewable technologies. In the interim, continuing to trade coal use for natural gas is a no brainer as this is substantially less carbon intensive. We also need a big buildout of nuclear power plants as nuclear is very energy dense, has zero carbon emissions, and can function as base load power, which renewable technologies (even backed up by batteries) cannot without a huge buildout of diesel backup generators, which is neither carbon friendly nor cost-effective.

A combination of natural gas as a long term bridge fuel combined with nuclear and renewables can work while we are doing the basic scientific research to come up with breakthroughs that can function as cost effective and reliable base load power replacements. And we should also pursue research into geo-engineering to mitigate the worst effects of Climate Change if such breakthroughs don’t come through in a timely enough fashion. Such an all-of-the-above approach is the only sensible way to proceed for the good of humanity.

See Also:

Want an Energy Revolution? It won’t come from renewables—which can never supply all the power we need—but from foundational scientific discoveries.

The “New Energy Economy”: An Exercise In Magical Thinking
By Mark P. Mills

3 Challenging Scenarios for Quality-Value Investors

A Simple Formula For Investing Success

Looking for the Next ROIC Machine

The Unfulfilled Promise of DNA Testing: Rapid advances in genetic testing are whipsawing families’ diagnoses and treatment

Socialists Don’t Know History: Young people don’t remember the Soviet nightmare. But what’s Sanders’s excuse?

Driverless Cars Are 90% Here. Another 90% Is Left to Go.

Rupal Bhansali Interviewed on The Long View Podcast

Rupal Bhansali is extremely impressive on this episode of The Long View podcast (transcript). She is the manager of the Ariel Global Investor (AGLOX) and Ariel International Investor (AINTX) funds.

While the strong dollar and extreme outperformance of the US market over the rest of the world during the bull market means that her recent returns aren’t too exciting, I am excited about her brilliance and her differentiated and well thought out process.

She focuses on risk management and has an extremely thoughtful disposition. In a world of index-hugging active funds, she is the real deal and concentrates her portfolio in her best ideas.

My Notes on the Interview

1). Her focus on risk management and risk-adjusted returns is right since the enemy of compounding is big drawdowns, because of the simple math that a 50% loss requires a 100% gain to get back to even. Like Howard Marks’s comment that if you avoid the losers, the winners will take care of themselves.

2). In this age of quant this and quant that, she has great insights on the need for deep qualitative business analysis to be performed on top of the quantitative work that she sees as simply “table stakes” and not a source of alpha.

She says you need to do the quantitative analysis to figure out the expectations implied by the stock price while recognizing that quantitative measures are essentially extrapolative of the past into the future. The key to her is to then perform the qualitative analysis of the business that may tell you whether the future is likely to be different than the past. This kind of analysis will give you an early warning of problems with (or positive inflection points for) the business before they show up in the numbers. This is how you find mispricings and generate alpha.

This reminds me of the debate over Microsoft (MSFT) over the last couple of years. Valuation aficionados like Chuck Carnevale have warned that it is dangerously overvalued, but that is if you assume the business will perform in the future like it did 8-10 years ago and should be valued similarly. I notice that MSFT is the largest holding by far in her global fund AGLOX (Ariel Global Investor), which gets my confirmation bias going as it is also my largest holding.

Her focus on the qualitative over the quantitative also reminds me of Warren Buffett’s comment that sometimes with his really great buys like See’s Candy and Coca-Cola, the numbers almost told him not to buy. It wasn’t quant valuation screens that pointed Buffett to these legendary buys, it was qualitative business analysis.

3). Her process of assigning a devil’s advocate to identify problems with bullish theses is smart. While it sounds simple, the depth of the analysis done is rather remarkable, especially given her example of how they picked apart the pro-State Street thesis.

4). While she is a value investor, she is not a fan of the financials. She sees regulatory overhangs, low rates, and deflationary forces around the world as big negatives, especially in Europe and Asia.

5). She is also not a fan of consumer staples as the social media led disruption of the sector is killing pricing power, especially for firms with products that don’t have really appealing quality and value propositions (Kraft-Heinz, Gillette razors).

6). She mentioned telecoms as the new consumer staples, as we are all addicted to connectivity and won’t give it up easily.

7). She sees the FAANG stocks as being quite risky. In particular, she doesn’t care for Apple and Netflix. Apple is still a hardware manufacturer that can see an elongation in the replacement cycle and could even go out of fashion like Nokia and Blackberry, and she also sees the services thesis as being overhyped. With Netflix her concerns are debt, losses, a recent drop in subscribers, and onrushing competition from Disney and a seeming cast of thousands.

I Am A Big Fan of Rupal Bhansali

She has obviously thought very deeply about all things investing and has a steel trap for a mind. I truly admire her Munger-like diversity of thought and pursuit of multiple avenues of inquiry. I will strongly consider investing in her funds, and will definitely watch her holdings for ideas.

See also:

Do Warren Buffett & Charlie Munger use a valuation formula? — Youtube

Personal Finance Advice That Changed My Life

Trump’s Game of Chicken – Dr. Ed Yardeni

Risk aversion is the big story, not the yield curve

Josh Wolfe Discusses Innovative Investments (Podcast)

Why Complexity Sells by Morgan Housel

“Science is the belief in the ignorance of experts.”
— Richard Feynman

Portfolio Changes Amidst the Selloff

Over the last month or so I have reduced outsized positions in winners Microsoft (MSFT), Pfizer (PFE), and Paychex (PAYX) from between 9% – 11% to about 6.5% each. I recently redeployed some of those proceeds to a new 4% position in Unilever (UL) after they abandoned their plan to relocate from London to the Netherlands as their sole headquarters. While their big emerging markets exposure is a short term negative, it should help in the long term as that is where the economic growth will be with growing middle classes seeking to improve their standard of living.

I’m not a huge fan of the consumer staples area as a whole because of the challenges they face from upstart brands marketing on social media and concierge brands like Costco (COST) and Amazon (AMZN), but I like the odds for Pepsico (PEP), Philip Morris (PM), and Unilever, as they still seem able to generate at least modest revenue growth. I hold all three.

I also sold my small AT&T (T) position after what I came to see as a nightmare earnings call on October 24th where it became clear to me that Randall Stephenson is a disaster as both a CEO and a capital allocator. All he does is over promise and under deliver. They are losing huge numbers of profitable subscribers to their DirecTV service while adding a declining number of subscribers to their vastly less profitable over the top streaming service. Tons of debt plus a hubristic CEO in denial at the deterioration of the business are not good omens. Stephenson seems like a guy who thinks he is a genius and is surrounded by yes men but is, as the English say, too clever by half. It is doubtful he can manage Warner Media as well as Jeff Bewkes. He is certainly not John Malone. Nor is he someone I trust as a steward of my capital.

As a replacement for AT&T, I chose Ventas (VTR), the senior housing REIT. This sector has been going through a tough time with low interest rates causing overbuilding by competitors. But a disciplined and experienced management team, an ongoing shakeout from higher interest rates causing less building, and the silver wave of Baby Boomers over the age of 75 coming over the next few years would seem to have them set to take advantage of an up cycle.

Current Watchlist to Put Additional Cash to Work

BlackRock (BLK) – Yields over 3% for first time in years. Likely to continue to benefit from the shift to passive investing and ETFs. 3.24% Forward Yield.

T. Rowe Price (TROW) – The class of the active money managers. Great culture and most of their business is from retirement plans. 2.98% Forward Yield.

Fastenal (FAST) – Good growth and execution, but higher costs and fallout from China tariffs and disruptions to manufacturing supply chains in North America carry potential for short term pain. 3.24% Forward Yield.

Texas Instruments (TXN) – Great management and capital allocation policy, but they are also likely to suffer from ongoing China tariffs and rethinking of supply chains, plus a slowdown in the auto market. 3.40% Forward Yield.

Visa (V) – Big winners in the world of digital payments along with Mastercard (MA). Making hay by partnering with upstarts, not competing with them. Forward Yield 0.73%.

See also:

Fed’s Restrictive Chatter Rattles Stocks – Dr. Ed’s Blog

AT&T Stumbles in Its First Quarter With Time Warner

AT&T Has More Worries Than Tepid Results

“It’s very difficult for companies to earn the same kind of ROEs on acquisitions that they can harvest from their existing operations. The sellers of the acquired company generally have a good idea of what it is worth — and they want to be compensated properly for the profitability and growth potential of their business. Instead of buying growth wholesale (the investment opportunities within a firm’s existing operations), acquisitions carry full retail prices.”
— Josh Peters

Global Warming Is a Real Problem, But The Left Is Wrong About a Solution

The latest IPCC report is the occasion for ever more wailing and gnashing of teeth in the media and on the left. If only they proposed a realistic solution.

Global warming is a real problem, but it is not a catastrophe that should cause authoritarian strictures on people to the point they can’t live full, productive and free lives, nor is it worth paying an infinite cost to remedy.

The leftist program of raising energy prices to the point of great pain is unrealistic and inhuman. It will not happen, because people will not accept the effect on their lives.

If there is a solution, it will be technological, not an attempt to turn back energy usage per person to the year 1900. The real zeitgeist behind the leftist program of deprivation is that mankind should pay a painful penance for their sins against Mother Earth. This is ridiculous. It should be looked at as a simple engineering problem to solve at an acceptable and lowest cost possible.

When the left starts to look at solutions through the lens of real world cost-benefit analysis, I will take their doomsday predictions more seriously. I won’t be holding my breath.

See also:

The Big Hack: How China Used a Tiny Chip to Infiltrate U.S. Companies – Bloomberg

Why China Is Growing More Belligerent – Barron’s

Lessons from Howard Marks’ New Book: “Mastering the Market Cycle – Getting the Odds on Your Side”

“What the pupil must learn, if he learns anything at all, is that the world will do most of the work for you, provided you cooperate with it by identifying how it really works and aligning with those realities. If we do not let the world teach us, it teaches us a lesson.”
— Joseph Tussman

That Was Quick: Musk Reverses Course & Settles With the SEC

Yesterday, the SEC announced Elon Musk and Tesla settled their securities fraud case based on his errant tweet of “funding secured.” I imagine Tesla stakeholders are glad to hear this news as Elon is allowed to remain CEO.

Two new independent directors are to be added to the board, Musk will be required to step down as Chairman for 3 years, and Tesla is creating new processes to vet Mr. Musk’s tweets before they go out. This is all to the good and is perhaps a sign that Elon is growing up a bit. A bit less pointless drama would be very welcome.

It would also be good if he would end his obsession with short-sellers and trying to “burn” them. Such distractions are harmful as they take away focus from his duties running Tesla. Make Tesla successful and cash flow positive and you will take care of that problem and be vindicated. As well, many stories of unhappy endings are there for CEOs of companies loudly focused on “getting the shorts.” Best to stick to your knitting and ignore the noise.

The next task should be finding someone to be COO — on the order of Steve Jobs finding Tim Cook. This would be good for the company and for Mr. Musk. Him burning himself out on operational details is in no one’s best interest. Happily for SpaceX, he has found himself such a person, so it shouldn’t be impossible.