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

The Economy Looks Great. Will Trump Screw It Up With a Trade War?

Putting aside the coarseness and unpleasantness of President Trump, we are faced with a couple of objective facts about his economic policies. His policy of deregulation has removed the wet blanket from the economy that President Obama’s oppressive regulation and hostility to business caused. The tax cuts, particularly the corporate ones, are good for growth and will make US companies more competitive worldwide. At the margin, the tax changes will encourage more jobs at home and reduce the incentive for offshoring. That plus our cheap energy resources from the fracking boom create big tailwinds for the economy and could even draw back some manufacturing.

Growth is already strong and unemployment is low, so the average worker may be starting to see decent wage growth. And the economic expansion may have been given a new lease on life, though increased deficits and adding stimulus with such a low unemployment rate could lead to higher interest rates and inflation. These factors need to be watched, but tax policy combined with deregulation look to be very positive for the economy on balance.

Trump’s Trouble With Prosperity

But as we’ve seen with the President in the past, he seems to have a hard time handling prosperity. The one real threat to this Goldilocks moment seems to be his looming trade moves. A trade war will reverse all of the economic progress that has been made under his administration.

A trade war equals higher prices for consumers, screwed up supply chains, retaliatory actions by other countries, inflation, and a potential downward spiral like with the Smoot-Hawley Tariff, which deepened and lengthened the Great Depression.

To protect industries that can’t compete, he will raise prices on all consumers, which is a giant tax increase. America has much more to lose than gain from this. Expect farmers to be some of the first to feel the pain of retaliatory tariffs.

Trade Protection Feels Good, But Hurts You More Than The Other Guy

The problem with Protectionism is that it feels really good, but it ends up hurting you more. It is the economic equivalent of Mutually Assured Destruction. It likely ends in a feedback loop of retaliation that hurts everyone severely. Like burning down the house in order to save it.

Is Trump Really Smart Like He Says?

One of the President’s biggest problems is a lack of impulse control and thoughtfulness. I hope he will step back and think hard about the situation and the second and third order effects before he stubbornly undoes all of the good of his deregulation and tax policies. If he fouls up the economy with a trade war, that could likely be enough to push even loyal Republicans off of his bandwagon. I would think it would also make a major defeat for Republicans very likely this fall and increase the chances of his impeachment and potential removal from office in 2019. Don’t do it Mr. President. Discretion is the better part of valor in this case. Impulse control now!

See also:

The Infrastructure Boom: 5 Ways Investors Can Play It

Warren Buffett’s Annual Letter to Berkshire Shareholders for 2017

Complexity Bias: Why We Prefer Complicated to Simple

The Sustainability of Growth vs Return on Invested Capital

Excessive Diversification is Pointless & Damages Returns

Making History By Doing Nothing — Morgan Housel

“The whole trick in life is to get so that your own brain doesn’t mislead you.”
— Charlie Munger

“We want to do business in times of pessimism, not because we like pessimism but because we like the prices it produces. It’s optimism that’s the enemy of the rational buyer.”
— Warren Buffett

Larry Fink’s Convoluted & Coercive Solution to the Problems of Indexing

I am delighted to find businesses that are ethical and treat their communities and employees well as a matter of doing good while doing well. These businesses are rewarded in the marketplace for being good citizens and profitable. They are also what might be described as “long term greedy,” realizing that helping their community thrive will help their business in the long run.

It is a virtuous circle, and the moral nature of business and capitalism has a long history of being addressed by greats such as Adam Smith in both The Wealth of Nations and The Theory of Moral Sentiments, and theologian Michael Novak in his book The Spirit of Democratic Capitalism.

Larry Fink Wants to Use Coercion to Recreate Capitalism in His Image

Now Larry Fink of ETF giant BlackRock has demanded that CEOs institutionalize the pursuit of their “social purpose” and the welfare of all so-called stakeholders, and put this on par with making a profit for shareholders while serving their customers.

This seems to me to be a convoluted and coercive solution to the problem a Progressive investor might have with indexing. But, it is easy to solve this problem without turning our companies into social welfare agencies. Become a stock picker or hire one to sell the stocks of companies that don’t meet your standards, and buy the stocks of companies that do. But this would be bad for BlackRock’s index business, so Larry leans on coercion to force companies to abide by his ideals while he can still rake in the fees his company gets from having $6 Trillion under management.

His plan would distract companies and employees from their productive functions to make them hold meetings, write reports, and push paper so that they can show they are keeping up with a new kind of enforced corporate political correctness. Something tells me that value creation and serving customers and shareholders would take a back seat. Larry would have made a great regulator during the Obama Administration.

Don’t Kill the Golden Goose or There Will Be No Wealth to Redistribute

One of the things that has always dumbfounded me is that the Left is so hostile to capitalism. The reality is that wealth must be created before it can be redistributed. So a sensible Progressive should want the economy to do well and create as much wealth and prosperity as possible so they will have it to redistribute. Killing the Golden Goose means no more golden eggs.

If Larry needs to assuage his conscience for being a rich capitalist, why not simply give his money to causes that support his values like Bill Gates and Warren Buffett are doing? I guess it’s cheaper to spout nonsense and hang on to his dough. It doesn’t sound like he is living up to his social purpose. But then I guess that depends on who the judge is.

Putting layers of useless guidelines, regulation, and bureaucracy on society so people are spending most of their time shuffling paper and ignoring their productive functions is a recipe for economic malaise at best. Forgive me if I hope people like Mr. Fink are kept as far from the levers of real power as possible.

Where Are the Pragmatists? Two Parties Filled with Fringe Lunatics Doesn’t Leave Voters a Decent Choice

One of the things that stuns me in our current political reality is that both sides are kind of nuts and dominated by their extremes. As bad as Trump is in many ways, at least his policies are focused on unleashing the creativity of the American people through cutting the suffocating regulation of the Obama years. If the Democrats could decide to be pragmatic and business friendly, they could really have something going. But the Far Left seems in control and wants to pursue the socialist policies that Hugo Chavez used to destroy a prosperous Venezuela. Doesn’t seem very promising.

“I think part of the popularity of Berkshire Hathaway is that we look like people who have found a trick. It’s not brilliance. It’s just avoiding stupidity.”
— Charlie Munger

The Wisdom of Charlie Munger: You Have a Moral Duty To Be Rational and Reasonable, and To Eliminate Your Own Ignorance

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Learning from the experiences of others will put you on the path to a successful life with fewer unpleasant detours. Charlie Munger is perhaps the wisest man alive. He is a man who has dedicated himself to understanding the world and figuring out what works. Pull up a chair and learn how to think and how to live.

A Conversation with Charlie Munger and Michigan Ross – December 20, 2017:

“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