Scala Private February 2023: A green transition.

The world is moving fast towards a better, greener world, but without much consideration to the dangers of an excessively speedy green transition.

We are entering a period of instability also due to the green transition. When you reflect on the 1970s everybody thinks inflation, Vietnam War, oil wars, scandals and terrorism. Few people reflect that the 1970s have been also the first green transition period. If you just remember (or watch a 1970s movie) how smoky a city like Los Angeles was you will understand.?

Green energy is a dirty affair. Some examples on the pic above:

1.???Higher energy price – while oil is USD80, fuel is around AUD2. Remember that in 2008 oil was USD145 and fuel was AUD1.60.

2.???The car industry is taken over by electric Chinese brands as the Chinese Government gave plenty of electric subsidies to the industry and forbade the use of foreign batteries.

3.???Rampant inflation.

4.???Ukraine/Russia, Syria, Turkey, South America and so on.

5.???China has 80% of rare earth minerals as they do not care about residual pollution and 80% of silicon for solar panels built with Uighur slave labour.

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Green energy is also dirty in the current technological state:

·????????Rare metals have become ubiquitous in green and digital technologies. MiningWatch Canada is estimating that three billion tons of mined metals and minerals will be needed to power the energy transition. Ore processing creates ~100B tonnes of waste per year, more than any other human-made waste stream. Analysts note how purifying a single tonne of rare earths requires using at least 200 cubic meters of water, which then becomes polluted with acids and heavy metals. Or to create 1 ton of lithium, the industry requires 2.2 tons of water! On top of that, imagine the destruction and energy required to obtain 1KG of gallium, which requires mining and processing ~50,000 kgs of rock.

·????????A 500kg battery (a Tesla 3 Long Range) requires 45,000kg of ore and 250,000kg of earth (all done with diesel trucks), without considering the refinery process.

·????????The US KIA CEO says it will be hard to produce mass market cars with a price inferior to USD30,000 (AUD42,000).

·????????For an equivalent installed capacity, solar and wind facilities can require up to 15 times more concrete, 90 times more aluminum, and 50 times more iron, copper, and glass than fossil fuels or nuclear energy. Then there is the question of what to do with discarded renewable technology like EV batteries and solar panels. Battery warranties currently last between 5 and 8 years (480,000km claimed).

·????????Analysts note how the passage to renewable and clean power sources may be beneficial but may also require a stable energy demand (instead of the growing energy demand seen since the early 1900s), above-trend rate of capital growth and substantial energy efficiency progress. Analysts note despite €2.7T invested over the last decade, renewables only produce 3% of global energy. Instead, fossil fuels helped reduce extreme poverty and may have enabled food production to exceed population growth. There is also evidence that air quality improves as countries get wealthier, by transitioning from coal to natural gas and using pollution-control technologies. Analysts suggest the dismissal of fossil fuels at the current stage of renewable development may have more costs than benefits.

·????????Even time is not on our side. In Sweden, the largest deposit of rare earths has been discovered. Estimates it will take 15 years to start mining such deposit. Green transition creates new dependencies – currently passing from Russia/Middle East to China and other countries (South America, Canada, US and Australia).

This does not mean I am against green transition. I am against the politicians that are imposing a green transition pace that will provoke massive unintended consequences and go to Davos to discuss climate changes in the World Economic Forum meeting. Some crazy stats from Davos: 2,658 attendees with approximately 1,050 private jets (increasing the pollution by 4 times over a normal week), over 5,000 soldiers and police to protect the super-elite! They already invented a new word: “polycrisis”. Go figure. The crisis is actually just one - them! The Davos elites grabbed 66% of all of the wealth created since 2020.

War in Ukraine

Russia seems to be re organizing to launch major offensives in 2023 and stall the Ukrainian counterattacks in a way it should have prepared in the initial stage of the war. It will try and use the waning war support in the West and the US Republican House to push Ukraine to a settlement.

The West agreed to send Western tanks (not many know that they are simplified versions of the Western tanks) and already Ukraine is now clamouring for F 16 jet fighters, bringing us ever closer to a real NATO-Russia conflict (the Doomsday Clock is 90 seconds to midnight – never so close to total annihilation).

The war in Ukraine is being used as a test bed of new weapon systems and as a real test bed for maintenance and usage stress of current weapons. While terrifying, it is giving the US a real laboratory for the next potential war with China. The most important weapon system are small, expendable drones worryingly similar to civilian drones. It does highlight how the US and European industrial base has decreased in the years of globalism as the resupply of weapon systems is draining the national stockpiles.

I do not have any proof – but while the media constantly shows Russian defeat, lack of new weapons and debacles, the latest news is about Russian advances and Ukraine begging for new supplies. My two dollar take is that the reality is more Ukraine not being defeated than Ukraine winning.

The good Ukraine has been also swept in a wave of corruption scandals that shows it is far from a democratic country (Ukraine was one of the most corrupt countries in the world before the war).

But my biggest worry is – what is the endgame for the West? A total defeat of Russia is hard to see. Years of sanctions and war barely made a dent in President Putin’s totalitarian system and even his fall could be followed by someone more evil and less pragmatic than him. The West is renowned to start wars for “good” reason (Vietnam, Iraq 1 and 2, Libya) that always have very little democratic supervision and end up in tragedy.

Inflation

Contrary to the Fed mantra (rates higher for longer), the forward indicators and the bond market signals that inflation is falling faster than the forecast in the US and the pivot will come late 2023. Only wages are not falling fast. This means that probably the Fed is wrong, as it happened many times in this cycle. The issue is that the economy is moving fast, and the Fed looks at indicators that are lagging. There are early signs that companies are pulling back price increases due to consumer backlash.

Unfortunately, the Fed’s professors are still barking at the old tree and they could send the US into recession, just because they can.

In Australia the situation is similar, but different. Inflation pressures are stronger and still increasing (in Australia there is always a lack of competition that allows big corporation to increase prices at discretion) ) , but the RBA rate increases have much more effect than the US as most borrowers are on variable interest rates. So, the outcome should be similar.

Translation for the market – a much better year than anyone expects.

At a corporate level only 67% of companies beat market expectation (vs 77% average 5 years) and the financial sector was the worst (as of 23 January). It is the lowest result since Q4 2020. As it was expected and inflation expectations are falling, the effect at index level is not that bad.

US

After a struggle, the House is now in the control of the Republicans. We will need to expect big fights, especially on the debt ceiling towards June when the extraordinary measures will run out and the ceiling will have to be raised. Moreover, there will be several inquiries on the affairs of Biden’s son (quite intermingled with the White House - as an example he was on the board of a Ukrainian energy company), the botched Afghanistan withdrawal and other issues.

It is also interesting to see how secret files found on Biden’s property provoked much less scandal than secret files found at a more secure Trump property.

On the corporate level companies profit are at the lowest since 2020 and estimates decreasing. As inflation is declining and most of the bad news are in the market – the market had the best January since 1998.

Europe

The European situation is improving a lot. This is due to the “worst case scenario” not happening partially due to the mild weather that reduced gas consumption. The data was stronger than expected and German GDP beat expectations. There are also discussions to examine joint financing instruments to combat Biden’s Inflation Reduction Act (practically another stimulus) and the Chinese stimulus.

UK

EU and the UK are preparing for an intense round of negotiations to solve the remaining issues of Brexit. Inflation is finally peaking, but consumers and the construction industry are under pressure.

Israel?

Israel is again swept up in another round of violence.

After the most extreme right government was set up in November, there is a very controversial planned judiciary shakeup that is provoking antigovernment manifestations. Effectively, Netanyahu’s government is drafting legislation that favours the extreme right (for example, Israeli politicians can serve notwithstanding conviction of tax fraud) and handing themselves power above the judiciary system.

Foreign investors are pulling out money from Israel weakening the currency, share market and government bonds.

On the foreign side, apparently “Israeli” (not official source, but Israeli media clearly point that way) drones attacked an Iranian munition factory.

If it was a spy book – all of these facts would be connected. Terror attacks to distract the population from passing a dictatorial legislation and an attack to an enemy munition factory used to supply Russia for his Ukrainian war to buy the US’s silence. ?

China

Covid-19 is taking its toll on China. China has admitted 60,000 deaths – but different sources show ten times higher than that and those are just hospital deaths. The Chinese population officially fell by 800,000 people for the first time since 1961, due to low birth rates. Demographers think that this trend probably started in 2018, but has been obscured by false data.

Notwithstanding that the official data is beating expectations Q4 GDP +2.9%pa above consensus of 1.6%pa. Bill Birtles (ABC News) “…restrictions in multiple cities and a nationwide outbreak….see not only as much economic activity as the same period as last year, but three percent more”.

The market as usual looks forward and usually Covid-19 peaks very fast, so the Chinese market is very positive and rallying hard.

New Zealand

New Zealand’s PM has stepped down – a breath of fresh air from the classic politicians that want to hang to power until the real end.

She has been touted as progressive and New Zealand’s economy performed better than Australia under Scott Morrison.

Lately she was not so well loved due to her lockdown strategies, handling of the economy (New Zealand, as Australia, is becoming expensive) and she received over 50 death threats.

Reserve Bank of Australia and housing

While the RBA will probably raise rates another 25bps in February, this could be the last hike before a pause probably until late in the year as labour seems to be cooling off. Futures indicate a rate cut in November – but it is quite too far ahead.

Unfortunately for homeowners, banks could increase the interest rate more than the RBA, as of December the banks are predicting a top mortgage rate around 6.6%pa around June.??????????????????????????????????????

Australia

The gas price gap apparently is already stopping a few providers accepting new clients. Several providers could even go bust as it already happened in the UK and France.

The Albanese- Chalmer new style of government is bigger government and bigger intervention in the markets. While the idea is not wrong as the concept of free market (like PM Howard) is wrong (free market implies that all parties are equal and efficient – clearly not when you essentially have just 2 supermarket (Coles and Woolies), 2 electric store departments (JB Hi Fi and Harvey Norman) and so on), usually the intervention of the state generates major disasters as it is bureaucratic and prone to waste money.

China set up a new agency to buy iron ore in a centralized way to stand up to the big Australian miners. While a smart move, I do not think it will influence excessively the iron ore prices but will decrease volatility. There is anyway an important decrease of tension between Australia and China.

The government is trying to pass legislation in order to limit the superannuation size to AUD5 million per individual arguing that superannuation is meant to assist retirement and not to preserve wealth from taxes.

While the concept is correct (like tax deductions for investment properties should be limited to the second investment property) – but again it makes rules around super always uncertain.?

Market 30.1.2023

Contrary to most pundits, January started with a bang! A mix of inflation cooling, and a bad reporting season already expected and digested, helped to throw the big research houses off course. Santa Claus rally came late (for the media, in reality the Santa Rally comes always after Christmas) and we had the best start of the year since 1998 (Nasdaq)!! You would not have guessed it by the media’s scary headlines! This is an impossible rally as all the big houses predict a scary first half and a recovery the second half (as a reminder I see a good first half, a mid-year fright and a normal second half).

As for the portfolio, we reduced some positions as the market is starting to be stretched (RSI at 70), but my model indicates more of a correction in the impossible bull market than a new phase of a bear market. As usual end of February is more dangerous.

January barometer

In Wall Street, there is a saying “so goes January (some say “the first five days”) so goes the year” (ie. market rise in January, market rise for the year). Statistically, this is true for 84.5% of the times since 1950.

In 2022, the first 5 days were -5% and January was negative and it ended in a very bad year.

In 2023, the first 5 days were positive and so the month – this is quite auspicious for a very good year.

Tik Tok

Tik Tok is a Chinese app similar to Facebook, to a degree. It has been banned from all US Government devices. The FBI and other sources hint that the data collected goes directly to the data bank of the Chinese government and algorithms get manipulated. Chinese law requires all Chinese companies to turn over data upon request and Bytedance (the holding) employs 130 Party members to ensure compliance. In December it was revealed that Bytedance had used the app to track several journalists in order to find their sources of information, for example.

China and Covid 19

In the aftermath of the abandoning of the Covid zero strategy the Chinese government practically went AWOL. No support, no medicines, no directions. Citizens and companies like Alibaba have been very good – using the web to put together demand and supply (Alibaba set up an exchange page that allowed people that got over Covid to give their medicines to people in need). A lot of organizations that were quashed by President Xi returned to try and save people.

This could be the second part of a silent revolution (the first part is refusing to make children) against the One Party. In any society there is a hidden pact between rulers and citizens. In China citizens accept the One Party big brother presence as it ensures prosperity and efficiency. When this pact falls, the situation slowly changes. It can take decades, but it is like an avalanche that cannot be stopped.

ChatGTP - generative Pre-trained Transformer

ChatGTP is the first AI chatbot (Large Language Model) that really works and it is almost indistinguishable from humans.?It was invented by a small US company and Microsoft already invested USD10 billion in it and launched its version “Copilot” – literally meant to give suggestions to humans (doctors, mechanics, coders) to improve their job. As anything tech, it can be very good or very bad. It can literally take over repetitive jobs or even write songs in a certain style mimicking a real author. Definitely a threat to white collar jobs.

Covid 19 - 2022

In the utter silence from authorities and media, 2022 we not only had a market crash – but a real killer wave of 15,600 deaths from Covid-19 (2020, 909 deaths; 2021, 2,639) and 17% excess deaths from unknown causes (3 years lack of early diagnosis and a surge in heart attacks in young people (conspiracy theorists would say vaccine kills).

And finally… a dad joke

Why did the kid throw his clock out the window? Because he wanted to see time fly.