Let’s get this out of the way; Lykeion is apolitical. Both sides are equally incompetent in our eyes.
We think that it’s incredibly important to understand how YOUR money is taxed and subsequently spent by the government – this is foundational for responsible and participating members of society, and it doesn’t take too much effort.
The hard part, in our opinion, is to understand the “facts” behind the rhetoric mainstream media shovels you.
The Inflation Reduction Act was passed into law this month, and with it, a slew of new spending, cost savings, and new taxing initiatives in an (staying apolitical) “attempt” to slow down inflation.
Here’s our breakdown of the bill, by category and amount of either New Taxes, Cost Savings, or New Spending.
Some thoughts (come up with your own views and again, send them over to us, we’d love to read):
The bill is leaning very heavy on the Corporate Minimum Tax, as it makes up ~40% of the combined new taxes + cost savings bucket. My fear stems from knowing that corporate lawyers are some of the most ruthless and crafty professionals I’ve ever met. They can almost always find a way around the law and carve out their own path, especially when it comes to taxes. And the more disadvantaged the law puts the corporation in, the more motived they are to find a way around it.
The incremental IRS funding is unnerving (trying to be objective): the IRS will receive $80 billion more funding to enforce tax collection, which is estimated to add $204 billion of tax revenue. The unnerving part is when you think about the fact that they are spending a lot more of our money ($80 billion) to go collect a LOT more of our money ($204 billion).
Some good news is that the bill is allocating part of the ‘Clean Electricity Tax Credits’ to nuclear, which, according to Doug True of the Nuclear Energy Institute, “puts nuclear on the same playing field as renewables… It will stimulate more interest in nuclear. Adding 300 reactors that generate 90 gigawatts over 30 years might be on the low end once this plays out.”
The total savings of the bill is estimated at $305 billion over 10 years. This may sound like a lot, but, sticking with the theme of context here, the CBO estimates the cumulative annual deficits over the next decade to total around $16 trillion… meaning that this bill represents just under 2% savings on the budget deficit over the next decade. Ouch.
Madness Visualized
I’ve tried to stay away from all the meme stock madness over the past couple of years as I have better things to do with my time (literally anything else).
But when I saw the headline that Cineworld (the largest chain of movie theaters operating out of the UK) is likely to file for bankruptcy, I had to do a little digging in.
And the 10 minutes I spent on this little project didn’t disappoint. You AMC folks are complete madmen (and women).
At a 30,000 foot view, AMC operates 11,041 screens on about $2.5 billion of annual revenue ($226k per screen). CINE operates 9,500 screens on $1.8 billion of revenue ($190k per screen).
They both carry about the same debt load, but CINE has been able to generate significantly more cash flow in the last twelve months (LTM) reported (Note: CINE LTM is as of 12/31/21 and AMC is as of 6/30/22, their last reporting periods respectively, so the figures will be different once CINE reports next month). But AMC is burning a lot of cash…
Enter the madness: CINE is going to file for bankruptcy, while AMC’s market cap is now 132x that of CINE.
The company that generates more cash at similar debt levels is going bankrupt. The other is worth almost $5 billion.
And we wonder why J. Powell hasn’t signaled a pivot yet…
Concentration of PV and Chips
Bravo to Congress for trying to bring this one back home.
Jacob’s latest report – A Geopolitical Primer on Taiwan, explores the increasing tensions between China and Taiwan, and the potential scenarios that could play out over the coming decade. It’s a must read if you haven’t already.
Here’s a couple charts to show what’s at stake as the Geopolitics of the region continue to play out in real time.
The world's most beloved renewable energy source, solar, is highly captive to Chinese supply chains. Think about how the world has responded to the Russian invasion of Ukraine and now play that scenario out if China invades Taiwan – which is almost universally agreed upon by Geopolitical experts that it will happen at some point (the nuance is in the when and the how that takes place).
Arguably the most mission-critical part of every piece of modern society, the semiconductor, is again, highly concentrated in the region – 60% of production of independent chip manufacturers for third-party customers are located in Taiwan.
Where the current administration gets some credit, is in passing the CHIPS act (Creating Helpful Incentives to Produce Semiconductors), which will include $53 billion in funding to bring semiconductor manufacturing back to the US.
Semiconductors are a strategic technology essential to American national security, competitiveness, and innovation. As the brains of modern technology, they play a powerful role in the future of our nation’s advanced defense systems, critical infrastructure and supply chains, and economic prosperity.
Despite being aware of this, the U.S. share of global semiconductor manufacturing capacity has steadily eroded from 37% in 1990 to just 12% in 2020. This is a consequence of the higher cost of building and operating fabs in the United States relative to that of locations in foreign territories.
The ten-year total cost of ownership of a new fab located in the U.S. is 30-50% higher than in competing countries - and 40-70% of this cost is attributable to foreign government incentives.
Oil Supplies
We’re watching Europe go through the worst energy crisis in 50 years and because of that, Diego wrote an excellent primer on the EU’s dependence on Russian energy imports here.
The issue the EU is facing right now is that of supply. They’re having an incredibly difficult time replacing their energy dependency on Russian imports, which is leading European gas to new all-time highs on a weekly basis and is forcing EU members to rush to alternative sources of oil imports (Middle East is the main solution). As gas matters for heating, power generation, and industrial activity, whilst oil matters mainly for transportation, it’s not a stretch to say that this is not an economic matter, but rather a national security one.
What about the US?
The US isn’t as dependent on natural gas imports as Europe is because we produce the most gas of any country (we actually exports quite a bit of it to the EU in the form of LNG). This means that when winter comes, we’ll be able to heat up our homes, albeit at a higher cost.
But, we are VERY dependent on oil.
The US consumes about 20 million barrels of oil per day (the most of any country in the world, at ~21% of global oil consumption), and of that, 67% goes to transportation (27% to industrial and the remaining to residential, commercial, and electrical power).
Europe needs their gas. The US needs our oil. They are the lifeblood of our economies. Hard stop.
How’s oil looking in the US?
If you follow our twitter account, you’ll know that I am, on a weekly basis, becoming increasingly concerned about our oil inventories, both commercial and in the Strategic Petroleum Reserve.
Here’s why:
From their peak last year, total inventories are down 27%. That’s the largest drawdown in that period of time that we have ever seen. EVER.
We’re now down to early 2000s levels of total inventory, and the SPR is down to 1980s levels. If you read any of Jacob’s pieces, a common theme is that the world is becoming more multipolar by the day, and in a multipolar world, global actors tend to get more hostile as the global rules based order breaks down.
Now is not the time to be bleeding dry the commodity that runs every part of our daily lives. And to any hardcore ESG people out there that will point to this as reason to go all in on renewables, just, don’t. Please. Go read most of our past pieces or go read anything from Doomberg.
Fuel Sources
Almost.
We almost made it a whole COTM without talking about nuclear.
But after writing the segment above I had to have one little crack at it.
Just take a look at this chart, have a step back and think about it for a minute or two.
Now take out a pen and paper and write to your congressman or congresswoman.
That's it for August, so now all you Europeans can finally get back to work!
If you didn't catch our last two weeks of publications, Bitcoin and Time Horizons and A Geopolitical Primer on Taiwan, I highly recommend you check them both out as they are great forward looking pieces on two incredibly important topics that we will build on over time.
Hope you enjoyed the piece, and as always, we'll see you out there...
Stormy last night in the Basque country | Hossegor, France
Co-founder & Head of Growth. Covers Energy, Markets, and Geopolitics. Ex-Goldman Sachs IMD, buy & sell side equity research, M&A, and head of strategy for media startup.
