Charts of the Month - May '22
Student Bailouts, Secretary of Energy, Oil & Gas Drawdowns, Lithium vs Hydrogen, US Crops for Fuel, Tech's Bloodbath, Bitcoin in 401(k)s, Inflation LEVEL
Will Students Get Their Bailouts?
Full transparency: I have student loan debt.
Back in the day I was a product of the linear path to ‘success’ (undergrad -> banking -> MBA -> M&A -> startup -> massive existential life crisis) and along that path, debt was a necessity.
The raging cost of a higher education in the US is well documented, but before all you overtly conservative types start waxing poetically about blue collar jobs and that the younger generations should all just become tradesmen, just chill for a second, and remember, LTCM was bailed out under Clinton, TARP was W, CARES was Trump, and The American Rescue plan was Biden.
Bailouts are bipartisan.
Whenever I hear the anti ‘cancel student loan’ crowd react, it’s usually in response to a question asked in a vacuum without context: “We should not cancel student loans because they took them out for stupid degrees and were irresponsible and taxpayers should not be on the hook to pay for them”.
Fair enough, and if the question was simply, “Should we cancel student loan debt?”, my answer would be, “No”.
The problem is that’s not really the question.
The real question needs context, like this: “Given the fact that over the last few decades, every time a business goes bankrupt because they overleveraged themselves and acted irresponsibly, the government bails them out, should we not consider a bailout for students? Before reacting, realize that most students (who tend to be much less experienced than the corporate executives who were granted bailouts) were told a fairytale when they were still in the prepubescent stage of their life, that in order to ‘make it in this world’ society was going to demand of them a degree from a good school. However, for the most part, their mom and dad can’t pay for the degree and because of the exorbitant costs, in order to become that productive member of society they’ll need to take out a loan at an interest rate that would make a loan shark blush.”
So, you have corporations running their companies into the ground for decades, frequently causing systemic risk to broader society while siphoning off billions for themselves, only to take taxpayer money to recapitalize and do it all over again.
Then you have students. Yes, getting a worthless degree and having no job prospects upon graduation is a type of irresponsibility, but their path pales in ethical comparison to the above, especially considering that higher education was paved and encouraged by the prior generation (ironically, those most inclined to complain about the student bailout). Not to mention that the younger generations will, in all likelihood, inherit a country with zero social security to lean on (even though they paid into it), a depleted energy reserve (thanks to the SPR drain), a debt-to-GDP ratio somewhere likely north of 300%, and the highest rate of inflation in the last 40 years… all problems created by the generation that has already received their bailouts, multiple times over.
So the real question isn’t “Should we bail out students?”, it’s “Who should we bail out next?”.
And there is no “neither” answer. Because history has proven that some entities are simply too important to fail. So, you choose which one it is this time…
We’ll Get What We Deserve
Doomberg has a saying he (or is a Chicken’s pronoun ‘it’?) uses a lot: “We are not led by serious people.”
I chime in every now and then to modify it to fit the context of a certain topic.
One of which was “We are led by no one. We are not governed by serious people.”
I’m now coining a new line, “We are not governed by competent people”.
We’re living through a unique time in history for sure, but the energy issues we’re dealing with are mostly from our own doing.
And you have to ask yourself the question, “How did we get into this mess?”.
My attempt at quantifying this shows that we allowed people with almost zero experience to lead (govern) one of the most important offices in the entirety of politics: The Secretary of Energy.
Over the last 20 years, across four Presidents (two Republicans and two Democrats) we have had exactly one energy secretary with any real-world energy experience before they were brought into the President’s cabinet.
The rest have been a mix of lifelong politicians, academics, a handful of researchers (mostly in an academic setting), and, in the case of the current acting Secretary, media commentary…
I don’t think I’ll ever forget this moment, and neither should you.
We’ll get what we deserve.
Oil & Gas Drawdowns
Speaking of energy, this last EIA report (from May 25th) was downright scary.
Stockpiles of just about everything energy related, from crude (both commercial stocks and the Strategic Petroleum Reserve (SPR)) to gasoline are down big year-over-year, and domestic production just can’t catch up (even if it could, remember, in the U.S., West Texas Intermediate (WTI), which is the fuel grade the US produces most of, isn’t the right type for our refineries, which means that we still have to import a ton of our oil. Don’t be fooled by anyone who tells you we’re ‘energy independent’. We’re not. Far from it.)
It’s times like these where having elected officials with a backbone that aren’t singularly focused on reelection, could prove useful. Someone to look the public in the eye and tell them:
- “No, we’re not releasing oil from the Strategic Petroleum Reserve because that oil is for, well, strategic purposes, like if another world war breaks out or the Middle East goes through another Arab Spring.”
- “Hey, ESG folks, pump your breaks. We’re going to invest in our energy infrastructure, fast track drilling permits, build out pipelines, and upgrade our refineries. And guess what, that will lower renewable infrastructure input costs so that we can continue to build windmills and solar farms.”
- Or better yet “Screw all you lobbyists, we’re taking the whole country nuclear!”
I kid, I kid. This is but a dream.
The last bit of incredibly confusing irony, Biden came out this week and told the public that high gas prices are good and are a part of this ‘incredible transition’ (while continuing to release millions of barrels from the SPR to... lower gas prices)
…which, surprising to absolutely no one, is basically the new script for the current World Economic Forum taking place in Davos right now.
The heart and soul of EVs, lithium-ion batteries are truly a global product – with one big bottleneck.
I won’t get into the anti-environmental or ethical side of this one (digging mines and shipping products around the world and reformulating materials with fossil fuels and child slave labor and all), you should do that research on your own.
This one is for informational purposes only.
As EVs continue their adoption around the world, there could be (likely should be) a renewed debate about battery vs. fuel cell technology as the powerplant of these vehicles. There's a LOT of momentum surrounding the hydrogen industry right now (hydrogen is the gas that powers a fuel cell), and for good reason: it’s now economically viable to produce, it can do things electricity can’t (like combust and be stored and shipped for future energy use like any other gas), and the infrastructure and technology is already in place to produce at scale.
It's also not subject to the supply chain constraints that batteries are as depicted above and (ok maybe a bit of a rant) from an environmental and ethical standpoint, there’s no comparison. You don’t need to dig up the earth with massive machines created by and operated with fossil fuels, it doesn’t need to be shipped around the globe to be processed and transformed (using fossil fuels), and it doesn’t require the use of slave labor (look into Cobalt mining in the Congo) or support a regime that already has its hands wrapped around the neck of the globe in terms of trade, and is enslaving an entire subset of its own population.
Just seems like we should explore alternatives a bit more, no?
If you haven’t read Doomberg’s “Diesel for Dinner”, it’s more frightening than a salmonella-laced undercooked chicken (you cannot reference Doomberg and not make a chicken joke… it’s a rule).
TL;DR – their team illustrates the fact that we're increasingly using food resources (corn and soybeans) for alternative fuel sources (gasoline and diesel). This is becoming increasingly more important during our current food crisis, and (in our view) should be viewed as another government virtue signal and (in their view) is possibly a large-scale government cover-up.
You should go read that piece and then come back to this chart because we wanted to see exactly how US crops have shifted over time.
Given the context from above, no huge surprise here.
Today, 40% of corn and 30% of soybean production in the U.S. is for fuel. Another 36% of corn production is used for animal feed.
Corn may have seen a small decrease in terms of total % of acreage planted, but the total acreage planted of all crops increased from 242 million to 250 million acres from 2007 to 2021. So the total % decrease of 2% was less meaningful from a yield perspective (from 91.1 million acres in 2007 to 90.3 million acres in 2021).
Soybeans for the win. From 2007 to 2021, the crop saw an increase from 26% of total acreage to 34%, which amounts to an increase of 22.5 million acres, from 62.8 to 85.3 million acres.
Why does this matter?
Because the increase in fuel-based plants acreage (corn and soybeans) has to come from somewhere, and that somewhere was wheat. Down to 19% from 24%, wheat is one of those crops that we actually still need a lot of to like, eat. And given the current state of geopolitics, with two of the top five wheat exporters in the world currently engaged in a war, it seems like an inopportune time to be decreasing the yield on a crop that the world desperately needs.
Too bad we can’t eat diesel, eh?
Tech’s Bloodbath continues…
Written by our buddy and ex-colleague, Eric Adomowsky, who runs The Report newsletter, a few bullets on the deteriorating state of venture-backed portfolio companies:
- “According to Phil Haslett from EquityZen, the number of people and groups trying to unload their start-up shares doubled in Q1 from late last year.
- He also added that the share prices of some billion-dollar startups — unicorns — have dived 22% to 44% in recent months.
- Meanwhile, PitchBook said that in Q1, venture funding in the country fell 8% from a year earlier to $71 billion.
- Layoffs.fyi, which monitors layoffs, noted that at least 55 tech companies have announced layoffs or shut down since the beginning of the year — compared with just 25 this time last year.
- Adding to the uncertainties, IPOs — the main way startups cash out — plunged 80% from a year ago.
- Just last week, Cameo, On Deck, and MainStreet all shed at least 20% of their employees.
- Meanwhile, Fast (a payments startup) and Halcyon Health (an online health care provider) abruptly shut down in the last month.
- And Instacart slashed its valuation to $24 billion in March from $40 billion last year.”
These highlights are added context to tech’s broader public sector selloff which will likely lead to a wave of layoffs at some of these larger firms.
Bitcoin in 401(k)s?
One of the earliest pieces we ever wrote covered Passive Investing Flows, and how these flows, coupled with market cap weighted index funds, place an indiscriminate bid in the market for the assets being bought.
Meaning, that with passive investing (predominately mutual funds and target date funds), new flows in drive price up and flows out, drive price down. Over the last few decades, there have been substantially more new flows in, driving prices up, because when the fund administrator receives new flows, they don’t care about the price of the underlying stock (or other assets), they simply buy new shares. That’s passive.
Then you have market cap weighted indexes, which most of the passive inflows get placed into. A market cap weighted index is just that, an index fund that’s weighted with stocks based on the size of the company. Apple, being the largest publicly traded company in these indexes, therefore receives the largest share of new inflows.
The reason I’m bringing all this up is that Fidelity (the largest retirement plan administrator in the U.S.) announced they’ll begin allowing purchases of Bitcoin (not crypto, only Bitcoin) in 401(k) plans.
There are a lot of rabbit holes I could go down here, but I’ll just say this: for a very long time, companies that made it into an index, like the S&P 500, saw HUGE amounts of value created for shareholders, not necessarily because the company was run well, but because of the above explanation of passive + market cap weighted indices.
If you can get your company listed in an index, then on some level, you’ll have a consistent buyer (target date funds and all other passive investments) for your stock. That’s an oversimplification, but directionally correct. This is why the story a few years back of Tesla being included in the S&P 500 was such a big deal.
Getting added as a 401(k) investment option is a HUGE first step. Most workers in the U.S. set their investment options once a year at most (probably reallocate every five years or so), and so once they’re set, that’s it.
We wanted to see what our Twitter followers thought of this, and the response was exactly what I thought it would be.
Just like our political divide, the Bitcoin landscape is split 50/50.
About 46 million Americans own a share of Bitcoin. There are ~166 million workers in the U.S., most of whom have some form of retirement account available to them (401(k), IRA, SEP IRA, etc.). We won’t speculate on the actual adoption of Bitcoin in retirement accounts (but our Twitter surveys are never wrong…), but as far as the trajectory is concerned, the number is higher than today…
Next up, let’s get that godforsaken Bitcoin spot ETF approved by the SEC!
We’re only 2 years into the 2020s, but I foresee this chart being one of, if not the most important of the decade.
Most of the pros reading this already understand this concept, but for everyone else, this is a PSA that the inflation RATE (the one you hear announced every month), is different than the inflation LEVEL. The RATE (of change) is driven by the LEVEL of inflation. It’s the increase (inflation) or decrease (deflation) each month.
In a few months (hopefully) or years (hopefully not) when the RATE ‘normalizes’ to something closer to 2% (the last reading was 8.3%), the media will stop covering ‘inflation’ as a story, because it will no longer be profitable for them to do so. Without a ‘SHOCKING’ inflation rate, you won’t click on their headline, and that’s their entire business model.
Unfortunately, your wallet doesn’t care if it’s being covered or not. You pay the LEVEL, not the RATE. And the level of inflation is now sitting significantly higher than any long-term or short-term trend line you can draw on the chart. And unless we get an unexpected bout of DEFLATION (not gonna happen), that level will continue to grow from the already very high base.
So even when the headlines stop, just remember, that a new level has been set.
But don’t worry, those Ralph Lauren shoppers will be just fine…
That's it for this month!
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Also, if you didn't catch last week's Update "Capitalism at Work", now's your chance to do so.
As always, we'll see you out there...