The Banker, Author at Bankers Anonymous

September 6, 2024September 6, 2024

Break Up Google

August was a busy news month.

The most impactful story for all of our lives is that the federal government won its landmark case against Google, with a district court declaring the company a monopoly. We don’t know yet what the court will order Google to do, nor how Google plans to fight the ruling in coming years. Still, this case may change everything about our tech landscape in the coming decades.

GOOGLE! Too Big!

The federal government also has ongoing anti-competitive lawsuits pending against mega-tech companies Apple, Amazon, and Meta (the parent of Facebook, Instagram and WhatsApp). These cases potentially build on one another. The Google ruling depended for precedent on a Microsoft ruling from 2000. The government’s win against Google strengthens its cases against Apple, Amazon, and Meta.

Implications

I believe this will be very good for markets in the long run, in the sense that successful capitalism requires innovation, which may itself require forcibly busting up giant companies every once in a while. It could be bad for US stock market investors in the short run, with its extraordinary top-heavy reliance on a few monopolistic tech giants.

My beliefs are based on past reading on the regulation of monopolies and technology innovation, which provides historical context.

The Microsoft precedent

The previous tech bubble of 1999/2000 was kicked off by the IPO for Netscape and the subsequent “browser wars.” That era concluded with Microsoft being sued by the federal government, found to be a monopolist in April 2000, and ordered to break up in June 2000.

MICROSOFT! Avoided break-up for being too big in 2020

In the end, Microsoft appealed the ruling and was not ultimately broken into two companies as it had been originally ordered to do. There are many steps still to come before Google is broken up. Still, observers believe that, because of its loss in court, Microsoft moderated its behavior and did not come to dominate the nascent internet in 2000. Remember Internet Explorer? Yeah, me neither. The rise of Amazon, Apple, Facebook and Google themselves may be owed to the fact that Microsoft did not successfully win the browser wars and manage to shut down internet innovation with its own dominance.

Regardless of the future for Google, an optimistic view on the recent monopoly ruling is that this loss in court will open up pathways for competitors to grow and compete in search, advertising, and possibly AI services.

Monopoly theory evolved

The big thing to know about the Google ruling is that the Department of Justice and Federal Trade Commission are working on a relatively novel theory of monopolies. This is the biggest win for their novel approach in 25 years.

Interestingly, in a society increasingly inclined to view everything under a partisan lens, all of the federal investigations of Big Tech for monopolistic practices began under the Trump administration’s Department of Justice and Federal Trade Commission. The Biden administration continued the investigations and launched each of the lawsuits, except for the one against Meta, which began in December 2020 under Trump.

A simple version of the novel theory of monopolies – laid out in a book I have previously recommended called “The Curse of Bigness” by Timothy Wu – is that sheer size is its own problem when it comes to tech companies.

[LINK to October 2021 column on Tim Wu’s book: https://www.expressnews.com/business/business_columnists/michael_taylor/article/Taylor-Antitrust-action-is-not-anti-business-16528601.php]

For decades prior to this argument, the FTC generally didn’t pursue this type of monopoly case. Instead, the bar for proving monopolistic behavior was that consumers were being harmed, usually through higher prices. Companies like Amazon and Google seem to bring lower prices, so have long fought off the idea that they are monopolies.

AMAZON! Too Big!

Lina Khan, the Chairman of the Federal Trade Commission, was brought aboard in 2021 specifically to pursue these anti-trust cases against big tech companies.

Khan made her reputation as a law student in 2017 initially by arguing that Amazon was a monopolistic threat to businesses, despite the fact that

1. Amazon probably reduces consumer prices overall and

2. Amazon faces extraordinary competition in each of its market segments.

So why is sheer size its own problem? A monopolist we assume will act in its own interest. Its interest is sometimes to destroy competitors and squash any threats from innovation, which big companies can typically do successfully against small and medium-size companies. And that’s pretty much it.

We can’t reliably know what innovations come next. But certainly telecommunications, software, retail, and artificial intelligence should continue to evolve and improve in the coming decades. Breaking up overly large companies that have formed tech monopolies is a way to shape the commercial landscape so that innovation can happen.

No business likes to be attacked by the federal government, and no monopolistic company will take this lying down. They will all fight vigorously against accusations of monopoly power.

Even while I cheer the break-up of Google, and possibly the other giants, I have no ill-will toward them.

I’m typing this column into my Google Docs account, saving it to my Google Drive while checking my Google Calendar and using Google Search continuously throughout the day, before I Gmail the column over to my editor or go on YouTube to watch some important video.

Google is convenient, excellent, universal, and mostly free. But if Google’s current dominance prevents the emergence of the next world-beating technology – as monopolies typically have the power to do – then this ruling is good news.

I’m also cheering this news knowing that it could cause rocky times for the stock market.

Implications for the Magnificent 7

The other three companies being sued – Amazon, Apple, and Meta, along with Google parent Alphabet, NVIDIA, Microsoft and Tesla – constitute the so-called Magnificent 7 stocks that have absolutely determined and dominated returns of the S&P500 and Nasdaq 100 over the past three years.

The last time the government found the most important tech company of the time – Microsoft – a monopolist in the Spring of 2000, things got volatile and scary. The Nasdaq dropped more than 36 percent in 2000, 32 percent in 2001, and 37 percent in 2002. Obviously the Microsoft story was not the only thing going on then. But the volatility of early August 2024 is a reminder that markets do not like uncertainty and they generally do not like governmental attacks on highly successful companies. So maybe we are in for some rocky days with respect to these court cases.

A version of this post ran in the San Antonio Express-News and Houston Chronicle.

Please see related post:

Book Review: The Curse of Bigness by Timothy Wu

Post read (22) times.

August 14, 2024August 14, 2024

Averting College Financial Disaster – Barely

My family dodged a major financial catastrophe this Spring.

I have one large point to make about the difficulty of making optimal personal finance choices within one’s own family. In the telling of the story, I slip in some small points about paying for college and updates to 529 education savings accounts.

This story ends well, but for a while it looked like we were totally cooked, financially.

Pursuing one’s dream

In November 2021 we did an official campus tour of highly selective out-of-state private University A. Old buildings, beautiful weather. Incredible foliage. Everything you’d want based on the brochures. My daughter, early in her high school career then, fell in love. I think it was the foliage. University A became her top choice from then on.

You might think allowing her first to fall in love with, and then second to apply to, a private out-of-state university was the original sin we committed. You wouldn’t be wrong. On the other hand, she has told us for at least the past four years that going to college out of state was a primary criterion. We respected that. Also in our defense we had not been totally irresponsible with funding her 529 account, which we started when she was 1.5 years old. The account had grown to something substantial.

Unfortunately, the sticker price of higher education for private universities has also grown, but to absurd heights, over the last 20 years. What normal family can afford this? If you haven’t checked lately, the all-in cost (tuition, room & board, books, fees, insurance and transportation) is about $90 thousand per year. Multiplying that by 4 years gets you to $360 thousand for an undergraduate degree. What even? Huh?

Briefly about 529 Accounts

529 accounts are merely fine investment vehicles. They are better than nothing. They are inferior to retirement accounts like 401Ks or IRAs.

I advise parents who have to choose which bucket to place their scarce investment dollars to fund their own retirement accounts more generously than their child’s 529 account. The tax advantages, opportunity for employer-matching, and long-term growth are all superior in retirement accounts as compared to a 529 account.

Another long-time knock on – or at least fear about – 529 accounts was that overfunding these accounts could leave dollars stranded, unusable for education purposes. I know that’s possible because two different families I am close to – relatives of mine – have overfunded their kids’ 529 accounts.

A 2024 change in 529 rules has made these accounts somewhat better and reduced the risk of “stranded money.” I’ll describe the rule change below.

But first, back to my daughter’s college journey.

She received a number of college acceptances this Spring, including her dream school, University A. Yay!

Because of its prestige, it has a policy of not offering merit scholarships. This is typical of highly selective universities in which the admission office essentially says “all of our accepted students have extraordinary merit,” so nobody gets money on that basis. Boo!

University B – With a generous merit scholarship!

She also got into University B with a very generous merit scholarship. For social and sporting reasons she also strongly considered University C, which offered a decent scholarship. In April of this year she had narrowed down her choice to A, B, or C. All three out of state, and private. The sticker prices for each is wildly high, but because of the three different merit scholarships, A, B, and C had totally different actual costs for our family.

The difference between finance rules and real life

With my finance-guy hat on, I know the cost of private out of state college is utterly ridiculous. Unconscionable. Absurd. Specifically, University A would cost us more than twice the amount that we had saved up over 17 years.

University C was also in the mix as an attractive option

But I am not only a finance guy. I am also a dad and a husband. And something strange happens when you try to apply finance-guy rules to real life choices for people who you love more than anything in the world. The rules melt away in the face of your most precious relationships.

[A reader recently wrote in to chastise me for making certain choices with respect to home equity line of credit debt, which isn’t in line with theoretical best practices. That’s right, I have done that. I will continue to deviate from best practices at times. Other criteria are sometimes preferable to the finance theory.

I know deep in my bones the personal finance rule that for a student – and her parents – going into extraordinary debt for undergraduate education is not a wise idea. And yet, when it came to the moment for my daughter to decide on college before May 1st, 2024, we did not insist on her choosing the optimal financial strategy.

We said she could choose University A.

My wife and I were those parents who did not enforce the right thing financially. Because of the crazy cost of private higher education, we faced taking on six-figure debt to make her dream come true. To paint a slightly fuller picture of the University A scenario, we also would have required our daughter to borrow the full amount of Federal unsubsidized loans under her own name, which adds up to $27,000 over four years. Which is also not optimal.

Financially, this was nuts. Emotionally, however, we were not willing to deny her a chance to pursue her dream.

The new 529 to Roth IRA rules

As I promised, I also have a small point to make about paying for education. That is, while 529 accounts aren’t amazing, they just got incrementally more flexible in 2024. That’s a good thing. Beginning in 2024, surplus funds – by which I mean money in a 529 account that will not ultimately be spent on the beneficiary’s education – can now be repurposed in a very advantageous way.

Surplus 529 account funds can be contributed to a beneficiary’s Roth IRA, with certain restrictions in the fine print, as follows.

First, the 529 account must have been open for a minimum of 15 years. Next, the lifetime limit for moving surplus 529 funds to a Roth IRA is $35,000. At the current annual individual contribution limit of $7,000, it would take at least 5 years to max out this 529 to Roth IRA conversion opportunity. In addition, the IRA beneficiary must have earned at least the contributed amount of income in the year it was contributed. So for example, a student earning $3,000 in income during a calendar year could only contribute up to $3,000 to her IRA that year. Finally, funds in the 529 have to have been in the account for more than 5 years before turning them over to the beneficiary’s Roth IRA.

These are a lot of conditions to satisfy. The purpose of all these persnickety rules is to make sure the 529 account is not being used as a backdoor Roth IRA funding loophole.

This 529 to Roth IRA rule is available this year for the first time in 2024.

Which is very very good! Because we got lucky and our daughter decided to give up her dream of University A in favor of University B. With University B, because of their generous merit scholarship, we will have funds left over in her 529 account at the end of 4 years.

In my family’s particular case, we satisfy all the persnickety conditions, so we are eligible to help fund our daughter’s Roth IRA, up to $35 thousand dollars, in her early working years.

This is all subject to change if she chooses instead to go to graduate school or some other educational opportunity that is more attractive than funding her Roth IRA. She starts University B in a few weeks. Hopefully she’ll have a Roth IRA funded after her first 5 working years as well. We got lucky and it was a very close thing.

A version of this post ran in the San Antonio Express News and Houston Chronicle

Post read (104) times.

August 14, 2024August 14, 2024

Book Review: The Curse of Bigness by Timothy Wu

Editors’ Note: I wrote this for my column in the San Antonio Express-News back in October 2021. After the ruling of Google as a monopolist in August 2024, I realized I hadn’t posted it here yet. Whoops.

Prior to a few weeks ago, I was not overburdened with any particular bias or knowledge when it came to antitrust law and how it affected US businesses. If anything, I start with a bias that regulators should butt out of markets whenever possible.

Then I read a short book.

And now I recommend you read this small book, weighing in at a slim 139 pages, Tim Wu’s The Curse Of Bigness: Antitrust in the New Gilded Age.

This book not only has changed my mind about what is likely to happen during the Biden Administration. It also has changed my mind about what ought to happen.

Antitrust, I see from Wu’s history, is something that enhances markets. It improves competition. It’s usually fought tooth and nail by the target company but it can be something necessary for an industry as well as for consumers. I had not expected to come to this conclusion.

We sort of, kind of, remember that the first wave of trust busting involved the dismemberment of John D. Rockefeller’s Standard Oil into 34 regional oil companies. Far from wrecking the oil industry, the break-up in 1911 of Standard Oil kicked off a robust national oil industry of competitive and innovative firms in the US.

Exxon, Amoco, Marathon Oil, and Chevron among others thrived in the over one hundred years since. Compare those to the lumbering national giants like Mexico’s Pemex, Venezuela’s PDVSA, or Saudi Arabia’s Aramco and you would always choose our market structure over theirs. You can see in them what a problem leaving Standard Oil’s monopoly would have been.

Or take the case of AT&T, the last great antitrust break-up, in 1982. This is the most convincing part of Wu’s book, in which he connects the dots between monopoly power, innovation, and the need for antitrust regulation to improve markets. AT&T never would have chosen the path of breakup if President Nixon hadn’t initially brought antitrust action against the company in 1974.

Before its breakup, AT&T had a monopoly on long distance telephony, local distance, and all equipment that could be plugged into a phone jack. It jealously killed off innovators that threatened any of its control, like tiny MCI trying to innovate with microwave towers. As Wu tells it, cutting-edge technologies of the early 1980s – like answering machines and fax machines! – would have been quashed or controlled by AT&T. The ability to innovate with modems, to eventually allow home computers to connect to “online service providers” like Compuserve and AOL, was only made possible by breaking up AT&T’s monopoly power.

Having read Wu’s book, however, I’m jumping on the antitrust train.

Wu argues that Europe and Japan in the 1980s largely left their national telephone monopolies in place. Japan – a tech innovator in the 70s and 80s – suddenly found itself leapfrogged by independent US telephone, and then computer, companies. Nippon Telephone and Telegraph retained its size and monopoly power for too long. As Wu writes “There is, after all, only so much you can do when your innovations need to be engineered not to disturb the mother ship.”

It’s hard to imagine counterfactuals, but the sheer size and control that AT&T had over telecommunications until 1982 meant that all the innovation that followed in the United States might never have happened, were it not for antitrust actions begun by Nixon.

Fast forward to the late-1990s. Microsoft nearly established monopoly control over the internet and search engines by crushing the startup Netscape, and bullying its way to 90 percent share of browser usage with Internet Explorer. Google and Amazon and Apple too at that point were merely scrappy medium-sized companies. After years of antitrust litigation, and an ultimately rescinded order to break up, Microsoft ceded space in the browser and search wars. (Just imagine if Microsoft hadn’t backed down. We’d all be using Bing today for search. Ugh. Bing is awful.)

Now we have today’s Big Tech monopolists. Like Amazon, Apple, Alphabet (aka Google), and Facebook.

Don’t get me wrong, I love these companies. They are extremely customer-friendly. I use their products every day. I am grateful for the convenience and services they provide.

I am convinced by Wu that their size alone justifies their breakup. Notice, I did not say “destruction.” Just separation into smaller, non-monopolistic parts, like what happened to AT&T and Standard Oil.

Currently, the antitrust train against the sheer size of Big Tech is gathering steam in state capitals and Washington DC.

Their size is why Texas Republican legislators teamed up with Governor Abbott to warn large social media companies that any perceived political biases will be punished and regulated. Their size is what made the recent “60 Minutes” whistleblower story resonate, in which a former employee said Facebook purposefully emphasizes hateful and anger-inducing content, because it’s better for increasing engagement with the platform. Their size is why, when Facebook and Instagram suffered an unexpected outage recently, the schadenfreude was palpable. Many of us use these companies but we also rightly fear – and truth be told – loathe them a little bit.

Their extraordinary control over speech and media is what so angered President Trump and conservative supporters when Trump was de-platformed following the January 6th riots.

Conservative Senator Josh Hawley (R-Missouri) pushes his “Trust-Busting Agenda For the 21st Century.”

The language on his website, calling out Google and Amazon in particular, seems straight from Wu’s book. On September 30th he introduced legislation to allow parents to sue social media companies if their children were harmed.

In the wake of the temporary Facebook/Instagram outage, progressive Representative Alexandra Ocasio-Cortez (D-New York) took to Instagram to call for breaking up Facebook, Instagram, and WhatsApp, due to their size.

You could almost ignore these calls as fringe political voices. But you shouldn’t. The antitrust calls will soon be coming from inside the White House. Tim Wu joined Biden’s National Economic Council as Special Assistant for the President for Technology and Competition Policy. I don’t believe Wu joined just to have a job. Stuff’s going to happen.

Having read Wu’s book, The Curse of Bigness, I want stuff to happen. Bigness is its own threat. Bigness ultimately quashes innovation. A better society, and a better market, requires governments to at times check the ambition, size, and voracious appetites of our biggest, and yes, most successful companies.

Don’t fear the trustbusters. We don’t know yet what tech marvels would be possible from the broken-up pieces of Google. Those software engineers don’t just go away. They probably just continue to invent, but without the innovation-squashing that incumbency and monopoly create.

Chop down the tallest tree and let the forest grow.

This post ran as a column in 2021 in the San Antonio Express News and Houston Chronicle.

Please see other Bankers Anonymous book Reviews – They’re all here!

Post read (54) times.

August 8, 2024August 8, 2024

Solar II – When Energy Prices Go Negative

Texans should understand that we – despite our reputation for gas guzzling and oil drilling – are at the leading edge of the renewables-plus-battery-storage energy market in the country. We are likely to get to energy abundance here before anywhere else does.

How do we know we are at the leading edge? A few facts.

About half of the new battery storage capacity currently being built in the US is happening in Texas. Texas has 3.5 Gigawatts (GW) of storage capacity now, with the potential for about 10 GW installed by the end of 2024, or soon after.

The Electric Reliability Council of Texas (ERCOT) manages the flow of electricity in the state and tracks certain records over time. If you’d like to feel optimistic about the energy transition and energy abundance, you can see all that data regarding these records online.

Literally in mid-July ERCOT recorded its all-time record for solar energy generation.

Also June set the record for maximum wind energy generation.

Meanwhile power storage usage hit a record in May.

Below I explain a bit about why utility-scale battery storage capacity is the key to tracking and understanding the growth and potential future impact of renewables.

Texas’ Future Electricity Market – Look to Europe

European markets are ahead of the US in terms of electricity available from utility-scale batteries, with an estimated 36 GW compared to about 15 GW total in the United States at the end of 2023.

European markets have some lessons to teach us about what may happen with pricing and availability of electricity as solar and storage get built. It’s pretty exciting, although it comes with hiccups.

One fact to know is that wholesale energy prices fluctuate throughout the day.

A second fact to know is that already-installed solar has close to zero marginal cost to generate additional power. You can’t turn off the sun, and electricity produced on bright days has to go somewhere. So producers have a need to offload electricity generated, somehow, into the grid.

Because of this need to offload power, In the middle of the day wholesale electricity prices approach zero or actually frequently turn negative, in certain markets where solar capacity has outstripped storage capacity. The number of observed “negative wholesale energy prices” days is rapidly increasing in Europe as well as in Australia.

This has been happening in Germany – the country with the most solar capacity in Europe – for a few years. It started happening in Spain in 2024. The country had prioritized solar production, but not battery storage. It actually kind of freaks them out.

A negative wholesale electricity price literally means the producer will offer electricity for free or pay to offload energy.

Utility-scale Battery Storage: A key to energy abundance

Energy market observers may remember the day on April 21 2020 – early COVID 19 pandemic days – when demand for fuel got so low that a refinery in Oklahoma was paying people to remove their physical oil in barrels. That’s sort of the analogy of negative electricity prices for solar. Somebody’s got to take the energy off the hands of the producer when there’s too much of it.

To be clear, extremely low or negative energy prices for solar producers are not great for the system. If you’ve built a solar plant but then spend many days of the year giving away your electricity for free – or worse, paying others to take it – that’s not good. In the long run this removes incentives to build more solar power generation and it could bankrupt producers.

In the short run, negative wholesale electricity prices are a big problem. In the long run, it’s a huge opportunity. In the long run there’s the possibility of extraordinary energy abundance.

So who might be willing to be paid to take energy, or can receive free electricity during the middle of the day? Utility-scale battery storage operators. A low or negative wholesale electricity price for battery storage operators is amazing, as long as storage providers can resell that electricity into the grid a few hours later when the sun goes down.

Currently, Spain is scrambling to invest in battery storage. Texas seems to have already figured out the future need, and the buildout is happening now.

So what happens when utilities can access very affordable energy for significant hours of the day during a significant number of days of the year? It can’t help but keep demand and therefore prices for other energy sources in check. Solar and wind plus battery storage is nowhere near sufficient yet in Texas, but rapid growth means we should see some effects soon.

When we learn about this price-arbitrage trade of battery storage operators – store free energy from the sun and sell it a few hours later at a markup – we might be tempted to object: Profiteering!

That’s probably the wrong response. Our best response is to celebrate those early profits, as they will lead to further solar and battery investment and further downward pressure on wholesale energy prices. Which eventually links to energy abundance as well as dampened consumer energy prices to keep our utility bills manageable.

“Energy transition” in 2024 has more to do with renewables making up a larger portion of the energy mix, even while both fossil fuel supply and demand continue to grow. The rapid growth of solar and battery storage is largely a move toward energy abundance and keeping prices low, more than reducing fossil fuel usage outright.

A version of this post ran in the San Antonio Express-News and Houston Chronicle

Please see related post

Solar I – Energy of the Future (and Always Will Be?)

Post read (54) times.

August 8, 2024August 8, 2024

Ask An Ex-Banker: Financial Advisors, Indexes, Non-Public Markets

Dear Michael

You asked about any personal finance quandaries. One I think about is my ability to manage investments on my own or pivot to a financial advisor.

Major changes are coming faster. The number of US stocks (and related mutual funds and indexes) continues to decrease while more private offerings and companies could be a missed opportunity. How do I know I am current and on track and keeping up with change when needed?

My overall situation is I consider myself an average or better investor but I will never be an expert, nor have I the time or desire to be one. How do I stay knowledgeable about investment choices and know when I am not? Are the benchmarks today (i.e S&P 500, NASDAQ, etc.) still relevant or am I missing non-public upside? Should I seek a financial fiduciary?

Joe Fischer, Houston, TX

Thanks for your questions Joe, which I think many people struggle with. You ask about four related issues: Personal expertise, the need for an investment advisor, the opportunity of non-public investing, and the major stock indexes. I’ll address all four.

On personal expertise

The healthiest way to approach investing is probably to be exactly as you described yourself: “an average or better investor, but not an expert.” And not just to be that, but to know that in your bones, and to act accordingly.

Here, a Charlie Munger quote is useful:

“We try more to profit from always remembering the obvious than from grasping the esoteric.”

The recently deceased Munger was of course Warren Buffett’s billionaire sidekick and partner at Berkshire Hathaway.

Personal ignorance isn’t great, but an even more dangerous place to be is probably to believe oneself an expert and to invest like one. I have done this a variety of times and it can be a very, very expensive education in how little I actually understand.

If you understand the obvious and remain modest in what you claim to understand, that humble approach will serve you best. Munger and Buffett did pretty well for themselves.

About seeking a financial advisor

Most people with financial assets – I usually say 95 percent of people – would benefit from a good financial advisor.

People with assets who do not need a financial advisor usually have a rare combination of extraordinary self-control around investment psychology plus comprehensive knowledge of markets to avoid big mistakes, combined with a healthy modesty about their own expertise.

I can tell from your question (but also frankly from some other correspondence you shared with me over email) that you personally might not need one. But that is rare.

A good financial advisor brings that comprehensive market knowledge but sets up a good plan that takes care of the self-control part and encourages the modesty part. That good plan isn’t good because it correctly predicts a market outcome. That good plan is one which will succeed regardless of what markets do.

Finally, the good financial advisor reminds the client not to freak out when the rest of the world is freaking out because – and here the advisor must be a good market psychologist to the client – the plan was built for all possible scenarios, particularly that freak out moment.

Another relevant Munger quote about expertise: “It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”

On non-public markets

A good financial advisor does not help the client access non-public markets. The more non-public markets-oriented a financial advisor is, the more I would become skeptical about the advisor. There is just a tremendous opportunity for overconfidence, inexpertise, and frankly conflicted-interest shenanigans when advisors begin to help their clients invest in non-public markets.

When you mention the part about non-public investments and companies, I detect FOMO. This is totally fine and absolutely common but try to resist that siren’s song. All of my worst mistakes when investing have come from non-public investing in which I either believed I had the relevant expertise or believed I didn’t need the expertise.

Munger again: “When you locate a bargain, you must ask, ‘Why me, God? Why am I the only one who could find this bargain?’”

The right model for non-public investing with a financial advisor is for the advisor to remind the client each of the 27 ways the idea will go wrong in the future. Then and only then, if the client insists on throwing their hard-earned money down that particular rat-hole, does the advisor wash their hands of the client’s foolishness and move on. Then a polite advisor bites their tongue when the non-public investment eventually does go sour.

I hope that gives you a sense for whether I think you’re missing out on non-public investing in 2024.

On indexes

The S&P500 and Nasdaq indexes are absolutely still relevant in the sense of giving an idea of how the largest 500 or so companies performed, or how the tech-oriented portion of the US stock market performed, respectively. Neither is comprehensive but both indexes are indispensable. We can say they are “necessary, but not sufficient.”

The main thing to understand about the S&P 500 in 2024 is that it’s become extremely concentrated among a few holdings at the top, all of which are the largest companies in the US – Microsoft, Apple, NVIDIA, Amazon, Meta (Facebook), and Alphabet (Google) – due to their extraordinary world-dominating success over the past decade. The Top 10 holdings out of the 500 or so companies actually make up 34 percent of this index. So you live and die by how these extremely few companies go if you own the S&P 500 or if you track your stock market investments against the S&P 500. Because these tech behemoths have been so successful, very few other investments – public, private, fantasy or otherwise – match up favorably with the results of the S&P 500 over the past decade.

That will not always be true in the future, to paraphrase that important financial disclosure written in the fine print of every single brokerage statement you’ll ever receive.

Similarly, with the Nasdaq, you should understand that this is skewed toward information technology and biotechnology companies, not for example consumer staples, utilities, or real estate. It’s totally fine for what it is, it’s just not comprehensive or representative of the US economy. It also shares the same largest 6 companies as the S&P 500, and its top 10 holdings (out of 100 or so companies) make up more than 48 percent of the total, so it’s even more skewed and top-heavy than the S&P 500.

To track a different index of the US stock markets and a broader segment of the US economy you could look at the Russell 2000, which tracks small cap public companies from every sector. But nobody is moving away from at least comparing their stock holdings to the S&P 500, the Nasdaq, maybe the Russell 2000, and that old standby the Dow Jones Industrial Average.

You’re not missing anything new there. If you own international stocks – and you should! – then you’d compare that against one of the MSCI indexes that closely matches your international exposure.

financial_architects_llc — He writes a really good monthly and quarterly

One final note about investment advisors. I do not have one myself, but I subscribe to newsletters from a few. These Munger quotes above come from one of the recent newsletters from one to whom I’ve happily recommended friends. Having a good investment advisor for most people will absolutely more than make up for the roughly 1 percent of assets the advisor may charge annually. On the other hand, having a mediocre or bad investment advisor will not be worth anything, or could be worse than nothing. If you do go shopping for one, I hope my comments about what a financial advisor properly does will help you sort the good from the mediocre or bad.

Please see related post:

Book Review: Simple Wealth Inevitable Wealth by Nick Murray

Post read (16) times.

July 23, 2024July 23, 2024

Solar: Energy of the Future and Always Will Be?

Shortly after I moved to Texas in 2009 I began to hear about the massive discovery of shale-based oil and gas deposits in South Texas and West Texas, plus improved horizontal-drilling technology and techniques. It all pointed to, and indeed was, an American onshore energy revolution. Since then the United States has become the dominant oil and gas producer in the world. This development has been extremely positive for the Texas economy and the US economy.

Solar_cover_economist — Big claima last month from *The Economist*

As a markets guy, another thought I had back in 2009 was: “Welp! I guess solar and wind aren’t going to become price competitive for another generation?!” Fifteen years later, I still think that was the correct instinct.

This is background to a bunch of dramatic claims made in late June from the ordinarily staid The Economist magazine, which declared that exponential growth in solar technology as an energy source is poised to change the world over the next decade.

All things being equal…

I’m not neutral on the issue of renewable solar power versus other sources, although I’m relatively industry agnostic. All things being equal, I like the idea of renewables more than fossil fuels.

“Solar is the energy source of the future…” sounds like a claim I’ve been hearing since I was a kid in the 1970s and my parents installed some panels on our home’s roof. “…And always will be,” is the kiss-of-death epithet that has described solar since then, as compared to fossil fuels.

All things have not been equal, and fossil fuels have remained cheaper and more reliable under all weather conditions as our primary energy sources through 2024.

Energy abundance should be the goal

What I really am in favor of is energy abundance, because it spurs economies, innovation, and leads to a wealthier and even more egalitarian society. Energy abundance is why the simultaneous discoveries of the Eagle Ford shale and Permian shale deposits with improved horizontal drilling were good news (despite their role in delaying the attractiveness of renewables.) The hope for further energy abundance is why it would be amazingly good news if the growth of solar lived up to anything like the recent hype from The Economist.

Points for techno-optimists on solar power:

So here are some techno-optimist points in favor of The Economist’s dramatic claims about the growth of solar.

While the US currently depends on fossil fuels for 88 percent of its energy usage, renewables hit an all-time high at 8.8 percent last year, just now surpassing coal (8.7 percent.).

The Economist further claims that while currently 6 percent of the world’s energy is supplied by solar, in a decade from now it may be the largest source of energy in the world. That’s a big claim for a relatively short time period. It would be revolutionary, if true.

Solar capacity worldwide has grown 23 percent per year for the last five years. Compounding effects at 23 percent make for huge future gains. When you apply high annual compound growth rates like that, mathematically the results over a decade are astonishing. From an admittedly low base, it’s the growth rates of both solar and battery storage that have people jazzed up.

We should remember that the techno-optimist case for solar (as well as wind) relies on the concomitant growth in battery storage plants and technology. Utility-scale battery storage sites need to be deployed alongside solar and wind generating plants for when the sun don’t shine and the wind won’t blow.

So that is largely why The Economist claims “solar cells will in all likelihood be the single biggest source of electrical power on the planet by the mid 2030s,” just a decade from now.

Of course continuous compounding growth – aka exponential growth – is hard to do in the real physical world, because of supply constraints.

But there is some evidence even here in Texas that compound growth is actually happening.

The evidence, in part, is utility-scale battery storage.

Economist Noah Smith has argued recently that the revolutionary technology of the next decade will not be AI, but rather the staid battery. Batteries – especially utility-scale battery storage of renewable energy – might just change everything.

Energy Information Agency

As of November 2023, Texas had installed utility-scale battery storage of 3.2 gigawatts, the second-most behind California’s 7.3 gigawatts. Texas’ battery storage capacity was roughly equal to all of the next 48 states combined. So that is a good start for the state. But we are getting better.

The US Energy Information agency listed the five biggest new construction battery storage projects in the US, of which four are in Texas. Each of these individual deals, bringing new storage capacity online in 2024 and 2025, is larger than any battery project currently operating in Texas.

Then consider this data: The EIA in May 2024 lists battery projects in Texas currently under construction or completed but not yet operational with a total capacity of 5.4 gigawatts, representing 170 percent growth over our current capacity in the state.

Battery-storage capacity – the key to renewables’ growth – is roughly doubling each year in Texas, in the United States, and globally.

Meanwhile solar projects in Texas with the same status as those battery storage projects in May 2024 – under construction or completed but not yet operational in 2024 – total 10.6 gigawatts.

Other important signs: According to a report by think tank RMI, battery costs have dropped 79 percent over the past decade. That same report points to global solar generation capacity doubling every 2-3 years for the past decade.

fka the Rocky Mountain Institute

The virtuous cycle needed for exponential growth depends on the simultaneous rapid drop in costs along with economies of scale and improved technology.

Solar finally cheap enough?

“If it’s cheap, it shouldn’t need a subsidy” is a slogan I mostly endorse. Compared to fossil fuels, for the past few decades, renewables have not been cheap enough, without subsidies.

Of course, it’s theoretically fine to subsidize – and we have been subsidizing – future technologies that need a little extra boost to reach their full potential. But part of a true solar revolution – a 10x increase in usage from here – requires solar costs to beat fossil fuels under most scenarios. “Solar is the energy of the future…and always will be” is the fear of observers like me who think renewables should eventually be much cheaper, without subsidies.

Improved battery technology and massive increases in capacity provide the possibility that solar can finally be cheaper than fossil fuels. Fingers crossed.

A geopolitical cautionary thought: China is the absolute leader in technology and production of solar panels – running 80 to 90 percent of certain parts of the global supply chain. The government of China has, for strategic reasons, subsidized this dominance.

The Biden administration just increased tariffs in May 2024 on solar cells from China from 25 to 50 percent, which in the best case scenario allows the US, or other Western countries, a chance to build competitive solar manufacturing capacity, but will raise prices on solar panels in the short and medium term. That’s a big potential bump in the road to exponential growth.

“Are we there yet?” is both an annoying question from the back seat during a summer road trip, and also a relevant question for futurists’ hopeful thinking around the rapid development of renewables capacity.

The Economist says we are there, yet. The data on Texas from the EIA says we are there, yet. Energy futurists suggest we are there, yet. With energy abundance as the goal, I hope that over this next decade we are there, yet.

A version of this post ran in the San Antonio Express News and Houston Chronicle

Please see related posts:

Book Review: The Green and the Black by Gary Sernovitz

The Natural Gas Revolution Part I – Mad Max Bizarro World in South Texas

The Natural Gas Revolution Part II- No Dry Wells in South Texas

The Natural Gas Revolution Part III – What a Fracking Site Looks Like

The Natural Gas Revolution Part IV – How Large is Large?

The Natural Gas Revolution Part V – The Labor Market

Post read (101) times.