Autumn 2018 stock market drops

[odysseus2000]

There is a compelling counter-argument: As we enter an energy constrained future, the moat of the railroads will be enhanced. Rail is much more energy-efficient than trucking, and physics ultimately trumps all.

Energy constrained? That was the thesis of peak oil in the 1970's.

Since then we have wirked out how to use renewable power with the uk at 30% and rising.

The advent of solar, wind, wave with storage gives us more practical power than we have ever had.

Railways may be energy efficient, but what matters to most of us is convenience, speed of delivery & cost. To me it looks highly probable that this will be given by electric propulsion driven by robotic systems. If that happens I do not see much of a future for rail.

Regards,

Robotic systems will enable cross-modal transitions. The most effective way for a robot freight truck to get across country, will be for it to catch a train
for the bulk of the journey

In theory yes, but when I drive on motorways overnight I see a lot of Royal Mail wagons.

If the rail system worked that well wouldn't more things go by rail?

At one time, pre Dr Beeching (spelling ?) there were rail roads every where, but many were closed & replaced by roads. Imho other than major city to city, port to city type things the rail roads are now too few & there is too much handling time for them to compete with road.

The scenarios for robotic transport often include road trains with pods that connect to the road train, then disconnect to deliver.

If it becomes possible to remove the human drivers from transport the cost is significantly reduced. If also accident levels can be reduced the overhead costs are also substantially reduced.

All of this robotic stuff may never happen, but the potential profits for any business that can make it work are so large that I expect it will come about. There are numerous practical problems but given that humans can do all of this sort of stuff there seems no obvious reason why machines that have sensory systems far more capable than a human can not also do it.

Regards,

[Spet0789]

Off topic now, but I think autonomous vehicles (cars and trucks) and cheaper electricity (solar in the US) could potentially put railways out of business within a couple of decades. They make so much more efficient use of transport corridor capacity. Google “platooning cars” for a small example.

[dspp]

The energy (and carbon) paybacks of wind and solar are pretty good (10x - 20x), sufficient to support global heavy industries including iron/steel, aluminium, and chemical. A limited amount of coal would be needed for iron/steel but pretty trivial in the overall context.

Freight rail carries a lot of coal. If you take a look at https://www.aar.org/data-center/rail-traffic-data/ it seems to me that coal is over half of US freight volumes. There is a big risk for freight rail as coal is increasingly being shut down (a combination of gas & renewables, with gas having been the major cause up until now). Please let me know if you see better splits data as this interests me (and ditto for seafreight volumes by commodity class).

Freight rail is far more efficient than freight truck for long distance transport https://www.aar.org/wp-content/uploads/ ... lroads.pdf. For the last 10/50-miles of distribution networks it doesn't do the trick, but for long distance it sure does.

If you look at pictures all along the CN-EU trail lines you will see that most, but I think not yet all, is electrified. In contrast the US freight railroads are almost entirely diesel. There is a big opportunity there for rail to both electrify and to become a electrical conduit (the US grid needs long distance reinforcement).

It is a complex story.

I don't know of any perfect moats out there.

regards, dspp

[SalvorHardin]

In theory yes, but when I drive on motorways overnight I see a lot of Royal Mail wagons.

If the rail system worked that well wouldn't more things go by rail?

At one time, pre Dr Beeching (spelling ?) there were rail roads every where, but many were closed & replaced by roads. Imho other than major city to city, port to city type things the rail roads are now too few & there is too much handling time for them to compete with road.

You're looking at the UK, where the geography favours roads. Moving freight by rail over here doesn't work well because of the shorter distances, so loading times make up a much more significant proportion of total transport time, whilst the energy efficiencies compared to road don't really apply. Also our railways are much more congested due to passenger traffic.

In America (and Canada) the much larger distances involved, especially for the West Coast railroads like Union Pacific, mean that the energy efficiency over trucks is really significant. There is little or no passenger traffic to get in the way of the freight trains, unlike the UK. And the system is already built around shipping between ports and rail hubs with trucks picking up for final delivery in most cases.

Trucks have the advantage when it comes to delivering over shorter distances, but not when it comes from moving a 25 ton container from Los Angeles to Chicago. There's nothing stopping trains from being powered by electricity, as and when that technology becomes commercially available. Some American locomotives are already powered by natural gas.

https://www.railjournal.com/regions/nor ... et-to-lng/

I remember when Berkshire Hathaway bought BNSF, there were loads of articles in the UK about buying British and European railway companies, such as First Group. These writers ignored the
completely different nature of the markets. I bought more Union Pacific shares!

[TheMotorcycleBoy]

The energy (and carbon) paybacks of wind and solar are pretty good (10x - 20x), sufficient to support global heavy industries including iron/steel, aluminium, and chemical. A limited amount of coal would be needed for iron/steel but pretty trivial in the overall context.

Freight rail carries a lot of coal. If you take a look at https://www.aar.org/data-center/rail-traffic-data/ it seems to me that coal is over half of US freight volumes. There is a big risk for freight rail as coal is increasingly being shut down (a combination of gas & renewables, with gas having been the major cause up until now). Please let me know if you see better splits data as this interests me (and ditto for seafreight volumes by commodity class).

Freight rail is far more efficient than freight truck for long distance transport https://www.aar.org/wp-content/uploads/ ... lroads.pdf. For the last 10/50-miles of distribution networks it doesn't do the trick, but for long distance it sure does.

If you look at pictures all along the CN-EU trail lines you will see that most, but I think not yet all, is electrified. In contrast the US freight railroads are almost entirely diesel. There is a big opportunity there for rail to both electrify and to become a electrical conduit (the US grid needs long distance reinforcement).

It is a complex story.

I don't know of any perfect moats out there.

regards, dspp

1 MW of wind capacity requires 103 tonnes of stainless steel, 402 tonnes of concrete, 6.8 tonnes of fiberglass, 3 tonnes of copper and 20 tonnes of cast iron. Call me when you can make all that without huge consumption of fossil fuels... Even well-sited green energy is just fossil fuel extenders at best, resource sinks at worst.

But that's only the initial investment.

Fossil fuel burning, even now, or in the past, ain't the means to everything. FWIW Aluminium smelting uses leccy as the heat provider. Sure carbon is a raw material, but not as a fuel, i.e. for energy provision.

[dspp]

The energy (and carbon) paybacks of wind and solar are pretty good (10x - 20x), sufficient to support global heavy industries including iron/steel, aluminium, and chemical. A limited amount of coal would be needed for iron/steel but pretty trivial in the overall context.

1 MW of wind capacity requires 103 tonnes of stainless steel, 402 tonnes of concrete, 6.8 tonnes of fiberglass, 3 tonnes of copper and 20 tonnes of cast iron. Call me when you can make all that without huge consumption of fossil fuels... Even well-sited green energy is just fossil fuel extenders at best, resource sinks at worst.

No I am afraid you are wrong. It is a very straightforward calculation.

https://en.wikipedia.org/wiki/Energy_re ... y_invested

The energy payback (EROEI) on a wind turbine is about 20x, and a typical turbine life is 20-years. So in the first year the turbine pays back all the energy embedded in the concrete, steel, GRP, copper, etc. The next 19 years the energy is available to run your fridge or whatever.

In contrast if you drill (say) a fracked shale well the EROEI is about 5 (or much less, but lets be generous), and a typical Marcellus shale well is only going about a year or so from drill to plug (https://www.fractracker.org/2017/10/lif ... lus-shale/) . So in the first 2-3 months it pays back its casing & tubing & cementing energy-embedded costs, and then it gets 9-months over for your car or whatever.

So that's the energy calc side of the equation. Turning to the technical viability of making concrete, steel, copper, whatever using electricity you'll find that many of these can indeed be done that way. In point of fact if you look at a lot of large mining equipment you'll find it is diesel-electric, so quite easy to hook up to the grid. And I can guarantee you from personal experience that most oil (drilling) rigs are diesel electric. Electric smelters are possible. Yes, as I have pointed out before, there would be residual petrochemical & coking needs, but most raw materials can be accessed using electricity as the fuel.

Please don't mistake me for a sandal-shod tree-hugging fluffy green bunny. I have run my fair share of oil & gas fields. But the energy economics of renewables are perfectly straightforward and increasingly economically preferable, and so too are the industrial pathways. I have colleagues these days working on how to manufacture wind turbines with zero petrochem content in the GRP itself by the way.

regards, dspp

[RececaDron]

What do you believe will be the key drivers of inflation?

We're pretty familiar with the deflationary drivers that have flowed from globalisation and technology over the past few decades. What follows are emerging or growing inflationary catalysts - happening now - which may overcome those still existent deflationary drivers and lead, slowly and in fits and starts, to a more inflationary environment than investors have been accustomed to:


- developed world fiscal expansion (being politically easier to deliver than fundamental change) unfolding as a palliative response to widespread dissatisfaction with the status quo [NB memo to the UK on this one...]

- rising developed world wages due to tightening labour markets, given a tailwind by loosening fiscal policies described above

- developed world current account deficit countries (inc. and esp. the US) benefiting from rising trade protection by capturing for themselves a greater share of global demand, and this proving supportive of the expansionary fiscal policies and rising domestic wages described above

- the ever-growing middle classes in the developing world, who hunger for all the things that developed world consumers take for granted, driving increasingly significant aggregate demand growth, the key element the global economy is/has been deficient in

- controversially: the abatement and gradual reversal of emergency monetary policies operating around the zero lower bound that have (unintentionally) suppressed consumption, investment & productivity, wages, economic animal spirits and thus growth. "Suppressed consumption" because a natural response by the prudent to near-zero nominal and negative real rates, which strongly signal to people that all is not well in the world, is to save more in order to meet personal savings goals, not spend more as CBs may hope; "Suppressed investment and productivity" because a prudent response to lower consumption and confidence is for corporates to use ultra low rates to fund buybacks through borrowing, not to borrow to fund risky investments; "Suppressed wages" because of lower productivity and lower demand; etc.


I note the way that some formerly consistent deflationary secular trends, such as those of long dated US government bond yields and total return indexes, have commenced signs of base/top formation development, indicating the possible first steps of a trend change. But too early to draw conclusions as very long term trends won't turn on a sixpence.

[onthemove]

There is a compelling counter-argument: As we enter an energy constrained future, the moat of the railroads will be enhanced. Rail is much more energy-efficient than trucking, and physics ultimately trumps all.

But things are already in motion for a radical change.

We are now seeing an irreversible shift towards electric transportation infrastructure. The political will now seems firmly in place for that.

And with that shift, that will give us an infrastructure ready and waiting for a future where electricity generation kicks up by orders of magnitude.

And why might such a kick up in electricity generation come from?

Quite simple - nuclear fusion.

Yes, I know, I know, nuclear fusion is always mañana.

But that's always been so far because why bother, when oil and gas are so cheap an plentiful.

But the theory is there for nuclear fusion. The physics is sound. It's only the engineering challenge that remains.

And just like the pledge to put a man on the moon in the 1960's, with the right political will, the right investment, we could get there fairly quickly.

Already, a number of projects round the world, like ITER, are expecting to hit a net energy positive in practice from nuclear fusion developments in the next 12 to 24 months.

Like you say, physics ultimately trumps all... people want energy, people want progress... ultimately physics already knows (in theory) how it can deliver what people want. That's the reality.

It just needs the political will to make it happen.

Another driver that might also kick start the political impetus for nuclear fusion, is perhaps Russia. With Putin becoming more and more restless, and little by little pushing the enevlope even further - chemical weapons attcks on UK soil, massive misinformation campaigns in the west to undermine western democracies and break up wester alliances, forays into Crimea, etc... it's getting ever harder for western governments to be reliant upon Russian gas to heat Europe.

A push for energy independence might just help to kick start the political will to make fusion a reality.

[TheMotorcycleBoy]

Quite simple - nuclear fusion.

In my cynics eye view, China is the one most likely to get into this.

https://oilprice.com/Latest-Energy-News ... tages.html

and weren't they the people bidding for one of our regular fission plants works (Hinckley point or something?)

[TheMotorcycleBoy]

Presumably in decades to come oil+coal+gas will get more and more pricey, so either that motivates someone e.g. the Chinese or Yanks to investigate fusion, or more likely we all die in WWIII as we fight to access the last drop, or something.

[tjh290633]

Energy constrained? That was the thesis of peak oil in the 1970's.

Do you think the Earths endowment of fossil energy has somehow increased since the 1970s? Peak oil is a geological inevitability, and gets nearer at 100m barrels per day. Every day.

We've had all the worries about peak oil in the last century. What people forget is that there is at least 200 years worth of coal in the ground. Compared with renewable sources of energy, it will probably be cheaper to use that, probably through underground gasification. It's not just a fuel, it's a chemical feedstock which none of your renewable energy is.

TJH

[dspp]

As for wind turbines, once you start adding storage and intermittency the EROI looks pretty low, particularly when you realise that the quoted EROEI tends to ignore a lot of real world energy inputs to the supply chain. Though to be fair, wind is a lot better than solar PV + storage, which has a dismal EROEI to begin with which only gets worse the deeper you look at the supply chain.

And of course, all these renewable sources are much much more expensive to set up than their fossil fuel competition. Where will the investment capital come from to fund these high cost, low and slow return power sources? Because those return characteristics are not particularly attractive. The answer so far has been subsidies and/or prohibitively high electricity bills. Who pays for those? And what else then doesnt get paid for as a result? Thats a dilemma that has a political angle.

Anyways, like dspp said, it's complex. A lot of people who have studied these problems are gloomy about what can actually be delivered, especially from unproven conjectures like fusion power.

I'll believe fusion when I can buy it for 5c/kWh.

The EROIs for wind and solar do take into account all the supply chain inputs. I've been involved in some of these well-to-wheels studies and they are very good indeed. I have done the academic side of this, and the industrial side of this / both on the oil & gas side, and on the renewables side. Don't knock the data, it is for real.

I will grant you that levelised costs for winds do not take into account storage. But neither do conventionals, and they can be just as intermittent. When you've watched a GT drop off the bars with no warning, you realise that everything is intermittent. Fortunately when you do the studies you realise that a) intermittency of renewables really is no big deal until 40% penetration, and even then scarcely matters; and b) most countries have a one-time free pass to solve intermittency by using their existing conventional fleet. Because slowly but surely that conventional fleet is being backed off the grid by CHEAPER renewables.

My own studies indicate that you can take renewables to 80% penetration at equal cost, after allowing for storage. I have not seen much public domain published in this, and because I am busy in my day job in industry I'm not rushing to publish my work. But increasingly the power station standards are being set in a technology neutral way that requires any power station to meet a set of despatchability criteria. It does not matter whether that power station is a wind farm or a CCGT, they will both need to be despatchable. It is up to the system designers how to do that (so for example the windfarm could have storage, or something else), it is increasingly becoming a moot point when building the future network.

However what is not a moot point is that whilst levelised costs for renewables may be lower than conventionals, upfront cash is not equal. If you want a quick heroin fix on your grid, then suck on oil & gas: cheap up front and pay for the rest of your life every year. In contrast renewables are all about front loading the cash and harvesting slowly over the lifetime. That is a big barrier to change, which is why adoption is slower than one might otherwise expect.

Coming back to the real subject of this thread, I think the issues are linked. It used to be that it took well over $100/bbl to cause economic downturns. Yet people are worried now. With oil still less than $100, interest rates still pretty low, deficits still rising, QE still ongoing in many countries. So cheap energy, and cheap money, and still worried. It seems there comes a point when everybody realises you can't push string. Electing populists will not solve that in any country, and will likely make things worse.

regards,
dspp

[TheMotorcycleBoy]

Thanks, for your last post Dave. As you are aware from the REDT thread I'm pretty interested in the tech side. However, for newbs like me and the OP, help me out please:

you've watched a GT drop off the bars with no warning

Do GT stand for "gas turbine?"

It used to be that it took well over $100/bbl to cause economic downturns.

And by $100/bbl you are talking about $100 for a barrel of oil? Correct?

thanks Matt

[odysseus2000]

Just a few comments.

I am now reasonably convinced that unless there is some unexpected discovery that the future will be all fusion powered, from that great big fusion reactor that we call the sun. Terrestrial fusion by contrast I rate has very unlikely. Sure there is some research on it, but a fair chunk of that is to support thermonuclear weapons although not advertised as such.

The reason for my belief that solar fuelled energy is likely the dominant energy source for the next 30 years is that it works and is being deployed by all the major economies. It is expensive to start but that is recovered over the lifetime and being carbon free it is sensible as no one knows what putting more carbon into the atmosphere is doing to the climate. With renewables will imho come extensive use of storage. Hydrocarbon usage for transport and electrical generation will imho fall away dramatically. This will hurt railways but make the air cleaner and is a very good thing imho. It will also reduce geopolitical tension as no one region will control energy production.

In the short term (5 years) I expect robotic driving to become the norm with human driven cars slowly being phased out and likely the ownership model changing to a short term rental one. If this happens I expect it to hurt railways and lead to changes in them such that they will begin to move robotic units over intercontinental distances with the robots then delivering the last part of the journey with much more business to consumer transactions that don't need a store, i.e. not helpful to high street shops.

As TJH notes there will still be demand for hydrocarbon feed stocks, but I expect substantial efforts to recycle plastics and if need be we and the US which has massive coal deposits can use these for feed stocks. In general however I expect more great recycling of all materials which is now at my local refuge depot over 60% by their measure.

All in all I am very optimistic about the future and the move towards many more humans having better living standards and with that hopefully we can better look after the environment. My only serious concern is what happens if artificial super intelligence happens. I am minded towards this being inevitable but what it will do leaves me at best ambivalent. As far as I can tell there are no tasks that are solely possible by humans, suggesting that general AI will if it happens be evolutionary and the history of the next level in evolution dealing with the previous level has never been good for the existing species.

Regards,

[dspp]

Correct matt.

[funduffer]

I'm more annoyed at myself in that we spent too much of our 20k/year ISA allowance too soon: i.e. around the summer when the market was high. I'm kind of annoyed that we only have about 2k of our (we just have 1 for now) ISA entitlement (well 1.5k now, as I spent £500 of it on Friday), till next April

I wish I'd read the Intelligent Investor's section on Dollar cost averaging and applied that concept in earnest!

I'm certainly planning to ration our buying next year better over the calendar.....

I would not beat yourself up over that. The drop in prices is fairly modest, so far, and if you are starting a long process then I would not worry.

I have been subscribing to ISAs since they were PEPs, i.e. over 30 years now. I always invest the lot on April 6th each year i.e. do not try and time the market or mess about with monthly subscriptions. Some years the market will drop from April but other years it will go up from there. It's impossible to know which will happen in any one year but, by investing early in the year, I have more in the market for longer on average and that is a good thing overall (unless markets are in a long-term decline in which case you would not invest at all anyway).

This recent move does not even rise to the level of a baby burp in my view.

I agree with this. Invest it all on April 6th. One further advantage is you get nearly a whole year’s worth of dividends that you wouldn’t have got by waiting until the end of the tax year. That’s a bit of a cushion if the market goes down, and a boost if it goes up.

[kempiejon]

I fill my allowance ASAP each tax year and I’m into unit cost averaging. I’m investing some £200,000 over the next 10 years. 20k each April into my ISA.

[odysseus2000]

What do you believe will be the key drivers of inflation?

We're pretty familiar with the deflationary drivers that have flowed from globalisation and technology over the past few decades. What follows are emerging or growing inflationary catalysts - happening now - which may overcome those still existent deflationary drivers and lead, slowly and in fits and starts, to a more inflationary environment than investors have been accustomed to:


- developed world fiscal expansion (being politically easier to deliver than fundamental change) unfolding as a palliative response to widespread dissatisfaction with the status quo [NB memo to the UK on this one...]

- rising developed world wages due to tightening labour markets, given a tailwind by loosening fiscal policies described above

- developed world current account deficit countries (inc. and esp. the US) benefiting from rising trade protection by capturing for themselves a greater share of global demand, and this proving supportive of the expansionary fiscal policies and rising domestic wages described above

- the ever-growing middle classes in the developing world, who hunger for all the things that developed world consumers take for granted, driving increasingly significant aggregate demand growth, the key element the global economy is/has been deficient in

- controversially: the abatement and gradual reversal of emergency monetary policies operating around the zero lower bound that have (unintentionally) suppressed consumption, investment & productivity, wages, economic animal spirits and thus growth. "Suppressed consumption" because a natural response by the prudent to near-zero nominal and negative real rates, which strongly signal to people that all is not well in the world, is to save more in order to meet personal savings goals, not spend more as CBs may hope; "Suppressed investment and productivity" because a prudent response to lower consumption and confidence is for corporates to use ultra low rates to fund buybacks through borrowing, not to borrow to fund risky investments; "Suppressed wages" because of lower productivity and lower demand; etc.


I note the way that some formerly consistent deflationary secular trends, such as those of long dated US government bond yields and total return indexes, have commenced signs of base/top formation development, indicating the possible first steps of a trend change. But too early to draw conclusions as very long term trends won't turn on a sixpence.

I am not sure these things will happen in the 21st century.

The big difference between now and previous manufacturing eras is the rate at which widgets can be made. Although I expect greatly increasing demand I do not expect this will lead to shortages and then price rises as I expect manufacturing will be able to deliver with increasing automation, not with people. I also don't expect resource constraints as I believe recycling will under go a step change with almost everything being endlessly re-used over and over.

I would also question if people will go with out things. The generation who lived through the Great Depression and the war would forgo stuff but the current generations seem less willing to go with out. If as I expect robotic cars become common the need to own a car and all the necessary expense will fall away and produce a huge boost to family incomes.

The current account deficits look terrible but don't seem to have much effect in practice with all the major nations happy to print money as needed something that was impossible before Nixon ended the gold standard.

In summary I think the world has moved forward and the inflationary troubles of the 20th century due to energy supply will be lost because of renewables and the supply constraints won't happen due to manufacturings ability to make more and more with less and less people and that the current account deficits and such are practically fictional as a threat and in practice don't matter.

The threat that I believe could create inflation would be a major war and there are clear tension points such as the China v Taiwan conflict, China v Japan, India v Pakistan, Iran v the West, Israel v Arabs, Putin v West and a few other. Any of these could lead to supply constraints and problems. We have lived with such issues since the second war and they may all dissipate in the by and by but for now they remain imho the biggest risk to the economy.

Regards,