Disclaimer. After nearly 40 years managing money for some of the largest life offices and investment managers in the world, I think I have something to offer. But I can't by law give you advice, and I do make mistakes. Remember: the unexpected sometimes happens. Oddly enough, the expected does too, but all too often it takes longer than you thought it would, or on the other hand happens more quickly than you expected. The Goddess of Markets punishes (eventually) greed, folly, laziness and arrogance. No matter how many years you've served Her. Take care. Be humble. And don't blame me.

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Sunday, June 5, 2016

New Ideas

It can take a long time for new ideas to percolate. My old geography teacher used to say, "people, you can't tell me that they'll put a man on the moon and bring him back alive". He was uncommonly reserved after the moon landing, with the whole class waiting to see what he'd say.  He never admitted he'd been wrong.

The famous consultancy, McKinsey, said not long after mobile phones started to become widespread, that they would never take off:

Here is a cautionary tale about a telephone giant and a management consultancy. In the early 1980s AT&T asked McKinsey to estimate how many cellular phones would be in use in the world at the turn of the century. The consultancy noted all the problems with the new devices—the handsets were absurdly heavy, the batteries kept running out, the coverage was patchy and the cost per minute was exorbitant—and concluded that the total market would be about 900,000. At the time this persuaded AT&T to pull out of the market, although it changed its mind later.

These days 900,000 new subscribers join the world's mobile-phone services every three days. In eight countries more than a third of the population own mobile phones; among Scandinavian men in their 20s the figure is almost 100%. Almost everywhere ownership is growing relentlessly, and sometimes exponentially. In both France and the Netherlands, for example, the number of mobile phones doubled during 1998. The tipping point seems to be somewhere between 15% and 20% of the population. Below that, people regard mobiles as expensive toys for business people, so it takes a long time to reach that point; but from there on, growth takes off.


And The Economist's article was written in 1999! Now there are more mobiles phones than ppl, and most of them are smartphones with computing power millions of times greater than the first IBM machine (the 701) introduced in 1952.

The same learning/experience curves are working in solar panels and their installation, in wind, in concentrated solar power, in batteries and in electric cars and buses. Just like McKinsey in the early 80s, there are many who cannot see that the cost curve declines and the growth in installations are exponential not linear. Something rising by 20% a year doesn't rise 100% in 5 years. It rises by 150%. It doesn't rise by 200% in 10 years. It rises 6 fold.

Renewables are growing by 20 or 30% per annum. That means they will go up at least 6-fold in 10 years. Already, in the world's largest CO2 emitters, the rise in renewables electricity generation each year is greater than the rise in electricity demand. We have passed the tipping point, and the transformation will only accelerate from here.

And just in case you thought that mobile phones were a special case, here are two photographs of the same New York Street, exactly 13 years apart, taken on Easter 1900 and Easter 1913.  In one, there is just one car, in the other just one horse-drawn vehicle.

(Source: Library of Congress/ National Archives; hat tip to addledlady  who pointed me in the right direction)

In just 13 years the entire technology of personal transport shifted irrevocably. In just 13 years. True, that was at that point only in  the US.   But the rest of the developed world followed over the next 25 years.

Currently EVs form just 1% of world car sales.  But sales are doubling every 18 months (BYD, the world's largest manufacturer expects its sales to double every year for the next 3 years.)  So in 3 years they will form something like 4% of sales, in 6,  something like 16%, in 9, 64% or more.  Sales growth is likely to slow after that as EVs get close to 100% of the market, ijn a classic S-curve pattern.

The implications of this shift are huge.  If you are a major low-cost oil producer with huge reserves (say, Saudi Arabia), it makes no sense to restrain production to keep prices higher, because demand is going to start falling by 2% per annum within 5 years and 10% per annum within 10 (assuming the average vehicle lasts 10 years).  You may as well produce as much as you can while you can still sell the stuff.  Expect the oil price to continue its secular decline, even if it has cyclical bounces.  Added to the impending decline in emissions from electricity generation, it also means that global CO2 emissions have prolly peaked and will start falling now, at first slowly but then faster and faster as we switch to the new energy economy.  It also means that conventional car producers and their hangers-on are in strife.  So add them to coal and oil stocks as investments to avoid,

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