(The) Future Returns
Monday 5 April 2021
The global economy is on course for a major recovery that will likely extend for several years. And in a throwback, the United States will spearhead the boom. The employment report, delivered Friday, April 2, was stellar at 916 thousand jobs created. Distribution of the gains across industries was particularly encouraging, with manufacturing and construction clear standouts. While the usual nitpicking gathered around the details, the previous two months were also revised upward. Those additions to January and February added another 156 thousand to the payrolls—a pat on the head to those forecasting a number close to 1 million.
Also reporting on Friday were vehicle sales, which came in well above expectations at an annual rate of 17.75 million. To get the true flavor of the market, it’s always advised to head over to the Detroit Free Press, and their story did not disappoint. According to Ford dealers, this year’s car sales frenzy is like last year’s toilet paper panic. What’s both familiar and unique to this new cycle now getting underway is that it’s being led by housing and autos. But underneath that seemingly textbook explanation lies the fact that this will be a very different auto cycle, one marked by massive investment in battery capacity and the transition to the EV drivetrain. Volkswagen’s Power Day presentation last month was in one sense a kind of big bang, in which the market was jolted with a new reality: for EV to take off, it is not a question of who will win the battery race, but rather, how will the collective auto industry globally manage to create enough capacity to meet demand. The same question holds true for raw materials like lithium, and of course semiconductors. When Taiwan Semiconductor announces it will invest $100 billion over the next three years(!) to increase production, that’s a signal we are entering a cycle that goes far, far beyond the simple restart of existing capacity.
If by chance you want to fret about the quality of the recovery, you could reference the IMF’s concern that it will be uneven, with emerging markets failing to fully participate. That’s probably true. And it’s especially frustrating that Europe, also cited by the IMF, will also lag. But the EU will lag in an unusual way. Without having done much fiscally to combat the pandemic (how typical) it’s hard to escape the idea that Europe now spies an opportunity to instead draft off the wheels of America’s recovery. If that’s the plan, conscious or not, then industrial economies like Germany and France will do well, but will once again leave southern Europe to rely solely on tourism. While it’s certain that tourism will bounce back strongly, that type of cycle is short-lived.
All this said, it’s increasingly undeniable that the coming boom will be much more than just a simple reopening. This cycle will be very heavy on technology, infrastructure, deployment of industrial products, and yes, resource extraction. Take a glance at the components of Germany’s DAX or the Dow Jones Industrial Average to get a flavor of what’s in store. Thus, after a terrible year in so many ways, one has a very real sense the future once again exists, and that’s very good news.
The annual mean wage of all jobs in the solar electric power generation industry has now surpassed the annual mean wage in the oil and gas industry. There are likely some gaps and holes in the comparison, as one industry is emerging and the other has many legacy positions. For example, managers in solar might be higher paid than in oil and gas, but line workers in oil and gas may get paid alot more. Industry comparisons are never perfect. That said, the solar industry’s mean wage of $98,230 compared to $97,660 in oil and gas is a directional signal. Indeed, when the offshore wind industry gets going on the eastern seaboard with its heavy call on specialized ships and deployment at ports, wages are going to look very similar to those seen in global trade, shipping, and offshore oil and gas.
Ember, the UK based energy think tank, released its global electricity review of 2020. This is a new offering that’s extremely helpful to researchers, arriving as it does several months before the BP Statistical Review, which typically isn’t released until summer. In its report, Ember plays close attention to one of the best metrics in our energy transition: combined wind+solar’s market share growth. In the chart below, not only do we get the news that wind+solar has now reached 10% of global electricity, but you can see the five and ten year progress of the two technologies in G20 countries. Something also stands out: the close proximity to the market share reading of wind+solar in China, and in the world at large.
Neil King, the former Wall Street Journal reporter who most expertly covered oil’s majestic bull market (and its crash in 2008), is walking from Washington to New York and telling great stories along the way. King’s passage through Civil War battlegrounds, colonial architecture, and road markings—and even a rare petroglyph in America’s northeast—is fascinating. The thread starts below, and is highly recommended.
Battery capacity and lithium supply are not new concerns, but we should pay close attention to the world’s ability to supply them adequately as EV adoption soars. Gene Berdichevsky, who was the seventh employee at Tesla, now heads up Sila Nanotechnologies, a battery start-up. Berdichevsky makes an important point already referenced above, and which will become increasingly understood: we should think less about who wins the battery race, and more about how we will supply all the coming demand collectively. He also observes we are right in the middle of a 100X transition, from the world requiring 20 GWh of battery production in 2010 to 2,000 GWh of production required by 2030. (!!!!) You can hear more of Berdichevsky’s remarks in this excellent podcast from The Interchange. (Another good source to keep up with the battery buildout is through Simon Moores of Benchmark Mineral Intelligence, who now describes the situation as an arms race.)
While the lithium supply chain is a bit harder to characterize, one general assertion seems right: the world has plenty of recoverable reserves of lithium, but development is slow, and as with other natural resources, is often hampered by political landscapes in the developing world. This suggests that focus (again, very generally), may start to shift to developed world domains like the United States. The Gregor Letter has covered the lithium story previously. But if lithium extraction increasingly migrates to the US, then friction will break out across environmental fault lines, with potentially intriguing conflicts between local concerns and national needs. Perhaps that’s an old story. But one still worth consideration. This High Country News coverage of the BLM’s approval of the Thacker Pass mine suggests just such an era has begun.
Gold continues to falter as the recovery gains steam, and interest rates remain under pressure. It’s been a few months since The Gregor Letter made remarks on gold, but the original thesis laid out last year holds true. Contra public perception, gold does not thrive on inflation but rather deflation as a supreme non-yielding asset, with long duration. Not unlike a long bond. Gold’s spectacular but brief run into the highs of late summer in 2020 almost perfectly captured the ominous threat of a long, deflationary period. And then, poof. The initial vaccine news placed alot of pressure on the yellow metal, and this year’s backup in rates has done further damage. If, at some point in the near future, inflation does get out of hand it will be a perfect test to see if gold (as advocates claim) has the ability to transmute, switching tracks to become a safe haven. But if you hold the view that inflation will run hot, but will eventually dissipate, we may not even get to run that test. One phenomenon to track as the recovery gathers pace: does the return of labor and the restarting of capacity eventually perform as expected, smoothing supply of goods and services to meet demand.
The Biden Administration released its infrastructure plan, a kind of big bang for clean energy. The Gregor Letter will examine the details over the next several issues, but the key takeaway for now is the extreme focus in the plan on making sure Detroit and the US more broadly don’t miss out on the grand upsweep of the EV adoption curve. The Biden team is thinking about everything from semiconductors, to charging stations, to battery capacity. Tesla, regardless of your opinion of its valuation, is solidly in the corner of the US. And frankly, that is a great puzzle piece to have in the arsenal. Tesla was early to the battery capacity game (the new great game, to be honest) and that gives the US an edge. But China and Europe (via Volkswagen, mainly) are looking fearsome. So it’s not for nothing that a $2 trillion infrastructure plan has $174 billion targeted to everything that surrounds America’s EV competitiveness. While we will have to wait months before we get a sense of how much of the proposal will pass, one gets the sense already that opposition is weak. Very weak. There’s enough in this plan to sate both urban and rural populations, and coming out against it would therefore not likely be popular in Ohio, Wisconsin, Pennsylvania, or Michigan. As many are now observing, the Biden team has learned from the mistakes of the Obama presidency. That doesn’t explain all the difference of course. The landscape has changed also. But the pandemic year has made many things possible. This seems a rather cruel observation, but such a dynamic has been seen often in history. More and more, 2021 is feeling like the beginning of a post-war era.
—Gregor Macdonald, editor of The Gregor Letter, and Gregor.us
The Gregor Letter is a companion to TerraJoule Publishing, whose current release is Oil Fall. If you've not had a chance to read the Oil Fall series, the single title just published in December and you are strongly encouraged to read it. Just hit the picture below.