Juggling Dynamite

Mark Z. Jacobson needs the patience of Job.

Not only does he lead by example, living in a zero-emission house and drive a zero-emission car that consume zero energy to run (actually, he gets money back from the grid). He is a civil and environmental engineer who has held a doctorate in Atmospheric Sciences for nearly 30 years. He’s been at the forefront of climate science since the early 90s and helped spearhead the Solutions Project out of Stanford University in 2013 which invested the work to create and publish blueprints on how every country, state, province and major city worldwide can transition to 100% renewable energy by 2050. Their website is here.

Jacobson has also written over 165 peer-reviewed papers as well as three textbooks, the most recent being the very enlightening 100% Clean, Renewable Energy and Storage for Everything, which I highly recommend as a valuable resource for daily fact-checking in the area of energy and storage.  In 2019, he was selected by Apolitical as one of the world’s 100 most influential people in climate policy.

In a world full of nay-saying non-experts, science-deniers and status quo sponsors, Mark continues to study and explain what we are doing wrong and how to fix it.   His latest interview with Resilience.org is worthwhile as the interviewer presents many of today’s commonly heard contrary talking points.  See Mark Jacobson on the clean energy transition.  For those who don’t wish to read the whole thing, here are a few key excerpts:

AA [interviewer]: Yes, sure, but if you keep growing the economy and you need more and more energy, even from 100% renewables, you’re going to have to do a lot more mining (to get all the materials for turbines and so on) to keep pace with that and is that really going to make the emissions go down? All that neodymium and lithium and aluminium?

Mark Jacobson:  First of all, when you transition to electrifying the energy sector, you have a 57% reduction of demand just by electrifying. And if you reduce that much you’re not going to grow energy demand worldwide that much. People are also going to be using energy efficient technologies…

MJ: First of all, rare earths are not rare, they’re everywhere. They’re not rare elements, but they are dispersed and not found in many concentrated deposits that are economically exploitable. And for something like lithium, every time they look they find more. It’s a question of looking…

AA: You’ve articulated a technical vision very well for how we can respond to the climate crisis. We already have the technology we need. Here’s the puzzle. So many people around me, STEM students, other Professors, keep harping on about how technologies that don’t yet exist are going to save us. Why?

MJ: I think there are just enough people pushing those ideas. Especially in a University like my own, I can see where those ideas come from.  They come from the energy resources engineering department which used to be called petroleum engineering. They come from a few economists who, for a lack of a better word, like fossil fuels. They might have been climate deniers, and now they believe, but they resist rapid change, they like the status quo. There was a Princeton study, it did a largely renewables scenario, but it was funded by ExxonMobil and British Petroleum (BP). MIT has large funding from fossil fuel interests and Stanford does too. At our School of Earth Sciences at Stanford, every faculty member gets two paid-for students. That comes from royalties from the oil and gas industry, since the 1950s…

I’ve been in or around politics for over a half-century now.  I’ve watched as corporations ransacked our system. In 1952, the corporate share of federal tax revenue was 32%. In 2020, it was down to 7%.  Here is a direct video link.

Wishful thinkers maintain that this cycle is different. Fundamental investment measurements (Price to Earnings, Price to Sales, Price to Book, etc.) are old-school irrelevant in a brave new world of technological disruptors and fee-free momentum traders.  But those of us who have lived through a few cycles and retain financial history can’t help but note that we’ve heard this all before.

In the 2002-08 cycle, the narrative was all about an insatiable demand for commodities that would keep ‘hard asset’ prices, realty and corporate securities leaping indefinitely.  In the 1993-2000 cycle before that, it was all about the game-changing internet, technology companies and a brilliant central bank head that would keep the economy and corporate security prices leaping well past traditional measurements evermore.

Fast forward to 2o21, and the narrative is again all about game-changing technology, escalating earnings forecasts and all-powerful central banks which ‘won’t let prices go down.’  If only these could ensure investment returns!

As I have discussed frequently, the time-tested reality is that even great companies and properties can be terrible investments depending on the timing and price paid.  GMO analysts explained this further yesterday in There are no bad assets…only bad prices.

In the chart below, GMO shows (lower left in green) the earnings per share (EPS) forecasts compared with the S&P 500 price index (in red) over the 7 years between March 1993 to  2000. While EPS forecasts rose at a healthy clip, stock prices leapt 69% faster (before collapsing 50 to 80% between 2000 and 2002).  On the lower right, they show a similar pattern over the last 7 years, where stock prices have grown 70% faster than already jubilant EPS forecasts. In our May client letter, we noted that today’s pricing disconnect reminded us of the 2000 cycle very much.  Because we were there!! We lived it, and no one within 20 years of their retirement today can afford to forget how these pricing overshoots end.  My partner Cory’s NASDAQ chart below from June 1998 through August 2002 offers a full cycle study.