Books - Q4 2024

This quarter we managed to read ten books, the only 5/5 being a re-read. In Q3 2024 we read ten, with three 5/5s. In Q2 2024, we read seventeen, with two 5/5s. In Q1 2024, we read seven, including one 5/5. A total of 44 for the year - not quite one book a week.

• Growth: From Microorganisms to Megacities (3/5) Vaclav Smil wrote a 664 page book to tell us that "growth must come to an end." This book makes it clear that he is a Malthusian physicist as opposed to a cornucopian economist. He is also a communist, demanding that we should be "reducing life's inequalities to tolerable differences." Still, he has worthwhile information to convey. "The coming transition from fossil fuels to renewables will not be an exceptionally speedy affair." "Exponential growth, natural or anthropogenic, is always only a temporary phenomenon, to be terminated due to a variety of physical, environmental, economic, technical, or social constraints." "All diffusion and adoption processes must conform to that general pattern: no matter if their early trajectory shows rapid or slow progress, it is eventually followed by a substantial slowdown in growth rate as the process asymptotically approaches saturation..." "Logistic growth has its kinetic analog in the motion of a pendulum as it progresses from rest to rest with the highest velocity at the midpoint of its trajectory.""Shares of coal and oil consumption have remained surprisingly flat rather than falling steadily, largely a result of vigorous demand for steam coal and transportation fuels in Asia..." "Since 1900 the maximum battery energy densities rose from 25 Wh/kg for lead-acid units to about 300 Wh/kg for the best lithium-ion designs in 2018, a 12-fold gain that fits a logistic curve predicting about 500 Wh/kg by 2050. We must hope that new discoveries will vault us onto a new logistic trajectory as even 500 Wh/kg is not enough for battery-powered machines to displace all liquid derived from crude oil..." "The long-term trajectory of English wheat yields is the first instance of a very common growth sequence that will be pointed out many times in the coming chapters of this book dealing with technical advances. Centuries, even millennia, of no growth or marginal improvements preceded an eventual takeoff that was followed by a period of impressive gains... recent decades have seen many of these growth phenomena approaching unmistakable plateaus..." Passenger-kilometers "is one variable describing the growth of global aviation that is still following an exponential ascent." "The growth of commercial aviation could thus be summarized by the following four growth curves. Passenger capacity and the cruising speed of airplanes displace clear sigmoidal (Saturation) curves. Improvements in operating efficiency of jetliners (energy required per pkm or per seat) show linear improvements... And the growth of worldwide air traffic (in pkm) has seen exponential growth..." It is great if you can find a royalty on exponential growth, where the capital investment is being funded by others. Regarding the Malthusians: the Limits to Growth and Erlich's book (The Population Bomb) were both published right as the annual rate of world population growth was peaking, at over 2% growth per year. The growth rate has plunged and is now below 1%. Smil thinks that we are well past peak innovation: "the period between 1860 and 1913 was a unique historical phenomenon that may have no similar follow-up." (His book Creating the Twentieth Century: Technical Innovations of 1867-1914 calls that time period "the greatest watershed in human history since the emergence of settled agricultural societies.")
• The Next Two Hundred Years: A Scenario for America and the World (5/5) Reread this. (Previously.) Vaclav Smil should read some cornucopian thinkers for a different perspective. Wonder what Smil's investment portfolio looks like? Kahn thought that we were living in a transitory era: a time between world penury and world prosperity. He differentiated between primary, secondary, tertiary, and quaternary economic activity. Right now we are quaternary: a service economy. As the world becomes even richer, he predicted that postindustrial economies would emerge, where the task of producing necessities has become trivially easy, and a greater share of the population is involved in quaternary activities. The quaternary sector does not process the output of the tertiary sector. It has only limited and indirect connections to the industrial economy. Think of people making a living as Instagram influencers. Some highlights, which we may or may not have posted the first time we read. Kahn predicted a labor shortage in the developed world, where citizens no longer wished to perform jobs at the bottom of the socioeconomic ladder. (We see this happening now: "there are no anonymous servants now," as Empty America says.) He predicted that tourism would become one of the largest industries in the world, since wealth and income would grow and people have an insatiable desire to travel. He pointed out that as countries get richer, the upper middle class fares worse while the lower classes do better. "Objections to growth by the elites [arise] directly out of this class interest." Still amazed that he predicted we would get oil from shale formations. Since it takes a special set of circumstances for petroleum to migrate from the source rock to reservoir rock and be trapped, there should be vastly more oil in the source rocks than was extracted from the reservoirs over the past ~century.
  
• The Coming Boom: Economic, Political, and Social (4/5) Reread this. (Previously.) The Next Two Hundred Years is clearly better as a cornucopian work. Something that we didn't notice the first time in this one was his discussion of political coalition building and compromise (mentioning The Emerging Republican Majority): "Reagan will not support any group all the way down the line. The nomination of Sandra Day O'Connor to be the first woman on the Supreme Court was a victory for the women's movement; Mrs. O'Connor's less than definitive opposition to abortion was a great disappointment to Reagan's pro-life supporters. Anyone who voted for the president on a 'one-issue' basis is going to have to accept the trade-offs necessitated by political realities." Kahn thought that the Reagan administration should support moonshot energy abundance projects like synfuels and coal to liquids. But he realized: "such intervention goes directly against the ideology of the Reagan administration and against its current high-priority programs. This is a typical situation where a general ideological position which may well hold in most cases should not be held to a fanatical degree or to the extent that the appearance of ideological consistency is maintained at any cost." Kahn thought that the federal debt in 1982 was no big deal as it was a small percentage of GDP - now it is much larger: almost 100%. You can also express it in per capita, real (divided by CPI) terms and the federal debt is $220k per working age person which has almost tripled (in real 2020 dollars) over the past 20 years. This is what makes us think that the system is going to pick inflation (including yield curve control) as the path of least resistance.
• Fragile by Design: The Political Origins of Banking Crises and Scarce Credit (4/5) This is by Charles Calomiris, who wrote the paper last year about "fiscal dominance" (our review) and predicted large and inflationary purchases of government debt by the Federal Reserve. The question he is trying to answer is, "Why stable banking systems are so rare?" Something that we never thought about is that the U.S. has had 15 banking crises since 1836 (if you count 2023, which was after the book was written), while Canada has not had one since it became an independent country in 1867. Calomiris calls this a "nonrandom pattern of banking crises." The countries with the most banking crises are Argentina and the Congo. Key thought: "the property-rights system that structures banking is not a passive response to some efficiency criterion but rather the product of political deals." We gradually realized in recent years that inflation is a political question, not something that can be predicted endogenously the way Prechter, Hussman, or Lacy Hunt think. (And the three of them have erroneously predicted deflation because they have the wrong model for this, not realizing the political component.) This is why we have been conducting a reading program in bailout studies. We just went through a bank failure cycle last year and we approached it using what we call a "cynical optimism" heuristic: the system would let a few institutions fail before stepping forward with a bailout. (In this case, the Bank Term Funding Program.) In contrast, those who remained (and perhaps still remain) bearish have what we would call a "naive pessimistic" view. The banks will all fail because the math says so; there will not be bailouts or the bailouts will not be efficacious. (See this tweet.) Something else about the recent bank failure cycle that surprised us was how sticky the banks' deposits were. We were concerned that depositors would flee bank deposits for higher-yielding (and safer) opportunities like Treasuries and money market, but noninterest-bearing deposits stayed above $4 trillion. Banks were able to earn an immense (>5%) spread by investing those deposits in T-bills. And total deposits are climbing again though are a bit below the all time high of $20 trillion. It must be the case that American businesses and individuals have cash working capital requirements of trillions of dollars, which is bullish for banks. (As Calomiris says, "the transactions costs and legal constraints of avoiding the deposit market are prohibitively high for some purposes.") If you need to keep bank deposits, then the government can tax you via the inflation tax. ("The autocrat can pretend to be helping the poor the whole time that he is insidiously taxing them, by providing well-advertised government welfare programs financed through the inflation tax." "Rich people tend to hold much of their wealth in assets other than cash, and those assets tend to hold their value against inflation." "Making the trick neater still, bankers and bank shareholders typically share [with the government] in the revenues from the inflation tax.") In the long run, the population will try to "evade" the inflation tax by avoiding holding cash or bank deposits, which reduces the inflation tax base. That causes the real revenue earned from the inflation tax to decline. (With this framework, you can see why inflation has a tendency to spiral out of control. If the inflation tax base shrinks, you need a higher rate of inflation to extract the same real inflation tax revenue.) History of banking: "Chartered banks and nation-states emerged as organizational forms at the same time... the two institutions coevolved because banks helped to align the incentives of the three groups crucial to the creation of a viable state: rulers, merchants, and financiers." Calmoris points out that nation states went from universal suffrage to fiat money to inflation in short order: "neither the central bank nor the government could afford to neglect the short-term political costs of high unemployment." (Recall the Durants in The Lessons of History concluded that, "history is inflationary.") He also offers a good critique of populism: "Precisely because there is nothing magical, or even necessarily competent, about decisions made through mass suffrage, liberals believe that democracy functions best in the presence of ancillary institutions that provide additional constraints on tyranny, including the tyranny that may be created by a democratic majority." They do this "by forcing legislation to pass through 'veto gates' (decision points at which legislation can be blocked by small groups)." "In the liberal conception of democracy, unless there are institutions that allow minorities to veto majorities, mass suffrage can, paradoxically, undermine the very goal of democracy - the existence of a free and just society." He points out that under populism, "debtor relief often destabilizes the banking system by undermining creditors' property rights; and in the longer run banks simply extend less credit, because they know that they are vulnerable to expropriation by debtors in coalition with politicians." Interesting concept mentioned by Calomiris: you can measure the quality of a country's property rights by looking at its proportion of contract-intensive money: the paper promises that require a high trust society. You can measure it as the proportion of M2 money supply that is solely currency (as opposed to M2's other components), or you can look at the insurance sector as a percentage of GDP. (Nobody in the Congo is buying annuities or whole life insurance.) Something else interesting: "U.S. banking crises were uniquely predictable events... Preceding WWI, every quarter in which the liabilities of failed businesses rose by more than 50 percent (seasonally adjusted) and the stock market fell by more than 8 percent, a panic happened in the following quarter." Buy gluts and sell shortages: "World War I was good for American agriculture, as worldwide food shortages pushed up prices. Those shortages, however, were short-lived. As world output grew, agricultural prices collapsed, and unit banks in rural areas of the United States began to fail." "Most of the banks that failed during the 1920s and 1930s were located in agricultural areas, and the evidence indicates that the primary contributor to bank distress [was] declines in agricultural income and land values both in rural areas and in cities." The increased agricultural yields drove down commodity prices; can we say that cornucopia caused the Great Depression? The real wheat price had already been declining for a century at the time of WWI, but that episode caused a price spike. Maybe one last theme worth mentioning: Calomiris thinks that Clinton did a lot to weaken residential mortgage underwriting and encourage risk taking, but when Bush got into office he poured gasoline on the fire. (As we know, this was based on Bush's idiotic idea that making people homeowners would make them vote Republican. The financial crisis and the Iraq/Afghanistan wars are the legacy of Bushism.)
• The Missing Billionaires: A Guide to Better Financial Decisions (3/5) Written by Victor Haghani, one of the Long Term Capital Management principals, who is now an RIA. There's a great review on The Tom File, where I also posted a comment about what, to me, is the interesting question: the missing billionaires. (The book does not actually address the puzzle of where the missing billionaires went, but I think the answer is that most rich families' wealth is dissipated by extravagant spending by the heirs and by taxation of income and estates.) Their mantra: "the optimal bet size, expressed as a fraction of wealth, is directly proportional to the gamble's expected return, and inversely proportional to its variance and to [the gambler's] personal degree of risk-aversion." The key to understanding Haghani is that he is very quantitative and in his investing career has operated at a very high level of abstraction. None of the strategies at LTCM involved investing in the Warren Buffett sense of becoming a part-owner of an attractive business. We have come to believe that the public markets are actually amazing because you can become an owner of a business that is far better than any business that you could buy or create from scratch. (Buffett said "the best business is one that is a royalty on the growth of others," and also "you’ll never buy companies as cheap as stocks sometimes get." Why didn't he focus on buying minority interests in companies with royalty-like business models for the past several decades?) We focus on the intersection of FCF yield on enterprise value and FCF margin on revenue. (That is how we found Marriott about a year ago.) Business ownership is a positive sum game: corporate profits are $3.4 trillion annually and most of that is earned by public companies. Most investors are too focused on stock prices, which are more volatile than the businesses' earnings, which are more volatile than the replacement cost of the businesses' assets. The job of the equity owners is to cushion the shock, bearing the earnings volatility and even greater mark-to-market volatility in exchange for a risk premium. (Employees are ill suited for this; they heavily discount profit sharing in favor of secure-seeming salaries.) As Lyall Taylor has pointed out, there is a risk that the current equity risk premium is actually too good to last. The real yields on government bonds and real estate have compressed and public equities (excluding the Mag 7) are one of the last places you can find a decent real yield. In response to Lyall Taylor's essay about the risk of a market meltup (e.g. to 50x earnings), Moontower pointed out that bond and real estate multiples are already very high, much higher than was historically the case. (See: "Every core-ish, newer apartment building in LA is priced in the 4.5% cap range on real numbers, in an operating environment where rents are still softening and a senior mortgage is like 6-6.5%.") 
• Natural Gas: Fuel for the 21st Century (4/5) Also by Vaclav Smil, this was written in 2015. Something interesting about natural gas is that a natural gas pipeline can transport energy at a lower cost per unit of energy and at a greater scale (i.e. 10x greater) than electrical transmission lines. He mentions that the world's largest accumulation of natural gas is a group of giant fields in the West Siberian basin. (Although the South Pars/North Dome field in the Persian Gulf that is split between Iran and Qatar is extremely large too, and possibly bigger.) Angela Merkel says that the U.S. opposed the Nord Stream pipeline because it wanted to sell its more expensive, shale-derived LNG to Europe. What if oil and gas are so abundant that what matters is not finding them, but being able to muscle other suppliers out of the way? Smil points out that the chaos in Syria and Iraq prevents anyone from building a pipeline from Qatar to the EU. Another effect of blocking Europe's access to cheap natural gas is that competitors to U.S. petrochemicals and related industries get shut down. (Remember that Exxon has its own foreign policy, a lucrative LNG business, and its former CEO was Secretary of State under Trump.) Highlights: "Finding fossil hydrocarbons became easier once we came to understand their biogenic origins... focusing on sedimentary basins where layers rich in organic matter became source rocks..." "The combustion of natural gas oxidizes carbon that has been commonly sequestered for 10^8 years." "Carbonate rocks harbor some of the world's most notable hydrocarbon reservoirs. They were deposited in shallow seas either through the precipitation of calcium and carbonate ions or the biomineralization by marine organisms..." "High porosity of reservoir rocks can be the result of initial rock formation or subsequent fracturing... effective porosity (total volume of interconnected pores) is usually much higher in sedimentary formations (primary porosity)... older and deeper reservoirs are less porous." "Obviously there is no economic incentive to invest into exploratory activities that would result in very large (>25 years) reserve to production ratios." "Significant shares of resources will always remain uneconomical (in too small concentrations, too scattered, of exceedingly poor quality), and in the case of hydrocarbons embedded in reservoir rocks, only the actual mining of those (more or less) porous formations (as is done in Alberta with oil shales) could recover virtually all fuels originally present in place." "Methane is the most important input for the synthesis of ammonia, for the production of hydrogen, and methanol and its derivatives. Ethane, the lightest of natural gas liquids, is converted into ethylene whose polymerizations yield the largest and the most valuable chain of synthetic products. Similarly, propane... is turned into propylene, the second most important compound to be polymerized after ethylene." "About half of the world's ethylene production is polymerized [producing] a variety of polyethylene, the world's most important group of plastic." "Ethylene is also the starting material for the production of PVC, the second most common plastic."  Pipelines: "Cathodic protection can keep pope's original wall thickness and strength almost indefinitely." The Henry Hub in Louisiana is where nine major interstate pipelines interconnect. The pipelines are owned by Energy Transfer, Williams, Loews Corp., Kinder Morgan, EnLink (now owned by ONEOK), TransCanada (aka TC Energy), and Enterprise Products. The Hub itself is owned by EnLink (ONEOK). And of course, the Henry Hub futures contract is traded on the NYMEX, a CME Group exchange. "TransCanada Pipeline owns the most extensive network of natural gas pipelines in North America." It occurs to us that Casey Handmer and his Terraform are still a long ways off from air capture of CO2 to liquid fuels, when you consider that we can't even economically convert methane (CH4) to liquid fuels. The shale puzzle: "Gas-bearing shales underlie large areas on all continents, but, so far, only the United States has developed this resource on a large scale." China's issues with shale: "no experience in applying and adjusting the two key constituent techniques of horizontal drilling and hydraulic fracturing and limited number of people with requisite experience... Chinese shales lie deeper than in major U.S. formations, are more scattered, have more fractures and faults, and are inadequately mapped." Other considerations are water availability and state ownership of the oil and gas industry as well as the subsurface (which leads to less entrepreneurship and risk taking). Geology: "Conventional natural gas comes mostly from younger Tertiary basins, tight gas originates mostly from Paleozoic formations with very low permeability due to prolonged compaction, cementing, and recrystallization." China's Sulige field has immense theoretical reserves, however, the gas layers are just a few meters thick and are more than 3 km deep. There's a Herman Kahn section: we could theoretically get methane from methane hydrates locked in sediments beneath the ocean floor. Smil also talks about how "the dominance of wealth creation shifted from agriculture to industrial production and then to services."
• Modern Times Revised Edition: The World from the Twenties to the Nineties (4/5) We like British historian Paul Johnson (1928-2023), having previously read his excellent, concise, opinionated biography of Napoleon (5/5, notes). His thesis: "The decline and ultimately the collapse of the religious impulse [at the beginning of the 20th century left] a huge vacuum. The history of modern times is in great part the history of how that vacuum has been filled." ''The destructive capacity of the individual, however vicious, is small; of the state, however well-intentioned, almost limitless." "At the beginning of the 1920s the belief began to circulate, for the first time at a popular level, that there were no longer any absolutes: of time and space, of good and evil, or knowledge, above all of value." One person criticized Johnson's work for "unabashed Eurocentrism that celebrates the contributions of white Protestant Christians to global progress." (Except Johnson was Catholic.) It is a mark of Johnson's good taste that he thought well of the pre-FDR American presidents (Harding, Coolidge, and Hoover) as well as the Iberian autocrats who kept their countries out of WWII: Salazar and Franco. Johnson points out that during WWI, the "warring states became steadily more totalitarian" resulting in a "qualitative and quantitative expansion of the role of the state which has never been fully reversed." Lord Curzon about India: "As long as we rule India we are the greatest power in the world. If we lose it we shall drop straight away to a third-rate power." Johnson: "though Lenin understood very well how to create a despotism, he had no practical vision of the Utopia at all. Marx provided no clue. He described the capitalist economy; he said nothing about the socialist economy... He was wholly ignorant of the process whereby wealth is created." Johnson's key belief: "There are no inevitabilities in history." Thoughts on colonialism: "A colony is lost once the level of settlement is exceeded by the growth-rate of the indigenous peoples." "The original Marxist thesis was that capitalism would collapse... The first fall-back position (Khrushchev's) was that the 'socialist bloc' would overtake the West in living standards... The second fall-back position, used from the early 1970s onwards, which was sold to the Third World and became the UN orthodoxy, was that high Western living standards, far from being the consequence of a more efficient economic system, were the immoral wages of the deliberate and systematic impoverishment of the rest of the world." "No Marxist ever seems to have held sensible views on agriculture, perhaps because neither Marx nor Lenin was really interested in it. Marxism is an essentially urban religion." And maybe the summary of this volume: "Marx described a world in which the central dynamic was economic interest. To Freud, the principal thrust was sexual. Both assumed that religion, the old impulse which moved men and masses, was a fantasy and always had been. Friedrich Nietzsche, the third of the trio [of German imaginative scholars], was also an atheist. But he saw God not as an invention but as a casualty, and his demise as in some important sense an historical event, which would have dramatic consequences. [...] Among the advanced races, the decline and ultimately the collapse of religious impulse would leave a huge vacuum. The history of modern times is in great part the history of how that vacuum had been filled. Nietzsche rightly perceived that the most likely candidate would be what he called the 'Will to Power,' which offered a far more comprehensive and in the end more plausible explanation of human behaviour than either Marx or Freud. In place of religious belief, there would be secular ideology. Those who had once filed the ranks of the totalitarian clergy would become totalitarian politicians. And, above all, the Will to Power would produce a new kind of messiah, uninhibited by any religious sanctions whatever, and with an unappeasable appetite for controlling mankind. The end of the old order, with an unguided world adrift in a relativistic universe, was a summons to such gangster-statesmen to emerge. They were not slow to make their appearance."
  
• Born with a Copper Spoon: A Global History of Copper, 1830–1980 (2/5) This is a woke history of copper. Would it surprise you to know that copper mining engineers ca. 1900 were all white men? (Mentions Herbert Hoover's mining textbook, which says that "in simple mine work," "one white man equals two to three of the colored races.") We need to take soft-subject academics who whine about mining and resource extraction and help them take a short vacation from all of the comforts of the modern world. Chapter 2 is "Futures Markets as Trustbusters: The Secrétan Copper Cartel and the London Metal Exchange, 1887–89," about a corner of the copper market. This law review article (pdf) about the Secrétan syndicate and its copper corner that is better than what is in the book. Pierre-Eugène Secrétan (1836-1899) was a late-19th Century industrialist "copperbug" who was unhappy with the cornucopian falling prices over the period 1882-1886, blamed shortsellers for the price decline, and thought that cornering the market would be a way to get the prices higher. As an economist would predict, the higher prices led to an increase in production, more copper was scrapped, and less copper was used. The corner failed. (The book says that the scrap market responded quickly to the rise in the price of copper: "shiploads of brass doors and church bells from poor towns in central Europe." Sad to melt them.) Right now we have a corner going on with Microstrategy (MSTR) and Bitcoin. The history of corners as well as economics (buy shortages and sell gluts) would predict that this one will fail too - eventually. This book should have been about the technological developments that allowed the price of copper to fall in real terms even as the rich ore bodies were exhausted. There should be a whole book about open pit copper mining, starting with Bingham Canyon - which is still producing! (Because of their large volumes, porphyry ore bodies can be economic from copper concentrations as low as 0.15% copper. The key is methods of separating the ore from waste after extraction, like froth floatation, "the single most important operation used for the recovery and upgrading of sulfide ores.") 
• Enemies of Society (3/5) Another Paul Johnson. Couple of funny quotes from the 1977 review in NYT: "When you're banging away like that you hit wrong keys occasionally." "Johnson knows what to dislike and is unflagging." Interesting question by reviewer: "if the Western edifice is indeed collapsing at every prop and stay simultaneously, then what's to prevent our suspecting that it must have been badly constructed?" Enemies of Society dovetails with Calomiris' Fragile by Design and with our cornucopian reading. One of Calomiris' major points was that in order to have prosperity you need investment and in order to have investment you need assurance against expropriation, either by an autocrat or by populism. Hence classical liberalism with limited government and economic freedom, like the U.S. constitution. (Johnson quotes Hayek, "There is probably no single factor which has contributed more to the prosperity of the West than the relative certainty of the law which has prevailed here." Also he says, "in the world created by John Locke and Blackstone's Commentaries, British society came close to proving that ideal. Virtually everything was a freehold, calculable in cash terms, from a clergyman's benefice to government office-jobs and army commissions.) At the time Johnson was writing, people were still taking the Soviet Union seriously. Even as late as 1989, Paul Samuelson was still saying that “the Soviet economy is proof that, contrary to what many skeptics had earlier believed, a socialist command economy can function and even thrive.” Some quotes: "In the Netherlands, periods of intense Calvinist theocracy were marked by religious persecution, censorship, and a loss of individual liberty, and resulted in emigration, usually of the commercial middle class, to England and America. Nor is this surprising, since strict Calvinism, as anyone who actually read's Calvin's Institutes of Church Government will find, not only does not promote commerce and the profit motive but militates against them." "If the religious impulse must be accommodated, and the evil contained, the Christian approach seems that most compatible with the aims of civilization." Relevant to cornucopianism: "[Ecological alarmism] incorporates many aspects of Marxist mythology, especially the idea that capitalist society creates, then satisfies, artificial and wasteful appetites, and is ultimately self-destructive."
• Focus: The ASML way - Inside the power struggle over the most complex machine on earth (3/5) This is a profile of the Dutch company ASML Holding N.V. (ASML) which makes the photolithography machines that are used in semiconductor fabrication. (ASML originally stood for Advanced Semiconductor Materials Lithography.) ASML are currently the only company selling an extreme ultraviolet lithography machine. (Extreme ultraviolet radiation has a very short wavelength, just longer than X-rays, which allows lithography of very small semiconductor features.) ASML has a gross margin of 51% and a net income margin of 28%. Downstream from ASML is Taiwan Semiconductor Manufacturing Company Limited (TSMC) which is the largest semiconductor foundry in the world, and a customer of ASML, and then further downstream would be NVIDIA (NVDA), which is a fabless producer of GPUs. ASML is doing $30 billion of annual revenue at a 28% net margin. TSMC is doing $100 billion of annual revenue at a 43% net margin. NVDA is doing $140 billion of annual revenue at an incredible 55% net margin. (Intel had only a 15% gross margin and a net income loss in the third quarter.) ASML trades 34x earnings, TSM is 26x, and NVDA is 44x.
  

New Year's Eve Links

• Another thing, in which Mr. Malthus attempted to clench Wallace's argument, was in giving to the disproportionate power of increase in the principle of population and the supply of food a mathematical form, or reducing it to the arithmetical and geometrical ratios, in which we believe Mr. Malthus is now generally admitted, even by his friends and admirers, to have been wrong. There is evidently no inherent difference in the principle of increase in food or population; since a grain of corn, for example, will propagate and multiply itself much faster even than the human species. A bushel of wheat will sow a field; that field will furnish seed for twenty others. So that the limit to the means of subsistence is only the want of room to raise it in, or, as Wallace expresses it, 'a limited fertility and a limited earth.' Up to the point where the earth or any given country is fully occupied or cultivated, the means of subsistence naturally increase in a geometrical ratio, and will more than keep pace with the natural and unrestrained progress of population; and beyond that point they do not go on increasing even in Mr. Malthus's arithmetical ratio, but are stationary or nearly so. [William Hazlitt]
• Which brings me back to the Haywood Algorithm for Business Success: make a list of everything you need to do, and then do all of it. It sounds like that could maybe, barely, work when you’re running yet another B2B SaaS company, or when you’re in charge of “Uber, but for fish antibiotics.” But it sounds like complete insanity, the height of hubris, perhaps even a category error to apply that advice to a rocket company. It’s all well and good to say, “We’re just going to do what we need to do and will not let anything get in our way,” but when the things that get in your way are national governments? The laws of physics? Really? What does that even look like? It looks like SpaceX. [Mr. and Mrs. Psmith’s Bookshelf]
• Delos David "D. D." Harriman, "the last of the Robber Barons", is obsessed with being the first to travel to—and possess—the Moon. He asks his business partner, George Strong, and other tycoons to invest in the venture. Most dismiss Harriman's plans as foolhardy: Nuclear rocket fuel is scarce as the space station that produces it blew up, also destroying the only existing spaceship. The necessary technology for a chemical-fueled rocket stretches the boundaries of current engineering. The endeavor is both incredibly costly and of uncertain profitability. One skeptic offers to sell "all of my interest in the Moon...for fifty cents"; Harriman accepts and tries to buy the other associates' interests as well. [The Man Who Sold the Moon]
• Mine is a mixed marriage: I love C. S. Lewis and my husband much prefers G. K. Chesterton. This probably won’t surprise anyone who reads our Substack, because it’s very clear where the two of us fall on the autistic-to-schizotypal spectrum,1 and if you’re familiar with those great twentieth century Christian apologists you’ll know that Chesterton is the one way down at the “painting with a broad brush of metaphor and joie de vivre and enthusiastic, impressionistic riffs” end of things.2 I am at the other end. I do like Chesterton — I wrote about him a bit here, and I’m very fond of his poetry — but he’s not the one who (as the Quakers say) speaks to my condition. I like my nice neat arguments. I do not have the soul of a poet or a Gothic cathedral. Lewis is also a wonderful stylist, but his writing is clearer, more pointed — something neoclassical, perhaps, if we’re to continue this architectural metaphor. [Mr. and Mrs. Psmith’s Bookshelf] 
• The most important manufactured goods in the world today are microchips, and the specialized tooling that make them (lithographic, ion implantation, CVD, and other tools). One Dutch company, ASML, uses American research to make $200mm EUV lithography tools with 400K+ moving parts; this in turn is used to make high-end chips which one Taiwanese company, TSMC, dominates the manufacturing. This history goes into why Americans lost the manufacturing of their semiconductor and EUV research to these 2 countries and the geopolitical importance of the chips and supply chains, as these are the most important inputs for AI systems. [arun rao]
• To be a winner, you must do two things, which, as of five seconds ago, I call the Golden Dyad. You have to work hard, and you have to get done everything that has to be done. I can hear you choke with rage, and say that is obvious, and I am wasting your time. Ah, but I will tell you why you are wrong. The empirical reality is that at least ninety-five percent of people can’t do both of those things, and usually can’t even do one. This is partially because many people are lazy, but much more so because working hard is not just doing hard work. [Charles Haywood]
• Uber is able to detect vertical acceleration — what we might call a bump. The more it bumps, after adjusting for speed, the rougher the road. They can take this, and the fact that Uber drivers are on the clock, and estimate a dollar value for road roughness from how much drivers slow down when faced with a rougher road. They find that a road with the median level of roughness costs a driver $1.05 per mile, with a totally smooth road costing $0.74 per mile, and a one standard deviation increase costs a driver an additional $0.23. We now have some idea of when it is optimal to repave roads! Simply multiply the number of drivers by the expected change in quality, and pave whenever the benefits exceed the cost. Tullock’s farmers, eat your heart out. This is especially relevant because, as they decisively show, road repaving is scarcely related to road roughness, or any other economic objectives, at all. To even approximate what Uber has, the NTSB has to send out cars to measure road roughness, and this lacks any estimate of the value which people assign to roads. [Nicholas Decker] 
• Whenever we build a new, more powerful telescope, we discover new and strange and wonderful things. Things that have been there all along, but invisible to us with our puny eyes and primitive technology. There’s an old joke that the quality of the astronomer is proportional to the size of the telescope. Instead of wasting the careers of scientists, engineers, and technologists on three decades of dead-end paper studies that teach us nothing about our universe and dissipate what little practical space telescope knowledge we already have, we can raise the scope of our ambition and build an exquisite instrument at the limit of physics, capable of imaging alien planets as though they were as close as our Moon. [Casey Handmer]
• Our techno-capital machine is a thermodynamic mechanism that systematically hunts for and then maximally exploits the cheapest energy it can find. When it unlocks cheaper energy, first coal, then oil, then gas, and now solar, it drives up the rate of economic growth, due to an expanded spread between energy cost and application value. [Casey Handmer]
  

Best of Credit Bubble Stocks - 2024

[Previously: Best of Credit Bubble Stocks - 2021 and Best of Credit Bubble Stocks - 2022.]

• It is a concern that the miners are expanding met coal production even while the commodity price has been weak and their own shares have been "cheap". Warrior's new Blue Creek mine is expected to produce 5 million tons per year and Peabody's North Goonyella / Centurion mine is supposed to produce 3 million tons per year. To put that in perspective, 8 million tons of new capacity is about equal to what Warrior produces in total now. [Coal Earnings Notes (Q1 2024)]
• The opportunity that we have seen is that these royalty interests in hydrocarbons are bond-like assets priced to give equity-like returns because of ESG investing and because of a brutal bear market, and subsequent investor disinterest, in natural resource production. [Review of Material World: The Six Raw Materials That Shape Modern Civilization] 
• We know that Google is an inferior business to Apple because Google pays a gigantic tithe to Apple. But notice that Apple's most recent quarter cash flow was running at a 5% yield on the enterprise value. That is much more attractive than the other companies in the Mag 7 (which otherwise seem quite expensive). Apple seems to have the best combination of moat and valuation. If you had to own one of the Mag 7, Apple would be our choice, hands-down, based on business quality and valuation. (Maybe you do have to own one. How far from the S&P 500 index and its performance are you allowed to stray?) [Looking at the Magnificent 7]
• We have been reëvaluating Elon Musk over the past two years, based on new events and information. In October 2022, he completed the acquisition of Twitter and has turned it into a free speech platform with quite liberal policies. Last year we read the Issacson biography and discovered that Musk does have some very intelligent ideas, like his Idiot Index (the ratio of the cost of a finished product to its bill of materials) and his Algorithm for making manufacturing processes more efficient. We also noticed that his politics have changed. [Musk as Sovereign]
• Amazingly, in his book The Next Two Hundred Years, he wrote that, "once an effective process for the extraction of oil from shale is developed, the total available supply of fossil energy could be more than quadrupled." Keep in mind that he wrote that in 1976. He just assumed that eventually people would figure out how to extract oil from source rock instead of the reservoir rock, and forty years later the production of "tight" oil from source rock became meaningful. Now the production of this oil using horizontal wells and hydraulic fracturing has surpassed conventional oil production in the U.S. If Kahn had ever gotten interested in commodities investing, his mantra would have been to sell shortages and buy gluts. [On Herman Kahn]
• Hopefully, Trump will replace as many of the monuments that were torn down during the 2020 cultural revolution as possible, and revert back the names of any places that were changed for woke reasons. We really need to change "Denali" back to Mount McKinley to honor a president who believed in the gold standard and protective tariffs and who was assassinated by a communist. It would be good to go on the offensive and build new statues and monuments. There should be a James K. Polk monument. [Reasons to Celebrate]
• What we have come to think is that shale is a cornucopian bounty, and the producers do not make money because they are in a classic bad business (resource extraction), not because there is something unsustainable about producing oil from the source formations. Being the highest cost producer of a commodity is just a constant tale of woe punctuated by occasional profitable times. The good times keep people - both managements and investors - chasing the dream. [Commodity Investments Under Cornucopianism]

Here is a shot at a Best of Credit Bubble Stocks for 2023, since we never published one:

• These are just very discouraging developments at Altria and some tobacco investors are kidding themselves thinking anything else. Juul is the best vaping product, hands-down, the same way that Zyn is the best oral nicotine product. Last year, Altria let Philip Morris buy - practically steal - Swedish Match and Zyn without lobbing a bid or even expressing interest that might have raised the cost for its competitor. [Altria's Bungles]
• Why is it bad that people are quitting cigarettes? Wasn't that our "re-nicotinization" thesis? Yes, but that was assuming that the reduced risk product profit pool would be as big or bigger than the cigarette profit pool, and that it would be captured by the incumbent tobacco companies. The cigarette business is basically a duopoly, hence very profitable. The reduced risk products have tons of competition. [Will "nicotine as a service" be as lucrative as cigarettes were?]
• Ask yourself why the macro environment is so bad for cigarette sales, yet McDonald's had a great quarter (U.S. comp sales up 13%), Chipotle had a great quarter (comp sales up 11% with margins also up), PepsiCo had a great quarter, and Valero had a great quarter (with demand for gasoline and diesel at record highs). The difference is that cigarettes have better, cheaper competition. There are the "open tank" vapes which the user refills with his own nicotine-containing liquids ("juice"), which we think appeal to the downscale ex-smokers, as well as the pothead users who have experience using them with THC liquids. For the younger crowd (which probably has never-smokers), you have closed tank products like Juul or the Elf Bar, which are illicit but selling like hotcakes. The biggest thing that tobacco longs are missing is that competitive intensity in nicotine delivery has gone from sleepy (the cozy Marlboro and Camel duopoly) to ferocious. That is going to make it very difficult for big tobacco to keep raising the price of the pack of cigarettes enough to offset the volume declines. It is also likely to shrink the overall nicotine delivery profit pool (which is more of a function of industry structure than market size) and divide whatever profit pool does exist among more players. Bearish. We think the time to get out of this industry is when you see the competitive intensity increasing. [Altria Reports 2023 First-Quarter Results]
• Zyn has been dominating the U.S. pouch market, but if you go to SnusDirect you can see that the pouch market in Scandinavia is very crowded. You can get a Jalapeño Lime flavored pouch from LOOP or an extremely strong Skruf mint flavored pouch. Perhaps the managers of Swedish Match sold the company because they knew an onslaught of competition would eventually reach America? They had two-thirds market share with Zyn in the U.S., but only about ten percent market share in Scandinavia (see slide 7)! [Young Vapers Like "Watermelon Ice"]
• Interestingly, there were no questions on the fourth quarter conference call, despite the fact that the company trades at 3x EBITDA (with a pure royalty business model) and is committed to shareholder returns! [Natural Resource Partners L.P.]
• There is a great tension between physics-based pessimism about natural resources and economics-based optimism (some might say cornucopianism) about the ability to respond to higher prices with substitution and invention. The LFP battery seems like a major point in favor of the cornucopian, economist viewpoint. We would not have thought it possible a few years ago to make a battery with just lithium and iron. [Review of Crude Volatility: The History and the Future of Boom-Bust Oil Prices by Robert McNally]
• During the years that Powell worked for the Treasury, the think tank, and the Federal Reserve, he was closely involved in six financial embarrassments or crises. Each time, there was a question whether the parties involved should take their lumps, to protect against moral hazard in the future, or whether they should be bailed out in order to protect against broader "contagion" or "panic". The essential takeaway from this book is that Powell has faced six such situations in his career and has recommended, advised, or chosen the bailout every time. [Review of Trillion Dollar Triage: How Jay Powell and the Fed Battled a President and a Pandemic---and Prevented Economic Disaster by Nick Timiraos]
• If you were running things, how would you maximize the amount you could raise via the inflation tax? You need to trick bondholders, otherwise the market interest rate on new debt issues will reprice higher for inflation. This seems to imply that the best strategy is periodic, large devaluations with the rest of the time spent talking very tough about inflation. [Paper: "Fiscal Dominance and the Return of Zero-Interest Bank Reserve Requirements"]
• I now realize there is a bit too much “critique” in Mencken. If you live in a healthy society - and he lived in our golden age - then engaging in criticism is sort of like taking down panels of Chesterton’s fence. On the other hand, you can understand that he was frustrated with two decades of political repression during the prime of his life and writing career. (He blamed Methodists for prohibition.) [Books - Q3 2023]
• It is always tough to tell what is going on as an outsider. Altria's "growth outlays" on Juul and NJOY were really desperate attempts to patch their leaky cigarette boat. The Juul money was thrown away for no increase in earnings, and it is possible that the NJOY acquisition will have the same result. In contrast, the free cash flow per unit of Enterprise has grown substantially (3.3x) over the past five years. And there are no illicit Chinese competitors offering to move the same shipments of oil, natural gas liquids, and natural gas for half of what Enterprise is charging. [Enterprise Products Partners - Q3 2023]
• The Sprouts stores are extremely well run and well merchandised, putting pressure on the tired old grocers that are owned by Kroger and Albertsons. (Imagine how much more run down those companies' stores will become if their merger happens.) And the business generates free cash flow even while expanding, which the company has been using to cannibalize its own shares. Since 2015, Sprouts has grown its store count from 217 to the current 401 while shrinking its share count by almost 40%. Giving customers the best experience while allocating capital for shareholders' benefit has gotten our attention. [Sprouts Farmers Market, Inc.]
• We are skeptical of big capital expenditures at companies with depressed valuations, but that is our outsider, generalist view. Perhaps our friends at Enterprise Products, Warrior, and U.S. Steel look around and see that no one else is making significant investments in coal, steel, and pipeline capacity. Maybe these investments are a cinch? [Coal & Steel Producer Earnings - Q3 2023]
• Something to emphasize about the model: the number of rooms in the Marriott system keeps growing without Marriott shareholders needing to pay for them. In the third quarter, their room count was up 5% year-over-year. Their ecosystem has 1.5 million rooms (around a quarter of the worldwide total), but since third parties own and pay for 99% of them, cash is available for distribution to shareholders. The business is royalty-like, because other investors are building the hotels and Marriott is getting percentages of revenue (and profits) to manage them. That is what allows Marriott to be in the top 2% of free cash flow margin in the S&P 500. [Free Cash Flow Conversion & Marriott International Inc]
• I realize that I underestimated some of his abilities and accomplishments while I was a Tesla bear. For example, Musk has something called the "idiot index," which is the ratio of the cost of a finished product to its bill of materials. The idea is, "if a product has a high idiot index, its cost could be reduced significantly by devising more efficient manufacturing techniques." The idea just occurred to me over the summer ("when a manufactured item costs much more than its bill of materials, it seems more likely that the final cost will continue to decline due to learning curve effects") only to find out that Musk already put the concept into use a decade ago. Musk has something called The Algorithm for making manufacturing processes more efficient: question every requirement, delete any part or process you can, simplify and optimize (only after deleting), accelerate cycle time (only after doing the first three steps), automate (last). It sounds like he read The Goal (which we read in 2019) and improved on it. [Books - Q4 2023]
  

Monday Night Links

• CME is a stellar business. You best bet their employees get paid pretty well. After all, they generate more revenue per employee than many venerated Wall Street names and even Microsoft. Remarkably, they convert a lot of that revenue into profits. Each CME employee generates a net income that is 3.6x and 5.3x of a Goldman Sachs and a JP Morgan employee respectively. Exchanges enjoy natural monopoly economics by design. There is a high regulatory burden to get licensed and high capital requirements to operate, and even if those two conditions are met, the cold start problem is very hard to overcome. Unsurprisingly, exchanges tend to be national and asset-focused. Once an exchange achieves critical mass in a particular market (like CME did in futures), traders naturally gravitate there for the best liquidity. More traders mean better prices, which attracts even more traders, and the feedback loop is hard to break (network effects) for any new entrant. The strong network effects automatically drive revenue, significantly reducing the need for traditional operating expenses like sales and marketing. Ongoing capex is limited to tech spending that ensures necessary maintenance and gradual modernization of infrastructure. For CME, capex is to the tune of 5.5% of FCF. That is closer to other zero marginal cost industries, like Netflix (also at 5% capex to FCF) and well below traditional financial services firms like GS (12%) and MS (11%, all figures for trailing twelve months). [The Terminalist]
• Ilya talks about data as fossil fuels, a finite and exhaustible source. But they might well be like fossil fuels, where we identify more as we start to really look for them. The amount of oil that’s available at $100 a barrel is much more than the amount of oil that’s available at $20 a barrel. Even in the larger model runs, they don't contain a large chunk of data we normally see around us. Twitter, for the most famous one. But also, a large part of our conversations. The process data on how we learn things, or do things, from academia to business to sitting back and writing essays. Data on how we move around the world. Video data from CCTVs around the world. Temporal structured data. Data across a vast range of modalities, yes even with the current training of multimodal models, remains to be unearthed. Three dimensional world data. Scientific research data. Video game playing data. An entire world or more still lay out there to be mined! [Rohit Krishnan]
• In both countries, researchers and companies are working furiously to make batteries that rely on a very different starting material than the lithium-ion batteries currently powering everything from our cellphones to our power grids. Such a battery could break China’s near monopoly on crucial battery-making elements at a time when trade tensions and America’s electric storage needs are on a collision course. Instead of lithium, this nascent battery tech uses a sodium compound called soda ash, which can be produced using table salt. Unlike lithium, sodium is easily accessible everywhere. Even better for the U.S. is that China must synthesize soda ash from salt, while it is cheap and plentiful here. In fact, with 92% of the world’s reserves, you might even say that the U.S. is the Saudi Arabia of the stuff. [WSJ]
• Until the fever broke. Today, Donald Trump is victorious, and Obama is the loser. In fact, he looks physically awful—angry and gaunt, after a summer and fall spent lecturing Black men, and Americans in general, on their failure to vote enthusiastically enough for his chosen heir, Kamala Harris, the worst major party presidential candidate in modern American history. The totality of Obama’s failure left party donors feeling cheated. Even George Clooney now disavows him. Meanwhile, Trump and his party are in control of the White House, the Senate, the House of Representatives, and the Supreme Court. [Tablet]
• The problem, as always, is bid-ask. The more granular the noise you want to target, the harder it is to overcome transaction costs. If you’re paying 1bp to enter or exit a trade, you need 2bps of opportunity just to break even, and at least 3-4 times that to make it worth the risk. (This is why there’s an entry threshold for your trades). In the late 1990s, the market was inefficient, but it wasn't that inefficient; the oscillations we were trying to capture were much smaller. [The Terminalist]
• This is what Amundsen realized, and Scott did not. The risks of failure — from exhaustion, starvation, injury, illness, accident, mishap — increase super-linearly with time; so the correct, risk-averse thing to do is to spend as little time as possible on the journey. [The Terminalist]
• While China’s overall oil demand still appears stable, its composition is shifting gears rapidly. Gasoline and diesel demand seems to have peaked: China’s total demand for these transportation fuels in 2024 will be 3.6% lower than in 2021, according to IEA estimates. China’s housing bust is partly to blame, as a slowdown in construction led to weaker demand for diesel used in machinery. But a bigger story comes from China’s rapid shift in personal transportation, and especially the rise of electric vehicles. More than half of the passenger cars sold in the country in recent months were new-energy vehicles, which includes plug-in hybrids, according to the China Passenger Car Association. Largely because of that trend, China’s gasoline demand in 2025 is expected to be 6.4% lower than the peak in 2021, according to IEA projections. More new heavy-duty trucks in the country are also using liquefied natural gas instead of diesel. Diesel and gasoline accounted for 44% of China’s oil demand in 2024, down from 51% in 2018. While transportation fuels are running out of road, China’s growing petrochemical sector has been gobbling up oil products. Consumption of naphtha, ethane and liquefied petroleum gas, all feedstocks for petrochemicals, has risen 59% between 2019 and 2024. [WSJ]
  

Friday Night Links

• I know that Trump wants to be seen as the bull market president, but MAGA is not a bull market set of policies. Sure, he’ll be great for some industries, but those are the industries that are beaten down and unloved. He’ll create bull markets where there have been epic bear markets. Meanwhile, accelerating nominal growth, along with high interest rates, are terrible for the sorts of businesses that are dominating the markets today. What if 2022 was a dress rehearsal for what the rest of the decade looks like?? Think back to what worked then, and what didn’t work. I think we’re about to have an inflection back to the strategy book of 2022. If so, we’re going to catch a whole lot of investors offsides, because no one is ready for a world with accelerating nominal GDP growth. I keep asking myself, what if we simply run the world hot for a change... [Kuppy] 
  
• [A] large 18th-century crucifix, finely carved in wood and painted, which once stood on the refectory wall of a Spanish convent of nuns. It was looted in the Spanish Civil War and found its way to England, and I bought it some years ago for a modest price in London. It is immensely realistic as to Christ’s sufferings: some would say gruesome. But that is the Spanish manner and I think it right to be reminded forcibly of the sufferings Christ underwent for our sakes. So I was very pleased to buy it and originally intended to hang it in the hall of our London house, to gratify Catholic visitors, and administer a salutary shock to Protestant ones and agnostics. But this my wife Marigold would not allow, for all kinds of reasons, including the conclusive one that “it would frighten the grandchildren.” So now it hangs in my study instead, and I see that my wife was perfectly correct. This is the right place for it. I kiss Our Lord’s poor feet, nailed to the cross and bleeding, before I begin my work each day, thus acknowledging the debt we owe him, and I can do so in the privacy of my study without arousing derision or scandal. As for die grandchildren, they are occasionally allowed in to glimpse it, and find the experience enjoyable, if not exactly elevating. [Paul Johnson]
• Loss of two provinces & resultant territorial division into three parts (all road connections between SK & BC go through AB) will end last pretenses of Canadian sovereignty, allowing United States to impose terms on the broken rump. Any areas which will likely vote Republican should be annexed as new states (certainly Alberta, possibly Saskatchewan) to give us two or four new senators, places like far north & Atlantic provinces which would vote Democrat can be added to existing states (NB/NS/PE to ME, NL to MA, YK/NT/NU to AK). New security arrangement would dissolve Canadian military & security forces beyond level of local police, & also end Canada's diplomatic service (to be handled by US State Department in the future). The undemocratic (it is appointed, rather than elected) Canadian senate should be dissolved, as should any vestigial ties to Britain & the House of Windsor such as governor-general. Canadian dollar should be phased out, & replaced with US dollar. Quebec's ports should be administered by the United States, & should have a unified tariff system, but otherwise should be free from US administration. Despite an initial difficult period of transition, Canada will be better off as a set of US protectorates, states, & territories than as an independent state. [Peter Nimitz]
• More broadly, Guinness is a sociable brew. It is far more popular on draught than in cans, despite Diageo making a special device that reproduces the Guinness pour for home use. It was easy to mistake the popularity of spirits in the pandemic for permanent change, but Guinness has come back into its own as young drinkers spend more time in bars with friends. Emotion and identity are weightier than portfolio strategy and it pays to keep faith in brands with long histories and consistent values, even if one sometimes has to be patient. Ivan Menezes, the former Diageo chief executive who led the push into premium spirits, often wore a Guinness harp pin. His heart was telling him something. [FT]
• Monoclonal antibodies, for example, are Y-shaped proteins that tightly bind to specific molecules. Each of these antibodies is made from two proteins, called the light chain and heavy chain, which interlock to form the complete antibody. Many of the most widely prescribed pharmaceutical drugs, including the immunosuppressant adalimumab (sold as Humira, and generating over $21 billion in sales in 2021) and cancer therapy pembrolizumab (sold as Keytruda, generating over $17 billion in the same year) are monoclonal antibodies. But only a few different organisms, mainly mammalian cells and yeasts, can make them because antibodies are glycosylated, or tagged with sugar molecules, and bacteria cannot naturally perform this reaction. Most monoclonal antibodies are generated using Chinese hamster ovary, or CHO, cells, which initially descended from cells taken from a hamster’s ovary and were later immortalized. [Works in Progress]
  

Tuesday Night Links

• You shouldn’t own any fixed interest securities. None. Inflating away debt means destroying the purchasing power of fixed income securities. There may be rallies, but fixed income is in a long bear market. Bond bull and bear markets move in about 40 year periods, and now we are into year 3 of the current bear market. You can lose a fortune in real terms over the long term. Therefore: No bonds. Period. [Russell Napier]
• I'm now going to offer you a megalomaniac explanation of the course of events. I wrote my book in '67, published in '68. My book was a response to a great number of coups in Africa, which followed inevitably from the fact that African states became independent in the early 1960s. By 1965, they were ready for military coups, and in the Middle East there were lots of coups. I was tracking events there because at that time I was employed by Walter J. Levy of London, the chief political advisor of big oil companies like Shell [In World War II, Levy led the petroleum section of the Office of Strategic Services or OSS, the forerunner of the Central Intelligence Agency.] I was reading about coups. What I did is I tried to distill the mechanics of the coup. All coups are different, but they're all the same, because all of them depend on taking hold, not of the nation, but simply of the repressive machinery of the state. So I wrote a description of how to do that. [Edward Luttwak]
• The bag dump: if you follow the companies on the BTC standard, they all push as aggressively as possible for any and all companies to follow them into the BTC standard. In particular, you’ll see them pushing for deep pocketed corporates (like Microsoft) or sovereign governments (particularly the U.S. / Trump administration) to buy Bitcoin / create a Bitcoin strategic reserve. While the BTC standard companies say they’re going to HODL their BTC forever and want these companies / sovereigns to do it for national security purposes, the skeptic in me can’t help put wonder if this is simply an attempt to get a big buyer to give the HODLers exit liquidity (and their strategy may be working; the Trump admin certainly seems open to anything the crypto bros want them to do!). [Yet Another Value Blog]
• Nearly four years ago I put my iPhone in a drawer. It never leaves unless I am traveling, when, as a small concession to the tedium of modern life, I use it to board planes, order a cab when I cannot find one (a situation that has become depressingly common in Washington), and so on. While I would never suggest that reading one hundred pages a day is impossible for regular smartphone users, I do think that eliminating the temptation to waste time—a heading under which I would include responding instantaneously to a non-urgent email that could be answered in a few hours or even the next day—makes it far less difficult. Many readers will reply that for both professional and social reasons they are unable to get on without a smartphone: their colleagues do not usually take phone calls (even though nine times out of ten what ends up being a protracted series of emails or text messages spread out over the course of several hours could be addressed in five minutes on the phone), their children’s sports league requires the use of a scheduling app, and so on. All of this is real and vexing. I suspect that until more members of the professional classes agree to the digital equivalent of a S.T.A.R.T. treaty for their attention spans, we will not see anything like a large-scale revival of reading in this country. [The Lamp]
• Paul Mellon always said one of the best forms of therapy for him was, he always had a hammer and some nails in his desk drawer, and he would move pictures around. When you move pictures around, hang them, light them, put them opposite other works of art or alongside, hang them next to something that you hadn’t thought about, it can be very stimulating. You can do it at home or in a museum. It’s a worthwhile experiment. [The New Criterion]
• Roosevelt pitted Saint-Gaudens against Charles E. Barber, the U.S.Mint’s chief engraver, who had designed much of the “atrocious hideousness” then in circulation. Dying of cancer at his studio in Cornish, New Hampshire, Saint-Gaudens completed his Indian Head gold eagle (pulled together from other designs) and his double eagle in 1907, in the last year of his life. With a walking Liberty based on both the Nike of Samothrace and his own William Tecumseh Sherman monument in New York’s Grand Army Plaza on the obverse, and an eagle flying above a radiating sun on the reverse, Saint-Gaudens’s luminous double eagle in particular reflected the luster of its material and became one of the country’s most revered coins. Roosevelt’s beautification of America’s gold coinage not only set a new standard for numismatics. It also reinvigorated the gold standard. The novel design, striding forward, stood in direct opposition to the bimetallism advocated by William Jennings Bryan bearing his populist “cross of gold.” [The New Criterion]
• What we have come to think is that shale is a cornucopian bounty, and the producers do not make money because they are in a classic bad business (resource extraction), not because there is something unsustainable about producing oil from the source formations. Being the highest cost producer of a commodity is just a constant tale of woe punctuated by occasional profitable times. The good times keep people - both managements and investors - chasing the dream. [CBS] 
• Cenovus seems to have problems with the Lima (Ohio) refinery that came with its acquisition of Husky Energy in 2020. Sometimes these things can't really be fixed. If you are running an airline with old, inefficient planes, you would never have results as good as a competitor with newer, more efficient planes. The more expensive jet fuel gets the worse you'll do in comparison. Amazingly, the Lima Refinery was opened in 1886 and is the oldest refinery in the United States. Cenovus got it in the acquisition of Husky Energy, and Husky bought it from Valero in 2007. Valero got it when they acquired a company called Premcor in 2005. Interesting that they sold it so soon afterwards. [CBS]
  

Friday Morning Links

• The anxiety of today’s parents and kids, which exacerbates the problem of achieving independence through practices like helicopter parenting, can be seen as a rational reaction to on-the-ground economic facts. The immature orientation of many people in their 20s, of bringing their parents to job interviews and the like, can be interpreted as basic biology. In times of perceived scarcity, young animals retain juvenile behaviors longer to signal their need for resources from the providing parent. [The Tom File]
• It used to be, of course, that the lower and middle classes were stuffy and constrained by social convention while the freethinkers at universities and in the ruling class got to experiment with unconventional ideas. If their experimenting got enough success, then it might eventually filter down to ordinary people. (The sexual revolution worked this way, more or less). But now it’s our ruling class that is hidebound by political correctness, and it takes movement by the masses to give it permission to express a controversial view. That’s a major change, and it’s one that the ruling class isn’t likely to appreciate much. But it’s good for the country. Preference falsification is undemocratic, and it makes a nation stupid. If people are taught to parrot slogans instead of to discuss, debate, and report on what’s actually happening, bad decisions get made. [Glenn Harlan Reynolds]
  
• Benzene leak. Hopefully, the EPA is contacted again. Serves them right for using a bunch of low-paid, out-of-state workers that aren't familiar with that refinery and don't have proper training to do the work. Those fuckers are going to get someone killed again like they did in Toledo by using cheap workers that don't know what the hell they're doing. [r/Lima]
• Tortoise Midstream Energy Fund, Inc. (NYSE: NTG) and Tortoise Energy Infrastructure Corp. (NYSE: TYG) will merge, with TYG emerging as the continuing fund, with combined total assets under management (AUM) on a pro forma basis of $1.1 billion as of Nov. 29, 2024. TYG will retain its original investment strategy and objective, becoming Tortoise Capital's flagship closed-end fund solution for investors seeking this structure. Tortoise Capital is announcing a change in the frequency of TYG distributions from quarterly to monthly. The monthly distribution declared by TYG will be $0.365 per share, which represents a 40% increase. [Tortoise Capital]
• Suncor's 2025 capital program is a balance between investments in sustaining its business, while selectively investing in high value economic opportunities. Major economic investments planned or continuing in 2025 include the replacement of the Upgrader 1 coke drums at Base Plant, the development of the Mildred Lake West Mine Extension and West White Rose projects, and the execution of our Petro-Canada retail network improvement plan. Suncor's lower cash operating costs per barrel continue to reflect progress on its initiatives to reduce its corporate WTI breakeven by US$10 per bbl versus 2023. [Suncor Energy Inc.] 
• There's some value to being able to say you're an investor in SpaceX, and it's at least a little rude to reply by asking "since when?" or "at what price?" The social convention appears to be: if you say "I've owned SpaceX since their Series B," that's true, and if you say "I own some SpaceX," it probably means you invested in an SPV at a higher valuation than actual shares have ever traded. Not every time; some people are modest, but there's a narrow band of modesty that requires namechecking the company but doesn't entail providing such details. [The Diff]
• Her Nigerian heritage often comes up in conversations about her straight-talking style. But she says this misses the point. ‘I find it interesting that everybody defines me as being Nigerian. I identify less with the country than with the specific ethnicity [Yoruba]. That’s what I really am. I have nothing in common with the people from the north of the country, the Boko Haram where the Islamism is, those were our ethnic enemies and yet you end up being lumped in with those people.’ [The Spectator]
• A weird side effect of venture capital is that you never get to see the counterfactual on growth. So a lot of times, your company is growing for some reason, probably inherent to the product or something like that. But because you've taken all this venture capital, you have to spend it, you can't just leave it in your bank account. And so you'll hire a bunch of people or spend a bunch of money on dumb stuff and then you will falsely attribute that spending to the growth, but in fact, it was not at all related. And what's funny about this is you can never run the counterfactual because of the venture capital dynamic and so it's really hard for people to believe. [Jeremy Giffon]
  

Friday Morning Links

• Global oil consumption has rebounded to all-time highs and increasing natural gas demand is being driven by LNG growth, coal to gas switching and the rapid increase in electric power demand stemming from new datacenter developments. Enbridge's incumbent footprint across its four core businesses puts the Company in an unparalleled position to meet increasing conventional and new energy demand in North America and beyond. As the world navigates a dynamically shifting macro backdrop, Enbridge will continue to play a leading role delivering safe, reliable and affordable energy. Our 2025 guidance, once again, reflects the predictability embedded across our businesses. We expect to generate EBITDA between $19.4 and $20.0 billion. This represents a 9% increase from the midpoint of our 2024 recast guidance and is 17% higher than our original 2024 guidance, driven by a full year of contributions from our U.S. gas utilities acquisitions, the roughly $5 billion of secured projects we're on track to place into service in 2024 and continued strong expected utilization of our assets. [Enbridge Inc.]
• US oil supermajor Chevron will cut capital spending next year for the first time since the pandemic oil crash, dialling back its shale expansion plans just as Donald Trump enters office with a pledge to “drill, baby, drill”. America’s second-biggest oil producer on Thursday announced a capex budget of $14.5bn-$15.5bn for 2025, down from $15.5bn-$16.5bn this year. It is the first time Chevron has lowered spending since 2021, when producers were reeling from a pandemic-induced collapse in energy demand, and comes as oil prices retreat on fears of oversupply in the global market. The Opec cartel announced on Thursday it would continue to hold back supplies, in another sign of producer concern about the oil market’s health. [FT]
  
• The US runs 6% deficits (let’s see what Musk and Trump are going to do about it, fixing this could happening, but I think we must wait for results), which means in the midterm inflation is coming back (and even now it is here!). This (financial repression) is a bit worse now (not as bad as in the 1940s), but this (financial repression) is always the case: if you are not invested in hard assets, inflation is going to (at least) pressure you. So, working hard is not going to cut it. The combination that cuts it is: work hard + think 1h about money once a week! Have a look at upper class families (mostly aristocrats, their investing is grained in their culture) that are around over 1000 years (yes, such families exist). What do they own? Fertile Land (hard asset), Gold (hard asset), Quality Stocks (hard asset), Quality Real Estate (hard asset). They do not invest in anything close to paper money (Bonds, money market funds) strategically. And they do not care about volatility because it does not matter if you own 2 billion, then 1 billion and then 3 billion 20 years later. Volatility is the problem of the middle class: this is the nut we need to crack. [Andreas Himmelreich] 
  
• Once reserved for granola-loving hippies, the term has been embraced by a range of women who are pursuing a more natural way of life. That could mean avoiding chemical cleaning products, cutting down on single-use plastics and opting for organic and unprocessed foods. For some, the lifestyle extends to health and medical decisions, such as protesting water fluoridation and choosing not to vaccinate their children. Many of these women, who cut across partisan lines, say they’ve found a champion in Robert F. Kennedy Jr., the medical skeptic who is poised to lead the Department of Health and Human Services. [WSJ]
• For the second time in about two years, Wisconsin utilities are extending the life of one of the state’s largest coal-fired power plants and possibly converting it to run on natural gas, saying the change is necessary to ensure grid reliability. Plant co-owners Alliant Energy, Madison Gas and Electric and Wisconsin Public Service said in a statement that the 1,100-megawatt Columbia Energy Center would continue to operate through the end of the decade to allow for the evaluation of converting one of the plant’s two units to natural gas. The companies said the extension doesn’t affect their goals to achieve carbon emissions goals and existing commitments to eliminate coal as a fuel source. The plant in south-central Wisconsin was initially slated for closure this year. [E&E News]
•  The Trump administration will be in charge of the United States Quarter Millennial celebrations in 2026. Herman Kahn was excited about America's bicentennial, and he wrote his best book in 1976 with his predictions for the next two centuries. Kahn thought these occasions were a big deal, an opportunity to set a tone and mood for the country, which he obviously thought should be Determinate Optimism to use Thiel's term. Sadly, he could not get dopey Gerald Ford interested in the bicentennial. Kahn would be excited about a presidential administration where the SpaceX founder has a front row seat. [CBS]
  

Cenovus Energy Thoughts ($CVE)

Looking at Cenovus' results for the third quarter of 2024. 

Their upstream segment earned $1.9 billion of operating margin during the third quarter compared with $2.4 billion the prior year. The downstream segment had operating margin of negative $229 million during the third quarter compared with a positive $655 million the prior year.

Upstream capital expenditures were up 29% year-over-year, to $811 million for the third quarter. Upstream production volumes of liquids were 631k boe/d, down 3.4% year-over-year.

Cash from operations for the quarter was $1.76 billion and total capital expenditures were $956 million. That puts free cash flow at $804 million, for an annualized yield of 9.5% on the enterprise value of $34 billion.

During the third quarter, Cenovus spent $234 million on common share dividends and $520 million on share repurchases. The $754 million returned to shareholders is a shareholder yield of 10.4% on the current market capitalization of $29 billion (at a $16 share price). 

Here is where the math is going to be tricky for the fourth quarter, though:

During the third quarter, the price of WTI crude averaged $75/bbl and the 3-2-1 crack spread averaged around $19. With oil now at $70 and crack spreads at $16, results for Cenovus are going to be worse.

At 600k bbl/d of oil production, a -$5 per barrel decrease in the oil price will reduce revenue and free cash flow by $270 million per quarter or $1.08 billion per year. At 643k bbl/d of refining throughput, having crack spreads $3/bbl worse could cost $174 million per quarter or $694 million per year. [This calculations are both a bit fuzzy because things like crown royalties and input costs should go down with the oil price down.]

Assuming a hit of $1.08 billion on oil and $694 million on refining, Cenovus' annualized free cash flow would drop from $3.22 billion to $1.4 billion, which would only be a 4.2% yield on the enterprise value.

Cenovus' high cost refining (losing money when the crack spread is $19) is dragging down the results. The other major Canadian oil companies (Canadian Natural Resources, Suncor, and Imperial) generate much more earnings per barrel than Cenovus. 

We see others who are still bullish Cenovus. One of those pieces begins, "Assuming that management can improve the company's downstream performance..." Cenovus broke even in the third quarter in Canadian refining; the losses were in U.S. refining. Cenovus seems to have problems with the Lima (Ohio) refinery that came with its acquisition of Husky Energy in 2020.

Sometimes these things can't really be fixed. If you are running an airline with old, inefficient planes, you would never have results as good as a competitor with newer, more efficient planes. The more expensive jet fuel gets the worse you'll do in comparison. 

Amazingly, the Lima Refinery was opened in 1886 and is the oldest refinery in the United States. Cenovus got it in the acquisition of Husky Energy, and Husky bought it from Valero in 2007. Valero got it when they acquired a company called Premcor in 2005. Interesting that they sold it so soon afterwards.