Thursday Night Links

• Let’s look at a country like India that imports almost all of its energy. The Federal Reserve has effectively been saying, “they’re a poor country, we’ll break them and then global oil consumption will decline and US citizens will have cheaper oil.” Meanwhile, OPEC is saying, “India is a large and growing customer of ours. We’ll defend them against the Fed. Sure, they’ll pay more for their oil, but that’s much better than having the Fed detonate their currency, banking system and economy.” The battle lines are now drawn and OPEC is taking the mantle from the Fed. The market is loving it. The Fed tends to be the last ones to realize anything when it comes to economics and the markets, so they likely haven’t internalized what OPEC just told them. However, the stock market understood it instantly, having one of the largest 2-day rallies in years. We’re getting much closer to The Pause. [Kuppy]
  
• There’s a variety of economies available to larger turbines. A taller wind turbine has access to higher and steadier winds that are less affected by friction against the ground - because wind energy rises with the cube of windspeed, even a small increase in speed can have a large impact on energy generated. Fewer, larger turbines means fewer moving parts, fewer additional costs from things like transmission cables. Longer windmill blades capture more of the surrounding energy, and (if generator rating remains constant) allow the turbine to more frequently operate at close to full output. And unlike construction costs for buildings, the cost of constructing a turbine doesn't (as I understand it) rise linearly with turbine size - even a 3 MW turbine can often be erected in a single day - making larger turbines cheaper to construct on a cost-per-watt basis. However, there are also diseconomies at work with increasing turbine size. A larger, taller turbine requires a larger crane to erect, and requires more work to be done in the field rather than the controlled conditions of a factory. The higher wind speeds mean higher lateral forces, and bending moments in the support tower and the windmill blades will rise with the square of height/length. And while available wind energy will rise with the square of rotor length, the mass of the rotor will (all else being equal) rise with the cube of rotor length. [Construction Physics]
• Wind turbines are like heat exchangers, Jamieson contents. They require lots of surface area to perform their task productively. Thus, he says, it is better to have lots of small machines than to have one big one, just as it is better to have lots of small fins than to have one big one on a radiator. There is "less mass in a multiplicity of structures" intercepting the same area. There is also an economic advantage from the improved reliability because of the redundancy of multiple machines, regardless of their greater infrastructure cost for more wiring and transformers. [Wind Energy Comes of Age]
• Toyoda reiterated that he does not believe all-electric vehicles will be adopted as quickly as policy regulators and competitors think, due to a variety of reasons. He cited lack of infrastructure, pricing and how customers’ choices vary region to region as examples of possible roadblocks. He believes it will be “difficult” to fulfill recent regulations that call for banning traditional vehicles with internal combustion engines by 2035, like California and New York have said they will adopt. “Just like the fully autonomous cars that we are all supposed to be driving by now, EVs are just going to take longer to become mainstream than media would like us to believe,” Toyoda said in a recording of the remarks to dealers shown to reporters. “In the meantime, you have many options for customers.” Toyoda also believes there will be “tremendous shortages” of lithium and battery grade nickel in the next five to 10 years, leading to production and supply chain problems. [CNBC]
• Why would anybody go to a club especially to listen to a d.j. playing other people’s records? Until my mid-thirties, this question confounded me. I enjoyed a wide variety of genres, but—apart from a mercifully brief jungle phase in high school—I hardly ever listened to dance music, which I experienced mostly through singles on the radio. It seemed facile to me—a manipulative sugar rush. Then, in 2017, my wife and I left our kids with their grandmother and visited Ibiza with friends. It was my first trip there. That Sunday, we went to Pacha for Solomun+1. When Solomun began his set, I was transfixed. This was no sugar rush. I didn’t know any of the music, I didn’t even understand some of it, and there were stretches when I didn’t take much pleasure in what I was hearing. The music was presented as one long phrase, continually promising a resolution that never materialized—it was like being trapped inside a five-hour Bach fugue. [Ed Caesar]
• “Who Will Buy?” is the exuberant ensemble number from the 1962 musical hit Oliver! It is also the rallying cry of a number of investors and analysts who are worried about who exactly will be purchasing trillions of dollars worth of bonds as inflation bites and public deficits balloon. Such concerns were on full show last week, when gilt yields soared after the UK government unveiled a mini-budget full of tax cuts that were expected to expand the UK’s debt burden. Prime Minister Liz Truss has since reversed the plan, but worries over the future attractiveness of a wide variety of bonds remains. To understand the concern, look no further than the analysts at JPMorgan Chase & Co., who argue that buyers across a wide variety of debt — including even the US Treasuries which form the backbone of global markets — are stepping away. “We remain concerned about the (lack of) structural demand for Treasuries,” wrote JPMorgan analysts led by Jay Barry and Srini Ramaswamy. In fact, they say, all of the three main buyers for US government debt — commercial banks, foreign governments and of course the Federal Reserve itself — appear to have stepped away from the market. While some of the retreat is to be expected as the US central bank tapers its balance sheet,  the scale of the shift in appetite is still noteworthy, they write. They estimate that the Fed’s Treasury holdings have dropped by $180 billion year to date as the central bank embarks on quantitative tightening. Meanwhile, commercial banks’ collective holdings of Treasuries have fallen by $60 billion this year, after growing more than $700 billion in 2020 through 2021. And foreign governments are also stepping back, with official holdings having dropped $50 billion over the past six months. [Bloomberg]
• Over the last few years, I’ve been predicting that the Next Big Thing following World War G (gay marriage) and World War T (transgender mania) will be World War P (polygamy). Now a judge in yet another one of these New York City rental lawsuits has ruled that “majoritarian animus” about marriage not being among more than two people is the unacceptable explanation for why the Obergfell gay marriage decision restricts marriage to two homosexuals. Way back in 1989, the gay marriage juggernaut got launched over a tawdry New York City rent control imbroglio. A rent-controlled tenant died without spouse or issue (rent control status is hereditary in New York), so the landlord was going to raise the rent, but then the dead lessee’s roommate announced that he deserved to continue to pay the rent controlled rent because they were more than just roommates. Now, we’ve seen a similar NYC rental dispute that might launch the polygamy trend of the 21st Century. [Sailer]
• Mr. Ryan, 45, exercises vigorously and is more in step with the modern Congress in terms of its smoking habits than Mr. Boehner, 65, a heavy smoker who shuns any outward concerns about health. Smoking has gone increasingly out of style among members, and the places for them to smoke have also faded away. The District of Columbia has strict laws prohibiting smoking in public spaces. But Congress, as the basic overlords of the district, eluded that ban by making sure that the district’s laws and regulations did not apply to “the functions or property of the federal government,” which include the Capitol. So members may indeed smoke in their offices. In one of her first acts as speaker in 2007, Ms. Pelosi banned smoking in the speaker’s lobby, the members’ hangout off the House floor, declaring in a news release that “the days of smoke-filled rooms in the United States Capitol are over.” House members who smoked were banished to a balcony of shame just off the lobby, where they would sit and shiver (or sweat) with their puffing peers outdoors. In a fit of pique in 2007, Representative Keith Ellison, Democrat of Minnesota, once called the Capitol police on former Representative Tom Tancredo, Republican of Colorado, for smoking a cigar in his office. Mr. Tancredo did not like this. The Senate is not known for smokers, either — it banned the practice in the Senate chamber in 1914 because an elderly member had breathing problems — but there are two spittoons on the Senate floor that have been largely out of use since the 1980s. [NY Times]
  
• My theory for some time has been that the sudden globalization and expansion of Free Trade following the fall of the Berlin Wall and the disintegration of the Soviet sphere of influence in the late 1980s, most-aptly summed up in this chart from Deutsche Bank, gave us a better tradeoff of growth and inflation for a given amount of money supply growth, but that that game was coming to an end at about the time Donald Trump was elected. [Inflation Guy]
• As of today, 10-year TIPS yields are all the way up to 1.67%, the highest they’ve been since 2010. I explained back in June why the equilibrium risk-free real interest rate is approximately 2.25%, so TIPS are getting to the neighborhood of long-term fair values in an absolute sense. TIPS have no risk in real space, when held to maturity, so if you can get an annual 2%ish real increase in wealth with no risk, that’s a good deal. And inflation-linked bond yields in developed markets basically never yield more than 4% or 4.5%, so the higher the yield goes the less your potential mark-to-market downside. A 5-yr or 10-yr TIPS yield of 4% is back-up-the-truck stuff if you see it. At those real yields, with no risk, other asset classes simply can’t compete. At 1% breakevens there was no reason to own nominal bonds rather than TIPS; at 4% real yield there would be no reason to own stocks rather than TIPS. But that sort of yield is of course very rare and we won’t see it unless nominal yields get up to double-digit land. At the current level, with TIPS at fair or slightly-cheap relative value and approaching fair absolute value, it is worth accumulating TIPS as a long-term hold. It has been an astonishingly long time since I could make that statement. And TIPS may well get cheaper from here. I hope they do! But in the meantime, you can do a lot worse than guarantee yourself that your wealth will increase 18% more over the next decade than the price level rises. [Inflation Guy]
• On behalf of X Holdings I, Inc., X Holdings II, Inc. and Elon R. Musk (the “Musk Parties”), we write to notify you that the Musk Parties intend to proceed to closing of the transaction contemplated by the April 25, 2022 Merger Agreement, on the terms and subject to the conditions set forth therein and pending receipt of the proceeds of the debt financing contemplated thereby, provided that the Delaware Chancery Court enter an immediate stay of the action, Twitter vs. Musk, et al. (C.A. No. 202-0613-KSJM) (the “Action”) and adjourn the trial and all other proceedings related thereto pending such closing or further order of the Court. The Musk Parties provide this notice without admission of liability and without waiver of or prejudice to any of their rights, including their right to assert the defenses and counterclaims pending in the Action, including in the event the Action is not stayed, Twitter fails or refuses to comply with its obligations under the April 25, 2022 Merger Agreement or if the transaction contemplated thereby otherwise fails to close. [Mike Ringler]
• The river flows into a large lake, and glaciers glitter in the mountains above. All in all, this place is a Southern Hemisphere mirror image of my home in south- central Montana, except that when the snow piles up above the windows in January where I live, people in Patagonia are enjoying 16- hour days. Riding horses. Having barbeques. Aside from this seasonal inversion, Patagonia can be conveniently compared to the American West: There are endless scrublands and deserts and canyonlands and mountains and glaciers and any number of extraordinary places to set the soul soaring. It is a place of special oddities. In 1905, for instance, Butch and Sundance were said to have robbed a bank in Rio Gallegos, about 700 miles south of their ranch. I’ve seen the robbed bank at Rio Gallegos- it still stands- and later on the same day I visited the nearby penguin colony. It was the same American West, all right. But a bizarro version, with hints of another dimension leaking into the scene. I was forced to imagine a daring daylight bank robbery, accomplished on horseback, with penguins strutting underfoot. And people ask me why Patagonia is my favorite place on Earth. [Tim Cahill]
• Suppose the Fed identified five major causes of inflation and how it plans to deal with each of them. Wouldn’t this approach instill greater confidence in investors and business leaders? Unfortunately, the Fed has no control over most of the current causes of inflation, but could work with the Treasury to address some of these at a fiscal level. Consistent with the policy response in the global financial crisis, we need a coordinated effort within our government to reduce uncertainty and to lay out a plan to reduce inflation—component by component. Here is an example of the type of actions that can help. Long Beach, California, hosts the largest container port in the United States. Given current supply chain issues, the port had a long backlog and considerable wait for container ships to unload. The City of Long Beach had a regulation that allowed the stacking of only two containers, designed to keep the containers from blocking residents’ view of the ocean. Realizing the bottleneck at their port was causing a national problem, the City of Long Beach changed the regulation, allowing four or five containers to be stacked. While inconvenient for citizens in the short term, the City of Long Beach did something to help the nation. Hundreds, if not thousands, of opportunities like this exist. These initiatives focus on supply. In contrast, the Fed is focused on 75 basis-point rate hikes. Each of the causes of inflation needs its own policy response. None will typically respond as predictably or quickly to aggressive tightening by the Fed. [Rob Arnott]
• Traditional capitalization-weighted indices generally add stocks with high valuation multiples after persistent outperformance and sell stocks at low valuation multiples after persistent underperformance. It’s well-known that the price impact of these changes can be large once a change is announced. The subsequent reversal is less well known. For example, in the year after a change in the S&P 500 Index, discretionary deletions beat additions by 22%, on average. Simple rules, such as trading ahead of index funds or delaying reconstitution trades by 3 to 12 months, can add up to 23 basis points a year. This benefit roughly doubles when we cap-weight a portfolio selected based on the fundamental size of a company’s business or on its multi-year average market-cap. [Robert Arnott]
  
• Okay, perhaps you should have bought inflation when 10-year breakevens were at 0.94%. At that level, the market was making a huge bet that inflation was forever dead. There was almost no risk in buying inflation at that level, as I pointed out at the time. That was the right trade, and the easy trade, and I know you’re committed to buying those levels the next time you see them. Unfortunately, you won’t. Those levels won’t be seen again for decades, if ever. The only way they could happen is because there was no natural bid for inflation risk, no one who was worried about it. No matter what happens to inflation from here, lots of people have learned that it’s something you ought to be worried about, especially if you can hedge it essentially for free as you could 19 months ago. [Inflation Guy]