'Buy the Umbrella' - Issue #38
Hi there!
Here is your latest dose of ‘Buy the Umbrella’, a short list of interesting things I’ve been reading and thinking about during the week.
If you missed last week’s issue, you can find it here.
Quotes
"The things that will destroy America are prosperity at any price, peace at any price, safety first instead of duty first, and love of soft living and the get-rich-quick theory of life.”
— Theodore Roosevelt (26th U.S. President)
"You can't stop a fever by putting an icepack over your head. You've got to get to the cause of the fever."
— Lyndon B. Johnson (36th U.S. President)
Charts
UK energy bills set to soar once again, exceeding £6,000
A typical annual energy bill is currently £1,971. Ofgem has announced that its price cap will rise to £3,549 on 1 October and will be adjusted every 3 months thereafter.
New forecasts suggest that energy bills could rise well over £6,000 a year from April 2023, pressuring the government to urgently support those struggling or unable to pay.
Note: the price cap puts a maximum per unit price on energy that reflects what it costs to buy energy on the wholesale market and supply it to UK homes. In addition, it sets a "strict and modest" profit rate that energy suppliers can make from domestic sales.
European energy crisis subsidies mount
European governments have now allocated approximately $280 billion in funding to cushion the impact of the energy crisis on households and businesses. Subsidies however do not solve the underlying drivers behind the energy crisis, i.e. the world is currently in short supply of critical commodities due to unhelpful supply-side policies in the west.
Germany's $2 trillion of value-add depends on $20 billion of gas from Russia - that is 100-times leverage
Credit Suisse put together a fascinating chart that shows Germany's reliance on Russia's gas to power its economy. It imports around $27 billion from Russia, mostly natural gas, which in turn enables Germany to power its manufacturing base that creates approximately $2 trillion in value. This would equate to 100-times leverage, an incredible risk for any individual business, let alone an economic powerhouse.
Articles
Zoltan Pozsar: War and industrial policy likely to result in continued inflationary pressures
Credit Suisse' Pozsar wrote a brilliant and thought-provoking piece on why current escalating geopolitics and eroding trust are unlikely to push inflation down in a hurry.
Two snippets that will hopefully encourage you to read the rest of the article:
"In 2007-08, big banks ran on “just-in-time” liquidity: the dominant form of liquidity was market liquidity, for which you could always sell assets into a deep market without moving prices, so you did not have to have liquidity reserves at the central bank. Similarly, big corporations today run “just-in-time” supply chains for which they assume that they can always source what they need without moving the price."
The West will have to pour trillions into four types of projects starting “yesterday ”: (1) re-arm (to defend the world order) (2) re-shore (to get around blockades) (3) re-stock and invest (commodities) (4) re-wire the grid (energy transition).
American Airlines announced an agreement to purchase Boom's supersonic passenger aircraft
American Airlines and Boom Supersonic announced an agreement to purchase up to 20 supersonic passenger aircrafts, with an option for an additional 40. The airlines has paid a non-refundable deposit on the initial 20 aircraft.
The aircraft, named Overture, is expected to carry passengers at twice the speed of today’s fastest commercial aircraft.
India's big industrial states plan massive coal imports to stave off shortages, cover residential and industrial needs for the next three years
The Indian states, which cumulatively accounted for nearly a third of India's electricity demand in 2021, plan to import 10.5 million tonnes of coal in coming months as officials "scramble to arrest widespread power cuts" according to Reuters.
This will likely push global coal prices to new highs and add further pressure on energy prices. It is worth noting that India is the world's second largest coal importer.
Blackstone to stop buying homes in 38 U.S. regional housing markets
The pandemic housing boom looks like it has come to a stop, or perhaps a pause, as existing home sales and new home sales are down 20.2% and 29.6% respectively on a year-on-year basis.
The announcement by Blackstone-owned Home Partners of America comes as several firms are realizing that the intensifying housing correction could translate into falling home prices.
BlackRock, BNP Paribas, UBS among firms named energy boycotters by Texas
Texas has banned ten finance firms from working with the state after concluding that they are hostile to the energy industry.
Until next time...
Thank you for reading this week’s issue. If you found it interesting, consider sharing it with someone who would enjoy it.
Do you have any questions or thoughts? Please feel free to reach out.
Have a wonderful week.
Why ‘Buy the Umbrella’?
Individuals, many of whom also run businesses and governments, tend to not think of the downside when the present is stable, and the future is looking positive (usually when we feel most in control).
Just because it is currently sunny, does not mean it will never rain. If we are not prepared, once it does begin to rain, we will end up running around looking for an umbrella in the middle of a storm when they are typically in short supply. We therefore need to ‘buy the umbrella’ before it rains.
Simultaneously, we cannot allow our awareness of risk to make us fearful, pessimistic, or paranoid, as this too works against us over the long-term.
Having the right mindset in advance is critical. The challenge is getting the right balance between being optimistic about the future and being able to not only withstand future crises, but in fact grow stronger due to the opportunities they tend to present.
It is not enough just to be conservative. One needs to be willing to put cash to work when others feel least comfortable doing it. To do that with confidence, we need to have a foundational understanding of history, business, markets and human psychology.
Our mission at BTU is to learn as much about the world as possible, and in doing so, to try to find investment opportunities with favourable risk/reward characteristics. These should, over the long term, help build sustainable wealth.