Hopefully none of our readers will have any involvement with so-called ‘crypto-assets’, or ‘crypto-currencies’. These are topics that we very rarely write about, primarily as they have no relevance to our business. Our portfolios have never, do not and will not hold these. I deliberately shy away from saying ‘invest’ into these, as they are not, in any shape or form, investments. Nonetheless, you cannot help but have noticed that one of the largest peddlers of these aberrations, an outfit named FTX, went spectacularly bankrupt last week. Bizarrely enough, there are some repercussions from this that will affect us.
First of all, there is nothing out of the ordinary with crypto. Homo sapiens has rarely been able to resist the lure of speculation. We are deterred by neither history nor experience. Crypto is no more than the latest notch on a bedpost that, in modern history, begins with tulip bulbs (and which includes the South Sea Bubble, dotcom shares, Bernie Madoff and beanie dolls). If I may quote the once inestimable Warren Buffet: “Nothing sedates rationality like large doses of effortless money” (Berkshire Hathaway, Letter to Investors, 2000. If you have even been tempted by ‘crypto’, please do look this up). But I digress. While the demise of this nonsense and domain of the professionally criminal is welcome, it is more important that the collapse of FTX is showing that monetary tightening is working. Money has become more expensive and harder to come by, and that makes things very tricky for those who need to borrow to stay solvent. This is no time to be leveraged, especially when one’s collateral is valueless.
That links us back to the Central Banks and monetary policy, both of which actually matter to the wellbeing of our portfolios. Last week it was reported that the rate of inflation in the United States fell by an unexpectedly large amount. Equity markets duly roared, on the hope that might mean the interest rates may not have to rise all that much further. Regrettably, it feels unconvincing. Later this week we have updates on the inflation rates for the UK and Europe, neither of which will be remotely as cheery as the US data. However, the US dollar has fallen sharply and this morning stands around 6% lower than its peak in late September. That is very welcome.
Much of the commentary around all things crypto has centred on the value of the market being ‘only’ $1 trillion. This, it seems, is too small to really matter even if (when) the whole charade finally unravels. It is, however, a trillion dollars’ worth of opportunity costs. It is a trillion dollars spent on speculation and the currency of the criminal that could otherwise be put to productive use. To put it very crudely, that is a trillion dollars that has not been spent on windfarms.
So let us do some very rough mathematics here. The cost of a large, 14-megawatt, wind turbine is estimated to be slightly over $12m. $1tr would therefore stretch to somewhere around 80,000 of these turbines, or a bit over 1.1m megawatts. If we translate megawatts to gigawatts, we have 1,100 of these. Estimates of what can be done with a gigawatt understandably vary enormously, but a reasonable working assumption is that it will power 300,000 homes. If we now add three zeros onto this, then our $1tr could possibly power 300 million homes. That is the United States twice over.
Obviously the mathematics does not quite work like that. My point, though, is that while so much hot air is being wasted at COP27, decarbonisation is quite feasible if only there were the political will. But there isn’t. What seems to be coming, however, is a much greater importance for the role of ‘carbon credits’. These are climatic brownie points given to those businesses that are either clean or becoming demonstrably cleaner, which can then be sold, at intended vast expense, to those which continue to pollute. They are tangible, monetary incentives for businesses to transition. They are also assets that can already be held in investment portfolios.
The US mid-term elections were quite a turn up for the books. The accepted wisdom of a tide of gains by the Republicans went the way of so many wisdoms. The markets do not know how to react to this. Normally one would argue that the diminished chance of Republican clean sweep in 2024 would be taken poorly. However, these are not normal times and markets are not yet sure of what the Republican party will look like in two years’ time: will it be Trump, or No-Trumps?
Finally, congratulations to those who knew the last week’s lyric from Disco Inferno. Today, a tough one and back to the time of our Buffet quote. The opening lines of the theme to a film: “I’ve crossed deserts for miles, Swam water for time, Searching places to find, A piece of something to call mine (I’m coming)”. Film and song, please.
Jim Wood-Smith – Market Commentator and Head of Climate Transition
All charts and data sourced from FactSet
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