Email of the day - on risk appetites and the value of a subscription.
Comment of the Day

August 21 2020

Commentary by Eoin Treacy

Email of the day - on risk appetites and the value of a subscription.

I am a pre-subscriber (financial constraints, exacerbated since Covid-19, make it impossible for me to become a full subscriber, I'm afraid, so I may not qualify for a reply. But David did reply to me on more than one occasion;  he was always so kind, and is greatly missed).

I remember your being on the panel at a money show in the conference centre in Westminster Square (I forget the name - possible Westminster Conference Centre) - it must have been about 2009 because I remember asking a question as to whether there were any "good" banks left that might be worth investing in.
Anyhow, in response to a question from another attendee about companies drilling for water in Australia, (or possibly into wind power or solar or even lithium miners (if it wasn't too early) - I forget exactly which), I remember you replying that you never favoured chasing these early-stage stories, and in general you have been proved right since.   

I still tend to class hydrogen fuel and battery power for vehicles in the same category, but perhaps you feel that times have changed sufficiently now?    Since I am only a pre-subscriber, and not able to read the full article, I appreciate that you may have said more on this there, or in previous Comments of the Day.
It seems to me that since hydrogen when mixed with oxygen is a very explosive mix (although this could also be said to a lesser extent of petrol vapour, I suppose), it would only take one careless mistake or faulty construction to cause a serious explosion.   But perhaps the design features are so tight that this would be impossible.   

At least I would trust an electric vehicle more than a self-driving one! In fact, I am a bit nervous by nature. I would never trust a Toyota now, after that stuck accelerator pedal caused a fatality. What the last minutes of those poor occupants were like I cannot face thinking about.

Whether it is possible to reply to this or not, many thanks Eoin for the comments that I am able to read daily. They give a very sane and reassuring perspective, especially in these difficult times.

Eoin Treacy's view

David always saw value in conducting a public discourse with subscribers because it helped to educate us as much as the Collective. It also ensures we are covering topics of interest. I agree and one of the things I enjoy most is attempting to provide satisfactory answers to subscriber’ queries. However, as someone who has been familiar with the Service for at least 11 years, might I suggest you at least take a trial subscription?

If that is too much of a financial constraint it may be time to reassess your investment/trading ambitions. Investing involves a degree of risk. If you are uncomfortable with driving a Prius because of a fault corrected more than a decade ago, it might be time to conclude investing is not for you.

The reality is that in today’s world cautious people are being forced to speculate. Negative real interest rates means money is losing its value in real time. Not everyone has the temperament for risk and even fewer are equipped with the tools necessary to tackle it effectively. However, that is the reason gold is advancing. It’s volatile but it is a clear hedge against devaluation.

When I was single, I travelled the world diving with sharks and other big pelagic fish. To the uninitiated that appears extremely risky behaviour. However, very few people understand that sharks are often afraid of the noise from air bubbles. The only animals in the ocean that blow bubbles are mammals. Orcas and dolphins have been known to kill sharks. If you measure your risk you can have a truly enjoyable experience with these fascinating animals. It is the same in the markets. There is the world of difference between the perception of risk and where risk in fact resides.

As an aside, autonomous vehicles do not in fact exist in any numbers yet so we will all probably be waiting a while before having to make a decision.

Unfortunately, the trend is towards more risk. That is the result of all momentum strategies. The growth of ETFs and the strength of the uptrend on the Nasdaq has led investors to ignore valuations. This occurs in every bull market and they do not end until interest rates choke off speculative flows.

11 years ago, renewables were a high beta play on oil prices. It was impossible for the shares to rally without a high oil price to support them. When oil collapsed, the sector crashed. That correlation decoupled in Q3 2019. That’s a meaningful event. It’s a clear change in behaviour and suggests something else is animating interest. It could be technological innovation and the promise of many new green funding programs.  

The defining characteristic of promising new technologies. whether genetics or quantum computing, is they are iterating at rates much faster than Moore’s Law. Artificial intelligence has the same potential because you only need to teach a computer program once. Regardless of how long that takes, the process is iterative whereas you need to teach each new human from scratch. This section from an article from the Houston Chronicle may also be of interest with regard to batteries:

On the inside track is Toyota with a new sulfide-based chemistry. In the middle of the pack are Volkswagen, with a 5 percent stake in Quantumscape; BMW’s partnership with Solid Power; and Hyundai’s work with Ionic Materials. Oil giant BP recently bought an advanced battery company too.

Solid state batteries have been promised for the last six or seven years and the deadline for delivery keeps getting pushed back. This is not an easy technological question to answer and battery technology does not iterate at the same pace as Moore’s Law. However, when these battery challenges are solved, they will double the range and greatly reduce the time to charge batteries.

New technologies do not just pop up out of nowhere. They represent the fruition of years of research and development. Success stories arrive because of a confluence of factors ranging from the promise of commercial success to access to liquidity, evolving market conditions and fresh business models. Hydrogen has been in development for a century but there was no urgency to commercialise solutions. Meanwhile, I’ve been saying for years that is was inevitable low natural gas prices would create new sources of demand. Hydrogen is a clear beneficiary.   

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