The Glorious Days of Yesteryear & the Gods of Times Past
This was published nearly a year ago and holds true to this day!
The idea that inflation is here to stay is one of the strongest narratives I have seen in a while. As many of you already know, I don’t agree with it. That is not to say it is impossible. It is however, far from my base case.
To understand why so many market participants hold this view, it is necessary to take a stroll through history; the history of glory days gone by and the worship of gods that never returned.
The story begins back in the 1970s. The horror… the horror…
This is the very moment that every single commodity investor, Chicago School Monetarist and gold bug has been waiting for. The return of the glory days!
Nothing would make them happier than to see the central banks humiliated. They’ve longed for the day that inflation once again runs rampant. All just to say, “I told you so.”
“I told you commodities and gold were the best investments; it just took time.”
“I told you the central banks were idiots; rates should have been at 6% or more.”
“I told you technology investing was just a bubble.”
And to which god does this crowd worship and pray? GOLD… they have waited and waited, shaking their fists at the sky in anger, knowing that one day their god would return when inflation finally made a comeback.
How they dreamt of those 1200% returns… oh, the glory…
But then something strange happened… monetary printing came, and their god was nowhere to be found. Why had he forsaken them? Abandoned and disillusioned, their gold holdings failed to offset the rise in central bank balance sheets...
Being the devout worshippers that they’d always been, they kept the faith and thought, “When inflation comes, everyone will see!” But then inflation came… and once again he did not show up. Much to their dismay, gold fell 28% in real terms…
Relentless in their devotion, they said, “Well, we still have a secret weapon that can stick it to those tech and crypto guys…” The gold mining stocks! The 10x play! And again, they were wrong. The miners went nowhere… they were just cyclical (h/t Brent!) ...
And in inflation-adjusted terms, it was even worse. They did nothing but fall: a net wealth destruction...
Then came those who in addition to worshipping gold, also worshipped commodities. This group – similarly – dreamt of the glorious 1970s when commodities outperformed in real terms. However, since those days, commodities are down nearly 90% in inflation-adjusted terms…
But what about demographics? Surely a doubling of the population since then would have meant that food prices would explode!
Not quite… in real terms, they have plummeted. Food is 90% cheaper…
Well, if God is not in gold, and he’s not in agricultural commodities, and even the return of inflation and massive monetary printing are unable to bring him back, where else can he be?
God is in the well… outside of gold, the worship of oil knows no bounds. Everyone needs it! We fight wars over it! The US has more of it than anyone else. Come to think of it, oil is as American as apple pie.
BUT…
… in inflation-adjusted terms, oil has also failed its devout worshippers. World demand exploded 300%, yet oil just managed to hold its price over time...
... and as energy ingenuity has continued to evolve, Global Oil Demand growth has collapsed…
Electricity Costs as a percentage of Median Household Income have also collapsed…
Ok, what the hell! Where are those glory days? Why aren’t they coming back? Where is God?!
The answer lies in TECHNOLOGY…
The pace of technological innovation in the extraction and growing of commodities is increasing supply above that of demand. What does this mean? Things get cheaper over time.
Technology is making everything cheaper – yes, even technology itself is getting cheaper. This leads to an endless cycle…
Computing power is exponential…
Computing power is collapsing in cost (as is cloud storage) …
… and the application of technology to new forms of energy is also collapsing costs…
When you look at this versus fossil fuels, renewables are cheaper (but they can’t yet scale as big) …
… but that cheapness is allowing renewables to grow on a relative basis… while coal, gas and oil fall…
Low-carbon sources (the application of technology) have meant that it now accounts for 38% of all electricity…
… and again, that is driven by renewables…
As is the case with just about all forms of worship, time has a way of invalidating them. The glorious days of yesteryear are gone… the gods of times past are no more…
We’re in a new paradigm now. My view is that technology and the digitisation of everything will lower the cost of electricity to negligible in the coming two decades. Imagine what a world of near-zero electricity cost would look like. What it would mean for innovation and productivity! It has been one of the last great constraints…
If you are interested in learning more about Global Macro Investor, my original, thought-provoking and completely independent research publication, click here.
This article is the clearest and best organized reflection I have read in a long time. The touch of humor is a wonderful spice to make the information easily understood. Thank you.
This was a big part of the initial reason for me to invest in Tesla. People still don't seem to understand the power of exponentially falling costs of renewable energy. Combined with falling costs and increasing capabilities of digital intelligence, we are about to enter an age where the two constraints on the economy will no longer be constrains. This is as big as the industrial revolution. Perhaps bigger.