Blain’s Morning Porridge – Feb 27th 2020
“Good morning passengers, as its raining heavily we’re going to stop the train for 5 minutes just short of the next station platform to ensure passengers waiting for this train get thoroughly soaked, and we’ve switched off the train heating…”
The appointment of US Vice President Mike Pence to deal with Coronavirus fills us all with a sense of security and hope. Nothing to worry about them. (US Readers – Sarcasm alert…)
Lots of talk yesterday about Coronavirus markets. Although you can’t ignore the way its driving the market, a number of Porridge readers have told me the fuss over it is ridiculous, the media is fuelling hysteria, and there is absolutely nothing to be worried about – it’s just a new form of flu, and less mortal! They argue only a fraction of cases are being recorded because in most people there are no symptoms – therefore its media hype.
Unfortunately, they are missing the point. It doesn’t matter if it’s just a flu. The reality is economic damage has been done, and the next stage – a nervous volatile market – is beginning to take on a momentum all of its own as global infections breakout like penicillin on a piece of mouldy cheese.
We are now moving into a new phase of this crisis:
· For the first weeks the market generally discounted the virus. It looked for evidence of contagion and mortality, information on the virus, and was unconvinced of the threat.
· In recent days markets moved into realisation just how deep the economic damage from the Authorities’ containment efforts has been – the economic talk is now about the likelihood of snap recession.
· But, now the market has swung into full reactive mode – and that’s when it becomes increasingly less predictable.
Prices are moving on rumour and sighs about infection outbreaks, contagion rates, barely coping hospitals, and mortality stories. A regional governor in Milan quarantines himself – sell Italy bonds! Chinese factory head making widgets for US firms admits the bulk of his staff has not returned to work – dump farm machinery makers because they will miss sales targets! Man sneezes in Pub in Northern England – close entire UK motorway, rail and air network. You get the drift..
When does it end?
Good question, and it might swing round quite suddenly. It could happen either when the virus abates – some analysts think it is close to peaking – which Trump assures us will happen in Spring when it gets warmer. Or it might follow Authorities admitting containment hasn’t worked, it’s time to let the virus take its course, and kick start economic activity. You get a sense of how that dynamic is developing in China in this story from the WSJ – As China’s Economy Suffers, Xi Faces Pressure to Lift Virus Restrictions.
At that point it’s going to get tough. Will health services be overwhelmed by the virus? And will fear of the virus keep workers from returning to work?
And what about the unintended consequences of policy decisions? What about stimulus measures on the fiscal side? Hong Kong has dropped helicopter money on its citizens, but similar measure across the globe would be a massive sell the fact moment on fears of inflation and a rates shock (which may dwarf the effects of the virus). It will all be a matter of careful timing.
For the record, if containment does break down, I’ll be going into hiding – the few studies of the disease from reputable sources all suggest its most dangerous to the elderly, overweight and those suffering from cardiovascular, respiratory and other pre-existing conditions. Dang I tick too many of these boxes…
No point worrying today about what we might have to worry about tomorrow…
Enough about the Virus… Let’s talk about saving the planet instead.. After y’days article in the FT about the rise of Hydrogen economy, let me outline some thoughts about why Hydrogen is tech you should follow.
Electric Vehicles Vs A Hydrogen Economy
I know I am going to get trolled remorselessly for the following post – but it’s important to say it: What the world needs now to decarbonise is efficient capacitance – storing and distributing energy. Whatever a bumptious South African thinks, Lithium batteries are not a good solution. They are inefficient, dirty, and riddled with ESG sinkholes. We need something better.
One of the expert sources I most respect in the Decarbonisation/Renewable energy world is the remarkably named Thunder Said Energy. Their energy consultancy commentary is excellent – and will surprise you. (If you decide to meet them, or sign them up, please mention Shard and how you read about them here!) Recently they produced a report showing how Battery Electric Vehicles (BEVs) will actually increase demand for Fossil Fuels for at least the next 17 years. Thereafter we will remain heavily dependent on Gas to produce the electric juice for BEVs for decades to come.
TSE have run the numbers in great detail, and it won’t be till 2037 that BEV’s actually start to lower the amount of fossil fuel energy required each year. That’s because it takes 3.7 times more energy to produce each BEV than the net road fuel it displaces each year. This is bad news from EV proponents who have been telling us how they can decarbonise the planet, but great news for the Gas industry which will be needed to make the electricity to power BEVs for many years into the future.
The research shows it takes about 9 tonnes of Co2 to make an EV battery – without even considering the other ESG implications of how Lithium is obtained. It takes about 50,000 miles before the battery breaks even with a conventional combustion engine car. If you assume an EV will have a practical life of 300,000 miles then it will create just 40% less CO2 than a conventional car. BEVs have a significant carbon cost.
Meanwhile, some of the top performing stocks of 2020 include a number of US and UK Hydrogen linked fuel cell makers. Hydrogen and oxygen react in simple fuel cells to create power, and a very simple and useful end pollutant – water. Nothing else. Fuel cells are a brilliant, simple and clean tech – but at the moment come out massively more expensive than lithium batteries. Like all new tech, the cost of producing hydrogen will fall, especially if renewable power sources can be directed to making hydrogen. Effectively, hydrogen could become a much cleaner and more efficient capacitor for EVs than a lithium batteries. Plus, hydrogen is the most abundant element – while child miners in Africa are digging less and less dirty lithium out the ground.
The Chinese are into building out a whole Hydrogen Economy. The obvious stuff is building fuel-cell buses. But they intend to use hydrogenise their whole economy to power transport, industry, chemicals, power, residential and commercial property and whatever else takes their fancy. They are solving the logistical problems around hydrogen in terms of transmission, distribution and storage. They are getting over the grid capacitance problems of renewable power by using intermittent solar and wind to manufacture green hydrogen – which at the moment remains more expensive than creating H from coal!
They have realised hydrogen offers a complete and cleaner route to decarbonisation, replacing fossil fuels earlier if it can be manufactured in quantity, and cost-efficiently. That will require renewable power costs to fall even more – which is what has historically happened. There are couple of exciting technologies coming on stream to produce hydrogen from methane (natural gas) and through direct solar energy generated power. (If you want to learn more, I’ll be happy to forward you some recent notes from banks and research companies.)
The bottom line is the current crop of EVs are probably an evolutionary step on the way to clean power and transport:
· Hybrids are analogous to the first lung-fish that crawled out the sea some 15 years ago.
· The current crop of BeVs – including Tesla – are like the reptiles that followed them; better, and able to cope well, but still limited by issues like range, battery tech and the sheer weight of carrying the batteries.
· The next evolutionary stage is likely to be fuel-celled hydrogen powered HEVs, a leap forward with simple efficient tech, range, weight etc.
· You were probably waiting for me to write “Dinosaur”, and so Hydrogen may prove when the “mammal” finally emerges – a safe fusion reactor the size of a golfball powering everything…
A thousand years from now people will be looking at fossilised Tesla and wondering exactly what it was…
Five Things To Read Today
FT – What Antarctica’s penguins tell us about the planet’s future
FT – Oil Market faces up to the grim implications of coronavirus
BBerg – Volatility Market Signals The Stock Pain Isn’t Going Away Soon
CNBC – The Barings Collapse 25 years on: what the industry learned after one man broke a bank
ZH – UK Government Document Warns Coronavirus Could Infect 80%, Kill Half a Million Brits
Out of time and back to the day job…
Bill Blain, Shard Capital