After the COVID-19 outbreak started, many people started asking “what will change in the future”. Instead, it’s usually safer to ask “what isn’t going to change”. That answer results in clear investment opportunities with limited risk. We say limited as no investment is risk free, even a currency in your country. When we think about the future, most want grand explanations full of dramatic shifts. The reality is that the future will see an acceleration of technology and an individual should prepare for the new environment.
Technology Will “Eat The World”: If you’ve been following the blog over the last 8 years or so, you’ve seen a slow and steady shift to technology instead of finance. This isn’t because we’re negative. It is because it is happening. If computer systems can beat the #1 player in Go (or any game at this point) and can drive cars in the future, it is certainly going to be able to do basic accounting/math problems. The artificial intelligence can quickly calculate the impact of a merger on financials without an excel jockey in the middle.
Technology will continue to make our lives easier… If true… this means that we should be over-exposed to technology from an investment perspective. Take the S&P 500 and look at the mix of the various industries, oil & gas, real estate, financial services etc. Simply take this mix and buy more of the technology sector. Sure. You may lose money in a particular year, month or week. And. Over the next 10-years you’ll eventually see technology become a more and more important part of the index.
Knowing that technology will continue to push forward at rapid rates (self-driving cars, curing diseases with AI, drones and new automated delivery devices) we can conclude that working in an industry that continues to help technology is a positive as well. For that we have to go “up stream” and move to the supplier side.
Moving Tech Upstream: We went from everyone wanting to create a blog to everyone wanting to create a brand to everyone wanting to have their own e-commerce store. The good news is that this trend will continue. You should then think about businesses that can move upstream. In simple words, you want to sell all those picks and shovels to the people creating brands and companies.
Some simple examples include: servers, manufacturing and logistics. If we can agree that people want to create their own “online brand” and push to internet based businesses, it means you want to be the “helper” for all of these people. You don’t care who wins in this case as some of them will fail and some of them will succeed. You’re just there to help them run their business by giving them servers, a manufacturing facility or offering a warehouse for storage.
Yes this is our next point of advice for anyone who is young. If you already have decent cash flows, you want to try and move upstream. This is less risky as you’re simply a picks and shovels play on the future of commerce. You don’t need to “win’ which is the hardest part of building a brand. Instead, think about the billions of people who will attempt to create commerce businesses online and ask yourself “how do i help them”. This gives you a stable return with less risk.
Wealth Inequality: With the current set up, wealth inequality is going to continue to rise. Currently, money printing is continuing at a rate we’ve never seen in human history. Billion and Billions and Billions of dollars… printed out of thin air. This money is not going directly to the people who are unemployed it is going into the “economic system” which is just a simple way of saying asset prices. The rich are spending *less* because they cannot travel, cannot spend on fancy trinkets and cannot go to expensive restaurants as frequently as they did in 2019. So all of this money has to go somewhere and it’s going into assets (stocks, real estate, gold, crypto etc.).
In addition, the companies that were forced to shut down (hair salons, restaurants, bars etc.) are taking out 0% interest loans due to specialized programs. The problem is that debt needs to be paid at some point. So if you are a small business owner, you’re probably better off shutting it down entirely and waiting until the pandemic is over before trying again. If you were already levered up prior to this, then you’re in for a rough decade. Having a partially opened business at “25%” capacity when your operating margins were already low at 10% is not going to help you as you won’t be able to cover fixed costs. If we can agree that inequality increased recently, it means scarce assets will continue to rise in value (beach houses etc).
Healthcare Investment: Outside of technology with COVID-19 or without COVID-19, more and more money will likely pour into the healthcare industry. After something this drastic, countries and companies will look into pandemic planning. They will also invest in the same healthcare trends that were here prior to COVID-19 (aging population as baby boomers are largely retired at this point).
Unless you’re an expert in the field, it’s probably best to avoid betting on specific stocks. You can simply look at the industry and make sure you are exposed to some of those trends in healthcare, bio-technology etc. Just buy the basket. If you have extra money sitting on the sidelines… you should be sprinting (not running) to put those dollars to work in a real asset if we’re going to continue to print money (devaluing fiat currencies).
Some Specific Changes (Tech and Healthcare): It’s highly unlikely that zero emission policies go the way of the dinosaur. The future is electric and we know that electrification of vehicles (cars, trucks etc) will continue. In addition, we know that alternative forms of energy will ramp up (reliance on oil is going to go down). If people believe otherwise we’d love to hear it. From our own research, it seems unlikely that digging oil out of the ground is energy efficient long-term.
Electrification ideas are actually quite easy to find. Wait for companies that have real units/volumes. Tesla has been a good example, battery companies will come around and solar panels will eventually work. Cost declines are real when it comes to these industries so you don’t need to invest in questionable companies with no real volumes (just look at Nikola for an example of why it isn’t worth it to invest in companies without units).
Another good example is “going up stream again”… but for technology. Instead of looking at the past, ask “what type of products are needed for electric vehicles?”. This changes the mix of commodities. So you will likely see an increase in commodity prices for minerals used in electric vehicles, solar panels etc.
Mental health is one area that needs to be addressed. This blog is probably one of the least empathetic areas on the internet. That said, anyone who has seen a wide range of economic spectrums knows that people (in general) want/need to feel appreciated/valuable. The worst thing is to feel “useless” and “good at nothing”.
With artificial intelligence ramping up (for better or worse we’re using it and seeing it), it is clear that many jobs will be automated. There is no way that the government and tech companies will create a seamless and perfect transition into the new normal. Structural unemployment increases and we need a way to both offer new education systems and mental health care systems. You do not want to see a society where everyone has nothing to lose.
If riots are bad now, the prior sentence would be 10x worse (or more). Hopefully the tone shines through, we’re not kidding when we say it’s a big issue. That said, the chances that the average person will agree is low, so you’re better off owning the bio-tech/healthcare industry in general. It’s hard for the average person to understand exponential change in job losses.
On a more likely note, healthcare spending will shift into disease research (due to COVID), life extension (continued from past) and new equipment to detect diseases. Those three have been going on prior to the pandemic (COVID accelerates one of them) but even if we solve COVID tomorrow, the main three will remain as “big problems” for society to solve.
The last one related to both technology and health is actually our water supply. At this point, we do have the technology to remove salt from ocean water. The problem is that the cost is too high (equipment needed). In the future, we’ll likely develop new solutions to clean/purify water that were unavailable in the past. If you want to see how serious water issues can be, look at Flint, Michigan in the United States. That is a city in a first world country. If you extend that problem globally it becomes a serious issue that needs to be resolved.
Higher Amounts of Personal Debt: Prior to the pandemic, individuals were still loading up tons of debt to go and get educations that may or may not actually benefit their long-term future. This led to a large debt burden for huge chunks of society. If you were a millennial, you watched 9/11 followed by a great recession followed by this pandemic. Meanwhile, you were told to go to college and that college did not guarantee any increase in income (or any income at all)… pretty sweet deal!
That aside, many companies took the interest free loans to stay afloat so the amount of debt is simply going up. This is going to lead to a very long drawn out recovery from an economic view (not talking about stocks in this case). In short, doesn’t make sense to own any bonds… especially those safe ones like student loans.
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I’m glad you brought up the oil conversation. It’s clear that oil industry as a whole got hit the hardest during this pandemic, but it’s hard for me to see even 5-7 years out oil becoming obsolete as most media headliners suggest. Exxon and Shell are HUGE, I see them purchasing smaller alternate energy companies to leverage the solar and electric side of the market. But I can’t subscribe to the idea of big oil dying in the next 10 years, and the USA alone consumes 1/5 of the global oil. I like the oil play right now, especially post-pandemic
I think non-transportation use of oil is something like 8% of total consumption.
Automobiles (not including trucks) account for maybe a third of all consumption.
The oil industry is somewhat hedged but its feasible that a decline in oil consumption from automobiles going electric could cause a serious decline in income for incumbent oil companies.
Fracking has created an effective ceiling on prices too. As soon as demand perks up, say above $60/barrel, then fracking starts up. There’s little fixed cost in starting a fracking well. This ceiling makes it hard for long term planning for oil companies, which tend to rely on good years to offset bad ones (roughly speaking).
Regarding ‘moving upstream’, any thoughts on doing this in the OnlyFans niche? Tons of money being minted by these “content creators” and lots of ways to offer them ‘picks and shovels’ – but even if one tries to remain discreet while building a business like this, concerned about reputational risk, as well as a possible backlash against these types of services in the future?
I hang with a lot of these types and think it’s only going to become more accepted as time goes on. What type of picks and shovels did you have in mind?
What should a non techie focus on to put themselves in a great position for the tech centric future?
Amusingly, increased amounts (usd/national currency denominated) debt of may not actually have as disproportionate an impact on individuals as in the past due to:
a) inflation; same dollar value debt is easier to pay off over time assuming inflation outpaces debt interest accrual (increasingly likely imo)
b) decreased reliance on credit checks & other traditional banking/financial systems where high debt burden has visible negatives; if payments are done online w/ crypto, trades/high-interest are done with DeFi, etc, you only need one point to convert to physical USD for necessities such as rent.
Someone who truly decided to say “i dont care at all about by traditional debt burden” could aggressively borrow USD in order to invest in assets (QQQ, btc, or whatever asset they believe is going to outpace debt interest rate). Not saying this is responsible or recommended but it does provide a non-zero ROI unlike 99% if degrees.
Great post. Additional thoughts:
Future of work – the majority of work and labor will also be “owned” by technology companies. Uber/doordash/taskrabbit (to name a few, there are a dozen variations of each) are not just on demand apps making our life easier – but will start to be platforms where people find work. I think this explains the crazy/lofty valuations put on these businesses. In addition to their core business, they are also part “HR” / “Job /Recruiting Platform” – and the valuation multiples reflect that. These platforms will start to act essentially as job markets.
It’s scary to think of a future where the majority of the population – in order to earn a wage – will depend on the whim of the 0.1% to deliver food/alcohol/grocery for them or drive them to the airport. But unfortunately that’s where we’re headed and very few are paying attention to it.
0.1% starts at $40M, wont see much use of those on-swipe services there. Platforms are for mass-affluent without much capital yet
For alternative forms of energy going up and reliance on oil going down, something to consider is the split between solar/electric storage at the house level vs grid level technology and US vs global markets.
Lines up well with overall deflationary for US market while also boosting GDP on export side to rest of world.
Have an engineering background, spent years in oil/gas and power transmission and the two main current issues is the tech currently doesn’t exist to store energy generated from wind/solar to meet peak energy demands for grid effectively and at a larger world scale, most of the world’s +1mm cities and growing populations (think Africa and ASEAN) do not live within 1,000 miles of suitable solar/wind power generating geography.
1,000 miles is crucial as that is about the limit power can be sent from generation source to point of use.
On the power grid side, when 100,000 people get up in the morning, all turn on their coffee maker, tv, lights, and take a shower at the same time to go to work, that spikes energy demand.
A power grid has to be balanced, meaning if there are 100,000 people using power, then there has to be the same amount of power flowing into the grid from power generation or storage sources at same time.
Currently, an operator will bring a gas turbine, nuclear, or hydroelectric (dam) generator up to speed to meet demand, then wind it back down once everyone goes to work and peak demand lowers.
Wind and solar are fine for contributing to power on the grid when available, but cannot be used for meeting base load like natural gas, nuclear, hydroelectric, or coal (coal is going away, can’t compete with natural gas prices).
Reason alternative energy sources cannot be used for base load currently is the tech doesn’t exist to store wind energy that may be generated at night, or solar energy generated in the afternoon to be used during peak grid demands the next morning.
Will we someday develop the tech for grid storage? Maybe, I would never be short capitalism and tech ingenuity, but so far not seeing anything that can fix this issue at the grid level which is sustainable with a longer life cycle than current energy generation.
Then, even if the storage problem is solved, would still have to contend with the 1,000 mile limit on power transmission and most the world not having good geography to place alternative energy closer to major populations.
Which is why I tend to think home alternative energy systems and oil/gas production for export will both continue to grow in the future.
I’m thinking along the lines of Tesla’s solar roof panels and home storage system.
As systems like that become more efficient, problems are worked out, and cost price point drops, solving peak energy needs on a per household basis becomes possible.
You don’t need an operator sitting in a grid control room spinning up and down a gas turbine when you get up at 5am since energy is stored at your house, and lessens demand on power grid during peak times.
This is great for the American market specifically. The US has a lot of area that is economically viable for wind and solar, and is also producing oil at a price point now lower than OPEC and rapidly coming down to meet Saudi Arabia thanks to relentless tech improvements in the industry.
We have also switched over most of the petroleum product market in the US to use natural gas as base input instead of oil since we are producing at 1/6th the global average price, and will be largest exporter of natural gas in world overtaking Qatar and Australia by 2024.
So fertilizers, fuels, lubricants, oils all some of the lowest input costs in the world now for farmers, manufacturers, etc contributing to the deflationary trend while also boosting GDP as more refined products are exported to rest of world which doesn’t have the geography for alternative energy and population centers too far away from viable sites, so will continue to build natural gas fired power plants.
As an example, China is expected to increase their natural gas use for power generation by 400% over next couple decades.
This adds up to life getting better in the US through lower costs as tech drives deflation in cost of producing oil/gas and innovation in alternative energy systems while also boosting exports of petroleum products and natural gas to the rest of the world that will continue to have an increased demand.
Reason natural gas use is rising, the upfront build cost for power plants is very low when compared to other energy generation sources, power plants can be placed where needed close to population centers, and the technical skill to operate and maintain is lower than nuclear.
A couple of the tech areas we are watching to disrupt this view is wireless power transmission and seabed turbines. If/when those techs are sorted out, that would help solve the distance limitation for power transmission and give potential to generate power closer to most coastal cities which are unsuitable for wind and solar and would disrupt demand for natural gas, but so far neither of these technologies are viable.
Great write up
The tech is already here. Offshore wind (fixed and floating), batteries (short tern storage) and hydrogen (way to store energy, replacing natural gas) are the future and likely to see exponential growth over the next 2-3 decades. Until then yes, gas is the “bridging” tech.
Renewable developers seem a no brainer to invest… long term growth, supportive cost outlook and policy (regardless of Trump… policy is done at State level).
If Biden wins the whole sector could get a policy boost as well.
Thoughts on feasibility of Bitcoin as a store of energy? I.e., excess energy -> mine BTC -> sell BTC later. Example: Cruse Energy Solutions.
why wouldn’t you take a technical role (trading) at a bank to get the best of both finance and technology?
declining sector
Agreed on distributing more cash to tech. I front loaded my 2020 401K into 2 funds. 75% on a heavy tech index, 25% to traditional index as a hedge.
Just checked the YTD:
Tech Index: 21.79%
Standard Index: 3.53%.
Total: 17.18%.
Going forward, I m allocating 100% to tech.
I would like to add that I don’t see non-hydro renewables going beyond 30%-40% of the US electricity mix, it’s not only the storage that must be solved but the transmission lines. Besides, you need massive amounts of steel, concrete and rare earth minerals in order to scale up for the entire country, and no linear regression or wishful thinking will make it easier. And we haven’t still priced in the cost of disposal.
On the other hand, these crazy 100% “clean” grid policies will ramp up demand for decentralized energy generation, you better invest in Distributed Energy Resources like Solar + Battery, Geothermal, and Diesel/Gas Generators as a back up in case you have blackouts like in California.
EV’s are a bit overhyped, the Lithium supply won’t keep up to projected vehicles sold, and competing with other electronics which are growing way faster. In many countries gasoline is a huge source of revenue for governments, good luck bannijg them and let’s see how cost competitive EVs are if they face the same regulations. Finally, millions of large batteries being disposed is worse than global warming.
With that said, that doesn’t mean the trends for alternative energy and electrification are bearish, and I also wouldn’t short the market and human ingenuity, but I totally second the motion that oil and gas will be around for longer.
Rare earth minerals and other precious metals mining could be an interesting investment, and I definitely think that big Oil and petroleum refining will come back, so if you have extra cash it’s a good time to buy some.
The world no longer revolves around money. Money is going to become obsolete and replaced by those that control the machines.