Jon Markman: Yesterday, Martin told you about the most powerful and potentially most profitable supertrend of 2015 — mobile chat apps. Today, I’d like to share with you what might be the next trend in energy in the coming years and how you could profit.
It starts with one of my closest friends, a longtime mentor, who passed away last month. He was the research director and risk manager of a large East Coast hedge fund, and very secretive. I depended upon him as a source for 15 years, and he would never let me use his name in print. His firm was the same way; very quiet, dedicated to their clients; never a word about them in the media.
It’s interesting to think about the roots of my friend’s uniquely broad and rich view of the world. A key element was that this gentleman, who I used to call Mr. P, was open to hearing from a very wide network of analysts — some of them well outside the mainstream. He was always looking for what he called “balance points,” or areas of agreement among seemingly diverse views.
This makes sense if you consider that a successful hedge fund manager’s job is to develop “variant opinions” about possible future events, and then bet on them well ahead of the crowd. If those non-consensus views later become mainstream, you can profit handsomely. If you’re wrong, well, so be it — at least you tried.
One of his techniques was somewhat cruel but also fascinating: He kept a Ph.D. analyst on his fund’s payroll who always expressed a consensus, or mainstream, opinion. Mr. P treated this individual collegially, as if he were offering insights, whereas in fact he considered this guy’s opinions to be virtually worthless. Mr. P always wanted to be generating views that were non-consensus, in short, because that is the most fertile area in which to bet. If this guy agreed with a thought, then Mr. P would abandon it.
A non-mainstream analyst Mr. P enjoyed conversing with was James Smith, who runs the independent analytics firm Catapult Research in New Jersey. Smith specializes in Gann analysis for institutional investors, an arcane application of financial geometry that separates the concepts of “time” and “price” when determining the future course of a security. W.D. Gann, the founder of this style of analysis, was no doubt a genius. It tends to be better at figuring out when something is going to happen, and at what price, than why. Sounds odd, but in the right hands it can be very useful.
|Could solar replace most of the fossil fuel we use in the near future?|
With permission, I thought I would share one of his emails because it bears on an area of technology research that I think will be very big in coming years: Solar energy.
As background, you should know that Smith’s research has led him to believe that the recent plunge in the price of oil is about more than just Saudi Arabia’s attempt to bankrupt U.S. shale drillers and to destabilize the petro-economies of rivals Iran and Russia. He thinks it’s about the end of 100 years of ever-increasing demand for oil, the start of serious trouble for fossil fuel explorers and producers, and the start of a new era for solar energy.
Smith in fact sees a crash coming in 2016 as investors begin to discount the possibility that companies like ExxonMobil (XOM), Total (TOT) and PetroBras (PBR) will ultimately end up writing off tens of billions of dollars’ worth of “stranded assets” in their oil fields. “Demand for oil will never recover — ever,” Smith says. “You don’t read this idea in the mainstream media because it is their job to tell you what you already know after it is obvious to everyone,” he says. “I’m saying that if the cost of solar drops 20 percent every time the installed base doubles, it is only a matter of time before solar takes over from fossil fuels. My best guess is that it starts to really happen from 2017 onwards.”
Now here is the rest of his argument, almost verbatim (with edits for continuity). I’m not saying I endorse it. I’m saying that these are the kind of views that go into shaping a non-consensus opinion.
Smith: “It would be well worth the investment of your time to view this video of Michael Liebreich, a British energy expert who is chairman of the advisory board of Bloomberg New Energy Finance. I have been warning my clients for the last few years that 2017 will be the year when alternative energy goes through a “phase change” from fringe to mainstream. People have the mistaken view that the change will be gradual. It won’t be gradual. It will be sudden and ruthless. Stranded assets of coal, natural gas and oil will turn the global economy on its head.
“I put solar panels on my home back in 2004 when most people thought it was fringe. I have done a lot of study on this issue of solar and wind. If there is one thing I try to get across to clients, it is that now is the time to buy into solar. First Solar (NASDAQ:FSLR) may become the first trillion-dollar company in ten years. I know that sounds audacious, but watch the video. Denmark gets 40 percent of their electricity from wind and Texas now gets 30 percent from wind. And wind is small potatoes compared to what will happen once 5 cent/kilowatt hour solar becomes standard pricing around the world. I’m saying that even natural gas cannot compete with solar. It may well be the worst nightmare the Koch brothers can imagine. Exxon will be a smaller company than many solar companies ten years from now. This is happening. It is real.
“Where I add to the picture for my clients is to frame the phase change in solar to coincide with the next 17-year bull market in the Dow. I’m saying that 2016 will be a crash year for stocks globally but out of the ashes, we’ll see a new bull market emerge in 2017 led by alternative energy going mainstream. The idea that most fossil fuels in the ground will become stranded assets is still not accepted by most fundamental analysts. They don’t get it. They will, eventually. By the time they realize what time of day it is, we will get a global stock market crash in 2016 as the market starts to discount the end of the fossil fuel era. Exxon and many big oil companies will lose more than half their current value. But even if oil companies never recover, the overall market will recover in 2017 and move up for the next 17 years.
“Now this is where I might disagree with [Mr. P], who always saw events through a political lens. I loved talking with [Mr. P] because he was so incredibly smart and informed on exotic subjects. But one thing I really disagree with is the idea that politics matters. I believe that the job of the politician is to claim credit for stuff that was going to happen anyway. A rapid technological shift is what changes the world, not the actions of any one politician or political party. Fundamentally it doesn’t matter whether you have a Republican or a Democrat elected in 2016. This technological ‘phase change’ coming in 2017 from solar and wind power will overwhelm the energy markets. It is a revolution in the making. When solar is cheaper than fossil fuels (and it will be everywhere by 2017) it will overwhelm the markets.