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Wealth can be yours if you plan it!

By Richard Cluver

Peace of mind comes from understanding the forces which shape the future.

Wealth comes from knowing how to use that knowledge.

My personal philosophy, honed by the rigors of a lifetime in South African news-reporting and financial journalism is represented in those two lines above.

Put to the test, they can be applied to both the simplest everyday events of one’s life and to those that are seemingly beyond our control. Thus, for example, one might argue that taking a lifetime partner is mostly all about compatibility, mutual respect and understanding with a healthy dollop of hormones thrown in to spice a complex mix, yet should one with a compulsive-spender partner kiss goodbye to any dreams of achieving a lifetime free from financial worry, let alone wealth?

Simply-stated, it is far easier to swim with the current than against it. Of course that view is dependent upon knowing where you want to end up and, unfortunately, observation of my fellow human beings has led me to believe that most of us do not even know where we want to go in life. That’s fine if you are content to be subject to the ebb and flow of human experience, but I for one have NEVER been prepared for life to decide where I am taken. I have ALWAYS had a plan and I have almost ALWAYS known where I was headed….note the word ‘almost’ because, like you, I am human and life does throw us challenges. But if you own a compass you are halfway there!

Practical experience has, furthermore, taught me that once one has identified one’s desired destination, plotting the best course to get there is not all that difficult. As every experienced sailor knows, getting a vessel from A to B is to mark the start and destination points on the chart and simply draw a line in between. That way one quickly spots the rocks lying in the way.

Life, I have learned is not much different. Once you have determined what you want to achieve, it is quite simple to draw up the plan that will get you there. If you think that is an over-simplification, just a little observation of the lives surrounding you will quickly convince you that the great majority are simply leaves in the storm; quick to complain about the vicissitudes but doing nothing to either anticipate or avoid them.

Similarly, one might believe that one has no control over the political management of the country one lives in because the majority rule applies. But the simple fact is that most of us enjoy the freedom of choice. Emotional ties might make it hard to escape mismanaged countries and move to an environment where economic growth is a cardinal value of government, but unless one chooses to live and work in a progressive community which values what one has to offer and rewards one accordingly, the fundamental truth is that both one’s personal freedom and one’s ability to create wealth will be held to ransom.

Making ourselves aware of the forces shaping our future is far less difficult than one might imagine. Here the media is our greatest friend because it is quite easy to immerse oneself in the mainstream of current affairs. Indeed, from the televised news shouting non-stop throughout the day to the more thought-provoking pieces written into an equally strident electronic media, repetitive themes soon begin to arise which offer one clear signposts about the tides of human activity.

The human mind is a remarkable thing for, if you subject it to all these signs, it soon begins to distinguish the patterns and before you know it you will be instinctively joining the dots, and from there it is but a short step to turning events to your own advantage. You will undoubtedly encounter false prophets along the way, but if you expose yourself to a wide spectrum of opinion you will soon learn to distinguish who they are and, more importantly, soon begin to discern the underlying truth which, as the philosophers have always maintained, will undoubtedly set you free. At the very least you will never then be caught unawares by the traps which life inevitably throws between us and progress. At best, you will soon learn to recognize how many events are repetitive and how constant are the cycles which shape the lives and tides of man!

Just how repetitive they are only became really clear to me when I began work on the ShareFinder program in the early 1980s. I had long understood that there were profit cycles which were clear from an even cursory following of stock exchange listed company prices over time. Indeed, from my earliest faltering footsteps as an investor on the Johannesburg Stock Exchange, I had been aware of the semi-annual cycles of share prices and, from the time of opening my first stock-broking account, I had profited mightily from buying quality shares at their nadir and selling them at their apex. At the beginning, all that I had required to make me effectively financially independent when I was still in my teens was some big sheets of graph paper tacked onto the back of my bedroom door and the schoolboy ability to create weekly price charts.

But it took the arrival of personal computers to enable me to fine-tune that observation until the stage where today I can with reasonable accuracy see where any security of value is headed, when it will peak and when it will bottom, and do all of that with sufficient precision that I have long been able to publish weekly predictions to a very large community of subscribing investors and, subjecting those to audit, can claim a short-term forecast accuracy rate of 93.33 percent.

I have learned to be extremely cautious when mentioning that forecast accuracy rate because few, from their vantage point of a chaotic world, believe it is possible. However, I have kept a weekly record since January 2002 of those forecasts and, I should add, I write for a very critical paying audience of investors who, I am sure, would be quick to challenge such claims were there any doubt.

Desktop computers were in their infancy when I began putting my long-held investment theories to the kind of regression analysis that only they are capable of because of their lightning-speed processing of immense quantities of data. And as I have just mentioned, I had known, since as a schoolboy of 14 I had first taken a serious look at a book detailing the balance sheet statistics and the annual share price highs and lows of Johannesburg Stock Exchange listed shares, that the price cycles were always there, but being able to map them and, more importantly, being able to see with crystal clarity when the upward curves began flattening to signal that a cycle was ending, would back then have taken far too much time when it all had to be done manually.

Computers are, however, neither lazy nor subject to our human distractions. Provide them with sufficient data and, more importantly, the right analytical routines and they will unerringly enable one to project the future with a clarity that would have astounded previous generations who would have thought that such prescience was only possible for seers and fortune-tellers with particular gifts.

The ShareFinder project began as a research project employing a simple interactive spread-sheet within which I loaded every bit of balance sheet data I could obtain about the listed companies I was interested in. The objective then was to find a way of determining a constant valuation system which would, in turn, allow me to search out those companies which were achieving the highest balance sheet value-growth and thus be able to determine which could be considered under-priced and so offer a profitable long-term investment opportunity.

The simplest and most reliable constant dictating the long-term value growth of a blue chip share proved unerringly to be its dividend record, since a dividend once paid out, cannot be recalled. Furthermore, since a regularly-rising dividend policy was the most clearly discernible aspect of a Blue Chip company: which led in turn to those seeking reliable sources of investment income to seek ownership of such company’s shares, it had long been understood that such dividend fidelity led to steadily-rising share prices which in turn provided company management with a most valuable takeover instrument. In short, in such shares the management of Blue Chip companies had a ready source of capital with which to buy out their competitors and thus progressively secure almost monopolist trading conditions for themselves.

Best of all, the issue of such shares, except where excessive issuance eventually led to the dilution of shareholder value, was effectively money for free. You did not have to go to a bank and borrow capital at crippling interest rates when you could take out your competitors with you own ‘effectively free’ paper.

There were other statistics as well but many of them could be fabricated by skilful book-keeping; by bringing to current book future sales or, conversely, delaying bringing profits to book. So I always knew that the dividend history was the vital bedrock that determined corporate fortune. But there were others, like how effectively corporates made use of their retained capital which could be readily illustrated by comparing share price growth with the percentage of retained capital over periods of time.

Indeed, there are many other statistics of varying importance to analysts trying to determine which corporates represent their best investment options and so, as I began building my own spread sheet, the most difficult task was to determine which weighting to apply to each of these varying statistics in order to achieve the greatest valuation accuracy. And that is precisely what computers exist to determine. So it was not difficult to design testing routines which tested every possible parameter to determine the best weightings.

To my ultimate surprise however, so far as I have been able to determine, nobody else had ever done this and so, when I began publishing the resultant investment findings in my widely-syndicated newspaper column, it was probably inevitable that readers quickly saw the profitable results of my research and began asking for copies of the software.

Within weeks of beginning to publish my findings I thus found myself the owner of a booming cottage industry and, more importantly, I was able to hire programming staff to assist me in developing software enhancements capable of additionally determining optimum buying and selling points which in turn quite soon allowed me to create an integrated share trading system which has remained in constant development ever since as attested by the ever-growing accuracy of its forecasts.

Now, since the earliest days of commodity trading thousands of years ago, ingenious processes have been developed to try and out-guess the marketplace and, particularly so with the development of stock exchanges which soon gave rise to professional traders whose ability to time the market grew exponentially over succeeding centuries.

The methods traders employed were complex and time-consuming and so, with the development of the desk-top computer, it was inevitable that market-timing software developed almost as rapidly as the computers themselves; because there were huge profits to be made by those who finessed the process.

I was therefore something of a late-starter in this secondary field of analysis but, nobody had ever made a proper comparative study of the various methods of ‘Technical Analysis’ as the process had become known. I was fortunate therefore, that two Americans; Robert Colby and Thomas Meyers had at that time written the definitive “Encyclopedia of Technical Market Indicators” in which they had published the formulae of every well-known technical analysis system then in use.

My staff was thus able to build working models of them all and build predictive systems which could be backward-analysed to determine which were profitable and which were not. Surprisingly, many of the most popular systems actually did not work at all when subjected to long-term statistics. Those, furthermore, whose methodology made considerable sense, often contained design flaws which only became apparent when computer-based mass-testing showed them up.

I was thus able to simplify and modify the three or four most promising market predictive concepts and accordingly soon afterwards launched my ShareFinder Two software which was the first to ever hit the investment market offering an integration of the two share market analytical systems.

What surprised me the most of all of these systems, particularly since it had provided me with the initial inspiration to begin share market trading at the tender age of 14 and thus should not have been any surprise at all, was that one could track the inherent sine waves within any data-set and reliably project them forward in order to accurately forecast future market directions.

For centuries, beginning it is believed with the Greek philosopher Pythagoras (6th century BC), whose experiments on the properties of vibrating strings that produce pleasing musical intervals were of such merit that they led to a tuning system that still today bears his name, scientists have been studying wave forms. From Galileo Galilei (1564 – 1642) to more modern physicists like Robert Hook and Feliz Savant, the studies went on. But it was not until the early 19^th century that the analysis of a complex periodic wave into its spectral components was theoretically established by Jean-Baptiste-Joseph Fourier of France and is now commonly referred to as the Fourier theorem.

In its simplest definition, Fourier analysis is the simplification of a complex waveform into its basic component sine waves of different amplitudes and frequencies to which there are a number of parameters which include the frequency of oscillation, their harmonics which in harmony of direction lead to trend amplification, their amplitude which is the maximum disturbance or displacement from zero caused by the wave or, to put it simply, the height of the wave. Another is its period, or the time taken to complete one oscillation as well as the wavelength or physical length of one complete cycle. Yet another is the wavelength velocity and the phase or displacement of one wave compared to another.

Our contribution to the Fourier series was to create an optimisation system which systematically explored which combination of these many wave parameters, and what observational time period, gave the most accurate forecast results.

To this we added processes which allowed the system to learn from any mistakes it made in forecast accuracy and thus continue to modify all the parameters of every lengthy time series in our possession. Thus we gave the algorithms a life of their own: a process that latterly has become known as the widely misunderstood concept of artificial intelligence. That process which we gave life to in the early 1990s has in turn become a life form of its own which has defied replication even by our most skilled programmers who have been presented with all its aspects of construction. Thus, in later life forms of the ShareFinder series, we have simply transplanted a copy of this vital beating heart and left it to continue its ever-more accurate analysis of every bit of data we have offered it: to the stage where, even when we cannot see why it is making a major market direction change forecast, I have learned to respect it. Our ShareFinder AI, much mutated from the original Fourier Transform that we built into those earliest iterations of the software, has unerringly predicted the Osama bin Laden’s September 11 attack upon the World Trade Centre, the 2008 Subprime financial crisis, the 2020 Covid-19 global shut-down and many more lesser crises along the way.

It is an awesome investment tool and, when teamed with the fundamental analysis tools which my team and I developed to give quality ratings to investment-grade securities, it has evolved into what I believe to be both the most complex and most accurate investment tool mankind has ever produced. As the grandfather of the ShareFinder development project, I have an almost superstitious awe for what it has come to represent to the worldwide investment community and a deep, pride at having been able to be part of the research which made it possible.

In subsequent issues of The Investor I will provide readers with a more detailed explanation of the many balance sheet statistics we analyse daily within the ShareFinder system to seek out the safest long-term investments. Suffice now to say that, with minor adjustments as we have refined the process over the years, the methodology we first developed in the 1980s has remained robust and, as our managed portfolios have so adequately demonstrated, it has proved to be a consistent winner!

However, as I have frequently observed, you can be an investment winner most of the time – even under the most adverse circumstances – if you are able to apply the appropriate methodology. But it is far easier to do so when you are swimming with the current rather than against it. So, if you want to prosper optimally, you need to be able to understand the prevailing political and economic climate and turn it to your advantage!

In subsequent issues I intend throwing as much light as I can on the understanding of where we are in those equally-important cycles…..and where they are leading. They are, as you will learn, chapters of a new book entitled Wealth which is nearly ready for publication later this year.

I hope you will enjoy it!

Global inflation in check?

By Richard Cluver

According to Investec chief investment strategist Chris Holdsworth, 38 of the world’s 50 largest economies have reported on inflation with the median inflation rate across the globe declining to 6.7% from 7.6% the previous month. Meanwhile, when weighted by gross domestic product, the global average is now down to 8.1% from a peak of 10.3% in October last year.

Furthermore the market is pricing in rates to be 50 basis points below spot in January next year. 

Investec in its monthly guidance report on May 5 noted the that the US Federal Reserve had raised its target range for the federal funds rate to 5.00% – 5.25% (25bp lift) as was widely expected, but its statement was much more balanced, highlighting all areas of concern versus previously showing a greater inflation focus.

In particular, it recognised a more flexible approach to “additional policy firming”, is appropriate, taking “into account the cumulative tightening of monetary policy” and “the lags with which monetary policy affects economic activity and inflation”.

The very hawkish approach of the earlier FOMC statements was dialled down, and the Fed essentially left the door open for a pause at its next meeting (14th June) or the terminal rate having been reached, but also did not rule out further hikes.

Chair Powell also placed concerns over instances of weakness in the US banking system front and foremost in his press conference statement, with the failure of a third US bank during the US’s very rapid, and severe, rate hike cycle.  

In particular though, the statements showed a shift in monetary policy to focus on both employment and inflation (the FOMC’s dual monetary policy mandate), from what had become a very unidimensional focus on inflation.

The Fed has raised its funds rate by a full 5.00% over last year and this year to date, which has only partially reduced inflationary pressures, although subsiding supply side pressures from last year into this was a key driver of lower inflation.   

High commodity prices pushed up the US’s inflation CPI and PPI inflation measures last year, and high demand pull pressure the year before. Both have subsided substantially since then, but second round effects have now become entrenched.

These are evident in core inflation measures in particular, which are elevated, far removed from the FOMC’s implicit inflation target of 2.0% y/y, and proving sticky which is still raising concerns for the FOMC. 

The FOMC has to balance these concerns against the impact of tighter credit conditions on the economy and banking sector, particularly the latter for financial stability, although the FOMC’s concerns over high inflation are still very apparent.

Critical to ALL investment decisions right now is the question of how the world is faring against inflation…. and there is numerous evidence that leading nations have turned the corner.In the investment marketplace, the next decision that flows from this fact is whether central banks have reached the apex of their current interest rate cycle and, far more importantly, when will investors see interest rates beginning to come down, for then the big gains will be made?

The latest graph composite on the right courtesy of The Financial Times, makes it clear the leading nations have a long way to go to beat inflation. Readers can judge for themselves the magnitude of the problem if they recognize that global M1 supply, which includes all the money in circulation plus travellers cheques and demand deposits like deposit and savings accounts, was $48.9 trillion as of Nov. 28, 2022 compared with just one trillion US Dollars in 1990. That publication furthermore estimated the total value of the M2 supply to be $82.6 trillion. 

 M2 is a broader classification than M1 because it includes assets which are still highly liquid but that are not exclusively cash. Money is also present in the form of investments and derivatives. The total market capitalization of just the New York Stock Exchange and Nasdaq is over $48-trillion as of December 2022, according to Statista. The total market cap of cryptocurrency, as reported by CoinMarketCap, adds another $1.07 trillion to that figure.

So enormous sums need still to be mopped up before the threat of rising global inflation can be consigned to the back-burner. However, as the second graph suggests, by weighing all the available data, international advisory group Statista is able to predict the likely trajectory of global inflation through to 2027 and, as you can see, offers the optimistic view that global inflation actually peaked last year and is now in steep decline to a projected 3.3 percent by 2027 matched by a general economic slow-down.

The problem, however, is that while wealthy Western Nations are winning the war against what is in fact an insidious tax which hurts the poor most of all, developing nations like South Africa are not. Worst of all, since developing nations in general earn their keep by exporting raw materials to the developed world, any economic slow-down radically affects the export earnings of countries like South Africa.

Furthermore, when developing nations fall under the control of socialist-thinking governments who simply cannot grasp the inevitable in-built inefficiencies of make-work policies when, as in South Africa, they also control many of the means of production such as the power utility and its badly-maintained electricity distribution systems as well as dysfunctional railway systems and pot-holed highways which make collectively make it impossible to get those raw materials to the harbor, you have a formula for disaster.

That is why our South African Rand is under attack: because foreign investors are bailing. They are selling our sovereign bonds and our Blue Chip shares because they fear our economy is now in collapse!

Coalitions

By JP Landman

Since the 2021 local government elections, several municipalities have been governed by coalitions. It has not been a happy experience. Johannesburg recently had its eighth mayor elected in eight years. In Tshwane, Ekurhuleni and Nelson Mandela Bay power has been bouncing around between the major parties like ping-pong balls.

Position, power, and patronage determined the formation of the councils, and governance fell by the wayside. It was and is about who will govern, not how they will govern.

The term of the current parliament comes to an end in May 2024, and a national election must then be held. (The Constitution allows for some postponement.) Currently, opinion polls and by-election results indicate that we may face a situation where no single party will have 50% plus one, leading to a coalition government at national level. In the light of what has been happening in municipalities, this possibility fills many people with horror.

National numbers

Elections are a numbers game. Currently, opinion polls put the African National Congress (ANC) in the mid-forties, the Democratic Alliance (DA) in the mid-twenties, the Economic Freedom Fighters (EFF) below 15% and the Inkatha Freedom Party (IFP) and ActionSA at between 4% to 5% each. Each of the three major parties are roughly twice the size of the next one.

A massive shift would have to occur for the DA to become the biggest party (the premise of the ‘Moonshot Pact’), for the EFF to overtake the DA, and for the IFP or ActionSA to overtake the EFF. The overwhelming probability is that the ANC will still be the biggest party after the next election, followed by the DA and the EFF.

Several new parties have created much excitement. The test is how many votes they could garner. In the 2019 national elections 48 parties registered but only 14 made it to the National Assembly. Of those 14, four parties (the ANC, DA, EFF and IFP) garnered 92% of the vote and 10 shared the remainder. Many small parties feature in the South African political landscape and every election has seen newly formed parties.

The biggest question in South African electoral politics concerns the millions of eligible voters who have increasingly chosen to stay away on voting day. Will they vote this time round? If yes, for whom will they vote? We simply do not know and will have to wait for the votes to be counted.

A comeback?

Could the ANC still clear the 50% hurdle? Two factors could make this happen.

1    First there is load-shedding. Our proprietary research, shared with clients, indicate that sufficient renewable power and storage is set to come online over the next year to alleviate (not terminate) load-shedding. Almost all this new capacity is being built by the private sector, which is no doubt in a hurry to connect to the grid (these projects all have access to the grid). An alleviation of load-shedding may work in favour of the ruling party. If the election is postponed, it will benefit the ANC more.

2    The second factor is the social-grant system. The social-distress relief grant of R350 per month, which 10 million people currently receive, is scheduled to end on 31 March 2024. The chances of the grant being terminated two months before an election are absolutely zero. It is more probable that the grant will be made permanent, dolled up a bit and its name changed to ‘basic income grant’. It will infuriate both the left and the right, but it may encourage a lot of voters to, once again, entrust their votes to the ANC.

Whether these two factors can negate the anger of the populace at load-shedding, increasingly dysfunctional municipalities and ever more news of corruption remains to be seen. Again, we will have to wait for the votes to be counted.

Forming a coalition

Let’s now turn to the possibility that the ANC does not get to 50% plus one, necessitating a coalition government at national level.

During April, the three main parties of the centre, the IFP, the DA and the ANC, all showed their hands on coalitions.

The IFP’s Mkhuleko Hlengwa, chair of Parliament’s Select Committee on Public Accounts (Scopa), succinctly summarised the IFP’s position. Their core values for a coalition are democracy, equality, social justice, economic development, and honest leadership. Going beyond those five values, he added: ‘It is essential that we create an environment and an engagement of parties that can work successfully should the electorate not give one political party a 50% majority in 2024.’ So not just values, but also an inclusive style of politics. Very important in an election year.

Also in April, the ANC outlined a framework on local government coalitions, which will presumably apply to the national level too. The framework states: ‘Coalition partners must also commit to shared values – stability, accountability, ethics and integrity, community participation, good governance, respect for the Constitution and the rule of law, social justice and equity, human dignity, non-racialism and non-sexism.’ These values do not seem too far removed from those of the IFP. On paper at least, values will not be a big problem.

The ANC framework also listed several principles on which a coalition should be based. Ten days later, though, these principles were roundly ignored in the election of the Johannesburg mayor. ANC members, activists and supporters have their work cut out for them to get their party to stick to its adopted framework.

DA leader John Steenhuisen, in his re-election acceptance speech on 2 April, did not refer to specific values, but put the focus on who would be included and excluded in a coalition – the ‘Moonshot Pact’. He was very clear: the EFF is the DA’s public enemy number one, and no grouping or party that has ‘tethered itself’ to the ANC would be welcome in the ‘Moonshot’ coalition. It’s a very rigid stance, and he may have painted himself and his party into a corner. Here too, members, supporters and activists will have to work to get their party out of that corner. However, most DA members would agree with the values listed by the IFP as well as the more detailed list of the ANC.

The ANC’s first stop for a coalition partner will probably be the IFP and some of the other smaller parties. If between them they can make 50% plus one, that will be the government. If they cannot reach the threshold, the ANC would have to cast their net wider.

A grand coalition

Irrespective of whether there is a 50% plus one outcome, 2024 is an ideal opportunity to establish a coalition of the democratic centre.

It is clear from the above that the three parties can find sufficient common ground to work together. The real moonshot would be uniting the middle in a grand coalition that would have the support of 70% or more of the voters.

It will provide the stability, social cohesion, and unity of purpose to get the job of proper governance done. By now it should be clear that to realise the promise of the Constitution, political stability, a very capable state, and a national will are required. All will be well served by a grand coalition.

We have seen repeatedly that the vast majority of South Africans are not extremists. They all want the same outcome: a society with much less unemployment, inequality, violence, and crime. A society where the dignity of all people is manifested in every person’s everyday life. If the values and the goals can be agreed on (which the parties of the centre do), differences of opinion on how to get there are surmountable.

So what?

• We run the risk of South Africa’s democracy being delegitimised by the instability and failure in local government, and more broadly, by the failure to restore the dignity of all citizens as promised by the Constitution.
• The country is in many ways where it was in the late 1980s – it again requires a political initiative to get out of the quagmire and set out on a new trajectory.
• A grand coalition of the parties of the middle may be the launchpad for such a new beginning.

Technology Turning

by John Mauldin

We often talk about technology’s influence on the economy. I’ve decided that isn’t strong enough. It’s more correct to say technology is the economy. But when I use the word technology here, I’m not talking about the big, nifty eight tech companies that dominate today’s stock market. I’m talking more about the entire scope of technological advances over the past 300+ years. None of our economy today is possible without those advances.

Broadly defined, technology is the practical application of knowledge. Humans learn things about the world and then use them to make life better. The improvements let us learn even more, which we apply again, in a repeating process going back millennia. Economics describes how we allocate these improvements through human society.  

Until recently, technology developed slowly. Daily life didn’t change a great deal between, say, 1500 BC and 1500 AD. Ships still had sails (although we had learned to sail into the wind). Horses were the fastest means of ground transportation. Then the pace accelerated with the printing press, gunpowder, steam engines, electricity, radios, and more.

Now, older people (like me) have seen more technological progress in 50‒70 years than occurred in the prior thousand years—and it’s still accelerating. The world I inhabited as a young adult in the 1970s was, we thought at the time, a period of extraordinary change. Men had just walked on the moon! But it’s nothing like now.

Who would have dreamed in the 1970s—when “live” TV and (very expensive!) long-distance phone calls were hot stuff—we would be able to gather virtually with people around the world, seeing, hearing, and interacting while never leaving home. Or do the same through a little box you could carry in your pocket wherever you happened to be. It’s quite remarkable to think about… yet in 2023, it’s also quite normal.

We’ve seen enormous technological change in the last 70 years. The next 50 years will bring several multiples of it. Some will surprise us—technologies so revolutionary we can’t presently imagine them. Yet some of the change is already visible, at least as broad outlines. We looked at battery and self-driving automotive technologies, artificial intelligence, and energy technologies—both fossil fuel and alternative sources like nuclear and fusion(!).

That last topic is more important than many think.

New Generation

Energy is the underlying technology of everything. Without abundant, inexpensive power to enhance our brains and muscles, humanity would be back in the Stone Age. Our global demand is growing, and supply needs to keep pace. No single source will suffice.

I’ve long said we are under-utilizing nuclear energy. This shouldn’t be controversial; nuclear has something for everyone. It’s cleaner than fossil fuels and, unlike wind and solar, can produce electricity around the clock in any weather conditions. The newest reactor designs address safety and cost concerns. We should be working full speed ahead to expand nuclear capacity, like China is… and certainly not closing fully operational plants, as Germany recently did.

I asked my partner Olivier Garret to moderate a panel on nuclear energy. The panelists were Chris Levesque of TerraPower; Dr. Mike Goff from the US Department of Energy; and Amir Adnani, CEO of uranium miner UEC.

Amir started with an often-missed point: The US imports practically all of our uranium supply, and most of it comes from Russia and Central Asian countries. That’s obviously not great from a national security perspective. The nuclear capacity we need isn’t just reactors; we need a stable, preferably domestic fuel source.

Next, Mike Goff addressed some of the safety and environmental objections. Keep in mind, he represents the Biden administration, and he believes nuclear is critical to reaching its aggressive decarbonization goals. In terms of safety, nuclear is actually one of the best options. We think about headline events like Chernobyl, Fukushima, and Three Mile Island but those are exceedingly rare (and only Chernobyl resulted in deaths from nuclear radiation). Compare them against the less noticed but far more common (sometimes fatal) accidents in oil fields, refineries, coal mines, and even solar (people fall off roofs, etc.) and it’s not even close.

Nuclear waste is another common objection. Dr. Goff said it is a manageable problem. This is from the transcript (which you can get here).

“In the United States, we’ve had the largest fleet of reactors during our entire 60-plus years of operating commercial plants. We’ve only generated 83,000 metric tons of commercial spent fuel, which depending how you stack it… if that was just on the ground stored, it’s a little bit larger than a football field. This is not a lot of waste we’re talking about generating. And I’ll point out from that 83,000 metric tons of spent fuel that we’ve generated we’ve saved the production of 400 million metric tons of CO2. Just to put these numbers in perspective, we’ve generated very little waste and we’ve saved a lot of CO2 emissions through that time.”

[JM—That is roughly 5,000 times more carbon saved than spent fuel accumulated.]

Chris Levesque talked about TerraPower (which Bill Gates co-founded, by the way) and its “Natrium” reactor designs. This will be an even safer and more efficient method than the current water-cooled reactors. The first site is currently under construction in Wyoming, supported by DOE. Mike Goff has worked on it and sounded very optimistic—mainly because the design is relatively simple and should be easy to replicate. It won’t be like the older generation where every site was different and thus more expensive. He thinks between Natrium and other new technologies, we will see a significant expansion in US nuclear capacity in this decade.

Multiple companies are working on “modular” reactor designs, kind of like pre-fab homes, where you can literally build them in one location and install them anywhere else in the world, greatly reducing costs and construction time.

This is a good reminder of how technology progresses with time. The first efforts always look flawed in hindsight because we learn from them. We identify mistakes and find better ways. It’s happening in nuclear and many other fields.

Chemical Reactions

Another aspect of technology is how the lines are blurry. Energy powers everything, but the kinds of energy available to us depend on developments in other fields. Computer technology drove the shale energy revolution, for instance, enabling the analysis of vast data sets and identifying where to drill.

I asked my friend, venture capitalist Joe Lonsdale, to lead a panel on some of his investments in various technologies. The panel ranged far beyond the initial topic.

The panelists were Nathan Mintz of Spartan Radar, which works on automotive sensor technologies, and Gene Berdichevsky of battery tech leader Sila. Gene was one of the early Tesla leaders in batteries (the #7 employee) and left to pursue a broader vision for power storage. We’ll start there.

In Gene’s view, battery tech isn’t just for transportation; it is key to the bigger green energy vision. Storing large amounts of electricity helps solve the “intermittency” problem in wind and solar production. If you have enough battery capacity, you can store excess production to draw on at night or in low wind conditions. (I think nuclear and fusion may be even better solutions, but we need to move forward on all these fronts. Let the better tech win.)

Batteries are simply chemical reactions. You transfer an electrical charge into certain minerals and transfer it back out later. There are many different ways to do this, some better than others. Sila works on making batteries more efficient, lighter, and less expensive. The necessary raw materials are often even more scarce, so they seek alternatives there, too.

Nathan Mintz talked about the other big transportation megatrend, what he calls “software defined vehicles.” At some point, a vehicle’s components become generic and versatile enough that software dictates what the car can do. He described it this way.

“You can kind of break the software that comes down into cars into three buckets. You have the driving assistance systems or autonomous driving systems, the infotainment system, which is how you play with your radio and do your navigation and what have you. And then the drive train, so those that do electronic fuel control, battery management, et cetera.

“So those three different capabilities, what we’re going to start seeing is more ubiquitous over the air upgrades where instead of having a recall involve going back to the dealership, it’s more just upgrade your software, you’re going to start seeing more multifunction, multi-mode things or your car behaving differently when it’s in different types of environments.”

This goes far beyond the “self-driving” technology we see described in the media, and it’s coming fast. The economic consequences will be enormous—and likely beneficial as the demographics make the labor shortage even worse. Here’s Nathan again.

“The average age of a trucker in the United States or median age is approaching 50 at this point. With the generational change, people just aren’t as interested in doing that kind of work. Even when a lot of these truck driving jobs are paying six figure wages right now.

“So long-haul trucking and others, I think automation is a good substitute to make sure that the country keeps moving. And we’ll just accept it in the same sense that automation’s taken over a lot of other aspects of our lives. Now there is some government pushback, particularly in California, there’s legislation being introduced to try and ban that of course. But in other states, in Texas, you’re going to see ubiquitous pilots and sort of scaling into commercialization as early as end of ’24.”

Joe, Gene, and Nathan then moved into a fascinating conversation about the military uses of this technology—which, suffice to say, will have giant geopolitical implications. (Note: Joe was a co-founder of Palantir.) You can watch this panel or read the full transcript with your SIC Virtual Pass.

Brute Force

One of the last sessions was my interview with mathematical software pioneer Stephen Wolfram, whose software program Mathematica is ubiquitous in almost any advanced tech software. I believe AI will be an earth-shaking innovation on par with electricity, telecom, satellites, etc. We are beginning to see it with ChatGPT and similar systems, but this is only the beginning. It’s going to change our world.

For now, humans still have superior intelligence, and one mark of it is the ability to explain complex subjects in simple language. Stephen gave us a masterful description of what AI is and how these latest models work. And it turns out to be remarkably simple. I can’t begin to explain it better than Stephen did, so I’ll just give you a long quote from the transcript.

“The ultimate operation of ChatGPT is something bizarrely simple. All it’s trying to do is [after] you’ve given it a prompt or some piece of text. Its goal is to continue that piece of text and it does that by adding essentially one word at a time. You have put in, (as an example) the cat sat on the… And it’s going to try and figure out what’s the likely next word. Maybe it’s mat, maybe it’s sofa, it could be lots of different things. How does it figure out that next word? Well, basically what it’s doing is, it’s read a few billion pages, about 4 billion pages from the web.

“That’s most of the publicly accessible web. And it’s also read a bunch of books and it’s seen the text on the web and in books and so on. And it’s seen there probably gazillions of examples of the sentence the cat sat on the mat. And so it knows, it’s seen all those examples and it’s kind of giving you the statistical average of okay, the next word is likely to be mat. And so that’s what it will tell one. And the thing that happens is, there isn’t enough data on the web to actually be able to say for any sentence you type in what the next word is going to be just based on the statistics of what’s already on the web. So you have to have some kind of model, some kind of way to extrapolate from what’s been seen on the web to what the likely next word will be.

“And the surprising thing is that we can’t give a sort of hard scientific explanation why it works. Start with the idea of neural nets. This whole sort of mathematical construction of neural nets turns out to be something where the way that it extrapolates from what it’s already seen is similar to the way that we humans seem to extrapolate. In other words, the words it produces are similar to what a human might produce. They seem reasonable to a human. Now the fact that it can keep going and produce a whole multi-thousand-word essay and that it continues to make sense is a very interesting thing. I don’t think we could say we really understand exactly why that works. The fact that it doesn’t wander off track, that’s a non-trivial thing.”

John here again. In one sense, ChatGPT is just brute force. It has read and remembered more words than any human can, and it can analyze what words most often go together. But how it gets from there to writing long essays that actually make sense? Even the experts don’t know.

The results are occasionally bizarre, amusing, and even wrong. Fact-checking isn’t part of these systems yet. But it will be, and that will enable them to do certain things far better than humans can.

Should we fear this? Certain jobs are going to get automated, perhaps quickly. The Industrial Revolution had similar effects, replacing many farmers and craftsmen. Yet it took decades for the technology to spread. People adapted. We won’t have that luxury this time. It is going to be somewhat chaotic, and today’s versions of Luddites will be screaming for the government to protect their jobs.

I’m sure we will talk more about AI at next year’s (20^th anniversary!) SIC. Is it possible the AI will someday talk to us? That would be fun and possibly enlightening.

Fusion Is 30 Years Away Coming Soon

The old joke is that fusion is always 30 years away and has been for the last 30 years. Except now it’s not. I asked my friend Britt Harris to pull together a panel on energy and tech. Britt runs the University of Texas/Texas A&M pension funds (the largest endowment in the country, who was the CEO at Bridgewater and has more awards and is consistently rated among the top five asset investors in the world. He is literally at the centre of the spider web of all things technology and investing. I will do a full letter around his presentation along with Terry Keeley on where energy is going, as it demands more than a few paragraphs.

But I do want to quickly highlight the presentation of Matt Trevithick on fusion energy. Matt now runs a VC firm called DCVC. Before joining DCVC, Matt was the COO of Google Quantum AI, and part of the team that first demonstrated that a quantum computer could outperform the world’s most powerful supercomputer on a particular task. Matt also directed a program of sponsored research in fusion energy and facilitated Alphabet’s investment in Commonwealth Fusion Systems. Yes, he is generally the smartest guy in the room.

Matt pointed out that fusion is no longer 30 years away. Let’s look at some quotes from his presentation:

“[Fusion research] has happened very quietly, there is about $5 billion invested into what’s now about 100 fusion companies, most of that over the last few years.

Source: Matt Trevithick

“And that really culminated in December of last year in a spectacular scientific achievement at the National Ignition Facility at Lawrence Livermore National Laboratories here in California, where, for the first time ever, there was scientific proof that you could get more energy out of a fusion reaction than you put in to spark that reaction.

“Now there’s something called the Fusion Industry Association that includes 34 of those companies amongst their members.

Source: Matt Trevithick

“So, for the first time ever, the development of fusion energy technology is happening in the private sector on a fairly large scale. And there’s multiple well-funded entrepreneurial ventures pursuing this really in parallel with government efforts as well. Here’s an example of what a few of these apparatuses look like. Some of them are very large. Think of these maybe more like mainframe computers.

Source: Matt Trevithick

“But some of them are pretty small, they fit on a desk, maybe more like a laptop computer.

“…There’s two things I have come to believe about fusion energy: that multiple groups are going to achieve the scientific goal of energy breakeven by 2030. And the second thing I’m also confident of is, no one knows which technologies are going to win yet.

“… I would encourage us to be optimistic here. I believe that over the next 30 years, by 2050, energy could transition from a resource that some have and others want, to a technology that if you want more of the technology, you make more of the technology—kind of the way computers and smartphones have evolved.”

Source: Matt Trevithick

John here: We covered only a tiny, if very important, part of the technological advancement happening all around us. It’s one reason I am so optimistic about the 2030s. We will discuss the less optimistic outlook for global debt and budget deficits in the next two letters, but ultimately, we will resolve that crisis.

Technology has kept advancing through multiple economic cycles. There is no reason to think this next economic crisis will slow down that advance. In fact, new technologies will create significantly more jobs than they disrupt. But those new jobs don’t come at the same time old jobs are lost. All of this will be happening amidst economic crisis so it will be an interesting time. Fasten your seat belts and stay tuned.

Banks are different

by Professor Brian Kantor

Banks are different to other financial intermediaries.

  They do more than borrow and lend.  They manage the payments system without which any modern economy could not function. The payments system cannot be allowed to fail and banks deserve support should their stability come into question. Which, as was apparent in the US recently, cannot be taken for granted.

 Banks maintain the payments system by supplying deposits to their clients and transmitting many of them on demand.  They bear the operating costs of doing so – which are considerable. They have to remain viable businesses, so they have to cover their operating costs with transactions fees and more importantly by lending long and borrowing short- realizing net interest income, essential to their profits and  survival.  Banks, competing with each other, are forced to operate with very limited cash reserves. They hold very limited reserves of equity- that is owner’s capital – and are highly leveraged for the same profit seeking purpose. The dangers come with the territory.

A margin of safety for them is to be found in their holdings of other liquid assets, mostly debt issued by the government, with varying maturities and interest rates, that the central bank will almost always repurchase for cash when asked to do so. In SA the cash to demand deposit ratio is less than three percent and the liquid assets to deposits ratio is now equivalent to about

 40%.

SA Bank Deposits withdrawable on demand and Cash and Liquid Asset Reserves. January 2023

 Source; SA Reserve Bank and Investec Wealth and Investment

Bankers everywhere must surely be considering attaching a longer notice period to their deposits and to reduce their dependence on transactions accounts – with interest rate incentives to do so: Giving them more time to call for a rescue from the authorities or other banks should their deposits drain away suddenly.

The relationship between the US Fed and its member banks changed in an important way after 2008. To rescue the banking system the Fed injected cash into the financial system on a very large scale through purchases of Government Securities from the banks and their customers in exchange for bank deposits with the Fed. A process of money creation described

 euphemistically as quantitative easing. (QE) Ever since then US banks have continued to hold large cash reserves despite short phases of quantitative tightening (QT) to reduce the supply of cash as is the case now- or at least before the banks ran into cash withdrawal problems.

US Banks Deposits with the Fed

The policy determined interest rate is now the rate the Fed offers the banks on deposit rather than the rate charged them for cash borrowed. The SARB decided it too would no longer attempt to keep banks short of cash.  SA banks since 2022 can now hold excess cash reserves and earn interest on them. Reserve Bank lending to the banks has fallen away sharply recently.

SA Banks; Actual, Required and Borrowed Cash Reserves.

But will central banks be able to exercise good control over the supply of money (mostly bank deposits) and bank credit?  The supply of bank deposits and supply of bank credit depends in part on the cash reserves supplied to them by the central bank. More cash supplied by the central bank leads to more bank lending and higher levels of deposits (M3) and vice versa. But this money multiplier (Deposits/Cash Reserves) can now rise or fall depending on how much cash the banks choose to hold, rather than on the extra cash supplied them by a central bank.  One bank’s extra lending becomes another bank’s extra deposits. If the banks prefer to hold more cash and lend less, the supply of deposits and the money supply will shrink and vice versa. Therefore, the money supply will tend to grow faster during the booms when demand for bank credit is buoyant, and then grow slower when demands for bank credit is weak- as is now the case in the US – making a recession more likely. Ideally central banks can contain inflation and help smooth the business cycle by controlling the supply of money and credit. The current dispensation for banks with excess cash makes this less likely.