Happy Chinese New Year Everyone,

To usher in the year of the Rooster, I’ve decided to finally break my silence and weigh in on some important topics my friends and I seem to debate regularly. After a tumultuous year, the coming year of the Rooster may usher in greater political, social and economic challenges. It’s important to keep in mind that the Rooster is a symbol for self-respect, ambition and perseverance.

Here are a few thoughts on 7 topics, feel free to agree to disagree:

Renewable Energy: The last two years have seen some fundamental shifts in the energy markets headlined by oil crashing ~70% from the 100’s to below 30 bucks. Beyond the headlines there have been some underlying tectonic shifts that will play out over the next decade. Traditionally high oil prices were good for investments in renewable energy. It’s been a fundamental relationship that’s held true until recently. In 2007 when oil reached the 140’s, investments in renewable energy were at historic highs. As oil crashed, investments in renewables followed. In 2015, despite the crash in oil some interesting things happened…

  1. For the first time ever, more investments went into renewable energy than fossil fuels.
  2. Investments into renewable energy by developing countries outpaced investments by developed countries.
  3. In the US, Solar made up most of the new power capacity for the first time.
That meant more than half of new power came from renewables
Developing countries are pouring more money into renewables

The next question you’re probably asking yourself is, why? I’d point to two things. Emerging economies are more likely to follow a different path when developing their energy industry. Instead of building out a traditional power grid with coal fired power plants they are more likely to “leap frog” directly to renewables similarly to what they did with cell phone towers vs. telephone lines as these renewable power systems have the advantage of being highly scalable and distributable.

Moore’s Law states that processor speeds, or overall processing power for computers will double every two years

The reason solar-power generation in particular will continue to dominate is because it’s a technology and not a fuel. The cost of solar power has fallen to 1/150th of its level in the 1970’s while the total amount of installed solar has climbed to 115,000-fold. The economics of solar function on a logarithmic scale similar to microprocessors which are governed by Moore’s Law.

The last question you’re probably asking yourself is, what’s next? There are a few hurdles left to clear before we are really off to the races. One of the issues with renewables is that it’s intermittent power generation, it can’t yet reliably generate power throughout the day. Until we are able to develop vast cheap storage systems, renewables won’t displace fossil fuels. Fortunately, there is plenty of investment and bright minds working to solve this problem.

Will the Trump administration’s stance on renewables stymie this gradual revolution? My money is on NO.

Electric Vehicles (EV’s): We’ve already discussed how the landscape of the power generation and energy markets are being transformed, now it’s time to take a peek at how the transportation markets are being affected and it’s potential impact on oil over the coming decades. Royal Dutch Shell’s CFO Simon Henry was recently quoted on their Q3 2016 conference call as saying:

“ We’ve long been of the opinion that demand will peak before supply, and that peak may be somewhere between 5 and 15 years hence, and it will be driven by efficiency and substitution, more than offsetting the new demand for transport.”

Let me be clear, this statement isn’t an acknowledgement that oil is going anywhere anytime soon, I share this view as well. It does however acknowledge that the lofty projections of future demand growth put out by the IEA and oil producing countries like Saudi Arabia may be a tad bit optimistic. We could very well see a few more cycles for oil, but I am of the view that longer-term it’s only a matter of time before the industry enters secular decline. Interestingly when oil crashed ~70% from the 100’s to below 30 bucks, global production was pegged at ~96.4 mmbbl/day which caused an oversupply of ~3.3 mmbbl/day. In other words a ~3% oversupply caused a ~70% drop in the price of oil, so it doesn’t take much to move the needle.

I’m a big believer that history tends to repeat itself and I try to draw parallel's between past events with the future.

  1. In 2007, Apple introduced the iPhone. A revolutionary high priced phone that’s critically acclaimed. Global smartphone adoption is limited and only a handful of vendors exist (Apple and Blackberry).
  2. As the technology develops, new smartphone manufacturers jump into the market expanding the number of models for sale, dropping the average selling price (ASP’s) for a smartphone and this all results in mass adoption.

In 2012, Tesla introduces the Model S. A revolutionary high priced critically acclaimed electric car that received the highest ever score from Consumer Reports (99/100). Global electric vehicle adoption is limited and only a handful of manufacturers have models. Now back to the charts…

The parallels between the mass adoption of smart phones and electric vehicles is intriguing. The number of electric vehicle models is projected to grow from a handful in 2008 to ~200 by 2020. Battery prices (which make-up 1/3 of the cost of an EV) fell 35% last year and the cost of an unsubsidized electric car is projected to be comparable to its gasoline counterparts within the next 5 years. There are some additional hurdles that still need to be cleared, infrastructure investments around charging stations and building up a smarter and more robust power grid need to be made. As the technology develops and vehicle manufacturers continue to make investments in EV’s, the adoption of EV’s should eventually hit their “smartphone” moment.

Obama: To this day, I’m still dumbfounded by the misinformation regarding the Obama administration that is constantly being repeated by the critics, the economy is not falling off a cliff, I’m sorry but I’ve always been a numbers and facts guy. Obama, like everyone, had his shortcomings and missteps but it’s important to keep in perspective all that he’s accomplished and the best way for me to illustrate this is with some charts that I’ve posted below. As the old saying goes, “a picture is worth a thousand words”, I’ve also included some helpful captions.

Chart 1) Unemployment has decreased at a record pace during Obama’s Presidency outperforming every other US president except for Bill Clinton.
Chart 2) Since hitting a peak of 10% during the financial crisis, unemployment has shrunk every year under the Obama to historical lows of sub 5%.
Chart 3) The economy under Obama has added 11.3 million jobs since 2009.
Chart 4) Total US Budget deficits have fallen every year since Obama took office.
Chart 5) Total monthly manufacturing employment, though low for historical standards, has actually gained every year since the financial crisis.
Chart 6) The US in terms of GDP has outperformed every major economy in the world since the financial crisis.

Unlike what Trump has been saying for the last few years, the economy under Obama has actually performed better than every other major economy in the world on a relative basis and has actually performed better than almost every other presidential administration on a historical basis.

The two biggest missteps by Obama have been the execution of the Affordable Care Act and Foreign Policy. I’m not going to point out or debate the problems encountered by the ACA, they’ve been widely publicized. What I’d rather circle back on is what it’s ultimately goal was, which was to provide universal healthcare. From personal experience, I grew up in a relatively poor family and what I’ve come to realize is that there were two key things in my life that gave me a chance to succeed in life and those two things were access to healthcare and education. Universal healthcare was a centerpiece in Obama’s vision and should continue to be a bedrock of American society.

Foreign policy was Obama’s weakest aspect, his approach to the conflicts in the Middle East were naive and he was out maneuvered by Russia in Eastern Europe. Obama is an idealist when taking a more pragmatic approach would have been more effective, his solution to the Israeli-Palestinian settlement conflict was refreshing but just wasn’t realistic. Obama tried to change America’s image abroad while pursuing a policy of retrenchment which was successful in some areas but ultimately failed.

Trump: Was it me or was Trump’s inauguration speech one of the most uninspiring speeches in recent memory? I’m not going get into the racist, misogynistic and xenophobic comments and tweets he’s made over the last year, we can set those aside as locker room banter. His supporters will say its just talk, that he said what he had to say to appeal to a certain demographic to get elected. I’d rather focus on three things that I think are interesting that people don’t pay much attention to.

Whether it’s considered a good thing or a bad thing, I can’t help but see the similarities between the new administration’s actions and China. Trump flexing his power to influence the decisions of senior executives, his inward looking domestic and foreign policy, his control and criticism of the media as well as his plan to tax imports to spur domestic production are actually very similar to China’s policies. It’s ironic to think but the US might actually look a lot more like China when all is said and done.

Trump supporters will dismiss many of his actions as breaking away from status quo and tradition to shake up the establishment. Personally, I agree that in many ways the political system over the last few years hasn’t worked as efficiently as it has in the past. That being said, there are certain traditions and protocols that were put in place for a reason. Trump’s encouragement of family members to take on formal roles in his administration, testing the limits of anti-nepotism statutes, his refusal to release his tax returns and file a personal financial disclosure and his refusal to divest and place his assets in a blind trust pose serious ethical dilemmas. Hate to break it to you but these actions aren’t moves to shake-up Washington, the’re really just moves to take care of himself and his inner circle.

My biggest concern regarding the Trump administration is his lack of leadership and consideration for other countries. On one hand, Trump may very well spur economic growth, his policies on paper do look like that’d be supportive for the economy. The question is, when it comes to important issues like Global Warming is it really worth it to overlook these things to squeak out a few extra basis points of GDP growth? Trump’s provocation of China over Taiwan essentially using the “One China” policy as a bargaining chip to extract better trade terms is insulting. The Chinese and Taiwanese people don’t need outsiders insinuating regional tensions for their own personal gain.

For now, I’ll reserve my judgement…

Lebron: The 2016 NBA finals between the Cleveland Cavaliers and the Golden State Warriors was a watershed moment for Lebron’s legacy. It was capped off with the Cavs becoming the first team in NBA finals history to come back from 3–1 down to win a series, Kyrie Irving cashing a three in Steph’s face, Lebron winning the MVP and bringing a championship back to “The Land” for the first time in 52-years.

The chatter I keep hearing is…Lebron is the GOAT (Greatest of all-time). When all is said and done, Lebron will go down as greatest small forward of all time, but he will never be THE GREATEST, that was bestowed upon MJ and that will probably never change and this is why. PERFECTION…MJ went 6 for 6 in the finals with 6 finals MVP’s, he was the best player on the floor every time he stepped on the court…enough said.

Housing: This topic has been a point of conversation with clients and colleagues on a daily basis and Vancouver is a microcosm of the overarching issue around the world. Rent is affordable to a point where you can just barely make the payments and live your life, yet too expensive to save any money. Buying a house is pretty much a pipe dream without your parents coming in with a six figure downpayment to get you on your feet. The provincial elections are coming up and the Liberal government has come up with two pieces of legislation that makes absolutely no sense. The first is a program that gives first time home buyers an interest free loan for half of their down payment. The second is an expensive tax break on properties valued up to 1.6 million dollars.

On the former piece of legislation, does leveraging-up marginal buyers to purchase a house really sound like a great idea? Sounds like a potential disaster waiting to happen…maybe addressing the supply side of the equation would have been more effective…also, have these guys ever bought their first home? One of the biggest costs to purchasing a new home is the GST, maybe extending the GST tax break for new homes past the 350k threshold (since nothing costs under 350k these days) might be more effective as it lets the new buyers hold a bit more equity in their home and addresses the problem of scraping together enough funds for a downpayment. Example: You buy a 500k house, if you put down 20% you’d need 100k for a downpayment and 25k for GST for a total of 125k. If you extended the GST tax break to homes valued at 500k and under, you’d reduce the funds required to purchase a house by ~25% and you’d maintain a healthy equity ratio to protect the downside.

On the latter piece of legislation, the government is intervening in the market to do exactly the opposite of what needs to be done. By giving home owners property tax breaks up to home valued at 1.6 million dollars, they’ve essentially prevented more supply from coming to the market.

Van girls: I’m not a fan of generalizing people, that being said this is strictly for fun. I was thinking the other day, if there was three things a guy would need to learn to love to get along with most van girls…what would they be? I’ll be the first to admit, this list can probably applied to most people I know these days haha.

1) Must love DOGS, I don’t know if it’s a west coast thing but literally every girl I’ve met owns and loves dogs 2) Must love FOOD, you got to be willing break the bank and try out all the new restaurants in town, the food scene is quite good 3) Must love TRAVEL, this probably isn’t only applicable to van girls and can be applied to all of the dreaded “millennials” out there.

To conclude, I’d like to wish everyone a Happy Chinese New Years. For Albertan’s and many of my friends, 2016 was a tough year, from the economy crashing to the Fort McMurray fires it seemed like we couldn’t catch a break…even the Calgary Stampede and Chasing Summer was rained out. Despite all of this, I think we can be proud of our resilience and resolve.

“Smooth seas don’t make good sailors” Anonymous

新年快樂, 恭禧發財!!!

Johnny