We’ve constantly been sharing a list of our recent reads in our weekly emails for The Good Investors.

Do subscribe for our weekly updates through the orange box in the blog (it’s on the side if you’re using a computer, and all the way at the bottom if you’re using mobile) – it’s free!

But since our readership-audience for The Good Investors is wider than our subscriber base, we think sharing the reading list regularly on the blog itself can benefit even more people. The articles we share touch on a wide range of topics, including investing, business, and the world in general. 

Here are the articles for the week ending 27 October 2024:

1. China’s Fiscal Policy Update – Leonid Mironov

Ministry of Finance top brass spoke at a press briefing, and outlined the extent of the Fiscal policy support they can offer *within the confines of the current budget*. However, while the steps laid out suggest a cautious and structured approach, notable gaps in specific figures leave room for market speculation…

…China is set to enhance its strategy for managing local government debt, which remains a critical issue. The central government will issue large-scale debt swaps, a move aimed at addressing the opaque “hidden debt” local authorities have accumulated off the books. Local governments still hold 2.3 trillion yuan in available funds, providing some breathing room to manage obligations in the final quarter of 2024. These steps aim to steady the debt situation, though the path forward will undoubtedly be closely watched…

…There is commentary out there to say that this is not new spending, I would counter with that yes, its not new per se, but its spending that would go in to this gap (authorised/unspent) but won’t anymore. So this is stimulative…

…With property markets showing persistent weakness, local governments now have the authority to deploy funds from special bonds to purchase unsold homes. These homes will be converted into subsidized housing—a dual-purpose measure to both alleviate property inventory and address housing affordability. It signals a nuanced, albeit gradual, approach to propping up the beleaguered real estate sector.

This is likely where most of that 2.3trn RMB mentioned in (1) will go. Again since the the property market is such a significant drag on the economy, this is reasonable…

…In line with recent People’s Bank of China (PBOC) directives, four major state-owned banks announced forthcoming cuts to existing mortgage rates. These rate reductions, effective from October 25, are part of broader efforts to ease financial pressures on households and further stimulate economic activity. Again given the sheer amount of total mortgages outstanding (38 trn RMB at the end of ‘23, see chart), this is significant. PBOC expects an effective cut of about 50pbs on average…

…Perhaps the most telling aspect of the press conference was what remained unsaid. There were no specifics on the magnitude of additional fiscal stimulus or further bond issuances. Additionally, there was no precise indication of how much the fiscal deficit might increase—a critical piece of information many market participants were hoping for…

…The Ministry of Finance’s approach at this juncture reflects a cautious yet deliberate strategy. While existing resources are being leveraged, and flexibility is maintained, major new initiatives have not yet been unveiled. All eyes now turn to the late October NPC meeting, where the prospect of more significant fiscal interventions could reshape the economic landscape for the year ahead.

2. The Bitter Lesson – Rich Sutton

The biggest lesson that can be read from 70 years of AI research is that general methods that leverage computation are ultimately the most effective, and by a large margin. The ultimate reason for this is Moore’s law, or rather its generalization of continued exponentially falling cost per unit of computation. Most AI research has been conducted as if the computation available to the agent were constant (in which case leveraging human knowledge would be one of the only ways to improve performance) but, over a slightly longer time than a typical research project, massively more computation inevitably becomes available. Seeking an improvement that makes a difference in the shorter term, researchers seek to leverage their human knowledge of the domain, but the only thing that matters in the long run is the leveraging of computation. These two need not run counter to each other, but in practice they tend to. Time spent on one is time not spent on the other. There are psychological commitments to investment in one approach or the other. And the human-knowledge approach tends to complicate methods in ways that make them less suited to taking advantage of general methods leveraging computation…

…We have to learn the bitter lesson that building in how we think we think does not work in the long run. The bitter lesson is based on the historical observations that 1) AI researchers have often tried to build knowledge into their agents, 2) this always helps in the short term, and is personally satisfying to the researcher, but 3) in the long run it plateaus and even inhibits further progress, and 4) breakthrough progress eventually arrives by an opposing approach based on scaling computation by search and learning. The eventual success is tinged with bitterness, and often incompletely digested, because it is success over a favored, human-centric approach.

One thing that should be learned from the bitter lesson is the great power of general purpose methods, of methods that continue to scale with increased computation even as the available computation becomes very great. The two methods that seem to scale arbitrarily in this way are search and learning.

The second general point to be learned from the bitter lesson is that the actual contents of minds are tremendously, irredeemably complex; we should stop trying to find simple ways to think about the contents of minds, such as simple ways to think about space, objects, multiple agents, or symmetries. All these are part of the arbitrary, intrinsically-complex, outside world. They are not what should be built in, as their complexity is endless; instead we should build in only the meta-methods that can find and capture this arbitrary complexity. Essential to these methods is that they can find good approximations, but the search for them should be by our methods, not by us. We want AI agents that can discover like we can, not which contain what we have discovered. Building in our discoveries only makes it harder to see how the discovering process can be done.

3. Austan Goolsbee Explains the Fed’s Big Rate Cut – Tracy Alloway, Joe Weisenthal, and Austan Goolsbee

Joe (12:30):

You mentioned lags. I want to ask you a question about that. When the Fed started jacking up rates aggressively, one of the theories for why it didn’t have a sharper impact on the economy is that so many households and corporations had in, say, 2020, first half of 2021, termed out their debt and so there was not a lot of sensitivity to debt.

The flip side of that now — and people have been writing about this — is that even though the Fed has now commenced a cutting cycle, that the weighted average cost of debt is probably going to rise in 2025 basically just mathematically, right? Because eventually that’ll have to be refi-ed at higher rates and so forth. How do you think about that dynamic now when you’re thinking about these lags? You’re starting a cutting cycle, but at the same time probably cost of debt is actually going to rise for a fair number of economic actors in this economy.

Austan (13:19):

You have remarked on this subject and thought it through. In my world that goes into the economic conditions and there are many things that have made this a hairy, strange time for central banks because the business cycle, both down and up, looked almost nothing like historical precedents. This is one aspect of that.

We’ve analyzed this specifically thinking about mortgages. Okay, so if I had told you, the premise of your question, I a hundred percent agree with, six years ago, if you said ‘The Fed is going to raise 500 basis points in a single year, what is going to happen?’ I think most all economists would say ‘Yikes, there’s going to be a major, major contraction and it’s going to be concentrated. Autos down the tubes. Consumer durables, bye-bye. Business fixed investment construction, all going to collapse because they’re very interest rate sensitive.’

We didn’t really see the economy go into the steepness of collapse that you would’ve expected. And so that brings us back to this question. It’s kind of a twofold. Is there something about this unusual business cycle that makes economic activity less sensitive to the interest rate? Or is there something strange about this moment that the lag effect is longer. And it can be both and they can run together, but in the case of mortgages, one of the things that has made monetary policy transmission less direct, is the fact that a vastly higher share of mortgages are 30-year fixed mortgages now, than they were in 2005, 2009, whenever you want to look at.

And so when they change the interest rate — in some countries virtually all mortgages are adjustable rate mortgages. So when their central bank raises rates, they bring out parents onto TV, ‘The central bank is killing us. You know, our mortgage payment went up.’

In the US, if everybody’s on a 30-year fixed, in a way that’s just a delay, but it’s a 30-year delay. So I do think that notion that there are companies that don’t have a lot of debt so they aren’t as especially sensitive to the interest rate, that the term structure of their debt may be such that the average rates they’re paying might even be higher as the Fed cuts. I think that’s not a problem, that’s just a fact and we just need to understand it and see what the magnitude is…

…Tracy (16:29):

Yeah, but my question is going to be ultra simplistic. Can you explain to us in excruciating detail what exactly you expect happens in the economy now, as you cut interest rates? How does that cut get transmitted?

Austan (16:45):

Oof. Okay, as a general matter, the Fed has only one tool really, which is a screwdriver that can tighten or can loosen and I always say if your problem is, you know, a loose fender, that’s great. If your problem is can you make breakfast? No, you kind of can’t do that with a screwdriver.

So the main channels of monetary policy impact on the economy, I think are on the real economy side and they are on interest rate sensitive parts of the economy — like consumer durables, business fixed, investment construction, things like that.

Now there are other channels of monetary transmission where there’s a lot of argument. How important are they and they are, well if you change the value of assets, like the value of housing, the value of stocks, etc., is there a wealth effect so that consumer spending might go up as the asset values go up. Or if you contract and asset values go down, would that limit spending?

There’s a dollar channel that if rates in the US are moving relative to how rates are moving in other places, can affect the currency and that could affect imports and exports.

Those are probably a lot of the main channels and it’s always in the counterfactual. What would be happening if we didn’t do this? So to the extent that there’s already a debt structure or to the extent that we went through a business cycle that for the first time ever was not driven by cyclical industries, but was driven by services because nobody could spend money on that, and services aren’t especially interest rates sensitive, that’s another reason why you might think the monetary transmission mechanism, which is actually a whole bunch of different transmission mechanisms, just looks different this time than before.

Now everything that looks different is not bad. Okay, in a way this is frustrating that monetary policy doesn’t have the same impact, but at the same time in 2023 we hit what I called the golden path. Inflation came down almost as much as it ever came down in a single year, and there was no recession. And that never happened before. And so the unusualness of this thing, sometimes it’s good!…

…Austan (21:27):

Yes, does not necessarily. I agree with [that]. So let me finish two thoughts. One, did the Fed have anything to do with it? That’s kind of the question. If it was all supply shocks, then the Fed didn’t really, yes, the Fed can’t be blamed for the inflation going up, but then the Fed shouldn’t take credit for it coming down.

There is some component that as supply shocks heal, you get immaculate disinflation. I do think that the fundamentally different thing that happened this time than the last time we were getting supply shocks, like at the end of the 70s, is that the market expectations of inflation basically never went up. In the 70s, as actual inflation went up, the expectations went up. And part of what made the Volcker experience so hard is you didn’t have to just slay the inflation dragon. You had to go convince everyone that we will hold this thing underwater for as long as it takes until it surrenders and that’s a brutal process.

I do think that expectations stayed — even as actual inflation was almost double digits — stayed exactly at PCE 2% as the inflation target said, was fundamentally the Fed making a promise it may look bad but we’re going to get it back, and that the market de facto believed it. And that is to the Fed, is about Fed credibility, and I do think it made a big difference…

…Tracy (38:43):

That was perfect. Can I ask one more serious question before we wind it down? But you talked about restrictiveness earlier in this conversation and I get where that comes from and people look at things like real yields and stuff.

But if you look at stock market prices, we’re recording this on October 9th, I think stock indices are at records again. If you look at credit spreads, those are at multi-year lows. Where’s the restrictiveness? Because I don’t see it in parts of the financial market, let me put it that way.

Austan (39:14):

I’d say two things. I told you, my focus is primarily on the real side of the economy. I think those are the biggest, most impactful parts of the monetary policy transmission mechanism, historically.

So I’m less of a fan of interpreting financial conditions indices as a measure of monetary restrictiveness or what monetary policy should do because, in my view, it’s got a major reflection problem that, let’s say the market, which is forward-looking, decides they think it’s going to work, that there will be a soft landing, that rates are going to come down because inflation has been tamed and is at 2%. Then equity markets go up, long rates would come down and that would then be interpreted as a loosening of financial conditions and it would be like ‘Oh, you better stop cutting, you better raise.’ But that’s just self-referential. So I think that’s a little problematic.

And the inverted yield curve, for two years, which everybody has been saying is an indication that there’s about to be a recession, that’s not normal. If we go back to a regularly-shaped yield curve like we’re in more normal conditions, that’s not the end of the world.

My view of restrictiveness is we set the Fed funds rate, we set it high and held it there for more than a year and as inflation came down, the real Fed Funds rate just kept going up, passive tightening. That’s the highest the real Fed Funds rate had been in decades. And so to me that’s where the restrictiveness is.

4. Investing lessons from a mini-Berkshire Hathaway – Chin Hui Leong

Gayner believes mistakes of omission are far more costly than mistakes of commission.

He shared a personal example of passing on investing in Berkshire Hathaway (A shares) in 1984 when he first discovered the company.

At the start of 1984, shares were trading at around US$1,300. By the time he got around to buying some shares, the stock price had risen to US$5,750. Hence, he missed out on a gain of over 340 per cent.

I’ll add a second lesson to his point.

Shares of Berkshire Hathaway (A shares) closed at nearly US$694,000 per share last Friday. In other words, even though Gayner did not invest earlier, his shares are worth about 120 times more than what he paid.

While his returns could have been over 530 times if he invested earlier, I don’t think anyone would lose a smile with a 120-fold return.

So, here’s my take: if you find a great company with a promising future, it may not be too late to invest, even if the stock has already appreciated…

…When selecting stocks to invest, Gayner looks for four key factors.

The first is about finding a profitable business with minimal to no debt and a good return on capital. The reason is clear; starting with this pool of stocks increases your chances of finding a winner.

Secondly, he wants to have a talented management team with integrity.

Gayner may have taken a leaf out of Buffett’s playbook here. As Buffett once said, without integrity, the other positive management qualities, will work against you.

Interestingly, Gayner also connected the use of debt with management’s character.

For him, debt is a character marker.

In a podcast recorded earlier this year, Gayner recalled the advice of Shelby Davis, another legendary investor and mentor. Davis pointed out that in the absence of knowledge about a new business, the use of debt can be telltale sign.

Simply said, if a business is entirely equity-financed, the management team will have no incentive to steal from their own funds.

To be sure, this does not mean that a debt-laden company is fraudulent.

However, Gayner argued that leverage creates conditions for a dishonest management team to exploit since the money does not belong to them.

5. A Message From the Past (Thoughts on Nostalgia) – Morgan Housel

I was recently asked at a conference how investors should feel about the stock market given that it’s basically gone straight up over the last 15 years.

My first thought was: you’re right. If you started investing 15 years ago and checked your account for the first time, you would gasp. You’ve made a fortune.

Then I thought, wait a minute. Straight up for the last 15 years? To echo my wife: What are you talking about?

Are we going to pretend like the 22% crash in the summer of 2011 never happened?

Are we supposed to forget that stocks plunged more than 20% in 2016, and again in 2018?

Are we – hello? – now pretending that the worst economic calamity since the Great Depression didn’t happen in 2020?

That Europe’s banking system nearly collapsed?

That wages were stagnant?

That America’s national debt was downgraded?

Are we now forgetting that at virtually every moment of the last 15 years, smart people argued that the market was overvalued, recession was near, hyperinflation was around the corner, the country was bankrupt, the numbers were manipulated, the dollar was worthless, on and on?

I think we forget these things because we now know how the story ends: the stock market went up a lot. If you held on tight, none of those past events mattered. So it’s easy to discount – even ignore – how they felt at the time. You think back and say, “That was so easy, money was free, the market went straight up.” Even if few people actually felt that way during the last 15 years.

So much of what matters in investing – this is true for a lot of things in life – is how you manage the psychology of uncertainty. The problem with looking back with hindsight is that nothing is uncertain. You think no one had anything to worry about, because most of what they were worrying about eventually came to pass.

“You should have been happy and calm, given where things ended up,” you say to your past self. But your past self had no idea where things would end up. Uncertainty dictates nearly everything in the current moment, but looking back we pretend it never existed.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. We currently have a vested interest in Markel (Tom Gayner is the CEO of Markel). Holdings are subject to change at any time.

We’ve constantly been sharing a list of our recent reads in our weekly emails for The Good Investors.

Do subscribe for our weekly updates through the orange box in the blog (it’s on the side if you’re using a computer, and all the way at the bottom if you’re using mobile) – it’s free!

But since our readership-audience for The Good Investors is wider than our subscriber base, we think sharing the reading list regularly on the blog itself can benefit even more people. The articles we share touch on a wide range of topics, including investing, business, and the world in general. 

Here are the articles for the week ending 20 October 2024:

1. Actual Reform has materialised – Leonid Mironov

The Ministry of Justice and the NDRC have put out the draft of the Law on Private companies, or to give it’s full name, People’s Republic of China Private Economy Promotion Law. And it’s really good one…

…It emphasizes innovation, technological advancement, and participation in strategic industries, while also providing improved legal protections and equal treatment to address longstanding concerns. In return, private businesses are expected to follow Party leadership, contribute to national development, and operate in compliance with laws and regulations…

…The takeaway is that the private enterprises are now not discriminated against in the key project deployment. They will have similar cost of capital to the SOEs and will be able to supply most major national projects.

Chinese SOEs have been told to get more competitive earlier in the year, now the playing field is being somewhat levelled. The government, to my mind, is taking onboard the idea that employment is employment, whether SOE or not, and if a private enterprise can provide it, its fine.

I honestly think that this is the most consequential announcement, as it’s an example of a long-term reform that the government has committed to, and it is carrying out. This gives us hope for land and hukou reforms, as well as pension reform eventually. But also, this is a sign that there no decision to increase direct state participation in the economy but rather, assuming that companies follow guidance form the CCP, the more efficient actors, whether private or SOE, will drive the new policies.

2. Becoming Berkshire: 1969 – Illinois National Bank – The Weekend Investor

Around this time, Buffett and Munger sought a bank to purchase and found a candidate in Rockford, Illinois.

On April 3, 1969, Berskhire Hathaway, Inc. acquired 81,989 shares, out of a total of 100,000 shares outstanding, of the common stock of the Illinois National Bank and Trust Co. of Rockford, Illinois, at a cash price of $190.00 per share. They also have made a tender offer to acquire the remaining outstanding shares at the same cash price.

Buffett considered Rockford Bank one of the most well-run and profitable he had ever seen. It was managed by Eugene Abegg, who was 71 years old.

Abegg, who owned one-quarter of the shares, had been negotiating to sell the business to someone else before Buffett came along. The potential buyer had started criticizing the deal and wanted an audit. This affected Abegg, and he decided not to go ahead with the deal. Meanwhile, Buffett worked out what he was willing to pay, which turned out to be about $1 million less than the other buyers.

Abegg was so fed up with the other bidders that he pressured his fellow shareholders to accept Buffett’s offer, threatening to resign if they did not.

The crusty Abegg was just the type of fellow that Buffett liked.

In 1931, Eugene Abegg, a young man with only $250,000 of capital, formed a bank in Rockford, Illinois… It had $400,000 of deposits. Since then, no new capital had been added to the bank by its owners. Nevertheless, by 1969, Abegg had built, piece by piece, a bank with a net worth of $17m and $100m of deposits.

He carried thousands of dollars of cash in his pocket and cashed checks for people on the weekends. He carried a list of the number of unrented safe deposit boxes with him everywhere and would try to rent you a safe deposit box at a cocktail party. Mind you, this is the biggest bank in the second-largest city in Illinois at that time…

…The Illinois National Bank, which Buffett soon came to refer to by its colloquial name of Rockford Bank, had been chartered in the days before the U.S. Treasury assumed the exclusive right to coin money. Buffett was fascinated to discover that it still issued its own currency. The ten-dollar bills featured Abegg’s picture. Buffett, whose net worth was now more than $26 million, could have bought almost anything he wanted, but not this. Gene Abegg had done him one better. He and the United States Treasury had the privilege of issuing their own currency, but not the Buffett Partnership or Berkshire Hathaway. The idea of legal tender with your own picture on it captivated him. He began carrying a Rockford bill in his wallet…

…Berkshire paid $190 per share to acquire Illinois National, plus $2 per share to an investment bank for services rendered in the transaction…

…With total Assets of $117.3 million, shareholder equity of $16.8 million, and a net profit of $1.7 million in 1968, the bank had an ROE of 10% and ROA of 1.4%.

3. Jigar Shah on the Nuclear Power Revival in the US – Tracy Alloway, Joe Weisenthal, and Jigar Shah

Joe (04:30):

Thank you so much. So I’m going to start off with this question, which is: Okay, we went for a long time basically without building new nuclear power plants. It’s starting to pick up again. How much is it because something has changed policy-wise with subsidies and tax credits, et cetera, versus demand is back, therefore the economics of nuclear makes sense? Or would you say it’s not binary?

Jigar (04:53):

Well, look, I think that when you think about what happened through a historical context in the 1970s, we had high inflation and nuclear power was subject to high inflation. And so part of this is people were already worried about building new nuclear plants before the incident occurred because things were just getting more expensive. And when you think about the utility bankruptcies that occurred way back when, it was because they had cost overruns on nuclear power. And so I think that in general, it goes to when America stopped believing in itself and its ability to do big things and infrastructure. And I think this moment, with load growth and with the president saying we are going to build big things here, has gotten people thinking again, “Hey, what would it take to actually figure this out this time around?”

Tracy (05:48):

This is actually exactly what I wanted to ask you about because I was reading that the initial construction cost for Unit One of Three Mile was about $400 million. And I guess today the cost of building a nuclear plant would be like $5 billion, $10 billion. Obviously the $400 million isn’t adjusted for 1960s prices, but it does seem in general like it’s more expensive to build nuclear plants, certainly since the 1960s. Where did that additional cost increase actually come from?

Jigar (06:23):

So when you think about building things… like if you were to build multifamily housing and you would build one multifamily housing building versus building 12 throughout the city. You can imagine if you’re using the same design, it would be cheaper. The workers would get better. The first one would cost more, the second one would cost less, the third one would be even less.

You get faster. I mean, you see that when you go into a new home construction place. The first home takes it seems a lot longer and then suddenly the homes start popping up every week. This is the same with nuclear power. We trained 13,000 people to build the Vogtle nuclear plant in Georgia, and then we were done. And where did all those workers go? To other jobs. So now if we wanted to build Units Five and Six — we wanted to rebuild V.C. Summer [Nuclear Station] in South Carolina, which is like a hundred miles away — we’d have to go out and find another 13,000 workers. And so one of the things that we have to figure out how to do is to figure out how to build 10, right? And have those same workers that we trained, all those same EPC [engineering, procurement, and construction] contractors, all of those same suppliers, not have to stop and start, but we continue to do these one-off things…

…Jigar (09:42):

So when you restart a nuclear plant, the nuclear plant is viewed as new additional capacity, right? Because it was shut down. And so as a result, this technology agnostic credit that was created by Senator Wyden, right?

Because remember we always had the solar tax credit and the wind tax credit and all these other things. So over time the IRA moves us to a technology-neutral tax credit so that everything that is clean gets this technology-neutral tax credit. It’s a pretty lucrative tax credit. Depends on the technology, but let’s say 3 cents a kilowatt hour. And so now you’re in this place where you actually have a bonus production credit. Now you separately can choose to get an investment tax credit, but it happens to be that the production tax credit is more lucrative for these restarts of nuclear plants. But if you decide to do the investment tax credit, then you get the 30% tax credit, then there’s bonus tax credit.

So if it’s part of an energy community, you get an extra 10%, right? If you have a lot of domestic content, you get another 10%, right? So you could imagine that some of the folks who are building brand new nuclear plants might go that direction, but as a result of these incentives, nuclear power is now very cost effective.

Then the question becomes who actually wants to buy this power? Because wholesale market prices have been low. And so then the question becomes who wants to buy it? And it happened to be that two different utility groups in Michigan competed over wanting to buy all the output out of the Palisades restart. And so he picked one of the groups to buy that power and then that led to the project becoming financeable, right? And so once that succeeded, then Constellation was like, hell, maybe we could do this…

…Jigar (11:49):

So for a restart, you generally choose a production tax credit, not the investment tax credit. And that’s because the cost of restarting a reactor is a lot lower than the cost of building a brand new reactor. So you make more money by getting that extra 3 cents a kilowatt hour for the next 20 years. So the math there is you put up, it depends on where the final cost runs out, but let’s call it $1 [billion] to $2 billion to do the restart. And then you get this 3 cents a kilowatt hour multiplied by the number of kilowatt hours that plant creates. And remember, a nuclear power plant runs on average, in the United States, 92% of the time. So that’s a lot of kilowatt hours that comes out of that plant. Whereas with a solar farm, you might get 25% of the time production, with a tracking system. The math means that you could get almost all of your money back on the $1-to-$2 billion from the tax credits.

Then you’ve got the sale of the power that you’re signing a long-term contract for, and that’s where you make your return…

…Jigar (14:42):

Into the PJM [Interconnection.] And Microsoft says, depending on what happens with this power, we will make you whole on the payment. So if we said that we’re going to pay 9 cents a kilowatt hour and you end up getting 7 cents a kilowatt hour, we’ll pay that 2-cent difference. And that includes not just the kilowatt hour price, but also includes the capacity payment. So you may have heard that the PJM had a very large increase in the price that the capacity payment cleared and the capacity payment is essential, because it convinces the coal plants or the natural gas plants or others who are sort of at the end of life to make investments to last a little longer because they got paid a capacity payment to stay open. So the pieces that come here are both a capacity payment and the energy payment, and Microsoft is saying that we get all the attributes, so we get to call our usage green, but separately, if for whatever reason the wholesale market value for what the nuclear power plant is creating is less than the strike price that we agreed to, then we will make you whole…

…Jigar (19:34):

It really is an extraordinary thing. I think that most people view electricity like water. So you just put a bigger pump in, you put in more pipe, it gets to your house, you got hot water, that’s great. It’s not like that at all. There is this complex physics equation that you have to solve for.

Joe (19:53):

Because the grid has to be in perfect balance all the time, right?

Jigar (19:56):

Well, so there’s the perfect balance between supply and demand. But then there’s also figuring out what the constraints are of each individual segment on the transmission line.

So if you’re using power in New York City and you’re creating a lot of extra power out of the nuclear plants in Illinois, then that power has to go via Indiana and Ohio and then through Pennsylvania to New York City, and they may or may not be able to carry that much. And so they have to do these studies. So every time you try to add something to the grid, they have to do a study and they have to figure out whether that capacity is there, how often it’s there, whether it would continue to be balanced or whether it would be imbalanced.

And so the big fight there is that… so in Texas what they do is they just look at the safety part of it, but they don’t look at the capacity part of it. They just say, “You connect at your own risk and if we’re clogged, we’re just going to tell you to shut down, and that’s on you.” That’s why they’re approving people super fast. Whereas with the PJM and others, they’re saying, “Not only are we’re going to do a safety study, we’re also going to do a capacity study and we’re not going to let you connect until this other generator shuts down and frees up capacity for your generator.” And so that then makes the wait time much longer.

4. Invest Local? – Victaurs

Well, a community bank in the U.S. is generally defined as a depository or lending institution that primarily serves businesses and individuals in a small geographic area. These banks emphasize personal relationships with their customers and often have specialized knowledge of their local community and customers. They tend to base credit decisions on local knowledge and nonstandard data obtained through long-term relationships, rather than relying solely on models-based underwriting used by larger banks…

…As of a year or two ago there were roughly $25 trillion in assets in the entire U.S. Banking system.

And the entire amount of assets in the Community Banking system is … drumroll please … $4.8 trillion for a grand total of 19.2%. Only 1/5 of all the assets in the system are controlled and managed by these smaller banks…

...When people don’t bank locally, they inadvertently contribute to a cycle that can harm their local economies:

Capital Drain: Deposits in non-local banks are often invested in national or international ventures, rather than being reinvested in the local community

Reduced Access to Credit: As community banks disappear, so does their deep understanding of local economic conditions and business opportunities.

Loss of Personalized Service: Large banks often use standardized lending criteria that may not account for local economic conditions or individual circumstances.

Economic Homogenization: As local banks disappear, communities lose a key institution that helps maintain their unique economic character.

Decreased Local Decision-Making: When banking decisions are made in distant headquarters, local economic needs and opportunities may be overlooked.

I don’t want to over dramatize the situation, but do any of these things sound good to you? And given lots of us grew up in small towns, love where we came from, owe our position in life to the kindness of a HS coach or the first job at a local restaurant, do you want capital to move away from these people? I don’t think I do.

Banking is numbers, so here are some numbers because they paint a stark picture:

• For every $100 deposited in a local bank, $58 is reinvested locally. For large banks, that number drops to just $36. This isn’t to demonize big banks, only to point out the facts.
• Community banks make 60% of small business loans, despite holding only 12% of all banking assets. (I know their 12% doesn’t jive with my 19%).
• When a community bank closes, the local area experiences an average 33% reduction in small business lending for several years. I highly recommend checking out this study. This is an awful second level impact of losing community banks…

…As of 2023, the United States is home to a staggering 33.2 million small businesses. These enterprises employ 61.7 million people – that’s 46.4% of all U.S. employees. To put it in perspective, if small business employees formed a country, it would be the 23rd most populous nation on Earth, just behind Italy. That was pretty crazy to me. Imagine if all of the small businesses went away?

But it doesn’t stop there. Small businesses are the dynamos of American innovation and economic activity:

• They generate 44% of U.S. economic activity.
• They create 1.5 million jobs annually (64% of new jobs created) – that’s like creating a new city the size of Philadelphia every year, filled entirely with new job holders. And even for those of us who aren’t Eagles or Phillies fans, we can agree this is a massive deal.
• They contribute to 33.6% of known export value and represent 97.5% of all exporters in the United States.

“Small businesses are more than just economic units,” says Dr. Emily Chen, economist at the Small Business Administration. “They’re the innovation labs of America, constantly adapting and evolving to meet new challenges and opportunities.”…

…This is a repeat stat, but worth mentioning again. Community banks provide 60% of all small business loans, despite holding only 12% of all banking industry assets. It’s as if the local high school football team was outscoring all the pro teams combined!

They make 80% of agricultural loans, forming the financial backbone of rural America.

During the COVID-19 pandemic, community banks processed 57.5% of all Paycheck Protection Program (PPP) loans, saving countless small businesses.

Community banks have over 50,000 locations nationwide, compared to about 18,000 locations for the largest banks. That’s like having a friendly neighbor on every block, compared to a distant acquaintance every few neighborhoods…

…Community banks have consistently demonstrated resilience in the face of economic challenges:

During the 2008 financial crisis, community banks continued to lend when larger banks pulled back, increasing their small business lending by 5.2%.

In the recent COVID-19 pandemic, community banks were often the first to step up, offering forbearance and emergency loans to struggling local businesses.

66% of small businesses that received PPP loans from community banks said the process was “easy,” compared to 51% for large banks…

…In 2005, Hamdi Ulukaya bought a defunct yogurt factory in New Berlin, New York, with the help of a Small Business Administration loan backed by a local bank. From this modest beginning, Chobani has grown into a billion-dollar company, employing thousands and revolutionizing the yogurt industry.

“Without that initial loan and the trust of our local bank, Chobani might never have existed,” Ulukaya has said. “They believed in us when no one else would.”

5. The next tectonic shift in AI: Inference – Rihard Jarc

To simplify it, the o1 model has a backtracking ability. The model predicts something, realizes it did something wrong, goes back, erases that, and comes back and predicts again from that point.

The most significant implication of this kind of model is that inference workloads should grow substantially more than we were expecting in the pre-o1 period.

The calculation for Inference is now not just the number of users using it multiplied by the number of times they use it. The model can now take 10x or even more time on inference compute to come up with an answer. So inference also becomes part of the accuracy process.

The second big implication for investors is that inference computing is now becoming a new scaling paradigm. So, you not only scale the model with what is now known as data and training compute, but you can also scale them with more inference.

Noam Brown, an OpenAI researcher, has said that a study on the board game Hex using AI found that if you have 15x the inference compute, it equals 10x the training compute.

The fact that you can now scale LLMs via inference means that:

A. You can have smaller models that you dedicate more inference compute that can be as good as bigger parameter models with less inference compute

B. Inference computing is much cheaper than training computing, but the market for inference will be vastly bigger than training computing. In my discussion with Sunny, I asked Sunny how big he thinks, as an industry insider, the Inference market will be; Sunny revealed that he had the chance to preview an interview with Jensen Huang, the CEO of Nvidia, where Jensen said that Inference will be 1 billion times larger than Training. Sunny added that it makes sense to think that a model is going to be used billions of times before it is updated (trained) again.

It is also important to note that the Inference chip market has much more competition than the training market, where Nvidia dominates. From an industry expert:

»Training also is notoriously hard because you need special architectures and special cards and interconnects between the clusterand RDUs and stuff like that. It’s mostly dominated by NVIDIA because they’ve done the best work there. Inference is interesting because inference can be done anywhere. Inference is very, very easy to do on any hardware. Training is harder.«

This means that other companies will be able to reap the benefits of inference chips besides Nvidia. It also means margins on inference chips are not going close to Nvidia’s margins on its training GPUs, where it basically has a monopoly.

It also opens a path for some companies to lower some of their costs, and instead of going heavy on training GPUs and scaling there, they can split some of that on inference chips and still scale the models. Inference for customers is vastly cheaper than training…

…The thing that I also didn’t mention, but because of the o1 model release and the fact that we are coming to the start of Big Tech reporting earnings, I believe there is a high chance that the hyperscalers and companies like Meta, who are building these LLMs will increase their CapEx expectations now even more in the short-term than what they did before and much higher than analysts expect. The reason is that they now have to account for spending on Inference compute to improve these models. Inference was before a cost that they could gradually introduce and control more with users getting limited access to AI features, etc. This has changed, and you can use inference to scale the model. This might not be what investors will like in the short term. Still, it is something that, in the long run, brings us even more capable models, possibilities of easier agentic AI use cases, and SLMs that have a good enough accuracy to be used more often compared to bigger LLMs. There are already estimates on how much the inference costs are more expensive with an o1 model than with »pre o1 models«. This industry expert quantifies how much more expensive it is:

» Analyst: Strawberry o1, I’ve been told it’s 4X-5X more expensive than ChatGPT?

Industry Expert: Yeah. That’s the right level. That adds up given that it will essentially use 4X-5X more tokens on average. In the worst case, it will be 10X possibly. The 4X-5X is an average number of how much more expensive it is.«

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. We currently have a vested interest in Meta Platforms, and Microsoft. Holdings are subject to change at any time.

We’ve constantly been sharing a list of our recent reads in our weekly emails for The Good Investors.

Do subscribe for our weekly updates through the orange box in the blog (it’s on the side if you’re using a computer, and all the way at the bottom if you’re using mobile) – it’s free!

But since our readership-audience for The Good Investors is wider than our subscriber base, we think sharing the reading list regularly on the blog itself can benefit even more people. The articles we share touch on a wide range of topics, including investing, business, and the world in general. 

Here are the articles for the week ending 13 October 2024:

1. An Interview with Meta CTO Andrew Bosworth About Orion and Reality Labs – Ben Thompson and Andrew Bosworth

Orion, Meta’s AR glasses, is spectacular. I must start with the caveat that this is not a shipping product; the glasses that I tried felt like a consumer-ready product, but they reportedly cost $10,000 each, and Meta has decided to hold off on shipping a consumer version until they can bring the price down. That will be a tall order, and that challenge should be kept in mind with everything that follows.

What follows is unadulterated praise. Orion makes every other VR or AR device I have tried feel like a mistake — including the Apple Vision Pro. It is incredibly comfortable to wear, for one. What was the most striking to me, however, is that the obvious limitations — particularly low resolution — felt immaterial. The difference from the Quest or Vision Pro is that actually looking at reality is so dramatically different from even the best-in-class pass-through capabilities of the Vision Pro, that the holographic video quality doesn’t really matter. Even the highest quality presentation layer will pale in comparison to reality; this, counter-intuitively, gives a lot more freedom of movement in terms of what constitutes “good enough”. Orion’s image quality — thanks in part to its shockingly large 70 degree field of view — is good enough. It’s awesome, actually. In fact — and I don’t say this lightly — it is good enough that, for the first time ever, I felt like I could envision a world where I don’t carry a smartphone.

Orion is a standalone product, at least in terms of needing a phone; instead there is a “puck”, an oblong unit that holds the compute for the operating system and connectivity, and which connects to the glasses wirelessly. The glasses themselves contain the compute necessary for low-latency calculations that pertain to the actual display. One challenge I see in this model is input: voice works well, and the wristband that detects the electrical signals in your arm worked flawlessly for me — you can control your glasses with your hand without anyone knowing — but I wouldn’t mind if that “puck” contained a Blackberry-style keyboard for extended text entry…

…Was there any aspect of the Vision Pro going so high end that also made you re-anchor on the low end, or do you think you would’ve ended up here regardless?

AB: No, I think we would’ve ended up here regardless. I mean, listen, I love that the Vision Pro — people won’t believe me — I love that they went maximalist. Just like, “What if we just take this dial and turn it to 11, and let the rest of the system fall where it does?”, and you see why we haven’t done that, just in terms of weight and cost. Like yep, that’s what it takes to take this dial and turn it to 11.

And this is why I think you and Mark right away seemed almost relieved by the Vision Pro.

AB: Your only real fear when a competitor launches a product is that they’ve had a breakthrough that you haven’t had. That there’s something that they’ve figured out, some technical thing that you haven’t figured out, because then they have a sustaining advantage potentially for some period of time until you can beat them on it. So I think whenever a device comes out, it’s like, “Oh good, this is all made with materials that we are aware of, this is all made with technologies that we have access to”.

“We understand why it costs this much, why it weighs this much.”

AB: We could have built this, we chose not to build this. It is both great for the world that there’s people exploring different quadrants of the space. By the way, if the Vision Pro had sold really well, of course we’d be changing our strategy. We’d be like, “Oh, okay, cool, there’s actually a bigger market than we’ve realized up there, let’s go do it”. And I think, by the way, I do actually think there will be a market there, when there’s software.

Are you surprised at how little content Apple’s released with Vision Pro?

AB: It’s how do you get the content? Before you have the devices and it’s a chicken-and-egg problem where it’s like, “Hey, okay cool, you have these devices out there, but there’s not enough for me to build my content for”.

Is part of the low cost a bet that if the egg is the end market, that’s the most important part?

AB: One hundred percent. We’ve talked about this all the time, you almost always hear me talk about the Quest ecosystem. I’m not talking about the Quest line of devices, I’m talking about building as big an audience as I can for developers to target so they can sell their software, so there’s more developers, that brings more consumers, and you have flywheel that way. Then at some point, that’s how you power your way up market. That’s how you power your way to, “Hey, we can now sell higher margin, higher end devices because there’s plenty of stuff”.

Well, to that point, Mark talks about, “In every market there’s the integrated version and the modular mass market one”, but if you go back to the PCs, Microsoft swept the market. Now one thing that’s important about that era that’s different from the smartphone era is in the smartphone era, Apple was first. In the PC era, DOS was first, so Microsoft was actually first, so they actually had developers first. At this point, seeing the Vision Pro, seeing what’s happened over the last six to nine months, are you shifting from a, “Yeah, we can both be winners here”, to, “We’re going to win the whole thing”?

AB: Man, I feel good about our position, if that’s what you’re asking.

I want to pretend I’m turning off the mic and getting your honest thought.

AB: With me, you’ll always get an honest thought, I have to make sure I’m phrasing this in a clever way.

The only reason I’m being careful here is I think — I don’t really want to be antagonistic with anybody, including Apple, I think it’s great that they’re investing, I want them to continue invest. Actually the Vision Pro has caused a surge of interest in investing in the entire space, including in us. I’ve gotten calls in the last couple of months especially that I would not have gotten, had Apple not launched the Vision Pro, and if they weren’t courting people to consider that there’s going to be a follow-on version. So it’s really, really healthy to have that competition. Good for consumers, good for us.

I also think that right now, if you’re a developer, you’d be an idiot not to build for us first, we have an audience that can actually go buy your software. It’s big enough to sustain you, and then yeah, no problem, bring it over to Apple Vision Pro after that.

Is your bigger concern losing to Apple, or that a market never materializes for these devices?

AB: Oh, good question. Yeah, my biggest concern is that the market gets capped somehow, like it doesn’t take off. The thing I worry about with Apple specifically is that they have their phones and devices so locked down that they can self-preference a ton. So they can easily, you look what our Orion glasses, these full AR glasses, incredible. We’ve got custom silicon in the glasses, we’ve got custom silicon in the puck, but Apple could build all that and just be like, “Oh, it only works with us,” which they’ve already done with the AirPods.

They don’t need a puck because they have a phone.

AB: They already have a phone, and they did this with Airpods.

Or the Apple Watch.

AB: Apple Watch. Those aren’t the best possible things you could build, but no one else is allowed to build those things, so it’s like, “Oh cool”, so if I have a concern about Apple, it’s not the competitiveness or non-competitiveness of their headsets, it’s that they’re going to bundle into their ecosystem in a way that really makes it hard for us to compete…

…This is the first device I’ve ever used that — I know you guys have been saying it — that genuinely feels post-phone.

AB: It could do it, right?…

…I’ll be totally honest, after using Orion, I’m excusing you all your billions of dollars a year spent, that’s how incredible it is, but I do think one of the critiques, and you talked about it when you went in, this was an entity that had two completely different camps that want to go in totally different directions. Then even a few years after you were there, you’re having an operating system bake-off for years instead of months and then it’s, “Should we do processors? Should we partner with someone doing processors?”. What is the forcing function that is getting you into, “Okay, we’re going to stop experimenting and actually start building”? What got you to that point? Was it the Year of Efficiency? Was there a bit where, “Look, we have to lay off half the team, so we’ve got to decide which half”?

AB: I love this question. It was before the Year of Efficiency hit. I think it’s not uncommon, you have these expansionary periods where you’re like, “We don’t know what matters yet, we truly don’t know what technology is the right technology, we don’t know what operating system is the right operating system, we don’t know what trade-offs matter yet”. So if you want to be successful with high confidence in a certain timeframe, it pays to parallel path a ton of stuff.

But how long do you parallel path it?

AB: We honestly turned the corner with Quest 2, especially when we had mixed reality in sight. That started the process, and now you’ve got to a point with a mixed reality with our metaverse division where it’s extremely focused, have a very clear vision of what good looks like, have a very clear ability to discern this is the path, this is not the path. As a consequence, you can be really, really much more efficient with your resourcing, your parallel pathing list, you’re just blitzing the things that matter more.

With augmented reality, Orion, a year ago, we actually hit this point where we’re like, “Okay, we believe in this, we see it, we have a really clear sense of where we’re going with this”, and you know what really helped a lot with that was the Ray-Ban Meta glasses as well. Cool, it’s not just that we have this distant AR thing, we actually have an entire family of devices coming before that that also matter.

Did AI save Reality Labs?

AB: Oh my gosh. So AI, because FAIR, the Fundamental AI Research group reported to me until this year. We just moved it over to join the rest of the AI stuff with Chris, and I don’t know if it saved us, but it’s a wonderful tailwind, it’s the first tailwind I can remember having. For us, it’s mostly just headwind after headwind after headwinds like, “Oh, guess what? This thermal performance is worse than you thought, this battery life is worse than you thought, the efficiency is worse than you thought”, and so we finally got a tailwind. We finally got a thing that showed up before it was expected, which was AI.

So I think to answer your first question, each of these devices has gone through an expansionary period and a contractionary period where it expands until you feel like you have a good understanding and intuition of what good looks like, and then you can start to prune and then you can get really good about pruning. Today our architecture is really tight, hand tracking, eye tracking, face tracking, Codec Avatars, these are shared technologies, they work in both VR and AR, and we have a single shared team building those technologies. Separately, the operating system for AR has to be its own operating system because it turns out the use cases, what you actually do, the interaction paradigm, completely different.

2. Xi Jinping is worried about the economy – what do Chinese people think? – Kelly Ng and Yi Ma

What is less clear is how the slowdown has affected ordinary Chinese people, whose expectations and frustrations are often heavily censored.

But two new pieces of research offer some insight. The first, a survey of Chinese attitudes towards the economy, found that people were growing pessimistic and disillusioned about their prospects. The second is a record of protests, both physical and online, that noted a rise in incidents driven by economic grievances.

Although far from complete, the picture neverthless provides a rare glimpse into the current economic climate, and how Chinese people feel about their future…

…The slowdown hit as the pandemic ended, partly driven by three years of sudden and complete lockdowns, which strangled economic activity.

And that contrast between the years before and after the pandemic is evident in the research by American professors Martin Whyte of Harvard University, Scott Rozelle of Stanford University’s Center on China’s Economy and Stanford masters student Michael Alisky.

They conducted their surveys in 2004 and 2009, before Xi Jinping became China’s leader, and during his rule in 2014 and 2023. The sample sizes varied, ranging between 3,000 and 7,500.

In 2004, nearly 60% of the respondents said their families’ economic situation had improved over the past five years – and just as many of them felt optimistic about the next five years.

The figures jumped in 2009 and 2014 – with 72.4% and 76.5% respectively saying things had improved, while 68.8% and 73% were hopeful about the future.

However in 2023, only 38.8% felt life had got better for their families. And less than half – about 47% – believed things would improve over the next five years.

Meanwhile, the proportion of those who felt pessimistic about the future rose, from just 2.3% in 2004 to 16% in 2023.

While the surveys were of a nationally representative sample aged 20 to 60, getting access to a broad range of opinions is a challenge in authoritarian China.

Respondents were from 26 Chinese provinces and administrative regions. The 2023 surveys excluded Xinjiang and parts of Tibet – Mr Whyte said it was “a combination of extra costs due to remote locations and political sensitivity”…

…In 2004, 2009 and 2014, more than six in 10 respondents agreed that “effort is always rewarded” in China. Those who disagreed hovered around 15%.

Come 2023, the sentiment flipped. Only 28.3% believed that their hard work would pay off, while a third of them disagreed. The disagreement was strongest among lower-income families, who earned less than 50,000 yuan ($6,989; £5,442) a year…

…There are other indicators of discontent, such as an 18% rise in protests in the second quarter of 2024, compared with the same period last year, according to the China Dissent Monitor (CDM).

The study defines protests as any instance when people voice grievances or advance their interests in ways that are in contention with authority – this could happen physically or online. Such episodes, however small, are still telling in China, where even lone protesters are swiftly tracked down and detained.

A least three in four cases are due to economic grievances, said Kevin Slaten, one of the CDM study’s four editors.

Starting in June 2022, the group has documented nearly 6,400 such events so far.

They saw a rise in protests led by rural residents and blue-collar workers over land grabs and low wages, but also noted middle-class citizens organising because of the real estate crisis. Protests by homeowners and construction workers made up 44% of the cases across more than 370 cities…

…Between August 2023 and Janaury 2024, Beijing stopped releasing youth unemployment figures after they hit a record high. At one point, officials coined the term “slow employment” to describe those who were taking time to find a job – a separate category, they said, from the jobless.

Censors have been cracking down on any source of financial frustration – vocal online posts are promptly scrubbed, while influencers have been blocked on social media for flaunting luxurious tastes. State media has defended the bans as part of the effort to create a “civilised, healthy and harmonious” environment. More alarming perhaps are reports last week that a top economist, Zhu Hengpeng, has been detained for criticising Xi’s handling of the economy.

3. Will Hurricane Helene Cause a Chip Shortage? What the Major Chipmakers Are Saying – Tae Kim

Hurricane Helene flooded and damaged the local infrastructure in Spruce Pine, making some roadways impassable, according to local news reports. Sibelco and The Quartz Corp., the two companies that manage the quartz mines in the town, have both temporarily shut down mining operations.

High-purity quartz found in Spruce Pine is a key material used in the production of silicon wafers that are used to make semiconductors. Quartz’s ability to withstand extreme temperatures is useful for making crucibles or containers that hold the melted polysilicon material used to produce wafers and solar cells.

According to Vince Beiser, author of The World in a Grain, the two companies’ Spruce Pine mines provide 70% to 90% of the world’s production of high-purity quartz used for the semiconductor industry…

…Ed Conway, author of Material World, a book about raw materials, posted that Spruce Pine quartz mines are unique in terms of purity and consistency, and finding another high-purity source would take months or possibly years.

But in a bad scenario, where the mines are offline for months, the chip industry may be insulated. “The significance of supply disruptions from the [Spruce Pine] mines is exaggerated,” Dylan Patel, chief analyst at SemiAnalysis said.

Patel added that the raw wafer companies had months of inventory, there are other countries that have high-purity quartz mines, and there are methods to purify lower-quality quartz or create synthetic quartz crucibles.

4. The Truth Behind the Highlight Reels – Thomas Chua

People are often shocked when seemingly perfect couples announce a divorce or breakup, even though their social media showed nothing but happiness just days earlier. What’s hidden from view are the realities that unfold behind the scenes—disagreements, financial pressures, or emotional distance.

The same kind of comparison happens in investing. We look at people like Warren Buffett, who delivered an incredible 30.4% annualized return during his partnership years (1957–1969), or Peter Lynch, who achieved 29.2% annualized returns at Fidelity’s Magellan Fund (1977–1990). Their results are awe-inspiring, but we rarely consider the personal price they paid to achieve them.

Warren Buffett’s biography, The Snowball, talks about how he spent his days working and his nights poring over Moody’s Manual. While his wife, Susie, took care of him wholeheartedly and assumed the responsibility of managing their household and raising the children, Buffett’s mind remained elsewhere. Even during family trips—like a visit to Disneyland—he would sit alone, engrossed in reading.

This single-minded focus on work created a widening distance between Buffett and his family. His children longed for his attention, and Susie craved a deeper connection. The strain eventually became too much, leading to Susie’s departure…

…Buffett and Lynch’s legendary results required intense focus and commitment, often at the expense of their relationships. This is not unlike the sacrifices elite athletes make, dedicating everything to training, diet, and recovery to reach the pinnacle of their sport…

…When it comes to investing, we need to ask ourselves: What’s the price we’re willing to pay? How much time, energy, and money are we truly prepared to invest? 

5. X (or Twitter) thread on China’s stimulus – Adam Wolfe

Why is China’s stock market booming if most economists, including me, don’t think the stimulus measures announced or reported go far enough to solve China’s economic problems or even its cyclical slump? I think it’s how the stimulus has been designed. 1/

The measures aimed at the real economy are mostly incremental, small, and inconsequential. But the measures that the PBoC announced to support the stock market are new, unlimited, and significant. 2/…

…Start with the 20-bps policy interest rate cut. 3/

PBoC Governor Pan was at pains to say this is as much as he could do. Rate cuts pass through to loan rates faster than deposit rates, so to keep banks profitable, he couldn’t offer any more. That also implies he won’t be cutting rates further soon. 4/…

…Existing mortgage rates were cut, too, saving some CNY150bn in interest payments per-year, according to Pan. But they would have adjusted in January anyway, so the actual savings are ¼ of that. They did the same thing last year. It had no macro impact. 7/

Lower down payment requirements for second home purchases? Done that before, too. It didn’t lead to higher sales of new homes. 8/…

…Another CNY1tn will be used to support consumption. About half of that would go toward extending the cash for clunkers programs. Those have helped specific industries but have had little macro impact. And the impact is getting smaller the longer these programs run. 11/

The only new thing for the real economy is the reported program that would give a monthly allowance to families with two more kids. I estimate that a bit over 10% of families would qualify, so it would cost about CNY500bn/year. 12/

This could have a big multiplier effect on growth, but CNY500bn is small beans. Plus, temporary support measures like this tend to be saved…

…But what about the stock market? The PBoC will set up a CNY500bn facility for institutional investors to higher risk assets for safe assets from the PBoC. This higher-quality collateral would then allow the investors to take on more leverage to buy more stocks. 14/

The PBoC will also open a CNY300bn re-lending window to encourage banks to finance the repurchase of stocks by listed companies. Pan made a point to say that both programs could be doubled or tripled if they work. The sky is the limit! 15/…

…Inflating a bubble in stock prices without doing much to boost earnings could end in tears. Alternatively, sucking liquidity out of safer assets like bonds could lead to another “redemption crisis” for WMPs/bond funds and losses for households. 19/

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. We currently have a vested interest in Apple, Meta Platforms, and Microsoft. Holdings are subject to change at any time.

We’ve constantly been sharing a list of our recent reads in our weekly emails for The Good Investors.

Do subscribe for our weekly updates through the orange box in the blog (it’s on the side if you’re using a computer, and all the way at the bottom if you’re using mobile) – it’s free!

But since our readership-audience for The Good Investors is wider than our subscriber base, we think sharing the reading list regularly on the blog itself can benefit even more people. The articles we share touch on a wide range of topics, including investing, business, and the world in general. 

Here are the articles for the week ending 06 October 2024:

1. My China’s Travelogue: China’s Super Apps, Western Brands, EV Boom and Challenges – Thomas Chua

When I arrived in Beijing, I activated my travel card directly through WeChat or Alipay, scanned a QR code, and that was it—smooth sailing. This seamless, mobile-first approach isn’t just a clever solution; it’s a necessity in a country of such a large scale. It offers an elegant, low-cost, and scalable system that is incredibly user-friendly and available in every city, eliminating the complications associated with traditional transport infrastructure.

In many ways, China’s lack of legacy infrastructure—often seen as a disadvantage—turned out to be a blessing. Without the entrenched banking systems and reliance on Mastercard or Visa that many developed countries face, China was free to reimagine its financial infrastructure from scratch. Where traditional payment systems come with a web of intermediaries and fees, China’s mobile payment platforms—WeChat Pay and Alipay—were built to be faster, cheaper, and more efficient.

However, a super app like WeChat does more than just make payments. It’s a super app, offering a vast range of services, from messaging and social networking to ride-hailing and food delivery. This super-app model emerged out of necessity, as many users in lower-tier cities had limited smartphone storage and data plans. WeChat’s mini-programs solved this problem, providing lightweight apps without requiring additional downloads or installations…

…I noticed all my rides were EVs, as were most cars on the road. I barely saw a dozen internal combustion engine (ICE) vehicles and didn’t come across a single petrol station in Beijing or Xi’an.

Curious about China’s rapid EV adoption, I began asking my drivers about the EV scene and learned that while many in Beijing drove 北汽 (BAIC) EVs due to their low price, the brand wasn’t highly regarded, with past models having plenty of problems. Surprisingly, I didn’t see many BYDs on the road in Beijing, but the drivers told me the brand was more prevalent in Shanghai and Hangzhou.

Tesla was perceived as superior but expensive. When I searched Baidu for the most popular EV, Tesla’s Model Y ranked as the most popular car in 2023.

How did China achieve a 54% electric vehicle (EV) penetration while other countries struggled? One key factor in Beijing is the stringent quota on car sales. To bypass the long wait for a vehicle (a local I spoke with has been waiting for over three years), consumers can jump the queue by opting for an EV instead of ICE or by having children.

When the policy of prioritizing EV purchases was first introduced in the mid-2010s, many people were hesitant to adopt EVs due to concerns over charging infrastructure. In those days, if you decided to buy an EV, you could have gotten the permit immediately. Today, those concerns have disappeared, with private companies installing charging points everywhere…

…During my trip, I visited several top consumer brands and observed foot traffic. Nike stores, to my surprise, were practically empty.

While not as deserted, Starbucks also saw far fewer customers than I expected. Li Ning had moderately more customers, while Lululemon was bustling. Even on busy streets, Starbucks was quiet, with consumers favoring milk tea brands like Chagee or 茶话弄 (Cha Hua Nong). Locals guessed this was due to the weak economy and Starbucks’ high prices.

However, this logic doesn’t fully explain Lululemon’s popularity despite its high prices. My guess is that Starbucks isn’t innovating fast enough for the fickle Chinese consumer. Competitors introduce new flavors at a much faster pace. And if Starbucks’ competitive advantage lies in its mobile app and loyalty program, it holds no advantage in China, where every food and beverage brand has a WeChat presence and can easily implement loyalty programs.

2. TIP661: Betting Big On China & Lessons From Bear Markets w/ Richard Lawrence – Clay Finck and Richard Lawrence

[00:12:23] Clay Finck: So is that a lesson of being more critical of the management teams you partner with? Did that help kind of hone in that side of the process?

[00:12:32] Richard Lawrence: Well, I think that number one, pyramid structures like that are out of bounds for any investor should never invest in a pyramid structure like that.

[00:12:42] Clay Finck: For those who aren’t familiar, what is the pyramid structure?

[00:12:45] Richard Lawrence: Well, the pyramid structure is the family owns 50. 1 percent of a public company that then in turn owns 50. 1 percent of another company and they own the asset. And the value of that asset is transferred to the owners of the top company and shareholders down below basically get nothing.

[00:13:03] Richard Lawrence: And they do it through any number of mechanisms. But paying dividends to minority shareholders, they’re generally not very big on. So you do it through excessive salaries, fees, costs. And so we learn, don’t invest in certain things.

[00:13:17] Clay Finck: Let’s transition here to chat about the Asian financial crisis. Many in our audience are likely aware of the crisis that occurred in Asia in 1997 and 98, but it’s not something we’ve covered too much on the show here.

[00:13:30] Clay Finck: I should also mention that many of our listeners are based in Asia as well. So you refer to this time period as nothing less than an economic nightmare, and there was really nowhere to hide for investors in these markets. How about you give us a sense of what was happening during this crisis that just made it so difficult for Asian economies?

[00:13:49] Richard Lawrence: Yeah, well, Clay, I was having a nice time here talking to you, and now you have to bring up memories of 1997 98. It churns my stomach still today with everything that went on. So, and really with the passage of time, there are fewer people that really understand the extent of the obliteration of value.

[00:14:09] Richard Lawrence: There was the inception of 97, 98 went back years that basically Asian economies were not able to self finance their growth. They were running what economists called current account deficits. And so they were having to borrow US dollars to fund their growth. And that US dollar debt built up, built up, built up.

[00:14:30] Richard Lawrence: And at the same time, they had fixed currencies. To the U. S. dollar. So all the companies were saying, well, if I can borrow dollars at the same price as my Korean won or my Thai baht or my Indonesian rupiah, I’m just going to do that. And so companies borrowed dollars, governments borrowed dollars, everybody was borrowing dollars and no one was hedging the currencies.

[00:14:54] Richard Lawrence: And then on July 2nd, 1997, the bot broke and it went from 25 eventually hitting 55 or 60 and it obliterated balance sheets. If you had 100 million of equity and 100 million of unhedged dollar debt, all of a sudden your debt grew 4 times in size and you needed 4 times the business to repay that debt. Of course, you didn’t have it.

[00:15:18] Richard Lawrence: Particularly when the economies were in recessions. To me, looking back, the dollar debt was really the biggest mistake. Current account deficits were a reflection of that. And the rupee in Indonesia went from 3000 to 15, 000. The one got obliterated within 6 months of July 2nd, 1997, the International Monetary Fund was called in to bail out Korea, Thailand, Malaysia, and Indonesia, which were the main markets at the time.

[00:15:49] Richard Lawrence: China was still a closed economy at the time. So they handled their own problems kind of internally out of sight the stock markets in various countries, like Thailand, Indonesia, went down nearly 90%. The real estate index in Thailand, which was a composite index, went down something like 98%. To do that, I calculated, you go down 80%, and then you go down another 80%, and then you go down another 80%.

[00:16:16] Richard Lawrence: That’s what going down 97, 98 percent is like. And so it was just a complete obliteration. We bottomed at Overlook. We went down from top to bottom about 65%. We really put a herd on our fledging investment management fund at the time, and we bottomed at about 4. 6 times earnings, about 0. 7 times book.

[00:16:37] Richard Lawrence: Interest rates rose because they had to protect their currencies. In Indonesia, the interest rates rose to 99%, and it didn’t stop the currency from declining. But the Indonesians couldn’t raise the interest rates higher because their banking system couldn’t accommodate three digits for interest rates.

[00:16:57] Richard Lawrence: And so interest rates meant nothing in Hong Kong, which had no dollar debt. It had a fixed currency to the dollar, but it was backed by the peg of the Hong Kong Monetary Authority and the government of Hong Kong. Interest rates went to 36 percent and they had no debt. So, you can just see the massive exodus.

[00:17:15] Richard Lawrence: It was a one way street out of Asia, and there I was, left. When eventually, 17 months later, I went out to Photon, and went in and met my friend Michael Chan, and went in and met the guys at Kingboard Chemical, and we survived by the chin of our chinny chin chin, as they say. But it was really something it was a lot of calls at night to my investors, you know, was pre zoom calls.

[00:17:39] Richard Lawrence: It was pre internet. I’d call them up and I’d say this is Richard Lawrence calling from Hong Kong and I’d get right through to the executive because calling from Hong Kong. It must be really expensive phone call. It was morning for the executives, the investors, and I totally wrecked their day. We went down 10 percent 5 straight months, maybe 6 straight months.

[00:17:58] Richard Lawrence: Now, you know why I feel so miserable answering, talking about 97, 98, but of course, like all bear markets, bear markets, self correct. And today, Asia runs current account surpluses. Today, Asia has really good balance of, with their government budgets. And we don’t have unhedged dollar debt. We have huge forex reserves.

[00:18:18] Richard Lawrence: All of that high savings rate, all of that’s come. The inception of that, all of it has come from 97, 98. We all, everybody. Any government official, corporate official, investor, we all learn those lessons. That’s why I think 97, 98 is such a pivotal time. We’ve had other bear markets, but they’re like water on ducks back…

…[00:22:33] Clay Finck: And you even mentioned in your book that you regretted ever listening to Buffett when it came to paying attention to macro. Is there anything else besides the current account deficits that you’ve implemented into your approach where you say you’re macro aware? Is there anything else to that process?

[00:22:50] Richard Lawrence: Yeah, there are. We had five, and then we added one, and then sort of in my Chinese way, I called them the five evils. And then the five evils plus one, but these are current account deficits, government deficits, fast loan growth. In my experience, banks can grow maybe 7 percent a year and not run into all kinds of trouble.

[00:23:08] Richard Lawrence: So, if they’re growing faster than that, they’re going to outgrow their ability to make good loans and know what they’re really lending. Loan to deposit ratios, forex reserves, those are all things that we’re very aware of. We track them religiously twice a year and we communicate them to our investors.

[00:23:24] Richard Lawrence: And in today’s world, we’re in another bear market in Asia, not as severe, but we don’t have a macroeconomic bear market. We have a geopolitical bear market, which is different. It has its severities. But Asia today is still running current account deficits, modest loan growth, very acceptable loan to deposit ratios, very acceptable government deficits, particularly compared to Europe or the U. S. So, it’s, Asia is still very, very competitive, I think…

…[00:46:49] Clay Finck: Since your team is looking at the macro situation or being macro aware and overlaying that on your very micro approach to picking stocks, how would you describe the current macro situation in China?

[00:47:02] Richard Lawrence: Well, let’s start off with the stuff that really matters, which is things like balance sheets. Okay, they got a 3 trillion of forex reserves. The household bank deposits are double the size of the market capitalization of the stock markets. And it nearly tripled the size of annual retail sales. So the individual Chinese consumer has a lot of firepower in their bank deposit.

[00:47:27] Richard Lawrence: Okay, so balance sheets are strong. Loan to deposit ratio is a conservative. The capital adequacy ratio at the banks is okay. So, you know, those balance sheet items are all in very good order. Current account, surplus, small government deficit. That’s not the problem. The problem is really a lack of confidence.

[00:47:45] Richard Lawrence: They’ve lost confidence. As you do in bear markets, as you do in recessions, you’ve lost confidence. And it was triggered by the declines in an overbuilt real estate market. The real estate guys had kind of a heads I win tails you lose kind of approach to real estate development, particularly the private guys.

[00:48:02] Richard Lawrence: They’ve all been gone bankrupt and all been flushed. But the residual is, is that real estate prices probably really have gone down 25 percent if you speak widely. You know, there are pockets where it’s stronger and pockets where it’s weaker. And that was the major asset of Chinese people. That’s what the citizens own.

[00:48:20] Richard Lawrence: They own some equities, but not a lot. And so they’re a bit shell shocked and they get sort of really mixed signals on capitalism from the government. And so their animal spirits have really been doubly repressed by lack of confidence and a concern over the commitment, both growth and capitalism in the country.

[00:48:40] Richard Lawrence: So that’s, that’s kind of where we are at the current time. And then you lever that on top with Geopolitical situation with the U. S. where both sides are at fault. Both sides have brought out the worst in each other and there’s a lot of sort of ganging on. It’s a bit like 10 year olds on a playground.

[00:48:59] Richard Lawrence: There’s kind of ganging up on each other. It’s not really great leadership for the world. This is probably the most important economic relationship in the world today. And the amount of discussion going on between governments is almost minimal. And we don’t have a big base in the United States of diplomats who are really well versed in China.

[00:49:21] Richard Lawrence: China for the last 40 years has not been the problem. And so the diplomats went to Afghanistan, went to Iraq, went to Syria, went to Ukraine and dealing with all those messes and largely sort of ignored China while China needed attention to address some of the fundamental problems. And so we don’t have.

[00:49:39] Richard Lawrence: The great outlook that we should have that we historically had starting with Kissinger on really creating a real relationship with China. And so it’s going to take the better part of the rest of this decade to turn that around. Now, having said that, my investments in China and in Asia are not predicated on US investors moving those stock prices up.

[00:49:58] Richard Lawrence: They’re just not going to come back. The sentiment towards Asia is so negative, but like I said, there’s plenty of, uh, gunpowder in banks and household bank deposits. And so I think that’s what will eventually turn it around, but we need more commitment to reform than we’ve had. There’ll probably be more rounds of stimulus.

[00:50:18] Richard Lawrence: You have to understand that the Chinese do stimulus differently. We don’t open the helicopter and throw the money out. They’re very tactical on how they stimulate, they’ll do tests, they’ll test it in a bunch of provinces, and if it’s successful, then they’ll roll it out. We’re seeing big reforms. They’re just offering refinance of all the mortgages, for example, because the interest rates have gone down.

[00:50:39] Richard Lawrence: Things like that will really help the Chinese citizen, and that’ll bring back animal spirits. It’s a long bear market. We’ve been three and a half years, almost three and three quarter years. And no upward momentum to speak of. So it’ll just take time. That’s the way life is sometimes.

[00:50:55] Clay Finck: China is certainly a very hot topic, both inside and outside the investing world.

[00:51:01] Clay Finck: Some like Overlook have been finding bargains within the Chinese market while others see China as uninvestable to some extent. What do you think is the biggest misconception when it comes to investing in China?

[00:51:14] Richard Lawrence: Well, if you think back to this eight year olds on the playground in the US, there’s a certain arrogance that China’s weak and has been brought to its knees and doesn’t have technology and is massively over levered and whatnot.

[00:51:28] Richard Lawrence: I think that’s not really realistic. If you look carefully at the semiconductor, which is something I’ve been tracking for nearly 24 years, we can try to restrict advanced semiconductors from China, but China takes a very long view of this stuff. And I guess in 8, 10 years, they’re going to have similar level of technology, and that will have happened faster than if we had really sat down and talked about what are the uses in China for the advanced technology, for the advanced chips, how to keep them out of the military.

3. Podcast: Eric Markowitz – Graham Rhodes and Eric Markowitz

I spoke with Eric Markowitz, Partner and Director of Research at Nightview Capital, about an essay he published this year titled, “How a brush with death shaped my long game” (link). We dive straight into the details of the health crisis which shook Eric’s world in early 2023 (link) and then have an open-ended conversation about what he’s taken from it as a husband, father, friend and investor…

…EM: Absolutely. I only survived because of a lot of other things—because I live in a country with access to good healthcare, because I have a wife who kept me alive, and because I had a great doctor and neurosurgeon. My brain surgeon was a friend of a friend, and the night they found the lesion in my brain, I called my best friend, Ben Jacobs, and said, “Take care of my wife and kids if things don’t work out.” He said, “Let’s call Zach.” Zach had just moved to Portland after finishing his neurosurgery residency at Stanford. He looked at my scan that evening and said, “I want to do your surgery.” So, I benefited from this social fabric that kept me alive.

These systems, like friendships, technology, and geography, all played a role. Without them, if I had been alone on an island, I wouldn’t have survived. There’s safety in numbers, but there’s also a danger in following the herd. Sometimes, you don’t want to be an outlier, but in other cases, you do…

…EM: Sure. “Tikkun Olam” is an ancient Jewish concept that essentially means making the world whole again. It’s about making the world a little bit better, and that can be interpreted broadly. It could mean doing charitable work, pursuing direct philanthropy, or finding other ways to contribute positively to the world…

…EM: Right. If your mission is to build something that can last 500 years, you should hope for crises. Crises create opportunities for reinvention within organizations. I’m starting to write about this for a column because it’s fascinating and not talked about enough. People often think crises are bad, but you should absolutely hope for one because that’s what will save you.

One of my favorite examples is a company from about 100 years ago called Kutol. They sold wallpaper cleaner, which was popular when homes were heated with coal and oil because walls would get dirty. But when homes started using cleaner energy like natural gas, demand for their product collapsed. The company was in turmoil.

The CEO’s sister-in-law, a schoolteacher, realized that kids liked playing with the wallpaper cleaner. They decided to repackage it as a children’s toy and, with nothing to lose, launched it as Play-Doh. Play-Doh became a phenomenal success, saving the company from bankruptcy. Kutol is still around today, over 120 years later. Had they not faced a crisis, I’m not sure they’d still exist. They were only willing to try something new because their backs were against the wall…

…EM: Yeah. I began my career as a business journalist and investigative reporter, and although I write a weekly newsletter, I hadn’t been doing much real writing. After I wrote the essay about my health crisis, I started writing a column for Big Think. It’s been fun, like an intellectual playground for me. It gives me something to focus on and a research project to dig into. I’m trying to make these columns really good, which forces me to cut out what doesn’t matter.

Writing is helping me think better, be a better investor, and find good companies. It’s helping me do better for my clients and my family because they’ll read these pieces one day and have their own insights. It’s compounding in a positive way, which I don’t think I was really doing before. Before, it was just about getting through the day—checking off calls, listening to earnings reports. Now, I’m more focused on doing one thing really well. 

4. Daniel Yergin – Oil Explains the Entire 20th Century – Dwarkesh Patel and Daniel Yergin

Daniel Yergin 00:06:43 

People think of John D. Rockefeller and Standard Oil and they go: gasoline. It had nothing to do with gasoline. John D. Rockefeller was a lighting merchant. What they did is that they rolled back the darkness with kerosene, with lighting. Before that, the number one source of lighting was candles and whaling. The whaling industry was delivering lighting. For the first 30 or 40 years of the oil industry it was a lighting business. Then came along this other guy named Thomas Edison. Suddenly you have electric lights and you say, “That’s going to be the end of the oil business.” But by the way, over here is Henry Ford and others. You’re creating this whole new market in the 20th century for gasoline. In the 19th century gasoline was a waste product. It went for like three cents a gallon.

Dwarkesh Patel 00:07:34

One of the things I learned from The Prize, I didn’t appreciate before. Before the car was invented, when Edison invented the light bulb, people were saying Standard Oil would go bankrupt because the light bulb was invented.

Daniel Yergin 00:07:47

John D. Rockefeller became the richest man in the United States as a merchant of lighting, not as a merchant of mobility.

Dwarkesh Patel 00:07:55

In some of the earlier chapters, you mention that Rockefeller was especially interested in controlling the refining business, not the land owning and drilling. A lot of the producer surplus went into refining. Why did the economics shape up such that the producer surplus went to refining?

Daniel Yergin 00:08:11

Because that was the control of the market. That was the access to the market. The producers needed John D. Rockefeller. There were a few other people but Rockefeller controlled about 90% of the business. He would either give you a good sweating—drive down prices and force you out of business—or force you to sell to him or amalgamate with him…

…Daniel Yergin 00:32:43

OPEC was setting prices, but then the market responds. Demand goes down. In fact, that’s exactly what OPEC did with its prices. It created incredible incentive to bring on new supplies and to be more efficient and undercut. It ended up undercutting its own price. Here’s one of the things I really carried away from The Prize. There are hundreds of really interesting characters in the book, but the two most important characters, one is named Supply and one is named Demand. That’s something that you’ve got to keep in mind with all the other drama that goes on.

Dwarkesh Patel 00:33:22

The interesting thing from the book is that oil did seem to be, at least until very recently, pretty different in that with other sorts of commodities you have strong elasticities of supply. If lithium gets more expensive, you’ll figure out substitutes for lithium and it’s not that big a deal.

Daniel Yergin 00:33:41

Or find more lithium.

Dwarkesh Patel 00:33:42

Yeah. Whereas, at least during the oil crises, it really felt like the entire world economy was just on hold…

…Dwarkesh Patel 00:59:51

How mad are the frackers that they basically solved America’s main geopolitical problem, but they were so successful that they’ve competed away their profits?

Daniel Yergin 01:00:03

That was a period up till about 2017, when it was growth for growth’s sake. Then basically the financial community said, “Hey guys, the party’s over. I’m not going to reward you for growth. I’m going to reward you for sending money back on my investment.” So in a sense, shale is almost a mature industry. I think people don’t understand how transformative it’s been. The US was the world’s largest importer of oil. We were only producing 5 million barrels a day of oil in 2008. Now we’re more than 13.2 million barrels a day. The US is energy independent. People thought it was a big joke. It could never be energy independent. Every president said, “We want energy independence.” Late night comedians could make fun of it. Actually, it’s happened and it’s had huge economic significance. Back in like 2008, the US was spending something like $400 billion a year to import oil. Now we basically spend nothing to import oil.

It’s been geopolitically very significant. That’s been a learning experience for the Biden administration. It turns out that if it wasn’t for shale gas made into what’s called LNG, liquefied natural gas, shipped to Europe, Putin could well have shattered the coalition supporting Ukraine by using the energy weapon with, not oil, but gas. Suddenly you had European politicians coming to the US to try and secure supplies of LNG because they were so worried about it. It really is a revolution that is playing out today. China imports 75% of its oil. It wishes it was in our position…

…Dwarkesh Patel 01:10:26

Let’s talk about solar and renewables. With oil, you have a commodity which is a flow. You can cut it off and you can turn it back on again. It gives the person who’s producing it a lot of leverage. Whereas with wind and solar, if you’re the people producing it, it’s just a capital stock. How does that change the geopolitical situation and the kind of leverage that the producer might have?

Daniel Yergin 01:10:51

It’s a question of scale. What I carried away, the basic premise of energy security goes back to Churchill. He said that safety lies in variety and variety alone, diversification. Wind and solar give you diversification. Electric vehicles diversify your fleet. Those are all there.

For China, wind and solar, electric cars, is very much a strategic issue because they see the vulnerability of importing 75% of their oil, much of it coming through the South China Sea. They know the story of what happened with World War II with Japan. For them, the shift to electric cars is less about air pollution and more about energy security. It’s also about knowing that they couldn’t compete in the global market with gasoline powered cars, but they can with electric cars. Those are the strategic things.

Wind and solar give you a more diversified system. Until you have batteries that can really deliver the storage, you have the intermittency problem. You take California today. People think wind and solar is advanced. It’s true. They are 25% of electric generation in California, but 43% of electric generation comes from natural gas. And that gets back to the data centers. You’re going to need to bolster your electricity power system. How much can you do with batteries and how much can you do with natural gas?

Wind and solar are also stories about entrepreneurship. In The Quest I asked myself, where did the wind and solar industries come from? The solar industry came from two émigrés who had left Europe, one of whom had driven his car out of Hungary in the 1956 revolution. In 1969, he’s a chemist working for the US government. He and his partner decided to go in the solar business. That became the first solar company. They started in 1973. With the wind business, I like to say the modern wind business is the result of the marriage between California tax credits and the sturdy Danish agricultural industry. It was driven by tax credits, but they needed to find wind power machines that could stand up when the wind blew in the Tehachapi Pass.

It took about 30 years for both those industries to become competitive. It only happened around 2010 that they actually became competitive. Now, of course, they’re very competitive but then guess what? Now,they’re all tied up. Renewables are also now tied up in geopolitics and, in what I call The New Map, the movement to the great power competition. The US just put 100% tariffs on Chinese electric cars, 25% tariffs on Chinese storage batteries. We recently had this bill, the Inflation Reduction Act. It’s huge, a trillion dollars the Treasury estimates when it’s done. It’s about climate and renewables, but it’s also about competing with China…

…I have the view that people have had too simple notions of how the energy transition will work.

That’s one of the things in The New Map. If people read one part of it, read the section on energy transition. It tells you that what we’re talking about today is not anything like any other energy transition. Every other energy transition we’ve had has been energy addition. Oil discovered in 1859 overtakes coal. Coal is the world’s number one energy source in the 1960s. Last year, the world used more coal than it’s ever used, three times as much as the 1960s. Now the idea is, can you change everything literally in 25 years?

Some of that thinking was developed during COVID, when demand went down and price collapsed. Part of it is people worrying about energy security. I was just reading last week the budget message from the finance minister in India. She talked about energy security and how they have to maintain economic growth. It’s very important to do that and energy security as well as energy transition. So it’s a different balance. There’s a difference between the North and South. Then there’s the constraints on minerals because as you make an energy transition, what people talk about, it’s more mineral intensive. An electric car uses two and a half times more copper than a conventional car.

We did the study and said, “Okay, let’s take the 2050 goals. And if you want to achieve them, copper supply has to double by about 2035.” What’s the chance of doing that? It takes 20 years to open a new mine in the US. We just did a study. It takes 29 years to open a new mine. Changing a $109 trillion world economy… it’s going to change. You said the development of solar is going to be really important. But things are not going to move in a straight line. We are in an energy transition, but it’s going to be a longer one. Here we are, as you mentioned, in Nantucket, which was a key part of the energy transition because it was a source of lighting in the 19th century from whaling.

5. The 27-Year-Old Billionaire Whose Army Does AI’s Dirty Work – Berber Jin

Sitting behind computers in cities across the world,  his startup Scale AI’s workers type out the stories, label the images, and craft the sentences that furnish chatbots with the text they need to better understand human speech patterns. Dubbed data labeling, their tasks range from composing haikus and summarizing news articles to writing stories in languages like Xhosa or Urdu.

The labor-intensive operation has become so in demand by businesses eager to enter the AI race that Scale’s revenue pace tripled last year, boosting its valuation to $14 billion…

…Meta’s code name is Flamingo—a stuffed version of which sat atop an employee’s desk on a recent visit to the startup’s headquarters. After Scale AI bungled a project last year for the tech giant, Wang declared a company emergency and launched an all-hands-on-deck effort to fix the job, called Flamingo Revival, according to former Scale employees.

Early last year, Meta Platforms asked the startup to create 27,000 question-and-answer pairs to help train its AI chatbots on Instagram and Facebook.

When Meta researchers received the data, they spotted something odd. Many answers sounded the same, or began with the phrase “as an AI language model…” It turns out the contractors had used ChatGPT to write-up their responses—a complete violation of Scale’s raison d’être.

The researchers communicated the disappointing results to Scale, prompting Wang to rally the entire company to try and save the contract.

He asked employees to drop everything and create new writing samples to send to Meta. An internal leaderboard showed who had completed the most labeling tasks. The prize for the winner: a paid vacation.

Later, Scale discovered that much of the bad data sent to Meta had come from Kenyans who had become experts in making a quick buck off the Remotasks platform, the former employees said. Scale restricted several new labeling projects to workers based in the U.S. and other wealthy, English-speaking countries. The change didn’t stem the fraud entirely: Some foreign workers found ways to skirt the new rules by buying labeling accounts registered to U.S. residents that they found for sale in group chats on WhatsApp and Facebook.

A Scale spokeswoman said that Scale has cracked down on such activity and the percentage of its freelancers exhibiting fraud fell to under 0.1% in July.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. We currently have a vested interest in Meta Platforms, Starbucks, Tencent (parent of WeChat) and Tesla. Holdings are subject to change at any time.