Why the urgency to shift to electric vehicles is getting bigger

Wednesday, 22 June 2022 — Albert Park

[5 min read]

Dear Reader,

Today, I’m going to introduce you to my friend Mark. He’s a
businessman. Our daughters go to the same swim class.

The other month, Mark told me he was moving to buy a big block of empty land in suburban Melbourne after the previous development plans for it fell through.

His business is generating lots of cash, so he can afford to finance it for at least five years.

That’s while considering whether to go all the way and build on it himself or sell it off down the track. Or he could subdivide it.

A month or two is a long time in markets.

This Monday, at swimming, Mark was feeling a lot less sure of the idea. He still has 10 days to pull out of the deal.

The big bank economists are suggesting a 15–30% drop in the housing market could be a possibility. But they said that in 2020 too.

He doesn’t really need the money. Why go for this potentially risky move and create more stress? Any business owner has plenty of that already.

But what if all those forecasts are wrong? Or he holds on to the land for 10 years or more?

That’s a lot of questions for two men sitting beside a noisy pool. I said my piece…and backed him to buy the land.

I don’t believe the housing market will fall as much as the bears say…or interest rates will rise as much as the market is currently priced in.

It’s also why I’m eyeing off property stocks all over the ASX patiently, but greedily as well.

It will only take this situation to revert a little and they’re going to look cheap on a long-term basis.

In the short term, the market is unpredictable and risky. But look out five years, and things look a lot brighter and more positive.

It’s not just property shares, either. Oh, my goodness, small-cap stocks have been smashed for at least six months.

Even the bastion of the previous bull market, the battery mineral plays, are now crumbling under the current pressure.

You and I face the same dilemma as my friend Mark and his property. Is the party over or is this a short-term glitch?

My thinking is the same here as it is above. Bear markets are when you’re SUPPOSED to buy up your long-term favourites. After all, you’re getting cheaper prices, right?

I’m not saying this is a trader’s market.

I’ve pulled my horns in on that front. But if you’re prepared to look out more than 12 months, now’s the time to start nibbling on the stock that can run big when the bull market returns.

You don’t have to go all in at once.

It’s not as if the trend toward electrification and decarbonisation stops because of inflation or the price or money rises. If anything, it makes it more urgent.

The best way to bring down the price of oil — and therefore inflation — is to undercut its market with cars that don’t use gasoline and trucks that don’t use diesel.

Diesel is the big one here. The refining margins for this are exploding because there’s a shortage of the stuff in Western markets. This pulls up the price of crude as refiners bid on oil to cash in.

That’s a problem for all of us because diesel feeds into everything: planes, trucks, and machinery.

The market isn’t stupid. There’s now every incentive to turbocharge the shift from ICE vehicles to electric.

You don’t even need a green agenda to justify it. The economics with diesel and petrol so high make fossil fuels look terrible.

We could have a win-win here where increasing adoption of electric vehicles brings down inflation and improves pollution simultaneously.

Now, a recession in the short term could suppress car buying and therefore demand for battery minerals. That’s what the market is doing now.

However, the lead times on mine projects are so long that the world can’t stop investing. In fact, it needs to go BIGGER now so that the supply is there to meet the demand in 2025 and beyond.

If private investors won’t step up to the plate now, either from hesitancy or fear, then it’s highly likely car makers, or governments, will just do it themselves.

This is another reason why I find the bearishness on Australia misplaced. We have a continent full of the natural resources that the world needs to get off fossil fuels.

I plan on capitalising on this bear market as much as possible to buy up cheap battery (and property) plays. I don’t know what that will look like at the end of 2022. But I’m pretty sure it will look great by 2026.

Stay tuned for more!

Regards,

Callum Newman,
Editor, The Daily Reckoning Australia

Dear Reader,

‘You don’t know what’s going on
‘You’ve been away for far too long
‘Baby, baby, baby, you’re out of time…’

The Rolling Stones

What’s happening now? What’s going on?

Stocks wobbled on Friday, up…down…but ended the day with the Dow below 30,000. What will happen today? Tomorrow? We don’t know.

But all over the world — except for Japan — major central banks are raising rates. Suddenly, it’s a new era…a new economy. Homeowners can no longer refinance their houses at lower rates; now, they face much higher monthly payments. Businesses can no longer roll over their debt by issuing bonds at lower and lower coupon yields; soon, they will default…and go into liquidation. And even the US federal government is feeling the pinch. A year ago, the feds could borrow at 1.5% (the 10-year Treasury yield). Today, they pay twice as much.

It’s a whole new ballgame. But this is just the early innings.

Keeping with the sporty metaphor, a headline at Bloomberg tells us that the ‘Fed may be planning a game changer’ for its next meeting.

Debt junkies

Yes, dear reader, for more than 10 years, central bankers attended cocktail parties…ran claptrap ‘models’ with their PhD economists…developed jackass theories — and left their key rates at paltry levels (zero!). Thanks to the Fed’s ultra-cheap money, stock and bond markets became gambling halls, debt ballooned up by US$30 trillion, households, businesses, and the government were turned into debt junkies, and the inflation cat got out of the bag.

Over the weekend, the hostess-with-the-mostest when the booze was flowing — Janet Yellen, now Secretary of the Treasury — claimed that her policies had nothing to do with high gas prices. It was not she who failed; she protested. It was the oil companies:

‘I think that producers were partly caught unaware by the strength of the recovery in the economy and weren't ready to meet the needs of the economy.’

Meanwhile, back at the Fed, Jerome Powell and his fellow fantasists say they’ll whip inflation now. For sure. Flabby and out-of-shape…unused to physical or intellectual exertion…with soft flesh and withered backbones…slow to anger…but even slower to insight, central bankers prepare for the battle of their lives.

They’re in the gym at 7:00am. Running laps. Lifting weights. Drinking protein shakes.

But the gist of our rumination today is that Mr Market is way ahead of them. As we saw yesterday, the Fed is ‘behind the curve’. It has ‘lost control’ of inflation.

A brief explanation: The idea of counter-cyclical monetary policy (what the Fed is supposed to be doing) is to offset the swings of the business cycle by ‘taking the punchbowl away’ when the party gets hot…and bringing the hard stuff back when things go quiet. But in the great Everything Bubble, March 2009 to January 2022, asset prices, debt, inequality, speculation, and financial nuttiness — all soared. Except for a brush with sobriety between 2015 and 2018, the Fed had a bottle in its hands the whole time.

And now, the Fed is completely out of shape, out of tune…out of time…and out of sync — trying desperately to get back to trim as it faces the highest inflation in 40 years.

Mr Market takes control

The Atlanta Fed is already forecasting a recession. The first quarter of this year showed a drop in output. The second quarter, most likely, will too. According to the Keynesian ‘best practices’ handbook, the Fed should be loosening up. Yet, instead of adding a little gin to the punch, the Fed is raising rates.

During the Bubble Epoch, the Fed offered drinks to a financial world that was already falling down drunk. Now, it is ‘tightening’ even while the economy is going into a downtrend — once again, the very opposite of what it’s supposed to be doing.

And yet, it has no choice. It has ‘lost control’. Now, it must fight the inflation it caused; the economy be damned.

But if the Fed is not in control, who is? Mr Market.

One of the curious things about an episode of runaway inflation is that it often begins with runaway deflation. In the classic configuration, a credit-driven boom leads to a debt-be-drenched economy. Debtors then need cash to pay their debts, which leads to deflation. Cash goes up; prices go down. Mr Fed inflates. Mr Market deflates. The Fed giveth. Mr Market taketh away. (Mr Market doesn’t like things to get too far out-of-whack.)

Mr Market is in charge now. He’s crashing assets — trashing stocks, bonds, real estate, cryptos, NFTs, junk bonds, and other goofy assets. Prices for gasoline and consumer items, on the other hand, are rising — the very opposite of the Fed’s agenda.

And the Fed is out of step completely…stumbling…bumbling…

…and spilling coffee in our laps.

Regards,

Bill Bonner,
For The Daily Reckoning Australia