I want to touch on two potentially seismic changes today that could completely transform the investing landscape over the next few years and decades: the move to a clean energy power system and the return of full employment.
The first is very familiar – the emergence of a new grid. I’ve been banging on about this seemingly forever but once we shift past the point where more than 50 to 60% of all energy produced comes from renewables or low carbon sources (nuclear), we are starting to move towards a brave new world. And that doesn’t even include the profound shifts in demand as parts of the transportation complex electrifies.
I’ve always been slightly worried that we’d start to see systemic grid instability once we got to say 70% but I have tended to ignore the possibility that we’d get to 100% any time soon. “Just not practical” tends to be my subconscious reaction. But the price tags being shouted about on the Crown Estate ocean bed leases tells you something very big is happening. A veritable tsunami of money is about to hit capex in renewables.
That forces us to think about what might happen if we do actually start to head towards 100% – maybe not in the next few years, but perhaps within the next ten years. As I said, I’d always assumed the worst but the lesson from Australia below might be that we’ll be pleasantly surprised. Maybe the 100% renewables scenario is more immediately manageable than we first thought.
On that score check out this story from down under which shows what happens when we do hit 100% – all the obvious cautions apply, which is that was for a short period of time in a sunny state that might have no long-lasting import. But maybe, just maybe this a sign of changes to come
” South Australia – maligned by conservatives over the world-leading share of wind and solar in its grid – now boasts the cheapest wholesale electricity prices in the country, even as it reaches “world first” levels of 100 per cent solar power.
The Australian Energy Market Operator, in its latest Quarterly Energy Dynamics report, confirms that South Autralia – as first reported exclusively by RenewEconomy three months ago – served all of its electricity demand for more than an hour shortly after mid-day on October 11 through rooftop and utility scale solar.
AEMO says this is a world-first in a grid of this size, and occurred in a December quarter when South Australia posted the lowest wholesale electricity prices in the country – thanks to the growing share of wind and solar and the increase in rooftop solar PV which is reducing grid demand.”
A full employment world
Over in the US, there’s a fascinating debate about whether the proposed Biden stimulus package is too large and whether inflation may resurface if too much money is pumped into the national economy. It’s a macroeconomic debate but it has huge investment implications.
My guess is that most investors, especially at an institutional level, have a ‘traditional’ free markets – dare I say that hated term neoliberal – mindset which assumes that if you push an economy too hard it starts to overinflate, pushing up interest rates and thus prompting recession.
Ranged against this is a growing consensus stateside that actually there is systemic underemployment and that we don’t need to worry too much about pushing above mythical ‘the output gap’. This school of thought suggests that we need a massive reflationary boost, bugger the output gap (which may be bigger than we first thought) and that full employment is the end goal.
Married to that is a massive redistribution process centered around a substantially increased minimum wage (more on that below). If we use old-fashioned terms one could call this a classic social democratic response whichemphasizes economic shock and awe combined with leveling up. Free market types recoil in horror and say that the economy will hit the barriers and rates will jump up. Nonsense says the critics – there’s much more spare capacity than we think.
If the social democratic camp wins the argument – and I think (and being candid hope) they will – then we could see a much bigger reflationary bump than we think AND that bump might not be as inflationary as we believe. That in turn could power a big boost to long-term growth rates and eventually help power a Roaring twenties hypothesis.
It’s important to say at this point that much of the social democratic, reflationary argument isn’t actually that extreme. Trump in many ways supported a similar agenda – full employment, rapid growth, more jobs for Americans, more money in Americans’ pockets, bigger state debt. In reality, the social democrats have latched on to an agenda that might just win them votes.
The US commentator Matthew Yglesias in his excellent blog Slow Boring has a really interesting discussion around this debate. Yep, his views are more progressive, social-democratic in nature but he’s grounded all his arguments in solid evidence. But the most interesting argument is that if the US does push towards full employment – a good thing in his view – it might also help in a surprising direction, namely that it might help push up the productivity growth rate, which has been chronically low for much of the last decade.
You can read the full blog HERE
The key bit is below – as the labour market becomes hotter the economy might actually move faster…
- “Training is the flip side of this. At the slightest sign of a healthy labor market, business owners start complaining that they can’t hire enough workers with the skills they need. But that’s how a healthy labor market should work. One way companies ought to compete is by being better at training workers as an alternative to paying very high salaries to recruit ones who are already trained. This is hard to do well! If you let the economy run with high unemployment for 20 years, the skill-set will atrophy because it’s not rewarded by top executives. But we can fix it.
- On policy: Some changes are what economists call Pareto Optimal and they genuinely make everyone better off. But that’s rare. Often you get something like the rise of desktop publishing software in the 1980s, which was good for the world but bad for my mother, a highly-skilled analog graphic designer. Graphic designers were not able to block disruptive change with rent-seeking regulation, but many other small business owners or little professional guilds are more successful. Busting up these arrangements raises growth, but “destroys jobs” and is much easier to pull off in a political economy of labor scarcity rather than high unemployment.
- Innovation! Back five to 10 years ago, I was worried that a lot of hardworking and intelligent people with technical skills seemed to be deploying their skills on creating structured credit products. There was a brief window of optimism when a lot of that talent shifted to the technology industry, but then it turns out a huge share of tech talent is working on selling more targeted ads. It would be better to have all these smart people working on developing labor-saving, productivity-increasing technologies rather than ways to get people to spend more time on Instagram. Labor scarcity raises demand for labor-saving innovation.”
One area where I think we will see meaningful change is an increased minimum wage of $15 in the US. Many free-market types – though not all – wince at this level yet in reality the suggested level isn’t actually that egregious by international standards. Here’s Renaissance Capitals’ chief economist Charlie Robertson on the subject…
” A $15 hourly rate would be the first rise since the $7.25 level was set in 2009 (it was around $5 in 1997 and $6 in 2007). A doubling to $15 would increase the monthly total of around $1,200, to close on $2,500 a month, more than 20% above the UK, Germany or France. Yet that does look justifiable given US per capita GDP, which was more than 50% above the UK in 2020, and which the IMF expects will be $66k in the US in 2021 vs $52k in Germany. The table highlights that even if there was a doubling of the US minimum wage, it would still put the annualised ratio to GDP, well below the UK, France or Germany based on 2020 GDP figures.”
Annualised minimum wage today as % of per capita GDP in 2020
For investors, I think this all adds up to a fundamental regime shift. We are moving towards a more redistributionary, full employment-focused economic agenda, closer in style to the 1950s and 1960s with much higher government spending.
Hawks will worry about the inflationary impact of this but the existing deflationary trends – technology and globalization – might help restrain near-term inflation. That in turn might mean interest rates stay lower longer. Eventually, my guess is that the inflationary genie will be let out of the bottle but not before we’ve started to push long-term growth rates higher. Overall, this is conducive for equities short to medium term i.e 2 to 7 years.