some topics im thinking about at the moment
some businesses that seem so essential for the functioning of society are terrible at making money. why is this? take the airlines. last year they transported about 4.5 billion passengers, in flying metal tubes, 10km up the sky, at almost-sonic speeds. it was one of the best years ever for airlines: they made around $6 dollars per passenger. the cumulative profits of all airlines from 2006 to 2024 is $60 billion. that’s 0.04% of $1.5 quadrillion of cumulative GDP. the cumulative number of passengers since 2006 is 50 billion. that equates to just above $1 of profit per passenger. this is astonishing to me.
the takeaway is that profitability is a function of value capture relative to its costs and competition, not providing necessities, even if it's and extremely hard thing to do. a business must focus on providing a differential service – building something new adds much more value per unit effort than refining something established. the market rewards novelty over need.
this is one of the few reasons the US is so successful; its venture capitalists are somewhat less risk averse and willing to make relatively riskier bets. in europe, capital is overallocated to Bunds, underallocated to startups. to a large extent, i think this is cultural.
why is Palantir (ticker: PLTR), making less than $500M in net income, worth more than all but two european technology companies? (as of nov 2024). and why did i still choose to own PLTR over SAP or AMSL?
this century, asset appreciation has been extreme. in 2023, a staggering 18% of US households were millionaires, but the number drops to 10% when excluding primary residences. millions of americans became millionaires (accidentally) by having access to cheap credit (shorting the dollar) and buying appreciating real estate. some homeowners don't realize this, but they were making more money sitting in their houses than at their full time jobs.
the story in the stock market is even more extreme. the rise in market capitalization has been the greatest wealth creator in history. asset owners have been essentially the only winners since the FED started QE in 2008. the losers: those at the other side of the trade, those who lend currency.
thinking about the current stock of wealth in the world, what percent, would you say, derives from capital appreciation vs earned income? almost all of it is asset inflation. this has massive implications in the "real" economy. the single largest driver of the economy is not employment, or salaries, or interest rates; its the wealth effect. most of the spent money is not “earned,” but “conjured” into existence.
where does this immense value creation come from? in the casino, what one earns was lost by another. in the stock market, this zero sum logic doesn't apply. wealth is created, not transferred. asset prices represent claims on future cash flows, which depend on productivity and growth. when these improve, value materializes - not from thin air, but from the alignment of scarce resources towards an improved allocation.
still, the nature of compounding interest makes the scale of this process mind boggling.
some maintain that this is all artificial, unsustainable, and propped up by central banks pumping liquidity at each crisis. if you believe this, it raises a difficult practical question. do you bet on the continuation of a system that seems increasingly fragile? or do you hedge against a bust?
a prosperous future must be energy abundant.
nuclear fission was a missed opportunity, made costly by over regulation, but might make a comeback with SMRs. recent news regarding tech companies investing in SMRs are positive (see tickers SMR, OKLO,) but development takes time and scale takes even longer.
fusion is the holy grail, but not yet feasible.
oil and gas production has made a momentary comeback in the US thanks to fracking, and i think they will continue to be a relevant portion of energy consumption in the first half of the century.
solar is the future. the argument is not ecological, its economic. the cost of producing a solar panel has fallen so dramatically in the past years, a solar panel now costs less than a plastic fence of the same size, and it produces electricity for 30 years in the future.
solar panel installation forecasts keep being shattered. every year, installations are expected to level off and yet actual installations keep increasing exponentially.
a single solar panel can now generate about 700 kWh/year. that’s more than the yearly per capita electricity consumption of the bottom billion people worldwide. 10 solar panels suffice for an average swiss’ yearly electricity consumption. the energy transition will occur in the context of a much broader and more important transition: the lifting of billions from energy poverty.
the issue then becomes storage. if cost reduction trends continue, it can be argued that installing over capacity and wasting power at midday is efficient as long as power production at other times increases. (its already happening in germany and the netherlands). this generates an arbitrage opportunity, incentivizing the development of better and cheaper storage solutions. batteries are also getting cheaper fast, though behind solar panels.
where is the money in the energy business? if you think the energy sector is about to change radically, how do you position yourself? solar power manufacturing in china is already ultra-competitive, has thin margins. batteries are slightly more profitable. oil has always been. utilities? distribution? physical arbitrageurs and commodities trading? i’ll never forget when oil prices went negative during 2020.
read this great Morgan Stanley report from early 2024 for details on macro stabilization and the energy sector in argentina. Download PDF
the strength of the american empire, formalized with the imposition of Bretton Woods after WWII, has led to the most unipolar world ever. but it won't last forever. what are the implications of a weakening order? who is positioned to gain from geopolitical volatility?
there are always many catastrophists that sound smart trumpeting the end of times, but is it really coming now? timing is more important than being right.
first of all, if the world gets more volatile, who wins and how?
several relative winners could emerge from autarky and trade decoupling. the southern cone gains strategic importance as an agricultural powerhouse, especially with red sea tensions adding friction to eurasian trade. mexico could capture significant manufacturing capacity through nearshoring. physical arbitrage players like shipping brokers, insurers, and commodity traders profit from increased friction and dislocation in global trade. digital infrastructure providers become more valuable as businesses seek resilient, cybersecure, location-independent solutions. systematic volatility traders (e.g. Danske Commodities) capitalize on more price dispersion, particularly in power markets. chinese capital outflows and redirected FDI could disproportionately benefit other emerging markets, though early movers with scale advantages may concentrate gains (winner takes all?).
Zlotan Poszar, former Federal Reserve and U.S. Treasury official, now a strategist, compellingly says the world is shifting away from US dollar hegemony and shifting towards a "Bretton Woods III" system based commodities. i honestly don't see this playing out in the medium term.
according to Dalio, China will become the new superpower, but while the growth of china has been remarkable, its capital markets have been decimated by hostile policy from the CCP.
the world is surely different from what it was before Trump’s first term, but not in the ways i would have imagined. the takeaway is that it’s hard to come up with universal narratives, the key is identifying and maintaining conviction in the fundamental transformations that mark the path forward (increasing demand for compute, sophisticated large-language models and agents, energy technology). it’s important to caveat the danger of the narrative - it's a hammer which can make everything look like a nail.