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Meet the Masters – The drive to decarbonize complicates corporate calculations on investment 

The decarbonization trend will be litigated and played out next few decades. For now, decarbonization is not a sure bet. Expensive technical issues are abound including matching the energy density of oil. However, humans have a tendency figure out hard, technical things. The global politics of this type of shift is a whole other set of pitfalls and possibilities. Regardless of how it all turns out, this trend will impact your future in Raleigh, NC. The energy markets have their own set of goals, aspirations and driving forces that can impact your investments. Olde Raleigh Financial Group loves to keep eye on that horizon with conversations around geopolitical trends and how those trends might affect investment decisions. Please enjoy this interview with Confluence Investments analyst Bill O’Grady. Topics include: The future of energy, a carbon price, electric vehicles, ransomware and the chances The St. Louis Cardinals have of winning the pennant. Enjoy and keep trucking! Trev


Key Points

  • What is a carbon price and why do energy companies want one
  • Update on the Nord Stream 2 Pipeline and why this is about the long-standing tension between Germany and Russia.  The Biden administration has changed the U.S. Policy around it and we explore the implications
  • On the margins: the price of Russian Oil vs U.S. Oil vs Middle East Oil and the dilemma of stranded investments in oil production
  • The state of state-run oil companies and what does the depreciation of their currency play in the future of energy 
  • Colonial Pipeline Ransomware Attack, Uninsurable Risks and why it might hinder Bitcoin’s and Ransomware’s future
  • Electric Vehicles, Fuel Cells, Nuclear Energy and the history of technical fixes to big problems
  • Baseball

Hey everybody. This is Trevor Chambers at Olde Raleigh Financial Group here in, actually, sunny Raleigh, North Carolina and thank you for listening. We move on, one more episode to the Meet the Masters series as part of our podcast Soundtrack to an Advisors Life. And I have an advisor with us today. One Bill O’Grady. How are you, Bill?

BILL O’GRADY: Good, Trevor. Thanks for having me.

CHAMBERS: Absolutely. Bill is a chief market strategist for Confluence Investment Management and they are professional asset managers based out of St. Louis. And in that role, Mr. Grady performs market and economic and geopolitical research for the firm, among other things. He is the founder and he is one of our favorite opinions to catch on the world and helps us manage money for our clientele. So, welcome back. This is you – your second appearance. We talked about a year ago and had a nice conversation and today I want to focus on energy. It’s an area that I know that you research quite heavily and talk about and write about. And it’s an interesting space. As you know, we’re just coming off or in the midst of or the end of the midst of a hack of a pipeline here in the east coast. And as a result, I have really bad gas in my tank of my car and – because I had to get a lower grade. But I wanted to talk about this beyond the pipeline hack, it’s just a really dynamic market that we’re watching and it’s going to be extremely impactful, obviously for the foreseeable future. So, Bill I just – I just, let me just kinda (sic) get right into it, here. The premises of my call core is this, we seem to be moving to a green, more green outlook on the economy. Not only in the US but the world but we still gotta (sic) get there and we gotta (sic) use fossil fuels to do it. Which, there hasn’t been a lot of investment apparently in – in the space of actually getting the fossil fuels out of the ground and there’s a capacity issue, apparently. So, but, the same token, you don’t want to invest too much because we have this green future coming, right, so. Where are we at? And there’s so much wrapped up to politics wrapped up in this thing. But –and I’m not asking for a specific market recommendation, but if I ever, and again, I’m – I don’t know that much about it but like, it would seem that gas and oil is going to become in shortage in some way. Because we’re not investing in it and – so are we – are we actually bullish on gas here for the next ten years or so, or what, you know. So, anyway, I just kind of want to start there.

BILL O’GRADY: Sure.

CHAMBERS: We’re at this pivot point. What do you think?

BILL O’GRADY: Well, this is something that we started wrestling with probably about a year ago. We run a whole series of different portfolios. If you go to our website http://www.confluenceinvestment.com and yes that is a shameless plug.

CHAMBERS: Yes, it is. It’s alright. I love it. No, that’s fine.

BILL O’GRADY: We run a whole group of portfolios and one of them is a hard asset portfolio. By hard asset, we mean a commodity that takes longer than a year to effect supply. So, we purposely don’t do direct agriculture because, you know, agriculture is about every six months you get a new supply of it, either from South America or from the United States and we don’t do much with livestock either for the same reason. Although, beef have a longer gestational cycle than a year. Pigs are about nine months and chickens are about every 30 days. So, it’s mainly oil, gas, base metals, precious metals. We also don’t own the intermediaries so we will own a oil company but not a refiner. That’s the thesis behind it. And the reason we developed the portfolio was the answer to if the worlds in big trouble what should I own. And that’s where that comes from. So, we were looking at this portfolio about a year ago and Mark Keller and I run the portfolio and I started developing this idea that if you’re an oil company and you’re looking at a long-term project, your fear is that it will become a stranded investment. That you make the investment. It takes you four or five years to get it fully developed and then ten years from now, suddenly the demand for your product falls off a cliff, it becomes very difficult to make that investment. And so, what we were – there were two things that came out of that discussion. First was that we were going to focus on oil as a commodity rather than oil from companies. And so, we held less – we were inclined to hold commodity exchange traded products that would give us exposure to oil and we dramatically curtailed our investment in – or our allocations toward energy companies toward oil and gas companies. We saw something very similar to this in coal. You know, over the past six or seven years, coal has just been devastated and we think oil and gas are heading toward a very similar future. Now with coal, the coal price never recovered because natural gas basically, you know, took away it’s – or supplied that demand from utilities that coal lost. But this time around it is going to be different because as you appropriately say, we’re still going to need stuff. We’re still going to be driving. We’re still going to be heating our homes but private sector companies are going to be disinclined to make the investment because they just don’t know what the futures going to look like. In fact, one of the real interesting changes you’ve seen recently is the oil and gas companies are clamoring for a carbon price which is a dramatic change from their policies before but they can’t discount any investment without a carbon price.

CHAMBERS: Define a carbon price.

BILL O’GRADY: That’s where you establish a price for the carbon that you’re emitting. So, let’s say it’s a hundred dollars a ton. If you’re a coal producer that means that you have to add 100 dollars per ton for the carbon dioxide that you generate and so what that does is it’s similar to a tax based upon how carbon intensive the fuel is. Coal is probably our most carbon intensive fuel and so the price would then adjust upward. And so, if you’re an oil and gas company you – at this point you want that price so you can look at a project and say well this is going to generate either natural gas or light sweet or heavy sour crude and that will help me determine whether that investment is viable. So, what – so we’ve prat along here for a bit, where does this take us? Well, where this take us is two directions. One is is that in the portfolios we want to – if we’re going to own oil, we want to own oil. We don’t want to own oil and gas and frankly for almost all of my career, if you were long crude oil, you could pretty much go long a basket of, you know, of energy stocks and pretty much do the same thing. And you can’t do that anymore. Now energies had a great year so far this year but if you look –

CHAMBERS: Yeah.

BILL O’GRADY: — at energies before (inaudible) relative to the S&P and oil prices, they hadn’t really gone anywhere. And you’re really better off just owning oil. The second thing is, we are seeing a shift from drilling to mining. So, as we electrify the transportation system, we’re going to use a lot more copper and cobalt and lithium and so if you look at our hard asset portfolio, there’s very little energy exposure. We treat energy exposure as opportunistic. So, if there’s a big sell off in energy stocks, we will take a flyer on a couple and then when we get to rally, we don’t stay. So, we view energy companies now as rentals, as far as investment goes. In our asset allocation portfolios, we have added a broad-based commodity exposure that does have a biased toward oil and oil products. And that’s how we’re getting our energy exposure. And we have not overweighted energy stocks but we have overweighted basic materials for example, again, based on this theme that you want to own basic metals and you don’t want to own the companies that produce oil and gas because of the uncertainty about their value of future investment.

CHAMBERS: Okay. That’s – alright. Well, that – I mean, that makes sense to me. Okay, let me move on to another topic here. Nord Stream 2. Can you give a little background on that? What’s going on and what’s the implications for, not only us, Western Europe and Russia?

BILL O’GRADY: Well, let’s start with the basics. Germany has always had a mixed relationship with Russia.

CHAMBERS: You said it. Yeah, that’s an understatement.

BILL O’GRADY: If you look at the long history of the relations between imperial Russia and Germany and imperial Russia and what proceeded Germany, the Prussians and various little principalities in what became Germany, the Germans wanted to have good relations with the Russians because they held so many natural resources that Germany wanted to get its hands on. But it also had an underlying fear of Russia because, you know, it never knew how far Russia would go in creating its buffer zones. Let’s back up a little bit and talk about Russian geopolitics. The problem for Russia is that the Russian – Russia’s principal cities sit on what’s referred to as the Great Northern European Plane. So, there’s this long flat expanse that runs from basically the Pyrenees all the way to the Urals and that means that there are really no significant barriers to an invading army going into what is Russia. So, Russia’s defense policy, time eternal has been to control as far — as much as they can of Eastern Europe, the Balkans and the, you know, the Armenia/Turkey zone. They want to push out as far as they can to force an invading army to march a long way and then wait for winter. And history shows it’s a bloody policy but it’s been pretty successful. It beat Nazi Germany and it beat Napoleonic France. And so, if you’re Germany, you’re always kind of wondering well, how far are they going to come to create this buffer? And so, there’s always been this tension. Geopolitical fear that the Russians are going to encroach but the economic goal of getting, you know, access to all that Russian raw material. So, as the cold war ended, one of the problems that has hit Russia, you know, pretty obviously is they’ve lost that buffer. You know, there are NATO countries now in the Baltics so from the Russian perspective this is absolutely terrifying development. And explains to a great extent why they have behaved the way they have with relation to Ukraine. Ukraine is – if Ukraine joins NATO, Russia really cannot defend itself. Braginsky made this point before he died, you know. We should have Finlanized (sic) Ukraine all along because the Russians are not going to tolerate this. This is something they’ll go to the mattresses over. Now, as this has evolved, Germany gets a lot of natural gas from Russia but the pipelines all run through the Ukraine. And so, these tensions with the Ukraine mean that on occasion that gas gets cut off plus the Ukrainians want to earn transit fees and the Germans finally decided, you know, this was under the social democrats in the – before Merkel took power to do this Nord Stream pipeline so they could put pipelines underneath the Baltic Sea and bypass the Ukraine. Now the US is opposed Nord Stream 1 and opposed Nord Stream 2. It didn’t stop the building of Nord Stream 1 but there was a serious pushback to Nord Stream 2 because the more capacity you create, the more Ukraine gets bypassed and the greater dependence, the Germans have on Russian gas. The Trump administration was vehemently opposed to Nord Stream 2, threatening all sorts of sanctions and pushing very hard on the Germans to suspend the project which is almost near completion. You know, you can kind of see the pipe sitting there, is kind of the way to think about it. And recently this week, the Biden administration backed away and pretty much put some meaningless sanctions on a few figures within the company of that are – companies that are involved in this and sanctioning the actual ships doing the pipelaying with the company – not the companies involved. It’s kinda (sic) baffling. It looks to me ostensively that Angela Merkel really wanted this and so she – she leaned on the administration to allow the project to come to completion. But what’s surprising is that Merkel’s a lame duck. You know, she’ll be –

CHAMBERS: Yeah.

BILL O’GRADY: — out of office in September and if the current poles can be trusted, the greens are likely going to, you know, dominate the government and the greens oppose this project. So, all the administration had to do was wait, you know, until fall and just keep stiff arming this thing and then they’d have pretty much gotten what they wanted. This looks like, to me, based on what I can tell here, you know, in the middle of the country that this was an administration own goal that they just kind of messed this one up. And there’s – you – whenever you see something like this, you’re always looking for what was the quid pro quo? What did we get for going along with this? It hadn’t shown up yet and I’m kind of baffled by it. Even more baffling is that it looks like the Secretary of State, Anthony Blinkin was a vehemently opposed to it as Pompeo was. And it looks like he was overruled by the president and I’m not sure for what reason.

CHAMBERS: Okay well thank you for that. It’s a complicated world out there, Bill. It’s incredible. So, just real quickly, and you can confirm this or clarify but I look at Russia and I look at – okay so we make a – the United States makes a lot of oil and gas. Middle East obviously makes a lot and they’re kind of what I gather, the products that we make here in the US are on the more expensive side and the Middle East is on the cheap but Russia’s sort of in the middle, in terms of what it cost to make, you know, a barrel of oil, let’s say. Are we increasingly moving towards a world where it’s on the margins? You’re either going to buy the most expensive or the cheapest and where does that leave Russia?

BILL O’GRADY: That’s interesting. This week the Russians came out and said we think we’re going to increase investment –

CHAMBERS: Yeah.

BILL O’GRADY: — you know, and so I started thinking about this. If you’re a private sector oil company that needs to make profits and needs to take care of shareholders you have a different agenda than a state-owned oil company.

CHAMBERS: Right.

BILL O’GRADY: So, for Russia, one of the failures that they have had is outside of creating hacking software and defense goods, they really don’t produce anything anybody wants.

CHAMBERS: Right.

BILL O’GRADY: Outside of raw materials. You know, nickel, big producer in nickel. The, you know, palladium, platinum –

CHAMBERS: Timber.

BILL O’GRADY: — timber –

CHAMBERS: Yeah.

BILL O’GRADY: — and oil and gas.

CHAMBERS: Right.

BILL O’GRADY: Now they’re looking at their oil and gas reserves and saying oh these are going to be stranded assets pretty soon. You know, within 20 years, there’s a great old line by the late Sheikh Yamani when he stated, and this was back in the ‘70s, “well someday the age of oil will end.” And somebody asked him, “well, does that mean that we’d run out of oil?” And he says, “well, no.” He said, “the stone age ended but we still have stones.” You know, we’re still going to have oil in the ground, it’s just nobody is going to want it.

CHAMBERS: Right.

BILL O’GRADY: And so, if your Russia, it becomes kind of a – and this is true of the state oil companies in general. It becomes a use it or lose it problem.

CHAMBERS: Yep.

BILL O’GRADY: And, you know, that scenario we painted at the beginning of the presentation was probably going to have higher oil prices. However, one way we would not is if you’re the Saudi’s and you look up and say, you know what, we still have got reserves here and if we don’t get them out of the ground now, in 20 years we’re never going to get them out. So maybe we should just pedal to the metal and if price drops to ten dollars a barrel, that makes it harder for people to electrify.

CHAMBERS: Yeah.

BILL O’GRADY: Now, there’s a risk to that policy and the risk is that if you’re a western government and you really want to push, you know, the electrification, you put a carbon price on it to the point that it doesn’t matter how cheap crude oil gets. You’re still going to be able to use it. But that’s something that we’re watching very – that’s kind of a new development. You know, because up to now OPEC has been clearly trying to keep the price propped up. And my suspicion is that the Saudis want to keep that price up to fund all these other projects that the crown princes is trying to do, which he thinks will diversify their economy away from oil. It’s an enormous gamble because if it doesn’t work, I don’t know what plan B would possibly be. But, you know, sometimes the only bet you have is black or red. You hope something comes up and so that’s kind of one of the things – let me kind of put it this way. One of the secrets of being a market analyst is that you have to try to overcome something known as conformation bias. You develop a narrative about how you think things are going to work. Then you have to figure out when you’re wrong and the problem with confirmation bias is that you’re constantly looking for things that make you feel like you were right. I got this from a book – one of the early writings of George Sorrows where he said, “I come up with a market position and then I seek out things that make me look stupid.”

CHAMBERS: Yeah.

BILL O’GRADY: It’s hard to do psychologically because it makes you feel really uncomfortable. But it’s kind of what you have to do and if there is a fly in the ointment of the higher oil price scenario it is – it’s a state oil companies. Private sector oil companies won’t do it but the state oil companies are looking at it wasting asset, may decide, you know, a dollar now is better than nothing ten years from now.

CHAMBERS: Yep.

BILL O’GRADY: And the other thing that the Russians have going for them, and this is something that is rarely taken into account. But if you’re the Russian, if you’re a Russian oil company, you’re paying your workers in rubles. But you’re earing dollars. And so, one way you can lower your cost of capital is to encourage your government to depreciate your currency. And the Saudis have tended to avoid that. They have, you know, they peg their currency and they rarely let it move, you know, and that’s because it’s a rent here state. And, you know, they have lots of princes they have to keep happy and

CHAMBERS: Yeah.

BILL O’GRADY: — depreciating the, you know, the Riyal doesn’t get them there.

CHAMBERS: Right.

BILL O’GRADY: But they Russians have no compunction of that. In fact, most wealthy Russians don’t keep — they keep as little money in rubles as they possibly can.

CHAMBERS: Right. Yeah, they Russians do have like a history of treating their people not so great. That’s for sure. It’s like guys listen, for the next two years we’re going to have you eat snow. Okay, you guys happy with that? Great. Move forward. So, yeah that’s not surprising. Okay, so that kind of leads me to this. Well, actually, let me go back to one thing. Can you give me a couple minutes, your thoughts on this hack, or this pipeline? Just real brief. I’d be really interested to hear because I just don’t think this – this is not ending. This is not ending. This is just a taste, I believe.

BILL O’GRADY: Yeah, I’m in the process of writing – we put out a publication called the Weekly Geopolitical Report and I’ve been writing this since my days at Edwards in 2006. But it’s an outgrowth of a daily comment on energy I used to write when I was an energy futures analyst. What I started doing in 1989. So, been looking at geopolitics for a long time and I’m actually doing a write up on this. And it’s actually pretty fascinating because there are a whole basket of, you know, threads that run through it. First off, ransomware is, you know, it’s become a big business. Darkside which was said to be behind this, actually has, it franchises its software. It has a customer service department that if they lock up your data, you know, you can work with their customer service department to pay them and then they’ll help you release your data, you know.

CHAMBERS: Did you ever believe you’d be in a world like that? I mean, come on. Yeah, it’s amazing. I’m sorry, go ahead.

BILL O’GRADY: Well, and it actually kind of gets to the whole nature of criminal behavior.

CHAMBERS: Right.

O’GRADY: Criminality kind of breaks into two directions. One direction is that criminals will provide products that polite society thinks shouldn’t be provided. So, if you think back to prohibition. Well, we shouldn’t let people drink. Well, people like to drink. So, government was preventing people from buying alcohol and organized crime, you know –

CHAMBERS: Stepped in.

BILL O’GRADY: — who supplied the service.

CHAMBERS: Right.

BILL O’GRADY: And we see that in all sorts of things. Illicit drugs, prostitution, loan sharking, these are all things that, you know, again society thinks really shouldn’t be allowed to happen and but there’s a demand for it. Somebodies gotta (sic) fill it. Organized crime does. And it has all of its problems. If you think back to the movie Good Fellas. One of the key insights that the lead character discovered was is that, you know, if you’re in this business and somebody does – basically hoses you, you can’t go to the courts to, you know, get it taken care of. And that is the role of, you know, the crime family had or, you know, the higher ups is to adjudicate. They really are adjudicators of alright who – you did this, you weren’t supposed to do this. This is your penalty. That’s one element of organized crime. The other element of organized crime is parasitic. You know, it takes – and what’s – what is the goal of a parasite? It’s to get resources from your host but do it in such a way that you don’t kill them. So, you know, one of the things that these ransomware guys – and ransomware kind of falls into the parasitic side. So, one of the things that the ransomware guys have figured out is they investigate companies they want to target with the same rigor as a, you know, equity analyst would do. How much can you pay? You know, how good is your software? Do you have insurance? How good is your insurance? And they size it all up and kind of figure out this is about what these people can pay. And then they hack the firm and they get paid. And this was a terrible mistake because they never intended for this to shut down, you know, eastern seaboard energy supply. That was not the goal of this. Their goal of this was to capture these guys data and make them pay. And they figured they’d pay it quickly. Here’s where they screwed up. They did not attack the command-and-control software of Colonial Pipeline. They attacked the business software, the billing software. What they failed to understand was the billing software was tied to the command-and-control software. And so, when they attacked the business software, colonial lost its ability to know what to bill people and who’d been shipped what, so they had to shut everything down. And the hackers did not anticipate that and the minute, of course, that shut down it went from being a parasitic criminal activity to a geopolitical problem.

CHAMBERS: Yeah.

BILL O’GRADY: And so, it looks to me like there’s a couple of fall outs from this. One is now ransomware has become – it’s come to the clear attention of the government – of governments.

CHAMBERS: Yeah.

BILL O’GRADY: And their starting to take it very seriously and one of the things I anticipates going to happen is the government is going to require that if you get hit with ransomware you’ve got to tell them.

CHAMBERS: Right.

BILL O’GRADY: The second thing, I think we’re going to see out of this is that it’s going to become an uninsurable risk. What makes insurance work is uncorrelated risk. When a risk becomes correlated, you can’t insure it.

CHAMBERS: Right.

BILL O’GRADY: That’s why – that’s why (inaudible) there is no flood insurance and there is no hurricane insurance for the –

CHAMBERS: Right.

BILL O’GRADY: — most parts of the country. There’s no flood insurance because it’s not an uncorrelated risk. If you live in a flood plain, you’re going to get washed out at some point.

CHAMBERS: Right.

BILL O’GRADY: And so, the government becomes the only provider of it. Well, the government – if the – if it becomes an uninsurable risk, then that eliminates the moral hazard. What was the moral hazard of software developers? You’re not rewarded for security. You’re rewarded for getting it out. Being the first mover.

CHAMBERS: Right.

BILL O’GRADY: Once, you know, MS-DOS was not the best operating system. CP/M was by far the better operating system but once IBM picked DOS for the PC, it dominated. So, what the lesson learned for software developers was, get it out there fast and be number one and if you’re waiting to make it really secure, you’re not going to win.

CHAMBERS: Right.

BILL O’GRADY: The other guys going to win. So, you have to change the incentive structure to where who becomes liable if you get hacked and if it starts becoming the software developers, low and behold, software’s going to get a lot better.

CHAMBERS: Yep.

BILL O’GRADY: The final element that I think you really gotta (sic) watch is that this event highlighted clearly that cryptocurrency has become the payment of choice for organized crime.

CHAMBERS: Yep.

BILL O’GRADY: Cryptocurrency exists because governments allow it. And you’re starting to see a crackdown. Wallstreet Journal article today –

CHAMBERS: Yep.

BILL O’GRADY: — you know, comes out and says the IRS is really going to start looking at crypto holdings. You know, and one of the things we have noticed is that cryptocurrency behaves a lot like gold. If you look at the past seven or eight years where crypto really started working, and you can correlate it to the price of gold, price of bitcoin, the price of gold correlates at about 66/67 percent for the past several years. But if you look at the relationship between bitcoin and gold, since last summer, since like last July, there actually adversely correlated at almost 90 percent. So, bitcoin has now reached the point where people are starting to view it as an alternative to gold.

CHAMBERS: Right.

BILL O’GRADY: And the criminal element could use gold but, you know, if you’re actually going to take delivery of gold, you’ve got these big chunks of metal.

CHAMBERS: Yeah.

BILL O’GRADY: — and people can see you moving them. And you gotta (sic) be a big fella to move a suitcase full of it. Where bitcoin weighs nothing. Perfect for this role.

CHAMBERS: Right.

BILL O’GRADY: If we start to see governments crack down on crypto, you’re probably going to see the people who are buying crypto as a debasement hedge start to gravitate back towards gold.

CHAMBERS: Yep. It makes sense

BILL O’GRADY: So, there’s a lot of working pieces to this thing. But kind of the bottom line here is that this was an epic error in judgement by whoever did this. Because the last thing they wanted to do – this is a bit like chopping off the head of the golden goose. They were making a great living on this stuff and now they’ve raised it to a threat level where it’s caught the attention of government. And that will probably lead to a response that makes ransomware a lot less attractive as a criminal enterprise.

CHAMBERS: Let’s hope so. Very interesting insights, Bill. I appreciate that. Alright, I’m going to move to another subject. I’ve only got you for another 15 or so, so want to talk about alternative energy and EV’s and cement production and steel production. We talk about EV’s. You know, we gotta (sic) get to EV’s. We just – Ford just released F-150, the electric 150 which is great. And all that but – and it’s very, you know, we all drive cars, right. So, it’s a big deal. Transportation, huge. Generates a ton of carbon. But so does steel and so does cement production. So, a lot going on but anyway. What’s your view of EV’s and where we’re going? How realistic, you know, the timeline. The thing that I’m stuck on is I think this is going to take longer than we all want it to. And again, it goes back to our conversation about the end of oil or supposably the end of oil. And then, you know, do you have any insight on other industries that produce a tremendous carbon footprint like oil and steel and kinda (sic) where are we at with that and where are we going? So, there’s a lot of questions in there but anyway.

BILL O’GRADY: Yeah. And one of the things I like to do with questions like this is try to look for some kind of unifying theme.

CHAMBERS: Perfect.

BILL O’GRADY: And the unifying theme in all this is, what is the direction of environmentalism? And I – I have concluded that environmentalism really has two poles – two Seminole figures in its history that really kind of encompass what the tension is within the environmental movement. One of them is Buckminster Fuller and the other is Thomas Malthus.

CHAMBERS: Okay.

BILL O’GRADY: So, Thomas Malthus as a reminder was the 17th century cleric who actually kind of made people define economics as a dismal science because you say, you know what, left to peoples own devices, they’ll overconsume, they’ll have too many children, they’ll live in destitution all their lives. And the environmental movement really has an element of that in it. Yeah, you can do all this stuff but eventually you’re going to make things so dirty that you can’t live in the world that you’ve created. The Buckminster Fuller element of this is that we can use technology to address the problems that development causes. And it’s a much more optimistic view. Now, when you first lay it out like that, it kinda (sic) looks like you create a strawman. Well, wealth is clearly lost. But it reminds me of a keen insight from one of the greatest movies ever made, The Simpsons Movie, where Bart got caught skateboarding naked and he was chastised for it and he tells Homer this is the worst day of my life. His dad says, “no son, it’s the worst day of your life, so far.”

CHAMBERS: Right.

BILL O’GRADY: The history of the past 250 years says Malthus has been wrong. And wrong almost consistently. You know, we’ve always come up with a technology that fixed it whether it’s the, you know, the food revolution, you know, we’ve fixed acid rain. I mean, we’ve always been able to fix things with new technology. But there was a French philosopher with the name of Jacques Ellul who always said, well you know, when you do that, yeah you fix that one but then you create a new one. And so, the technology fix, the Buckminster Fuller fix to these kinds of problems is always a treadmill. Because yeah, you fix one but you know what, you create another and you gotta (sic) fix that one too.

CHAMBERS: Yeah.

BILL O’GRADY: I mean, remember going to cars at first seemed like an environmental victory because, you know, the country was choking on horse shit.

CHAMBERS: Right.

BILL O’GRADY: And, you know –

CHAMBERS: Yeah, truly. Yeah.

BILL O’GRADY: Yeah, we really were.

CHAMBERS: People don’t remember that.

BILL O’GRADY: And, you know New York City was producing so much horse manure that they couldn’t figure out how to get rid of all of it.

CHAMBERS: Oh, they just take horses that died and just leave them out on the streets. Pigs and –causing pestilence on people. Yeah, yeah, right.

BILL O’GRADY: So, you know, when –

CHAMBERS: Yeah.

BILL O’GRADY: — the car first came out people were like this is going to be great.

CHAMBERS: Yeah.

BILL O’GRADY: You know and that fixed the horse problem but then it caused another one. And, you know, the problem is Malthus may end up actually winning at some point but the human race is going to do everything it can to try to push that day off a little further. So, that’s kind of a background of this. So, what are we dealing with? Well, the car has clearly created this carbon problem and we have to come up with the technology to fix it. Now EV’s are one answer to that. There are others. Hydrogen is a potential as well. In fact, I’ve followed the fuel cell industry for years and it reminds me of Brazil. You know, Brazil is always said to be the country of the future and always will be. Hydrogen kind of falls into that. But you are seeing some strides made on hydrogen so I wouldn’t necessarily say that electric vehicles are going to win because the fuel cell vehicle may at some point actually winning this thing. Especially if we come up with new ways of creating hydrogen from water that turn out to be, you know, more efficient. Right now, it’s still pretty dirty. We get most of our hydrogen from natural gas. But anyone whose taken high school chemistry knows you can get oxygen and hydrogen out of water through electrolysis.

CHAMBERS: Right.

BILL O’GRADY: Nuclear is another area that, you know, has been sold short. We like nuclear a lot.

CHAMBERS: Yep.

BILL O’GRADY: Because – and one of the things that has surprised me is that we are starting to see people within the environmental movement when they sit back and look at this, they look at this as there really is no way we can get around this.

CHAMBERS: Yep.

BILL O’GRADY: Without nuclear. The issues with steel and cement are technological issues.

CHAMBERS: Yeah.

BILL O’GRADY: And they do create a lot but you know what if you properly price carbon, people will come up with new ways of doing things that will reduce less of it. But you have to create incentive and that’s why you are starting to see this carbon price argument bubbling up. Now, politically it is – it’s still really tough.

CHAMBERS: Yeah.

BILL O’GRADY: But any economist will tell you, step one is putting a price on carbon and trying to get it as close to accurate as you can. And, you know, the thing that is always surprised me is that when you talk to people in steel, you talk to people in cement or frankly of any industry, there will always be a whole string of other alternative ways of producing the product that are available. They just don’t get exploited because their too expensive. But once you change the pricing incentives, then all the sudden, oh yeah, we can do it that way and it will be less dirty. The other thing, I always mention when I get on this topic is that there is nothing humans do that doesn’t have some dirtiness to it. So, if we go to EVs, when you start looking at the production of metals, man it’s disruptive.

CHAMBERS: It’s not good.

BILL O’GRADY: And there’s really kinda (sic) no way of getting around it –

CHAMBERS: Yeah.

BILL O’GRADY: — and so it’s kind of a pick your poison problem and you know this is always difficult for people who want to do environmentally the right thing to rappel with because ultimately nothing that you do is pristine.

CHAMBERS: Do you think they’re politically speaking we’re going to be on this – I know that there’s a timeline that’s globally kind of being set like, hey we gotta (sic) really get on these guys in the next 20, 30 years. But politically speaking, at least in this country it seems like this is going to be a tough road given the polarization to get – right? I mean – Biden will come in and do stuff and then, you know, it’ll get reversed by the next, right? I mean, it’s just –

BILL O’GRADY: The thing you have to always remember is politics is always hard.

CHAMBERS: And long.

BILL O’GRADY: And long. And, you know, because you’re building, I mean in democracies you have to build consensus.

CHAMBERS: Yeah.

BILL O’GRADY: You know, authoritarian regimes, you have to build consensus among the leadership and then you can only go so far.

CHAMBERS: Yeah.

BILL O’GRADY: You can go further but the risk is that you, in democracies, you have a better chance of seeing the breaking point. When I look at the current political turmoil, what that tells me is, is that we are trying to figure out a new social consensus. We’re just not there yet.

CHAMBERS: Yep.

BILL O’GRADY: If you look at American history, we go through this about every 50, 60 years.

CHAMBERS: Yep.

BILL O’GRADY: And we’re kind of due and so, you know, in terms of what are we going to do politically about climate change? Well, one thing I think you have to look at is the whole notion of mitigation. You know, I live at the, you know, at the confluence of the Illinois, Missouri and Mississippi Rivers and so flooding is a pretty normal occurrence around here. I mean, it doesn’t happen every spring but about every third spring you get some flooding activity. You know, one simple solution is you don’t build – you don’t put anybody’s houses on a flood plain. You know, you can do some building. May become great for things like soccer parks, you know, little league baseball –

CHAMBERS: Right.

BILL O’GRADY: — and, you know things like that. You just have to go in every three or four years and kind of clean them up after the flood waters recede. But, you know, on the coast as sea levels rise, you know, you’re going to have to mitigate and that may mean that you don’t put stuff on Manhattan. You know, you start building stuff in New Jersey.

CHAMBERS: Yep.

BILL O’GRADY: And I – one of the things I have been kind of amazed at is how fast the West grows. And I lived in Denver for a couple years. I love the Rocky Mountains but every time I go to Denver, I’m like I don’t know where these people are going to get water to drink.

CHAMBERS: Yeah. Yeah.

BILL O’GRADY: You know, it’s –

CHAMBERS: It’s crazy.

BILL O’GRADY: — and so, again, a lot of things ultimately – one of the key core elements of economics is getting the price right. And that’s where a lot of this comes down to.

CHAMBERS: Yep. That’s a great theme and one for us to watch. Well listen, I really appreciate it. I’ve just got one other thing. Have you read any of Daniel Kahneman’s stuff and his new book Noise. Have you heard about this? I was just thinking of you –

BILL O’GRADY: I’ve heard of it.

CHAMBERS: Yeah. Have you read any of his stuff?

BILL O’GRADY: I have. I think it’s really good.

CHAMBERS: Yeah, he’s incredible.

BILL O’GRADY: The – I’m an avid podcast listener.

CHAMBERS: Yeah.

BILL O’GRADY: Not only do I create my own but I listen too, and there was a recent podcast I listened to reviewing, you know, him and his book and –

CHAMBERS: Okay.

BILL O’GRADY: — you know, it – what I like about Kahneman and really the whole behavioral economics guys, Bob Shiller got a book out now called Narrative Economics, which –

CHAMBERS: Yep.

BILL O’GRADY: — gosh, it dovetails into everything I’ve experienced –

CHAMBERS: Yeah.

BILL O’GRADY: — in, you know, 35 years of doing this kind of work.

CHAMBERS: Yep.

BILL O’GRADY: You know, it’s – we are in the business of storytelling.

CHAMBERS: Yeah, for sure. Well, Kahneman, he’s been interviewed a bunch, but Barry Ritholtz interviewed him and that was – he’s interviewed them I think a few times. It’s just fascinating. And by the way I think you turned me on to Odd Lots. How incredible. Isn’t that just a gem of a podcast?

BILL O’GRADY: Yeah.

CHAMBERS: Those two are – I mean, it’s just – the whole thing on like, you know, shipping containers and microchips, you know. And by the way, who knew that microchips took up – I mean it’s obvious but took up so much water and now Taiwan’s in a drought. So right back to the environmental thing, you know. It’s just so –

BILL O’GRADY: They – they do an exceptionally good job –

CHAMBERS: Of topic picking.

BILL O’GRADY: Yeah.

CHAMBERS: That’s the thing. You know what I mean. It’s just like wow.

BILL O’GRADY: Yeah, they do and they’ve got a little bit of an element of getting ahead of the puck which –

CHAMBERS: Yep.

BILL O’GRADY: — I was listening to the most recent one which was really frustrating because it’s so deep in the weeds on crypto and I’m too old to understand –

CHAMBERS: Yeah.

BILL O’GRADY: — a lot of it. I joke to people, I’m out walking around getting my exercise listening to these podcasts, they’ll say something and I’ll be like yelling, you’re asking the wrong question. This is the question you have to ask.

CHAMBERS: Yeah.

BILL O’GRADY: I think people think I have turrets but it was really interesting. I haven’t finished the latest one. I have about ten minutes of it left but you know right at about the mark where there’s a bout ten minutes left this guy’s talking about with the difference between bitcoin and what Ethereum is going to. So, bitcoin works on a thing called proof of work.

CHAMBERS: Yeah.

BILL O’GRADY: So, you get to post a transaction on the blockchain if you solve this puzzle.

CHAMBERS: Right.

BILL O’GRADY: That’s the proof of work. And of course, we all know the story of how complex these puzzles are getting and how much energy they are generating —

CHAMBERS: Yeah.

BILL O’GRADY: — to fix this. Ethereum and according to the guy they interviewed, on July 15th, Ethereum is shifting to something to proof of stake.

CHAMBERS: Yep.

BILL O’GRADY: Which means that you get to put stuff on the blockchain based upon how many of the Ethereum coins that you pledge and then there’s a lottery. So, if you pledge half the existing Ethereum for example, there’s a one in two chance that you’re going to get to post the transaction on blockchain, you’re going to have a fee for that. Start thinking about it as I’m walking around. It’s like, well gosh, if this replaces proof of work, all these server farms that have developed to generate all this – to crack all these puzzles, suddenly aren’t necessary. And, you know, are we going to suddenly find a glut of available server capacity that had been tied up –

CHAMBERS: Interesting.

BILL O’GRADY: — doing bitcoin.

CHAMBERS: Yep.

BILL O’GRADY: I don’t know who provides all that but that can be really a bad outcome if that’s how it plays out, so. Yeah, Odd Lots is – it’s my favorite.

CHAMBERS: Yeah, it’s good.

BILL O’GRADY: I think they do a really bang-up job.

CHAMBERS: Yeah. I think that gentleman coined it yield farming.

BILL O’GRADY: Yes.

CHAMBERS: Yeah, yield farming which is so interesting.

BILL O’GRADY: Well and the question I was screaming is whose paying 80 percent annual, you know? They never address that. They like money, just money kind of falls from heaven. It’s like wait a minute. Somebody’s paying this.

CHAMBERS: Yeah.

BILL O’GRADY: Who’s the clown that’s paying this?

CHAMBERS: Well, you know what, there was parts of that that guy didn’t even know what – he was like, honestly, I’m trying to figure it out myself, you know. So, there you go. This is the world we live in, Bill.

BILL O’GRADY: Yeah.

CHAMBERS: Never-ending. To your point. Well, listen, I really appreciate it. How’s St. Louis doing in the race for pennant? How we doing this year? What’s going on out there?

BILL O’GRADY: They’re leading the league.

CHAMBERS: Good.

BILL O’GRADY: You know, they’re – it’s kind of a weak division.

CHAMBERS: Okay.

BILL O’GRADY: The Brewers can’t hit. They’ve got fantastic pitching staff but they’re – Yelich has been hurt so they’ve been struggling.

CHAMBERS: Okay.

BILL O’GRADY: Pittsburgh is just a, you know, a dumpster fire. The Cubs are, they’re in –

CHAMBERS: The Cubs.

BILL O’GRADY: — well, you know, they had their run and now I think they’ve kind of concluded that they need to rebuild and so they’re kind of selling off parts and –

CHAMBERS: Okay.

BILL O’GRADY: — you know, so the – and the Reds frankly should be better than they are. But they can’t seem to make up their mind if they’re in a rebuild or not so, you know the Cardinals are kind of the last team standing and they got Nolan Arenado over the winter and gosh he’s just crushing it. And the problem for the Cardinals is that there has been a lot of injuries with starting pitching.

CHAMBERS: Okay.

BILL O’GRADY: They have one really exceptional starter, Jack Flaherty. And then everybody else, I mean they trot Wainwright out there. I think he’s 98 years old now and he pitches really well at home and he gets shelled on the road. And they’ve had a couple guys hurt and so it’s been kind of a hodgepodge in the starting rotation. But they got a couple guys that are coming back from rehab and if the starting pitching improves, they’re probably going to win the Central. I don’t know if anybody’s going to win whoever – beat whoever comes out of the West, however. You know, the Dodgers.

CHAMBERS: Yeah.

BILL O’GRADY: San Francisco and San Diego. I mean the Cardinals got swept by San Diego and it really wasn’t close.

CHAMBERS: Yeah.

BILL O’GRADY: You know, so it that’s kind of the thing you look at.

CHAMBERS: Right.

BILL O’GRADY: You know, getting into the playoffs is important but –

CHAMBERS: Yeah.

BILL O’GRADY: — you know, gosh those teams out there look really tight.

CHAMBERS: Yeah. It’s run into a (inaudible) yeah. Well, I always love it when we end with baseball. And I really – I didn’t know you were a pitcher at one time so that’s very cool.

BILL O’GRADY: Yeah. You know, I probably need both elbow and shoulder surgery but in my current life, it kind of doesn’t matter but when I used to coach Little League, you know, I – by the times the kids got to be about 12 years old, they’re like gosh you kind of throw like a girl. Well, nothing wrong with that.

CHAMBERS: Nothing wrong with that. Girls throw hard, man. They throw it hard, believe me.

BILL O’GRADY: But no, I kind of throw like an old guy whose arm is shot and –

CHAMBERS: Right.

BILL O’GRADY: — but yeah, I have – my shoulder will fall out of socket if I’m not watching what I’m doing.

CHAMBERS: Yeah, don’t do that.

BILL O’GRADY: That’s just, you know, that’s a rotator cuff that needs to get fixed and –

CHAMBERS: Yep.

BILL O’GRADY: — is not going to get fixed.

CHAMBERS: Yep. I got it. Yeah, man, don’t mess with shoulders. Anyway, alright, well listen. It’s been great. Thank you so much. I always love your perspective and your team’s perspective on things and we totally appreciate it. And have a wonderful weekend. Until next time, Bill. Thank you so much.

BILL O’GRADY: Okay. Thanks, Trevor.

CHAMBERS: Alright, Bud.

Background Information:

Bill O’Grady – Full Bio
As Chief Market Strategist, Bill O’Grady performs market, economic and geopolitical research for the firm, and is a member of the investment committees for the Asset Allocation strategies and International Equity strategies. Bill also co-manages Confluence’s Global Hard Assets portfolio, which focuses on tangible commodities investments. Additionally, Bill writes numerous reports for the firm, which can be found under Research & News, in which he provides insights on various economic and geopolitical topics and discusses market effects. In all, Bill has more than 30 years of experience following the energy, foreign exchange and futures markets and is frequently quoted by such national media outlets as The Wall Street Journal and Bloomberg News. Bill earned a master’s degree in economics from St. Louis University and has undergraduate degrees in history and public administration from Avila College.

Trevor Chambers – Full Bio
Trevor joined Olde Raleigh Financial Services in January of 2015 and his primary role is new business development and marketing.  Prior to joining the firm, Trevor spent 12 years working at his family’s restaurant, Raleigh’s Bella Monica Cucina & Vino. “Exceptional service, no matter the industry, is paramount and we attract clients who value and take comfort in being taken care of.”