The Unholy Union: The Marriage of Technology and Geopolitics

The Unholy Union: The Marriage of Technology and Geopolitics

The world economy is undergoing a technological revolution that resembles the dotcom bubble on steroids, gamma rays, and LSD. From AI to biotechnology to quantum computing to renewable energy to energy storage, the number of fields undergoing rapid advancement are beyond counting. We have reached the point when the sheer vastness of these trends creates a sort of network effect – an innovation in one area can lead to rapid advancements in other areas.

Due to the improvement and efficiency in hardware and computing power, launching a startup has never been easier. There are now thousands of startups around the globe working on applying AI and ML to various aspects of our lives.

Innovations in battery technology are powering a second transportation revolution which is separate but further enhanced by the autonomous driving revolution. Within a few years electric powered drones will be capable of flying people across cityscapes reducing the travel time by 90%. Cheaper more durable batteries are enabling grid power that can solely rely on renewable energy.

This accelerative and widespread technological revolution stands in stark contrast to the fears of a global depression just beyond the horizon that sends the world’s nationalist elements into conflict against each other. Instead, the global economy is a non-zero-sum game and for the first time in my life time, from Trump in the US to Xi in China to Abe in Japan to Modi in India to Macron in France to MbS in Saudi Arabia to Macri in Argentina the world’s largest economies are headed by pragmatic deal makers set to make their mark.

Which brings us to our favorite macro theme, The Unholy Union: The Marriage of Geopolitics and Technology.

These big players have just begun their dance, with each one jostling for a bigger share of a growing pie. This competition is incredibly positive for global growth. Already we’ve seen Japan and India form a partnership (The Asia Africa Growth Corridor) to offer an alternative to China’s Belt and Road Initiative (BRI). At the same time, Japan is not shunning China entirely. Abe and Xi have renewed their countries commitment to each other.

‘“At the end of the meeting, President Xi said this is a meeting that marks a fresh start of relations between Japan and China. I totally feel the same way,” Abe told reporters.’

By working together, Japan and China can fill gaping holes in each other’s economy. Japan wants to weaken its currency, and invest in projects that return more than 0.4% yielding 40 year JGB. China has the projects and the factories to make it happen but needs help with financing. Japan can shift its savings to Chinese bonds, weakening the Yen against the RMB, propping up China’s economy and currency which in turn would boost the rest of the emerging world which so heavily depends on China’s ongoing economic expansion. As a net exporter, Japan would gain an increased benefit from positive global growth. In this scenario, a key barometer of success will be the CNY/JPY exchange rate.

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But this is just one example. There are many new deals forming, under the surface between global powers. Did you notice that MbS announced a major turning point in US Saudi relations months before he purged his political enemies?

Do you think Trump’s bid for Aramco the very moment MbS had purged his government of political enemies was a coincidence?

Or that some of those caught in the purge just so happen to have funded some of Trump’s political enemies as well?

The good thing about these deals, is that they cannot be fully obscured for the players are too big to hide their hand. The bad news is that the financial risks have never been greater. The debt has never been this high. The demographics whether it be our aging populations or the deteriorating health of those populations has never been worse. And the wealth divide has never been this large. The cost of failure is very high and very very real.

On our current trajectory, inflationary pressures that send shockwaves through the OECD bond markets may be less than 2 years away. At the sametime, central banks have embarked on tightening monetary policy in earnest for the first time since the crisis. But with the help of accelerative technological trends and improving geopolitical relations world leaders still possess the tools and resources to prevent or at the very least delay any significantly bad outcomes for years to come. Which means, that for the foreseeable future, the biggest risk to global economic stability is not economic, but geopolitical.

 


DISCLAIMER: This blog is the diary of a twenty something millennial who has never stepped foot inside a wall street bank. He has not taken an economic or business course since high school (which he is immensely proud of) and has been long gold since 2012 (which he is not so proud of). In short his opinions and experiences make him uniquely unqualified to give advice. This blog post is NOT advice to buy or sell securities. He may have positions in the aforementioned trades/securities. He may change his opinion the instant the post is published. In short, this blog post is pure fiction based loosely in the reality of the ever shifting narrative of the markets. These posts are meant for enjoyment and self reflection and nothing else. So ENJOY and REFLECT!

Vanadium: The Next Commodity You’ll Pretend To Know Everything About

Vanadium: The Next Commodity You’ll Pretend To Know Everything About

Ever since China arrived on the global stage at the turn of the 20th century, front running the rising juggernaut has been an incredibly lucrative strategy. In the early 2000’s this meant buying exposure to common elements like copper and iron ore, but more recently emerging technologies have shifted the focus to more niche and illiquid elements like cobalt and graphite (carbon) making the trade harder to put on. The next link in this chain is Vanadium, which is fast becoming a key component to many technologies and industries.

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Vanadium is used to make steel and aluminum stronger while reducing the weight. Lighter and stronger metal alloys are increasingly important in our modern society where we strive for lighter more fuel efficient vehicles. From WSJ:

“By 2025, the amount of lightweight, high-strength steel in a car or light truck in North America is projected to rise to an average 483 pounds, 76% above the 2015 average, according to industry consultancy Ducker Worldwide.”

“Aluminum content in cars and light trucks in North America is expected to reach an average of 520 pounds in 2025, a 31% increase from 2015, according to Ducker Worldwide. More than two-thirds of closure components, such as hoods and trunk lids, on light vehicles are expected to be aluminum by 2020, double from 2016.”

More recently, Vanadium has found its way into the energy storage business. Vanadium redox batteries may not have the same energy density as lithium ion batteries, but they make up for it in terms of reliability, durability and robustness. As renewables create more demand for grid storage we should see yet another source of demand for vanadium. Here’s a link to cool visualization for all the uses of vanadium.

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All else being equal before I even take China into account, there is a very bullish backdrop for vanadium demand. Vanadium’s global annual inventory change is shown in the chart below.

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As for supply, the vast majority of vanadium comes from a byproduct of iron ore mining, which like every other commodity industry in the past 6 years has undergone heavy consolidation. Russell Clark of Horseman Capital wisely notes, capex from the four largest iron ore miners has fallen off a cliff.

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As part of China’s movement to deleverage parts of its economy and reduce environmental damage, potentially 1/3rd of iron ore mining licences in China will be revoked. This policy also extends to some pure vanadium mines that will be forced to shutter as well. But that’s not all, because China recently banned the import of low grade vanadium scrap metal reducing vanadium supplies further.

At the same time, China is moving up the value chain and will need to create high quality products that are worth of the “Made in China” and OBOR brand names. So this summer, China announced a new policy that raised the standard tensile strength of steel rebar from 335MPa to 600MPa, which could boost China’s demand for Vanadium by 30%, bringing it more in line with western levels.

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Note India at the low end of the consumption spectrum is planning a massive infrastructure overhaul of its own country. Obviously roads aren’t made of steel, but the point is clear, India is serious about upgrading its poor infrastructure.

Also worth noting the last time China upped its vanadium demand through similar policy was in 2005.

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To quickly sum up, supply of vanadium is falling or stagnant. Demand is seeing notable increases from a wide range of sources. And the two world’s largest countries by population are set to supercharge these imbalances through new policies. Unless Earth is about to be hit by a bug meteor full of vanadium it seems to me that prices have only one direction to go.


DISCLAIMER: This blog is the diary of a twenty something millennial who has never stepped foot inside a wall street bank. He has not taken an economic or business course since high school (which he is immensely proud of) and has been long gold since 2012 (which he is not so proud of). In short his opinions and experiences make him uniquely unqualified to give advice. This blog post is NOT advice to buy or sell securities. He may have positions in the aforementioned trades/securities. He may change his opinion the instant the post is published. In short, this blog post is pure fiction based loosely in the reality of the ever shifting narrative of the markets. These posts are meant for enjoyment and self reflection and nothing else. So ENJOY and REFLECT!