The Big Three Opportunities

The Big Three Opportunities

Freedom Financial Archive | Originally posted Nov 29, 2022
  • Following on with our Wiggin Session chat, I talk about the big three opportunities for investments.
  • We also talk about why turtlenecks don’t solve the energy crisis.
  • And we cover how we’ve got to pay the piper, thanks to poor central bank policy.

Mark: When we started this back in 2019, we looked at the market and we saw a lot of opportunity in the private sector, not so much the public sector. We saw a global shortfall of energy infrastructure.

Now that's obviously a massive term. What does that mean?

We wanted to bucket it into three locations.

One is hydroelectric. The second is fertilizer production. The third is renewable diesel refining.

We saw a shortage of base load power, and we wanted to find a way that we could capitalize on the green movement while providing base load that is going to be there 24/7.

Then we turned and we said there was a global food shortage.

Fertilizer is massively energy intensive.

We wanted to find a solution to increase fertilizer production while trying to stay and find waste products to do so.

And then on the diesel front, in terms of refining.

Good luck trying to get a crude refiner built. But we found this one company that creates renewable diesel using wood waste as well as agricultural waste.

Now the beauty of renewable diesel is one, you're not taking food to make fuel, and it's molecularly the same as petrol diesel or crude diesel.

We wanted to find a way to address these problems with the view of GHG and ESG in mind.

But one thing I learned long ago, taking enough ethanol facilities into and out of bankruptcy, is that government subsidies should pad the returns, not drive the returns.

Why? Because a stroke of a pen can instantly change your profitability.

We wanted to find companies and assets that stand on their own two feet, and we wanted to show, "Look, you can have an environmental mindset while still making money and delivering value without saying, 'Oh, well…'"

I don't know if you saw Japan just told everyone they have to buy turtlenecks. Because if you wear turtlenecks, you will keep yourself warm and you'll reduce your consumption of energy.

That's ridiculous.

That is not a solution to anything.

But there's a way to build more LNG capacity to make more LNG available.

Addison: Maybe if you're farming a sheep in New Zealand, it is.

Mark: True. Maybe we should get into the wool trade!

But you're watching the absurdity of this.

It's like, so you're forcing discounts and sales of turtlenecks to keep people warm, where we can actually look at this and look at the shortages.

Can we increase LNG availability? Can we develop and capture flare gas, to take that flare gas that was a pollutant and is now powering your home and your heat?

There are ways to look at this with an environmental mindset while still delivering value and capturing something that is going to have longevity behind it.

Addison: Let's talk about inflation a little bit too because that is impacting the energy markets.

But most of the trends that you've been describing up to right now in this conversation, they predate any concern of inflation and any lockdowns in the economy.

What impact did low to negative interest rates have on the way that the energy markets developed over the past 15 years?

Mark: [Central banks] created an artificially low hurdle rate where suddenly money was free. Everybody was buying in on the green movement.

You had a ton of subsidies that were being thrown out.

So instead of looking at things and understanding the math of supply-demand economics, looking at the grid, dispatchable power, it was just, “How can I get the best subsidy the fastest and capitalize on the fact that I can borrow money at one and a half percent?”

That's something then after borrowing money at one and a half percent, I can then go to the government and then essentially get 2% back and I can – whether this product or project works – I'm going to make money.

And you watch this grift and this insane inflammatory world start to emerge where it wasn't about the math and the economics.

It was, "Well, the economics work because the government's paying me to make it work."

And that's why when we saw all of this, then you see these adjustments, and now you're left with these policies and these projects that don't deliver the value that they were supposed to.

And you have these stranded assets, which the taxpayer spent billions on.

In some cases, trillions in total, and you're not getting what you were supposed to.

Because anybody who understands physics and chemistry and the way the electron moves and the way the world works, just rudimentary math, you're like, that's not going to be enough.

What are we trying to replace here?

So, between the insane low rates and the amount of liquidity pumped into the market, you created this artificial floor that was going to be fine, and rates were going to be low forever.

Now, the UN has come out and said that raising rates is the worst policy decision that we've ever had.

Well, what about the last 10 years?

How is that not the worst policy decisions that we've ever had?

Are we just going to keep rates low forever?

No, we have to be diligent about liquidity, about saving this for a bad time or a COVID type situation, or lockdowns, if you will.

But now you essentially dumped all this money into the market, and even as we head into a recession similar to the 70s, you have no choice but to take the liquidity out because you were so greedy for so long.

And that's going to create these broad shortfalls.

But in my opinion, and this comes back to FTX, and all of this grift getting pulled out of the market without free money, people have to look at returns again.

They have to say, “Well, I can't just dump money into an Uber that I've given you billions of dollars and you've delivered no actual value in terms of cash appreciation.”

So, my hurdle rates go up, my cost of capital goes up.

When are you turning a cash flow? When are you returning cash? When are you cash flow positive? How quickly will that happen?

That covers it for today.

All the best,

Freedom Financial News