Welcome to our Friday mailbag edition!
Every week, we receive some great questions from your fellow readers on our recently published essays. And every Friday, I answer as many as I can.
Today, we have questions on America’s electricity generation infrastructure, the eventual outcome of the Fed’s prolific money creation, the strength of the Russian ruble, the potential impact here of China’s aggression in Taiwan, and nuclear fusion…
But before I get to those…
On Wednesday night, more than 8,000 people tuned in to my Running on Empty Summit. It was basically a deep dive into the energy crisis that’s just around the corner. I want to prepare my readers for what’s to come, so they can prepare their portfolios.
I named the five sectors I believe will go down during the energy crisis… as well as the five that will go up.
I also shared the details on a small, publicly traded firm that could hold the key to solving a major problem in the energy crisis.
The replay of this critical summit is online right now. So if you weren’t able to tune in last night, you can just go here to watch it.
And now, on to this week’s mailbag…
So let’s get started, with this from Charles, who asks if the current electricity generation infrastructure is ready for the energy transition to come…
Considering the rather bullish position you made for electricity, why have you failed to provide insight as to where or how all this “juice” will come from?
Yes, we have indeed bet the farm to say we will drive our future via electricity. But what of the industry and infrastructure conditions currently? Can they really be expected to meet the meteoric rise in distribution and demand, in concert with projections?
Take a hard look around and I believe your view will change to “oh no.”
– Charles P.
Hi Charles, thank you for your email. You bring up an important point. America must update and upgrade current electrification standards and power companies to prepare for the coming energy transition.
This has been addressed in the $1 trillion Bipartisan Infrastructure Act, which President Biden signed into law last November. The recently introduced Inflation Reduction Act of 2022 also has provisions to address these crucial needs.
These acts focus on direct investment in the electricity space. They also provide generous tax incentives to existing utility companies to overhaul their facilities to be able to handle the larger demands on the electricity grids.
And it’s not just the government. Private companies in this area have also been working extensively on enhancing their power capacity.
These include Amazon, which I did a deep dive on at a special event on Wednesday. It’s the largest corporate investor in renewable energy, with a current total of 310 renewable energy projects across 19 countries.
And Google has invested $3.5 billion in renewable energy projects.
The transition to New Energy will take time. And while building out wind, solar, and yes, nuclear supplies will be a huge focus in the coming years, the existing infrastructure will also receive attention.
As I’ve said all along, the traditional energy sector won’t disappear overnight. It still has a vital role to play in the generation of America’s energy needs.
But it will need to adapt and upgrade to accommodate technological advances and increasing customer demand.
There is much work still to be done. And it will take time as energy-efficient technologies come online. That’s a reason why I remain bullish on the electrification sector.
Next, Van wonders if the Federal Reserve is playing games with the U.S. dollar…
When you have time, please address the possibility of an eventual currency crisis involving the U.S. dollar.
After all, how can the Federal Reserve keep the printing presses running and not eventually have the U.S. dollar deteriorate to monopoly money?
Or is that part of “their” plan?
– Van D.
Hi Van. I know this topic of when, or if, the U.S. dollar will hit an eventual crisis is on many readers’ minds.
From a sheer purchasing power perspective, the dollar has been in decline since the Federal Reserve was founded in 1913.
Back then, one dollar would have bought 30 Hershey’s chocolate bars. Would it even buy one today?
Visual Capitalist has a great graphic on the declining value of the dollar. You can access that here.
So you’re right to be concerned. Each dollar that’s created by the Federal Reserve reduces the value of the dollars in your account and wallet.
And as I wrote earlier this week in a special evening edition of Inside Wall Street, the Fed has increased the supply of money by roughly 40% – $6 trillion – since the pandemic.
Now, if it were just the Fed printing money, the U.S. dollar would be weaker. But other major central banks have been printing money as well.
The European Central Bank (ECB), Bank of Japan (BOJ), People’s Bank of China (PBOC), and the Fed printed a total of about $12 trillion since the pandemic hit.
So the U.S. dollar retains its comparative advantage.
The U.S. Dollar Index has, for the most part, appreciated in favor of the dollar since the pandemic, as you can see in this chart.
The U.S. dollar has also maintained its primary reserve currency status. And I believe it will continue to do so for the foreseeable future, even though there are other currencies, such as the Chinese yuan, vying for that reserve currency status.
I’ve explained the reasons behind my conviction in recent months. You can catch up here, here, and here.
And I’ve shown readers several ways to play the U.S. dollar’s strength versus other currencies for profit.
Next, Michael K. is concerned about the Russian currency’s comparative strength right now…
What about the Russian ruble? Hasn’t it been even stronger than the U.S. dollar the last 90 days?
– Michael K.
Hi Michael. Thanks for your question.
You’re right, the Russian currency had a good ride since the start of the war in Ukraine before peaking just above $0.019 on June 29.
In fact, it was the best-performing currency in the world at one point this year.
This blindsided a lot of people.
You see, a country facing international sanctions (never mind a major military conflict) would normally see a steady outflow of capital. And that would cause its currency to drop.
But Russia’s aggressive measures to keep money from leaving the country, along with a dramatic rise in fossil-fuel prices, created demand for the ruble. That pushed its value up.
As I write this, however, one ruble is worth around $0.017. That’s a 12% drop from where it was trading in late June.
One of the biggest drivers of this has been the Fed’s hawkish interest rate policy.
The reason for this is simple…
When interest rates rise, individuals see a higher return on their savings. This tends to attract foreign investment. And this, in turn, increases the demand for (and value of) the home country’s currency.
That’s essentially what happened here.
The ruble has recently regained some of its drop. But the fact remains that as long as the Fed keeps raising interest rates, the ruble will remain at a disadvantage, or potentially weaken again, relative to the dollar.
Moving on, we all know that semiconductors (or chips) are used in everything from our smartphones, cars, TVs, and computers, to sophisticated military equipment.
But ever since the pandemic, the global chip supply has been precarious. Before the pandemic, the lead time between ordering a chip and its delivery was about 11-12 weeks. In July, the average lead time was 26.9 weeks, according to Susquehanna Financial Group.
The U.S. government recently passed the Creating Helpful Incentives to Produce Semiconductors for America Act (CHIPS) Act to help secure the supply of these vital components.
But reader Paul B. worries about the effects of China’s potential actions against Taiwan, the international hub of chip manufacturing…
One may agree or disagree with Nancy Pelosi’s decision to go to Taiwan. But it had the advantage of showing the true colors of China.
My prediction is that in the very near future (1 or 2 months), China will set up a maritime blockade of Taiwan, and will maintain it until Taiwan capitulates. In that scenario, everything coming out of Taiwan will have to be flown out.
How will the semiconductor industry be able to survive? The U.S. stock markets will crash. Any suggestion on how to protect ourselves? Thank you for your insight.
– Paul B.
Hi Paul, thank you for your email. You make some interesting observations in terms of what could happen if China were to place an economic stranglehold on (if not outright attack) Taiwan.
First off, this has been considered a pending issue for years. And I discuss it in my forthcoming book, Permanent Distortion.
While not out of the realm of possibility, it’s certainly up for debate if China could pull off something like that in such a short space of time.
Especially now that the country’s economy is plagued with problems. These include low GDP growth, ongoing Covid-related shutdowns, and some very serious issues in the housing market.
However, if this were to happen, there would definitely be more supply chain disruptions.
That’s because Taiwan essentially dominates the global production of semiconductors. It accounts for about 65% of the world’s total chip production. For the more specialized chips, that figure goes up to 92%, according to a recent Boston Consulting report.
The island’s strength in the semiconductor market has become synonymous with four letters: TSMC – the Taiwan Semiconductor Manufacturing Company. It’s responsible for about half of Taiwan’s semiconductor output.
Apple and other major U.S. companies are highly dependent on TSMC for the chips that go into various mobile devices, cars, and household appliances.
Incidentally, TSMC’s critical role in supplying the U.S. was all too evident during Nancy Pelosi’s recent trip. She made sure to take time to meet with TSMC executives.
If China were to ban/blockade Taiwanese exports of semiconductors, that would be a big blow to the U.S. tech giants. And, by extension, to the U.S. stock market and the economy.
But here’s the thing…
For China, targeting Taiwan’s semiconductor industry would come at the cost of inflicting significant harm on itself.
That’s because it depends on TSMC to provide most of the chips it needs to feed its own economy.
Yes, that’s right. Despite pouring billions of dollars into developing its industry, China still controls very little of the market – just under 10%.
That’s the most likely explanation for why China’s most recent attempts at economic coercion left Taiwan’s semiconductor industry unaffected.
Now, I can’t provide personalized investing advice. But one way investors could invest around potential disruptions in Asia would be to take long positions in U.S. semiconductor companies, such as Intel (INTC).
While no one can ramp up production overnight, the company already has plans to spend nearly $60 billion on new cutting-edge semiconductor factories in Arizona, Ohio, and Germany.
And finally, Jonathan sees a gap in the alternative energy market…
When discussing alternative forms of energy, I do not see any mention of nuclear fusion. As companies advance this technology, it would appear to be very significantly attractive for the generation of electricity.
– Jonathan W.
Hi Jonathan, thank you for your email. I really appreciate it.
The whole area of nuclear energy is one I’m very bullish on. My team and I originally published an essay on nuclear energy when we first launched Inside Wall Street.
In it, we addressed some of the popular misconceptions about nuclear energy that are delaying its adoption. We showed that nuclear energy is safer, more reliable, and greener than some of the more traditionally accepted fuel sources.
Shortly after that, we responded to some readers’ questions and comments in a Friday Mailbag edition. We wrote about the development of next-generation nuclear reactors and the central role nuclear energy can play in ensuring we have a cheap, reliable supply of electricity.
And just last month, I showed that many countries are now realizing that nuclear power has the potential to help them reduce their reliance on fossil fuels.
I believe nuclear energy will play a major role in helping countries to transition to New Energy economies. And there are many different aspects of this to explore, including the area of nuclear fusion.
Right now, I’m working on a series of essays on nuclear energy – specifically uranium – which I hope to bring to you next week. So keep an eye on your inbox for those.
And I’ll bring you more essays on this important topic in the weeks and months to come.
And that’s it for this week’s mailbag. Thanks again to everyone who wrote in.
If I didn’t get to your question this week, look out for my response in a future Friday mailbag edition.
I do my best to respond to as many of your questions and comments as I can. Just remember, I can’t give personal investment advice.
And if there are any other topics you’d like me to write about, I’d love to hear from you. You can write me at from you. You can write me at [email protected].
Happy investing… and have a fantastic weekend!
Regards,
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Nomi Prins
Editor, Inside Wall Street with Nomi Prins
P.S. Just a final reminder about my Running on Empty Summit. I can’t stress enough how important it is to prepare your portfolio for the coming energy crisis.
At the event on Wednesday night, I outlined the five sectors I believe investors should avoid right now… as well as the five sectors I believe will go up as the energy crisis deepens this winter.