Divestor

Wow, that was quick.

I said less than two weeks ago:

One major event that will occur in the future (a matter of when, not if) will be a significant power grid failure that will have been instigated by having too much intermittent energy sources on the grid, without available backup from domestic or external grid sources. This may be caused by a freak transmission failure (cutting an intermittent-heavy grid from a dispatch-able heavy grid) or some other ‘black swan’ event. When this occurs, there will likely be a dramatic shift in power generation policy to increase the robustness of a domestic power grid.

And what did we get last Saturday? Headlines such as:

(August 14, 2020) * Stage 3 Emergency Declared; rotating power outages have been initiated to maintain grid stability
(August 15, 2020) ISO Requested Power Outages following Stage 3 Emergency Declaration; System Now Being Restored
(August 16, 2020) Flex Alert Issued for Next Four Days, Calling for Statewide Conservation

What happened?

Excuse my crappy handwriting, but I had to illustrate this. Factors:

1. Wind dies down (can’t predict the wind very well, so you have no idea what your future supply is going to be);
2. Solar gets interrupted during the peak of the afternoon due to clouds;
3. Natural gas supply is down due to plant shutdown;
4. Cannot import (other grids are facing similar demand/supply issues).
5. Record-high daytime temperatures (e.g. Riverside, CA which is a suburb about 80km east of Los Angeles, at daytime highs of 40 degrees C), which causes huge demand for air conditioning.

What do you get? Rotating blackouts.

While I wouldn’t call this a “major event”, the fact that a major jurisdiction can’t keep the lights on speaks volumes.

This issue isn’t solved by adding renewables onto the grid – indeed, having too many renewables on the grid with the lack of dispatchable power sources was the cause of the problem.

If my suspicion is correct, this is going to be the start of a paradigm shift on what was a dead power production market (ruined by floods of cheap capital for intermittent power sources). I can’t tell whether this comes in the form of further power price increases (see: California, Ontario, Germany, etc.), increases in dispatchable energy supply (read: natural gas, nuclear or thermal coal!), or energy restriction mandates (or a combination of all), but either way, there are obvious investment angles coming down the line.

My only other comment is there are operational implications when you allow your quasi “crown corporation” primary power supplier PG&E (NYSE: PCG) to be sued into bankruptcy due to wildfire transmission line risk – when you get into situations like this weekend, it is obvious they will be shutting down transmission grids which reduces the robustness of a power grid since they don’t want to get sued to death again in case a spark catches fire somewhere. I wonder when they will get sued for constructive negligence because they shut down transmission lines and caused a huge cascade power failure which caused even more economic damage. Companies that operate under heavy regulatory coverage in California live and die at the behest of the state – watch out if you’ve got capital in PCG equity!

A few things caught my attention today, and it is likely that means that the next few days (i.e. the short term) there is going to be some turbulence in the stock markets. If you have some leftover cash, after this storm purges some weaker holdings out of their positions, it’ll be a better time than not to load up.

First, the commodity that seemingly everybody in retail has talked about ad nauseum as the salvation to currency depreciation (gold) has cratered today:

This ~US$100 drop in gold is significant. The last time it got dumped badly was during the Covid-19 crisis where people were seeking liquidity in the form of cash at any price possible. Beyond that you have to go back to late 2016, and I think this was due to threats of interest rate normalization (does that feel like a long time ago!).

The psychology of the situation is telling. Gold was the crowded trade where everybody piled in because they were comfortable in ordering the shiny yellow metal. It was the hedge against the collapse of the currency and economy due to COVID-19. After it eclipsed $2,000/Oz, that was a catalyst for people to assume it was all systems go, and people were pronouncing price targets of $2,500, $3,000, etc., per ounce. Instead, the bottom is falling out, and the question is how low this price will have to go for the people that got in at $2,000+ to bail out.

What’s even more interesting is the rise up (some 10bps or so) of the 30-year US treasury bond:

This is not a huge rise, but it is sharp. Rising long-term interest rates have many spin-off consequences. Since the Federal Reserve effectively controls the yield curve at present, they may be pushing for larger spreads. Tough to tell at present. The assets of the Federal Reserve continue to be flat in the month of July.

I’m going to guess there will be a spike of equity volatility in the next few days that will follow this minor tremor. It will be enough to get weak hands out of the market and confuse people about future market direction – negative headlines and worries will once again permeate. A great time to deploy more incremental cash, similar to when the markets vomited in the second week of June.