A TPDEARR Article
Trans-Pacific Dynamic Equity Allocation Research Report
“It lives! Rise! Rise, new Society!
Take up the mantle; consume what you must and lead us into the future!”
Ever the tinkerers, we human creatures have found a way to very fittingly become the IRL version of Dr. Frankenstein. Our great globe-spanning society—increasingly interconnected and functionally intertwined—we have given a “life” of its own, and it’s now become the Monster itself (we shall name it: “Society”; our very own, customized model), consuming the energy it needs to stretch its tentacular appendages and spread across planet Earth. Just as biological organisms on Earth consume different forms of energy to perpetuate their individual lives, so too does our Society require energy, for we have made it to be so with our technological propensity.
This consumption and processing of energy we highlight frequently in TPDEARR Natural Elements articles as it is from the nature and environment of planet Earth (including the sunlight that strikes it) that such energy resources are cultivated. We have no other options… yet. But we humans, as a community, and however voluntarily, are remarkably naive about the particulars of energy consumption. Rising obesity rates globally are a strong indicator that we are less-than-optimally-oriented in our approach to our own bodily energy processing; it would be irresponsible to assume we can unanimously apply better reasoning to our society’s energy consumption in kind. There are fundamental differences between processing bio-organic material for human digestion to provide caloric energy for cellular functioning, and processing natural resources to generate electro-mechanical energy that can be redirected to accomplish “work” in manufactured devices; in this article we will be submerging into the latter, particularly because the (infinite) growth prospects in the latter process far outstrip the former, and we ought not lose sight of our focus of where to channel our capital.
Strap in; the following will cover ground at great length.
The Unchallenged Throne
Cities don’t consume salads, they consume electricity. As Society grows (expressed through urban evolution,) so does its usage of energy along with it1. Especially as climate conditions are becoming more volatile, technologically-forward infrastructure is becoming ever-more imperative, such as in HVAC systems, which typically account for 1/3-2/3 of a building’s energy usage. Looking into consumption details in the “energy mix” of an economy can provide further illumination. In the US, for example, the sources of energy are petroleum, natural gas, renewables, coal and nuclear. Consider the following breakdown of the data:
- Nuclear – Virtually 100% of nuclear energy (about 9% of the total consumption mix) is applied to electricity generation;
- Coal – Roughly 89% of coal burning is used to generate electricity directly, the rest is allocated to industrial and commercial end-users who use virtually 100% of it to generate more electricity on their own (coal also accounts for ~9% of the total energy mix);
- Renewables – Also about 9% of the energy mix, renewables contribute virtually 100% of their energy processing to electrical generation;
- Natural Gas – Making up ~36% of the mix, 40% of natural gas use is towards direct electrical generation (also the fastest segment of growth YoY), another 42% of natural gas usage is allocated to the commercial and industrial sectors where the vast majority of it is used to generate electricity for specific businesses on-site, indicating >82% of natural gas’ contribution to Society is for electricity generation;
- Petroleum/Oil – ~2/3 of petroleum is allocated as transportation fuels (a shrinking proportion) so it is burned to accomplish locomotion, but every such vehicle capable of this feat either requires a battery/electricity to run, or was produced with electrically-powered heavy machinery, so it’s impossible to fully divorce the electrical implications from the fuel’s use in transit. Additionally, a huge portion of the petroleum that is used by the industrial sector (~1/4 of the source total) is involved in producing plastic products, which is extremely energy-intensive.
Some quick back-of-the-envelope arithmetic [9+9+9+(36*0.82)] will show you that, even excluding electricity’s supporting and ancillary roles in other sectors like transportation, >56 of the total energy consumed in the US annually is “used” to directly generate electricity, which is the actual end-resource that contemporary Society processes to accomplish its work. This ratio is growing by the moment, compounded by significant technological trends, such as the ongoing electrification of modes of transit, and the boom in subdomains of artificial intelligence applications, which are intensely electricity-consuming. The IEA acknowledges that, although AI will significantly alter the energy innovation playing field, it’s also likely to experience double its electrical demands by 2026 (this timing is right around the corner, we also believe it to be a conservative projection that doesn’t fully account for undocumented use cases, nor escalation). Moreover, why would we assume the increases in energy demand will stop in 2026?
The computerization and digitization of Society’s workings is an evolution that finds electricity emerging as an increasingly greater and more-fundamental pillar of civilization, particularly so due to a lack of alternatives. There is nothing else like electricity that could be used as a substitute to accomplish our electro-mechanical, heavily computerized work; it is the foundation upon which all of our new innovations are laid. Like cities themselves, computers can’t eat salads to function.
Energy is required, and electricity wears the crown. No challenger exists to otherwise accomplish our digital workload. Our entire civilizational practice of feeding energy to Society so that it might grow and accomplish our work for us has now come to revolve around electron flow, and boy do we know little about that! Through electricity, has Society been reborn; but a typical human can’t even explain what electricity is!
Consuming the Incomprehensible
Watch your step; this field is littered with rabbit holes. That is, of course, unless your goal is to immerse into the Quantum Unknowable…
Remember, it’s not just about the lights. Consider the following: the future potential of the electrification of Society spans substantially beyond extending human presence further into the night; it extends, most notably, at least from our current historical vantage point, into the digital infinite via the application of what’s called “binary arithmetic“, which is the ones-and-zeroes “language” that computers “use” to process “information” by routing electricity through phenomenally intricate pathways laid out on labyrinthine semiconductor chips at dimensions hovering around the atomic scale. Over the past 150 years, humans have developed the infrastructure, hardware and software required to facilitate a transition of the manual-work and thought-work of humankind to the realm of machines. In a long smear of technological upgrading, this transition is playing out, with more to come. Capitalism “pays for” this process (obviously, we investors know this) via the capital flows that facilitate industry. And, in a way, since we can talk about it with such seeming clarity, it’s almost as if we seem like we actually know what we’re talking about. But what do we actually know about what, in this discussion of Society’s electrification?
Let’s clear the low-hanging investment fruit first. The investing implications for (electrically-dependent) semiconductors are obvious, and hopefully by this point, you, dear reader, are well aware that virtually every commercial sector is being fundamentally supported by semiconductor-embedded technologies. It’s almost impossible not to be exposed to semiconductors, so your own portfolio makeup needs to have this consideration in mind when balancing exposures. And the semiconductor trend can not dissipate quickly; even if some new computational hardware system could be (unexpectedly) constructed from some novel semiconductor-less material recipe, the necessary scale of time and resources required to produce and distribute such an alternative to a global user-base would be prohibitive of any rapid technological change-over (i.e. shorter than the order of “decades”.) More importantly for this article, we’re not here to suggest semiconductor investment plays—you should already have primary positions placed. If a focal underlying play for computers is semiconductors, what’s the underlying play for semiconductors? How does a semiconductor actually work, anyway? Even more importantly: What… is… electricity?
If Society’s brain-and-body system of electromechanical infrastructure is powered by electricity-consuming, semiconductor-powered computers, how can we conceive of the is-ness of electricity as its essential resource, seeing as how it is the distributable (natural) commodity in question? If we can’t explain what it is, how could we pretend to understand how our future-selves might utilize it?
“Electricity” is a highway of energy, sure, but to take a closer look (physically) requires zooming all the way in to the atomic (and sub-atomic) scales—to view and analyze the electrons directly in their discrete individuality. Let us attempt such a thing:
[Traversing this idea without slipping into jargon is a challenge; please accept our best attempt to distill the following in “common tongue”.]
When electrons “flow” through a material (such as a conductive one, like a copper wire,) the individual electrons are still bouncing around randomly (actually, like a smeary cloud: rabbit hole), but also display a dimension of directionality (rabbit hole) that is orchestrated by the emergence of magnetic fields when electric charge is applied (rabbit hole), and which can be directed via manipulation of the size and shape of the conducting materials (rabbit hole).
Perhaps we can demonstrate something through a verbal diagramming trial: The instant a power plant begins generating and transmitting power, connected downstream participants are capable of drawing on that electric charge (rabbit hole); but the downstream users, who might be miles away, are not instantaneously in-taking the same individual electrons that are physically present at the “beginning” of the electric power transmission circuit; the electron particle “output” being forced down the conductor back at the power plant has not traversed the whole length of the transmission line… nor will it (rabbit hole)…rather, an accessible pulse of energy has traversed the length, and the downstream users are in-taking waves of electromagnetic propagation travelling at (roughly 2/3) the speed of light (unless the material is a superconductor, in which case the speed is even faster) that cascade across the randomly gyrating electron-highway, which, due to the electric current, is itself drifting slightly (called: drift velocity = the “average speed” of electrons in a conductor—otherwise, the average velocity of an electron, due to chaotic opposing movements balancing out, is zero, which is a little counterintuitively absurd since the average speed of electrons at room temperature is >1500 km/s).
If you ask electricians to explain more in-depth about the fundamental quantum properties of electrons, they’ll refer you to the physicist; the quantum physicists, in turn, scrutinize a domain far removed from reality as we know it, for reality as we know it is really reality “up here”, at a much-larger-than-quantum scale, wherein stuff like Newtonian physics produces repeatable results and makes electro-mechanical operations possible. Such is not the case “down there”, in the quantum realm, many orders of magnitude away in scale (around about 10-19 meters or so, where it “seems like” we can access electron-information when they’re engaging in what appear to be point-like behaviors; for comparison, an atomic nucleus is roughly 1 femtometer, or 10-15 meters—though, that’s not nearly as small as the Planck scale-rabbit hole). Cross-domain interdisciplinarity becomes more strained the more complex the jargon of the field becomes, and it’s doubtful there is anything that struggles more to be defined by language than quantum physics, a field we mere 21st century humans understand frighteningly little about; fully “explaining” electricity is not possible, yet.
As investors, let’s take a step back and take stock of what we’ve laid out. The term “electricity” refers (colloquially) to both the charge of energy that’s transmitted across a complete circuit, as well as the electron-particle identity of the charge-carriers themselves, and all the atomic relationships associated with matter at this scale. We are just looking to preserve our capital by guiding it towards the only safe capital havens there are—the kinds in which capital grows; do the ineffable nuances of quantum theory really matter to our investment allocations?
As the situation currently stands, the train of technological progress for humankind seems to be faring quite well in trying to tackle the use and application of electricity without a supreme understanding of it. A typical electrician might not be able to expound upon the nuclear forces that bind subatomic particles within electrons’ host nuclei, but their (algorithmic) understanding of resistance is a workable model of what happens on the atomic scale as electricity passes through materials: each material provides an atomic framework that poses some degree of difficulty for electrons to pass through/across—the more obstacles there are for electrons to navigate, the more they bump into other particles, the more frictional heat is generated within the material, the hotter (and brighter, think of a lightbulb filament) they become, the more resistance is present within the material. Friction = heat = light. This is why some materials are “better” conductors than others—they are “better” in that they present an atomic scaffolding that’s more conducive to the unimpeded flowing of electrons across it, rather than not.
Ironic though it may be, one needn’t necessarily understand the underlying physics to make use of the “knowledge” of electricity disseminated through Society. Since the electrical knowledge prerequisites are limited for most commercial competition arenas, and since its centrality in expanding industries is increasingly embedded, there are few obvious headwinds2 to further proliferation and expansion of electrical usage.
Utility+
It must be generated; it must be supplied. These two processes are not the same thing, so obviously we are looking to make an investment play on both.
Electricity provision for many residences and businesses around the world frequently vacillates in its sourcing, alternating between being supplied directly from nearby/regional generators, and being supplied from “backup stock”, which is usually either a type of battery, or some other means of generating electric power that fundamentally differs in its operation from the primary regional electricity generators3. All of these processes are undergoing substantial industrial evolutions.
Cheap though they still are (relative to most newer technologies), coal-fired power plants are getting more and more difficult to site and construct due to the rising global opposition to fossil fuel burning in general. New coal-fired plants are still coming online, to be sure, but their lead in the sector has been lost and they are, as it were, a dying breed. All sorts of “new” types of energy generation have been developed over the past few decades, many of which we have included in past TPDEARR Squads, ranging from solar and wind, to new iterations of hydro-power and tidal-powered generators, to geothermal and hydrogen cells, and a seemingly unending parade of novel ideas fighting for recognition in the energy arena.
This energy battle has always been at play, particularly in the business world, but what seems to set this episode of the drama apart from its past repetitions in commercial history is the centrality of electricity in further-order effects of industrial progress. We once used electricity to power our heavy (electric) machines, unlocking a whole new revolution in industrial production; now we seek electricity so that we might feed it to our (electronic) computers, so that they might use it to compute (beyond our capability) and disseminate information back to us, as well as to other machines. The difference between electric and electronic is not trivial here (or ever). Again, we’re analyzing the investment landscape here, so we’ll try to avoid the rabbit holes.
With electric machines, circuits (when switched “on”) of conducting materials provide energy, through electric current, in a distributive flow of power to a destination; with electronic machines, electric current is split and channeled such that one pathway of electricity in a (highly complex) circuit controls another one. In electronics, the application of electricity is not to channel energy/power to compel some machine that has been designed to perform some type of locomotive operation with great strength, speed or dexterity (in order to replace human physical labor); electricity within electronics is subdivided and portioned along intricate pathways in order to be fed through highly-specific (and, now, exceedingly microscopic) circuit components that “process” its movements with a system we call binary mathematics.
Binary math is how computers “read” electricity as it flows through relays and gates in an electronic circuit.
[Think this is an oversimplification of binary math? Make your way to the rabbit hole…]
Flow = 1
No flow = 0
It’s all just ones and zeroes. The potential, though, is infinite.
Computation, via binary math, is an additive process, with no upper bound. It is limitless, for there is no upper limit to the possible complexity in electronics. The more complex the electronic, the more electricity required to “do” all the processing (really, just shooting around circuits, remember!) The more advanced we make our computers and computational goals, the more electricity is (quite literally) required to perform all the binary arithmetic processing. Why else do you think wealthy companies are buying up new power plant technology?
Many key interests are advantaged by a business having exclusive access to electric energy; financial and risk optimization, greater resource supply control, safeguarding of operational measures, prospective growth planning, and strategic competitive advantage, to name a few. Having all that sweet electric nectar for exclusive use, such as with that provided by [MAR.25 Squad Asset #2], is how some of the richest global companies are directing their capital flows to maintain their market supremacy. They are the ones using the most advanced computational technologies; they are the ones demanding the highest flows of electron-mediated direct energy.
As we’ve previously touched upon, electricity provision is non-negotiable for computerized processes (such as in all tech companies, for example), so it has some of the key properties of being a “utility”, but its provision has unique and inherent asymmetries that set it apart from other utilities like water or gas that might be “pumped” into homes and businesses. Consider, as a counter-example, the upper limits on use for pumping more water or gas into a home via utility lines. A family or business only uses so much water; extra beyond what’s required doesn’t provide an advantage, say, economically. By contrast, more electricity enables more computational complexity, which opens up new/previously-unexplored digital frontiers from which new and novel innovations and developments frequently emerge. There is no maximum amount of electricity above which no additional benefit could be drawn; theoretically, any amount of electricity could be put to profitable and advantageous use within a single organization or location. This is the fundamental difference in electricity versus other utilities—no upper limit—and it is indicative that our species has only begun to scratch the surface of our future relationship with electron flow. We find [MAR.25 Squad Asset #1] is strongly positioned to capitalize on increased direct electrification trends over the coming intermediate term.
We also find that [MAR.25 Squad Asset #2] is in a similarly opportunistic situation for its ability to provide large-scale electric power provision from “backup stocks” via pumped-hydro energy storage (PHES, or PSH) solutions. Less glamorous than other headlining, future-forward technologies, pumped-hydro is a far simpler system that can also be installed for far cheaper, and with dramatically fewer regulatory and environmental hurdles to implementation. PHES fundamentally operates by storing excess generated energy as water at elevation that can be utilized later to re-generate more electricity on-demand. The original energy can be generated by any means, such as wind or solar, then some of the excess is expended to pump water uphill, essentially, wherein it becomes incorporated into the elevated body of water as gravitational potential energy. This is, quite simply, a water battery. The technology has been around for over a decade, it can be sited all over the world in inland and coastal areas, and broadly accelerating interest in being able to provide sustainable electric energy is expanding the undercurrent of this technology’s adoption. Along with direct electricity generation, the two methodologies comprise two sides of the electricity provision coin—a taste of the dream of continuous and uninterrupted electricity with on-demand scalability.
Every new human, business and robot is virtually guaranteed to be a consumer, and customer, of electricity. The traditional utility sector is already losing control over its reign on electricity provision as the power generation options expand with new technologies and as larger and larger capacities are privatized. A revolution in the industry heralds a new Wild West of innovation and commercial pioneering, all powered by electricity.
Final Thoughts
First, a quick note about quantum computing: quantum computers, still a fledgling technology (rabbit hole), do not use binary math to “compute” information from binary bits, like those that measure “on-off” states in conventional computers. Rather, they use what are called “qubits”, which exist in a state of quantum superposition, indicating that they are an expression of all possible outcomes simultaneously (rabbit hole). Qubits also provide access to the quantum teleportation of information (rabbit hole) and other formerly-science-fictional operations, so it’s obviously impossible to predict a lot of the evolutions in the space. Binary math is still involved, though, in integrating quantum computers with conventional infrastructure, as well as in further refinement and processing of qubit-derived information, so electricity usage to process future computing demands certainly isn’t going to become obsolete. Moreover, quantum computers are even more energy-intensive than conventional computers, particularly in their cooling requirements, so if anything, they represent a boost to future electricity usage.
Second, a quick note about AI: generative AI systems engage in rapid parallel processing of data streams. In other words, they do lots of different computations simultaneously (in parallel) to be able to “come up with” results for queries, with increasingly more sophisticated algorithms every day. This can be thought of as multiplicative of electricity demands, ranging from 10x to 1000x+ over the electricity draw from typical internet browsing commands, for example. AI systems are very energy-intensive, also indicated by the surge in data center electricity usage, now over 10% of the US total; growth in this industry represents further fundamental support for [MAR.25 Squad Asset #1] and [MAR.25 Squad Asset #2].
It doesn’t get much more natural than the atom, the constituent element of all molecular matter. The natural world, in a very real and quantum way, emerges from potential itself (rabbit hole), so we cannot discount any realm of empirical information as irrelevant to our interests—we seek to understand how Society exists within its natural environment, so that we may guide our capital accordingly. It’s not the point of life, but if you want to see it grow, it is the point of money. Good luck with your natural element-based allocations this quarter!
- We understand that some optimistic souls might disagree that this positive correlation between the evolution of Society and the growth of energy consumption is a certainty, but we have struggled to find convincing evidence that humans are conservative harvesters of resources. The human historical record is fairly repetitive in its depiction of, whenever possible, humanity’s expansion of her interests in nearby resources (aka energy-producers). ↩︎
- Obviously, black swans exist just outside of our view; nothing lasts forever; and history is irreplicable. Don’t be foolish enough to think that such a thing as a “sure thing” exists; cash buffers and smaller allocations to ultra-high-risk-ultra-high-reward positions, with which you can take advantage of positive black swans, can both help to counteract losses from less-risky “sure things” when things don’t go as the planners had planned. Usually, these planners live in Mediocristan, wherein the belief that nothing extreme is likely-enough to occur reigns, and where things play out with a regular and normal distribution of occurrences, and wher- you know what, this is exactly what we were talking about with the rabbit holes. See NNT for more on the absurdity of exalting the Gaussian Way. ↩︎
- In cases of disaster, emergency, environmental disruption or even just daily or seasonal supplementation, being able to generate power from additional sources that are not subject to the same operational vulnerabilities as a primary power plant has proven to be an effective strategy to keep the lights on (literally), and is widely employed. ↩︎
tkscm, limited 