Charts of the Month.

May '21

Bitcoin’s BoE Energy Usage

If you didn’t know, there’s an environmental debate taking place on the carbon footprint of Bitcoin mining. And it’s getting heated…

The prevailing narrative (which is shifting by the day) is that China mines a lot of Bitcoin, China’s grid derives a lot of its electricity from coal, and therefore, Bitcoin bad. It’s gotten to the point where Elon is not even the highest profile person to comment on it. (Sure he’s got more Twitter followers than the Pope, but I still think the Pontif has a bit more sway)

We’ll let the Nic Carter’s of the world handle the heavy lifting on this one, but we wanted to look at what Bitcoin energy usage would look like from a Barrels of Oil Equivalent (BoE) basis and compare it to overall US consumption.

Are we at peak FUD yet?

Copper Reserves

The demand story of copper is well known; electric vehicles and all sorts of new renewable grid technologies alongside the general rise of continued technological advancements around the world all lead to one thing…demand goes up.

But you’ve really got to love the commodities game to study the supply side as it’s much more nuanced with many moving variables. Luckily, the guys at Gorozen heart the hell out of commodities and have done the research for us.

Long story short, they believe the supply of copper will be falling somewhat dramatically over the coming decade (which began its decline in 2016) through a combination of two types of mineral depletion: a decline in both the quantity of the initial mineral reserve and the quality of the remaining mineral reserves.

Here are some highlights from their Q1 ’21 Market Commentary:

  • “Copper companies can add reserves in one of two ways: by making new discoveries or lowering the “cut-off” grade [i.e. the minimum grade required for mining to be economically viable] of their existing reserve base.
  • We estimate that in 2001 the grade of new reserves booked was 0.8% copper. By 2012, just after the peak in copper prices, the grade of new reserves had dropped by nearly two-thirds — to only 0.26%. So while the copper industry was able to more than replace production with new reserves, the quality of those reserves dropped dramatically. An industry making few new discoveries, but more than replacing its reserves with lower grade material, by definition must be lowering its cut-off grade. Our models suggest almost all of the gross reserve additions between 2001 and 2014 were related to lowering of the cut-off grade
  • Between 2006 and 2014, our group of 24 companies averaged 12 mm tonnes of annual copper production. Gross reserve additions easily offset production, averaging 27 mm tonnes per year. Careful analysis of these annual reserve bookings shows that new deposits were responsible for only 6 mm tonnes of new copper reserves while brownfield expansions made up the remaining 21 mm tonnes. As much as 80% of the brownfield expansions likely came from lowering the cut-off grade. We concluded this was not sustainable.
  • Back in the second quarter of 2014 we wrote in our investor letter, “The reason the distinction of how reserves are being added is ultimately so important is that there is a natural limit on how far you can lower your cut-off grade. In other words, below a certain cut-off grade, the cost and complexity to produce copper begins to grow exponentially. Our analysis suggests that we are quickly approaching the lower limits of cut-off grades.” We concluded: “If this is correct, then we are rapidly approaching the point where reserves cannot be grown at all.”
  • Almost all copper producers followed this pattern between 2000 and 2014; however, we believe the copper mining industry has now gone as far as they can in lowering the cut-off grade further.
  • Copper production from our group of 24 companies went from averaging 12 mm tonnes between 2006 and 2014 to 13 mm tonnes between 2014 and 2020. At the same time gross copper reserve additions collapsed from 27 mm tonnes annually to 13 mm tonnes.
  • The slowdown was driven by disappointing brownfield additions, just as we had predicted. New mine reserve additions were largely constant over the two periods, averaging 5 mm tonnes annually. Brownfield reserve additions, no longer propelled by an ever-falling cut-off grade, collapsed by almost 65% from 21 mm to 8 mm tonnes per year. In 2014 we predicted the industry’s underlying depletion problem could no longer be masked by changes to cut-off grades and that reserves would soon stop growing. This is exactly what happened.”


Why is Apple a $2 trillion company?

Yes, market-cap weighted indexes help. As do passive flows. And a captive userbase. And excessive monetary policy. And probably a few other drivers.

But, it’s also because they have product lines that are larger than some of the biggest non-FAAMG tech companies in the world.

It’s just a damn good company TBH.

Wealth Inequality and The FED

Tasking the Fed to solve the wealth inequality issue is analogous to giving the Sinaloa cartel the green light to solve the War on Drugs.

Transitory Inflation?

From our buddy and fellow inflation enthusiast Jeff Snider:

“The monthly gain in the core CPI last month was absolutely impressive, eye opening, but we just did this a few months ago and for all the same reasons! Back in July 2020, after Reopening 1 had reached its frenzied apex bursting at the seams with Uncle Sam’s helicopter deliveries and unemployment bonuses, the monthly increase in the core was 0.54% which had been the highest in just short of three decades. Most impressive (sounding).

And it wasn’t just July – June, July, and August 2020 – when consumer prices went on a historic run. The reason we don’t remember or hear much about that run this year is how after the sugar rush wore off, by late summer, the frenzied elevation proved to have been, say it with me, transitory.”

Current Pandemic Stimulus vs History

Governments around the world have spent A LOT of money (read as a combination of tax revenues and fiat printing) in an attempt to keep this house of cards we call the global economy functioning.

The aggregate spending packages of Trump’s “The Cares Act” in 2020 and Biden’s “The American Rescue Plan” in 2021 sits at $4.1 trillion dollars. Or roughly 20% of GDP. Let those numbers sink in for a minute.

It took 7 years of the Iraq war to surpass just The Cares Act, and The Great Society (the original war on poverty) was launched in the 1960s and still hasn’t caught up to The American Rescue Plan.

People talk a lot about the US’ ability to absorb these eye-watering large deficits, because of 1) the largest and ever-expanding GDP, 2) global reserve currency status, and 3) as Brent Johnson would say, “still the best of the worst”.

But at some point…Rome (well, a more accurate comparison would probably be the fall of the Spanish Empire but ‘Rome’ sounds more dramatic).

Note: figures are adjusted for inflation up to the most recent that we could find.