Annual Reading of the Declaration of Independence: Renewal

As I conducted my annual reading of the Declaration of Independence, I was struck by the thought, “What would Thomas Jefferson write today if he were revising this document?”

Well, I have no idea. So I worked on what I can- how would I revise it? So I did. Before you read it there are a few caveats:

  • I focused on what I know- finance and economics. There is scant technology in the original so this is largely not discussed. The current document gives voice to my concerns regarding the current global economic condition.
  • I sought to edit the original document and insert/excerpt as little language as possible.
  • I avoided the issues related to the current public dialog on security, privacy and surveillance. I deeply believe these are very important, but I wanted an undiluted message communicating a critical issue of our time.

Dedicated to the economic well-being and abundance of people everywhere.


IN CYBERSPACE, July 4, 2014 (238 Years after the Political Declaration of Independence of the United States.)

The unanimous Declaration of the collection of Economically Independent Agents across the planet

When in the Course of human events, it becomes necessary for people everywhere to dissolve the economic bands which have connected them with another, and to assume among the powers of the earth, the separate and equal economic station to which the Laws of Nature and of Nature’s God entitle them, a decent respect to the opinions of humankind requires that they should declare the causes which impel them to the economic separation.

We hold these truths to be self-evident, that all humans are created equal, that they are endowed by their Creator with certain unalienable Economic Rights, that among these are Equal Access to Economic Entrepreneurship, An Unbiased Economic Landscape and the pursuit of Economic Well Being.–That to secure these rights, Governments and Economic Systems are instituted among People, deriving their just powers from the consent of the governed, –That whenever any Form of Government or Economic system becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government or Economic system, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Economic Well Being and Economic Growth.

Prudence, indeed, will dictate that Governments and Economic Systems long established should not be changed for light and transient causes; and accordingly all experience hath shewn, that mankind are more disposed to suffer, while evils are sufferable, than to right themselves by abolishing the forms to which they are accustomed. But when a long train of abuses including concentration of wealth in the hands of a select few, legislation and politics dominated by economic funding and special interests, unchecked power of corporate interests and economic access to those in positions of political or economic privilege, pursuing invariably the same Object evinces a design to reduce them under absolute Economic Despotism, it is their right, it is their duty, to throw off such Government and Economic System, and to provide new Guards for their future security.–Such has been the patient sufferance of these global citizens; and such is now the necessity which constrains them to alter their former Economic Systems including global transactions of trade and state controlled currencies. The history of the present Economic system such as was crafted and evolved since after World War 2 is a history of repeated economic injuries, economic injustice and economic control, all having in direct object the establishment of an absolute Economic Tyranny by a minority controlling Wealth over these people of the world. To prove this, let Facts be submitted to a candid world.

  • The current Government and Economic System has evolved into one of highly centralized control over the majority of the Earth’s Wealth and Resources and Capital flows. This is universally acknowledged to increase economic risk and stifle economic activity and growth.
  • The current Economic System has evolved into one of strict control of capital flows and economic activity through state controlled currencies.
  • The current Economic System has evolved into one whereby Economic Resources are concentrated at unprecedented levels such that economic activity for society at large is at risk. Wealth concentration at current levels is an unsustainable economic system for pursuit of Economic Well Being and is completely unpredictable under stress.
  • The current Economic System has Centralization of Economic Resources thereby creating an unprecedented Economic Risk to the economy of the world.
  • The current Economic System has evolved into one of centralized control of capital among a small cartel of banking and corporate interests thereby subjecting the world to unprecedented economic risk through contagion during times of economic stress.
  • The current Economic System has evolved into one of riskless (arbitrage) profits for those controlling capital. This is a fundamental violation of free market principles. Whereby those controlling capital have profited from a highly advantaged economic position and taken unreasonable risks resulting in their economic ruin being averted solely through extraordinary use of public capital. There have been no legal or economic costs associated with this economic abuse.
  • The current Economic System has evolved into one whereby those controlling capital have been found to perpetrate economic abuse through market manipulation of key economic resources and metrics such as LIBOR, Gold and others. For this, there are no legal or economically relevant consequences.
  • The current Economic System has evolved to grant even more economic privilege to those currently holding it most. Access to Economic opportunity is fundamental and necessary for a vibrant global economy.
  • The current Economic System has evolved into a symbiotic relationship between legislators and their economic donors resulting in the passing of Laws of immediate and pressing importance to donors to economic detriment of broader society. This stifles economic competition and stilts the emergence of innovation in businesses, entrepreneurship and technology.
  • The current Economic System has evolved into one of privilege for the privileged and has neglected to pass other Laws for the accommodation of large districts of people seeking economic growth and well-being. The current donor-patron system of legislation fails to address the economic interests of the greater majority of people in the world. These people of the world often have either never been granted the right of Representation in Legislature or have lost it, a right inestimable to them and formidable to economic tyrants only.
  • The current Economic System has called together bodies of Economic Privilege at places unusual, uncomfortable, and distant from the depository of their public Records, for the sole purpose of forging these bodies of Economic Privilege into informal systems of political and economic influence that maintain their economic dominance.
  • The current Economic System has leveraged the unequal economic access to legal representation repeatedly, for opposing with manly firmness any legal challenges to the Economically Privileged invasions on the rights of the people.
  • The current Government and Economic System has evolved for a long time, to cause others to not be elected that represent the economic interests of the lower economic strata; whereby the Legislative powers, incapable of Annihilation, have returned to the People at large for their exercise; the vast majority of people of the world remaining in the mean time exposed to all the dangers of economic distress from without, and continued economic erosion within.
  • The current Government and Economic System has endeavored to prevent immigration reform, except for the interests of Corporate patrons. Resulting in the obstructing of Laws for Naturalization of Foreigners; refusing to pass others to encourage their migrations hither, and thus limiting access to economic opportunity.
  • The current Government and Economic System has erected a multitude of New “Security” Offices, Policies, Secret Legislation, and aggressively conducts active, deep surveillance, and sent hither swarms of Security Officers to harass and surveil our people, and erode our economic competitiveness.
  • The current Government and Economic System has kept among us, in times of peace, Standing Armies of Governmental, Private and Corporate Intelligence without the Consent of our legislatures.


In every stage of these Oppressions We have as a whole failed to adequately Petition for Redress in the most humble terms: Our failure to Petition Effectively have been answered only by repeated injury. A People that bear up under Economic Tyranny without refusal, become thus marked by every act which may be inflicted by an Economic Tyrant, is unfit to be a free people.

We are this day called to Petition Effectively by economic activism in line with the principles of:

  • Equal Access to Economic Entrepreneurship
  • An Unbiased Economic Landscape
  • Economic Well Being
  • Liberation for Control via State Owned and Controlled Currencies

Nor have we been wanting in attentions to the current Government and Economic System. We have warned them from time to time of attempts by their neglect of legislature that they extend an unsustainable economic risk over us. We have reminded them of the circumstances of our emigration and settlement here. We have appealed to their oaths to the Constitution of the United States, or native justice and magnanimity, and we have conjured them by the ties of our common kindred to disavow these acts of Economic Tyranny. They too have been deaf to the voice of economic justice and of consanguinity.

We, therefore, the Citizens of the Global Economic Community of Humankind, Decentralized, Unassembled, appealing to the Economic and Political Leaders of the world for the rectitude of our intentions, do, in the Name, and by Authority of the good People of this World, solemnly publish and declare, That these Citizens of the Global Economic Community of Humankind are, and of Right ought to be Economically Free and Independent Economic Agents; that we are Absolved from all Allegiance to trade strictly by State Controlled Currencies, and that Economic Repression via Control of Currency and Capital, is and ought to be totally dissolved; and that as Free and Independent Economic Agents, they have full Power to conduct Commerce, conduct Trade of Goods and Services. Make Contracts, establish Commerce, and to do all other Acts of Economic Activity, Growth and Entrepreneurship, and Things which Economically Independent Agents may of right do. And for the support of this Declaration, with a firm reliance on the protection of divine Providence, we mutually pledge to each other our Lives, our Fortunes and our sacred Honor.

Calling for a “Magna Carta for the Internet”- Thanks Tim!

In my last post I was bold and earnest in calling the Internet the center of gravity of human rights in the world. It was for me, a dangerous post. It is not the kind of strong opinion that someone looking for a job in a small technology company is counseled to post in social media. However, I wanted to be honest and candid on my thoughts and who I am. (frankly, I see individual authenticity as perhaps the only true competitive advantage there is for people.)

I was exhaling a sigh of relief this morning when I saw the fabulous article by the Guardian about Tim Berners-Lee (inventor of the world wide web). In it, he calls for a “Magna Carta” for the Internet. I want to highlight it here and state that it does reinforce my initial thoughts from a highly credible and insightful source. The Internet is constantly in flux and I continue to maintain that it is the central focus of human rights. This is gaining momentum and companies and investors and governments can adapt or … well you get the picture. Thanks for the voice Tim!

*note- for some reason, WordPress was not able to insert a link into my post of the article which can be found here:

The End of the Beginning – Moving Beyond a Childish Understanding of the Internet and into the Next Frontier of Human Rights

“When I was a child, I spoke like a child, thought like a child, reasoned and acted like a child. But when I matured, I actively stopped behaving and being treated like a child. Currently we see an enigma, but eventually there will be complete transparency. At this time, I only see pieces of the whole, but inevitably I will be able to fully understand what is going on, exactly as I have been fully understood.”

(1Co 13:11-12 paraphrased by Chris Montaño)

Stage 1. “Childhood’s End (1973 – 2013)”

In a recent Harvard Business Review post, Bruce Schneier compares the current state of security on the Internet to a feudal system. I have always liked Schneier’s take on security and privacy. He is a thought leader as well as facile “synthesizer” and communicator. He also has been a rare civilian cryptographer/cryptanalyst that has published several books on cryptography and is respected for his technical work. He recently joined the board of Electronic Frontier Foundation.

In equating the Internet to feudalism, Schneier is talking mostly about IT security and privacy. However, whether intentional or not, I think he is making a broader statement in a quiet manner. I think he has identified an IT reality, but also touched a raw nerve of the realities of a globally, internetworked society. We live with the Internet like serfs lived with feudal lords- in a state where we are viewed as “resources” rather than regarded as individuals with intrinsic human rights.

Imperial, unaccountable, idiosyncratic, personality-driven; feudalism is a system where the masses have little to no legal rights, little to no due process, and virtually no formal institution of political or economic power. Society’s resources may be diverted to the ruling elite and vassals roles are to serve up any and all resources required of us by the imperial. Feudalism is very simple – the masses trade our autonomy for civil structure and protection against chaos.

However, I think that the time is ripe for the next era in the use of the Internet. I think that we are either near or at a tipping point where we will demand that our fundamental human rights be recognized, honored and legally regarded on the Internet. Legal issues aside, I consider Ed Snowden’s recent actions as one of a chain of “weak signals” indicating forthcoming change in how we are treated as individuals on the Internet.

I surmise that this change is inevitable, because feudalism failed to maintain the social contract in an era of growing knowledge and maturing world views. It resulted in major social problems and was consequently dispatched to the dustbin of history as a rudimentary form of government because it simply didn’t work anymore.  Similarly, over the past 40 years we have been taken by companies and the government into an international network of information access that necessitated strong controls to help the world understand what the Internet is, how to use it and become part of the information explosion we are amidst. This was a necessary stage so that we could all reap the benefits of the instant knowledge available for the first time in history.

Stage 2. “In the course of human events…” (2013 – ?)

I have a personal tradition that on the 4th of July, I renew my view of our state by reading the Declaration of Independence. It is a short document and a welcome opportunity to refresh my ideals so that I can face the often times cynical news flow throughout the year. This year, as I read the Declaration of Independence, I was gripped with the perspective that the state of the individual on the Internet is in a near identical situation as the 13 colonies were in 1776. We receive no hearing by the “rulers”, laws are made without authentic consideration of users, we are treated like an information resource to be bought or sold, rather than as persons and given little respect for dignity, privacy, personal information property – let alone legal rights. The colonists found themselves under a form of leadership that wasn’t sustainable. And in response, they worked for several years to develop something completely new.

With clarity and simplicity the signatories stated, “We have grown up. We require you to treat us not only as adults but equals on completely new terms. We are not asking permission but notifying you and everyone else what we are doing.”

There are several points in the Declaration that I wish to emphasize that are relevant to the Internet and our what I believe is our changing role as individuals:

1. Autonomy is a natural evolutionary process that results from maturation.

While we assail feudalism, we need to recognize that for a time, it worked. It served a purpose. But “When in the course of human events…” we grow, we evolve, we understand ourselves and our roles in the world in a more mature manner and wish to exert our autonomy and power. I believe that we have reached the point in the evolution of the Internet where we as individuals will begin to reclaim and assert our rights and autonomy as individuals.

I think this is true, not because of any political or philosophical view I hold. It is based upon the current generation that is dominating the Internet globally. This current generation holds a richly textured, sophisticated technological and societal perspective of the Internet. Having been in the middle of the Internet’s explosion into the public consciousness during the late 1990s, I am truly wowed by their intuitive understanding of how the mechanics of the Internet interact societally. An example of this is the role played by Wael Ghonim in Egypt’s revolution. This generation is truly remarkable and deserves to be recognized as the pioneers they have proven to be in their actions. They are leading this transition into this next era. And as Egypt demonstrates, it won’t be easy. But this transition is part of the natural evolution of society. I believe it is unstoppable. However, I don’t for a moment think it is beyond being repressed and it will certainly be opposed by those who will lose economic and political power.

2. Assertion of the unarguable legality of autonomy, equality, dignity and respect for the individual- you either get this or you don’t.

Our fundamental human rights are not a debatable point; it is how we view ourselves. It is THE super-ordinate value and consequent world view we possess. All that we are as a society and government rests upon this fundamental assumption. We have built our nation on the premise that individuals have unquestionable legal rights of dignity, autonomy and reasonable freedom to pursue our personal growth and maturity [life, liberty and the pursuit of happiness].

The next era won’t discuss whether human rights will be extended to the Internet, it will be about the struggle to assert the human rights we intrinsically hold. There will be no dialog about the fact that we are bestowed with “… certain unalienable Rights, among these are Life, Liberty and the pursuit of Happiness. …” (Please note that this is not an exhaustive list, it is a call-out of some important rights among others.)

It is my view that a mature governmental and business perspective must understand this basis of our society in order to have a long-term, viable government or business. Governments that deny this fundamental truth will eventually be rebelled against as the Founders did against their taskmasters. And companies that are not able to grasp and honor this fundamental truth of customers’ rights and dignity will eventually crash, crumble or decay. The best they can do is control the trajectory of the transition and so maintain a legitimate role.

3. It is harder to change than to suffer, but a tipping point is eventually reached.

It is fascinating to read the 18th century equivalent statement that I expect to find in a contemporary self-help book. Apparently, it has always held true that if the data demonstrate a consistent pattern of abuse without recourse or adequate response, there is no other choice but radical change. Companies and governments love our current system. In it, they hold all the cards and all the money, they make all the laws, and they get most of the benefits. I won’t belabor the 99% arguments that others have made so much more eloquently than I could, but I will point out that we are hurtling toward an unsustainable economic and political imbalance. As circumstances continue concentrating economic and political power, societal pressure is building and will eventually drive change. The combination of non-sustainable economic profits and unabated surveillance by governments and companies is driving us toward this tipping point.

In my view, Ed Snowden’s disclosures of a $20M program that most everyone believed was already occurring doesn’t provide any new information to privacy concerns. It does however confirm that there is rampant Powerpoint slide abuse occurring in the deeper echlons of the NSA. However, in the context of Wikileaks and “hacktivist” movements such as Anonymous, I view it as another “weak signal” that change is forthcoming. While there is a secret judicial branch to match the secret executive branch, it appears that companies have stepped into the role of secret legislative branch of our government.The balance between national security and human rights is more complex and delicate than ever.

It is not only the U.S. government that is grappling with changes foisted by the Internet, Egypt demonstrates that any educated population requires a measure of freedom, order and autonomy. While repression is real and can persist for a long time, ultimately, an open Internet will lead to big changes. Hence, non-progressive governments are scrambling to erect Internet firewalls that edit content that could potentially instill ideas of individual freedom. In absence of active, aggressive repression, the Internet offers an unprecedented channel for knowledge, education and freedom of press. If governmental power is rampantly abused, there will come a tipping point where a rigged legality is trumped by broadly recognized lack of legitimacy. This is a dangerous place to go and I hope we don’t.

What I haven’t seen yet, is the commercial equivalent where individuals begin actively rebelling against their corporate feudal lords. Examples of this could be an anticipated wave of privacy based companies or some form of information co-op whereby individuals band together for network economics and control the flow and payment of personal information assets. There could also be legislation explicitly declaring that content we naturally generate from of our lives is personal intellectual property and therefore covered underneath IP law. That we own it and it may not be stolen or used without our consent. It may be the case where legally, individuals are given special protections to compensate for the resource imbalances between corporations and people. I personally believe that the golden era of personal information arbitrage is over- not because of political or philosophical ideology, but because all economic profits eventually trend to zero. Smart companies, entrepreneurs and investors recognize this and may already be starting companies and adjusting their strategies, expectations and business trajectories.

4. Autonomy is hard and requires commitment, focused attention and our resources.

As serfs maturing into responsible adults, we have a lot to learn and it is going to be hard. It will require our efforts and resources. This is the weight on the other end of the individualism and rights- they are costly and weighty.

Some will rise to the challenge more effectively than others. Some will be able to develop and lead, and others will cling to what they know because it is easy. But I think that history shows that as we mature and grow individually and collectively, our structures and forms of society must either evolve with us or be swept away. Our choices have never been easy. But a reading of that magnificent document that is the Declaration of Independence, reminds me that that growth and maturity is the struggle that builds strength enabling us to move yet further again.

I am not calling for anything other than recognition and legal enforcement of the fundamental human rights we recognized in our Declaration of Independence, United States Constitution and Bill of Rights. I say this because it is who we are and how we defined our society to be when our nation was created. I think that the founding fathers got it right on the human rights ideal. As we have for the past 237 years, we practice our ideals imperfectly, but guided by the ideal of respect for each person and their unquestioned value. I am simply pointing out that I think that this ideal will eventually embody itself in how we are treated on the Internet and that this change is inexorable and inevitable.

Energy 3.0 At the Cusp or on the Brink – Part 3 Will the Last one off the Planet Please Turn out the Lights?

“You have to go out – but you don’t have to come back!”former, unofficial motto of the US Coast Guard

In Parts 1 and 2 of my series, “Energy 3.0 At the Cusp or on the Brink” I began developing my 7 theses of investing in Energy 3.0. The 7 theses are displayed in Figure 1.

Figure 1. 7 Investment Theses for Energy Investing

Source: Christopher Montaño, CFA

In my posts 1 and 2 I covered the first 4 energy theses; Energy = Life, Energy = Commodity, Energy is Political and Energy is a Mature Market. The results have been fairly dismal. In my discussion we have seen that:

  • energy is critical
  • energy is a commodity -regardless of intellectual property
  • the industry requires political involvement
  • it has regulatory encumbrances
  • it has a low margin structure
  • there is low customer engagement -regardless of technology
  • and if these aren’t enough to discourage you there are “supercompetitors” in the form of regulated monopolies that devour everything in sight in excruciatingly slow fashion.

By now readers may well be asking, “Given your investment theses thus far… what’s the use investing in the energy sector?

Cheer up, it gets worse

This brings me to my 5th investment thesis:

5th Investment Thesis: Sustainability Mandates Investment Capital.

My 5th thesis is that in order to sustain our global economic growth, and sustain our population base, we have to allocate capital investment into energy supply and demand. We simply have no other choice.

Simply put, we do not have detailed understanding about our planetary natural resource limits and our population is getting very large. I also believe that there are major global economic and demographic shifts that will accelerate natural resource consumption during this century.

In 2010, we reached a global population of 7,000 million people. The United Nations projects that during the 21st century, the global population could reach as high as 16,000 million people. (See Figure 2.)

Figure 2. World Population Growth Scenarios

Source: United Nations World Population Prospects:  The 2010 Revision

The truth is that we don’t have a firm idea of how many people that the earth can support on a life sustenance basis, let alone on a growth and consumer based lifestyle basis. From where I sit in 2012, 10,000 million and certainly 16,000 million seem impossibly large numbers of people for the planet to support. I concede that at one time, 7,000 million probably seemed impossible, yet we are managing- for the moment.

Where’s my iPad & iPhone?

The big uncertainty comes in the form of global consumption patterns due to economic development. The good news is that the emerging and developing markets are moving along nicely in their economic development. The bad news is that there is a large population base that’s driving toward consumption patterns like us– the developed economies. There will be significant impacts upon natural resources due to shifts in global consumerism.

There are two waves of population bases that are migrating economically this century. First there are the population in the emerging markets and after that there are the “frontier markets”, the next wave of economically developing countries. Both of these markets represent a large population base that will be attaining a consumer based lifestyles of various levels during this century. This is a large increase in absolute numbers of people that will be consuming natural resources, durable goods, non-durable goods, food, etc…  — and this demographic wave will drive energy demand.

The emerging markets powerhouses “BRIC” (Brazil, Russia, India, China) are already a growth engine for global economic output. When their populations gain greater discretionary income they will begin consuming more along the lines of developed countries via automobiles, housing, clothes, appliances and food- and ultimately energy. How this will impact global stocks of natural resources is unknown. How long will the global stocks of petroleum, natural gas and coal last? This is uncertain and the data are not uniform or estimates closely clustered. Beyond this there is an issue of even if we have fossil fuels to support these new consumers, how do we impact the atmosphere?

Historically there has been about 43% of the world population in the BRIC countries since 1950. These four countries currently have 2,900 million people in them and are projected to peak out in population in 2045 at 3,349 million people (See figure 3.) On an absolute basis this is an increase of 445 million people in 35 years. (For reference, the previous 35 year period saw a growth of 1,160 million people amongst the BRIC countries.)

Figure 3. Population Growth Among the Big Four Emerging Markets, Brazil, Russia, India, and China

Source: United Nations World Population Prospects:  The 2010 Revision

One factor not included in the BRIC countries are their consumption patterns. The number of people moving economically upwards is very large. Common sense suggests if consumption patterns match the current developed world, then this will place a strain on all sorts of natural resources and derivative products. We wonder at what level of annual income does the consumption pattern of a population base enter exponential growth?

The situation becomes more complex as we consider the Frontier Markets. These are the large number of countries that have not been economically developed and are just beginning their economic growth – often based upon human capital arbitrage, global transportation and communications networks. The Frontier Markets include the following countries:

Table 1. Frontier Markets

Within this list are 88 countries that are staged to experience rapid economic growth in the middle and latter portion of this century. These countries are the next wave of consumption behind the traditional emerging markets and also have a large population base. Figure 4 details the middle scenario population growth through this century of the frontier markets. There are currently about 1,700 million people in these countries and the UN expects that number to increase by 1,300 million by 2050 and another 1,000 million by 2100.

Figure 4. Population Growth of Frontier Markets in 21st Century

Source: Source: Christopher Montañ0, CFA, United Nations World Population Prospects:  The 2010 Revision

If we combine the “BRIC” emerging markets with the frontier market populations, then in 2050 we will have a net population of 6,300 million consumers at lesser, but rapidly growing consumption levels than the developed nations. The population by 2100 of these same countries is estimated to be almost 7,000 billion people.

The consumption patterns of economically developing populations may vary from country to country. However it’s clear that fundamental human nature is to move toward ease of existence and actualization. The famous “S-Curve” (Bass diffusion curve) is the most basic of all market demand forecasting tools. New products that people like invariable have exponential demand until a natural level of saturation is achieved. There is no reason to expect that this will be different for the 7,000 million new consumers as they think about cars, televisions, clothes, housing, HVAC, etc… Without diving into excruciatingly deeper data, suffice it to say that sustainability and energy demand will be major, growing issues throughout this century.

How do we provide energy for this growing population group? The answer is likely to be any way possible. While the implications take effort to digest, one is clear. Without massive, global capital investment in all phases of the energy value chain, we will not meet demands during this century for continued economic growth and perhaps, even basic sustainability itself.  It is this fundamental driver of sustainability that I view as a primary thesis for investing in the energy value chain.

The first 4 investment theses dealt with the risk factors in investing in Energy 3.0. In this post, I turned toward a fundamental demand driver- population coupled with global demographics and economic growth. And it is this key factor that investors have responded to in the past 5 years.  However, there are now the challenges that are rearing up in the time period prior to the exponential knee of the growth curve. And it is exactly at this time that patient, wise  investors redouble their efforts in learning how operations and companies succeed in markets. It is also the time where less hardy investors may lose interest or be forced out of a market.

Energy 3.0 At the Cusp or on the Brink – Part 2 Introducing Seven Investment Theses for Energy Investing- First the Bad News

In my first post in this series I looked at the grand theme of “Energy = Life”– fun stuff spanning the scope of human history but not actionable. However, I maintain that context is important when considering investment themes. And given the historical impact of energy on the human condition I thought it merited an entire post to establish the proper level of gravitas this sector holds.

In this post I will transition into more pragmatic comments and lay out some basic investment themes for the Energy 3.0. I will break it up into a series of smaller posts for the sake of brevity. I don’t assume that this list of seven is complete. It would be arrogant to assume that I could capture all important Energy 3.0 investment theses in seven statement but I must somehow be practical in my approach. Feel free to chime in with additional themes. Disclosure- I hold that investment theses aren’t static and reflect the changing markets. These are what I see today with my limited perspective and my theses are subject to change based upon new information and market dynamics.

7 is the Lucky Number for Energy Investors

I have developed 7 fundamental theses on investing in the Energy sector.

Figure 1. 7 Investment Theses for Energy Investing

Source: Chris Montaño, CFA

Thesis 1: Energy=Life

The first thesis, Energy=Life was covered completely in Part 1 of this series and I will refer you to my prior post. Suffice it to say that we need water, air and food to live. However, it takes energy — lots of it, to be a civilization so this is a sector that will be of high importance for a long time. They primary point is that we need to upgrade, renew and invent new ways of creating, delivering and using energy for our civilization to continue its trajectory of population growth, economic and technological progress.

Thesis 2: Energy=Commodity

Almost the direct opposite of Energy=Life thesis is that Energy=Commodity. While this is not exactly true, there are several reasons that an investor in the Energy 3.0 sector needs to understand this concept. Since the basic inputs to our energy system are commodities, it’s unsurprising that downstream products (electricity, gasoline, fuel, etc…)  take on many of the same properties.

One of the most important properties of commodities is that any substitute must be cheaper. The basic properties of commodities aren’t variant so it is really about the economics of substitutes. Any replacement of a hydrocarbon with a renewable source must be driven by cheaper economics. One important implication that has not been lost on the investment community is that we are still a long way off from unsubsidized renewable generation being cost equivalent with hydrocarbons. The fact that there is simply so much technology involved in deploying an alternative energy source leads me to be cautious regarding the time frame when a photovoltaic chip or thin film can compete with geologic time scale processes that produced coal, gas and oil. I consider the current vintage of renewable source energy investments to be experimental and its economics driven by anticipated supply shortfalls and geopolitical concerns rather than renewables working their way down the cost curve.

When you couple the economics of commodities with the perfect substitutability of electrons (or many petroleum based products) it is understandable that customer engagement for energy is very low.  From a customer perspective there is little to no differentiation between electrons or fuel sources.

In fairness to the boldness of alternative source energy entrepreneurs, there is a need for the industry to work down the cost curve and contend for financial viability. There are reasons to persist and push the cost effectiveness envelope. We do not have an accurate understanding of the true level of reserves in the oil, gas and coal global raw stocks. If there are shortfalls then the economic crossover point for alternative energy sources may shift dramatically as prices of hydrocarbon sources increase. There also remains the problem of global climate warming. Even if global raw stocks are sufficient, then it may turn out that we can not burn fuel for 7 billion plus people without accelerating an already perilous atmospheric carbon condition.

Thesis 3: Energy = Politics

On a global basis, governments are deeply involved in energy. This is also true at the state and local level. The energy sector is subject to administrative laws and state, and federal regulations. While the petroleum industry is not a regulated industry as is electrical generation , there is still a high level of government involvement — especially as problems occur. For the investor in energy, regulatory engagement is not optional. Depending on the particular portion of the Industry more or less regulatory engagement is merited. I have identified 3 basic levels of regulatory engagement:

  1. Awareness is the most basic level of engagement and is simply being aware of the applicable rules and regulations impacting the economics of the industry as well as potential regulation under consideration.
  2. Understanding is taking the time to study policy and laws and form views and develop investment theses based upon regulatory policies and laws.
  3. Regulatory Engagement seeks to influence development and implementation of laws and policy. Most industries spend monies seeking to inform, influence and shape markets to benefit them. Figure 2. is data from on lobbying monies spent from 1998-2011 by top spending industries.

Figure 2. Top Sectors Lobbying Spend


From Figure 2. we can see that Energy sectors were among the top investing sectors investing in political capital. I think it’s safe to assume that the majority of the investment is done by the current established base and that renewables is a minor fraction. And what are established competitors receiving for their investment? Subsidies- lots of them (See Figure 3.) The World Energy Outlook for2011 estimated that there were about $409 billion in fossil-fuel consumption subsidies in 2010. For the investor in alternative energy, this is a clear signal that while venture capitalists are plowing limited partner (and general partner) investments into new systems, the incumbents are investing a lot less dollars in political capital for a significant return.

Figure 3. Subsidies for Fossil Fuel Companies

Source: World Energy Outlook 2011

Investment thesis 4: You’re Not Getting Better, You’re Getting Older

The energy markets are mature. In 1891 the first 3-phase ac electrical distribution network was deployed in Frankfurt, Germany. One consequence of this maturity is that there is little economic margin for new entrants with new technology to capture outsized profits while incumbent competitors play catch-up. It is my view that innovation is rewarded by outsized, initial profits for new businesses that deliver new products and services. These initial profits serve to compensate new businesses for the lack of capital in balance sheets as well as provide incentives to investors and entrepreneurs. In mature markets where there is little reward for innovating, it may not be economically rational to invest financial and human capital.  This places an even greater pressure on entrepreneurs as near-zero economic margin translates into near-zero margin for error in the managing the business. Mistakes that may be recoverable in other nascent and developing industries are not likely to be excused in a mature, well understood industry like energy. Investors in energy must be aware that on the job training for first-time entrepreneurs will likely carry very high tuition rates. Also, successful venture investments may have capital returns moderated due to the margin structure of the industry. I believe that there are pockets of higher margin business investments but must be carefully selected to capture these profits.

Another consequence of market maturity is the presence of the “super-competitor” in the form of incumbents. In the oil industry there are the “oligarchs” that are essentially unassailable. Untouched, these behemoths do as they please and have little to no competitive risk profile due to a global transportation infrastructure that is daily dependent upon them. The same forces that propel our Global Economy forward discussed in Part 1 of this series give this group of companies almost unlimited free reign from a competitive standpoint. On the electrical generation side, utilities that transform coal and gas and uranium into electricity are mostly regulated and therefore dominate the channel. The only way to reach the customers is either to make peace with the incumbent or to appeal directly at a grass roots, direct sales channel. With utilities struggling with customer engagement it is a massive task for a start-up company to attract customer interest let alone serve the volume of customers. Should a start-up be fortunate enough to attract the attention of an incumbent, then the sales cycle will likely be long, arduous and invasive. Any investment into an energy company at any level needs a clearly defined channel strategy that steers into the competitive dynamics of the industry.

It’s Always Darkest Before Dawn

For the investor in Energy 3.0, the challenges are large. While energy appears to be a limitless, unquenchable demand curve it also reflects a commodity market structure. On top of this, there is a strong political and regulatory dimension that is very difficult to break into. Not to mention the competitive advantages of large subsidies for the consumption of fossil fuel sources and regulatory barriers for new entrants. On top of this Energy is not a highly profitable business making the process of raising capital even more challenging. Energy 3.0 is a daunting investment environment to say the least.  (Please do not try this at home- these are professional investors in a closed environment.) But before we abandon Energy 3.0 stay tuned. There are still yet 3 more investment theses to review and they offer not only solace to the Energy 3.0 investor but I believe they point to the direction in the near term (1-5 year window)  as well as more general direction for the longer term (10+ years.)

Energy 3.0 – “At the Cusp or on the Brink” Part 1

Introduction to Energy 3.0

I am introducing a new series of posts that are a distillation of my views on the energy market. I recently spent two years working in the energy efficiency industry and formed my perspectives during this time. My understanding of this sector is nascent, dynamic and subject to change. Two years is an incomplete introduction to one of the world’s largest industries and there is much to learn.

Having worked previously in technology, investment research and venture capital, I approach markets with a world view that is a combination of these lenses which are very different than the typical energy industry perspective. At the time I began working in energy I was mildly curious. However, as I learned more about this critical sector, I found my interest growing. As a student of changes and trends from humankind’s interaction with technology, it’s impossible to ignore energy. An examination of the energy industry, its role in our world and economic impact suggest its past and future history is inextricably intertwined with that humankind’s growth and development. Join me in this series and I invite your comments and challenges to my views– I am a data driven analyst and welcome skeptics as friends that ultimately serve to hone my views.

Energy is as Old as Humankind

Energy = Civilization = Population Growth = Economic Growth = Life. While this is a large statement, I believe it is a logical conclusion upon examining the data. It seems hard to ignore that our progress as a species has marched hand in hand with our energy consumption and economic output. Which led? I am not sure, but the data appear reasonably correlated and so I will recognize the relationship and the co-dependency of population, economic growth, technological progress, quality (and quantity) of life and our ability to harness and use energy. Regardless of which developed first, it’s true that our civilization at this time depends upon an abundance of inexpensive energy.

Table 1. The Evolution of Civilization

Source: Chris Montaño; Human Race

I have divided the history of energy into 3 distinct eras and called them Energy 1.0, Energy 2.0 and yes, Energy 3.0. Each era is defined by the energy sources available to humankind during that time. While none of these dates are crisp, they serve as markers where a trend in a new energy source was well established.

Our early history as a civilization was essentially driven by burning things- mostly wood and toward the end of the era, coal. Fire was our first source of energy and it brought us quite far by heating us, providing cooking and eventually leading to the steam engine. However, most work done during Energy 1.0 was performed by muscles- human or livestock. Once we understood hydrocarbons and leveraged them, we were into Energy 2.0 which saw the advent of industrial society, the modern city and work performed mostly by mechanical motors and engines. The ability to change the form factor by which work was delivered and tailor it to specific jobs gave rise to manufacturing and general availability of goods on an unprecedented scale. Motors also changed transportation and introduced autos and airplanes and ships driven by motors rather than wind. This era saw the global economy evolve into the trillions.

Table 1 illustrates the parallel development of energy and humankind. On virtually all measures of civilization’s advances, humankind’s economic growth and energy consumption and population growth have been in lockstep. It is also clear that progress and consumption have been non-linear and exponential. Population grew from ~800M to 2,400M from 1759 to 1944, a period of 185 years but required only another 77 years to reach add more than 4,500M people and reach a global population of 7,000M

Energy 3.0- “On the Cusp or on the Brink”

I am naming this series Energy 3.0 – “At the Cusp… or on the Brink.” As I have looked at energy demands and economic forecasts along with projected population growth through this century, it seems clear that the next era requires significant increases of energy supplies. In essence we are at the “Cusp” of a new wave of demand in energy based upon population, economic and technological growth. However, if we fail to identify significant new supplies or extend current ones, then perhaps we are “on the brink” of deeper, more unpleasant changes for our civilization.

Our growth as a species has been spectacular and I wonder how long it can continue at its current pace. The implication is that we are ultimately hurtling toward some envelope of sustainability in our planet’s ability to provide food, water, and energy for everyone and natural resources for the technology needed for continued growth. Given the exponential growth of all biological populations, I cannot help thinking about the asymptotic limits of what our planet can sustain. Realizing that we have faced similar questions of sustainability in the past yet managed to navigate our way to continued growth and progress as a civilization, I think it’s possible that we will yet again thread the needle. However, I cannot help having the feeling that somehow this time, it is different and the scale is greater than what we have ever faced and the rate of change is ever accelerating.

Driving this situation are a couple of billion people in the developing world that are headed toward middle class economics- and energy consumption in the next 50 years. The World Energy Outlook for 2011 forecasts a 1/3 increase in energy demand between 2010-2035 and 50% of that demand growth coming from India and China. As their consumption patterns match those of the developed nations, it seems reasonable that our resources and infrastructure to meet energy demands will be taxed severely. Economics 101 suggests that increased scarcity of a resource goes lockstep with increase in prices. Of chief concern is the fact that virtually all energy supplies are currently delivered by natural, non-renewable resources. While this is not necessarily a problem in itself, logically there is a limit on what we can expect to extract and use. It seems a prudent step begin developing renewable sources of energy and ensure what energy we do have is developed as economically efficiently as possible.

While renewables have been around since the first wind powered mill was built, modern society has been built upon the energy density of hydrocarbons. There is simply nothing that packs as much energy into a compact form, easily transportable and with an infrastructure that can rapidly translate hydrocarbons into usable energy. There exists no solar or wind powered motor that can drive a container ship across the globe or power an intercontinental flight. The fact remains that the primary drivers of our economy remain gas turbines and diesel motors. These motors power our jets, shipping trucks, container ships and most passenger and military vehicles around the globe.

Renewables electricity generation is at its beginning in being explored in earnest. In fact, in its current state of development it appears to me an economic experiment. It is borne from our reasonable concerns regarding projected energy demands coupled with resource constraints and the nagging worry that we may have already pushed past the tipping point of global climate balance. How this experiment unfolds and the data that it bears will have a profound impact upon our way of life.

The Audacity of Hope Part II

In my prior entry, The Audacity of Hope, I told the story of Vann Nath, one of the few survivors of the infamous S-21 death camp. While no one is certain, the latest figures that I read were that 14,000 went in, 7 came out. One of them was Mr. Vann Nath. He passed away a month ago on September 5th. The Economist printed an eloquent obituary that can be found at this link.

I wanted to remember Vann Nath and the brief role he played in my life. While I never met him, I did commission a painting that he did entitled, “Hope”. I detailed the entire story in my prior blog post. I encourage you to read it and reflect on this remarkable person and his passing.

Why is this important to me? I think because at my core, I am a hopeful person. And I am touched by those rare individuals that are thrust into seemingly hopeless circumstances and demonstrate the strength of spirit to bring forth hope amidst great darkness. There is no training or degree or education that prepares one to be a person of great soul. Mr. Vann Nath was such a person.

I am posting a picture of his painting, entitled, “Hope”. May his spirit of hope amidst insurmountable challenges strengthen us.

Rest well.

“Hope” by Vann Nath