Volpe's Blog

We are sleepwalking into the worst energy crisis since the 1970s. The Strait of Hormuz has been closed for 34 days now, and with it the world’s supply of 20% of oil and gas, 30% of fertilizer, 33% of helium and 10% of aluminium, among other critical materials.

Brent Oil is already at all-time high, but we haven’t priced in the effects nor have governments reacted. Shortages and high prices around the world are likely to come next. Restrictions have already started in some countries. To give perspective of the depth of the situation, the US had to rush to lift sanctions on Russian, and even more shockingly, Iranian oil.

Our Covid moment

This is just like covid in January 2020. But this time it’s not a novel virus that we don’t know if it’ll kill us all and spread like a plague, or just a flu that’ll go away. This time we have the rare benefit that we know what’s coming: the shortage of the fuel we’ve relied on for 100 years, and many other key raw materials. I think people will start to react when leaders around the world start to issue warnings and limitations to lifestyle, as we’re already seeing in New Zealand and Australia. It is our own responsibility to be prepared.

But it also feels opposite in a way. During the pandemic oil traded negative because there was such demand destruction, now high prices are the ones pushing the destruction.

The catalysts for a crash are already laid out, and it can happen sooner than most expect. AI is here to stay. If used right, chances are it will make us all more productive. That, on the other hand, does not mean it will be a good investment.

Big tech doesn’t need to win, just outspend

Magnificent 7 companies are increasing capex to their biggest ever to differentiate their tech from each other and the big AI labs, but the key realization is that they don’t have to spend it to win. It’s a defensive move for them, if they commit $50B, OpenAI and Anthropic need to go raise $100B each to stay competitive, which makes them reliant on investors’ money. As the numbers get bigger, the amount of funds that can write checks of the size required to fill such amounts gets smaller. And many of them are now getting bombed in the Gulf.

This is the reason there’s a push for IPOs, it’s because it’s the only option left to keep the funding coming.

Taking this into account, Google is extremely well positioned to weather the storm. When they announce capex expenditure, they don’t spend it overnight. They can simply deploy month by month until their competitors struggle to raise and get forced to capitulate. At that point they can just ramp down the spending and declare victory in a cornered market. They don’t need capex, they just need to make it very clear for everyone that nobody can outspend them. It is hard to picture as numbers get so big, but Alphabet (Google’s parent) is ten times more valuable than the biggest military company .

This also has a great implication for the Mag 7, especially Google: their capex will be a lot smaller in practice than projected, and as investors hate to see high capex in tech, the market will probably reward that if it materializes.

The S&P 500 is near all-time highs. Crypto is up. And yet the US has started its biggest Middle East war since Iraq, and 20% of the world’s oil just went offline. Why is most everybody pretending things are normal?

Last month during the Rio Olympics it broke news the story of Argentine Santiago Lange after he won a Gold Medal in sailing. Media featured for a week how this 54 years old man could beat everyone after recovering from cancer, getting one lung removed and getting two time-penalties during the race. They used him as an example of self-improvement and perseverance.

Universities have their own rules and rhythm. Frequently, students stick to the rules of the university which can stifle creativity. Students follow a common path that includes taking the same courses to fulfill majors. Anything that breaks the path is deemed wrong or risky, affirming that at the end of the day grades and exams are what matters. I personally experienced this myself when I considered starting my own business last year. I had a decision to make, and during that time I learned that being indecisive is the worst enemy of productivity and passion. It became evident that doing is more interesting and exciting than studying.