This Is the End


Markets, Risk and Human Interaction

December 11, 2017

Stocks to Short for Your Grandkids

As I mentioned in an earlier post, working in a pension fund makes me think toward the long term. In that post I spoke about broader long-term risks; here I will give my view about long-term risks at the more specific level -- namely, industries to short if you are looking out a generation or more. That is, how various industries will decline over the next thirty or forty years. That is a long time, like the time since Whip Inflation Now of the mid-1970's, or the LBO craze of the late 1980s, but if you are under fifty there is a good chance you will live to see it, and your grandchildren will be in the thick of it.

General propositions
The key drivers of what to short are developments in the following areas:
  • Increased reliability of products. Already, many of the things we consume are more reliable and last longer than any time in the past. Take computers and LED screens. And soon, it will be electric cars.
  • Less consumption of goods. In the sense that most of our time is spent on fewer things – like those highly reliable computer items.
  • More commodity items. Which means less demand for advertising. Compare advertisements today with those of a generation or two ago. Almost everything was driven by brands. Now we are not as focused on brands, and as far as brands go, there are so many brands that are hard to differentiate that they may as well be commodities. Meanwhile luxury goods are moving toward items that are inherently scarce, like art and real estate -- items that do not require production.
  • More efficient production. And part of that efficiency is that what we produce requires less labor.
  • Increased demand for personal space and privacy. We will circle the wagons around our personal space and privacy. We are going to draw the line when we find that companies know more about us than we know about ourselves.
Let's start with the easy ones, where there is a clear consensus, and work our way down from there:

Oil. We all know that fossil fuel is a goner. And the more obvious it becomes that oil remaining in the ground will be a stranded asset, the more oil will be pumped out in the shorter term. So between growing renewables, flowing oil, and more efficient technologies, energy will be abundant.

Will the oil jobs be replaced by renewables. Is it only a matter of retraining of those working in this sector to work with renewables? No, because even ignoring the higher economies in production, the capital plant of renewables lasts a lot longer and requires less maintenance per kilowatt-hour produced.

Saudi Arabia and the rest of the Middle East. There is a clear regional implication to this, of course. This is not good for the Middle East. And what is also bad for the Middle East is climate change. Some predictions are that the Arabian Peninsula will become so hot as to be uninhabitable. So much for the Saudi's Vision 2030. And, I really can’t understand what the thinking is with Aramco. It is a long-term bet under the clouds of oil demand dropping with increasing speed and the political vulnerability of Saudi Arabia.

Trucking. Trucking will also clearly be altered from an employment standpoint by self-driving vehicles. We got a taste of this a few weeks ago when Tesla unveiled its semi truck. Whether you like Tesla's odds or not, self-driving trucks are coming, especially for runs along the interstate.

Things will also change at the local level, for example for package delivery. A new household appliance, already in the works, will be a lockbox that can be opened for securely delivering packages, as ubiquitous as mailboxes. In the limit there will be one run per day of an autonomous vehicle to each residence and business. (How the packages get from the vehicle to the lockbox is the weak link in taking humans out of the loop in this scenario.)

Autos. Another no-brainer is that the automobile-related industries will be far smaller. Gas stations will disappear. And most mechanics. Cars will last far longer and require less maintenance, garages, which are already on the downswing, will largely disappear as well. (New tires from Costco.) Once production is scaled up with a few rounds of efficiency gains, electric cars are not complex, and are cheap to build. The cost of cars will be a fraction of what they are today. With low maintenance, low fuels costs, low purchase price, and autonomous driving, transportation will be far safer and less expensive.

People will be traveling less; fewer trips to the mall. People will have less need for a dedicated car because they will summon an autonomous car that can be running people one place or another nearly 24/7. And most people won't care as much about style because they will be treating them as what they are, transportation services -- which gets to my point about more commodity-like products.

There will still be the vestigial car, just like there are still mechanical watches. Gas-powered cars will be admired and collected for their workmanship and intricacy, and not for their performance or function. Driving a car will be a hobby, like horseback riding. And maybe not in forty years, but at some point, people-driven cars will be seen on the street about as often as horses are. They will be enjoyed on closed tracks, just as horses are today.

Casualty Insurance
It is a mixed bag; some lines will dwindle, others will grow.
Auto. Autonomous vehicles are safer than people-driven vehicles, especially when all cars are autonomous. Fewer accidents means less need for casualty insurance.
Liability. Less high-risk labor.
Property. Things will be looking up here, due to the effects of climate change.

Real Estate
Commercial. Stores will become less prominent as the efficiencies of delivery improve. And as many items last longer. This leads to issues for commercial real estate. There will be construction for warehouses and "fulfillment centers." These are cheaper to build and maintain than commercial retail space. So less construction and maintenance. With the move toward renewables, there is a drop in construction of large-scale fossil fuel plants, and the plant for renewables will not require as much construction and maintenance demand.

Residential. Demographics and lifestyle will change the demand for housing. There will be less demand for large houses with living rooms and dining rooms that are not used, and for four and five bedrooms. This means a glut for some zip codes. And it also means fewer construction jobs. Houses will have solar cells and batteries to be increasingly self-sufficient, so less energy use.

So chalk up the construction industry -- one that is more immune to technology -- as another casualty.

Basic Materials and Mining
With less demand for new cars, less construction, and key goods that are replaced less often, there will be a drop in demand for many raw materials. Though others, like those that are needed for batteries and computers, will increase in demand. Or maybe not. Who knows what raw materials will be in demand, and how great that demand will be with the changes in technology that we might see over the course of the next generations. And because these products last longer, and finally meet the needs for various functions, they will not be the same engine of production.

Advertising (and Facebook and Google)
There is a feedback loop between advertising and the information and social network companies that depends on advertising. This feedback leads to a self-destructing business model, with the information companies and advertising going down together. The information companies depend on advertising, and yet they are information engines that reduce the need for advertising.

And advertising for non-luxury and non-status goods (luxury and status goods are not the fodder of Google or Facebook) will drop for the reasons I mentioned above: less advertising because we will demand fewer goods, and many of the goods will be commodity-like. Few of us care about which chargers we buy for our phones.

There are other pressures that might build for social networks such as Facebook. We will still need search engines, but Facebook is already tiresome to some of us, and we are getting the first whiffs of the toxicity at its root. With the world veering toward an impersonal dystopia, we will guard our privacy, we will circle around our real relationships. Here are recent articles from Wired that give a flavor of where things might be going, one a truly harrowing saga of overcoming malicious cyber attack, and another one of any number you can find, appearing with increasing frequency, on privatizing Facebook. From the perspective of forty years out, Facebook and social networking in general will have been a flash in the pan.


  1. This is the consensus US generalist worldview. Here are a few figures and timelines compliments of a Shell downstream lunch I attended with a slightly different take,"

    Bear case scenario gas fuel demand continues to increase until 2030 before it starts to plateau. Base case is 2035.

    Average vehicle utilization is 4%.

    See a future with little ownership. Ride hailing will be much bigger. Don’t see a world where people don’t travel but rather will be driven. As people get driven, utilization will go up dramatically.

    Today you have 1B cars on the roads. 0.1% are electric. In 2040, their most bearish scenarios say there will be 2B cars on the road and 5-10% electric. They don’t see a tipping point on EV’s until 2050 and beyond.

    EVs a good choice in big cities. Average charge gets you 200-300 km under ideal circumstances but in reality city range is much shorter. Drive huge distances in Canada and the US present a hurdle. Hydrogen the optimal solution for heavy loads/ trucks. Battery size and capacity is a big issue.

    Not complacent, otherwise would not be putting charging stations and hydrogen fueling stations but oil and gas as a transportation fuel will be around for quite a while.

    Plan is $1B a year investment in alternative fueling stations until 2020 in the UK & Europe.

    Aim is to drive growth in non-fuel as electrification theme intensifies. While millennials are owning fewer vehicles than older cohorts, that won’t necessarily reduce miles travelled. Shell remains of the view that the system will eventually be decarbonized, in both power generation and transportation

    There is no money to be made in charging, and with an 80% charge taking 10-15 minutes, they see an opportunity to grow the in-store business via a captive customer.

    Exited most of Scandinavia downstream because the modern Scandinavian wants unmanned retail sites. A model where they believe they can’t compete and don’t want to compete. Want to bring the customer in to buy things, whether its hydrogen, fuel, electric. Retail site with no attendant is not the model they want to run. It doesn’t fit with their retail destination model. They want premium destination. Bought Bangkok from the competition. Turned it into premium only. Offer premium customer service. iPads to order instore products from the car. Get 4x the volume. High margin profitable business."

    Canary in the coal mine for a lot of what you are describing (EVs, Oil consumption, Gas station transformation, insurance changes) would be Norway, which boasts the highest EV penetration in the world (accomplished with a healthy dose of cash-subsidies, non cash subsidies (EV prioritized driving lanes premium parking spots, and legislative will).

    Non-consensus view would be that hydrocarbons like cigarettes have a longer tail than is currently being priced in (similar arguments were made about the end of big tobacco in the 90's amid similar societal and legislative pressures).

    Thank you for sharing Rick

    1. Thank you for this detail.

      How much is a matter of the time it takes versus parts of the scenario that Shell doesn't see happening. I'm surprised about their projections for the number of cars and the time it takes to have EV dominate. I might be taking a view sort of like what domes cities where in the 1930s, but if there is more car sharing, so auto utilization is more like 50% (or more), and if people get most of their products delivered, there should be fewer cars on the road. Maybe it is increased penetration in developing countries?

      On retail, the idea of in-store charging is interesting. The premium destination model also makes sense to me. For the same reason people go to theaters, which some thought would disappear with DVDs and large TVs. I wonder how many of those there will be versus the current number of brick-and-mortar retailers.

  2. Hi Richard - thanks for the article and your books. I am in broad agreement with a lot of your post but differ from you on a few key issues - have posted my thoughts here