"Kee Points" with Jim Kee, Ph.D.

The Cleveland Federal Reserve Bank (one of 12 Federal Reserve banks) released a study last week that discussed “residual seasonality” of GDP. It showed that GDP has a seasonal component, with the first quarter being the weakest, even after the statistical seasonal adjustment procedures have been applied to the data. That is important to keep in mind as the Atlanta Fed’s GDPNow model currently has the first quarter GDP growth coming in at 1.1% (the New York Fed’s model is at 2.9%). In other words, if you always expect a low first quarter number, you will, on average, be surprised the least.

Last week, we had energy expert Amy Myers Jaffe in for a brief energy update in Dallas and San Antonio. I thought one of the more interesting stories that Amy told was of the slanted media coverage the energy industry has received with regard to its relationship with Russia. I wouldn’t call Amy a conservative Trump fanatic, which is what made this discussion so provocative. Amy mentioned that the prior administrations had always tried to forge a friendly relationship with Russia following the collapse of the old Soviet Union. Since the Russians always want access to US energy companies’ technical expertise, bureaucrats have typically brought US energy executives with them to Russia to help ensure positive discussions, and US energy companies have usually promised some investment of money and talent. Invariably the Russian’s would renege and the companies would lose some or all of their investments, and the media would portray it all as some sort of corrupt "Russian/energy company industrial complex.” At one point ExxonMobil threw in the towel when trying to cooperate with the Russians (and energy company Rosneft) and instead decided to compete head on and take market share from them around the world (i.e. ExxonMobil decided to do what ExxonMobil does best, which is compete). The Russians, being outclassed on both technical and marketing fronts, then suddenly became interested in “cooperation,” and awarded then-CEO Rex Tillerson (now Secretary of State) the Order of Friendship award in 2013. The press largely spun this by expressing "concerns about the Russian entanglements of Rex Tillerson.” 

When asked which most kept her up at night, Russian political meddling or North Korean aggression, Amy felt that both were serious concerns. North Korea, she noted, had explicitly stated that it was intent on building a nuclear missile with the capability of hitting San Francisco. And as for Russia, she noted that the person responsible for putting together the petition for California to secede from the US was funded by the Russians and in fact now lives in Russia. Amy stated that the Russian government is basically engaged in disrupting or trying to disrupt stable governments around the world. It appears that the Cold War lives on. 

Christian Ledoux, our Director of Equity Research, moderated the event, and he wanted to add the following for Kee Points readers: Amy also expressed her opinion that the IPO of Saudi Arabia’s state-owned energy behemoth (Saudi Aramco) will be the defining event in oil this decade. Expected to make its public market debut in 2018, the company is likely to be valued higher than Exxon. A lot is riding on the outcome for not only the kingdom’s finances, but the valuation of oil producers globally. Because Saudi Aramco’s reserves are well defined and production capacity is highly predictable, investors will be collectively setting their long term outlook on the value of a barrel of oil. It used to be clear that the phrase ‘peak oil’ referred to supply; more recently this phrase has been used in relation to demand. The Aramco IPO may be investors’ first real chance to place its bet on which is right.

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Finally, I recently attended an investment conference that featured several keynote speakers discussing technology. Each did a breathtaking run through technological advances in biotechnology ("human beings are now just a software engineering problem"), energy ("fossil fuels will be dead in five years due to advances in solar technology"), transportation ("self-driving cars are in the final stage before dominating"), etc. Each ended their talks with something to the effect of, “are you scared now?” I’ve been listening to these tech “shock jocks” for almost two decades now, and I find them both captivating and always a little over the top. Interestingly, though, they are in sharp contrast to the “new normal” crowd that asserts that most of the gains from technology have already occurred, condemning us to permanently lower economic growth. In my lifetime, technology has always been characterized by breakthroughs that occurred much quicker than anybody expected (smartphones, computing capabilities, etc.) along with frustratingly slow technological advance in other areas (like travel, cancer cures, etc.). I see it all as just the story of free enterprise, and I find that my life in general is usually improved by technological advances (nothing stops me from doing things the old way if I were to choose to do so). From an investment perspective, remember that for every Apple or Facebook that in hindsight look like an obvious, game changing disruptive investment, there are dozens and dozens of promising technology companies that go to zero. In fact, studies of investing in early-stage companies (known as seed or pre-seed rounds) indicate that you need to invest in at least 15-20 companies just to have a high (90%) probability of getting some of your money back (e.g. Right Side Capital Management-San Francisco).