Forwarded this email by a friend? Subscribe here.
Here’s to making it to Thursday!
If you feel sticker shock every time you step into a grocery store these days, imagine what it must feel like to shop in Argentina, where inflation surged past 70% this month. That’s right, seventy — that is not a typo — and the New York Times has experts predicting it will increase to 90%! Then consider the UK, where consumer prices were up 10.1% year-over-year in July, compared to 8.5% in the US.
Thanks to the hyper-connectedness of our global economy, rising prices in one country have ripple effects throughout the globe. High inflation, material shortages, delivery delays, and interest-rate rises all contributed to a sharp drop in US business activity in August. It’s the same story in Europe, where business activity just declined for the second month in a row thanks to rising energy prices.
So what does this mean for investors? Don’t be surprised to see the global economic slowdown impact company earnings. As you will remember from our discussion of the impact of the stronger-than-usual dollar, multinational companies and companies that rely on international goods can be impacted on multiple fronts by the costs of goods and services both in the United States and abroad. If you’re looking for a silver lining (as we often are at FWIW), consider this: downturns provide opportunity for those with capital to invest. We’ve got some thoughts on investing in a recession for those of you looking for ideas.
How all of these trends will play out over the next few months is a bit of a coin toss. Even the leaders on Wall Street can’t agree. When there is a lack of consensus on the short-term direction in the financial markets, we — again — take solace in our commitment to focus on the long-term and to look for the companies and funds that are both in line with our values and positioned to succeed over a 5-10 year period.
News you can use
- More changes in the workplace are expected with high inflation and economic uncertainty rising. Half of the 722 execs surveyed this month predict job cuts in the next 6-12 months, with 52% also expecting to institute a hiring freeze. When coupled with recent announcements from companies like Lyft, Yelp and Salesforce that they are selling or leasing out part of their office spaces, you can see multiple shifts in the US workplace taking hold. Something for all of us to keep an eye on.
- Many were relieved to hear Wednesday’s debt relief announcement out of the White House. President Biden announced a plan to cut $10,000 of student debt for all who had an income of less than $125,000 a year and $20,000 for those who were Pell Grant recipients. Overall, the White House estimates that this action will clear 20 million people of all their student debt in the next year. This hotly debated topic… will likely continue to be debated.
- California is gearing up to challenge the internal combustion engine! State regulators will be voting today on a historic rule that would ban the sale of new gasoline cars starting in 2035. If passed, 35% of each automaker’s sales will need to be zero-emissions by 2026. A growing list of car makers, including GM, Ford, Toyota, and Honda, have backed the state’s authority to do this in order to be eligible for government fleet purchases. Proponents are saying this is the push the auto industry needed to speed up introduction and production of more zero-emission vehicles. Critics… well, there are a lot of them and they have a number of issues with the timeline.
Splitting H2O for its Hydrogen
The climate clock is ticking and leaders are exploring ways to transition our energy system, kicking and screaming, away from fossil fuels.
One of the best ideas we’ve come up with is clean hydrogen. We know this may have brought up bad memories of a chem class from your past, but don’t worry, we’ve got you and there is no final exam. Experts say more reliance on clean hydrogen for the energy we need to drive our economy can help address the toughest third of global greenhouse gas emissions, and many countries, including ours, have adopted this strategy. It has the support of billionaire Bill Gates and the disapproval of battery-bullish Elon Musk. So what is everyone gassed about?
A quick Chem 101 recap
Hydrogen is the simplest, lightest and most abundant element in the universe. In fact, it’s found in about three-quarters of all matter. The name translates to “water former” in Greek because combined with oxygen it forms, well, H2O. We use hydrogen in industries (petroleum processing, treating metals, producing fertilizers, processing foods) and to power electrical systems.
It’s also, as the kids like to say, problematic. Almost always attached to another element (clingy much), it has to be extracted with chemical processes that can damage the environment. A 2019 IEA report says the annual production of hydrogen is responsible for CO2 emissions equivalent to that of the UK and Indonesia combined.
The hydrogen color wheel
Since hydrogen’s climate impact depends on how it’s made, you may come across nicknames for this colorless gas. Black, brown, or gray hydrogen, the dominant type we have today, is derived from fossil fuels in a process that releases carbon emissions.
The holy grail for environmentalists and policymakers is green hydrogen. It’s made from water and renewable energy and is completely emission-free. Running an electric current through water (electrolysis) splits the hydrogen from oxygen. This hydrogen can be stored for future use in fuel cells and re-electrified whenever required, only emitting water vapor and warm air.
There’s low-carbon forms, like blue hydrogen or gold hydrogen, that rely on carbon capture. Pink/red/purple hydrogen is created with electrolysis of water powered by nuclear energy and the exciting turquoise hydrogen is still in its infancy.
The strongest end-use case for clean hydrogen is in hard-to-decarbonize areas like long haul freight trucks, maritime shipping, and heavy industry. Bloomberg says five sectors — steel, ammonia, methanol, chemicals, and oil refining — will use more clean hydrogen in 2022 than all the world’s 51,000 hydrogen cars combined.
As for the cons, clean hydrogen is expensive. However, more infrastructure, innovation, carbon pricing and subsidies are expected to make it competitive. Also, burning hydrogen — as is planned for hydrogen combustion airplane engines and some ships — may be carbon-free, but it does release some other air pollutants like nitrogen oxides. Experts say this is a tradeoff that they (meaning we on 🌎) can live with.
An investment opportunity
Companies driving the clean hydrogen revolution stand to benefit from the policy push. You can target the industry broadly through exchange-traded funds like Global X Hydrogen ETF (HYDR), Defiance Next Gen H2 ETF (HDRO), and Direxion Hydrogen ETF (HJEN), or explore some of the themes below. (All stocks mentioned are examples and not meant as recommendations.)
- Electrolyzers and fuel cells – The CEO of Plug Power called electrolyzers “the building block of green hydrogen” and their global sales are expected to at least quadruple in 2022 from 2021. Hydrogen fuel cells combine hydrogen and oxygen to generate electricity. Besides Plug Power, some other US-listed makers of these clean solutions are Bloom Energy, Cummins, Ballard Power Systems, Fusion Fuel Green, and FuelCell Energy.
- Infrastructure – We need firms that produce, process, store and distribute hydrogen on a large scale. Industrial giant Linde is one example. Air Products owns and operates over 100 hydrogen plants and maintains the world's largest hydrogen distribution network. Goldman Sachs described oilfield services company Baker Hughes as “levered to hydrogen” through its infrastructure, distribution and transportation services. ECombustible Energy has announced it will try to go public this year.
- Fuel cell electric vehicles (FCEVs) – Cars, buses, trucks, forklifts, even ships, can operate on hydrogen fuel cells. Companies betting on this technology include Toyota, Volvo, Hyundai, Volkswagen, and Lightning eMotors.
Before you go -
Should you swap your morning granola bar for ice cream? One study says it could be healthier.
** FWIW team members own shares of Baker Hughes, Fuel Cell Energy, Toyota and Volkswagen. We have yet to wrap our heads around the idea of eating ice cream for breakfast, but might just give it a try during the next heat wave.