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June 28, 2024
By Steve Blumenthal

“The AI boom is fueling an insatiable appetite for electricity, which is creating risks to the grid and the transition to cleaner energy sources.” 

Katherine Blunt and Jennifer Hiller, Wall Street Journal, “Big Tech’s Latest Obsession Is Finding Enough Energy,” March 24, 2024 

Today’s post is all about AI and energy, and I’m really excited to share it with you. I’ve been doing a lot of research in both areas, and it just keeps hitting me how much each one needs the other. And it’s not just me.  

While in Texas last week, I met a client who owns and operates several data centers. Most of the big tech names you know are his clients. The following day, I interviewed Dan Steffens, an expert in the oil and gas space, for my podcast. Our discussion went beyond technology, covering population growth, wind, and solar energy, and the ongoing and increasing demand for oil and gas. Dan concluded that the energy industry today is “very good.” However, something he said struck me: The amount of energy needed to fund the AI data centers in the U.S. may exceed the energy needed to power New York City each year by 10x. He said natural gas is the most likely power source. 10x! That’s a lot of energy and a lot of natural gas. 

Another interesting story to me, and probably to you as well, is AI. This week, CNBC’s Andrew Ross Sorkin was in Aspen, Colorado, where he interviewed Mustafa Suleyman, the CEO of Microsoft AI, at the Aspen Ideas Festival. They discussed the future of artificial intelligence, and Suleyman shared how he thinks humanity can use AI to its advantage.  

Grab your coffee and find your favorite chair. With an upbeat and optimistic mindset, I share my summary notes from my discussion with Steffens and the Sorkin-Suleyman interview in bullet-point format below. You’ll also find video replay links to each presentation.  

Opportunities? There are presently many for investors to seek, and AI and energy are two important areas I believe we should consider. Ten years ago, data centers needed 10 megawatts of power to operate; today, they need 100 to 200 megawatts of power. The existing public grid is outdated, antiquated, and capacity-constrained. It is not prepared to satisfy the growing needs. It seems AI and energy are joined at the hip—closer than one might think. Put them On Your Radar!

On My Radar: 

  • Andrew Ross Sorkin’s Aspen Ideas Festival Interview with Mustafa Suleyman, CEO of Microsoft AI 
  • Oil and Gas Discussion: Dan Steffens and Steve Blumenthal  
  • Random Tweets 
  • Personal Note: Cape May, San Diego, and Denver  
  • Trade Signals: June 27, 2024 

See Important Disclosures at the bottom of this page. Reminder: This is not a recommendation to buy or sell any security. My views may change at any time. The information is for discussion purposes only.


AI – Andrew Ross Sorkin’s Aspin Ideas Festival Interview of Mustafa Suleyman, CEO of Microsoft AI

I’m sure you are well aware of Nvidia’s massive price surge. These days, AI is in every discussion, everywhere. Yet, we’re still in the very early innings of AI development, which is both exciting and concerning. I have my bear market investment shopping list formed and expanding. There will be many opportunities in AI to come in both the public and private spaces 

Click on the photo to listen to the full interview. Highly recommended!

Source: NBC News

Here are the key points from Mustafa Suleyman’s interview at the Aspen Ideas Festival on the future of artificial intelligence:

  • State of AI Development: AI is still in the early stages, comparable to the beginning of a baseball game. Significant progress has been made, but much more will come in the next decade.
  • AI Capabilities: Rapid advancements in AI capabilities, such as language models and AI agents, create a transformative experience. These advancements are becoming more integral to daily life, performing tasks and organizing activities.
  • General AI (AGI): The concept of AGI, where AI can perform any task a human can, is theoretically possible but not imminent. Safety and ethical considerations are crucial as we approach higher levels of AI capability.
  • Global Governance: Developing a new global governance mechanism is essential to ensure AI technology benefits humanity and mitigates risks, including disinformation and ethical concerns.
  • Regulation: Regulation of AI is necessary and should be embraced. Historically, regulation has improved safety and functionality in other technologies, like automobiles.
  • Open Source and Safety: Microsoft supports open-source AI models while developing powerful proprietary ones. Balancing open access with safety and ethical considerations is a priority.
  • Data Use and IP: The debate over the use of data for training AI models, including issues of intellectual property and fair use, is ongoing and complex. The reduction in the cost of knowledge production will transform information economics.
  • Education and Skills: Future skills should focus on adaptability, digital learning, and an interdisciplinary approach, combining humanities and STEM education.
  • Privacy and Antitrust: Integrating AI into various products raises questions about privacy and antitrust regulations. Ensuring responsible integration is crucial for trust and functionality.
  • Energy Consumption: AI’s energy demands are significant, but Microsoft is committed to renewable energy and sustainability goals.
  • Competition and Cooperation: Cooperation between AI companies and nations, including China, is necessary to prevent adversarial relationships and foster global progress.
  • AI in Politics: AI should not participate in electioneering due to the potential for misinformation. Democracy should remain a human endeavor.
  • Misinformation and Disinformation: Addressing misinformation requires aggressive action against bad actors while preserving free speech. The adaptability of humans provides resilience against disinformation.
  • Future of AI: AI’s role in society will continue to evolve, requiring ongoing ethical discussions and governance to ensure it serves humanity’s best interests.

 

This is not a recommendation to buy or sell any security. It is for educational discussion purposes only. Opinions are subject to change. Consult your advisor

 


Oil and Gas Discussion: Dan Steffens – Steve Blumenthal

First, click on the video below to watch the discussion that includes slides. My summary follows. 

Source: CMG and EPG

Spotify – Click here for the audio replay on Spotify:

SB Bullet Point Summary Notes

Our conversation focused on the energy sector, particularly oil and natural gas. We discussed the increasing demand for oil and natural gas as the global population grows, and the impact of seasonality and geopolitical events on the market. We discussed the current state of the oil market. Overall, our conversation focused on the importance of understanding the complexities of the energy market to make informed decisions. Dan has spent most of his career in the energy sector, from accounting to oil and gas production. He writes a subscription-based research letter on the energy industry. 

  • Dan discussed the need for increased production and export capacity and argued that oil and gas remain essential despite the growth of renewable energy.
  • Dan is bullish on oil and natural gas.

Dan noted that the only kind of oil that has declined is whale oil. We are adding over 200,000 people to the global population daily. 

  • Despite investments in wind and solar, fossil fuels still account for over 85% of the world’s primary energy supply in 2022.
  • With population growth and the massive energy demand of AI, the demand for oil and gas will continue to increase. He favors a focus on nuclear energy but cited the “NIMBY” Not In My Back Yard challenges.
  • He argues nuclear energy is necessary to reduce carbon emissions despite public concerns about safety.
  • The global oil supply remains tight. Consumption needs are exceeding supply, particularly in OECD countries like the US, Canada, and Europe.
  • He said oil companies are profitable at the current price of around $80.
  • Based on U.S. Environmental Information Administration (“EIA”) forecasts, he remains constructive on the price of oil through 2025.
  • Dan discusses how OPEC expects oil demand to increase to at least 2045, while the IEA has become increasingly political.

The U.S. oil production

  • US oil production growth now comes primarily from the Permian Basin in Texas and New Mexico, which is showing signs of peaking.
  • Dan said the recent uptick in natural gas prices is due to increased electricity demand for air conditioning, not seasonal demand for space heating.
  • Dan discussed how prices can vary significantly depending on location and weather patterns.
  • He projects 5.2 billion cubic foot shortfall in natural gas demand by 2025 due to pipeline constraints.
  • US natural gas demand growth is accellorating, LNG exports are expected to increase… strong energy market dynamics.
  • Dan noted the potential for significant growth in US LNG export capacity, with the total growth possibly higher than previously thought.
    • Mexico is planning to build pipelines to export natural gas, which could further increase demand.
  • Due to increased demand, Dan projects 100% growth in natural gas demand by 2030.
  • He emphasized the demand for reliable power to fuel AI data centers, with a focus on natural gas and propane.
  • US natural gas production is growing due to increased drilling rig efficiency, but not enough gas wells are being drilled to meet demand.
  • He highlighted the potential of AI centers, estimating 85 terawatt hours of electricity demand in 2023. He also emphasizes the need for dedicated power infrastructure to support AI growth, citing 40 natural gas-fired power plants in Texas alone.
  • Discussed the potential of natural gas as a reliable energy source in America, mentioning its versatility and existing infrastructure.
  • Highlighted the need for a common sense energy plan in America, away from unreliable wind and solar sources, and towards natural gas and other reliable options.
  • Coal-fired power plants may need to delay retirements due to increasing electricity demand.
  • Talked about drill baby drill and the increased supply impact on oil prices. Dan said if Trump wins he may enforce sanctions against Iran immediately, bullish for oil. It was a very interesting discussion.

Please check out the video to hear it in full, and please reach out to me if you have any questions. I’m happy to share ideas.  

That concludes my bullet point notes. Please contact me if you have any questions. 

Not a recommendation to buy or sell any security. For discussion purposes only. Current viewpoints are subject to change.

Interesting statistics on income needed to live comfortably by state in the U.S. Source: Visual Capitalist

Source: Visual Capitalist

 

Interesting point:

Source: BLS, Haver Analytics, Appollo Chief Economist

I “like” and “retweet” posts I find interesting. I enjoy X because I can easily follow people I like to keep On My Radar.

You can follow me on X (formerly Twitter) @SBlumenthalCMG.

Not a recommendation to buy or sell any security. For discussion purposes only. Current viewpoints are subject to change.


I often feel my job is a bit like the show Shark Tank. I really enjoy looking into new opportunities. When I think about investment positioning, the reality is that there are always opportunities.  

In my mind, investing is much like the game of chess. Think of the macro-economic investment world as a giant chess board. The movement of each piece depends on the movement of the pieces of the player across from you. But in this game, there are many players making moves at the same time, with some of the players being more or less powerful than others. In fact, let’s call it quantum chess.  

We are all pawns to some degree, maybe a knight or bishop, and we play a role in the game, but individually, our moves aren’t worth as much as those of the queen or king. You can think of the Fed and other central banks as the most powerful game pieces, the queens and kings. For example, what is the chess-move reaction to quantitative easing, zero-interest rate policy, and money printing? What is the reaction function of quantitative tightening, higher taxes, or lower taxes? Trade tariffs? Who will we elect? What are other inputs like debt, inflation, interest rates, and valuations? Peace or war? What about human behavior tendencies? All are examples of inputs in the quantum investment chess game.  

The Encyclopedia of Chess Middlegames provides the following tactics categories: annihilation of Defense, Blockade, Decoying, Deflection, Demolition of Pawns, Discovered Attack, Double Attack, Interception, Intermediate Move, Overloading, Passed Pawn, and Pawns Breakthrough. Like chess, there are many tactics for investing.  

To win the game, one has to be aware of the various pathways and threats. As you know by now, I believe debt is the big elephant in the room. We have nearly $35 trillion of debt in the U.S., and I think we’ll see $50 trillion in a few short years. The real number is much higher when you count in unfunded liabilities like Social Security and Medicare.  

It sounds simple, but the pace of the game is slow, it doesn’t move in a straight line, and frankly, as in chess, a few major game moves may require you to shift your plan of attack. 

One consequence of debt and money printing is inflation and rising interest rates. That’s not good for the players in the game owning 4.25% 10-year Treasury paper. They lose to inflation, and if I’m right and we see 8% yields in the next five years, not only do they lose to inflation, but their bonds are also worth significantly less. 

I know many readers think I’m pessimistic. I’m not. I just don’t like low-interest-yielding bonds and overpriced stocks. I’m actually very optimistic by nature. I’m simply trying to look at the chessboard and find other pathways to success. How we each move our money, however, is a personal decision.  

I am very bullish on AI and energy. Are there reasons to be worried about AI? Sure, there are. But it is coming at us whether we like it or not. I took the transcript from the AI discussion above and asked ChatGPT to summarize the most important notes. It did a pretty good job… and it will get better. Need legal documents? AI will create it for you. I finished a call earlier today with a firm that builds and manages off-the-grid natural gas and renewable gas energy facilities—built to spec right next to a data center. There is a growing industry of decentralized energy resources. Shark Tank stuff, indeed. Really cool. 

There is some good news on the Coach Sue boys’ high school soccer front. The summer league has started, and I’ve been on the sidelines with Susan this week. I think we found our striker and a ninth-grade midfielder who is ready for varsity. It’s fun to watch how much the boys enjoy each other. Pre-season starts in mid-August, and the coach is cautiously optimistic. For new readers, Susan is my wonderful wife.    

Sunday marks our 12th anniversary together. We are heading to Cape May, New Jersey, for a few days to celebrate. A beach chair, a book, some peanuts, and two ice-cold IPAs await. 

There will be no OMR next week as I’ll be in San Diego visiting one of our portfolio companies next Friday. I’ll also be having dinner with my son Kyle and, hopefully, daughter Brianna. Denver follows later in the month. 

I hope this note finds you with fun plans ahead. All the best to you and your family.  

Steve

Trade Signals: June 27, 2024

“Extreme patience combined with extreme decisiveness. You may call that our investment process. Yes, it’s that simple.” 

– Charlie Munger

Notable this week:

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The views expressed herein are solely those of Steve Blumenthal as of the date of this report and are subject to change without notice. Not a recommendation to buy or sell any security.


Stephen B. Blumenthal
Executive Chairman & CIO
CMG Capital Management Group, Inc.
Private Wealth Client Website – www.cmgprivatewealth.com
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Stephen Blumenthal founded CMG Capital Management Group in 1992 and serves today as its Executive Chairman and CIO. Steve authors a free weekly e-letter entitled, “On My Radar.” Steve shares his views on macroeconomic research, valuations, portfolio construction, asset allocation and risk management.

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IMPORTANT DISCLOSURE INFORMATION

This document is prepared by CMG Capital Management Group, Inc. (“CMG”) and is circulated for informational and educational purposes only. There is no consideration given to the specific investment needs, objectives, or tolerances of any of the recipients. Additionally, CMG’s actual investment positions may, and often will, vary from its conclusions discussed herein based on any number of factors, such as client investment restrictions, portfolio rebalancing, and transaction costs, among others. Recipients should consult their own advisors, including tax advisors, before making any investment decision. This material is for informational and educational purposes only and is not an offer to sell or the solicitation of an offer to buy the securities or other instruments mentioned. This material does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual investors which are necessary considerations before making any investment decision. Investors should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, where appropriate, seek professional advice, including legal, tax, accounting, investment, or other advice. The views expressed herein are solely those of Steve Blumenthal as of the date of this report and are subject to change without notice. 

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Written Disclosure Statement. CMG is an SEC-registered investment adviser located in Malvern, Pennsylvania. Stephen B. Blumenthal is CMG’s founder and CEO. Please note: The above views are those of CMG and its CEO, Stephen Blumenthal, and do not reflect those of any sub-advisor that CMG may engage to manage any CMG strategy, or exclusively determines any internal strategy employed by CMG. A copy of CMG’s current written disclosure statement discussing advisory services and fees is available upon request or via CMG’s internet web site at www.cmgwealth.com/disclosures. CMG is committed to protecting your personal information. Click here to review CMG’s privacy policies.Please take note of the following text:

 

“The blue line in the lower section shows how much the orange line is above or below the long-term trend line. It is currently in the “Overvalued” zone. Lastly, the data boxes at the bottom of the chart display the annualized gains based on each zone (Overvalued, Fairly Valued – blue line in the middle zone, or Undervalued).”Please take note of the following text:

 

“The blue line in the lower section shows how much the orange line is above or below the long-term trend line. It is currently in the “Overvalued” zone. Lastly, the data boxes at the bottom of the chart display the annualized gains based on each zone (Overvalued, Fairly Valued – blue line in the middle zone, or Undervalued).”



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