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Friday Thoughts

We had a great, albeit cold and damp, Memorial Day weekend in Asheville. The weather cleared up late Sunday so that we could go explore Black Mountain and the weather was great for a visit to Chimney Rock on Memorial Day itself. I love getting up to the mountains and this trip helped cement those feelings. 

After last week’s somber Friday Thoughts, I wanted to share some of the things that gives me hope for the future of our country and the world. First, I do want to go over a few things that I had thought were going to happen over the last few weeks. In my May 1st Friday Thoughts, I wrote that I was expecting the Fed to raise interest rates 1/4% and indicate that they were probably done. But, I added  - “I think that they may leave the door open to raise again at one of the next two meetings by saying that their actions will be “dependent not the data”. What that means is that if inflation doesn’t go down in the May report and/or the employment reports on Friday and June 2nd show no marked increase in unemployment they may raise again at the next meeting.”

Well, about a week after the Fed meeting, this was a quote in a CNBC article - “‘First of all, we haven’t said that we’re done raising rates.’ NY Fed President John Williams said on May 9, ‘We’re going to achieve our goals and we’re going to assess what’s happening in our economy and make the decision based on data.’”  Wall Street analysts are still predicting that the Fed is done raising rates and will even start cutting rates before the year is out. I disagree. I’m not some oracle, but rather, I take the Fed officials at their word that they will keep rates higher longer to get inflation down. 

Then last week, I wrote this about the debt ceiling debate - “I suspect that a deal will get made in the last minute and they’ll kick the can down the road a little bit further, like they always do.” Again, this wasn’t hard to predict. They did kick the can further than I expected by suspending the debt ceiling for two years. I’m not sure what the Republicans got out of the deal. They’re claiming spending cuts, but spending is still going up. In the real world, when you spend more this year than you did last year, your spending went up. But, the Washington folks don’t live in the real world. 

Ah, well. Back to something to be optimistic about. The Mauldin Strategic Investment Conference (SIC) had a number of panels of entrepreneurs who were at the forefront of some new and innovative research that will be transformative to the way we live. Artificial Intelligence (AI) is getting a lot of buzz right now in the media. There was a panel about AI, but there seems to be as much concern about AI as there is excitement in the minds of the panelists. There was a lot of talk of needing to find ways of regulating it and building in breakers like breakers in your home electrical system. 

The panels that I’m most intrigued by were those involving energy. There was one about nuclear energy, one about batteries and energy control, and one about traditional energy sources. There is a converging of several factors that are driving innovation in the energy sector - electrification, decarbonization, and energy security. Whether you buy into the argument that man is contributing to the change of the climate, or not (I’m in the “not” camp), there is a clear need for more sources of electricity, ways to store that electricity, and a way to safely use that electricity. 

One of the panels included Amir Adnani, CEO of Uranium Energy Corporation, Chris Levesque, CEO of TerraPower, and Dr. Michael Goff, Principal Deputy Assistant Secretary in the Office of Nuclear Energy in the US Dept. of Energy. Uranium Energy Corp. purchased a Uranium mine in Wyoming from Uranium One, which is a Russian company, and is now the largest Uranium mine in the western hemisphere. TerraPower was co-founded by Bill Gates and is working on building small, modular nuclear power plants using a different nuclear reaction process than the current nuclear power plants throughout the US. There is a renewed desire to develop power generation sources that do not require carbon resources and nuclear is seen as a viable option to that power generation. Dr. Goff says that the administration is focused on supporting that development. He claimed that they are expecting to have more new plants come online between now and 2035 than all that were developed in the 60’s and 70’s. 

There was discussion about what hurdles are faced in developing nuclear plants. Many of the hurdles are perceived, rather than reality. Safety was an example. We have had 100 nuclear plants in the US and 400 plants around the world for decades. There have only been 3 meltdowns and only 1 resulted in deaths (Chernobyl, Three Mile Island, and Fukushima). Waste was another one, and this one surprised me. With all of the nuclear plants that we have in the US, and how long they’ve been operating, we have only generated 83,000 Metric tons of waste, which if stacked together would cover less than a football field. And, the amount of energy produced by those power plants would have generated 400,000,000 metric tons of CO2 in a traditional coal power plant. 

TerraPower is one of many companies working on small, modular nuclear power plants. Most of the companies are working on the use of slow reactors. These are inherently safer than the traditional fast reactors in use today because they don’t require outside sources to keep them cool. They also use a different fuel source and they are working to be able to use the spent fuel from the traditional plants. TerraPower is building a plant in Wyoming right now and they actually had three communities competing to win the opportunity to build the plant. The plan is to have the first one complete by 2030. They are expecting to need 600 of these plants by 2050 (we have had 100 nuclear plants in the US and have 93 still operating). 

There was also discussion of the development of fusion reactors. Both traditional and the small, modular nuclear reactors use nuclear fission. This is where particles are hit with neutrons, causing them to break into smaller particles, releasing energy. Fusion presses several particles together to create a new particle, which also releases energy. Up to this point, it has been very challenging to control fusion reactions and it has required more energy to produce the reaction than it generates. But, the technology is very close to crossing the line to be net energy producing. Interestingly, earlier this week it was announced that the US Dept. of Energy has granted a $5 million grant to ZAP Energy to design a fusion pilot plant. To give you an idea of the power of fusion power plants - the sun is one big fusion reaction.  

As we generate more electricity, we need to improve energy storage technology. Think about your cell phone. It seems that after about two years, the lithium batteries begin to loose their charge quicker. Most phones are now sealed, so you can’t see the battery, but many lithium batteries often begin to swell and generate more heat after a number of charging and discharging cycles. Sila Nano is a company workin on the next generation of batteries. They have developed a silicone based anode that they say should be able to make batteries hold twice the capacity, meaning they will last longer, or be smaller. So far, they have made batteries for wearables, such as fitness trackers and watches. They have partnered with Mercedes to develop batteries for their next generation of Electric Vehicle batteries and hope to have them on the road in the next two to three years. Sila’s co-founder, Gene Bercichevsky, was the seventh employee at Tesla and he said that he learned about scaling up new innovation while at Tesla. It requires much more space, equipment, and capital to make the larger battery components at first. But, as those hurdles get met, the price to manufacture comes down rapidly. He expects that we’ll get there soon. 

The last innovation that I’ll talk about today was one I had never heard of, and it sounds like they kind of stumbled into it themselves. Nathan Mintz is an entrepreneur who has been involved in many startups in the defense industry. He started Epirus as an answer to unmanned arial systems (drones) on the battlefield. They developed a directed energy device that uses high powered microwaves to disable electronic devices. In short, they paralyze drones by zapping the electronics in them, causing them to drop from the sky. In their development, they realized that they were developing a way to control electric circuits. Our increasingly complex electronic devices have many electric components and they all use a certain amount of power, even when not in use. Epirus’ technology is aiming at being able to turn off the electric components not is use in order to preserve power. For example, the computer that I’m typing this on has a very robust graphics processor.  In my office, it’s running the normal screen and 2 42” monitors on the wall. It probably uses a lot of that graphics processor. But, when I’m traveling and just checking e-mail, it’s not using but a small percentage of that processor. They want to develop the technology to shutdown the part of the processor not needed to save on power consumption. It may not be a big thing in a laptop. But, imagine the power savings in a car! They hope to get 15-20% more efficiency out of the batteries in electric vehicles. 

As the public interest in electric vehicles and other electric products grows, the demand for energy is also going to grow. At the same time, interest in traditional sources of energy, such as oil and natural gas, is waning. That’s a trend that doesn’t look to be changing anytime soon and these are just some of the companies working on amazing technology to address these needs. None of these companies are publicly traded and this is not in any way a solicitation to invest in any of them. They all carry a high risk of failure. But, there are people out there pushing the edge of technology and creating new innovations every day. 

This is what makes me optimistic about our long term prospects. The American ingenuity hasn’t left us. We often don’t see it until it’s here, though. 

Summer is in full swing for us. We’re heading up to the mountains of North Georgia for a few days next week, will be home for a week of Camp Create at church, then we have our annual week at the beach in mid June. It will be a busy season, but I’m always available by phone. If we’re going to be gone from the office for more than a day, I have all calls to the office forwarded to my cell and I always carry my laptop, so can be reached via e-mail, too.

I hope that you are able to get away to enjoy the summer, too.

The views stated in this letter are not necessarily the opinion of First Allied Securities, Inc. and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein.  Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed.  Past performance does not guarantee future results.

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