Newsletter 2

Space Debris, Semiconductor Dollars, and a Minsky Moment

This week I write about space debris and the challenges of tracking the growing number of objects in orbit. Then I get into a thought experiment on alternatives to the petrodollar system in the form of semiconductors. And finally - I talk climate risk, the economy, and a ‘Minsky Moment’ - a situation in which investors expectations about future climate policies adjust suddenly, resulting in fire sales of existing assets during abrupt repricing of risk.

Sleeping Space Debris 

There is nothing cooler than space. It’s the next frontier for human civilization and the progress we’re making should get everyone excited. I’ve been watching the new Netflix series on Inspiration 4 and needless to say, I’m inspired. Yet there are still so many challenges that remain if we want to continue to develop our space infrastructure and eventually colonize the great beyond. Perhaps no bigger than cleaning up space debris. There are currently 34,000 objects orbiting in space, only 29,000 of which are trackable with reasonable accuracy. 96% is a pretty good accuracy but things continue to get crowded up there. In 2011 there were ~965 satellites in space. In 2021 there are 4,500. This is a number that will continue to grow as cheap satellites are a booming business, a la Planet Labs. 

The worst possible situation we could experience in space is something referred to as a Kessler effect. This is a theoretical scenario in which the number of objects in low Earth orbit (LEO) due to space debris is high enough that collisions between objects could cause a cascade in which each collision generates space debris that increases the likelihood of further collisions. One potential outcome is that the distribution of debris in orbit could render space activities and the use of satellites in specific orbits difficult for many generations. That would be most unfortunate. If it happened in LEO it would wipe out the entirety of SpaceX’s Starlink satellite network, new Earth observation companies, and advanced monitoring systems. It would also make it virtually impossible to get objects or people to get to orbit. I’ll need to explore the idea of redundancy for space systems in the future.

It’s a good thing we’ve invested in monitoring capabilities. Radars operated by the US DoD and private enterprises are what we predominantly rely on. A big advancement on the military side has been the “Space Fence” which is a radar system based on the Marshall Islands that can make close to 2 million observations every day. Many of which are objects just 5cm across, which is about the length of a AA battery. Being able to detect those objects via radar from the ground is amazing in-itself - however, we still have to try and predict where these objects will actually go next. In order to predict an object's future orbit, the position must be recorded several times, to observe how its path is being altered by the gravitational pull of the Earth, Moon, and sun, along with the pressure from solar radiation and if you’re looking at LEO, the drag of occasional wisps of air from the upper atmosphere. All those data points are computed to give a predicted path which we hope is accurate. This is essentially Iron Dome, but applied to Space. This data is already used to reposition satellites and prevent collisions.

Orbital tracking and debris clean up are two areas to keep an eye on if you’re interested in space. There are proposals for satellites that can go up and act as a space sweeper of sorts, deploying a collector pod to grab the debris then reconvene with the main unit. There are companies attempting to use lasers to eliminate rogue pieces. There are private companies that do observation both on earth and via satellites already up in space are selling data to make it easier for operators to alter flight paths away from debris. Orbital tracking has a very interesting national security consideration which I have to mention. By projecting an object's orbit, you can also detect when it deviates, potentially revealing the potential for an attack. Scott Norr, an expert at Lockheed Martin who works with Space Fence, gives the example of an object that appeared to be debris from a Russian military launch. In 2014, the debris started moving suddenly, triggering fears that it could be an anti-satellite weapon. These types of sleeper cell debris may exist already - and who knows how many of them at that. 

Semiconductor Dollars

A few weeks ago I wrote about the Petrodollar and the idea of tying currency to specific assets in order to maintain the currency’s value. A brief recap on the way this works in the petrodollar system - everyone who sells oil only sell it in US dollars in exchange for something like US military support. It’s a great trade if you believe oil is of vital importance to the world economy and not going anywhere. This is exactly what the US did in the 1970s via a deal with Saudi Arabia and it’s one of the reasons the dollar still remains the reserve currency of the word despite questionable monetary policy from the US. 

Yet times are a changing. It remains to be seen what will happen to the US dollar in the coming decades with enormous amounts of money being printed. Something like 35% of all the dollars in existence have been printed in the last few years. I made an argument last week that crypto may one day have enough adoption to become an alternate reserve currency against the Dollar. But I’m hedging this week and want to throw out another idea - the semidollar. 

The semiconductor (or computer chips) industry continues to grow at unprecedented rates. The level of innovation and development has kept pace with Moore’s law - while demand has increased 3x in the last 15 years. We’re deeply committed to the industries that semiconductors enable - from electric cars, crypto, to AI and machine learning. The future of the technology economy goes through semiconductors. So should we consider tying the semiconductor to the dollar? And what would it look like to attach the US dollar to semiconductors? 

We could start by having US based firms purchase semiconductors in US Dollar. Many of the world’s advanced chips are developed by US based companies - Intel, AMD, NVIDIA, Apple, etc. The actual production is heavily dependent on TSMC in Taiwan (~80% of chips are made here), this will likely to change somewhat in the coming decade as Intel and Ford have announced plans for US based semiconductor fabrication facilities. 

Having US firms purchase their semiconductors seems doable with national security considerations around semiconductors. The next step would be to get allies like Japan, South Korea, and Great Britain onboard. We may need to pull some levers with TSMC to get them to deal their goods in dollars. Perhaps we could suggest something strategic, such as offering to help them build desalination plants to alleviate their water scarcity issues. If TSMC got onboard, we could have an overwhelming amount of industry players dealing in US Dollars. This would be a huge strategic win for us. And it could also maybe kick off WW3. It would absolutely infuriate China. It would probably be wise to slow play a strategy like this. With Taiwan vulnerable to Chinese aggression, perhaps it would be best to wait on trying anything with TSMC until we have better security in the south china sea in place via AUKUS. 

Regardless of those geopolitical ramifications it seems like it may be a good horse to bet on if we want to maintain dollar primacy for the foreseeable future. I’m curious what other assets would be worth considering for this thought experiment. The Tiktok-dollar? Send some ideas over if you’ve gotten this far. 

Minsky Moment

The Economist published an article in the September 4th issue asking if climate change could trigger a financial crisis - “Hot Take”. It raises some interesting points - maybe the most alarming of which is that academic estimates of the effect of 3 degree warming range from losses of 2% to 25% of world GDP. Global economic losses resulting from weather-related catastrophes have already gone from $214 billion in the 1980s to $1.6 trillion in the 2010s. This trend will surely continue as warmer temperatures create conditions for more intense storms or fires. 

With all the worthwhile attention being paid to climate tech and clean energy, regulators have started to discuss economic “transition risks”, or the challenges of the economy moving away from dirty sectors towards cleaner ones. In the worst case, companies in polluting industries could default on loans, and see share prices nose dive. This wouldn’t be good for anyone, even the most environmentally minded among us. Around $18 trillion dollars of global equities, $8 trillion of bonds, and around $30 trillion in unlisted debt is linked to high-emitting sectors of the economy. Compare that to the $1 trillion market for CDOs that instigated the Global Financial Crisis in 2007 and you realize the scope of transition risk we face. 

The numbers are staggering. In 2015, Mark Carney, former governor of the bank of England and now the head of Brookfield’s impact investments, described a possible “Minsky moment” in which investors expectations about future climate policies adjust sharply, causing fire sales of existing assets and a widespread repricing of risk. The question is of course what would make investor expectations adjust so sharply. In the last newsletter we talked about the consequences of consecutive, concurrent, and compounding events. Certainly a severe enough series of climate disasters could force certain investors to recalculate their investment decisions and turn away from existing pollution heavy assets. “Minsky moment” is named for Hyman Minksy, an economist who spent much of his career exploring the characteristics of the financial crisis. 

Many of the losses from climate disasters are shouldered by insurers, however as time goes on, we will surely see more of these costs passed to customers via higher premiums. Similar to the 2007 financial crisis, we will also see regulators become concerned about the exposure of certain “systemically important” banks or insurers. During a stress test at Banque de France, claims on issuers did rise as a result of worsening droughts and flooding, by more than 5x in some areas. The key takeaway from stress tests done by the central banks of the world is it is absolutely essential to give firms time to adapt. If governments can stop delaying and move towards concrete goals - like the US did with announcing a plan to be 40% solar powered by 2035, existing firms will have time to course correct. In the meantime, let’s hope disasters don’t lead to a full blown Minsky moment, plunging us all into the next Great depression.