Miles Below Ground.

Volatility as an "asset class."

Weekend Edition!

1. Time to move inland:

The coldest location on the planet has experienced an episode of warm weather this week unlike any ever observed, with temperatures over the eastern Antarctic ice sheet soaring 50 to 90 degrees above normal. The warmth has smashed records and shocked scientists.

“This event is completely unprecedented and upended our expectations about the Antarctic climate system,” said Jonathan Wille, a researcher studying polar meteorology at Université Grenoble Alpes in France, in an email.

“Antarctic climatology has been rewritten,” tweeted Stefano Di Battista, a researcher who has published studies on Antarctic temperatures. He added that such temperature anomalies would have been considered “impossible” and “unthinkable” before they actually occurred. (Source: washingtonpost.com)

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2. Not boring Boreholes.

Miles below ground, where pressures are intense and temperatures far exceed the boiling point, dense layers of super-hot rocks offer the promise of a natural, inexhaustible supply of clean energy.

Environmentalists have long dreamed of a way to reach those depths to tap the potential geothermal energy in those rocks, but the technological and financial barriers have been too great.

Now, officials at an MIT spinoff say they’ve figured out how to drill as deep as 12 miles into the Earth’s crust, using a special laser that they say is powerful enough to blast through granite and basalt like a knife through soft butter.

In the coming years, Quaise Energy, named for a section of Nantucket, plans to dig some of the deepest boreholes in history to reach rocks that can exceed temperatures of 1,000 degrees and surface a kind of heavy steam that has the potential to provide a nearly unlimited supply of clean energy anywhere in the world. By the end of the decade, they plan to capture the steam and use it to run turbines at power plants. (Sources: bostonglobe.com, quaise.energy)

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3. Battery breakthrough?

Making electric cars more competitive with gas-powered ones will require a breakthrough battery that remedies those shortcomings. That, at least, is the argument of Jagdeep Singh, chief executive of QuantumScape, a Silicon Valley startup that claims to have developed just such a technology. 

The company asserts it did so by solving a chemistry puzzle that has stumped researchers for nearly half a century: how to use lithium, the lightest metal on the periodic table, to boost the amount of energy that can be packed into a battery without posing a routine risk of fire or otherwise sacrificing performance. The company says it achieved this, in large part, by developing a solid version of the flammable liquid electrolyte.

VW was impressed enough to invest hundreds of millions of dollars in QuantumScape. The German auto giant also agreed to set up a joint venture with the company to mass-produce the batteries and says they’ll be in its electric cars and trucks on the road by 2025. (Sources: technologyreview.com, quantumscape.com)

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4. Ultra-cheap feedstock.

As the world struggles to improve the efficiency of cars and other vehicles in order to curb greenhouse gas emissions and improve the range of electric vehicles, the search is on for ever-lighter materials that are strong enough to be used in the bodies of cars.

Lightweight materials made from carbon fiber, similar to the material used for some tennis rackets and bicycles, combine exceptional strength with low weight, but these have been more expensive to produce than comparable structural elements made of steel or aluminum. Now, researchers at MIT and elsewhere have come up with a way of making these lightweight fibers out of an ultra-cheap feedstock: the heavy, gloppy waste material left over from the refining of petroleum, material that refineries today supply for low-value applications such as asphalt, or eventually treat as waste.

Not only is the new carbon fiber cheap to make, but it offers advantages over the traditional carbon fiber materials because it can have compressional strength, meaning it could be used for load-bearing applications. The new process is described today in the journal Science Advances, in a paper by graduate student Asmita Jana, research scientist Nicola Ferralis, professor Jeffrey Grossman, and five others at MIT, Western Research Institute in Wyoming, and Oak Ridge National Laboratory in Tennessee. (Sources: news.mit.edu, science.org)

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5. Volatility as an asset class.

It’s getting harder to deal in some of the world’s most important commodities as everything from geopolitical turmoil to exchange snafus prompt traders to rush for the exits, rapidly draining liquidity.

Prices of materials like crude, gas, wheat and metals have become alarmingly erratic as a gulf emerges between buyers and sellers who are facing big financing strains. Markets have been roiled on fears about Russia’s invasion of Ukraine constraining commodities flows, though in many cases rallies were quickly followed by a drop in prices.

The London Metal Exchange’s embarrassing weeklong suspension of nickel trading is an example of a market grinding to a halt after extreme price moves. Liquidity is nonexistent as some dealers try to close positions amid a glitchy reopening of trade in the critical metal. 

The volatility is particularly difficult to navigate because some moves appear to defy fundamentals, with hedge funds exiting long-term bullish bets just as supply looks the tightest in years. Merchants are finding it harder to snap up any cheap cargoes because of huge margin calls and credit line caps. 

“Volatility as an asset class is enormous now, and on top of that you have some serious operational issues,” said Ilia Bouchouev, a Pentathlon Investments partner and adjunct professor at New York University. “It’s a vicious loop where volatility forces companies to reduce positions, which means what’s left in the market is forced trading. That in turn contributes to even more volatility.” (Source: bloomberg.com)

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6. Wolfgang Munchau:

Remember the Brics? This acronym stood for Brazil, Russia, India, China and South Africa. Back in the early 2000s, they were thought of as the five largest emerging economies. What the four that are not Russia have in common today is that none of them have imposed sanctions on Russia. They are not strategic allies of Russia. But they, and many other countries, will continue to trade with Russia.

The west, meanwhile, has taken the biggest gamble in the history of economic warfare. We have frozen the assets of the Russian central bank. Call it a special economic operation.

But we did not think this through. For a central bank to freeze the accounts of another central bank is a really big deal. Economically, what this means is that the entire transatlantic west has defaulted on our most important asset: our fiat money. Russia’s central bank reserves were earnings from legitimate sales, mostly to the west. Courts can freeze assets if they are obtained illegally. But this was not the case here. Russia has violated international law by invading Ukraine. But its central bank accounts held abroad are legal.

With this one sanction, we have done all of the following: undermined trust in the US dollar as the world’s main reserve currency; forestalled any challenge the euro might ever make; reduced the creditworthiness of our central banks; encouraged China and Russia to bypass the western financial infrastructure; and turned bitcoin into a respectable alternative transaction currency. At least the blockchain is not going to default on you…..

I hear you say: maybe this is a price worth paying to stop a dictator from waging war. Unfortunately, it won’t. Europe is still paying Putin some €800m each day for oil and gas.

As I argued last week, an oil and gas embargo is the sanction that would have made an impact in the short-term, severely constraining his ability to replenish military stock he is using up now. The west chose the central bank sanctions because they were least inconvenient in the short run. But we did so without even considering the long-term consequences.

We are resorting to the only problem-solving method we know: kicking the can down the road. Until we hit a brick wall. (Source: Munchau, eurointelligence.com)