Why Oil?

As I’ve been doing my research on energy, I've come more and more bearish on green tech for the foreseeable future. The world will continue to rely on oil and oil companies. The reasons are the following:

1. Russia Out of the Picture. With refined Russian goods out of the picture due to the European price caps, there will be less oil produced reducing availability. 
2. Food Security and OPEC. As food prices rise OPEC countries will limit oil production to increase prices so they can reduce food price inflation within their own economies.
3. America the Manufacturing Hub. America is becoming a manufacturing hub again with high amount of cheap energy through natural gas availabile. Anything that requires immense and cheap energy will be manufactured in the US. This means less energy exports.
4. Green Energy, Bootstrapping Problem. To produce solar energy has a huge bootstrapping problem requiring high amounts of energy. This is particularly acute with polysilicon for solar energy. The green energy transition will only be possible through cheap natural gas.
5. Lack of American investment. American oil companies are no longer investing in new oil developments. With the government passing the Inflation Reduction Act to invest in climate change, most oil companies are extracting as much from their existing projects as possible without investing in new oil fields.

All of this leads me to suspect that oil prices will likely just keep going up for the foreseeable future.

Europe, Selling out the Future to fight Russia

Yesterday, the UK announced that they will top off what citizens have to pay and instead will have the government pay for it and then have the government pay the producers. This seems like a bad idea because it will add debt to their country which they know their current major demographic will not be able to pay and who the next major demographic will be straddled with.

The end result being no one in their right mind would purchase or loan any amount of money to europe because the ability for europe to repay by taking on a debt on their economy is a bad deal.

The Europeans are moving the money they borrow to the same pool of money they will use to pay pensions. This means that one their own current generation pays the price by socializing the price of energy across everyone and second the next generation loses too because they will be on the hook for paying this down.

The end result of this is that there is no way to trust the European countries and the measures they will take to sell themselves to go against Russia. In a measure it is a lose, lose situation anyways.

For a US investor this just means one thing. The Europeans are borrowing money to fight Russia that they have no intention of repaying.

Because of this the only thing to do is to pull out completely from the Europe. No one can do this completely as every company has exposure shut any company that has major exposure in Europe will be paying a price with a weaker long term currencies.

Labor Shortage and Depopulation

There are a few undercurrents that are fueling the labor shortages. The first is that baby boomers are retiring. This mostly startedlast year but going head strong this year. If hearing stories of my friends and observing my own parents they are getting out and looking to stop working.

Many Millennials are now taking over for the high paying and upskill jobs that the Boomers are retiring from. This means a lot of service jobs where Millennials have been working are vacating.

Finally, and the reason we have massive labor shortages is there aren’t enough GenZ to replace Millennials and Boomers. The outcome is what happens to a country when it depopulates.

As Boomers continue to retire this year and next the likely outcomes are longer wait times or more of those QR code ordering machines. One likely positive that may happen is that companies may become more lenient with their work schedules to allow retirees to return to work part time once they get the golfing and boat building out of their system.

Indian Manufacturing

India won’t be a great place to manufacture and Apple flirting with the idea seems interesting but likely won’t pan out. The problem is energy costs. India does not produce any major energy. It will not have the capacity to bring energy cheaply enough to be able to do so significantly enough. Second, transport. If energy is expensive then transporting becomes expensive as well. If my my thesis about Russia not being a major producer anymore because of the exit of western technology is true then oil prices will rise a lot in the next few years. Transporting anything long distance becomes less interesting and Mexico looks more and more like a good option for United States manufacturing. India may develop its own local manufacturing but will not get the western capital it needs to support global manufacturing. Not that it needs to as there are enough people in India for India to just focus on its own population.

Europe versus Russia, Mutual Assured Economic Destruction

https://www.wsj.com/articles/vladimir-putins-energy-war-with-europe-seems-to-falter-11663523925

This article portrays the Putin as retreating from the Europeans resolve over the war. But it seems both sides are playing a game of chicken.

Putin is waiting for winter to come to hit the Europeans hard with the expected shortages. Once people start dying from the cold, that will push people one way or another. However, the Nord Stream shutdown is not due to sanctions. The Russians have no idea how to run their pipelines without western expertise. Exxon, BP, and Shell were the companies that made Russian oil productive. With the sanctions and the war those companies exited meaning all the oil drilled out of the crazy Russian permafrost is beyond the capability of the Russians. Their military equipment completely broke down against western equipment, why should we expect their oil drills to fare any better without western equipment. In all likelihood once winter hits Russia will not be able to produce oil at all. Likely, the end of the Russia economy.

The Europeans seem to be just printing money to subsidize energy. Since demographically speaking the Central Europeans are basically at a retirement age and they don’t have a replacement population this printing of money will never get paid. The shutdowns of their manufacturing and agricultural businesses will have a detrimental effect on their economy leading to companies finding alternatives. This war came at the worst time for Europeans. As most of them start retiring and the state prints money, socialism breaks down. The state will not be able to provide resources that it previously has in the future without borrowing/printing more money. Europe is no longer a meaningful place for investments, it will however, be a place to get access to cheap human capital.

If Ukrainians keep pressing for advantage they can likely fully take over the lands they lost to the Russians in 2014. However, once winter approaches this will slow down. Putin likely thought that he could waltz into Ukraine, and win it in a few days. The war would be over with Ukraine falling. The west to prevent bloodshed would appease him. And the Russia would still have access to western oil expertise. All of those things have fallen apart. The Ukrainians may very well win, but in doing so they will have taken down Europe and Russia.

The United States is pretty vested in the Ukrainians winning because if Russia isn’t completely demolished they will attack NATO countries triggering Article 5 of the alliance meaning America has to send troops. America really, really doesn’t want to do this (especially after Afghanistan and a significant decrease in people joining the military). So it is okay with Europe failing as long as it means it doesn’t have to go fight a war over there.

Long story short we are seeing the destruction of the Russian AND European economies not just Russian.

WEAT

I’ve taken a significant position on WEAT, a commodity futures ETF for wheat. Most of the world will experience food shortages next year. The reasons are for the following:

• 1/3 Pakistan under water and likely not able to start their food growing
• Drought in the Western United States
• India banning wheat exports due to food uncertainty.
• Ukraine’s output continuing to dwindle as a result of the war as it is one of the primary producers of wheat.
• Russian fertilizer shortage due to sanctions will affect Brazil, a major producer of food. Also, African countries rely on fertilizer to generate enough food for their population
• China also banning its export of fertilizer as it still deals with the African swine fever which is having China buy all foodstuff from the global market to regrow their herd.

All of these conditions are pointing to a 2023 with conditions set for a famine that will likely be included in the next “Old Testament.” (The thesis for this investment is also based on human misery and for that may the gods have mercy on me.)

The question then becomes why hasn’t WEAT taken off? It seems to have taken off right after the start of the Ukraine war but has fallen back. The reason is that the contracts for wheat for 2022 are based on fertilizer and inputs from 2021. We have not priced in wheat from the inputs of 2022 conditions and in general the crop haven’t even been planted yet (if it will in terms of Pakistan).

I hope I am wrong and maybe the United States will step in but it doesn’t produce enough to feed a billion mouths.

Liquidating Crypto

Crypto no longer seems like a viable investment to me. The reasons are several:

1. The era of cheap Capital is over as we are faced with a tectonic shift is what is happening in the world. Crypto being so volatile while the existing fiat currencies also being volatile doesn’t bode well for it as a currency that will be used. 
2. Crypto has no fundamentals. We are returning to an era where fundamentals matter. Crypto not having any fundamentals doesn’t bode well for it to remain relevant.
3. Crypto still isn’t easy to use. I still don’t know how to build or pay for things easily.
4. The value of crypto will continue to drop. The game is up, and the losers are starting to realize they are losers.

It was fun while it lasted but FTX's demise has only accelerated crypto's demise.

What won’t change in a decade?

As we go through a major economic reshuffling, the question that keeps coming to mind is: What won’t change in a decade? We are still on the early side of a major capital, demographic and geopolitical reorientation that will take a better part of a decade to sort out. During this period, companies will be constrained by capital and workers. The Cloud, APIs, and Automation will be a major part of the equation.

As baby boomers retire in significant numbers starting this quarter, we are experiencing a lot of things all at once. The first is that we no longer have workers sufficient enough to replace the retiring baby boomer population, as GenZ is the smallest generation we have. The second is as baby boomers retire and sell their small businesses there is immense room for automation to take foot which has not happened yet. Many SMBs still use on-premise tools that haven’t been updated to take advantage of the current generation of Cloud powered tooling.

As baby boomers retire and move their $79 trillion dollars of wealth to safer asset classes the capital structure is going to change. We are entering an era of expensive capital where interest rates will be significantly high for years. The result of this is there just won’t be enough capital to do any meaningful R&D through VC-based companies. So companies will be driven to efficiency and to make do with less. Automation and APIs will take on major roles at companies. This does not mean additional SaaS tooling but tooling that does work on behalf of companies. In the words of Clayton Christensen, a Job to Be Done.

So what won’t change in a tremulous decade ahead? The Cloud. If anything, the Cloud is still in the early adoption phase and has significantly further to go.

Sales, Marketing, Value Delivery, Value Creation, Finance. Pick Two.

Any company can only be good at two of these things and should really optimize the efforts on two. As a company can’t do it all and can really only focus its resources on optimizing a few pieces.

Examples:

• Coca Cola. Sales, Marketing. They are selling sugar water no new value is being created or delivered.
• Apple. Marketing and Value Creation. They are heavy on advertising and building new products.
• Microsoft. Sales and Value Creation. They are selling to enterprises and they make most of their money on sales. Their marketing efforts are largely limited to Xbox it seems.
• Starbucks. Marketing and Value Delivery. you can buy coffee anywhere. Why buy it at Starbucks other than the idea of the third place.
• Safeway. Marketing and Value Delivery. They don’t really make their own food per se. they basically act as a distribution.
• Uber. Marketing and Value Delivery. They haven’t created new value they have found a more efficient delivery method for wanting a taxi.
• Amazon. Value Delivery and Value Creation. Amazon creates amazing amount of value and delivers it cheaper allowing them economies of scale.

Product vs Service Business

Product businesses are so hot right now. There is a literal app for every single thing. Product companies are great because margins are high, custom work is low and scaling that is relatively easy. Unfortunately, with opsZero I’m in the service game.

Services are interesting because after doing services for 20+ companies in the last 5 years a few patterns emerge:

• Services can be delivered in a Productized manner.
• Most companies aren’t unique in their requirements. If you do it for one company, likely many more have the same need.
• Most things require scaffolding. If you can Productized the scaffolding and provide the value on top it allows the value to be delivered faster.

Some negatives of a service business.

• Since people are interacting with a person instead of a product they have weird things they want to throw in versus what they would do with a product. A product can fail and you move on because a product can’t do everything. A service on the other hand people have weird expectations that they wouldn’t have of a product because they are speaking to another person. “Oh you do Kubernetes, let’s have you do database optimization.”
• A product company is mostly a subscription business now. This is unfortunate because I grew up in the shareware generation and I think a lot of products can be that model. Anyways, this results in people thinking the old model is product based subscription businesses and everything else is a “lifestyle” business.
• People are willing to treat other people poorly versus having to go through a support channel to treat people poorly.

So why do I like service businesses?

• Everyone wants to build a product but to use your product someone needs to do the work. Just because a product is created doesn’t mean that your customer can do it themselves. Webflow, WordPress, Wix, etc. Have figured out how to do this by creating a partner marketplace. But if you are just starting out it doesn’t exist.
• Value is easier to discern. You deliver value and you get paid for it. Time is literally money.
• The price of time has a higher value in the short term than in the long term compared to a product. Overtime a product has the better revenue + profit vs a service business. But in the short term a service has a better outcome. On the other hand a product has a harder time getting a footing which is also a risk a service company doesn’t have to do.

What are some things a service company can do to innovate?

• A company can innovate in delivery. Process delivery, i.e delivering the same things multiple times for multiple customers, is the best way to deliver value. Basically make things as cheap as possible by constantly reducing cost.
• As a business model service businesses don’t incentive workers. A person delivering $100 dollars in value isn’t that different from a company providing $150 in value if they are following the same checklist. Essentially a service business is seeking engineers at the cheapest rate possible and isn’t looking for the sake of tomorrow but the needs of today. Incentives in this structure is hard as people doing harder work usually results in higher pay. In a service business the goal should be getting the work done for the same amount over time.

Bundling and Unbundling

While writing PR.FAQs for my projects I keep doing, “this project does x and y and z.” Basically, bundling too many things into a single thing. This results in lack of focus and projects that are not connected to each other but if you squint it looks like they are.

For example, I wanted to combine DevOps, Kubernetes and Serverless. While seemingly related in that they all are Cloud based the similarities stop quickly and optimizing the offering to deliver consistently and reliably fails fast. Providing services for DevOps can entail all sorts of things from Android, iOS, Cloud, Databases, etc. Really too much for any one person or company to necessarily get good at. Kubernetes and Serverless while related in terms of getting code running on a server somewhere has another set of issues. You can learn Kubernetes for the different Cloud providers but then Serverless is difficult because you have to figure out what Serverless platform you want to use. Optimizing delivery of Kubernetes problems is much much different than optimizing delivery of Serverless offerings.

I’ve had mentors and people tell me that doing too many things like this is unproductive. Obviously, I didn’t listen to them because I am special… But simplicity of offering matters. For all the complexity that Stripe handles and their seemingly endless products their API is simple. All their products are build into a consistent whole which is take payments on the Internet.

So as much as I wanted opsZero to do multiple things I do not think a brand can be made to handle multiple things. People need a brand to do exactly one thing for them. A job to be done. A business is a “person” after all. It just does the same task a person would do themselves but as a repeatable entity that does it for n people.

The lesson learned is that a company, as Peter Drucker noted, exists to exploit an opportunity. And a business that is simple and easy to understand from the outside looking in, is better at exploiting opportunities than a company that tries to do too many things.

So how does this affect what I’m doing? By having everything combined into one it was providing to be difficult to hire. How do you hire for a plumber and ice cream shop built into one? I’m now looking at every business as a machine. A machine that does a single thing well with different people working on the different parts with a singular metric to optimize around. My goal is as I go through building the machine I will be able to step back from each piece going from contributor, to manager, to owner delegating responsibility.

Consulting Business Model

For a business cash is king. This has been a truism and it is definitely something that I have paid little thought to. However, how money comes in and how it goes out to vendors/employees plays a huge role. Unfortunately, I have come more and more to the conclusion that getting paid upfront for a retainer and customers purchasing chunks of time is a better model.

Fixed-Costs

• Fixed-Cost projects are great for customers because they only pay a certain amount for a task and overages are on the consultant.
• For a consultant it may not be the best because based on how the contract is structured they payment may be based on milestones so the onus is on the consultant to figure out how to raise money to pay vendors in the meanwhile. This can lead to not being able to grow as you are constantly chasing the money in the future.
• Cost overruns and spec creep. Fixed costs are also a benefit to customers in that customers can change the scope or add to the work that wasn’t previously scoped. Or there is a discovery that happens after the contract is signed that results in complexity.

Hourly

• Hourly is beneficial to the consumer and consultant in that work can be more regularly paid leading to consultant having to only float the vendors/employees for a shorter period. The amount of accounts payable should hopefully be reduced in this scenario.
• However, growth in the scenarios is still zigzaggy as you can get more work but you may be pulled back from a lack of cash to pay the workers since there is a discrepency between when you are paid and when you pay your vendors.
• Some customers pay much slower than others resulting in a percipitous drop in cash so large cash cushion is needed which could otherwise be used for growth.
• The problem with the hourly model is that payment is always in the future, which means if you have a sales team that is growing your company, you may not be able to fulfill the work as you will have a lack of cash. So growing will lead to failure.
• Lastly, it is hard to prioritize work as every client is paying in the future. So each client is equally important.

Hourly Retainer

• I think hourly retainer is the best mechanism for both a customer and consultant. A retainer being an upfront payment for a set amount of hours.
• A retainer gives a float to the consultant to allow them to hire the employees/vendors that can help fulfill the work quickly ensuring quality of delivery.
• It benefits the customer in that they can commit a small amount of hours and test the waters with the consultant and constantly move forward to the finish of the project. The hours can have accountability.
• The consultant can hire a team of sales and admin staff to help grow the company further, while not being afraid to fulfill the work needed.
• This model also incentivizes and prioritizes work to the clients that have a regular retainer. Ensuring that work is always prioritized.

Anyways this whole article is to say I’m moving to an hourly retainer model.

Paying Yourself and Incentives in a Small Business

Owning a small business has a pitfall that where you start and where the company starts are blurred. You take money out whenever you want and treat the company as a personal bank. I think this has caused misaligned incentives and coming to the conclusion that it be avoided.

When you are the owner of a business that business belongs to you and you decide whether to keep it or not as an investment, when you work on the business you allocate capital including hiring and creating dividend, when you work in the business you get paid for the work you do. An entrepreneur needs to think in these three terms.

An ownership of a business does not mean treat the company like a bank. A company should exist as its own independent unit that like any life force is seeking to optimize itself toward a mission while giving a ROI. The owner of the business needs to think of the business in this term. So a flush out of cash leads to the company not performing at its peak. If anything ownership is an external factor.

Working on the company is using the capital within the company for the benefit of growing the company while also benefitting the stakeholders such as the owners. It is for this reason giving employees ownership is seen as a benefit. When working on the company Capital is allocated to where it is needed and excess capital should be returned as a dividend. The important drive here is while working on the company the incentives should be to think like an owner while acting like a worker. So the worker should be paid a compensation appropriate to their work, but their drive should be to increase the growth rate.

Lastly, working in the company is commiserate to being paid for the work performed. Your incentives are to work to get paid.

As a small business entrepreneur or any entrepreneur, for that matter, it seems that the best way to achieve the desired outcome is to go up the chain. When working in the company you get paid for the work performed, when working on the company you get paid for the work performed and once a quarter give a dividend if it is appropriate, as an owner you seek to ensure that the ROI is appropriate and find other investors who’d want to invest or raise capital to put into growing the business.

Each task set is completely independent.

Simplicity of Execution

Complexity is Entropy. If something takes you much longer to do than doing it the easy way you are basically wasting energy. I’ve been wondering why that is? I think the reason is that though simplicity scales better it gets boring. For people who can run a marathon or do the same weightlifting routine for years there is obvious regularity and gains. But an entrepreneur is by nature someone restless.

Doing the same thing over and over from an execution standpoint gets boring. It is a reason I think companies like Amazon have moved to a microservices model. Each service can be modeled simply and other services can build on top. Each individual component is simple but work together to create a complex adaptive system.

Anyways, as a business owner the real goal then is to produce simplicity at the core of what you do so that others can execute and understand the rules of the game, create rules that others are bound by which leads to an outcome. If the rules are too complex the game won’t be played well. So simplicity is quite important. Though defining if a finite or infinite game is being played also creates a challenge.

Managing Inconsistent Agency Cash Flows via Margin Accounts

Banks are conservative. They don’t loan money to businesses that need money, they loan money to businesses that don’t money. This doesn’t help if you are an agency where companies pay you in whatever timeframe they want even if you say NET-15. An agency likely also has a hard time raising money since it is a services business as opposed to a product business so venture funding doesn’t really exist.

So I’ve had to figure out how to minimize unproductive cash while being able to have access to cash readily when I need it. The simplest solution I found is to have a brokerage with a margin account with a low margin rate. I use Interactive Broker (#aff).

The idea is simple, there should be as little money in the business bank account as possible. If you are a LLC you want to minimize the liability that you are responsible for if you get sued. Second, you want to ensure that you are not holding as much cash especially in a high inflation environment like right now.

What I have done is the following:

1. Keep a minimum amount of cash on hand to pay bills, and a little extra for emergencies in the bank account.
2. Move all cash into a Brokerage that is dedicated to the business. This should be a personal account as this won’t get possessed if you get sued.
3. Invest based on your risk tolerance, with an idea of minimizing the risk so you can access that cash in the future.
4. When money is needed by the business, take a margin loan against your brokerage account to pay for what the business needs. I leverage up to 25% of the portfolio, but I suppose I have a higher risk tolerance. This way you are not incurring capital gains taxes on your investments.
5. Refill the brokerage when cash comes in to pay off the margin loan and continue buying more assets.

The benefits has been I can have access cash on a low rate versus a bank loan and don’t have to deal with a bank at all. Second, the brokerage account continues to grow giving me an even cheaper margin rate.

The risk is of course an increase in interest rates, but say you have a bunch of S&P500 ETFs, on average they grow at 15% year over year. Even if the margin interest rate is 5% you are still up 10% on average.

(This is not investment advice, you should do your own research.)

Moving on From OKRs

I’ve tried OKRs long enough now that they are not resulting in a positive outcome from a quarterly perspective. The problem lies in a couple things:

1. Changing OKRs from quarter to quarter seems too fast and doesn’t result in actual time to develop long-term strategy.
2. Once a strategy has been developed for an OKR it is hard to not drop it with a new OKR the next quarter.

I may be doing this wrong, but the whiplash of constantly chasing new OKRs doesn’t create consistent throughput. New OKRs can create misalignment since changing directions, mid-route is fighting the inertia of the previous OKR.

So I’ve changed tactics. I am no longer doing OKRs. Instead, there is a singular company-wide mission with key metrics that don’t change from quarter to quarter. This mission will be the North Star for the foreseeable future.

Hopefully this results in some long term benefits:

• Not wasting a lot of time planning on what new OKRs to make up. From a quarter to quarter standpoint opsZero doesn’t change that much. Companies want much the same thing they want last quarter. My goal is to make it more efficient to deliver it.
• Build metrics dashboards to understand key results somewhat in realtime.
• Focus on tasks that continuously benefit the mission’s key results as opposed to changing tactics quarter to quarter.

Planning

Getting rid of OKRs does not negate the need to plan. Instead, planning will be in shorter iteration cycles of six weeks. Planning should be to figure out the high leverage tasks, scaffold new initiatives, and basically treat building as continuously fixing bugs.

The optimal time for an iteration cycle seems to be 6 weeks. Four weeks is long enough to get major tasks done without having to stop for planning, two weeks are spent down-cycle, relaxing, and coming up with new initiatives. After 6 years of running opsZero, going full steam all the time is no longer a real objective. Taking breaks more frequently, has been a godsend.

A Shift to Focus on Profit

Capital is going to get expensive if it already hasn’t which means the era of crazy valuations and everyone getting a puppy when they join a tech company are over. This will result in a sizable adjustment as many venture backed companies will just perish as they run out of funding the next few years.

However, this is not going to be peaches and roses for Google, Meta, or Microsoft either. The first two are reliant on the cheap Capital to help startups pay for advertising. Microsoft on the other hand has half its revenue coming from international. As the dollar strengthens relative to the other currencies Microsoft will also face the same headwinds.

In this market Amazon seems to be in the strongest position as they seem to be the most diversified. They will have headwinds on their AWS business but a lot of the startups are playing with credits anyways and haven’t started to pay Amazon. With a focus on healthcare that they seem to be doing with their recent purchases they seem to have the most strength of the big tech companies.

The lack of capital will kill many companies because there is just no way many of them have a way to get to profitability. This will be likely the big focus of the next decade, back to the power of cash flows and balance sheets. This may have unintended consequences on the broader tech ecosystem as the goodwill of these companies has been the primary driver of many of the innovations in tech the last decade.