Exclusive Interview: Investing in the Rise of the New Spending Class

Read the full interview transcript below.

Jerry Robinson, Host: Joining us on the line today is Gianni Kovacevic, and he is the author of a brand new book, “My Electrician Drives a Porsche: Investing in the Rise of the New Spending Class”. He’s also an investor, and also dubs himself the “Realistic Environmentalist”. Gianni, it’s great to have you on the program. Thanks for joining us on Follow The Money.

Gianni Kovacevic: It’s great to be with you. I’m here in Houston, Texas as we speak.

JR: That’s right. You’re driving around an all electric Tesla Model S. How do you like driving that around the country?

GK: Well, I’ve owned a lot of cars in my life, and it’s an amazing piece of rolling technology. Anyone that has driven in a Tesla understands that, and I think first and foremost, as a consumer of an automobile, it has to be a great car. You want a pickup truck for hunting or a Ferrari for sports car driving. Utility is number one. It’s a fantastic machine. I guess the first thing I should talk about is my book entitled, “My Electrician Drives a Porsche” and I’m driving a Tesla. So, to just get that out of the way, the book has nothing to do with fast cars. It has everything to do with electricity and understanding how the world is changing. So, it’s a young electrician who enlightens his family doctor who’s 58 years old and lives in Seattle, has never had a passport, and is oblivious to what makes the world turn. They go on a page turning adventure of enlightenment to talk about changing demographics, technology, energy. All the icons people see on the cover of the book, the information is presented in this really fun and memorable format. So, first and foremost, I think I should let people know that that’s where Tesla comes into the book title.

JR: Makes sense. Talk about the Realistic Environmentalist. I know there’s a lot of people out there who are strong on environmentalism. Other people are not, so they don’t really factor that in. Explain what you mean by being a proponent of Realistic Environmentalism. What do you mean?

GK: Well, I consider myself to be in the middle. I don’t want to get involved in this big argument that takes place between capital G “Greens” and climate change “Dires” or whatever you want to call them. I’m an investor, and I’m in the middle. You’re viewers are probably much like me. They look at it as “Where’s the opportunity?” Being a Realistic Environmentalist, what that means is first of all, I recognize that fossil fuels are important to the energy mix. We’re not going to go off of fossil fuels, but at the same time, are we weaning ourselves off of some of the fossil fuels in the coming 10, 20, or 30 years, and the answer is definitively, yes. It’s not even a question of policy or being a Capital G Green. It’s assets that are deemed uneconomic or assets that are stranded, things like coal. We’re going to go away from coal not because of policy but simply because it’s not the best fuel source any more for electricity. And, so, as a Realistic Environmentalist, the second part of it is to understand and appreciate that there are seven and a half billion people that live on the planet, and they know how the world works now for the most part. More people have emerged and are still emerging, but there are another 1.2 or 1.3 billion people that don’t have electricity like you and I. They don’t have running water in their homes. Who am I to tell them they can’t have it? More importantly, how can I even do this? They want it, and they’re going to have it. So, a Realistic Environmentalist says, “I understand that.” Probably, they’re not going to be buying expensive electric cars, and they’re not going to be buying expensive green energy. It’s probably going to be what is the fuel source in their jurisdiction, and how can that fuel source come to market as electricity so that they can live with basic human dignity. In a nutshell, the Realistic Environmentalist sort of sits in the middle, and he just wants to understand these trends and themes and then also participate as an ambassador because it’s ok for environmentalism, innovation, and investment to cohabitate together.

JR: You know, speaking of that, the idea of the shift that’s occurring, especially with these emerging markets over time. I remember a statistic I read, it’s been many years ago, Gianni. It’s probably different now. I remember reading that if China consumed fossil fuels at the rate that Americans did, the way that we do. We represent five percent of the world and we consume about 25% of the fossil fuels at last check. If China were to consume the same levels that we do per capita, they would require the entire earth. There wouldn’t be enough for both of us, and so, there’s almost a need to move toward some other alternative type of energy because the rest of the world can not possibly live the way that we have lived for the last several decades. True?

GK: That is true, and that’s why a lot of the leading innovation with respect to so called renewable energy is coming, actually, from China. They recognize this absolutely. So, they’re already making these big pivots to renewable energy. It’s not even necessarily the economics or even policy. It’s just social upheaval. We’ve all seen the rampant pollution in some of the megacities of China. So, they are addressing this, and this comes from many sources, not the least of which is automobiles. They are now the world’s largest vehicle market by far. To give everyone a quick recap, in America, we’re selling around 17 million cars a year, China is now 24 or 25 million a year, far and away the largest market. They are also going to increasingly electrify not just their light vehicle transportation, but also urban fleets, buses, cement trucks, milk carriers, postal carriers and these kinds of things. And, the other part of it for fossil fuels, why they’re developing so much green energy is that tens of millions of people still heat their homes, Jerry, with coal heating, Dickens era coal heating. This is particulate pollution. There’s only one way to alleviate this. I mean, people have to heat their homes, and so what needs to happen is they need to provide a lot more electrical energy so that they can get rid of the worst of the evils and pollution sort of metric is this coal heating. And, so many, many things come together. I’ve got a bunch of statistics and numbers I can give people to relate with. I don’t know how much time we have, but if you want me to in a later question, I can really give people a greater appreciation and understanding of the changes that have already happened. They are, truly now, at this point, the leaders in the installation of wind and solar power.

JR: They really are. There’s no doubt about it. One of the things that you focus your book on and even the subtitle is “Investing in the Rise of the New Spending Class”, the rise of the world’s new spending class. What we’re seeing, I was watching a story just recently, a media story about China’s film industry. I’ve been watching this kind of evolve over time, and now you have China putting out 600 feature films every single year, threatening to overtake Hollywood in as far as production and profit levels and all of this. One of the things that we wrote a long time ago, Gianni, in the book that I wrote, was that the rise of China was going to be hard on America psychologically because we have for so long been the world’s number one everything, right? We think of ourselves in those terms. That hurts an investor, doesn’t it? That’s a dangerous idea and a dangerous psychological idea for an investor.

GK: Yes, but there’s a lot of opportunity here. There’s challenges associated with so much global growth, but there’s also vast opportunities. I look at what we call the new spending class. My book gives a lot of statistics and a lot of reference to all the growth that’s taking place in China. One thing I want people to understand is I throw a lot of information and facts at people in the book, but you don’t even realize you’re absorbing it because it’s done in this adventure. It’s the journey of two buddies, and you’re really getting the stuff in a page to page manner that resonates with people. So, yes, there are tremendous opportunities there. The largest economy in the world is the United States. It’s just over $18 trillion of output. China is now $12 trillion of output. In 2006, China only had $3 trillion of output. I mean, it’s just been an incredible growth factor, and it’s pivoting. It’s becoming a consumer services based economy. Many people have read about that. There’s a lot of confusion with the currency, the stock market which doesn’t encompass all Chinese people, and the actual economy, and it is pivoting to services. Today, about 53 to 54 percent is services, and it’s on its way to about 70%, just like in the United States. Unless a calamity happens in the United States of America, it can take care of itself, and China wants to go that same road. They don’t want to be the junkyard of the world anymore. Who’s the future of the Chinese economy? It’s the youth, the millennials, so let us put some perspective here to this new spending class. There are 87 million millennials in the United States. There are 450 million in China. It’s five times the number. Over 100 million of them have already graduated university, typically in things in the stem field, science, technology, engineering, and math. They have far higher expectations than the generations before them. This is another one of the major reasons the economy is pivoting. These young people don’t want any part of this factory job network anymore. You know, nothing to do with it at all, and to give people context, the fellows that run the country right now are the demographic of the children of the cultural revolution, 55 to say, 66 or 67. You know, 160 million in that demographic block, only a million college graduates. There’s over a hundred times difference in enlightenment and awareness and spending patterns, and how we, as investors, can participate in that. It’s a tremendous opportunity.

JR: Let’s talk about that. Let’s talk about how we participate, because I’m looking here, for example, in your book, and I’m seeing that one of the amazing stats shows that China, between now and 2030, is building about 1000 gigawatts of renewable energy capacity which you point out is equal to 90% of the current US power grid. That’s just mind boggling to think about that. How does the average US investor take a look at this shift that’s occurring and actually position themselves for the best? Just give us a few tips that investors can be looking at or focusing on.

GK: Yes, I’ll give you a stealth one, I think, something that’s a really interesting opportunity for any investor. The classic line for any value investor is “buy low, sell high”. So, if an industry is trading at all time lows, and it has a very interesting future, I think that’s something to look at. So, let’s get a quick understanding of energy, electrical energy. By this, we are talking, of course, about fossil fuels, renewable energy. America has electrical capacity of 1100 gigawatts of electrical capacity, and it’s falling. It used to be 45% of that was coal. It’s fallen. It’s around 35% that is derived from coal and a lot more from increasing gas. The rest of the renewables, hydro, nuclear, and your alternate renewables which are wind and solar. China has a capacity today of 1400 gigawatts of electrical capacity, but their biggest amplitude of increase is coming in green energy, wind and solar. They’ve invested about $150 billion a year over the past 4 or 5 years. The lion’s share of that is coming from renewables. $100 billion of that $150 billion in green energy. Only about $20 billion in coal, and falling. So, this is going to pivot. Who’s the biggest winner in this pivot? It’s copper. It takes four to five times more copper per megawatt of utility when you create, transfer, and utilize greener and cleaner energy. People don’t talk about this. So, copper is trading at all time lows. There’s a reason why Carl Icahn got involved in Freeport-McMoRan some months ago. I think, if you look up and down the food chain with how one can invest in copper, and you look at the different valuations, you can say there is some interesting opportunity here because it’s trading at all time inflation adjusted lows.

JR: So, copper is required, is an integral part of renewable energy?

GK: It’s the Achilles Heel. It’s the keystone. It’s the magic component. To give you numbers, in an electric car which we can get into that later. I’ll give people statistics on how that’s going to change, but there is about 300 to 400 more percent copper per vehicle, plus you have to charge them. Wind power takes 500% more copper for each megawatt compared to conventional electrical generation because what they are is a generator, a big generator head and you have to collect all the power at a central point and step it up, step it down, and move it into the transmission lines. It’s a tremendously heavy user of copper across the board, and I think we should really look at how vehicle transportation is going to change. I think this is something that investors have to look at as well. I’ll give you some examples, things to be cautious of and things to be optimistic of.

JR: We’re talking, by the way, with the author of a new book that is entitled, “My Electrician Drives a Porsche: Investing in the Rise of the New Spending Class”. Of course, the new spending class would be people who are not in America. They are people who are overseas. In fact, you’re pointing out places like China, Nigeria, and India, and many of these other types of markets that are now beginning to develop a middle class. Of course, they’ve had a middle class for some time and many of them are in this upward mobility phase, and now they want automobiles. Now they want nicer homes, they want refrigerators, they want televisions, they want air conditioners, they want everything that you and I have here in America. The point of your book is simply to say that the only way to achieve that is primarily by renewable energy because there’s simply not enough fossil fuels in the ground that’s accessible for us to be able to pull this off. So, we’re looking at different kinds of ways to invest, and you’re saying copper is key in, is it in all renewable energy, Gianni, or is it mainly wind or mainly solar or is it across the board?

GK: It’s across the board, but it goes even farther than that, because now we have to talk about efficiency and conservation because that’s another thing that is an interesting way that investors can participate. In the United States, these things are mandated, things like air conditioning has to be 10% more efficient by 2018. It has to be 25% more efficient by 2023. The average automobile has to, right now the average American car is about 27 or 28 miles per gallon, but that’s going to be 54 miles per gallon by 2025. So, how do you make things more energy efficient? Well, I’ll tell you that 46 or 47% of America’s electricity is consumed by motors. To make a motor more energy efficient, it requires more copper. Typically, you would use a copper rotor motor, or you would use an AC induction motor. In some cases, you would use a permanent magnet motor, and in many cases, you would have things like variable speed drives to oscillate the frequency of these motors. It takes a tremendous amount of copper to make that happen. Also with transformers, you have to use copper windings instead of aluminum windings. Even in efficiencies, and this happens on a global scale, everyone wants to use less energy, particularly big governments. Like in China, they also want to have these efficiencies, and so it’s yet another place where people can look at that opportunity. It all comes down to the building blocks of making these things efficient. I know I keep going down the path of copper, but when you look at it, it’s pretty hard for an investor to figure out how they play the efficient energy or efficient motors or better transformers. You know, it’s pretty hard for them to choose. Also, when you talk about automotive manufacturers if you want to invest in that, everyone’s heard about Tesla. Everyone’s heard about the tremendous success there. For me to guess the price of Tesla, it’s going to go up or down. It’s going to have some volatility in there because there are people that seem to want to short that stock, and I’m not a good enough trader to pick tops and bottoms and things like that. So, let’s go and look at other opportunities, the building blocks that make these things possible. With Tesla in particular, some of the critical components there are lithium, lithium ion batteries, but there is also the graphite involved and the cobalt involved and the scarcities there. So, there’s a lot of different things. One of tips I give people in my book is to go to conferences where all of these things are represented. I don’t have the time with you in our 15 minutes to go over all of the different variables, but they can go to conferences. It costs money to do these things, but your enlightened listeners probably do these things anyway. Also, get specialty newsletter services and listen to specialty radio programs like yours to get it, and you have to tune in to these things like financial soap operas. You can’t just tune in every three months. You have to really be aware and see where the changes are coming on a daily and weekly basis to really have that foundation. What my book does, I think, is it gives you that initial foundation made really, really strong, to give you all those tips and clues and point you in the right direction. It gives you the unbiased science, the facts. I don’t do any prognostication. I don’t do anything that’s actually stalemated. My book is going to be relevant this year as much as it will be three to five years from now.

JR: Oh, sure, probably even more so as we go forward and more people wake up to the realities that await us. Another statistic I found very interesting as well in the book and also in some of your good stuff on the website is the fact that only about one out of five Chinese actually have a driver’s license, and yet, as you mentioned, they already have the largest auto market in the world. When I think about China though, Gianni, I think of a closed market. I think of a market that is increasingly difficult for the US to really gain a good foothold in because China is realizing that it can close its economy and still get away with a lot. And so, one of the things that I think of whenever I think of Chinese car sales and I see Chinese movie sales and I see all of this and I think, gosh, can I really play that with a US stock, or am I going to have to learn more about the Chinese stock market? What’s your take on that? Are you mainly thinking, aside from copper, we talked about that major theme, but if you want to get in on China car sales that are exploding, or whatever the case might be, are you looking at things like Tesla that do have the ability to break into China, or are you thinking more Chinese manufacturers and Chinese companies? What should the investor be looking at?

GK: It is a hard market to play, also because of the volatility we’ve seen in Chinese stock markets. It may not be somewhere that people want to play in. You saw what happened in Shanghai and Shenzhen in the stock markets in the past 12 months, a huge boom and then a big bust. But, you know, they’re still higher than they were a year and a half ago. They went up so high so fast with a lot of unsophisticated investors, Chinese investors I’m talking about getting involved. A very small portion of these companies can be bought by foreigners. There are groups that specialize in Chinese markets. There are people that are Chinese bears, Jim Chanos, everyone knows, is a famous bear. Kyle Bass is certainly not, he doesn’t believe in the Chinese banking system. He thinks that there is going to be a massive explosion there. But, then there are people that are following these markets very closely. My friends at KraneShares, it’s an ETF that follows the Chinese market, invests in the Chinese market, and looks at giving disproportionate returns to their investors. One thing that I’m involved with is my CO2 Master Solutions Partnership which is going to evolve and turn into a fund later this year. It looks at all the ways to play this theme of the new spending class, and particularly opportunities we’re going to see around the world. It’s going to be agnostic, ambivalent, whatever the word you want to use, and a lot of it is going to focus on not just China, but this new spending class markets. So, I guess to answer your question the long way around, yes, it’s a difficult market for individual investors to dabble in and probably one, unless you’re doing it under the guise or something like a really interesting hedge fund or a really interesting ETF, I would actually caution people to stay away. Try to focus on the subliminal building blocks, things like the copper and maybe all those different commodities that are going to be winners and not losers. Some fossil fuels will be losers, metals will be winners, I think.

JR: Very interesting stuff. Our guest today, Gianni Kovacevic, and the title of the book, “My Electrician Drives a Porsche: Investing in the Rise of the New Spending Class”. It’s a very thin book that can be easily read. It’s written in a very nice illustrated way in the fact that it tells a story. It tells a very important story about the global shift that is occurring right now in our world. Gianni, I just want to close with this. I think this is really interesting. You’re doing something right now to promote the book. You’re doing a Realistic Environmentalist Tesla Tour. You began in March in Toronto, up in Canada where you’re from, coming down into the United States, and then you’re going to end up back in Seattle on May 11. You’ve just been touring the country and raising awareness about this. Just tell us a few things that you’ve learned along the way before we bring this to a close.

GK: Yes, for sure. People can actually follow my tour on my Twitter handle @realisticenviro, and that same thing will correlate with Instagram or Facebook. It’s a very important journey, I think, to take. People that are aware of, particularly, Tesla, really hyper aware of energy, are not as interested, but, of course, there’s more people that are not aware of these things. Ultimately, it’s about explaining to people and physically showing them that the future is now. I took a really skeptical German journalist on one of the legs of my journey, and I told him, “Look, you tell me when you need to stop to take a restroom break, when you’re hungry, and we’ll stop.” Our drive from Toronto to Boston took no more time than it would have in a gas can engine vehicle. Charging these cars takes half an hour, about 40 minutes. The chargers are everywhere. It’s only going to be more so in the future, and people are slowly starting to wake up. The tremendous success of the launch of the Tesla is through. Now they have to make the cars and deliver them. Certainly, there’s pent up customer demand. This is one of the greatest roll outs in history. In sales, it’s like $11 billion. Car wise, they’re up to 350 thousand pre orders for these deposits. To give context, BMW only sells 95 thousand BMWs in the United States every year. Every manufacturer wants this. They don’t have any infrastructure, really. They do this with tiny little showrooms, and cheap rent in the warehouse district to service the car. So, by taking this tour and engaging with people and doing interviews, radio media and various things in all the different cities, it’s the eye opener for people, the fact that the future is now. This is not coming. This is here, and it’s going to happen so quickly, it’ll be like the adoption of the internet. Right now, some hotels offer charging for my Tesla, but many don’t. That’s going to quickly ramp up. There’s not going to be a hotel anywhere in the nation that doesn’t offer electric charging because who’s going to stay there if there are a lot of electric cars? It takes an electrician a little over four hours to install this thing, so why would you not have that? It’s going to be as important as offering wifi connections for people. It’s a fun journey. We’re in Houston, and we’re going to be at the Tesla headquarters on May 4th or 5th in California, and people can get their updates from my handles that I just gave.

JR: By the way, you are listening to the voice of Gianni Kovacevic, and he is the author of “My Electrician Drives a Porsche”. Gianni, how can people get a hold of you if they want to learn more about the book? Where can they buy it, and how can they learn more about you?

GK: My book is featured at all US airports, so that’s an easy one, at Hudson’s Book Sellers. It’s prominently featured on the premier tables, so we’re very happy about that. It’s the second printing, by the way. They can find it on Amazon. It’s on the Kindle version, and in the hardback version. They can dialog with me through Twitter @realisticenviro, and my Facebook page and through Instagram and Realistic Environmentalist. If I’m still coming to your city and you’re a group of investors, or if you want to do a little discussion, if I have time in my schedule, I’d be more than happy to facilitate, and people can get that from my personal website, the upcoming dates.

JR: That’s great. So, you’re going to be in Texas and Oklahoma and Arizona and California, just all over the place. What an exciting journey you must be on right now. Well, thank you so much for taking time out of your busy schedule to join us. I want to encourage people to check out this book and think about some of the things that they’ve heard in this interview. Very, very compelling. Thank you, Gianni, so much for your time.

GK: Thank you. Nice being with you.

Featured image courtesy of: wang song / Shutterstock

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