Invest Like the Best with Patrick O'Shaughnessy
· John Arnold, Patrick O'Shaughnessy
I wonder if some of the same dynamics that’s happened with solar will start happening with batteries soon. As the technology is getting better, the manufacturing gets optimized, you start running out of the advancements that have significant cost ramifications for the battery system. It becomes more and more about what the input costs are. We've seen lithium prices, for instance, just in the past few months, be up more than 50%. That's going to translate into higher battery costs, all things being equal. [00:00:00] S0: It's fascinating that it all comes back to the same problem of labor. Can we build these things? Can we build them quickly? Permits. A lot of our attention as a country maybe should just be there. We can take for granted these falling cost curves, which are great. It’s great, but not sufficient to have the end system that we want. If I was forcing you to invest in something related to the proliferation of data centers today, I'm curious how you would attack that problem. So much excitement around these things. Lots of companies that are predicated on the rise of data centers and the build-out of data centers. What would it take for you to get excited about investing in something that was tied to that trend?
· John Arnold
[00:00:00] S1: There’s a number of companies that are trying to make the build-out of the data center less labor-intensive through robotics. That's an interesting source. It could be a very crowded space, though. It remains to be seen how good of an investment that robotics companies will be. From an energy standpoint, I think advanced geothermal is one of the most interesting components of the system today. It is a baseload energy source that is friendly to the environment. It is coming down the cost curve, it's still very early in this industry. So it still us unclear what costs are going to look like in a few years. But there is the skilled labor force that exists in this country already. It comes largely from the oil and gas sector. The technology has now been proven out. There's a lot of work to do to scale this. Early on in shale gas or shale oil revolutions, it just starts out small because these companies have had to prove out the geology, have to prove out the techniques, have to prove out the management team. You have to get to the project finance market in order to get a very low cost of capital to make these things really work. It takes time to get from startup of the industry and getting all these steps proven, to getting to where banks are willing to loan you money because they know it's going to work and they know where they will get repaid. But I can see in five years that the geothermal industry could be the most exciting in the United States.
· Patrick O'Shaughnessy
[00:00:00] S0: We've talked a lot about energy infrastructure specifically. Are there other parts of U.S. infrastructure, non-energy, that interest you most?
· John Arnold
[00:00:00] S1: The housing discussions that are happening across the nation are really fascinating. A lot of the YIMBYism, or Yes In My Backyard – as a combatant to NIMBYism – originated in California, largely because California had some of the highest housing costs and the fastest growing housing costs, and some of the most stringent restrictions on trying to build new housing. And it had gotten so bad that there started to be this pushback against all of that. What we've seen is similar to permitting reform, this has become a very bipartisan issue, of "Make it easier to build housing." We see it from not only California, but you see it in Montana, you see it in places like Austin and in the Northeast. And so, it has kind of superseded politics. I think politicians are now realizing that this affordability issue is front and center for voters. And that’s driving this renewed focus on cost of electricity, renewed focus on cost of groceries, and on housing. People are asking their mayors, governors, the federal government, "What about housing? What are you doing to reduce the cost of housing and make it easier for people to buy that first house?" If you don't have a response as a politician, you're just not going to win a race these days. President Trump came out and made this comment about, "I want housing prices for those who have a house to go up." He also talks about making it more affordable to buy a house. You can't do both unless there is just a massive government subsidy. I think that's one of the risks of this affordability push. It's been decades in the making from all these regulations, all these restrictions on building things in this country. There aren't easy solutions to overcome this, besides just big subsidies. The real solutions take time, and the problem is that that window is longer than the political cycle. If you're a politician and you're facing re-election every two or four years, you have to have an answer today about, "What you are doing that you can actually see during my term?" One of the easiest things to do there is, if you have access to the budget, which federal politicians do, you just start subsidizing things. Which makes the problem worse in the long-term, but the electorate likes it in the short-term.
· Patrick O'Shaughnessy
[00:00:00] S0: I'd love to apply your system thinking to some other areas that you've studied carefully and been really involved in with the foundation. Before we do that, maybe describe your goal for the foundation overall. One of the things I've heard you say that's so interesting is that foundations should get less powerful over time. Individual foundations, that is. As someone that's running a big one, that's an interesting thought, I'm curious why you think that. So maybe before getting to some of the things that you focus on, just frame, why have a foundation if you want to get weaker over time?
· John Arnold
[00:00:00] S1: Any institution gets less effective over time. I think it's true of companies. I think it's true of countries or governments. I think it's true of foundations. You have your best, most innovative times when you're still relatively young as any organization. So I'm very cognizant of some of the downsides of having perpetual foundations. One of the roles of a foundation is to take risks that the private sector and governments aren't incentivized to take. There might be political risks, there might be economic risks. Because there's less accountability on foundations, they can provide that capital and resources to try things that others aren't willing to do. But those are risky. Oftentimes, those will fail. I think organizations become more bureaucratic, more risk-averse over time, and so they're not able to do one of the main functions of a foundation. There's this difference between charity and philanthropy. Charities often are designed to meet short-term needs, and philanthropy is more on trying to create long-term solutions. We do both of those. We're mostly on the long-term solution side, but we also give money to our local food bank. We give money to help the local hospital. It's harder work. It requires having bigger staff. It requires having a longer time frame, and being willing to live with ambiguity and likelihood of failure on many of the things that we're doing. I talk about, the easiest money to raise is a university that's going to build a new building, because a donor has trust in that institution. They know that if I give a dollar, I can point at the brick that my dollar went to. Sometimes you even have your name on that brick. You see directly where your money's going. A lot of the work that we do, which is based on trying to improve these big systems in America, whether that is the healthcare system, or the criminal justice system, or infrastructure, our public finance system, education. It is long-term work and progress is slow, but we really act as this conduit between researchers and policymakers, trying to do this experimentation, and do evaluations and research about what works and what doesn't in these systems, and help people think about new ideas, and how will you test them, and how can we translate them into something that's useful for policymakers to improve the outcomes of these systems.