Imagine the world as a ball-shaped scoop of ice cream, sitting upright in an ice cream cone.
The polar vortex is a circular flow of low-pressure cold air swirling around the top, or dome, of the ice cream scoop. This low-pressure air flow is held in place by a ring of high-pressure warm air that surrounds it like a doughnut.
When the jet stream weakens, the ring of warm air that keeps the cold air in a circle around the dome gets broken, allowing the low-pressure cold air to spill outward and downward.
Imagine chocolate syrup or butterscotch topping dripping from the top of the ice cream scoop down onto the sides; now picture cold air from the polar vortex, spilling out and down as a weakened jet stream fails to contain it, enveloping much of Europe in January and, last week, hitting Texas.
This is how parts of Texas came to be colder than Alaska over the course of the past week. A circular flow of freezing-cold air — normally contained at the top of the cone — spilled out and down over the sides of the world like butterscotch drizzled onto an ice cream scoop, reaching all the way to San Antonio.
There is no historical record for the polar vortex behaving like this (spilling out over its sides and reaching all the way down to Texas). As such the Lone Star State is used to episodes of extreme heat, but not extreme cold.
Texas was, in fact, warned about a decade ago that its energy grid was unprepared for extreme cold.
“Federal regulators warned Texas that its power plants couldn’t be counted on to reliably churn out electricity in bitterly cold conditions a decade ago,” Bloomberg reported on Feb. 17, “when the last deep freeze plunged 4 million people into the dark.”
“They recommended that utilities use more insulation, heat pipes and take other steps to winterize plants,” Bloomberg added — “strategies commonly observed in cooler climates but not in normally balmy Texas.”
For whatever reason, Texas decided not to winterize in February 2011 (or at any point since). That decision now looks catastrophic.
As the Texas cold-weather crisis (now spreading to surrounding states) initially unfolded, some people hastily blamed frozen wind turbines.
But trying to pin the disaster on wind energy is silly: For one thing, wind accounts for less than 25% of the Texas energy mix, and other, more heavily relied upon sources — like natural gas and nuclear power — also failed disastrously in conditions of extreme cold. For another thing, wind turbines do just fine in freezing-cold temperatures if installations are winterized properly. Just ask Minnesota, Sweden, Denmark, or any of the other snowy places that rely on wind energy each winter.
The catastrophic stories now pouring out of Texas guarantee this story will receive sustained national attention.
In addition to dozens of deaths directly attributed to extreme cold — along with Texans being forced to sleep in their cars with the motor running, or burn furniture for heat — new waves of outrage were created as wholesale electricity prices shot higher by as much as 10,000%.
In the deregulated Texas energy market, consumers can be directly exposed to wild swings in electricity prices with no cap on costs. That is how Scott Willoughby, a 63-year-old Army veteran living on Social Security, wound up with a $16,752 electric bill charged to his credit card.
Tens of thousands of Texans, if not hundreds of thousands, will be looking at monthly electricity bills in the range of 50 to 70 times the expected cost.
The wild price-gouging is legal under the fine print of deregulated energy costs — it’s in the fine print of the contracts that were signed — but this explains why the current Texas system will not survive politically. Public outrage will almost certainly kill the current arrangement. Catastrophic power shortages are one thing; sky-high bills authorized in the fine print are another; when both are put together, the result is collective consumer rage.
And this brings us around to front-month copper prices, which surged by an astonishing 4.43% in a single day on Friday, Feb. 19. Four-percent-plus might be small beer for, say, a speculative technology play, but it is gargantuan for a global base metal like copper.
On that same day, the blue chip copper miner in the TradeSmith Decoder portfolio more than doubled copper’s single-day percentage performance, rising by more than 9.8%; that core holding was up more than 257% as of the Feb. 19 close.
In our view, the copper price threatening to go parabolic was a function of what’s happening in Texas.
The connection runs through infrastructure and the growing political inevitability of a major infrastructure package making its way through the U.S. Congress.
The Biden administration had already been planning to push the most ambitious infrastructure overhaul in decades, with a size and scope to rival any initiative since the Federal Highway Act of 1956. Now, in the aftermath of Texas and the change in political climate (no pun intended), they will be tempted to go even bigger — and their plans will likely resonate with the American public.
One of the biggest concerns relating to the polar vortex incident, and the Texas cold-weather catastrophe, is that it could happen again next winter, or the winter after that. Apart from another brutal cold snap, Houston could soon experience more extreme floods, of the kind it has faced repeatedly over the past few years.
The point is that we can no longer count on the “100-year storm” actually taking place every 100 years; we are now at the point where 100-year weather events seem to take place routinely.
With the latest run of events in Texas — and with the pain spilling out to surrounding states — Americans are experiencing the catastrophic costs of underpreparation in the most visible and painful way.
The way to respond to all this — or at least the given lines of response in Washington — will be to:
- Build out America’s decrepit infrastructure, which, according to routine professional assessments, has been in a state of neglect and disrepair for decades.
- Winterize, weatherize, and otherwise upgrade America’s energy grid (including the Texas grid, which is separate and on its own system), in order to head off the potential costs of future catastrophic weather events (which are becoming more and more frequent in occurrence).
- Rethink and revamp the approach to deregulated utility markets, in Texas and wherever else, as such that consumers don’t get gouged to the point of financial disaster even as the providers themselves are experiencing catastrophic delivery failures.
All of this is going to cost many, many trillions — and state budgets are more or less busted at the tail end of the pandemic, which means the federal government will need to foot the bill.
Under normal circumstances, there would be significant political pushback in Washington at the notion of rolling out a series of mind-bogglingly expensive infrastructure initiatives on par with Eisenhower’s national highway system, or even Roosevelt’s public works projects of the 1930s.
Now, though — largely thanks to what’s happening in Texas — the political appetite for resisting an infrastructure overhaul for the ages will be much diminished.
Who wants to argue with the visceral imagery of millions of Texans freezing in the dark, with no water in their toilets, as ongoing shortages evoke the specter of a failed state?
The infrastructure story will also play into the economic growth story, in our view, as the infrastructure package that is coming will place deliberate emphasis on the creation of millions of new jobs.
All of this spending and allocating and job-creating can be expected to deliver one heck of an inflationary wallop — but not right away, as we will explain in future pieces. The unfolding narrative of “growth first, inflation later” will be key for investors to grasp as various asset prices react.