Leave Some Room for the 'Old Guard'

The biggest threat to the U.S. financial system isn't some foreign cyber entity...

It's not cryptocurrency, rising debt levels, or even the struggling real estate sector.

It's old age.

You see, the bones of our financial system were largely built between the 1970s and 1990s. That's around the time computer systems were proliferating... and banks started hiring developers to digitize all the processes that used to be done by hand.

Major banks needed those young developers to learn COBOL – the "hot" programming language of the day.

By modern standards, COBOL is clunky. It's great for moving data around and doing basic calculations... and not much else. At the time, though, it was state of the art.

COBOL developers built millions of programs that handled all aspects of the financial system. Digital-stock trading ran on COBOL. And when you got a paycheck, it was almost certainly calculated in COBOL.

And now, 30 to 50 years later... not much has changed.

The entire U.S. financial system still pretty much runs on COBOL. Meanwhile, nearly all the COBOL developers who built our financial system are in their 60s, 70s, or older.

Folks, the market is always looking for the next "latest and greatest" advancements. That's why new tools and systems are built in modern coding languages like Python and Java.

However, as you'll see today, sometimes the "old guard" can be just as valuable.

The developers who know COBOL are almost all retired...

But when the financial powers that be need help, that's who they turn to.

One anonymous programmer told Wealthsimple Magazine that he helped build a major Canadian bank's systems all the way back in the 1980s. He retired in 2007.

Now well into his 70s, he still gets called every so often to "tune up" the code.

Bill Hinshaw, another former COBOL developer, launched a consulting business called COBOL Cowboys in 2013 for the same reason. Companies can hire the cowboys to keep their old software systems up to date... and fix them if they break down.

Even though young programmers could rebuild these systems in modern languages, banks don't care. They'd rather leave well enough alone, as long as there are COBOL developers willing to keep the system running smoothly.

And they're plenty willing... considering that retired COBOL developers frequently charge hundreds of dollars an hour for their expertise.

But eventually, there won't be any COBOL Cowboys left to fix our aging systems.

Banks know they can't kick the can down the road forever. Even so, they're taking as long as they can to completely replace these systems.

Sometimes, the speed of innovation just doesn't matter. When there's an existing tool that does the job well, it can take decades to completely replace it.

This isn't just true in the programming world... It also applies to energy.

We have the technology for most cars to switch away from gas right now. However, the actual transition is easier said than done.

Government mandates help. But it's still going to take years – and billions of dollars – for the entire world to embrace renewable energy.

Look at California, which introduced a plan in 2022 to wind down the sale of internal combustion engine ("ICE") vehicles. This was part of an effort to reduce carbon emissions. However, the state will only begin banning new gas cars starting with 2026 models... and aims to bar the sale of all ICE cars in 2035.

Since California implemented this plan, eight other states have followed suit. They've set forth their own goals to eliminate sales of new ICE vehicles.

And yet, electric vehicles ("EVs") only make up 1% of all cars on the road today. That figure is only expected to reach 13% by 2035.

At that rate, EVs won't make up the majority of cars until 2050... even if California and other states ban new ICE car sales by 2035.

Bank of America analysts estimate that the reality of EV adoption is about one year behind schedule…

And this slowdown is forcing the government's hand...

In June, the Biden administration eased its nationwide EV goal (50% of all cars sold) from 2030 to 2031 because folks aren't adopting EVs fast enough.

And in the meantime, the old guard is still raking in plenty of cash.

Legacy oil and gas (O&G) companies often trade at discounts because the market is quick to assume they're doomed.

However, we're still more than a decade from most of the world phasing out gas-powered engines. And it'll be another decade-plus after 2035 before the use of clean energy surges ahead.

The O&G sector has a much longer lifespan than many investors realize. Just take a look at companies that manufacture parts for gas vehicles… like BorgWarner (BWA) and Dana (DAN).

Their longevity may surprise you.

Regards,

Joel Litman
September 4, 2024