Why eurozone stocks are solid and Gates could throttle Musk
• US cycle is comparatively wizened and new emissions-reducing technology is on the horizon
Afew things you might (but shouldn’t) have missed last week. From the Economist, a case for owning eurozone shares:
Success in investing often means going against the grain. There is an argument for buying eurozone shares precisely because their defects have now become all too clear to everyone. Among the shortcomings is that Europe is ageing.
It is the place to find businesses ripe for disruption, rather than those doing the disrupting. Its bourses are heavy with the technologies of the second industrial revolution — massmarket cars, petrochemicals and machinery — but light on the digital firms that power stock markets in the US.
Its banks, a big weight in stock market indices, look leaden. Deutsche Bank is a target of short-sellers. The strong 2017 GDP growth has cooled. A nasty recession could plausibly break the zone apart.
So there is plenty not to like. The experience of owning European stocks over the long haul has been quite horrible. The Euro Stoxx 50 of big euro-zone shares is no higher now than it was 20 years ago. Its broader sibling, which contains 300-odd companies, is well below its peak of the summer of 2000. But there is a strong case for doing exactly the opposite.
For a start, eurozone equities look cheap. The earnings yield on the Euro Stoxx 50 is 6.4%. That compares with a 4.8% earnings yield on the US’s S&P 500. Patience may be required. But over time the chances that a punt on eurozone equities pays off are good. There is room for earnings to improve. Banks [are now] in decent shape.
“If at any point interest rates turn positive, you could see huge earnings upside,” says Eric Lonergan, of M&G.
In the US, by contrast, there is no comparable scope for earnings to accelerate, because the economic cycle is more mature.
● From Bloomberg, [Ben] Bernanke’s warning that the US economy faces a “Wile E Coyote” moment in 2020:
Bernanke observes that the $1.5-trillion in personal and corporate tax cuts and a $300bn hike in federal spending signed by President Donald Trump “makes the Fed’s job more difficult all around” because of very low US unemployment.
“What you are getting is a stimulus at the very wrong moment,” Bernanke said last Thursday during a policy discussion at the American Enterprise Institute, a Washington think-tank.
“The economy is already at full employment. The stimulus is going to hit the economy in a big way this year and next year, and then in 2020 Wile E Coyote is going to go off the cliff.”
● From the Institute of New Economic Thinking, a warning from Jim Chanos that we can expect more financial fraud, and “cryptocurrency is a speculation game masquerading as a technological breakthrough”.
“I’ve found in my research that what I would call the ‘fraud cycle’ — instances of large-scale financial fraud over multiple platforms and companies — follows the financial cycle with a lag,” says Chanos, who teaches a course on the history of financial fraud at Yale University.
“That as business and particularly financial markets improve, peoples’ sense of disbelief and caution that they’ve earned from the previous downturn begins to erode.
“Schemes that before might have seemed too good to be true begin to be embraced. So today we’ve got Bitcoin and ICOs [initial coin offerings], which went ballistic in 2017.
“I suspect going forward we’re going to see more and more evidence of questionable companies as this bull market keeps advancing and ageing.
“At one blockchain gathering there were a set of rented Lamborghinis parked outside to entice the traders and day traders and retail investors: this, too, can be yours if you hop aboard the blockchain and Bitcoin bonanza!
“For those who believe you need to own digital currency as a store of value in the worstcase scenario, that’s exactly the case in which a digital currency will work the least. And if you say, well, fiat currency is going to bring the world down, which could, of course, happen, then I say the last thing I’d want to own is Bitcoin if the grid goes down.”
● From Bloomberg, something to make Tesla investors more nervous: promising emissionsreducing technology may let people keep driving cars with internal combustion engines.
As Bloomberg explains: Carbon Engineering, co-founded by Harvard physicist David Keith and funded, among others, by Microsoft founder Bill Gates, has been running a carbon extraction plant in Canada since 2015, testing technology that was until recently rejected as too costly.
But in a paper published last Thursday Keith and his collaborators claim the process they have developed allows the capture of a metric tonne of carbon dioxide at the cost of $94-$232, depending on variable costs. This is far lower than previous estimates, which ranged from $550 to $1,300 per tonne.
“This means converting from fossil fuel would [still] need to be subsidised by environmentallyfriendly governments,” says Bloomberg, “but such subsidies have a distinct advantage over incentives for EV [electric vehicle] owners and investment in parallel infrastructure: “Nothing will need to change for the enormous existing fleet of cars, about 1-billion of them.
“Existing gas stations will be able to handle the new liquids just as they do fossil fuel. And the new fuels could be used for those modes of transportation that aren’t even close to being electrified, such as ships.”
● A reminder from Morgan Housel at Collaborative Fund:
There’s a scene in Lawrence of Arabia where one man puts out a match with his fingers, and does not flinch. Another man watching tries to do the same, and yells in pain. “It hurts! What’s the trick?” he asks. “The trick is not minding that it hurts,” the first man says.
Which brings to mind something Arnold Schwarzenegger says in his autobiography, Total Recall: My Unbelievable True Life Story.
“No matter what you do in life, it’s either reps or mileage. If you want to be good at skiing, you have to get out on the slopes. If you play chess, you have to play tens of thousands of games … the only way to have your act together is to do the reps.”
AT ONE BLOCKCHAIN GATHERING THERE WERE A SET OF RENTED LAMBORGHINIS PARKED OUTSIDE