May 22, 2024 • 34 mins
Embark on an expansive journey to travel through the economic and political landscape of Europe and the Middle East, including a foray into energy geopolitics, with the esteemed Dr. James Thorne and our seasoned co-hosts Clem Miller and Steve Davenport.
We reflect on how the Russian invasion of Ukraine cut off the supply of cheap energy to European industries, damaging their competitiveness, and upended global energy markets.
We highlight North America’s emergent status as an energy superpower. We illuminate the importance of cheap electricity—not just for households but as a catalyst propelling cutting-edge technologies, namely AI.
We consider investment opportunities with globally oriented European stocks.
We also consider prospects within the oil services sector, the increased demand for uranium as an alternative fuel source, and the potential boon for the defense industry as Western militaries rebuild their weapons supplies.
Last, we broaden our discussion by confronting the burgeoning debt levels and higher bond yields that shadow Western economies, the role of China and Japan in holding such debt, and the potential long-term financial repercussions of such heavy debt loads.
Straight Talk for All - Nonsense for None
Please check out our other podcasts:
https://skepticsguidetoinvesting.buzzsprout.com
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Steve Davenport (00:03):
Welcome everyone to today's edition of
Skeptic's Guide to Investing.
I've got my co-host, ClemMiller, here and we've got a
special guest today.
Dr James Thorne joins us fromCanada.
James is the chief strategistat Wellington-Alta Private
Wealth and we wanted to kind ofgo around the world and talk
(00:26):
about what's happening.
So to start with, I'd like togive a little perspective.
Dr Thorne was a economist andhe leads a lot of the thought in
Canada in terms of how weshould look at markets and how
we should look at the world.
Clem, as you know, has spentmost of his career in the
(00:49):
international space,particularly fundamentals, and
my specialty is domestic andquantitative.
So what we're going to do iswe're going to start from the
highest level with Dr Thorne andwe'll kind of go around the
world.
And so today we're going tostart the first podcast talking
about Europe and the Middle Eastand how that part of the world
(01:12):
has been drawing attention andnot necessarily been drawing
returns.
So is it over?
Is it just beginning?
If the Ukraine can get resolvedwith Putin in charge or without
Putin in charge, where are wegoing to go?
So, james, it's great to haveyou aboard and I'd love to get
(01:33):
some perspectives on what youthink is happening politically
and economically in the Eurozoneor Europe as a whole, and what
you see there right now 2020-24?
.
Dr James Thorne (01:50):
Well, first off, it's great to see both of
you and we've now we've got theband back together it's, uh,
it's.
I've got to be very carefulbecause, uh, I've chatted hours
and, you know, a long time withyou guys.
I've learned a lot from both ofyou.
So, yes, up here in Canada, atWellington- Altus, I continue my
views as if we were justcontinuing to work together.
(02:13):
So so let me just phrase it inthe way that I look at it.
Right, the highest level I'vegot is look, the global economy
is closed.
I've got is look, the globaleconomy is closed.
Right, which is very specificin the sense that you get
periods of time over historywhere you get supply, demand and
(02:34):
balances that need to bereconciled right, we don't
export to a planet yet.
And to me, as an economist,that frames my narrative.
I think you know, Clem, you andI, at point in time, were in DC
listening to Michael Pettis inone of his presentations.
And it's very interestingbecause when you look at the
mercantilist point of view thathas happened since, let's say,
(02:58):
china getting into the WorldTrade Organization and with the
unification of Germany, we knowthat Germany and China were
manufacturing too much andconsuming too little and
creating too much supply in theworld, and therefore we had a
fall in the standard of livingin the United States, so on and
(03:20):
so forth.
Right, and so that's myframework.
So let's go to Europe, I meanwhat I think is the most
interesting thing.
I don't want to get into themilitary aspect, but when I look
at the Ukraine situation, whereI process this, is that the
reason why Germany was one ofthe reasons, main reasons why
(03:44):
Germany was a leader and had theability to do what they were
doing in terms of manufacturingtoo much and consuming too
little, was one.
They had the benefit of a cheapcurrency because of the
eurozone.
If the Deutschmark was stillafloat, you know, Germany's
(04:04):
currency would be significantlyhigher.
And let me be clear on this Ido not subscribe to interest
rate differentials determiningcurrency crosses.
I subscribe to economicfundamentals.
The other thing I would say toyou is how I process the Ukraine
situation is the fact thatGermany has lost a very, very
(04:25):
cheap source of a critical input, which is natural gas, into
advanced manufacturing, and ifGermany has to basically
manufacture based on importingLNG from the United States, for
example from the United States,for example then their cost
(04:50):
advantage goes away.
And that's one and two.
When I look at the Middle East Igo back to the G20 meeting, and
we've talked about this, guysis, you know, when you look at
the pipelines and you look at,you know, russia, in terms of
its use, has a market for theirproducts, which is Europe.
Well, if the Middle East cantake their, when there was a
(05:23):
significant trade agreementsigned between, uh, saudi Arabia
, india, israel, the UnitedStates and Europe in terms of
creating a corridor, um, youknow, I I find that very
interesting and then I wouldover.
You know, days of Germany arebehind them and you're starting
(06:06):
to see that, with theoutsourcing of, or the movement
of, the big chemical firms away,I think it speaks highly.
I mean, I love the UnitedStates in terms of, a, the
innovation, but B, because theyhave a cheap source of natural
gas, right, so, and so I reallythink, in that sense, the, the,
(06:31):
the dynamics of the chessboardare changing in favor of the
United States, and then withChina, I just think that what's,
to me, the most interestingthing on that is the fact that
they've pivoted from being amajor importer and urbanization
is their goal to being anexporter, and I frame that in
(06:51):
the way of looking at it, interms of what Japan did coming
out of World War II.
So it's all dynamic, it's allmoving.
I think the United States isvery well positioned for what's
going on.
Is this time different?
No, but if you take a longenough lens or step back, it's a
very interesting move.
(07:12):
But these moves aren't subtle.
They're huge in their dynamic.
And that's how I basically frameit.
Steve Davenport (07:22):
Well, one of the things that I mean, Clem, I
want you to tell me what youthink fundamentals are happening
.
But one item that you kind ofmentioned but didn't really
expound on is I believe it hasto do with this peace dividend.
They've had a long time wherethey haven't, germany hasn't
committed to a large militarybudget, and that extra capacity
(07:45):
or extra resources, by notspending it on military, is now
being eaten up, and therefore,if you believe we're going to
have a more peaceful world,maybe they get back to that, but
I doubt it.
I think that what's happened isthey've broken the glass.
Whatever happens in the Ukraine, you're starting to see I hate
(08:08):
to call this the axis of evil,but it's a very nice analogy
with Russia, china, iran kind oflining up Venezuela, and now
you've kind of got the Europeand the US and Canada taking the
other side.
Clem, what do you think aboutthe fundamentals of Europe and
(08:29):
the political situations?
Clement Miller (08:32):
So I have a lot of agreement with what Jim is
saying in terms of you know,when you sort of boil it down,
europe having a lot ofweaknesses relative to, say, the
US.
That's why, in my own personalportfolio, I am very selective
(08:54):
about what goes into myportfolio in terms of European
stocks.
So, again, on this call, we'renot recommending any particular
stocks, but I will discuss Iwill just go through very
quickly the list of stocks thatare in my own portfolio.
So first of all, you have Chubb, which is the Swiss insurance
(09:16):
company, globally oriented.
I have Novo Nordisk, which isthe Danish pharmaceutical
company that's very involved inthe GLP-1 obesity drugs.
I have ASML, which is the Dutchmanufacturer of semiconductor
laser chip lithography equipment.
(09:37):
I have CRH, which is anIrish-based global manufacturer
of building materials basedglobal manufacturer of building
materials.
I have Ferrari, which is theItalian based luxury automobile
manufacturer, and I have LVMH,louis Vuitton, which is the
(09:57):
luxury brands manufacturer, or Ishould say owner of luxury
brands based in France.
Steve Davenport (10:07):
So those are my you have too much money.
Clement Miller (10:11):
Yeah, so those are my.
Well, I spread it around manychips, right.
And so those are my selectionsin Europe, very selective and,
as you can see, companies thathave global revenues, global
sales, especially in the US, butalso in Asia, including in
(10:32):
China, but they're not Chinesecompanies, they're European
companies that sell in China.
And just to round this out andto complete my input here, in
terms of the Middle East, whichyou had asked about as well,
there are very limited stockopportunities in the Middle East
(10:53):
.
Most of these countries have nostock market, most of them, and
honestly, I find that there's,especially now, there's too much
risk in putting your money intoMiddle East companies.
Steve Davenport (11:07):
Well, that helps us transition very nicely.
I mean, I believe that we talkabout the Middle East and we
talk about Ukraine, not becauseof their GDPs, but because of
how they impact one of the greatcommodities, which is oil, and
how oil helps make the world goround.
I mean, there's been a lot oftalk about ESG and companies and
(11:29):
countries being cleaner, but Ithink we saw very quickly how
Germany had to change onceRussia's supply of oil and gas
mainly gas started to be inquestion because of the Ukraine.
They suddenly had a new feelingabout what the environment
means to them versus what itmeans to their GDP to pay the
(11:52):
higher prices.
So, James, how do you see blackgold, Texas tea being a factor
in the world economy and being afactor in how you view what's
going on with Europe?
It feels to me like it's stilla knife hanging over their head
oh yeah, I mean, I think, Ithink first.
Dr James Thorne (12:14):
I think one of the biggest things that we've,
I think, is discounted way toomuch by our generation.
We have memory of the 70s, 80sand 90s is the fact that the
United States is now an energysuperpower and, to a certain
extent, the US dollar is now apetrodollar.
(12:34):
And so that's one.
Two I really think that whenyou start overlaying stuff like
alternative intelligence in thedigital economy, I think the
biggest let's even be more bluntthe biggest competitive
advantage going into thisdigital age is going to be who
can manufacture electricity atthe lowest price.
(12:54):
Right, that's NatGas, I thoughtit was the cleanest.
Beg your pardon.
Steve Davenport (13:01):
I thought it was the cleanest production of
energy.
Dr James Thorne (13:04):
Well, I, we can, it seems like an old idea,
James.
Steve Davenport (13:09):
I know, but I'm not woke up in Canada anymore.
Dr James Thorne (13:26):
What I do is frame myself in terms of a
narrative.
My biggest objective is to havea narrative and recognize the
fact and have humility, to knowthat.
You know that.
You know the narrative is mostlikely going to be 60 to 70%
correct.
If I can get that right, thenyou know to be 30% to 40% wrong
in the narrative.
So the way I look at it is thefact that, yes, the thing I
(13:49):
would put that people don't getand that's my perspective is the
United States is an energysuperpower and they have oil Now
it's sweet oil superpower,right, and they have oil, now
it's sweet oil.
You combine Canada with thedirty and all the other natural
resources we have in NorthAmerica and we are sitting
pretty.
And it really questions theeconomic viability of Europe,
(14:15):
right, and it also really talksabout what is this competitive
landscape with China look likegoing out a couple of decades.
So so I is saying the countrythat has the cheapest
electricity wins has the biggestcompetitive advantage because
(14:48):
AI is going is, like you know,crypto mining.
Right, it's run by GPUs.
It's four to five times moreenergy intensive or electricity
intensive, and we are about torewire the world, going from a
CPU centric infrastructure thatwas designed by Johnny Von
Neumann in 1947 at Penn to a GPUcentric, and so it's all about
(15:13):
cheap energy, as far as I'mconcerned.
In so far as oil, yes, theUnited States has a ton of oil.
Add Canada on top of that, andthen I also suggest to you that
I don't think it's going awaybecause I view the US dollar as
a petro currency now.
So what's that right price and Ithink it trades between $70 and
(15:35):
$90.
I think it trades between 70and 90 dollars.
Right, and I'm hugely bullishon it, but at the same point in
time, I think my view is is issomewhat non-consensus at this
time no-transcript.
Steve Davenport (16:17):
How would you put the opportunity in Europe
compared to the?
Clement Miller (16:18):
opportunity in the US and Canada.
Well, as I mentioned, I am veryselective with regard to what I
would choose to invest in inEurope.
Well, I'm selective everywhere,but I'm much more careful with
regard to Europe, because I'mlooking for companies in Europe
that aren't domestically focusedbut are more internationally
(16:40):
focused, and that's not the casewith what I'm doing in the US.
In the US, I'm looking forcompanies that are good but can
focus on a large market in theUS and aren't necessarily
exporters and aren't necessarilyexporters.
(17:06):
But I would want to address onething that Jim said about oil
and gas.
I think I agree with him on theopportunities there.
I also think that oil will movein the $70 to $90 range, which
means, of course, that you'renot going to have large surges
in oil prices.
(17:26):
But I think the best way toapproach that is to invest in
some of the equipmentmanufacturers, the oil services
companies, and rather than insort of integrated oil companies
.
So the oil services companies,who are going to be selling
equipment regardless of what theoil price is.
(17:47):
They're going to sell more ifthe oil price is higher, but
they're going to.
They're not going to bedisadvantaged by an oil price
that's you know that's lowereither.
And one last thing I wanted tomention I think Jim might
appreciate this is that thereare opportunities here for
uranium as well, because ofsomething of a bit of a uranium
(18:11):
or nuclear renaissance, plus thefact that the US and others are
beginning to put sanctions onrussian uranium, and so there's
a.
I have a another company in myportfolio again, um, you know,
very selective about this.
It's a canadian company, uh,called cameco.
(18:32):
I'm sure, uh sure, jim isfamiliar with that uranium
company uh, and, um, you know,so I'm invested in that as well,
looking at the opportunitiesfor uranium going forward.
Steve Davenport (18:45):
Well, you guys are talking, Clem, to me, about
a dirty portfolio when you talkabout.
One part of this that I thinkis interesting is that in the
world of AI, in the world of alltechnology, we still get back
to what are the things that aregoing to drive the energy price
(19:06):
and what are the things that aregoing to affect how companies
and how countries do well.
So the second area I'd like toask you guys, just for a little
thought on, is are weaponscompanies going to be the next
black?
Are they going to be the nexthot thing?
Is this movement in Ukraine andthe Middle East and potentially
(19:30):
in Taiwan, going to cause theLockheed Martins, the Raytheons,
to really have a marketplacefor the next five or 10 years,
or is this just a short-termblip?
Is military demand short-termor long-term?
What do you think, James?
Dr James Thorne (19:50):
Well, at first glance I would say it's
long-term right.
But I think one of the thingswe really haven't touched on is
the fact that we have fiscal.
We've gone through a period oftime of fiscal spending
reminiscent of a wartime economysuch as World War II or World
(20:12):
War I I think it's the head orthe president of the WEF said
that debt in the Western worldis at Napoleonic war levels.
Right, the interest on debt inthe United States now dwarfs the
military budget in the UnitedStates.
The interest on debt up here inCanada dwarfs the transfer
(20:34):
payments for healthcare.
So I think, theoreticallyspeaking, yes, you know the
companies that you mentioned.
I mean, the US is a leader inthese and you know it's.
You know you talked, I think,steve, you talked about proxy
wars.
I mean we didn't even talkabout.
You know, is Japan going tobecome an offensive military
(20:57):
power within the South China Sea, which I think that's happening
right before our eyes in theevolution of Japan?
So I would say the first, myvisceral response, quick, gut
response, is yes, but I reallythink it comes down to the fact
that we're about to enter into aperiod of fiscal responsibility
(21:18):
and, if that is the case, usingWorld War II as our guide,
right, or even World War I asour guide?
What does the growth andspending look like coming out of
the government when you takethe deficit down from, let's say
, 7% of GDP in the United Statesdown to 3%, right?
(21:40):
Could there?
?
Go ahead
Steve Davenport (21:45):
You have to find the savings somewhere, and
I think that's a logical way tolook at it.
But it feels to me like thepublic or people don't realize
how the spending equation workson a regular, personal level
with their credit cards or withtheir overall behavior in terms
of supporting, you know,military actions it's, I'm not
(22:09):
sure.
Politically, you believe thatthere's a will for, uh, better,
better behavior.
What do you think, clem?
Are you skeptical aboutgovernments being able to manage
their budgets with higherinterest rates?
Clement Miller (22:23):
Yeah, definitely for sure.
Yeah, I am skeptical interestrates in the future, the fact
that governments will beperceived as having, you know,
perhaps slightly lesscreditworthiness going forward
(22:46):
and so folks are going to demandsort of higher rates from them
in the future.
I did want to address thismilitary point.
I think that's an area which,again, is highly specific.
I think that one can't justassume you wouldn't want to just
buy a military-focused ETF andsit on that.
(23:09):
There are some specificcompanies that are doing well,
some specific companies thataren't doing well, doing well,
and you'd be surprised at,really, which ones are doing
well and which ones aren't doingwell.
Some of the bigger names areactually not doing all that well
.
Some of them have been pricedup and are seeing some pullbacks
(23:31):
, for example.
But I do have a couple ofmilitary companies.
I'm not going to go into allthe details about what products
they sell, what contracts theyhave, but those are the kinds of
things you have to look at arethe products and the contracts
in order to be able to make anascertainment as to whether they
have long-term prospects or not.
(23:53):
The other companies in themilitary space I can go without.
Steve Davenport (23:59):
Yeah, I think that when we look at this, this
issue of where to invest and howto invest in Europe has got a
lot of hair on it, and I've kindof made the decision that it's
going to be invested there whenyou're looking more for income
versus when you're looking forgrowth, and so, from a dividend
(24:19):
portfolio perspective, we'vefound some great names in Europe
that are global and havefranchises that really transcend
their country, and so, in manyways, I think the term investing
in Europe or investing in Asiais probably a little bit old,
because all of these companieshave locations worldwide, and so
(24:46):
I'm not sure that we have tonecessarily say this is a
European company.
If a company has a greatfranchise in all of South
America and North America andparts of Asia, it could be
located in Europe.
But I really think we need totranscend this discussion and
start thinking what's goodglobally.
This discussion and startthinking what's good globally.
Yeah, if I would ask you guys,companies, to close out what,
(25:07):
what investment in europe do youthink has worldwide presence
and impact that people probablydon't think of when they think
about european investments?
You want to start, james, or?
Or you can go first if you wantto climb.
Clement Miller (25:25):
Well, I would just say the companies that I
mentioned earlier are all globalcompanies, every single one of
them Chubb, novo Nordisk, asml,crh, ferrari and LVMH all global
companies.
They happen to be based inEurope.
They have a European gloss tothem.
Ferrari, for example, has aEuropean gloss, but the others
(25:49):
do as well.
But I don't know that a lot ofUS investors, especially retail
investors, really understandthat Chubb and Novo Nordisk, and
maybe even LVMH, are Europeancompanies.
They may just think, oh, theseare US companies because I see
(26:10):
them all over the place, butindeed they're based in Europe,
but they sell globally.
And I do want to say one morething, steve, about something
you said about dividendportfolio in Europe.
Steve, about something you saidabout dividend portfolio in
Europe, and that is, indifferent countries there's
different attitudes and taxregimes towards dividends, and
(26:30):
so when you look around theworld, uk investors like to see
dividends, australian like tosee dividends, canadian like to
see dividends, but you don't seethat in a lot of other
countries in the world in termsof wanting to see returns in the
(26:53):
form of dividends as opposed toprice appreciation.
Steve Davenport (26:57):
Can I just get a kind of a momentum guide from
each of you, kind of a momentumguide from each of you, clem,
what's percentages of yourinternational mail and whether
you think you're going to beadding to, staying the same or
decreasing your exposure toEurope as we go forward in 24?
Clement Miller (27:15):
I don't think I'm going to be increasing or
decreasing.
It's all sort of bottom up.
But I can't see I'm not makinga decision as to whether I'm
going to be investing more inEurope per se.
I'll have more to say on amacro level in our next podcast
(27:39):
when we talk about Asia.
But in terms of Europe, Idefinitely look at things from a
bottom-up, specific stockperspective.
Steve Davenport (27:48):
How about James ?
What are you thinking?
Dr James Thorne (27:51):
Well, in my framework, when you look at the
data going, I think the day, Ijust read an academic paper and
the data goes back to 1990 andit parses returns, uh returns,
in the in the stock market, andit basically says that the
majority of wealth is created by2.39 percent of stocks.
(28:12):
So if you let's round that upto three percent and use the s p
500, it's 15 stocks, right.
Half of the returns aregenerated by a quarter of 1%.
So just to anchor off of or toadd onto what Clem is saying or
what you said, look at, I don'tthink.
(28:33):
I think that the error ofgeographic investing, where
you're going to go and have anexposure because of an ETF into
an area I think, is over.
I think the objective ofinvestors and portfolio managers
is to find the best 20 stocks,irrespective of geopolitical
(28:55):
areas, and so what I say whenpeople ask me about where to go
around the world, I say theeasiest pond and the pond that's
got the most fish to build agreat portfolio that have
leaders is the United States.
Sure, are there a couple ofnames in Europe?
Yes, clem's named them, right.
I mean, you don't want to haveLily and you want to buy Novo.
(29:18):
Okay Right, you want to buyNovo because it's cheaper than
Lilly.
Well, it's always been cheaperthan Lilly, but is it?
Does it have a great seculartheme behind it?
Yes, it's going to beinteresting to see how it trades
, given that one of their majorplans is on fire today, but at
(29:39):
the same point in time in myjourney, in my perspective, is
to try to get investors to focuson, you know, what is important
in their portfolio, right, andto make sure that they have
exposure to that.
And so what I would suggest is,you know, we have in a period
of extreme levels of debt.
(29:59):
I kind of go counter to thisconsensus in this.
The New York Fed has a modelit's called the SLW model, which
Williams, who is the presidentof the Fed, helped develop it.
The neutral rate or R star ofinterest is declining, right.
(30:24):
It's now around 74 basis pointsin the United States, and if
you buy into the Fed'sphilosophy that whether they're
tight or loose is dependent on Rstar I'm using this is the
Fed's argument and I'm using theFed's model then I would
suggest to you that interestrates are going to go
(30:45):
substantially down, not up, andI question it remains to be seen
for me that we are in a newinflationary era.
I still think that we haveexcess capacity globally,
(31:11):
capacity globally, and I thinkthe US dollar and the will
depreciate somewhat over thenext while, and I think the
reason is is that we need tofinance the US debt.
So in that environment.
I still think the United Statesis the place to be, but I would
reiterate, as Clem said, it'son a case-by-case basis, but I
do think that having aconcentrated portfolio is the
(31:32):
way to go and I think people aremissing that important fact.
Steve Davenport (31:37):
Thanks, James, I agree with you in terms of
where rates are going.
I think they have to go down tohelp the governments, you know,
not lower their interestpayments.
I believe that, unfortunately,I don't have.
I'm a little skeptical as towhether we will suddenly find
financial discipline veryquickly, Because I think that
(31:59):
it's too hard for Congress andpoliticians to not spend the
money to do things that theythink are going to improve their
prospect of reelection or theirconstituents prospects by
helping with the handout.
So I think we've gotten in avery bad habit of giving money
to this idea of supportingpeople and supporting markets,
(32:25):
and one of the things I wonderis what the populist ideal
that's happening now and theanger at government where it
goes, Because I think the onething we didn't talk about was
an election and I think that weall know that this election
could be very controversial anddifficult.
I'd like to thank you guys.
(32:46):
We're going to head off and Iappreciate your insights in
Europe and I appreciate youbeing with us and if you could
give us a like share and we lookforward to talking to you again
soon.
Welcome everyone to today's edition of
Skeptic's Guide to Investing.
I've got my co-host, ClemMiller, here and we've got a
special guest today.
Dr James Thorne joins us fromCanada.
James is the chief strategistat Wellington-Alta Private
Wealth and we wanted to kind ofgo around the world and talk
(00:26):
about what's happening.
So to start with, I'd like togive a little perspective.
Dr Thorne was a economist andhe leads a lot of the thought in
Canada in terms of how weshould look at markets and how
we should look at the world.
Clem, as you know, has spentmost of his career in the
(00:49):
international space,particularly fundamentals, and
my specialty is domestic andquantitative.
So what we're going to do iswe're going to start from the
highest level with Dr Thorne andwe'll kind of go around the
world.
And so today we're going tostart the first podcast talking
about Europe and the Middle Eastand how that part of the world
(01:12):
has been drawing attention andnot necessarily been drawing
returns.
So is it over?
Is it just beginning?
If the Ukraine can get resolvedwith Putin in charge or without
Putin in charge, where are wegoing to go?
So, james, it's great to haveyou aboard and I'd love to get
(01:33):
some perspectives on what youthink is happening politically
and economically in the Eurozoneor Europe as a whole, and what
you see there right now 2020-24?
.
Dr James Thorne (01:50):
Well, first off, it's great to see both of
you and we've now we've got theband back together it's, uh,
it's.
I've got to be very carefulbecause, uh, I've chatted hours
and, you know, a long time withyou guys.
I've learned a lot from both ofyou.
So, yes, up here in Canada, atWellington- Altus, I continue my
views as if we were justcontinuing to work together.
(02:13):
So so let me just phrase it inthe way that I look at it.
Right, the highest level I'vegot is look, the global economy
is closed.
I've got is look, the globaleconomy is closed.
Right, which is very specificin the sense that you get
periods of time over historywhere you get supply, demand and
(02:34):
balances that need to bereconciled right, we don't
export to a planet yet.
And to me, as an economist,that frames my narrative.
I think you know, Clem, you andI, at point in time, were in DC
listening to Michael Pettis inone of his presentations.
And it's very interestingbecause when you look at the
mercantilist point of view thathas happened since, let's say,
(02:58):
china getting into the WorldTrade Organization and with the
unification of Germany, we knowthat Germany and China were
manufacturing too much andconsuming too little and
creating too much supply in theworld, and therefore we had a
fall in the standard of livingin the United States, so on and
(03:20):
so forth.
Right, and so that's myframework.
So let's go to Europe, I meanwhat I think is the most
interesting thing.
I don't want to get into themilitary aspect, but when I look
at the Ukraine situation, whereI process this, is that the
reason why Germany was one ofthe reasons, main reasons why
(03:44):
Germany was a leader and had theability to do what they were
doing in terms of manufacturingtoo much and consuming too
little, was one.
They had the benefit of a cheapcurrency because of the
eurozone.
If the Deutschmark was stillafloat, you know, Germany's
(04:04):
currency would be significantlyhigher.
And let me be clear on this Ido not subscribe to interest
rate differentials determiningcurrency crosses.
I subscribe to economicfundamentals.
The other thing I would say toyou is how I process the Ukraine
situation is the fact thatGermany has lost a very, very
(04:25):
cheap source of a critical input, which is natural gas, into
advanced manufacturing, and ifGermany has to basically
manufacture based on importingLNG from the United States, for
example from the United States,for example then their cost
(04:50):
advantage goes away.
And that's one and two.
When I look at the Middle East Igo back to the G20 meeting, and
we've talked about this, guysis, you know, when you look at
the pipelines and you look at,you know, russia, in terms of
its use, has a market for theirproducts, which is Europe.
Well, if the Middle East cantake their, when there was a
(05:23):
significant trade agreementsigned between, uh, saudi Arabia
, india, israel, the UnitedStates and Europe in terms of
creating a corridor, um, youknow, I I find that very
interesting and then I wouldover.
You know, days of Germany arebehind them and you're starting
(06:06):
to see that, with theoutsourcing of, or the movement
of, the big chemical firms away,I think it speaks highly.
I mean, I love the UnitedStates in terms of, a, the
innovation, but B, because theyhave a cheap source of natural
gas, right, so, and so I reallythink, in that sense, the, the,
(06:31):
the dynamics of the chessboardare changing in favor of the
United States, and then withChina, I just think that what's,
to me, the most interestingthing on that is the fact that
they've pivoted from being amajor importer and urbanization
is their goal to being anexporter, and I frame that in
(06:51):
the way of looking at it, interms of what Japan did coming
out of World War II.
So it's all dynamic, it's allmoving.
I think the United States isvery well positioned for what's
going on.
Is this time different?
No, but if you take a longenough lens or step back, it's a
very interesting move.
(07:12):
But these moves aren't subtle.
They're huge in their dynamic.
And that's how I basically frameit.
Steve Davenport (07:22):
Well, one of the things that I mean, Clem, I
want you to tell me what youthink fundamentals are happening
.
But one item that you kind ofmentioned but didn't really
expound on is I believe it hasto do with this peace dividend.
They've had a long time wherethey haven't, germany hasn't
committed to a large militarybudget, and that extra capacity
(07:45):
or extra resources, by notspending it on military, is now
being eaten up, and therefore,if you believe we're going to
have a more peaceful world,maybe they get back to that, but
I doubt it.
I think that what's happened isthey've broken the glass.
Whatever happens in the Ukraine, you're starting to see I hate
(08:08):
to call this the axis of evil,but it's a very nice analogy
with Russia, china, iran kind oflining up Venezuela, and now
you've kind of got the Europeand the US and Canada taking the
other side.
Clem, what do you think aboutthe fundamentals of Europe and
(08:29):
the political situations?
Clement Miller (08:32):
So I have a lot of agreement with what Jim is
saying in terms of you know,when you sort of boil it down,
europe having a lot ofweaknesses relative to, say, the
US.
That's why, in my own personalportfolio, I am very selective
(08:54):
about what goes into myportfolio in terms of European
stocks.
So, again, on this call, we'renot recommending any particular
stocks, but I will discuss Iwill just go through very
quickly the list of stocks thatare in my own portfolio.
So first of all, you have Chubb, which is the Swiss insurance
(09:16):
company, globally oriented.
I have Novo Nordisk, which isthe Danish pharmaceutical
company that's very involved inthe GLP-1 obesity drugs.
I have ASML, which is the Dutchmanufacturer of semiconductor
laser chip lithography equipment.
(09:37):
I have CRH, which is anIrish-based global manufacturer
of building materials basedglobal manufacturer of building
materials.
I have Ferrari, which is theItalian based luxury automobile
manufacturer, and I have LVMH,louis Vuitton, which is the
(09:57):
luxury brands manufacturer, or Ishould say owner of luxury
brands based in France.
Steve Davenport (10:07):
So those are my you have too much money.
Clement Miller (10:11):
Yeah, so those are my.
Well, I spread it around manychips, right.
And so those are my selectionsin Europe, very selective and,
as you can see, companies thathave global revenues, global
sales, especially in the US, butalso in Asia, including in
(10:32):
China, but they're not Chinesecompanies, they're European
companies that sell in China.
And just to round this out andto complete my input here, in
terms of the Middle East, whichyou had asked about as well,
there are very limited stockopportunities in the Middle East
(10:53):
.
Most of these countries have nostock market, most of them, and
honestly, I find that there's,especially now, there's too much
risk in putting your money intoMiddle East companies.
Steve Davenport (11:07):
Well, that helps us transition very nicely.
I mean, I believe that we talkabout the Middle East and we
talk about Ukraine, not becauseof their GDPs, but because of
how they impact one of the greatcommodities, which is oil, and
how oil helps make the world goround.
I mean, there's been a lot oftalk about ESG and companies and
(11:29):
countries being cleaner, but Ithink we saw very quickly how
Germany had to change onceRussia's supply of oil and gas
mainly gas started to be inquestion because of the Ukraine.
They suddenly had a new feelingabout what the environment
means to them versus what itmeans to their GDP to pay the
(11:52):
higher prices.
So, James, how do you see blackgold, Texas tea being a factor
in the world economy and being afactor in how you view what's
going on with Europe?
It feels to me like it's stilla knife hanging over their head
oh yeah, I mean, I think, Ithink first.
Dr James Thorne (12:14):
I think one of the biggest things that we've,
I think, is discounted way toomuch by our generation.
We have memory of the 70s, 80sand 90s is the fact that the
United States is now an energysuperpower and, to a certain
extent, the US dollar is now apetrodollar.
(12:34):
And so that's one.
Two I really think that whenyou start overlaying stuff like
alternative intelligence in thedigital economy, I think the
biggest let's even be more bluntthe biggest competitive
advantage going into thisdigital age is going to be who
can manufacture electricity atthe lowest price.
(12:54):
Right, that's NatGas, I thoughtit was the cleanest.
Beg your pardon.
Steve Davenport (13:01):
I thought it was the cleanest production of
energy.
Dr James Thorne (13:04):
Well, I, we can, it seems like an old idea,
James.
Steve Davenport (13:09):
I know, but I'm not woke up in Canada anymore.
Dr James Thorne (13:26):
What I do is frame myself in terms of a
narrative.
My biggest objective is to havea narrative and recognize the
fact and have humility, to knowthat.
You know that.
You know the narrative is mostlikely going to be 60 to 70%
correct.
If I can get that right, thenyou know to be 30% to 40% wrong
in the narrative.
So the way I look at it is thefact that, yes, the thing I
(13:49):
would put that people don't getand that's my perspective is the
United States is an energysuperpower and they have oil Now
it's sweet oil superpower,right, and they have oil, now
it's sweet oil.
You combine Canada with thedirty and all the other natural
resources we have in NorthAmerica and we are sitting
pretty.
And it really questions theeconomic viability of Europe,
(14:15):
right, and it also really talksabout what is this competitive
landscape with China look likegoing out a couple of decades.
So so I is saying the countrythat has the cheapest
electricity wins has the biggestcompetitive advantage because
(14:48):
AI is going is, like you know,crypto mining.
Right, it's run by GPUs.
It's four to five times moreenergy intensive or electricity
intensive, and we are about torewire the world, going from a
CPU centric infrastructure thatwas designed by Johnny Von
Neumann in 1947 at Penn to a GPUcentric, and so it's all about
(15:13):
cheap energy, as far as I'mconcerned.
In so far as oil, yes, theUnited States has a ton of oil.
Add Canada on top of that, andthen I also suggest to you that
I don't think it's going awaybecause I view the US dollar as
a petro currency now.
So what's that right price and Ithink it trades between $70 and
(15:35):
$90.
I think it trades between 70and 90 dollars.
Right, and I'm hugely bullishon it, but at the same point in
time, I think my view is is issomewhat non-consensus at this
time no-transcript.
Steve Davenport (16:17):
How would you put the opportunity in Europe
compared to the?
Clement Miller (16:18):
opportunity in the US and Canada.
Well, as I mentioned, I am veryselective with regard to what I
would choose to invest in inEurope.
Well, I'm selective everywhere,but I'm much more careful with
regard to Europe, because I'mlooking for companies in Europe
that aren't domestically focusedbut are more internationally
(16:40):
focused, and that's not the casewith what I'm doing in the US.
In the US, I'm looking forcompanies that are good but can
focus on a large market in theUS and aren't necessarily
exporters and aren't necessarilyexporters.
(17:06):
But I would want to address onething that Jim said about oil
and gas.
I think I agree with him on theopportunities there.
I also think that oil will movein the $70 to $90 range, which
means, of course, that you'renot going to have large surges
in oil prices.
(17:26):
But I think the best way toapproach that is to invest in
some of the equipmentmanufacturers, the oil services
companies, and rather than insort of integrated oil companies
.
So the oil services companies,who are going to be selling
equipment regardless of what theoil price is.
(17:47):
They're going to sell more ifthe oil price is higher, but
they're going to.
They're not going to bedisadvantaged by an oil price
that's you know that's lowereither.
And one last thing I wanted tomention I think Jim might
appreciate this is that thereare opportunities here for
uranium as well, because ofsomething of a bit of a uranium
(18:11):
or nuclear renaissance, plus thefact that the US and others are
beginning to put sanctions onrussian uranium, and so there's
a.
I have a another company in myportfolio again, um, you know,
very selective about this.
It's a canadian company, uh,called cameco.
(18:32):
I'm sure, uh sure, jim isfamiliar with that uranium
company uh, and, um, you know,so I'm invested in that as well,
looking at the opportunitiesfor uranium going forward.
Steve Davenport (18:45):
Well, you guys are talking, Clem, to me, about
a dirty portfolio when you talkabout.
One part of this that I thinkis interesting is that in the
world of AI, in the world of alltechnology, we still get back
to what are the things that aregoing to drive the energy price
(19:06):
and what are the things that aregoing to affect how companies
and how countries do well.
So the second area I'd like toask you guys, just for a little
thought on, is are weaponscompanies going to be the next
black?
Are they going to be the nexthot thing?
Is this movement in Ukraine andthe Middle East and potentially
(19:30):
in Taiwan, going to cause theLockheed Martins, the Raytheons,
to really have a marketplacefor the next five or 10 years,
or is this just a short-termblip?
Is military demand short-termor long-term?
What do you think, James?
Dr James Thorne (19:50):
Well, at first glance I would say it's
long-term right.
But I think one of the thingswe really haven't touched on is
the fact that we have fiscal.
We've gone through a period oftime of fiscal spending
reminiscent of a wartime economysuch as World War II or World
(20:12):
War I I think it's the head orthe president of the WEF said
that debt in the Western worldis at Napoleonic war levels.
Right, the interest on debt inthe United States now dwarfs the
military budget in the UnitedStates.
The interest on debt up here inCanada dwarfs the transfer
(20:34):
payments for healthcare.
So I think, theoreticallyspeaking, yes, you know the
companies that you mentioned.
I mean, the US is a leader inthese and you know it's.
You know you talked, I think,steve, you talked about proxy
wars.
I mean we didn't even talkabout.
You know, is Japan going tobecome an offensive military
(20:57):
power within the South China Sea, which I think that's happening
right before our eyes in theevolution of Japan?
So I would say the first, myvisceral response, quick, gut
response, is yes, but I reallythink it comes down to the fact
that we're about to enter into aperiod of fiscal responsibility
(21:18):
and, if that is the case, usingWorld War II as our guide,
right, or even World War I asour guide?
What does the growth andspending look like coming out of
the government when you takethe deficit down from, let's say
, 7% of GDP in the United Statesdown to 3%, right?
(21:40):
Could there?
?
Go ahead
Steve Davenport (21:45):
You have to find the savings somewhere, and
I think that's a logical way tolook at it.
But it feels to me like thepublic or people don't realize
how the spending equation workson a regular, personal level
with their credit cards or withtheir overall behavior in terms
of supporting, you know,military actions it's, I'm not
(22:09):
sure.
Politically, you believe thatthere's a will for, uh, better,
better behavior.
What do you think, clem?
Are you skeptical aboutgovernments being able to manage
their budgets with higherinterest rates?
Clement Miller (22:23):
Yeah, definitely for sure.
Yeah, I am skeptical interestrates in the future, the fact
that governments will beperceived as having, you know,
perhaps slightly lesscreditworthiness going forward
(22:46):
and so folks are going to demandsort of higher rates from them
in the future.
I did want to address thismilitary point.
I think that's an area which,again, is highly specific.
I think that one can't justassume you wouldn't want to just
buy a military-focused ETF andsit on that.
(23:09):
There are some specificcompanies that are doing well,
some specific companies thataren't doing well, doing well,
and you'd be surprised at,really, which ones are doing
well and which ones aren't doingwell.
Some of the bigger names areactually not doing all that well
.
Some of them have been pricedup and are seeing some pullbacks
(23:31):
, for example.
But I do have a couple ofmilitary companies.
I'm not going to go into allthe details about what products
they sell, what contracts theyhave, but those are the kinds of
things you have to look at arethe products and the contracts
in order to be able to make anascertainment as to whether they
have long-term prospects or not.
(23:53):
The other companies in themilitary space I can go without.
Steve Davenport (23:59):
Yeah, I think that when we look at this, this
issue of where to invest and howto invest in Europe has got a
lot of hair on it, and I've kindof made the decision that it's
going to be invested there whenyou're looking more for income
versus when you're looking forgrowth, and so, from a dividend
(24:19):
portfolio perspective, we'vefound some great names in Europe
that are global and havefranchises that really transcend
their country, and so, in manyways, I think the term investing
in Europe or investing in Asiais probably a little bit old,
because all of these companieshave locations worldwide, and so
(24:46):
I'm not sure that we have tonecessarily say this is a
European company.
If a company has a greatfranchise in all of South
America and North America andparts of Asia, it could be
located in Europe.
But I really think we need totranscend this discussion and
start thinking what's goodglobally.
This discussion and startthinking what's good globally.
Yeah, if I would ask you guys,companies, to close out what,
(25:07):
what investment in europe do youthink has worldwide presence
and impact that people probablydon't think of when they think
about european investments?
You want to start, james, or?
Or you can go first if you wantto climb.
Clement Miller (25:25):
Well, I would just say the companies that I
mentioned earlier are all globalcompanies, every single one of
them Chubb, novo Nordisk, asml,crh, ferrari and LVMH all global
companies.
They happen to be based inEurope.
They have a European gloss tothem.
Ferrari, for example, has aEuropean gloss, but the others
(25:49):
do as well.
But I don't know that a lot ofUS investors, especially retail
investors, really understandthat Chubb and Novo Nordisk, and
maybe even LVMH, are Europeancompanies.
They may just think, oh, theseare US companies because I see
(26:10):
them all over the place, butindeed they're based in Europe,
but they sell globally.
And I do want to say one morething, steve, about something
you said about dividendportfolio in Europe.
Steve, about something you saidabout dividend portfolio in
Europe, and that is, indifferent countries there's
different attitudes and taxregimes towards dividends, and
(26:30):
so when you look around theworld, uk investors like to see
dividends, australian like tosee dividends, canadian like to
see dividends, but you don't seethat in a lot of other
countries in the world in termsof wanting to see returns in the
(26:53):
form of dividends as opposed toprice appreciation.
Steve Davenport (26:57):
Can I just get a kind of a momentum guide from
each of you, kind of a momentumguide from each of you, clem,
what's percentages of yourinternational mail and whether
you think you're going to beadding to, staying the same or
decreasing your exposure toEurope as we go forward in 24?
Clement Miller (27:15):
I don't think I'm going to be increasing or
decreasing.
It's all sort of bottom up.
But I can't see I'm not makinga decision as to whether I'm
going to be investing more inEurope per se.
I'll have more to say on amacro level in our next podcast
(27:39):
when we talk about Asia.
But in terms of Europe, Idefinitely look at things from a
bottom-up, specific stockperspective.
Steve Davenport (27:48):
How about James ?
What are you thinking?
Dr James Thorne (27:51):
Well, in my framework, when you look at the
data going, I think the day, Ijust read an academic paper and
the data goes back to 1990 andit parses returns, uh returns,
in the in the stock market, andit basically says that the
majority of wealth is created by2.39 percent of stocks.
(28:12):
So if you let's round that upto three percent and use the s p
500, it's 15 stocks, right.
Half of the returns aregenerated by a quarter of 1%.
So just to anchor off of or toadd onto what Clem is saying or
what you said, look at, I don'tthink.
(28:33):
I think that the error ofgeographic investing, where
you're going to go and have anexposure because of an ETF into
an area I think, is over.
I think the objective ofinvestors and portfolio managers
is to find the best 20 stocks,irrespective of geopolitical
(28:55):
areas, and so what I say whenpeople ask me about where to go
around the world, I say theeasiest pond and the pond that's
got the most fish to build agreat portfolio that have
leaders is the United States.
Sure, are there a couple ofnames in Europe?
Yes, clem's named them, right.
I mean, you don't want to haveLily and you want to buy Novo.
(29:18):
Okay Right, you want to buyNovo because it's cheaper than
Lilly.
Well, it's always been cheaperthan Lilly, but is it?
Does it have a great seculartheme behind it?
Yes, it's going to beinteresting to see how it trades
, given that one of their majorplans is on fire today, but at
(29:39):
the same point in time in myjourney, in my perspective, is
to try to get investors to focuson, you know, what is important
in their portfolio, right, andto make sure that they have
exposure to that.
And so what I would suggest is,you know, we have in a period
of extreme levels of debt.
(29:59):
I kind of go counter to thisconsensus in this.
The New York Fed has a modelit's called the SLW model, which
Williams, who is the presidentof the Fed, helped develop it.
The neutral rate or R star ofinterest is declining, right.
(30:24):
It's now around 74 basis pointsin the United States, and if
you buy into the Fed'sphilosophy that whether they're
tight or loose is dependent on Rstar I'm using this is the
Fed's argument and I'm using theFed's model then I would
suggest to you that interestrates are going to go
(30:45):
substantially down, not up, andI question it remains to be seen
for me that we are in a newinflationary era.
I still think that we haveexcess capacity globally,
(31:11):
capacity globally, and I thinkthe US dollar and the will
depreciate somewhat over thenext while, and I think the
reason is is that we need tofinance the US debt.
So in that environment.
I still think the United Statesis the place to be, but I would
reiterate, as Clem said, it'son a case-by-case basis, but I
do think that having aconcentrated portfolio is the
(31:32):
way to go and I think people aremissing that important fact.
Steve Davenport (31:37):
Thanks, James, I agree with you in terms of
where rates are going.
I think they have to go down tohelp the governments, you know,
not lower their interestpayments.
I believe that, unfortunately,I don't have.
I'm a little skeptical as towhether we will suddenly find
financial discipline veryquickly, Because I think that
(31:59):
it's too hard for Congress andpoliticians to not spend the
money to do things that theythink are going to improve their
prospect of reelection or theirconstituents prospects by
helping with the handout.
So I think we've gotten in avery bad habit of giving money
to this idea of supportingpeople and supporting markets,
(32:25):
and one of the things I wonderis what the populist ideal
that's happening now and theanger at government where it
goes, Because I think the onething we didn't talk about was
an election and I think that weall know that this election
could be very controversial anddifficult.
I'd like to thank you guys.
(32:46):
We're going to head off and Iappreciate your insights in
Europe and I appreciate youbeing with us and if you could
give us a like share and we lookforward to talking to you again
soon.
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