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.
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
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Steve Davenport:
Welcome everyone to today's edition of Skeptic's Guide to Investing. I've got my co-host, Clem Miller, here and we've got a special guest today. Dr James Thorne joins us from Canada. James is the chief strategist at Wellington-Alta Private Wealth and we wanted to kind of go around the world and talk about what's happening. So to start with, I'd like to give a little perspective. Dr Thorne was a economist and he leads a lot of the thought in Canada in terms of how we should look at markets and how we should look at the world.
Steve Davenport:
Clem, as you know, has spent most of his career in the international space, particularly fundamentals, and my specialty is domestic and quantitative. So what we're going to do is we're going to start from the highest level with Dr Thorne and we'll kind of go around the world. And so today we're going to start the first podcast talking about Europe and the Middle East and how that part of the world has been drawing attention and not necessarily been drawing returns. So is it over? Is it just beginning? If the Ukraine can get resolved with Putin in charge or without Putin in charge, where are we going to go? So, james, it's great to have you aboard and I'd love to get some perspectives on what you think is happening politically and economically in the Eurozone or Europe as a whole, and what you see there right now 2020-24?.
Dr James Thorne :
Well, first off, it's great to see both of you and we've now we've got the band back together it's, uh, it's. I've got to be very careful because, uh, I've chatted hours and, you know, a long time with you guys. I've learned a lot from both of you. So, yes, up here in Canada, at Wellington- Altus, I continue my views as if we were just continuing to work together. So so let me just phrase it in the way that I look at it. Right, the highest level I've got is look, the global economy is closed. I've got is look, the global economy is closed. Right, which is very specific in the sense that you get periods of time over history where you get supply, demand and balances that need to be reconciled 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 and I, at point in time, were in DC listening to Michael Pettis in one of his presentations. And it's very interesting because when you look at the mercantilist point of view that has happened since, let's say, china getting into the World Trade Organization and with the unification of Germany, we know that Germany and China were manufacturing too much and consuming too little and creating too much supply in the world, and therefore we had a fall in the standard of living in the United States, so on and so forth. Right, and so that's my framework. So let's go to Europe, I mean what I think is the most interesting thing. I don't want to get into the military aspect, but when I look at the Ukraine situation, where I process this, is that the reason why Germany was one of the reasons, main reasons why Germany was a leader and had the ability to do what they were doing in terms of manufacturing too much and consuming too little, was one. They had the benefit of a cheap currency because of the eurozone. If the Deutschmark was still afloat, you know, Germany's currency would be significantly higher. And let me be clear on this I do not subscribe to interest rate differentials determining currency crosses. I subscribe to economic fundamentals. The other thing I would say to you is how I process the Ukraine situation is the fact that Germany has lost a very, very cheap source of a critical input, which is natural gas, into advanced manufacturing, and if Germany has to basically manufacture based on importing LNG from the United States, for example from the United States, for example then their cost advantage goes away. And that's one and two.
Dr James Thorne :
When I look at the Middle East I go back to the G20 meeting, and we've talked about this, guys is, you know, when you look at the pipelines and you look at, you know, russia, in terms of its use, has a market for their products, which is Europe. Well, if the Middle East can take their, when there was a significant trade agreement signed between, uh, saudi Arabia, india, israel, the United States and Europe in terms of creating a corridor, um, you know, I I find that very interesting and then I would over. You know, days of Germany are behind them and you're starting to see that, with the outsourcing of, or the movement of, the big chemical firms away, I think it speaks highly. I mean, I love the United States in terms of, a, the innovation, but B, because they have a cheap source of natural gas, right, so, and so I really think, in that sense, the, the, the dynamics of the chessboard are changing in favor of the United States, and then with China, I just think that what's, to me, the most interesting thing on that is the fact that they've pivoted from being a major importer and urbanization is their goal to being an exporter, and I frame that in the way of looking at it, in terms of what Japan did coming out of World War II.
Dr James Thorne :
So it's all dynamic, it's all moving. I think the United States is very well positioned for what's going on. Is this time different? No, but if you take a long enough lens or step back, it's a very interesting move. But these moves aren't subtle. They're huge in their dynamic.
Dr James Thorne :
And that's how I basically frame it.
Steve Davenport:
Well, one of the things that I mean, Clem, I want you to tell me what you think fundamentals are happening. But one item that you kind of mentioned but didn't really expound on is I believe it has to do with this peace dividend. They've had a long time where they haven't, germany hasn't committed to a large military budget, and that extra capacity or extra resources, by not spending 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 is they've broken the glass. Whatever happens in the Ukraine, you're starting to see I hate to call this the axis of evil, but it's a very nice analogy with Russia, china, iran kind of lining up Venezuela, and now you've kind of got the Europe and the US and Canada taking the other side. Clem, what do you think about the fundamentals of Europe and the political situations?
Clement Miller:
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 of weaknesses relative to, say, the US. That's why, in my own personal portfolio, I am very selective about what goes into my portfolio in terms of European stocks. So, again, on this call, we're not recommending any particular stocks, but I will discuss I will just go through very quickly the list of stocks that are in my own portfolio. So first of all, you have Chubb, which is the Swiss insurance company, globally oriented. I have Novo Nordisk, which is the Danish pharmaceutical company that's very involved in the GLP-1 obesity drugs. I have ASML, which is the Dutch manufacturer of semiconductor laser chip lithography equipment. I have CRH, which is an Irish-based global manufacturer of building materials based global manufacturer of building materials. I have Ferrari, which is the Italian based luxury automobile manufacturer, and I have LVMH, louis Vuitton, which is the luxury brands manufacturer, or I should say owner of luxury brands based in France.
Steve Davenport:
So those are my you have too much money.
Clement Miller:
Yeah, so those are my. Well, I spread it around many chips, right. And so those are my selections in Europe, very selective and, as you can see, companies that have global revenues, global sales, especially in the US, but also in Asia, including in China, but they're not Chinese companies, they're European companies that sell in China. And just to round this out and to complete my input here, in terms of the Middle East, which you had asked about as well, there are very limited stock opportunities in the Middle East. Most of these countries have no stock market, most of them, and honestly, I find that there's, especially now, there's too much risk in putting your money into Middle East companies.
Steve Davenport:
Well, that helps us transition very nicely. I mean, I believe that we talk about the Middle East and we talk about Ukraine, not because of their GDPs, but because of how they impact one of the great commodities, which is oil, and how oil helps make the world go round. I mean, there's been a lot of talk about ESG and companies and countries being cleaner, but I think we saw very quickly how Germany had to change once Russia's supply of oil and gas mainly gas started to be in question because of the Ukraine. They suddenly had a new feeling about what the environment means to them versus what it means to their GDP to pay the higher prices. So, James, how do you see black gold, Texas tea being a factor in the world economy and being a factor in how you view what's going on with Europe? It feels to me like it's still a knife hanging over their head oh yeah, I mean, I think, I think first.
Dr James Thorne :
I think one of the biggest things that we've, I think, is discounted way too much by our generation.
Dr James Thorne :
We have memory of the 70s, 80s and 90s is the fact that the United States is now an energy superpower and, to a certain extent, the US dollar is now a petrodollar. And so that's one. Two I really think that when you start overlaying stuff like alternative intelligence in the digital economy, I think the biggest let's even be more blunt the biggest competitive advantage going into this digital age is going to be who can manufacture electricity at the lowest price. Right, that's NatGas, I thought it was the cleanest. Beg your pardon.
Steve Davenport:
I thought it was the cleanest production of energy.
Dr James Thorne :
Well, I, we can, it seems like an old idea, James.
Steve Davenport:
I know, but I'm not woke up in Canada anymore.
Dr James Thorne :
What I do is frame myself in terms of a narrative. My biggest objective is to have a narrative and recognize the fact and have humility, to know that. You know that. You know the narrative is most likely going to be 60 to 70% correct. If I can get that right, then you know to be 30% to 40% wrong in the narrative.
Dr James Thorne :
So the way I look at it is the fact that, yes, the thing I would put that people don't get and that's my perspective is the United States is an energy superpower and they have oil Now it's sweet oil superpower, right, and they have oil, now it's sweet oil.
Dr James Thorne :
You combine Canada with the dirty and all the other natural resources we have in North America and we are sitting pretty. And it really questions the economic viability of Europe, right, and it also really talks about what is this competitive landscape with China look like going out a couple of decades. So so I is saying the country that has the cheapest electricity wins has the biggest competitive advantage because AI is going is, like you know, crypto mining. Right, it's run by GPUs. It's four to five times more energy intensive or electricity intensive, and we are about to rewire the world, going from a CPU centric infrastructure that was designed by Johnny Von Neumann in 1947 at Penn to a GPU centric, and so it's all about cheap energy, as far as I'm concerned. In so far as oil, yes, the United States has a ton of oil. Add Canada on top of that, and then I also suggest to you that I don't think it's going away because I view the US dollar as a petro currency now.
Dr James Thorne :
So what's that right price and I think it trades between $70 and $90. I think it trades between 70 and 90 dollars. Right, and I'm hugely bullish on it, but at the same point in time, I think my view is is is somewhat non-consensus at this time no-transcript.
Steve Davenport:
How would you put the opportunity in Europe compared to the?
Clement Miller:
opportunity in the US and Canada. Well, as I mentioned, I am very selective with regard to what I would choose to invest in in Europe. Well, I'm selective everywhere, but I'm much more careful with regard to Europe, because I'm looking for companies in Europe that aren't domestically focused but are more internationally focused, and that's not the case with what I'm doing in the US. In the US, I'm looking for companies that are good but can focus on a large market in the US and aren't necessarily exporters and aren't necessarily exporters. But I would want to address one thing that Jim said about oil and gas. I think I agree with him on the opportunities there.
Clement Miller:
I also think that oil will move in the $70 to $90 range, which means, of course, that you're not going to have large surges in oil prices. But I think the best way to approach that is to invest in some of the equipment manufacturers, the oil services companies, and rather than in sort of integrated oil companies. So the oil services companies, who are going to be selling equipment regardless of what the oil price is. They're going to sell more if the oil price is higher, but they're going to. They're not going to be disadvantaged by an oil price that's you know that's lower either.
Clement Miller:
And one last thing I wanted to mention I think Jim might appreciate this is that there are opportunities here for uranium as well, because of something of a bit of a uranium or nuclear renaissance, plus the fact that the US and others are beginning to put sanctions on russian uranium, and so there's a. I have a another company in my portfolio again, um, you know, very selective about this. It's a canadian company, uh, called cameco. I'm sure, uh sure, jim is familiar with that uranium company uh, and, um, you know, so I'm invested in that as well, looking at the opportunities for uranium going forward.
Steve Davenport:
Well, you guys are talking, Clem, to me, about a dirty portfolio when you talk about. One part of this that I think is interesting is that in the world of AI, in the world of all technology, we still get back to what are the things that are going to drive the energy price and what are the things that are going to affect how companies and how countries do well. So the second area I'd like to ask you guys, just for a little thought on, is are weapons companies going to be the next black? Are they going to be the next hot thing? Is this movement in Ukraine and the Middle East and potentially in Taiwan, going to cause the Lockheed Martins, the Raytheons, to really have a marketplace for the next five or 10 years, or is this just a short-term blip? Is military demand short-term or long-term? What do you think, James?
Dr James Thorne :
Well, at first glance I would say it's long-term right. But I think one of the things we really haven't touched on is the fact that we have fiscal. We've gone through a period of time of fiscal spending reminiscent of a wartime economy such as World War II or World War I I think it's the head or the president of the WEF said that debt in the Western world is at Napoleonic war levels. Right, the interest on debt in the United States now dwarfs the military budget in the United States. The interest on debt up here in Canada dwarfs the transfer payments for healthcare. So I think, theoretically speaking, yes, you know the companies that you mentioned. I mean, the US is a leader in these and you know it's.
Dr James Thorne :
You know you talked, I think, steve, you talked about proxy wars. I mean we didn't even talk about. You know, is Japan going to become an offensive military power within the South China Sea, which I think that's happening right before our eyes in the evolution of Japan? So I would say the first, my visceral response, quick, gut response, is yes, but I really think it comes down to the fact that we're about to enter into a period of fiscal responsibility and, if that is the case, using World War II as our guide, right, or even World War I as our guide? What does the growth and spending look like coming out of the government when you take the deficit down from, let's say, 7% of GDP in the United States down to 3%, right? Could there?
Steve Davenport:
?
Dr James Thorne :
Go ahead
Steve Davenport:
You have to find the savings somewhere, and I think that's a logical way to look at it. But it feels to me like the public or people don't realize how the spending equation works on a regular, personal level with their credit cards or with their overall behavior in terms of supporting, you know, military actions it's, I'm not sure. Politically, you believe that there's a will for, uh, better, better behavior. What do you think, clem? Are you skeptical about governments being able to manage their budgets with higher interest rates?
Clement Miller:
Yeah, definitely for sure. Yeah, I am skeptical interest rates in the future, the fact that governments will be perceived as having, you know, perhaps slightly less creditworthiness going forward and so folks are going to demand sort of higher rates from them in the future. I did want to address this military point. I think that's an area which, again, is highly specific. I think that one can't just assume you wouldn't want to just buy a military-focused ETF and sit on that.
Clement Miller:
There are some specific companies that are doing well, some specific companies that aren't doing well, doing well, and you'd be surprised at, really, which ones are doing well and which ones aren't doing well. Some of the bigger names are actually not doing all that well. Some of them have been priced up and are seeing some pullbacks, for example. But I do have a couple of military companies. I'm not going to go into all the details about what products they sell, what contracts they have, but those are the kinds of things you have to look at are the products and the contracts in order to be able to make an ascertainment as to whether they have long-term prospects or not. The other companies in the military space I can go without.
Steve Davenport:
Yeah, I think that when we look at this, this issue of where to invest and how to invest in Europe has got a lot of hair on it, and I've kind of made the decision that it's going to be invested there when you're looking more for income versus when you're looking for growth, and so, from a dividend portfolio perspective, we've found some great names in Europe that are global and have franchises that really transcend their country, and so, in many ways, I think the term investing in Europe or investing in Asia is probably a little bit old, because all of these companies have locations worldwide, and so I'm not sure that we have to necessarily say this is a European company.
Steve Davenport:
If a company has a great franchise in all of South America and North America and parts of Asia, it could be located in Europe. But I really think we need to transcend this discussion and start thinking what's good globally. This discussion and start thinking what's good globally. Yeah, if I would ask you guys, companies, to close out what, what investment in europe do you think has worldwide presence and impact that people probably don't think of when they think about european investments? You want to start, james, or? Or you can go first if you want to climb.
Clement Miller:
Well, I would just say the companies that I mentioned earlier are all global companies, every single one of them Chubb, novo Nordisk, asml, crh, ferrari and LVMH all global companies. They happen to be based in Europe. They have a European gloss to them. Ferrari, for example, has a European gloss, but the others do as well.
Clement Miller:
But I don't know that a lot of US investors, especially retail investors, really understand that Chubb and Novo Nordisk, and maybe even LVMH, are European companies. They may just think, oh, these are US companies because I see them all over the place, but indeed they're based in Europe, but they sell globally. And I do want to say one more thing, steve, about something you said about dividend portfolio in Europe. Steve, about something you said about dividend portfolio in Europe, and that is, in different countries there's different attitudes and tax regimes towards dividends, and so when you look around the world, uk investors like to see dividends, australian like to see dividends, canadian like to see dividends, but you don't see that in a lot of other countries in the world in terms of wanting to see returns in the form of dividends as opposed to price appreciation.
Steve Davenport:
Can I just get a kind of a momentum guide from each of you, kind of a momentum guide from each of you, clem, what's percentages of your international mail and whether you think you're going to be adding to, staying the same or decreasing your exposure to Europe as we go forward in 24?
Clement Miller:
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 making a decision as to whether I'm going to be investing more in Europe per se. I'll have more to say on a macro level in our next podcast when we talk about Asia. But in terms of Europe, I definitely look at things from a bottom-up, specific stock perspective.
Steve Davenport:
How about James? What are you thinking?
Dr James Thorne :
Well, in my framework, when you look at the data going, I think the day, I just read an academic paper and the data goes back to 1990 and it parses returns, uh returns, in the in the stock market, and it basically says that the majority of wealth is created by 2.39 percent of stocks. So if you let's round that up to three percent and use the s p 500, it's 15 stocks, right. Half of the returns are generated by a quarter of 1%. So just to anchor off of or to add onto what Clem is saying or what you said, look at, I don't think. I think that the error of geographic investing, where you're going to go and have an exposure because of an ETF into an area I think, is over.
Dr James Thorne :
I think the objective of investors and portfolio managers is to find the best 20 stocks, irrespective of geopolitical areas, and so what I say when people ask me about where to go around the world, I say the easiest pond and the pond that's got the most fish to build a great portfolio that have leaders is the United States. Sure, are there a couple of names in Europe? Yes, clem's named them, right. I mean, you don't want to have Lily and you want to buy Novo. Okay Right, you want to buy Novo because it's cheaper than Lilly. Well, it's always been cheaper than Lilly, but is it? Does it have a great secular theme behind it?
Dr James Thorne :
Yes, it's going to be interesting to see how it trades, given that one of their major plans is on fire today, but at the same point in time in my journey, in my perspective, is to try to get investors to focus on, you know, what is important in their portfolio, right, and to 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. I kind of go counter to this consensus in this. The New York Fed has a model it's called the SLW model, which Williams, who is the president of the Fed, helped develop it.
Dr James Thorne :
The neutral rate or R star of interest is declining, right. It's now around 74 basis points in the United States, and if you buy into the Fed's philosophy that whether they're tight or loose is dependent on R star I'm using this is the Fed's argument and I'm using the Fed's model then I would suggest to you that interest rates are going to go substantially down, not up, and I question it remains to be seen for me that we are in a new inflationary era. I still think that we have excess capacity globally, capacity globally, and I think the US dollar and the will depreciate somewhat over the next while, and I think the reason is is that we need to finance the US debt. So in that environment. I still think the United States is the place to be, but I would reiterate, as Clem said, it's on a case-by-case basis, but I do think that having a concentrated portfolio is the way to go and I think people are missing that important fact.
Steve Davenport:
Thanks, James, I agree with you in terms of where rates are going. I think they have to go down to help the governments, you know, not lower their interest payments. I believe that, unfortunately, I don't have. I'm a little skeptical as to whether we will suddenly find financial discipline very quickly, Because I think that it's too hard for Congress and politicians to not spend the money to do things that they think are going to improve their prospect of reelection or their constituents prospects by helping with the handout.
Steve Davenport:
So I think we've gotten in a very bad habit of giving money to this idea of supporting people and supporting markets, and one of the things I wonder is what the populist ideal that's happening now and the anger at government where it goes, Because I think the one thing we didn't talk about was an election and I think that we all know that this election could be very controversial and difficult. I'd like to thank you guys. We're going to head off and I appreciate your insights in Europe and I appreciate you being with us and if you could give us a like share and we look forward to talking to you again soon.
