an evening with jim mellon
TRANSCRIPT
AN EVENING WITH J I M M E L L O N
24th November 2016
This Evening’s Talk • Macro Outlook • Rules of Engagement for Investors • Big Ideas = Money Fountains
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Trump Presidency • Keynesian Laffer curve man • Substantial borrowing for infrastructure • Higher interest rates coming
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Laffer Curve
• Repatriation amnesty -> USD 2 trillion at 10% tax • Corporate tax likely to decrease from 35% to 20% • Simplification of tax code • Worry on trade but watered down
Trump Presidency
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UK & Brexit
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Europe • From crisis to crisis • Banking system a house of cards • Brexit just the beginning and a side show • Rise of populism and other nationalist
movements
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From Crisis to Crisis
Oct ‘16 - Hungarian referendum on
immigration
Dec ‘16 - Italian referendum
Current - Spanish political deadlock
Oct ‘17 - German federal elections
Aug ‘16 - Italian banking crisis
Current – Catalonian separatist movement
Halt on further EU integration
Dec ‘16 – Denmark - greater immigration
control
Ongoing – Greek economic crisis
Ongoing – Greek economic crisis
Current - French rise of national sovereignty
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0% 5% 10% 15% 20% 25% 30%
United Kingdom
Germany
France
Euro area
Portugal
Italy
Spain
Greece
Unemployment Rate
0%20%40%60%80%
100%120%140%160%180%
Debt
to G
DP %
Source: Bloomberg – end of 2015
European Debt and Unemployment
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Target2 Balances
-€600b -€400b -€200b
€0b €200b €400b €600b €800b
2001 2004 2007 2010 2013 2016ECB Austria Belgium Cyprus Germany EstoniaSpain Finland France Greece Ireland ItalyLithuania Luxembourg Latvia Malta Netherlands Portugal
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UK & Brexit What we know:
– GBP under pressure – No financial Armageddon – No recession – FTSE100 and 250 near all time highs – Article 50 before end of March ’17
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Trade Relationship
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Emerging Markets
• Strong USD a negative for EMs • China significant non-performing loans • Significant debt problems elsewhere • Still commodity dependent
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Macro Summary • Capital misallocation with QE, ZIRP & NIRP • US equities overvalued • Bonds ridiculously overvalued • Selective emerging markets attractive • Political problem and rise of populism
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Quantitative Easing
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Bond Yields
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
US 10-year govt bonds yield
US 10-year govt bonds yield
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
Germany 10-year govt bonds yield
Germany 10-year govt bonds yield23 Source: Bloomberg
Bond Prices
80
90
100
110
120
130
Bond
Price
Belgium 100-year govt bonds Ireland 100-year govt bonds
Austria 70-year govt bonds Italy 50-year govt bonds24 Source: Bloomberg
Valuations Over 10 Years Value Fwd PE Growth Fwd PE Value P/BV Growth P/BV
Current 14.2 17.7 1.5 3.5 Per cent rank 89% 86% 56% 88% High 15.2 19.4 2.2 3.7 Low 7.8 8.9 0.9 1.7 Median 12.3 15.7 1.5 2.9
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Valuations Since Start of Data Set Value Fwd PE Growth Fwd PE Value P/BV Growth P/BV
Current 14.2 17.7 1.5 3.5 Per cent rank 65% 64% 30% 61% High 24.7 40.5 2.5 7.6 Low 8.9 11.0 1.1 2.1 Median 13.2 16.9 1.8 3.3
Source: Bloomberg
10-Year Growth Forward PE Premium
-10%
0%
10%
20%
30%
40%
50%
Prem
ium
/ Disc
ount
PE Premium MSCI Growth Index vs Value Index26
Source: Bloomberg
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Rules of Engagement Curiosity Adaptability Application Network effect
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Investment Dos and Don’ts • Status quo investments = penury • Look for:
–Disruptors; –Comparative advantage; or –Deep under valuation
• Research, probe and specialise 29
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Big Ideas • Technology • Quantum Computing • Longevity
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Productivity & Tech Stasis • Moore’s Law broke down in 2005 due to Dennard
Scaling • Cost of computational power is rising more than
benefit it delivers e.g.: – Aerospace relies on efficiency gains from computing power – Drug development for more complex diseases requires
exponentially more computing power • Marginal productivity gains in decline
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Technology 1. Virtual / augmented reality & AI 2. DNA sequencing machines universal clinical practices 3. CRISPR / CAS9 - Synthetic life 4. Truck platooning & self driving robots 5. Li-Fi 6. Blockchain and payment technology 7. Reusable rocket - SpaceX 8. Improvement in battery technology – Tesla Model 3 9. Voice recognition
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US Productivity Growth
-1.0%
1.0%
3.0%
5.0%
7.0%
Manufacturing Retail (2013) Restaurants(2013)
Airtransportation
(2012)
Trucking(2013)
Commercialbanking
Prod
uctiv
ity G
rowt
h
Before and After Recession
1995 - 2007 2007 - 2015 (or as noted)
Source: Bureau Labour of Statistics and Kauffman Foundation 36
Quantum Computing Classical Computing
In classical computing a bit is 0 or 1. A 2-bit computer has four ‘states’ but can only perform one of these operations at a time:
Quantum Computing In quantum computing a qubit is 0 or 1 or both at the same time (!?!) because of “super-positioning.” A quantum computer can thus analyse all four states in one operation:
0 0
? ?
? ?
? ?
0 0
1 0
0 1
1 1 37
Quantum Computing A computer with n cubits can be in super-position of 2n states at the same time. So a 4 qubit quantum computer could analyse 16 parallel states in a single operation:
0 0 0 0 1 0 0 0 1 1 0 0 1 1 1 0 1 1 1 1 0 0 1 0 0 0 0 1 0 1 1 1
0 0 1 1 1 0 0 1 0 1 1 0 1 0 1 0 0 1 0 1 0 1 0 0 1 1 0 1 1 0 1 1
Quantum Computer
? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ?
? ? ? ? ? ? ? ? ? ? ? ? 1 0 1 0 ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ?
Classical Computer
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Quantum Computing Operations Required to Analyse All States
# bits / qubits Classical Computer Quantum Computer 1 2 1 2 4 1 3 8 1 4 16 1 5 32 1 6 64 1 7 128 1 8 256 1 9 512 1
10 1,024 1 11 2,048 1 12 4,096 1 13 8,192 1 14 16,384 1 15 32,768 1 16 65,536 1 17 131,072 1 18 262,144 1 19 524,288 1 20 1,048,576 1
A quantum computer with 300 qubits (2300
classical bits) can process as much information as there are particles in the universe!
-
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20Op
erat
ions R
equi
red
to A
nalys
e All
Stat
es
Number of Qubits
Classical Computer Quantum Computer 39
Driverless Technology • One billion vehicles on the road today – majority with just a single passenger
and idle 95% of the time • Driverless cars will:
– Use roads efficiently - Reduce congestion – Increase car sharing - Reduce energy requirements – Improve safety - Disrupt insurance industry – Free up time – NO PARKING!
• 2.5m driving jobs in the U.S. alone • Uber has demonstrated its driverless technology for trucks delivering beer
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Energy Revolution • Energy conversion of fossil fuels is ~13% • Significant production efficiency gain possible • Solar power cost is at grid parity in southern US and
southern Europe and many parts of Asia
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Energy Revolution 1. Bioo plant – photosynthesis 2. Gold nanowire – no degradation 3. Magnesium – no shielding required 4. Solid state lithium ion – super capacitor
potential 5. Graphene car batteries – charge and
discharge 33 times faster than lithium ion 6. Foam batteries, safer (not flammable), higher
energy density, cheaper and longer life 7. Aluminium graphite – fully charged in one
minute 8. Alfa battery – 40 times charge of lithium ion 9. Skin power – current from skin using gold
film 10. Foldable batteries – bendable gadgets
• Over the last four years, battery costs have declined over 50%. A further 50% price decline is anticipated by 2020
• Tesla’s Giga-factory will produce 35 giga-watts of batteries by 2020, more than 2013’s global batter production
• Many new technologies in development
Foldable Battery
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Centralised
Blockchain
Decentralised Distributed 43
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Longevity
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72
1900 2015 2050
Four million years produced an 11-year
increase from 20 to 31
115 years produced a 41-
year increase
Source: James Carey; Longevity United Nations Development Program
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Immune-Oncology Key Advantages of IO:
1. More Specificity 2. Less toxicity to normal tissue
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Sequencing Technology 1993: One researcher could read 500 letters of the human genome per day 2016: Computers can read more than 3 billion genome letters per day at a cost of $5,000. This is the equivalent of 6 million researchers in 1993
Dr. Francis Collins Leader of the Human Genome Project
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Hand Held DNA Sequencer
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CRISPR / CAS9 • Young technology but has fundamentally changed gene editing
and medicine
• Part of immune system of bacteria used to fight viruses
• Simple, versatile and reproducible results
• Can target multiple genes at once
• Applications from basic research, drug development, agriculture and genetic diseases
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Longevity • Key pathways implicated in ageing beginning to be
understood – nicotinamide, MTOR, AMPK, SIRT1 & other Sirtunis
• Understanding a result of rapid sequencing and study of: – Yeast Saccharomyces cerevisiae – Mice Mus musculus – Fruit flies Drosophila melanogaster – Earth worms Caenorhabditis elegans
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Single Stock Ideas • Sony Corporation • FANUC Corporation • Gilead Sciences Inc • Galapagos NV • Arrowhead
Pharmaceuticals Inc
• Synergy Pharmaceuticals Inc
• Regent Pacific Group • Condor Gold Plc • SalvaRx Group Plc
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Reading List 1. NEJM 2. BMA Journal 3. Spectator 4. Gavekal 5. Bioworld 6. Techcrunch 7. Economist 8. New Statesman 9. The Atlantic 10. National Review 11. NYT 12. FT
13. WSJ 14. Telegraph 15. Guardian 16. Times 17. Prospect 18. Country Life 19. Vanity Fair 20. The New Yorker 21. New Scientist 22. Scientific American 23. National Geographic 24. Wired
25. The Week 26. Money Week 27. Master Investor Magazine 28. Foreign Affairs 29. Rolling Stone 30. PC Advisor 31. How It Works 32. Berliner Zeitung 33. Le Monde 34. Investors Chronicle 35. Private Eye 36. Which
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More Information Additional information: • www.masterinvestormagazine.co.uk • www.fastforwardbook.com • www.crackingbio.com
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Enquiries to [email protected]