HF & G ISSUE 10 - NOVEMBER 2020 - BIDENOMICS
President-elect Biden is going to run the printing press like a drunken sailor; "green metals" could explode higher in coming years; and a new SGX listed pick.
First off, if you are on Twitter and like to get more regular updates please look up HF&G @GreedyHuat for sporadic commentary on markets, Covid-19, and stocks on our radar.
PORTFOLIO REVIEW
November was a strong month for global equity markets as there was no chaos after the US elections and vaccine hope pushed market optimism. HF&G is cautious on the vaccine news (we are NOT anti-vaxxers) but these are complicated areas of medicine that usually take multiple years to develop. So far we have been shown press releases by pharma companies. HF&G would like to highlight that the sky-high efficacy ratios of 90-95% touted by Moderna/Pfizer were on a very small subset of people and mostly with adults below 65 years old. The chance of dying from Covid for someone in reasonable health and below the age of 65 is about the same as dying in a car crash (source: Prof Ionnadis, Stanford).
HF&G also listened to Peter Piot saying that vaccines are generally not very effective with older people. If it is the 70-80+-year-olds we mostly need to protect could this become an issue going forward? Lastly, do not let anyone tell you that vaccines are not without risk:
Now to the order of the day…your money invested in HF&G’s stock picks.
This is our 10th issue and so far HF&G has picked 21 stocks/assets/crypto tulips. Close to 80% of our selection is showing positive returns. HF&G also recommended its subscribers to take profit in Bellevue Gold after a 192% run-up.
As it is “Cyber Monday” we are releasing our full portfolio list with returns to everyone. A full portfolio review is available in a separate post released only to our paying subscribers.
BIDENOMICS = FIRE UP THE $ PRINTER
As expected by the polls Joe Biden won the US presidency. The polls were alarmingly wrong in their predictions for a blue landslide, but unless one believes Trump can turn it around via the Supreme court, we are looking at four years of Bidenomics.
Biden has wild spending plans which will depend on the outcome of the US Senate races in Georgia in early 2021. If Democrats manage to control both the house and the senate wild spending is all but assured. Note that this would not have been much different if Trump had won a second term in office. In 2020 the fiscal deficit in the US alone is estimated to be approximately 20% of GDP!
If his campaign promises are to be believed Biden will spend 5.6 trillion USD excluding any additional Covid-19 relief which could easily be another 1.4 trillion USD. All this would add up to over 7 trillion USD in spending. Remember the days when the market was spooked in 2008 when the US government was spending 787 billion USD during the financial crisis? That is now pocket change. HF&G stance remains that all this money printing in a combination with zero or negative interest rates makes it hard to ignore investing in gold and other commodities (copper, uranium, nickel, zinc, etc).
Asian economies, in general, look like sane institutions vs the US. Please re-read our posts in February this year why HF&G believes Asia will outperform US stocks in the coming decade. Nothing has changed in this long term trend.
GREEN NEW DEAL
Bidenomics is surely going to try and push the “Green New Deal” forward. The plan to radically transform America and move it away from oil and gas will be costly. During one of the presidential debates, Biden even said it would be done by 2025 (he meant 2050). One can be ideologically opposed to the fallacy that much of this “green” energy is in fact “green”, but the delusion of crowds seems to have won over rational long-term energy policies. As investors, you better act accordingly.
HF&G is not against solar energy, for example, but it remains an intermittent energy source and it has been heavily subsidized in most countries. Storing renewable energy remains an enormous issue. Recently, we learned that in France the government is now backtracking on contracts to solar park operators.
To quote the most important part of the Financial Times article:
The amendment mentions “excessive profitability” — officials say some investments generate margins of more than 20 per cent — and says tariffs will be cut in such a way that “the return on fixed capital . . . does not exceed a reasonable level given the inherent risks of the investment”.French officials said they had a duty to save public money, not least so they could finance further investment in renewable energy. They calculated the contract changes would save €400m-€600m a year of the €2bn annual spending on the 235,000 contracts signed in the four years of a photovoltaic investment “bubble”. (Most of the contracts are with individuals and farmers for installations of less than 250kw capacity and are not affected).
The €2bn spent annually produces less than 1 per cent of France’s electricity, but consumes a third of public spending on renewables, the officials said.
“It’s not an arbitrary decision,” said one. “Everybody understands the problem of the 2006-10 bubble. In a few years the cost of installing solar panels fell to a quarter of what it had been.
The funny part is that in order for the green new deal to be successful record amounts of steel, copper, concrete, zinc, etc will be required. In order to find, mine, extract these minerals a lot of oil, gas, and water will be needed. The likelihood that this pushes these commodities up significantly cannot be ignored. Do the economics of all these green projects still work if the copper price triples, zinc doubles, and steel prices go up 80%?
The French solar example is not an isolated case. In Great Britain, the Daily Mail uncovered the massive subsidy bonanza for small windmill operators. Wouldn’t you like to be paid 375K GBP for producing something only worth 51K GBP?
If you think you have seen this before: you have! In 2007 The Guardian newspaper quoted Tony Blair promising to power the UK with wind energy by … 2020.
Unfortunately, these are not isolated incidents, and unless one believes deficits don’t matter the astronomical costs of rapidly transferring entire economies to be “green” in a short time frame is going to bankrupt Western government desire to the right thing to appease the “climate alarmist” narrative across much of the mainstream media. The narrative of alarmism is nothing new but has existed at least since the 1960’s. A short recap (including all links):
Below are the 50 failed doomsday, eco-apocalyptic predictions:
1. 1967: Dire Famine Forecast By 1975
2. 1969: Everyone Will Disappear In a Cloud Of Blue Steam By 1989
3. 1970: Ice Age By 2000
4. 1970: America Subject to Water Rationing By 1974 and Food Rationing By 1980
5. 1971: New Ice Age Coming By 2020 or 2030
6. 1972: New Ice Age By 2070
7. 1974: Space Satellites Show New Ice Age Coming Fast
8. 1974: Another Ice Age?
9. 1974: Ozone Depletion a ‘Great Peril to Life
10. 1976: Scientific Consensus Planet Cooling, Famines imminent
11. 1980: Acid Rain Kills Life In Lakes
12. 1978: No End in Sight to 30-Year Cooling Trend
13. 1988: Regional Droughts (that never happened) in 1990s
14. 1988: Temperatures in DC Will Hit Record Highs
15. 1988: Maldive Islands will Be Underwater by 2018 (they’re not)
16. 1989: Rising Sea Levels will Obliterate Nations if Nothing Done by 2000
17. 1989: New York City’s West Side Highway Underwater by 2019 (it’s not)
18. 2000: Children Won’t Know what Snow Is
19. 2002: Famine In 10 Years If We Don’t Give Up Eating Fish, Meat, and Dairy
20. 2004: Britain will Be Siberia by 2024
21. 2008: Arctic will Be Ice Free by 2018
22. 2008: Climate Genius Al Gore Predicts Ice-Free Arctic by 2013
23. 2009: Climate Genius Prince Charles Says we Have 96 Months to Save World
24. 2009: UK Prime Minister Says 50 Days to ‘Save The Planet From Catastrophe’
25. 2009: Climate Genius Al Gore Moves 2013 Prediction of Ice-Free Arctic to 2014
26. 2013: Arctic Ice-Free by 2015
27. 2014: Only 500 Days Before ‘Climate Chaos’
28. 1968: Overpopulation Will Spread Worldwide
29. 1970: World Will Use Up All its Natural Resources
30. 1966: Oil Gone in Ten Years
31. 1972: Oil Depleted in 20 Years
32. 1977: Department of Energy Says Oil will Peak in 1990s
33. 1980: Peak Oil In 2000
34. 1996: Peak Oil in 2020
35. 2002: Peak Oil in 2010
36. 2006: Super Hurricanes!
37. 2005 : Manhattan Underwater by 2015
38. 1970: Urban Citizens Will Require Gas Masks by 1985
39. 1970: Nitrogen buildup Will Make All Land Unusable
40. 1970: Decaying Pollution Will Kill all the Fish
41. 1970s: Killer Bees!
42. 1975: The Cooling World and a Drastic Decline in Food Production
43. 1969: Worldwide Plague, Overwhelming Pollution, Ecological Catastrophe, Virtual Collapse of UK by End of 20th Century
44. 1972: Pending Depletion and Shortages of Gold, Tin, Oil, Natural Gas, Copper, Aluminum
45. 1970: Oceans Dead in a Decade, US Water Rationing by 1974, Food Rationing by 1980
46. 1988: World’s Leading Climate Expert Predicts Lower Manhattan Underwater by 2018
47. 2005: Fifty Million Climate Refugees by the Year 2020
48. 2000: Snowfalls Are Now a Thing of the Past
49.1989: UN Warns That Entire Nations Wiped Off the Face of the Earth by 2000 From Global Warming
50. 2011: Washington Post Predicted Cherry Blossoms Blooming in Winter
Still not convinced that peddling climate doom creates good headlines but never actually happens in real life? Don’t you read almost every day that climate-related disasters are on the rise? From a UN report released this year: is the two-decade trend rising or declining?
HF&G highly recommends the following book which came out earlier in 2020. The FT with a good review of the book.
COMMODITIES SUPERCYCLE
HF&G is here to help its subscribers make good investments given the cards we are given by Biden, Trump, Bolsonaro, Johnson, Xi, Putin, and other world leaders who determine the playing field. One reader recently commented that HF&G was political rather than stock market focused. HF&G's answer is that politics, economics, and stock markets are tightly linked. If a political decision is made to print money like a drunken sailor the investments we require are vastly different than if the Fed would raise interest rates to 3% and reintroduce a real cost of capital in finance.
HF&G could change its mind but from everything we see our best guess (yes, it remains a guess!) is that the printing press will be fired up by drunken Sailor Joe and the likelihood this leads to a commodities supercycle is not small. In last month’s issue, we introduced you to Ron Stoeferle who invented the Tequila Theory of Money. His firm incrementum made the following chart highlighting how cheap commodities are vs the S&P 500.
They also highlight how the current commodity bull market might have further to run.
The biggest risk in commodities that one gets overly confident and can not change their mind. Let’s be clear: HF&G fully expects there will be a time to avoid commodity players as they are too expensive and overhyped.
There is a scenario where the vaccine gets launched successfully, Covid hysteria dies down and markets will focus their attention on the recovery trades such as hotels, restaurants, airlines, movie theatres, airports, travel websites, cruise line operators, etc. HF&G is also exposed to that theme in our portfolio (SATS, Haw Par, Major Cineplex, Rex, SUTL) so please do not ignore this if you are putting together a basket of stocks yourself. HF&G thinks the risk/reward in many commodities is attractive but please use a basket approach to commodity stocks as Tesoro might have gone up 934% but Red5 is up only 30% despite them both offering gold exposure.
ANOTHER SIMPLE IDEA: BET ON JOHN LIM FROM ARA
For this month’s recommendation, we are again giving you our latest pick for free: it is Cyber Monday after all.
The company is Straits Trading (SGX-listed) and has a market cap of around 545 million USD (730M SGD). Straits Trading has been listed for 41 years (IPO: 3 December 1979) and is a Singapore based investment company with stakes in multiple businesses. Straits Trading is owned by Dr. Tan Sri Tan Chin Tuan's family office vehicle Tecity (read about its history here).
The company has a diversified real estate portfolio:
HF&G has no real estate exposure in its selection and Straits Trading gives us a diversified way to invest in property. For this write-up we will mostly ignore its Asian real estate portfolio but focus on the key catalyst: the IPO of ARA in 2021.
Straits Trading owns 22.1% of ARA. ARA was privatized in February 2017 by John Lim (the founder), Warburg Pincus, and Straits Trading. Next year the company should relist on SGX and the value of its real estate portfolio will have tripled.
The company privatized itself at a ratio of EV/AUM at 5% in 2017. If we apply this to an estimated asset base of 120-150 billion in 2021 this means a potential IPO value for ARA between 6 to 7.5 billion SGD.
Straits Trading owns just over 22% of ARA and its stake in this potential IPO process is therefore worth between 1.32 billion SGD to 1.65 billion SGD (these are ballpark estimates, we don’t know the debt that will be put on the company so cannot accurately calculate EV). HF&G is rather approximately right than precisely wrong with these sort of back-of-envelope calculations.
Compare this to the 730M SGD valuation for the Straits Trading right now. Please keep in mind all other assets at Straits Trading are not included here, they are just free upside. The hospitality assets could rebound in 2021-2022 too. While you are waiting for ARA to re-list you will get paid a 3% dividend yield. The stock is still down 15% YTD, but has been ramping higher in the last three months as more investors learn about the ARA angle.
That’s it for this month. A Merry Christmas and a good end of the year, we will be back on the last day of 2020 with our thoughts for 2021.