Podcast Summary
High cost of US equities often overlooked: Recognizing the high cost of US equities is crucial for investors, as overlooked expenses can impact returns. US stocks are expensive, but administrative hurdles and compliance requirements make it difficult for individuals to capitalize on cheap alternatives like UK equities.
While US equities have been expensive for an extended period, and UK equities are considered cheap, the high cost of US equities is a significant issue that often goes unacknowledged. This discussion was inspired by the work of James Monti from asset manager GMO, who has previously warned about the high valuation of US stocks and the potential for mean reversion in corporate profit margins. The administrative hurdles and compliance requirements in investing can make it difficult for individuals to capitalize on such opportunities, as was the case before the 2008 financial crisis. The conversation also touched upon the challenges of adopting new technologies like cryptocurrency due to administrative complexities. Overall, the key takeaway is the importance of recognizing the high cost of US equities and the potential implications for investors.
US stocks are currently overvalued based on historical data: US stocks' high valuations make them as expensive as during the tech bubble, potentially offering only a 3% real return for the next 10 years
Despite the recent trends of growth outperforming value in the stock market, US stocks are currently overvalued based on historical data. James Montier, an economist, argues that even if corporate profit margins stay the same, US stocks' high valuations make them as expensive as they were during the tech bubble in 2000. If profit margins revert to their historical average, the CAPE ratio would be much higher than it is now, indicating a much lower expected real return for investors. Even if things go perfectly for the next 10 years, US stocks may only offer a 3% real return, which is not enough to justify the risk of buying equities. Montier suggests that the US running a permanent deficit is one reason for the high corporate profit margins. However, he does not address specific factors that could bring those margins down in this paper.
Brexit creating investment opportunity in UK equity market: Despite Brexit uncertainties, UK equity market is cheap and a good long-term investment opportunity due to discount caused by discouraging international investors
Key takeaway from this conversation with Jim Mellon is that while the Brexit situation is not going as well as hoped by some, and not as badly as feared by others, it has created a significant opportunity for investors in the UK equity market due to the discount caused by discouraging international investors. Despite some concerns about the government's handling of the situation and the potential negative effects on the economy, Mellon believes that the UK equity market is phenomenally cheap and a good long-term investment opportunity. However, the British government's actions, such as increasing taxes and adding regulations, could negatively impact the economy and the equity market. Overall, the Brexit situation remains uncertain, but the potential investment opportunity is a positive aspect.
UK Equities: Attractive Investment Opportunities Despite Challenges: UK equities offer value due to discount compared to US companies and industries like fossil fuels, defense, financial services, insurance, investment trusts provide long-term confidence. UK's resilient economy, high services exports, and inward immigration contribute to future growth.
Despite the concerns of excessive regulation and economic malaise in the UK, there are still valuable investment opportunities in the UK equity market. The UK economy, while facing challenges, remains resilient and is not unique in its struggles. The discount on UK equities compared to similar companies in the US makes them an attractive investment. Additionally, industries such as fossil fuels, defense, financial services, insurance, and investment trusts offer long-term confidence. London's position as a leading financial capital in the world is not in jeopardy, and the economy's strength lies in its high services exports. Despite government efforts to restrain the economy, the UK's resilience and inward immigration are expected to contribute positively to its growth in the coming years.
Managing Demographic Changes for Economic Sustainability: As the world's population ages rapidly, managing demographic changes is crucial for economic sustainability. Efforts should focus on preventing people from becoming frail and encouraging longer working lives, rather than solely importing labor.
The current trend of immigration may not necessarily lead to an improvement in individuals' living standards in the short term, potentially even diluting GDP per capita. However, as developed countries face a demographic crisis with population collapse in many places, there will be a need for migrant labor in the future. Instead of focusing solely on importing people, efforts should be made to manage economies and societies to cope with aging populations. This includes preventing people from becoming frail and encouraging longer working lives. The world's population is aging rapidly, with more than half of the G7 population expected to be over 65 years old by 2070. It's crucial to address this issue proactively to prevent social unrest and ensure economic sustainability. While Japan is an example of a society that has begun to adapt, its approach may not be suitable for all countries. The key is to find a balance between managing demographic changes and ensuring the well-being of the population.
Investing in Japan: Optimism Amidst Economic Instability: Warren Buffett's continued investment in Japanese conglomerates and trading companies signals long-term growth potential, but junior analysts' entitlement may hinder success. Stay informed and committed to investments during uncertain economic times.
Despite concerns of economic instability and a potential recession, some investors, including Warren Buffett, remain optimistic about the long-term prospects of investing in Japan. The country's large conglomerates and trading companies have seen significant growth, and Buffett's continued investment in them serves as a strong endorsement. However, there's a growing sense of entitlement among junior analysts that they don't need to put in the same level of effort and research that was once required. Despite the challenges, it's important for investors to stay informed and committed to their investments, especially in uncertain economic times. For more insights on money, markets, and politics, tune in to The Big Take DC every Thursday on the Iheartradio app, Apple Podcasts, or wherever you get your podcasts.
Monetarists propose relationship between money supply and stock markets: Monetarists suggest a link between money supply and stock markets, but market performance isn't guaranteed. Overpriced markets may deter investment, while underpriced ones attract it. The value of currencies and specific stocks require individual analysis.
The relationship between the money supply and stock markets, as proposed by monetarists like John Greenwood, can be effective but is not a guaranteed indicator of market performance. Markets, such as Japan in the late 1980s, can become overpriced and unattractive for investment. Conversely, underpriced markets, like the UK, may attract mergers and acquisitions from private equity firms. The value of the yen, despite its undervaluation, remains a mystery, and the Japanese economy and stock market are not favored by many investors. The Japanese trusts, which have underperformed, have missed out on the value end of the market, and individual stocks, such as Sony and Toyota, offer potential value. However, the rise of electric vehicles in China and the challenges they present, such as limited export capabilities and fire hazards, should be carefully considered.
Challenges in the Rollout of Electric Vehicles and Industry Changes: Despite the push towards electric vehicles, challenges like battery fires, industry adjustments, and financial struggles persist. Productivity declines and healthcare costs rise in Western countries.
The rollout of electric vehicles (EVs) faces challenges such as fires caused by batteries and their heavier weight. Additionally, the UK government's plan to stop producing conventional cars by 2030 might not be feasible and could harm the industry. Productivity in the car sector has declined due to environmental regulations. Tesla, a major player in the EV market, is facing financial struggles and its market cap is much higher than that of its competitors, some of which have more experience in producing cars. Life expectancy has stalled or even decreased in some Western countries due to the pandemic, and the US is expected to spend a large portion of its GDP on healthcare. The promise of extending human life through biological interventions is still a work in progress.
Investment and Research in Biotech and Agtech: Extending Human Life and Producing Alternative Food Sources: Jeff Bezos, Google, and other investors are funding research in biotech and agritech for healthier aging populations, reducing healthcare costs, and addressing food security. Companies like Juvenescence and Altos Labs are making progress in human longevity, while the UAE leads in agritech with factories for novel protein production.
There is growing investment and research in the fields of biotechnology and agritech, specifically in areas related to extending human life and producing alternative sources of food, such as cultivated meat. These areas hold promise for improving the health and productivity of the aging population, reducing healthcare costs, and addressing food security issues. Notable investors include Jeff Bezos and Google, and companies like Juvenescence and Altos Labs are making strides in developing interventions to improve the robustness of older people. In the agritech sector, the UAE is leading the way in building factories for producing novel proteins through cellular agriculture and precision fermentation. While there are currently no clear investment opportunities for the average investor in these areas, it's recommended to keep a close eye on developments and potential public offerings from companies like Juvenescence.
Investing in agronomics and alternative proteins can lead to significant returns: Investing in agronomics and alternative proteins, like cell-based meat, can yield substantial returns. Starting your own company provides a larger share and greater potential upside.
Investing in agronomics and backing scientists and entrepreneurs to develop their own companies in the biotech industry can lead to significant returns, as seen with Agronomics' nearly 4x increase in NAV. Starting your own company, like Liberation Labs, provides a larger share of the company and greater upside potential. The market for alternative proteins, such as cell-based meat, is growing rapidly and presents an exciting industry opportunity. Despite economic uncertainties, it's essential to differentiate between lab-grown, bioidentical meats and plant-based meat substitutes. In the political sphere, the Big Take DC podcast covers how money, politics, and power shape government and its impact on voters. While there may be concerns about economic instability, the distinction between real and fake market indicators is crucial to understanding the current economic landscape.
A sustainable alternative to conventional farming: Clean meat, grown in labs, offers a more sustainable solution to traditional farming by reducing water usage, antibiotic and hormone use, and animal suffering, while addressing concerns related to mercury and microplastics in fish and the environmental impact of animal agriculture.
Clean meat, which is grown in a lab, offers a more sustainable alternative to conventionally farmed meat, fish, and other animal products. This includes lab-grown meat for humans, as well as alternatives for pet food. Clean meat production does not contribute to the displacement of water resources, antibiotic and hormone use, or animal suffering on the scale of conventional farming. While plant-based food companies may face competition, clean meat companies are making strides in gaining acceptance and endorsements from industry leaders. Additionally, clean meat production addresses concerns related to mercury and microplastics in fish and the environmental impact of animal agriculture in countries like India and China. Although it may take many years to significantly impact the food market, clean meat production offers a promising solution to the environmental and ethical challenges associated with traditional animal agriculture.
Jim Mellon's Preference for Gold Over Bitcoin: Businessman Jim Mellon advocates for gold investment due to its stability and lower volatility compared to Bitcoin, and donates book proceeds to charity
Jim Mellon, a well-known businessman and co-host of the Longevity Forum, strongly prefers gold over Bitcoin due to its stability and lower volatility. He believes that gold has retained value throughout the years and is a safer investment compared to Bitcoin's extreme price fluctuations. Additionally, Mellon is passionate about charitable work and recently wrote a children's book called "Juno's Ark" to raise funds for Compassion, World Farming, and a dog shelter in Ibiza. The book, aimed at 8 to 12-year-olds, follows the adventure of a dog named Juno as she rescues cruelly farmed animals and discovers cell agriculture. All proceeds from the book go directly to these charities.
