Wednesday, July 13, 2016

Europe is important for investors

Well it has been a while since my last post and that is partly because not much has happened with stocks at near record levels, especially in the U.S., oil prices stagnant and gold continuing its rally. There was also my short trip to Europe, in particular to the northern part of the Netherlands, known by connoisseurs as the province of Friesland, where the Frisian dialect is so distinct that it is by some considered a language on its own. I certainly don’t understand a word of it.
'Skutsjesilen' in Frisian means ‘Schuitje zeilen’ in Dutch and ‘boat sailing’ in the English dialect of the Dutch language J (I can never stop myself from making that last joke which only the Dutch seem to appreciate). Talk about integration by immigrants into their new homeland!  One of the big issues in the world is overpopulation, especially in Africa, resulting in large numbers of economic and wartime fugitives. Overpopulation and the world's poor becoming more affluent also is the real cause of pollution. We can keep on improving our technologies and become more energy efficient and reduce emissions, but any progress is right away negated because more people are added to modern day consumption habits. Simultaneously, the population of the western, rich, economies is becoming older; spends less while it is saving more. The result is less economic growth for these rich economies depriving them of the capacity to absorb large numbers of fugitives. 
In fact, refugees and other immigrants are over the long term beneficial to these economies were it not for their poor integration into the hosting cultures. This is the real problem in Europe – liberal governments do not set as stringent conditions to the admission of immigrants and don’t select based on economic viability as we here in Canada do. This will likely change in the future. Yet large numbers of immigrants and fugitives do not even meet Europe’s laxer admission standards and illegals flood the Mediterranean shore lines. The results are heart wrenching immigrant camps like the ones in France’s Normandy near Calais. The bad conditions in those illegal immigrant camps are often exploited by both left wing anarchists and right wing xenophobes. Lack of economic progress and the fugitive issue combined lies at the root of much economic discontent resulting in Wall street Occupy, Brexit and Donald Trump. These political phenomena are not solutions but rather symptoms of our deeper problems – all starting with demographics.
The demise of the Euro and EEC so gleefully announced by North American gurus is likely premature. The economy in the northern EEC is doing relatively well with Amsterdam real estate booming right now. It is also amazing to discover how deep the tentacles of American multinationals reach into the European Economy – I just learned of the ownership of stalwart companies such as Dutch coffee giant DE (Douwe Egberts) founded around the 1850s in the Frisian town of Joure, which turned out to be owned by U.S. based Mondelez, a spin off from Kraft! If 40% or more of S&P500 earnings is from overseas, then 30% of these earnings are from Europe!
To think that Brexit means the collapse of Europe is unrealistic. Europeans have invested too much in a united Europe and the European economy despite very distinct cultural identities is alive and kind-of well. The Brexit vote was more a protest against the governing elites than anything else. If Great Britain would really split off than that may well spell the final breakup of that once great empire starting with a separation by Scotland, followed by the Irish and by even the Welsh. Not likely. Brexit may also cause a significant recession and diminishment of London as a center of global finance replaced by Parish, Frankfurt or maybe even Amsterdam. Great Britain has benefited tremendously from the European Economic community and would be nuts to actually cut itself off. The real message, and this is true for the entire world, is for the political elites to pay more attention to people that have trouble flourishing in these turbulent times.
Also, if you believe in renewable energy, then think again. Numerous 200m high lampposts with humongous wings attached are sprouting up everywhere in the once picturesque landscape of the Netherlands. They are also clearly visible from the beautiful Dutch beaches. Yet, these three armed monsters do not contribute much more than 5% of the current Dutch energy needs. If you add Elon Musk’s wunderkind Tesla and competitors to the picture how many more wind mills need to be added?  Talking about a windmill pest!  The Europeans are some of the most nuclear adverse populations of the world and they don’t want multistage frac’d horizontal wells below their densely populated cities (I can understand). So where is all the energy really coming from?  Putin?  Saudi Arabia?  I think North American natural gas has definitely a place here. Maybe geothermal?
Ontario’s infatuation with wind and hydro is probably overdone and so is BC’s ‘holier than thou’ attitude towards Alberta’s energy industry. Politicians selling a pipe-dream to a gullible public is one thing. Making it a reality is quite another. 
What is the big picture right now for the Bull Market? Right now I don’t see an overheated stock market but I think the U.S. is definitely overpriced and I am counting on a declining U.S. dollar after the Brexit storm has abated. I also see a resumption of increasing oil prices in the 4th quarter of the year. Canada’s stock market will likely continue to be one of the strongest in the world followed by Europe.  We are climbing a wall of worry. However, U.S. earnings may keep suffering from a high dollar and that may remain so for quite a while depending on U.S. interest rates. I think that the strong U.S. dollar and worldwide low interest rates are strongly connected. It may force the U.S. central bank to delay ‘normalizing’ and join the low to negative interest rate environment. This means Gold Baby Gold!

Consider lowering your investments in the financial sector and increase cash – including physical gold – to 15% or better 20%. Also increase your market weighting of gold specifically to 5-10% of your stock portfolio and tin crease your oil and gas to at least 5% of your stock portfolio. My favorites are companies with liquid rich natural gas and good balance sheets and companies with light oil are a close second. Oh and consider REITS and Alberta real estate as a source of income rather than bonds – especially when oil and gas prices continue to recover. Well there you have it – my current view of the investment world and Europe’s place in it - for what it’s worth.

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