The Eurozone Dystopia

The economic deterioration in Europe has accelerated substantially since the process of fiscal consolidation started in 2010. The Bundesbank, the most influential member of the ECB system, has enforced an agenda of austerity and strict price control that is at clashes with what peripheral countries need. 

This sequester orchestrated by the creditor nations runs contrary to the lessons learnt during prior crises and to the consensus of the international community –as even the IMF scaled back from expansionary fiscal consolidation theories and supports some of the most progressive views among the FED’s . The situation is such, that not even the most optimists among economists believe that structural reforms and Ricardian equivalences will re-ignite the peripheral economies. The periphery has suffered deflation since starting the crisis, yet, none of these countries have made any meaningful effort to achieve a more balanced position with their creditor counterparts, such as a dual mandate for the ECB (incorporating employment / GDP) or some form of solidarity-compensation stemming from Germany’s ever growing trade surpluses. 

These Governments (Ireland, Italy, Greece, Portugal and Spain) face stratified societies: senior citizens have all their assets denominated in Euro and don’t want to suffer the devaluation associated with leaving the common currency. Younger citizens, whether employed or not, would probably be better-off with the flexibility that a 'devaluable' (able to being devalued) currency would offer, but only the radical political parties echo such views, while the most highly-educated and entrepreneurial of them emigrate to northern latitudes. 

This framework has worked beautifully for the German exporters: not only they benefit from the undervalued domestic currency, they also extract rents from the subsidised labour and the strict anti-inflation mandates embedded in European institutions. 

The problem is to imagine how/when/where this race to the bottom converges with the views of a prosperous Europe that policy-makers had in mind when they designed the grandiose experiment. Sooner or later, the automation of the manufacturing sector will put German’s economic model in jeopardy (Productivity in the manufacturing space will keep raising higher than demand ever does). Equally, South-Europe cannot and should not survive by exporting tourism and olive oil. (There is a better way, even

Now, as the Euro approaches the average life expectancy of monetary unions (not followed by Political and Fiscal unions), the literature to help our ailed Euro-area policy-makers has expanded. Several books point out to the dangers of austerity, advocate for economic stimuli until economic health is restored, and for a new (social) contract between creditor and debtor nations. But perhaps more suggestive for those more strained at home is to dream about Mariana Mazzucato’s “Entrepreneurial State”. She advances that the fiscal multiplier, or the elasticity from the Governments spending in the economy, is greater when the investments are made in value-added sectors, such as research in life sciences, technology, clean-tech energies, etc. With a lion in the cover of her book, she ironizes that it has been Government funding schemes that have paved the way for the private sector to reap the benefits when these technologies have matured. For example: had it not been for the entrepreneurial, dynamic and creative role of the US Government through the DARPA and NIH programs, it would be difficult to imagine such thriving technology and biotech sectors as we know them today in the US. 

In summary, European policy-makers risk falling victims of complacency as sovereign risk premia decrease, but European institutions and R&D intensive SMEs are lagging the progress of international counterparts –sadly, cannot expect that to be reversed through a combination of price controls 

--written in Feb 2014 - Peter Martin fellowship at the FT

The Oil slide. Chapter II: winners and losers

We've had an oil price drop that almost no-one anticipated. Brent now at $60/bl from an avg of $110 in the last few years, WTI at $56/bl.

This has taken the Russian Rouble to the doldrums, and Nicolas Maduro (Venezuela's President) calling former Spain's President Aznar a bloody assassin.

We've seen the first attempts for consolidation:  Halliburton and Baker Hughes on the services side (a $34.6bn deal). Repsol just agreed to buy Talisman for $8.3bn this week, a deal that would double their upstream exposure. Maybe the more exciting, if not desperate attempts have been found among the pure-players in exploration: Ophir managed to get their hands on Salamander after being rebuffed by Premier Oil.












They haven't fared particularly well as a group. Tullow, the European bellwether for the African explorers has under-performed Exxon by almost 50%.  Those geared to high-cost barrels, whether shale oil in the States, arctic or deep-water, or to riskier production areas in Africa have been the biggest losers. The oil majors have held significantly well: Exxon has only lost 15 pct from its peak at 104.8 (adj for divs.). I assume this means there is some level of optimism among investors, probably anticipating that oil prices will be roaring back higher within the next couple of years after having fixed both sides of the equation:

On the demand side, a lower oil price is as good a stimuli as anyone can ask for: it goes directly to consumers' pockets. The biggest economic beneficiaries will be the found in Japan (highly geared to energy prices since shutting down its nuclear plants), Europe, Turkey, India and China. This is also the perfect opportunity to slash subsidies wherever they exist: India, Brazil, Indonesia, etc.

On the supply side, the cost of production has creeped up materially in the last few years. The cheap barrels are long gone even for the most advantaged countries. The Ghawar oil field in KSA has a breakeven price of ca $80/bl. The production curves in the shale oil fields in the US are steep: those production tails don't last more than a couple of years, and in practical terms they need continuous drilling.

My belief is that both of these sides will be fixed within the next two / three years. What will not revert is the level of technology: self-driven cars should be significantly more fuel efficient than human-driven cars, both in the city as in the high-ways  --where they will drift as cyclists in the Tour de France.

The manufacturers will not get any tailwinds from technology: the sharing economy should also allow consumers to achieve higher usage and occupancy rates from our car parks. I believe that the winning bet will continue to be the american and the international consumer.

The Oil slide. Chapter I: looking for shorts

On August 19 2013, OMV announced it had bought Statoil’s stakes in Gulfaks, Gudrun, and Rosebanks fields. The final consideration for the deal was $2.65 bn in cash. The biggest acquisition for OMV in its history.

WoodMac’s valuation of these fields is approximately 20% below. The disparity is driven mainly by Gulfaks and Rosebank: both have significant upside potential. Additionally, OMV hinted in the conference call that their underlying oil price assumption is $100/bl (while WoodMac assumes a price decline to real $85/bl within four years, staying constant at that level). Additionally, there are fiscal synergies when these assets are brought into a producing portfolio --compared to their value on a stand-alone basis.

In this insight, we aim to shed light on these three variables that drive the price disparity and our take on the transaction.

Sources familiar with the matter mention that it was a competitive sale, with many firms interested in the portfolio of assets on sale; which reflects the scarcity of high-quality assets in the market place. OMV rationale for over-bidding was a drive to diversify their above-ground risk mix towards geographies and fiscal regimes of stability/visibility/certainty.

Prior to the transaction, OMV had a portfolio of producing fields and E&A acreage that spans the MENA region 'and beyond'. This year the firm has over-performed all other European O&G firms.

In the last months we've seen investments retrenching from emerging markets and flying back to the US. As the US Treasuries come back to more palatable yield levels for investors (on the back of an earlier taper off of the Fed’s stimulus program), we've seen EM currencies depreciating against the greenback. Additionally, we have seen an uptick in the political uncertainty in the MENA region: Egypt, which had been among the most stable countries in the region for decades, saw a coup last month. This adds significant political and economic risk to the area.

Of course, nobody wants to see layers of financial leverage overposed to operational leverage; but if events in the MENA region continue to be so constructive, or if the oil price loses some ground, OMV has positioned itself ideally to enjoy the winner's curse in all its forms and shapes. "buena suerte amigos".

Sohn Investment Conference 2013

Read in FT's Alphaville:

3) Global figure most associated with negative views: the one and only Ben Bernanke.

My view: to compare their (Sohn's puppets) understanding of the trade-offs in today's monetary policy environment is like comparing Einhorn's tie knots with those of Bernanke ...

(Better don't do it).  Of course we would all like to live in an easier world: one with lower debt, higher expected returns; one where we all can be successful HF managers leaving office at 5 pm and running triathlons on weekends.

Alas, it turns out that the cocktail of low inflation and a reach for yield have sent risky asset prices soaring, depressing future expected returns. Now Wall Street blames Ben Bernanke for making their job a tad more difficult. They say it's distorting the economy and the financial markets.

Well, the truth of the matter is that the Fed's actions weren't that hard to anticipate. There are only two metrics in their dual mandate: full employment and price stability. Both have been lagging the targets for some time. Inflation has been incredibly subdued and there are no signals of any dramatic change. Wall Street's mandate was to position itself to benefit from the world that was coming. They, the asset owners, should have benefited the most from the new normal of lower nominal rates. They chose to be cautious and have lagged the indices since the market bottomed; that's fine, but it just doesn't feel right to hear these guys putting blame on Bernanke because they don't know what to buy now.

The decisive action taken by chairman Ben Bernanke and his FOMC colleagues has been fundamental to underpin this recovery. It only takes a peek outside the US to know that it feels good to be an asset owner in the US. Maybe our super-investors should invest in Europe instead, who could not but admire the rectitude and righteousness of the Bundesbank?   "buena suerte amigo"

SRI - Social Responsible Investing

Topics of Interest:

- Nocera's artificial photosynthesis
... and how chemical fuels could not only substitute oil and gas (e.g. for transportation purposes), but go further and supply energy in scattered geographies like ElectroPS.it is doing in Asia and Africa.

- Fracking Could Work If Industry Would Come Clean
Companies like Baker Hughes and Schlumberger are developing technology to overcome many of the current problems mentioned.

It is quite certain that gas will be a game changer, and therefore substituting coal by gas seems like a good idea. But SWITCHING FROM COAL TO NATURAL GAS WOULD DO LITTLE FOR GLOBAL CLIMATE, STUDY INDICATES. Where they note that methane leakages have stronger greenhouse effects than CO2. Furthermore:

- Climate change may not be that related to CO2 emissions --but rather, to solar activity. Hence, carbon sequestration may not be a technology worth developing.

Published in the blogosphere: Omitted variable fraud: vast evidence for solar climate driver rates one oblique sentence in AR5

- Quantum physics could help minimize energy consumption by electronic devices. NYT reports that Physicists Create a Working Transistor From a Single Atom

- Examples of efficient buildings from p.70.
Which companies would benefit the most from the potential growth in this area? Schneider, GE, Sylvania?

More to come.
In the meantime, keep wired (to) Watts Up With That?
Boing Boing, Wired Science, Women in Planetary Science, David Robertson.

Meeting with Sven de Causmaecker

Meeting with Sven de Causmaecker in KL, Malaysia.
He is a graduate in Chemistry from Germany. We chatted about possible breakthrough technologies within the renewable energies world.

He talked about Daniel Nocera, a Massachusetts Institute of Technology professor whose recent research focuses on solar-powered fuels.

2 H2O >> 2H2 + O2

Hydrogen, used as a chemical fuel, has much higher storage capacity than the lithium batteries (there is not enough lithium for widespread transportation usage. H2 has also zero emissions; and the chemical reaction can be reversed with sun power at relatively high levels of efficiency.

There are several interesting videos of this technology in youtube. I would highlight his lecture in the Brookhaven Science Associates titled "Harnessing Energy from the Sun for Six Billion People -- One at a Time."

Oil is a very efficient form to store energy because its chemical union has little mass: Carbon - electron - Carbon, while for Lithium, the lightest metal, the density of energy that you can store is much lower. The nuclei are very light in atomic weight. But it is less common than 25 of the 32 chemical elements.

Uranium: 20 Terajoules/kg

Hidrogen condensed at 700 bar): 123 MJ/kg

Gasoline & Diesel: 47.2 & 45.4 MJ/kg

Fats / Carboydrates / Proteins: 37 / 17 / 16.8

Lithium air battery: 9

Lthium battery: 1.3

Lithium-ion battery: 720 kJ/kg.

Sven also mentioned cyano-biofuels, a small biotech firm based in Berlin, born from the university entrepreneurial lab of the German university of xxx, doing research on cyanobacteria and how to obtain cheap ethanol from algae and CO2.

We also talked about other technologies other than sun, which are clearly insufficient to meet the energy demands of the global population for the next decades.

[Current population: 7bn people. Energy consumption: 14TW.

Exp. population in 2050: 9bn people. Exp. energy demand in 2050: from 30 to 50TW]

Wind (farms) could yield up to 3TW of energy, which falls much short of demand growth. Onshore wind is the cheapest of the renewable energies. It is already pretty developed, with most of the best areas in many countries already exploited. Furthermore, aesthetic considerations will probably curb future development (as WT are growing bigger and taller, and therefore they can be seen from larger distances.

Fernan, working in SG for Gamesa pointed out that for strong winds it is better to have a high density net of smaller WT. While for milder winds it is better to have fewer but bigger WT.

Sven also said that offshore wind farms provoke vibrations that affect the bio-diversity of the area. Although few decision-makers will care about it.
Onshore WT also have collateral damage for the biologic fauna: they kill birds.

Offshore wind farms slightly lowers the load factor in the onshore wind farms. As you harvest the wind in the sea, the load factors inland will be reduced because the total quantity of wind energy generated by the sun is limited.

Peter Gleick is a PhD from UC Berkeley. His area of research is centered around freshwater.

All-Europe Equity Research Teams

Participants in the 2012 All-Europe Research Team were asked to rate, on a scale of 1 to 10, the importance they attach to a dozen sell-side equity research attributes. Industry knowledge receives the highest rating, followed by integrity/professionalism; accessibility/responsiveness and local market knowledge/country knowledge tie for third. Earnings estimates is deemed the least important of the attributes.

2012's ranking:
DB 117, BAML 77, UBS 52, MS 49, JPM 54, Citi 30, CS 25, Barcap 17, Stanford C. Bernstein 32, Exane 15, Nomura 10, RBS 4, CA 10, SG 3, Kempen 4, GS 3, Redburn Partners 3, Goodbody 3, Handelsbanken CM 3, MainFirst Bank 3, Rabobank 4, Davy 4, Santander 4, SEB 4, Equita S.I.M. 3.

2011's ranking:
DB 74, UBS 77, BAML 56, CS 49, MS 47, JPM 58, Citi 17, CS 49, Barcap 20, Stanford C. Bernstein 37, Exane 11, Nomura 31, RBS 6, CA 6, SG 5, GS 4, Kempen 2.