It seems fitting that the quote used for this week’s title comes from Winston Churchill late in WW2; given the apt comparisons between Ukraine’s war time President Zelensky and Britain’s wartime PM, it resonates even more, states Jay Pelosky of TPW Advisory.
But my usage stems from the thought that amidst all the negative headlines and volatile cross market action we, as investors, should look for the silver lining and make use of the crisis mode markets find themselves in.
And not just investors but also companies, countries, and regions. The first example that comes to my mind is Europe using this crisis to very good effect indeed, moving at speed on issues like defense and energy security that Russia’s invasion suddenly exposed as glaring fault lines across the continent.
Europe is often criticized for its slow moving nature (takes time to get 27 countries to agree) but it also has a history of responding well to crisis. Today it seems that Europe offers investors both a tactical opportunity as well as a strategic one. The tactical one is simply that European financial assets are being given away for dirt cheap. The Euro (EUR/USD) is under 1.10 to the USD while folks rail about the need to diversify FX holdings, EU banks sell at 50% of book vs 1.5-2x for their US counterparts. BofA reports record (off the chart) outflows from EU equity funds while EU stocks sell at near record discounts to US equity and price in zero EPS growth according to MS.
Obviously, there is a war going on in Europe and so some weakness is to be expected, but the lazy thinking and extrapolation of energy price spikes that get so much attention on the way up but none on the way down suggests opportunity. This is especially true if there is a near-term resolution in the Ukraine—something that seems likely to us given Russia’s lack of success on the battlefield, growing domestic discontent and rising economic costs as the excision of Russia from the global economy has proceeded in an unparalleled fashion. As noted last week, time is not Putin’s friend, and as every day passes that becomes more and more clear.
Markets hate uncertainty and when the uncertainty lifts expect a rapid reversal in the most heavily sold segments, like European equity. It’s a technical market for sure and global stocks are in never land but note the COBE SPX Volatility Index (VIX) finally broke below 30 for the first time since Feb 25.
There is also the strategic case to be made for LT investors to use this tactical weakness to build LT strategic positions in a region that is only going to look stronger in the years ahead. Joint fiscal spending to beat Covid crossed one Rubicon for EU nation states and policy makers—doing the same to build its defenses and secure its energy sources seems quite likely as well. This has all sorts of positive ramifications ranging from Europe becoming a source of demand (See German spending on defense, energy security, infostructure, digitalization) rather than a free rider on global demand, to Europe as the global leader in renewables as its accelerates its shift from Russian energy to renewable energy (KRBN anyone), from a region divided to a region more integrated across health, environment, defense, energy policy, tech policy, etc.
We have written for some time that we see Europe as a likely winner of the 2020s; Russia’s ill conceived, poorly executed invasion has only reinforced that POV. And today it is on sale for dirt cheap—don’t let a good crisis go to waste!
Europe’s future also reinforces our conviction in our Tri Polar World (TPW) framework and the evolution of geo-economics, politics, and markets. As worries over food and fuel security grow, the fault lines exposed by Covid are becoming clear again as countries look to ration supply and limit export. This reinforces the trend to shrink supply chains and produce more at home or at least close by (nearshoring).
Europe is a big winner here, as is Asia; it’s The America’s though that have the most upside given how little integration there is between the north and south. View the talks between the US and Venezuela in this fashion—look at Chile’s young, new President as a source of engagement…the US urgently needs to think about deepening integration in the Western Hemisphere to size up to a newly energized Europe and an Asia led by China that views what has happened to Russia as a reinforcement of its existing focus on self-reliance thanks to the Trump years.
The other opportunity that seems to be building is in the disruptive tech space which is perhaps even more hated than European risk assets. Mention ARK Innovation ETF (ARKK) and you get laughed at. We look at Tesla (TSLA) and see a true Tri Polar World company—about to open its first European plant in Germany while also opening its state of the art production plant in Texas, both in a matter of months. It’s the only auto company to have state of the art production plants for EVs at a time of surging demand in each of the three poles—Asia, Europe, and The Americas. So how is the stock doing—hmm, down 23% ytd. TSLA is ARKK’s biggest holding at over 8%; how is ARKK doing, hmm, down 39% ytd.
In our most recent model portfolio update we began to work back into this space—it peaked a year ago, has already had its bear market, down 60-70%, now cheaper in many cases than private market valuations, record short positions in ARKK for example. If we are right in our multi-year outlook for BTE global growth, this period will be seen (in hindsight of course) as a great entry point for LT investors.
We continue to think that Russia’s invasion has taken an aggressive Fed off the table—QE is over yes, the Fed will raise rates in a week or so, yes…but will it be as aggressive as the market was pricing pre invasion—no. Thus the big risk, an overly aggressive Fed that tightens until something breaks (US economy, SPY) is off the table.
Talk of stagflation should likewise be taken off the table—consensus US 2022 GDP is 3.5%; for context recall that the US averaged 2.3% real GDP growth between 2015-19. What about surging US gas prices at the pump to drive stagflation—oops, now down US gasoline prices off 18% from record high a few days—almost in a bear market—have you seen that headline—nope and you won’t. Russia’s invasion also took the critical fact that Covid is ebbing and the global economy is reopening completely off the table—something that we believe will dwarf the impact of Russia’s invasion over the coming 12-24 months.
In this vein, the ECB’s decision to accelerate the end of its bond buying program speaks to the underlying strength it sees in the European economy, which the ECB forecasts to grow at 3.7% in 2022 and 2.8% in 2023 in its latest, up-to-date forecast. For context, European GDP growth averaged less than 2% in 2015-2019. The idea that Europe will go into recession is pure extrapolation of spiking energy prices that have already rolled over.
If we are correct that an aggressive Fed is off the table and thus the potential for BTE global growth in the 2023-2025 period has increased, it's arguably even more likely now thanks to the cap ex boom that will be taking place in Europe and the disruptive tech space is where the biggest upside to that BTE globe growth outlook will be found. The FANGS are going to derate over time—no repeat of the 2000 tech bust. FANGS are money printers, Amazon (AMZN) and its stock buyback is the latest example—but they are no longer the fast growers either—that’s the province of the disruptive tech, thematic, ARK space that is being given away.
“Never let a good crisis go to waste” is great advice. Once uncertainty is removed, the current price for many assets will shift materially—now is the time for investors to be focusing on where the best opportunities are for a future that could well be much brighter than the current day appears.