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An Eastern Promise Worth Exploring…

It is 23 years since I was last in Japan. I still love it. The cultural collision of ancient tradition, mass urbanisation and advanced technology is a gobsmacking experience. And, then there’s the friendly population hungry to learn while blessed with fabulous food, beautiful rural scenery, extraordinary attention to detail, safe streets and a commitment to social harmony. It is perhaps unique among the advanced economies of the world. However, Japan has its challenges. We all do these days but maybe Japan offers a fresh perspective on how to cope with change. I lived in Tokyo for three years in the ‘90s and this visit has been an eye-opener on how Japan is responding to change. So, I have decided to write a series of short articles in the coming weeks while travelling here on topics relevant to European business and investment. I’m currently on a Shinkansen (Bullet) train out of Tokyo on my way to the beautiful Gifu region and wanted to touch on a few early themes. Let’s set the scene.

A quick glance at the daily newspapers – Yomiuri Shimbun, The Nikkei and The Japan Times – confirms that global trade disruption is the topic du jour in common with almost every other country on the planet. The Japanese economy is a trade-based one, given its relative lack of natural resources. It also had its own MAGA-type isolationist experiment from 1602 to 1863 when trade and foreign visitors were effectively shut out from Japan by its ruling Shoguns. So, it’s interesting to note the Japanese media focus on the “isolationist” aspect of the extremist Trump regime in Washington. Let’s just say the Japanese are a bit sceptical on Washington’s ability to put together a coherent trade framework. In fact, the unofficial feedback from the Japanese trade delegation sent to the White House was damning.

There was a strong Tokyo view that the American negotiators “have no idea what they want”. Furthermore, this is a Japanese negotiating team which agreed trade deals with Trump in 2017 (TPP) and 2019 (agriculture/industrial products). As long-time Japan observers know, Japanese business and its leaders value relationship building and trust before committing slowly to any commercial deal. The mind boggles as to how Trump’s negotiating team think they will get any deal done with the Japanese while ignoring the terms agreed with Trump himself during his first presidency. Trust in the US is evaporating.

There has been a global ‘sell America’ trade in recent weeks as the US dollar, US Treasury bonds and US stocks have been whacked by foreign sellers who have lost faith in US institutional stability. Japan is believed to have been the original foreign seller of US Treasuries (it holds $1 trillion (!) of these bonds) which spooked Trump into delaying tariffs on ‘negotiating countries” like Japan earlier in the month. Instead, Trump’s team focused its tariff tantrums on China while giving most countries a 90 day breather. As I write, the White House attempt to shift focus and possibly gather trade “allies” against China is blowing up rather embarrassingly. Indeed, Japan have just said they will not join any co-ordinated trade axis against China as it is too important as a trading counter-party. Sensible stuff. Meanwhile, the CEOs of Walmart, Target and other US retailers have apparently told Trump that store shelves “will be empty in 2 weeks”. Indeed, import activity at US ports has collapsed and the country’s 8 million truck drivers (and MAGA hats) are on stand-by for mass lay-offs. Whoops… not so sensible stuff.

It turns out China can’t be removed from the US economy on the whim of Agent Orange. In fact, the latest word from the ‘stable genius’ is that tariffs on China will be reduced. No doubt, there will be some spurious ‘win’ claimed by Trump and his blowhard MAGA champions but the silence from China and President Xi has been deafening to all sane watchers of geopolitics. China has been prepping for this trade war for years, and has forced Trump to blink for all to see. However, the damage is already done to US credibility and increases the relevance of Japan as a trading partner for economic blocs in Asia and Europe. So, where can Europe work with Japan in a new world order? I already see a few shared pain points.

In many ways Japan is a window into Europe’s future. Europe is already in “low growth” phase with its ageing population and high level of risk-averse savings. However, the demographic cliff facing Japan has already sparked a dramatic change in policy. For context, Japan’s working population is expected to lose more than 10 million workers (72m to 62m) in the next 15 years. Yep, ten million. So, it was immediately striking on this visit to Tokyo to see the number of non-Japanese working in the hospitality and retail sectors. So striking that I went to check the statistics. According to a Japan Times report in 2018, more than 1 in every 8 adults living in Tokyo’s 23 wards (cities) are not Japanese citizens. That is remarkable considering when I first worked in Japan there were just over 1 million foreigners living amongst a Japanese population of 126 million across a country roughly the size of Italy. Perhaps the desire to live in Japan is less surprising when you consider in the same time period (from the ‘90s to now) the annual number of tourists has rocketed from 2.7 million to 40 million. However, the true surprise is the policy shift in Japan to allow immigration in significant numbers. Bluntly, despite far right political party activity in Europe, immigration is a necessary part of its future. But…. not the only solution. Japan again is leading.

Mario Draghi in his 2024 European Competitiveness report highlighted innovation and productivity as a necessary policy focus. In Japan, the use of robots and technology to assist in service-heavy healthcare and retail is well established. I personally witnessed robots in action in Narita airport and a variety of Tokyo retail settings but the presence of humanoid robots in Japanese nursing homes is also well established. In fact, Japan dominates world robotics, accounting for 40% of the global market. Of course, innovation does not happen without risk capital/investment. While the financial headlines have obsessed over AI and the gyrating performances of “Mag 7” tech stocks, Japan has quietly turbo-charged its investment environment.

Thanks to policy changes facilitating shareholder activism and takeover activity, the Japanese private equity market has exploded. We often write that the “future is private” so it is remarkable to see conservative Japanese capital markets experience 40% growth in 2024 private equity/venture capital activity. Unsurprisingly, the global private equity giants like KKR, Blackstone and Bain are all over this structural shift. Hedge funds have been racing to set up offices in Tokyo to follow the action too. Back in Europe, Draghi has highlighted the lack of innovation and investment/financial policy coherence across 27 different jurisdictions. Joined up thinking on investment could be as transformational for Europe as it appears to have been in Japan. And if you’re looking for policy endorsement, then who better than Warren Buffett.

We will return to the Japan private investment environment in greater detail in subsequent articles but the public markets have already received the “Buffett kiss”. Over the last few years Berkshire Hathaway has built 10% equity stakes in each of 5 Japanese trading houses. These trading houses, also known as sogo shosha, are large, diversified conglomerates involved in a wide range of businesses, from trading and investment to logistics and manufacturing. Buffett has invested in the big five sogo shosha – Mitsubishi, Mitsui, Sumitomo, Itochu, and Marubeni. We have written previously on this Buffett move but way before the Trump tariff tornado hit global markets. And, now I’m beginning to wonder. Did Buffett see an isolationist America coming and deliberately seek out the centuries-old trading relationships established across Asia by these Japanese trading giants? It wouldn’t be the first time Buffett saw a structural shift early. However, it’s not too late for Europe. A deliberate attempt to increase co-operation and relationships with Japan might be a very clever way to diversify risk away from an inward-focused US and explore Asian opportunity. Certainly, the Japanese can offer interesting perspectives and responses to deal with the four horses of Europe’s stagnation apocalypse: trade, immigration, demographics and innovation. Lots to learn, lots to write (or right).

April 25, 2025
Beautiful Minds Will Prevail

The late Peter Sutherland would smile. Sutherland’s stellar career took in stints as Ireland’s youngest ever Attorney General, youngest ever EU Commissioner, father of the student Erasmus Programme, Director General of GATT and its successor, the World Trade Organisation, topped off with Chairman roles at Goldman Sachs and BP. He was a pretty decent rugby prop forward too. Sutherland’s appreciation of equilibrium at scrum time, laser-like attention to detail and powerful negotiation skills were critical to his success in securing 123 sovereign signatories to the General Agreement on Tariffs and Trade (GATT) in 1993 when the highly complex Uruguay Round of global trade talks were in danger of collapse. He might always have been “Suds” to his friends, but in the international business world Sutherland was the “father of globalism”. And, he truly understood the complexity of global trade agreements. So, what would he make of the Trump regime’s shakedown of the global trading system? Well, as all students devouring legal judgments in the UCD Sutherland School of Law will know, precedent is key. And…..we have Brexit as our stare decisis case study.

Recall the Brexiteer mantra of “Global Britain” and those fantasy soundbites like “we hold all the cards”, “they need us more than we need them”, or best of all “Britannia Unchained”. Sound familiar? In hindsight, the freedom to pursue new trade deals featured far more chains and ridicule than expected. Britain is still to create the promised bi-lateral free trade deals with the likes of the US and India, while Truss-trumpeted deals done in Pacific Rim countries have had no more impact than if these faraway agreements had been signed by penguins. We mentioned “equilibrium” earlier and this really isn’t just a scrummaging thing. The brilliant Nobel Prize winning research by John Nash, featured in Hollywood’s “A Beautiful Mind”, are the foundation of all game theory analysis applied to trade deals. The Nash Equilibrium is a key concept in game theory where knowledge of other players’ strategies (politics) gives no players incentives for deviating from their own strategy. Hence, we experienced a “hard” Brexit. Now, think about China and the US currently engaged in escalating tariff retaliations. Also, remember the Pacific penguins.

The Trump trade team seem to believe they have 70 nations queuing up to sign trade deals with the US. Let’s be very clear, and Britain can attest to same, the signing of bilateral trade agreements (two countries in isolation) is extremely difficult to execute. Peter Sutherland would quickly point out that a change in trade terms with one country automatically opens up the possibility of trade being diverted through more favourably disposed countries eg China production switching to Vietnam during the Trump 1.0 administration. Trade is by definition MULTI-LATERAL and requires Nash-like understanding of game theory and trade negotiation. Britain’s trade delegations can sheepishly tell you all about how their Japan deal negotiations went. The short version is that Japan told Britain any new trading terms would be inferior to the EU because the EU was a far bigger and more important trading partner. Now, cast your minds back to Trump 1.0 and his renegotiation of an existing trade agreement (NAFTA) with Mexico and Canada. This “straightforward” renegotiation took TWO YEARS to complete. The current Trump trade advisory team are delusional about their ability to close out a series of bilateral trade deals in 90 days. Also, there is no Nash or Sutherland on the US team. In fact, it’s far worse than that…

*Trump’s White House Counsel on Trade, Peter Navarro, and his alter false ego Ron Vara, went on TV last night to claim bond yields (which “didn’t intimidate” his mobster boss) were going down while the rest of the sane world saw them continue their worrying climb higher.

*US Secretary of Commerce, Howard Lutnick, continues to laugh hysterically in his media appearances and reassured all viewers on Fox yesterday that the US economy would “explode”. Yes, Howard, that’s what we all fear.

*If you were hoping AI was going to help frame a complex trade agreement then think again. US Secretary of Education, Linda McMahon, was outside her WWE wrestling comfort zone but still managed to stun a panel discussion this week with her comments on how “A1” would impact teaching. Yep, Linda hasn’t really heard the “AI” term in conversation before, and her reading to date on the topic picked up the AI term as “A1” which is a steak sauce apparently.

Not only will trade deals not get done there is now a US institutional credibility issue. As I write, the US dollar, US Treasuries and US stock markets are being sold by investors all over the world. Typically, the US dollar and Treasuries would strengthen in a period of stock market volatility so this is HIGHLY unusual erosion of trust in US governance. There is perhaps worse to come. Lost in the crazy headlines this week was a decision by the US Supreme Court to allow Donald Trump to fire officials leading two independent agencies. Again, the critical point is precedent. These officials have the same legal status as that of Federal Reserve governors. Already, Trump is whining about the Fed not cutting interest rates so the possibility of Federal Reserve Chair, Jay Powell, being removed by Trump can’t be ruled out. We should also be aware that the trade war with China could go financial and some commentators are speculating about the US government reneging on US Treasury interest(coupon) payments. A hint of either of these actions would make this week’s market gyrations look like jelly ripples in comparison. And yet, it’s possible we could have an “Orange Swan” event in the global financial system. Also, if it’s black swans you’re looking for, keep an eye on Chinese internal politics.

President Xi looks like he’s in for the long haul in this trade war with the US, but he’s not sure about his comrades. Latest reports suggest that the second ranking general in the People’s Liberation Army(PLA), He Weidong, has been purged. That level of rank in the PLA being purged has not happened since 1968 during Mao’s Cultural Revolution, and signals some dissent within the Politburo. Regime change in Beijing is a long-shot but most of the action in the near term will be in Washington.

Business decision-making is paralysed and the charts showing US Economic Policy Uncertainty Index in this week’s Financial Times were unprecedented, surpassing even Global Pandemic levels of confusion. Consumers aren’t feeling much better. The results of the University of Michigan consumer survey has just hit the screens and the commentary is ugly:

“Consumer sentiment PLUNGED 11% this month to a preliminary reading of 50.8, the second-lowest reading on records going back to 1952. April’s reading was lower than anything seen during the Great Recession”

This all reads as gloomy stuff but there’s a potentially “beautiful” outcome not quite in Trump’s strategic vocabulary. Financial markets, business and voters are all aligning in rapid fashion and beginning to smell incompetence. Was it only a few weeks ago that Trump’s security team shared military operational details with the outside world in real time via mobile phone chat groups? This week, team Trump stands credibly accused of almost blowing up the world’s financial markets. Whether you’re a Fox News viewer, or an oil worker in Galveston, or a farmer in Idaho you know something’s up and it isn’t pensions, savings or 401ks. Global trade needs great thinkers not spoofers, and the world is calling this ugly trade bluff quickly.

April 11, 2025
Truly A Moron
We are into the name-calling phase of global trade policy. The “Stable Genius” Party told us to “reject the evidence of your eyes or ears” or even the ten trillion dollars of capital destruction. But, enough is enough. Or, so thinks DOGE-whisperer Elon Musk. The focus of his ire is the White House driver of Donald Trump’s trade tariff policies, Peter Navarro. Now, Peter is an interesting chap. He first came to my attention with a series of books featuring hard line views on China and US trade deficits generally. He then served in the Trump 1.0 administration of 2016-2020 when his “fringe” economist status acquired an unusual qualification. Well, weird. It turns out the globally reputed economist, Ron Vara, quoted in many of Peter’s books was a fictional figure. Indeed, Ron Vara was not just supportive of Peter’s bonkers economics but also an anagram of his own name. No, seriously.

So, who’s surprised to read the Navarro tariff calculations are the work of a ChatGPT output which the right-leaning American Enterprise Institute (AEI) think could be out by a factor of four times(400%)? It’s a bit late now but Musk has just described Navarro as “dumber than a sack of bricks” and “truly a moron”. You’ll note my view that Musk is too late to undo the damage of the Mad Orange King and the Ron Vara school of economics. In fact, it’s not actually my view. Policy uncertainty paralyses business activity and the scores are coming in fast….

*Larry Fink, CEO of the largest asset manager on the planet, BlackRock Inc, with $10 trillion reasons to care says “Most CEOs I talk to would say we are probably in a recession right now.”

*Jamie Dimon, CEO of the most valuable bank on the planet, JP Morgan, in his annual letter to shareholders delivered a blunt warning – “The recent tariffs will likely increase inflation and are causing many to consider a greater probability of a recession.”

*Airline share prices are traditionally viewed as early warning signals of trouble ahead. So, when you see Delta, American and United stocks drop 35-45% this year we should pay attention. Larry Fink is anyway – “Airlines and air traffic are a canary in the coal mine. Right now the canary is sick”

Cheery stuff. However, these are US-focused observations. We have been here before and we should remind ourselves that capital markets can be quite effective in taming policy tyranny. Ask Liz Truss. Then check bond markets. Interestingly, if bond markets “believed” recession was imminent then bond yields(rates) would not be rising like they are right now. US 10 year Treasury yields have jumped from 3.87% to 4.52% in the past two trading sessions. This is highly unusual bond behaviour when equity markets are so volatile or declining. In fact, it’s the all-powerful bond market questioning the credibility of US institutions. Hence, you’ll soon be hearing Trump whining about the Fed lowering interest rates but, again, not quite understanding bond markets. Other markets are behaving in a more orthodox manner but could also upset the tariff toddler.

You might have noticed that Trump has refused the pre-‘Liberation Day’ EU offer of zero tariffs on industrial goods. Trump and his team are now switching focus to “non-tariff trade barriers” and demanding the EU buy $350 billion of energy to balance out trade deficits. The White House is rapidly losing the faith of its fossil-fuel friends who are staring down the barrel of $50 spot prices for oil. Ahead of inauguration, the reversal of Biden’s signature IRA act and decarbonisation/cleantech investment incentives sounded good to the oil barons but they didn’t plan on Trumpolini playing Texas Hold ‘Em with every trading partner in the world …..at the same time. And, don’t forget the Kremlin and its war economy is acutely oil price sensitive too.

Cryptocurrencies and their broligarch fan boys are also going to be a bit tetchy apart from “car assembler” Musk. Bitcoin is down 17% year-to-date with cryptocurrency ETFs (funds) suffering their third consecutive month of outflows. In fact, the big picture worry for all cryptocurrency evangelists is that on current pricing history evidence Bitcoin appears to have morphed into a tracking instrument for the tech-heavy Nasdaq equity index. It’s supposed to be a currency, as a quick reminder. Go check the charts and then wonder how long before the broligarchs put pressure on Trump to move the markets into risk-on crypto-friendly mode. We will wait but private markets won’t stand still. In fact, big global structural themes (outside trade) will continue to play out in private. Just this week we spotted these three deals amid all the screaming red ticker-chyrons and panic headlines:
- Faster research: San Francisco-based Rescale provides AI-powered R&D simulation software and has raised $115m from investors including Nvidia.
- Content generation: Another Californian start-up with Spanish founders, Krea, uses generative AI for image content generation and design. They have just raised $83m from investors including Bain Capital.
- Payment infrastructure: Juspay, an Indian payment infrastructure start-up has raised $60m from institutions including Kedaara Capital.
Humanity and innovation will keep moving forward irrespective of the headlines. Public markets gyrating violently are the real-time expression of capital flows, fears and policy paralysis but, in private, both in Washington and in private markets we can be far more optimistic. Nothing crystal clear right now but the waters will still be blue ahead…
April 8, 2025
Three Pictures Of Opportunity From A Changing World Order

It is difficult to avoid pictures of the St Patrick’s Day sex-pest parade at the White House but I can assure you it is well worth the effort. Clearly, the rule of law and the world order is enduring a seismic shakedown but it would be a mistake to assume all is lost. Hidden behind the disbelieving headlines and festive mug-shots there are a number of alternative pictures really worth thinking about. Hedge fund billionaire, Ray Dalio, wrote The Changing World Order: Why Nations Succeed and Fail as recently as 2021 and used five centuries of history to show how nation success depends on cycles much like business. So, I have been struck by three investment trends whose emergence could be attributed to these long-run cycle shifts. The first cycle journey actually starts with cars…..

The mighty Volkswagen AG (VW) of Wolfsburg was founded in 1937 in the midst of another seismic geopolitical shift and 80 years later in 2017 became the world’s largest automotive manufacturer by global sales. In 2021 VW reached its peak market value of €155 billion but the Ukraine war, rocketing energy prices and electric vehicle (EV) competition has wiped almost €100 billion from that valuation since then. In fact, this week the even-older arms and military vehicle manufacturer, Rheinmetall AG, surpassed VW in market value. In reality this is a 10-year story rather than a 135-year history. As recently as 2014, Rheinmetall’s 125-years of manufacturing ammunition, missiles and military transport vehicles had built a total franchise value of just €1.3 billion. The invasion of Crimea by Russia in the same year was the “butterfly wing flap” moment as the company’s valuation over the following 10 years increased exponentially to deliver a 48x return to any far-sighted Kremlin watching investors. The picture below is a graphic reminder of the defence sector resurgence opportunity and the industrial shift away from the internal combustion engine (ICE):

Of course, Germany is not the only country impacted by geopolitical change. Plenty of Trump apologist commentators seem to believe “Agent Orange” is playing 4D chess and seeking an alliance with Putin to take on the growing threat of China. Well, how’s that going? About as well as Trump’s ‘day one’ defeat of inflation or the $5 trillion evaporation of the US stock markets driven by a tech-heavy “Magnificent 7” meltdown. In contrast to US investors, the Chinese are enjoying a 40% rise year-to-date for their tech sector stocks and a healthy almost-20% gain for the broader Hang Seng Index. Ironically, it’s a Chinese AI company called Butterfly Effect which is creating possibly even greater waves than the DeepSeek cost ‘shock” back in January. Butterfly’s AI digital assistant, Manus, is more powerful than DeepSeek and has automated up to 50 tasks from buying a property in New York to editing a podcast. There have also been big Chinese breakthroughs in recent weeks in quantum computing and robotics adding to a stark picture below (Source: Bloomberg) – a whopping 40% outperformance by the Chinese tech sector over the US tech sector since Trump took office in January.

If it feels like US Big Tech is in relative retreat then the latest data from VC research house, Pitchbook, makes for interesting reading. Big Tech is playing a less prominent role in the US start-up M&A market due to regulatory pressures but big corporates seem to have been replaced by start-ups themselves as acquirors. More specifically, in 2024 more than one third of start-up acquisitions were made by VC-backed start-ups. This highlights the emergence of a new buyer profile and exit route for start-ups; VC-backed ‘unicorns’ with significant cash reserves and an appetite for growth. Indeed, Pitchbook analysts put this rather well:

“Amid the trend toward ‘profitability’, it is important to remember that growth remains essential and serves as a key motivating factor for these buyers…..The high number of VC-backed companies also creates numerous opportunities for consolidation. While acquisitions by VC-backed companies may not often dominate the headlines, they are becoming an important aspect of the venture capital liquidity narrative. ”

The chart below (Source: Pitchbook) shows start-ups accounting for just 20% of M&A by value as recently as 2018. So, the move above 33% today seems significant…

In summary, the pictures above should be viewed as opportunities happening in real time while we are distracted by tawdry turmoil and photo-ops in Washington. More importantly, we should start to think about geopolitics as the driver of not just nation cycles, but also business cycles and new long-run structural trends.

March 18, 2025
Ten MEGA Signs Of Not So Much Winning…
Never thought I’d say this. I think I need those Freezbrury cold water challenge days to extend into March. Well, I need some shock therapy to dull the senses and distract from a rules-based world order which is crumbling by the hour. Should I care that a former Fox & Friends host has just instructed the US military to cease all operations against Russian cyber threats? Probably, but I’m not sure it’s helpful to follow the dizzying pace of breaking news and broken alliances. We have previously written about how the financial markets can rein in autocratic megalomania both East and West. In that instance we flagged the power of bond (debt) markets. Now, it looks like a regime which promised “so much winning” is losing the confidence of more than the bond market. Here’s a list of losers….

US Business Confidence: The silence or craven submission of US business leaders to the erratic ‘shake down’ of US allies and the established world order has been stunning to observe. However, as we often write, corporate actions can be more informative. Quietly removing DEI policies requires minimal leadership courage (I’m being very generous with that word). Dealmaking (M&A) on the other hand is way up there in terms of career risk for senior executives. Guess what? US M&A deal activity in January slumped to a decade low with a 30% drop year-on-year. Uncertainty is a strategic decision killer.

US Capital Markets: The US financial markets have dominated the world since the 2008-2009 financial crisis. US stock markets now account for more than 50% of the value of global equities after outperforming international stocks for more than 16 years. However, this year it’s a different or shifting story. At the end of February, international stocks had gained 7.3% in 2025 vs a 1.4% gain for the S&P 500.

US Growth: Investors in US stocks appear to be concerned. They are not alone. The much-watched GDPNow forecast of the Atlanta Fed is currently projecting US GDP will CONTRACT by 1.5% in the first quarter compared to the forecast of healthy 2.3% growth a week earlier. Also, US consumer spending has just fallen for the first time in two years.

US Technology: The “broligarchs” might have taken over the White House but the “Magnificent 7” technology stocks are experiencing slippage in 2025. Only one of Meta(+11%), Apple (-4%), Amazon (-3%), Google (-10%), Microsoft (-6%), Nvidia (-10%) or Tesla has seen its share price in positive territory this year.

Tesla: Tesla’s share price decline this year is a whopping 23%. Apparently, Elmo Musk’s fondness for autocrats and far-right parties in Europe has been a bit of a brand-killer. Sales in Europe for the first two months of 2025 are down 46% which can’t all be explained by consumers waiting for a Model Y refresh. Don’t expect any bravery from Tesla board directors either.

US House Sales: US existing home sales have dropped to the lowest levels since…. 1995. Yes, that’s when there were 80 million fewer people living in the US and didn’t have a President threatening a tariff war with its neighbour and construction-critical timber supplier, Canada.

US Dollar: As the world’s reserve currency the US Dollar (USD) is a long way away from any structural impact from the waning credibility of its sovereign’s political system. However, the USD is trading at an 11-week low against 6 major rival currencies. And….one of the better macro writers out there, Barry Ritholtz of The Big Picture blog, has flagged the dangers of policy error for the USD:

“Since the end of World War Two, the USD has been America’s “exorbitant privilege” as the world’s reserve currency. However, several factors threaten this privilege: wide-scale tariffs, the embrace of alternative digital currencies, the breaking of long-standing alliances, and dallying with dictators.

Since the end of World War II in 1945, the rise of the United States as the world’s dominant economic, military, and cultural power has led to a relatively peaceful 75 years in the Western Hemisphere, Pax Americana, has greatly benefited the U.S. and its allies. Putting that at risk would be one of history’s greatest unforced errors.”

US Supply Chain: The just released ISM Manufacturing survey for the US reveals the “prices paid” index for companies surged to a 32-month high as suppliers adjusted prices upwards ahead of threatened Trump tariffs. Oh, and don’t mention egg prices to the ‘Build-that-Wall’ cult – egg shortages are pushing prices up by 53% vs 2024 prices. Yep, you might remember there was some bloviating chat about inflation being fixed ‘on day one’.

US Jobs: There’s every chance Elmo Musk could end up being the DOGE that caught the car. Musk has been tasked/appointed himself to remove unnecessary spending by the US Federal government and its 3 million employees. But… the shock being applied to the US economy is possibly underestimated. The US government spent $6.8 trillion in 2024. For context, that’s more than 10x the size of the global semiconductor industry’s annual revenues ($628 billion 2024). Firing people in climate/weather forecasting roles and shutting down foreign aid (USAID) are just headlines. The bigger picture suggests one of the US economy’s most critical components (government spend) is in contractionary territory which will impact not just government jobs but the entire government supply chain in the private sector. Yep, a $7 trillion customer of the US economy is now being run by Elmo and his “Muskrats” with cute names like “Big Balls” and “First Buddy”. No seriously.

Brand America: As a symbol of American global reach and brand value it’s difficult to beat McDonald’s. Some of you may even recall the opening of its first Moscow restaurant with the famed “Golden Arches” in January 1990. You just knew the geopolitical sands were shifting. Less than two years later the Soviet Union collapsed. Now, check out the IPO of a company in Hong Kong this week. McDonalds is no longer the biggest food and beverage chain in the world. That title now goes to Mixue Ice Cream & Tea which has 45,000 branches in Asia and is opening approximately 21 stores……. every single day.

It’s a bit early to be suggesting a shift in global leadership but perhaps the competition has just shot itself in the foot. I’m thinking of Europe now and how a geopolitical crisis might just prompt real thought about making Europe great again (MEGA). Three financial data points caught the eye this week and suggested investors might be warming up to real policy action in Europe:
- The Swedish Krona is appreciating fast (2.4% today) as investors recognise Sweden has the highest military equipment production per GDP in Europe.
- Europe’s benchmark stock index, the Stoxx 600, has risen every week for 10 straight weeks.
- Germany’s Rheinmetal (+14%), Britain’s Bae Systems (+19%) and France’s Thales (+23%) have seen their share prices rise by double-digit percentages in a matter of days.
The $2.5 trillion global defence industry won’t be the only area Europe should target to compete as a “trusted partner” . Presumably, many countries and organisations seeking commercial partners in healthcare (medicine/vaccines) and financial services will have noted the risks of deal exposure to a US political leadership who ultimately might want a “piece” of a country in exchange for “peace”. Europe, by standing with Ukraine, could send a very powerful message on dependability to future partners as its former Washington ally works furiously to keep the KGB lieutenant colonel in the Kremlin happy.
March 3, 2025
Private Portfolios And Future Returns: Part II

Well, we promised. This is a follow-up to our last piece on expected returns for a private portfolio. This time we are going to illustrate a variety of portfolio outcomes with some numbers. However, there IS a catch. Humans are not good at forecasting the future so these returns outcomes are just a guide. A bit like a US-NATO promise to Estonia – we might send military forces to fight off an attack from Russia, but then again we might not. The good news for investors (for Estonia not so much) is that history can provide some confidence but no guarantees. History, in this instance, is the long-run return on private assets which we referenced in last week’s article. As a refresher, here is the reference table we used (Source: Pitchbook):

We noted the various categories of assets and concluded that Spark investors would be mostly invested in private equity and venture capital type assets. Then we decided to use 12% as a conservative ‘base case’ annual growth hurdle (IRR) expected of a portfolio with that mix of assets and quantified that growth over 10 years:

“In real terms (and compounding those rates [12%] of return) that equates to an initial investment of €10,000 growing to €31,000 over 10 years. For context, a fund with publicly listed equities would be expected (by financial planners) to generate 7% returns per annum and thus turn €10,000 into €19,600”

However, many of the Spark investment opportunities are very early-stage (higher risk) so it would be reasonable to expect something in excess of this 12% base case growth/returns scenario. Rather than use another headline number, we thought this article would be an opportunity to build a returns scenario from the bottom up. In other words, we would use illustrative portfolios of 25 investments each and explore three different mixes of outcomes. Our reasoning for using a portfolio of 25 investments is that this approximates to what many of our Private Portfolio (service) investors are currently trying to target/build as a personal portfolio over three years. The other assumptions used across the different illustrative portfolios are as follows:

Total investment cost = €50,000

Position size = €2,000 equally invested across 25 companies

EIIS tax rebate rate = 37%*

Holding period = 10 years

*The EIIS tax rebate rate is a ‘blend’ of the new standard rate of 35% and the higher rate of 50% applied to pre-operational businesses.

Now, let’s consider our first portfolio. According to the US Bureau of Labour Statistics, 65% of start-ups go out of business within 10 years. So let’s use that historic 65% failure rate as a future outcome for our first portfolio. In other words, 16 of our 25 portfolio companies will end up being worth zero. With the remaining 9 companies, we are going to assume that 5 of them become unspectacularly profitable and grind out a typical equity return of doubling every ten years(7% per annum). The final 4 companies are expected to be successful exits or ‘wins’ generating returns of between 7x and 15x. The table below illustrates those outcomes with an overall portfolio rate of return (IRR) of just over 13%. This equates to a multiple of 3.4x of the initial investment cost MINUS your EIIS tax rebate.

Portfolio 1:

The above example shows how important tax is to the initial cost or valuation multiple paid for your investments ie a 50% tax rebate cuts in half the valuation multiple paid. This portfolio generates a respectable 13% return but in the next example we’d like to demonstrate the importance of “winners”. So, in Portfolio 2 we raise the failure rate to 20 companies (80%) and model the impact of two big exits of 20x and 40x. This scenario delivers a superior IRR (vs Portfolio 1) of 15.4% and a multiple of 4.2x your initial cost of investment:

Portfolio 2:

Clearly, a return of 40x on a single investment would be huge but for ‘unicorn’ followers of companies reaching billion dollar valuation status this is the equivalent of a €25m company growing to €1 billion. Rare, but increasingly possible given the research team at Dealroom estimate 100 ‘unicorns’ have entered the billion dollar club every year since 2018. However, if the mention of unicorns smacks of fantasy territory let’s look at a more ‘diversified’ mix of outcomes in a portfolio. In particular, we want to model a portfolio reflecting some of the themes (including Spark’s risk management process) we touched upon in our first article of this series. Portfolio 3 is a mix of the following themes:

Recovery: Failure of ‘asset lite’ businesses could actually deliver some recovery values due to the data base built, team domain expertise, customer relationship assets etc.

B2B: Almost 70% of Spark investments are business-to-business (B2B) companies in a world where corporate VCs (CVC) are increasingly active eg Google has acquired more than 200 start-ups over the years.

Taxation: Due to higher capital gains (CGT) and income tax (dividend taxation) regimes in Europe and particularly Ireland the ‘hurdle’ or exit/return expected of a young company must be commensurately higher to compensate institutional investors.

Quality: Start-up funding is, bluntly, more scarce in this part of the world and Spark probably turns down 9 out of every 10 investment opportunities. In theory, we are already investing in the top quality decile of opportunity.

So, in Portfolio 3 the failure rate will be lower than previous examples (60%) and will also not amount to a ZERO return but include a recovery value of 20%. However, as demonstrated above, the key swing factor is the ‘winner’ category of investments. In Portfolio 3 we ‘diversify’ the outcomes of the surviving 10 companies with 6 actual exits. The following table outlines those outcomes across the portfolio:

Portfolio 3:

Clearly, diversification of outcomes and a higher number of more moderate exits does move the returns (IRR) dial. Any investor with a portfolio delivering 14.7% annual returns for an almost 4 X return on initial investment cost should be happy. Of course, these are merely estimates of the future anchored to historic data. We, like all forecasters, will get it wrong. However, it is reasonable to think a portfolio of mainly B2B assets with varying levels of maturity (along the start-up to private equity buy-out spectrum) operating in busy corporate VC activity sectors will achieve some exit success. You’ve read it here many times before… the future is private. But… there’s an additional Spark Private mantra to get to know – the process is portfolio. Private investors should build a sufficient opportunity set by holding multiple investments in a portfolio. As a small aside, this writer’s personal view is that exit valuations in the private asset world will surprise on the upside compared to even the multiples used in the portfolios above. Again, no promises!

Writer’s Note: The above is just a basis for discussion and exploring the long-run drivers of portfolio returns. I would be more than happy to talk through our investment pipeline and deal-types with anyone interested in building a diversified portfolio of private assets over the next 2-3 years.

February 19, 2025
You’re Watching The Wrong Dictator Reality Show..
It deserves an expletive. It’s exhausting. Magic water spigots turned on in Northern California, summary dismissal of Inspectors General watchdogs and sending uninvited military planes into the airspace of your closest Latin American ally. Of course, it could be worse as an ally – you could just be asked over an introductory phone call to give up over 95% of your sovereign territory. Perhaps, there will be a Eurovision-style poll run by Fox News to decide the future of Denmark and Greenland. I can almost see it now… say hello to the voting panel in Belgrade, or Moldova…. or Transnistria. More expletives. But, no. This week we were given a trillion dollar reminder that we are watching the wrong dictator reality show.

The trillion dollar damage to tech stock valuations inflicted by China’s unveiling of a super-cheap AI large language model, DeepSeek (with similar performance powers to ChatGPT, Gemini etc) was indeed a “wake up call” for US Big Tech according to President Trump. However, at the same time, the geopolitical machinations of China are veering into reality show territory. Thanks to the erosion of truth in the world there’s no need for James Bond-style subterfuge. Instead, it can be as brazen as hell. Chinese ships have been damaging undersea cables around Taiwan in recent months but this week marked the third severing of an undersea cable in three months…. in the Baltic Sea. The fibre-optic cable in the latest incident connected Sweden and Latvia but this time involved a China-owned ship in the sabotage operation. It would seem that Russia, as China’s “mineral colony”, has invited China to assist in infrastructure “grey-zone” conflict. Indeed, China has its own domestic reasons to ratchet up the geopolitical temperatures of distraction.

The latest economic activity data from China is looking pretty grim. January manufacturing activity actually contracted which won’t put the cheer into the upcoming New Year celebrations for 1.4 billion Chinese. This manufacturing slowdown has surprised many given recent monetary stimulus initiatives by the Beijing regime. However, we can expect further stimulus measures given Chinese government debt/GDP ratios are closer to 60% compared to US and European governments labouring under debt burdens over the 100% mark already. This monetary firepower will have knock-on effects across international markets and global economic growth. But… there is a strategic price to be paid by the rest of the world. And, it’s not just the obvious trade deficits. DeepSeek is more likely to be a temporary shock and, despite the hysterical headlines, the emergence of a better engineered cheaper way to harness computing power is a net benefit to all, including broader equity markets. However, DeepSeek highlights the growing excellence of China across multiple technologies.

According to a 2024 study by the Australian Strategic policy Institute (ASPI), China now dominates the US in 57 of 64 critical technologies, up from just three in 2007. The US, which led in 60 sectors in 2007, now leads in just seven. Rankings by the ASPI were based on cumulative innovative and high-impact research and patents. ASPI credits President Xi Jinping’s ‘Made in China 2025’ plan for the infusion of “massive direct state funding for R&D in key technology,” stating that existing strategic investments turned into a plan to achieve technological “supremacy”. The areas where China excels include…
- advanced integrated circuit design and fabrication
- high-specification machining processes
- advanced aircraft engines
- drones, swarming and collaborative robots
- electric batteries
- photovoltaics
- advanced radiofrequency communication
Oh, and did we mention nuclear fusion? Of course, you might have missed this if you’d been watching the fantasy Greenland invasion on the other show. In the past week, Chinese scientists broke the nuclear fusion record for sustained plasma at over 100 million degrees by maintaining a mix of electrons and ions in a fluid state for more than 1,000 seconds. As a reminder, nuclear fusion replicates the sun’s energy, offering limitless, carbon-free energy.

So, if you were a White House strategist you might want to curtail China’s technology advances. And, this is where things have taken a very strange turn. The Trump campaign has made lots of noise about China with tariffs being the chosen commercial weapon to rebalance US trade deficits with the Middle Kingdom. Fast forward to today and tariffs were, instead, the chosen weapon to bully Colombia. But… the US actually has a trade surplus with Colombia. More strange has been the Trump reverse-ferret on TikTok which he’d now like to see continue operating in the US (rather than enforce the ban upheld by the Supreme Court) with a US investor partner like Elon Musk or Larry Ellison. That all make sense? Now, for the really weird stuff.

Remember when Taiwan was supposed to be protected by its US ally from the increasing threat of China? Well, while we’ve all been distracted on DeepSeek news, there were some fairly seismic developments in US-Taiwan trade relations. Check out this headline about the two ‘allies’….

Trump’s 100% tariff threat on Taiwan chips raises cost, supply chain fears – Business Insider

So much for the tough talk on China. Beijing must be thrilled and President Xi will be encouraged to keep up the ‘grey zone’ infrastructure sabotage in the Baltic Sea and Straits of Taiwan. Meanwhile, the new US Defense Secretary , Pete Hegseth, fresh off the Fox & Friends chat sofa, has got to work defending the nation. First priorities….. revoking former chair of the Joint Chiefs of Staff, General Mark Milley’s security detail, removing all portraits of the general in the Pentagon and pursuing his demotion.

Anyone get the feeling the wrong ‘enemy’ is being pursued…..?
January 29, 2025
A World Losing Control Of Truth….

You know that feeling. No control, just watching helplessly. On a personal level, I observed the devastating wildfires in Los Angeles from afar via Google Maps and X(itter) but was updated on the ground by my son dangerously close to events on the UCLA campus. Evacuation to San Diego was his fortunate escape while the estimates of fatalities and rebuild costs continue to climb. Sadly, the losses are not just in the physical world of lives and properties. Truth has also been scorched by the partisan politics of the US. Incoming President Trump and his oligarch allies have been quick to blame political incompetence for the fires and deflect from the urgency of the climate crisis. A cursory look at Xitter and other online channels reveals waves of misinformation on lack of water and firefighting resources, saving smelt fish(yep), DEI /woke policies (open season it seems) and even funding Ukraine as the ultimate source of blame. Now, for a few stubborn facts:

No rain in Los Angeles (LA) since May 2024

Highest summer temperatures in LA ever

Land/vegetation is the second driest on record – UCLA research suggests 25% drier than average

Strongest seasonal Santa Ana winds in 14 years (up to 150 kph)

That lethal combination of extreme heat, bone-dry fuel and tornado-like winds are climate change driven. Fires are nothing new for California, but the change in wind/heat patterns has dramatically increased the intensity of the fires and the speed-of-spread when they occur. However, the extent of climate denial deflection at the highest US political leadership levels is amply demonstrated by the words of the incoming Trump nominee for Energy Secretary, Chris Wright, at his Senate confirmation hearing just this week: “I stand by my past comments…..the hype over wildfires is just hype”. Not for the first time, the world of finance will have its say too. In particular, the exit of insurance companies and house protection coverage for residents of LA, West Virginia, Florida and Texas is probably more instructive than the internet warriors in their underpants shrieking about political mismanagement, conspiracy theories or super-powered immigrant arsonists. Credibility and truth are inextricably linked and the biggest bully of them all is flexing its truth-seeking muscles….

We have written in recent days about debt markets constraining the actions of autocrats in the geopolitical world. However, in the financial world there are increasing words of worry from some very credible players about a credibility gap emerging. So, without bamboozling with jargon, let’s flag two financial facts.

*Interest rates around the world are either falling or stabilising at lower levels than 18 months ago.

*Bond yields which usually track interests rates are not falling, or even stabilising. Longer term yields in the UK, Japan and US have broken free of their relationship with interest rates and are rocketing higher.

This divergence of trajectories for interest rates and bonds is HIGHLY unusual. So, what’s happening? Well, debt and bond markets do track interest rates set by the central banks….normally. But, in this instance, credibility or credit has come into play on two fronts. First, central banks like the Fed and Bank of England are facing increased scrutiny in their battle to tame inflation. Second, government bonds track the credibility of sovereign governments – their ability to confront or tell the truth. And that’s a problem now. Nobody believes current UK government policies are able to deliver growth and not many believe Trump’s tax cuts and tariffs menu will tame inflation. Bluntly, there are increasing fears in financial circles that the Fed has lost control of the most important financial market in the world: the US Treasury market. Again, truth and credibility (not denial) are critical to attract risk capital, insurance, investment etc.

Finally, we should note the warning in President Joe Biden’s farewell address to the nation this week. Critics might argue his presidency wasn’t bold enough, even cruel enough, but his departing words might resonate with those who read President Dwight D. Eisenhower’s farewell speech warnings in 1961 about the dangers of the “military-industrial complex”. Biden points to an oligarchy of “extreme, power, wealth and influence” in a “tech-industrial complex” which wields a very modern weapon to serve their own interests. The tacky million dollar Trump inauguration donations and spineless abandonment of content moderation by the tech oligarchs could be mistaken as the source of bitterness for an ousted president but I’ve a feeling the following statement will be revisited by historians as a prescient warning:

“Americans are being buried under an avalanche of misinformation and disinformation, enabling the abuse of power. The free press is crumbling [or] disappearing. Social media is giving up on fact checking. The truth is smothered by lies told for power and for profit…. Meanwhile, artificial intelligence is the most consequential technology of our time, perhaps of all time.”

I’ve got some bad news. That “avalanche of misinformation” is just the start, and the reference to AI is key. It feels like every funding round at the moment is attached to “AI-agents”, bots who will carry out the mundane content generating tasks of human workers. In fact, one in every two dollars of VC funding in the US right now is going to AI. The number globally is 37% (Source: CB Insights). However, let’s think about that ‘army’ of bots to be unleashed on the future of work and communications. First, know that an estimated 50% of all online traffic right now is bot generated. Yep, that’s bot created content, bot engagement, bot dissemination….. the whole false fly-wheel effect. Now, imagine a vicious circle of billions of bots, content pieces and false engagement. Then think false content.

You will hear more about “Dead Internet Theory” in 2025. It started out as a peripheral online conspiracy theory claiming the internet has been taken over by artificial intelligence(AI). Viral posts, engagement rankings, traffic stats etc all have a whiff of AI-bot promotion these days but there’s worse to come. The sheer volume of misinformation coming our way via AI-agency bots could kill online platforms’ utility value. Even this week, using Xitter was an exercise in dodging the underpants brigade + bots and finding real true information on the LA fires. And, now the chat is Elon Musk will be buying Tik Tok. A change of commercial control perhaps, but the reality at a higher communications level is more existential. We could lose control of not just the internet, but truth itself.

“You can’t handle the truth!!” – Colonel Jessup, A Few Good Men.

January 16, 2025
Trump Words Scare But Bonds Are The Real Bully Boys

The flashbacks are coming on strong. Who thought myself and Donald Trump would be ratified for new office in the same week? Not me. Anyway, enough about me… said the Donald never. Seriously, do we really have another four years of these whining streams of consciousness, aka press conferences. As Los Angeles burns and Gaza starves, the world is still digesting The Accused’s quasi-declaration of war on Panama, Mexico, Canada and…… Denmark. Clearly, the Orange Toddler is emboldened, as Putin’s number one fan boy, to threaten the invasion of both Panama and Greenland for “national security” reasons. One could be dismissive of these attention-seeking words of intimidation but this feels different, and probably Putin derived. Hamlet this is not, but Act I of this tragedy was Ukraine. Who knows what Act II could be in a new world order of misinformation, security over-reach and sovereign destruction? Taiwan would top most risk lists. However, Estonia or Finland might disagree, as the Baltic plays host to “infra-destructure” warfare. I might disagree too. There’s a bigger bully boy out there and possibly a reason for hope.

We have written many times before about the perils of depending on “other people’s money”. In most cases, the most catastrophic financial implosions have involved high levels of debt or leverage. However, in certain cases catastrophe has been avoided. The phrase “my word is my bond” speaks to credibility but I’m thinking of a more threatening type of bond today. Recall the famous words of Clinton White House strategist, James Carville….

“I used to think that if there was reincarnation, I wanted to come back as the President or the Pope or as a .400 baseball hitter. But now I would want to come back as the bond market. You can intimidate everybody.”

Liz Truss might attest to that intimidatory power. Her lettuce-life UK premiership was ended by the UK government debt markets (Gilts) going into freefall after her mini-budget ignored all rational advance warnings and almost blew up the UK pension fund system. The Bank of England saved pension funds with a swift monetary/funding intervention but there was no saving Chancellor Kwasi Kwarteng or his delusional prime minister. Fast forward to 2025, and bond markets for me are the big start-of-year story. And, it’s not looking good for the UK….again. In fact, things have deteriorated since the Truss budget debacle. It appears that an election pitch along the lines of “the other lot are awful, vote for us” is failing to convince the all-powerful debt markets that the new government of Sir Keir Starmer has any credible grip on the economy. Try these bond market data points for starters…

UK government long-term borrowing costs – priced in the 30-year Gilt/bond markets) – are at their highest levels since…. 1998.

UK government medium-term borrowing costs – priced in the 10-year Gilt markets – are at their highest since 2008.

In real terms, this means that the UK government is going to spend more on interest costs than on national education this year. Meanwhile, the politics of the country is consumed by “grooming gang” criminality which has been widely known about since at least 2015 (Jay Report). Oh, and UK Treasury Minister, Darren Jones, has just soothed House of Commons members’ fears saying “it is normal for the price of gilts to fluctuate”. Fluctuate? I can think of other “F” words being used on City financial trading floors right now. However, the ‘reality bite’ of bond markets might not be confined to the UK.

The US government has been racking up monster debts too – just the $34 trillion at the last count. So, for those believing Trump is either going to buy Greenland for trillions of dollars or spend similar amounts on military invasions of US allies (I know, genius stuff), there’s a tiny bond detail which merits some attention. At this week’s US government monthly auction of 10-year bonds/debt instruments traders pushed the yields/costs to be paid by the US government to an 18-year high of 4.68%. It might not look like a particularly big cost but this is the foundation of all pricing in the US house mortgage and car finance markets. So, if the bond markets are threatening mortgage or car financing costs to rise to levels not seen in almost two decades, then be assured that the bond bully boy will trump the fantasy words of Agent Orange. This is an example of debt markets warning about spending inflation and unsustainable government budget deficits. But, there’s another type of warning which the bond markets can deliver.

Ultra-low interest rates(bond yields) can also point to multi-year stagnation caused by a national (including government) debt crisis. Japan is the classic multi-decade example of minimal GDP growth or inflation and super-low interest rates. But, there’s a new contender for zombie debt stagnation: China. The Middle Kingdom’s $11 trillion government debt market is sending some very strong signals. The gap in costs/yields between the US and Chinese government bond markets is the highest in history. Chinese 10-year bonds are yielding just 1.6%, but the bigger story is in the long-term 30-year bond markets. Japanese 30-year bond yields are now higher than China’s which starkly signals a “Japanification” of the Chinese economy. The credibility of China’s economy is at stake but critically that of President Xi too. Interestingly, Xi’s new nickname on the Chinese internet is “the elementary school student”. Of course, an invasion of Taiwan could distract the Chinese population but there’s also a real possibility bond markets could signal Xi being toppled from power.

As a final thought and one recently raised by David McWilliams in an excellent podcast there could also be a reality check around the tariff threats of the incoming Trump administration. Maybe it’s not quite as bad as invading your allies, but imposing tariffs on your biggest trading partners could prompt a painful bond bite-back. McWilliams makes the very good point that the Chinese and Japanese own/hold trillions of US government bonds. If these trading counterparties sell them as part of a bigger trade tariff war then US government interest costs and US consumer finance costs will painfully spike. US government interest costs already exceed $1 trillion annually which, if it were a standalone government department, would actually outspend the US Defense Department’s annual budget. My money is on financial pragmatism watering down most of the actual tariff outcomes. In fact, another part of the financial world is hinting at Trump threats not quite happening in a different market. Despite the threats to roll back cleantech and renewable initiatives of the Biden administration, it would seem the markets are not quite convinced. Indeed the latest data from Wall Street might surprise; apparently the share price performances of clean energy stocks and fossil fuel stocks are in a statistical dead heat since Election Day (Source: Callaway Climate Insights).

Perhaps there’s a new lesson soon to be learned in geopolitics….

Your words are only as strong as your bonds.

January 9, 2025
Does Europe Have Whatever It Takes?
This is tricky. Here goes… I’m going to sound like Boris Johnson for a moment. Relax. No Greg Wallace, Master Chef or “middle-class women of a certain age”. More like the Middle Ages, and a stunning personal discovery this week that, before counterparties sign off a private investment in Germany, a public notary must read every single word out loud. Yip, not a banana-straightener but for a venture capital investor this week that meant “12 hours and counting” for a Series A investment document to be read out loud in front of founders and investors. In person. It sort of feels like Germany has missed out on a few productivity hacks since the Gutenberg printing press arrived in 1439. Meanwhile, European leadership is in disarray as the French government collapses, Germany’s industrial base struggles and the UK paddles alone in its own faeces-filled waters. It is difficult to ignore the “Europe is Donald Ducked” chorus growing louder by the day. And yet, I believe Europe can change course for the better. First, let’s identify a few key problems…

Actually, why don’t we turn to the man who rescued Europe once before. Back in 2012 Mario Draghi as President of the European Central Bank (ECB) declared that “the ECB is ready to do whatever it takes to preserve the euro”. Remember the “PIIGS” who struggled in the crosshairs of European debt crisis traders for weeks? Well, Portugal, Ireland, Italy, Greece and Spain have more than survived that credit (or credibility) crisis. In fact, this week Greece was able to borrow at cheaper rates than France. Stunning. And perhaps, that should be Europe’s inspiration. Greece was a mess. Not now. However, the same Mario Draghi in his 400 page EU Competitiveness report is telling us Europe is in a mess and that “without action, we will have to either compromise our welfare, our environment or our freedom”. Draghi sees the following challenges:
1. Productivity: European GDP growth has lagged the US by 0.5% every year since 2000. Interestingly, demographics (population growth) has played its part in that too. How about building that wall? Maybe not.
2. Innovation: There are no leading technology companies in Europe. Draghi identifies a “middle tech” trap where Europe seems happy to be in “the peloton” rather than lead. Indeed, outside the information and communications technology sector, European productivity growth matches and often beats US competition.
3. Finance: Draghi bemoans the lack of joined-up thinking and fragmentation in the area of debt financing and regulation. Think about those hoarse notaries and the 1,330 banks servicing Germany. Then know that Canada has just 93 banks.
4. Security: Draghi deals with a number of distinct challenges in his report but I have lumped them together as almost existential threats: defence(war), climate crisis (decarbonisation) and industrial dependence(China).
There’s a danger these challenges are perceived as nothing new. Arguably, the outbreak of a full scale European war is the only really new challenge of recent years. The other challenges have been slow-moving train wrecks over a decade or more. However, the point to be made is, like our climate crisis, Europe is running out of time. As always, I try to use data to tell a story and here are a few standout numbers which have crossed my desk in recent weeks:

*In the 1950s to 1970s period European investment in innovation equated to 4% of GDP. That percentage is now 0.5%.

*Venture capital investment in Europe is 6 times lower than the US.

*71% of all current funding for AI globally is in the US. Europe accounts for just 14% of global AI investment.

*The performance gap between US and European stock markets this year is over 21%. That’s the biggest performance divergence since 1976. In fact, US stock markets now account for 65% of global stock market capitalisation but with just 26% of global GDP.

*According to Bank of America research, US to European equity valuations have risen to 3.6x in November, an all-time record. This ratio has DOUBLED in 8 years, and is 3 times the historic average.

*The US stock market has outperformed Europe in 12 out of the last 15 years.

*There are more than 270 regulatory bodies involved in digital networks in the EU today.

*The EU has 34 mobile network operators. China has four, and the US three.

If the list above feels a bit “money” oriented there is good reason. If investment, performance, valuations and growth gravitate to one economic region the knock-on effect is significant for competing regions like the EU. Stripe didn’t even bother starting out in Ireland. The Collison brothers went straight to California. It’s not just start-ups. One of Europe’s homegrown fintech stars, Revolut, is about to IPO but co-founder and CEO, Nikolay Storonsky, has said the US will be their public listing home as London “can’t compete”. Not surprisingly, CB Insights are saying 40% of the world’s AI companies (and talent) are located in the US.

It’s not just a money tale – those stats above about regulators and network fragmentation are massive hurdles to companies competing for investment capital based on growth. You don’t need a notary to grow GDP. However, like Greece and Ireland in the recent past, it is possible to be ‘forced’ into survival strategies which may require pain. As an illustration, the decision of VW to close manufacturing plants in Germany for the first time in 87 years might only be the start of bad news for the 100,000 VW workers striking in protest. Now for some better news, and a bit of European inspiration…

Europe has proven already it has whatever it takes to win the battle of the skies. In a truly pan-European collaboration project, Airbus has emphatically emerged as the dominant aircraft manufacturer on this planet. Even before Boeing’s troubles, Airbus was racing towards 60% global market share and currently is winning the market for large single-aisle planes on an 80/20 basis. The European champion of the skies has been beating Boeing for 5 consecutive years and has an order backlog of 8,600 planes. This is the inspiration and illustration of European collaboration. Now look to the skies again.

War is a tragic European fact of life in Ukraine. However, battles for survival can bring innovation. WW2 was the catalyst for Europe to invent radar, penicillin and jet engines. Today, you might consider the 200 Ukrainian companies currently manufacturing Unmanned Aerial Vehicles (UAVs). Yep, drones are the future and Elon Musk has had the temerity to suggest US F-35 jet fighters are “already obsolete”. If Musk is right and “Future wars will be drone wars” then Europe is the epicentre of UAV innovation. Interestingly, Germany’s start-up AI software company, Helsing, has focused on drones and jet-fighters and is now manufacturing its own attack weapons. These drones are armed and don’t need pilots or GPS, it’s all AI. And, Helsing is already valued at $5 billion.

Our other survival battle is climate. And Europe can lead. One of the key drivers of productivity and valuation divergences over the years has been energy costs. An auto factory or chemical plant in Europe can typically pay $500m to $1 billion more for its power supply…. each year. Electrification is not just the decarbonised future, it is European industrial survival. While Europe might be stuck in a “middle-technology” trap it might be the US and China who remain wedded to cheaper fossil fuel options. Draghi’s analysis envisages Europe spending €3-4 trillion on electrification, or about 25% (!) of EU GDP over the next 10 years.

Investment/spend is critical to innovation, and Europe right now looks like it is losing out in the energy race. So, we must hope a power crisis breeds innovation opportunity in electrification and perhaps gives Europe a head start over more complacent rivals. In fact, one of my favourite stats this week emerged in the decarbonisation space. A research paper from University of Chicago and Wharton estimates the total carbon burden of US corporates is $87 trillion. That’s 1.3 x the market capitalisation of US companies in 2023, and starkly demonstrates payment for damages caused by greenhouse emissions would bankrupt corporate America.

Adversity forcing dramatic shifts in industrial policy and investment capital could ultimately be Europe’s saviour. Furthermore, we should look east to see how countries and cultures free themselves from government and regulatory over-reach. Poland is now, per capita, as rich as Japan or Spain. Its military is arguably the strongest in Europe, and its GDP has grown by 3.5x since 1990. Quietly Poland is becoming a tech and innovation hub. And, behind that drive is a STEM graduate pipeline ranked 4^th in Europe between 2013 and 2019. That will only accelerate as Microsoft invests $1 billion, Google builds an R&D centre and a talent brain drain now moves into reverse. Inspiring stuff.

It can be done. However, it might need a further crisis to prompt Europe’s leaders to commit to ‘whatever it takes’ to survive and lift itself out of decades of decline. And… the data and vibes suggest we are close to that moment.
December 5, 2024