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AN EVENING WITH
J I M M E L L O N
24th November 2016
This Evening’s Talk
• Macro Outlook
• Rules of Engagement for Investors
• Big Ideas = Money Fountains
2
3
4
5
Trump Presidency
• Keynesian Laffer curve man
• Substantial borrowing for infrastructure
• Higher interest rates coming
6
7
Laffer Curve
• Repatriation amnesty -> USD 2 trillion at 10% tax
• Corporate tax likely to decrease from 35% to 20%
• Simplification of tax code
• Worry on trade but watered down
Trump Presidency
8
9
UK & Brexit
10
Europe
• From crisis to crisis
• Banking system a house of cards
• Brexit just the beginning and a side show
• Rise of populism and other nationalist
movements
11
From Crisis to Crisis
Oct ‘16 - Hungarian
referendum on
immigration
Dec ‘16 - Italian
referendum
Current - Spanish
political deadlock
Oct ‘17 - German
federal elections
Aug ‘16 - Italian
banking crisis
Current – Catalonian
separatist
movement
Halt on further EU
integration
Dec ‘16 – Denmark -
greater immigration
control
Ongoing – Greek
economic crisis
Ongoing – Greek
economic crisis
Current - French rise
of national
sovereignty
12
0% 5% 10% 15% 20% 25% 30%
United Kingdom
Germany
France
Euro area
Portugal
Italy
Spain
Greece
Unemployment Rate
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
DebttoGDP%
Source: Bloomberg – end of 2015
European Debt and Unemployment
13
Target2 Balances
-€600b
-€400b
-€200b
€0b
€200b
€400b
€600b
€800b
2001 2004 2007 2010 2013 2016
ECB Austria Belgium Cyprus Germany Estonia
Spain Finland France Greece Ireland Italy
Lithuania Luxembourg Latvia Malta Netherlands Portugal
14
15
UK & Brexit
What we know:
– GBP under pressure
– No financial Armageddon
– No recession
– FTSE100 and 250 near all time highs
– Article 50 before end of March ’17
16
Trade Relationship
17
18
Emerging Markets
• Strong USD a negative for EMs
• China significant non-performing loans
• Significant debt problems elsewhere
• Still commodity dependent
19
Macro Summary
• Capital misallocation with QE, ZIRP & NIRP
• US equities overvalued
• Bonds ridiculously overvalued
• Selective emerging markets attractive
• Political problem and rise of populism
20
21
Quantitative Easing
22
Bond Yields
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
US 10-year govt bonds yield
US 10-year govt bonds yield
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
Germany 10-year govt bonds yield
Germany 10-year govt bonds yield
23Source: Bloomberg
Bond Prices
80
90
100
110
120
130
BondPrice
Belgium 100-year govt bonds Ireland 100-year govt bonds
Austria 70-year govt bonds Italy 50-year govt bonds
24Source: Bloomberg
Valuations Over 10 Years
Value Fwd PE Growth Fwd PE Value P/BV Growth P/BV
Current 14.2 17.7 1.5 3.5
Per cent rank 89% 86% 56% 88%
High 15.2 19.4 2.2 3.7
Low 7.8 8.9 0.9 1.7
Median 12.3 15.7 1.5 2.9
25
Valuations Since Start of Data Set
Value Fwd PE Growth Fwd PE Value P/BV Growth P/BV
Current 14.2 17.7 1.5 3.5
Per cent rank 65% 64% 30% 61%
High 24.7 40.5 2.5 7.6
Low 8.9 11.0 1.1 2.1
Median 13.2 16.9 1.8 3.3
Source: Bloomberg
10-Year Growth Forward PE Premium
-10%
0%
10%
20%
30%
40%
50%
Premium/Discount
PE Premium MSCI Growth Index vs Value Index
26
Source: Bloomberg
27
Rules of Engagement
 Curiosity
 Adaptability
 Application
 Network effect
28
Investment Dos and Don’ts
• Status quo investments = penury
• Look for:
– Disruptors;
– Comparative advantage; or
– Deep under valuation
• Research, probe and specialise
29
30
31
Big Ideas
• Technology
• Quantum Computing
• Longevity
32
Productivity & Tech Stasis
• Moore’s Law broke down in 2005 due to Dennard
Scaling
• Cost of computational power is rising more than
benefit it delivers e.g.:
– Aerospace relies on efficiency gains from computing power
– Drug development for more complex diseases requires
exponentially more computing power
• Marginal productivity gains in decline
33
Technology
1. Virtual / augmented reality & AI
2. DNA sequencing machines universal clinical practices
3. CRISPR / CAS9 - Synthetic life
4. Truck platooning & self driving robots
5. Li-Fi
6. Blockchain and payment technology
7. Reusable rocket - SpaceX
8. Improvement in battery technology – Tesla Model 3
9. Voice recognition
34
35
US Productivity Growth
-1.0%
1.0%
3.0%
5.0%
7.0%
Manufacturing Retail (2013) Restaurants
(2013)
Air
transportation
(2012)
Trucking
(2013)
Commercial
banking
ProductivityGrowth
Before and After Recession
1995 - 2007 2007 - 2015 (or as noted)
Source: Bureau Labour of Statistics and Kauffman Foundation 36
Quantum Computing
Classical Computing
In classical computing a bit is 0 or 1. A 2-bit
computer has four ‘states’ but can only
perform one of these operations at a time:
Quantum Computing
In quantum computing a qubit is 0 or 1 or
both at the same time (!?!) because of “super-
positioning.” A quantum computer can thus
analyse all four states in one operation:
0 0
? ?
? ?
? ?
0 0
1 0
0 1
1 1
37
Quantum Computing
A computer with n cubits can be in super-position of 2n states at the same time. So a
4 qubit quantum computer could analyse 16 parallel states in a single operation:
0 0 0 0
1 0 0 0
1 1 0 0
1 1 1 0
1 1 1 1
0 0 1 0
0 0 0 1
0 1 1 1
0 0 1 1
1 0 0 1
0 1 1 0
1 0 1 0
0 1 0 1
0 1 0 0
1 1 0 1
1 0 1 1
Quantum Computer
? ? ? ?
? ? ? ?
? ? ? ?
? ? ? ?
? ? ? ?
? ? ? ?
? ? ? ?
? ? ? ?
? ? ? ?
? ? ? ?
? ? ? ?
1 0 1 0
? ? ? ?
? ? ? ?
? ? ? ?
? ? ? ?
Classical Computer
38
Quantum ComputingOperations Required to Analyse All States
# bits / qubits Classical Computer Quantum Computer
1 2 1
2 4 1
3 8 1
4 16 1
5 32 1
6 64 1
7 128 1
8 256 1
9 512 1
10 1,024 1
11 2,048 1
12 4,096 1
13 8,192 1
14 16,384 1
15 32,768 1
16 65,536 1
17 131,072 1
18 262,144 1
19 524,288 1
20 1,048,576 1
A quantum computer with 300 qubits (2300
classical bits) can process as much information
as there are particles in the universe!
-
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20OperationsRequired
toAnalyseAllStates Number of Qubits
Classical Computer Quantum Computer 39
Driverless Technology
• One billion vehicles on the road today – majority with just a single passenger
and idle 95% of the time
• Driverless cars will:
– Use roads efficiently - Reduce congestion
– Increase car sharing - Reduce energy requirements
– Improve safety - Disrupt insurance industry
– Free up time – NO PARKING!
• 2.5m driving jobs in the U.S. alone
• Uber has demonstrated its driverless technology for trucks delivering beer
40
Energy Revolution
• Energy conversion of fossil fuels is ~13%
• Significant production efficiency gain possible
• Solar power cost is at grid parity in southern US and
southern Europe and many parts of Asia
41
Energy Revolution
1. Bioo plant – photosynthesis
2. Gold nanowire – no degradation
3. Magnesium – no shielding required
4. Solid state lithium ion – super capacitor
potential
5. Graphene car batteries – charge and
discharge 33 times faster than lithium ion
6. Foam batteries, safer (not flammable), higher
energy density, cheaper and longer life
7. Aluminium graphite – fully charged in one
minute
8. Alfa battery – 40 times charge of lithium ion
9. Skin power – current from skin using gold
film
10. Foldable batteries – bendable gadgets
• Over the last four years, battery costs have
declined over 50%. A further 50% price
decline is anticipated by 2020
• Tesla’s Giga-factory will produce 35 giga-
watts of batteries by 2020, more than 2013’s
global batter production
• Many new technologies in development
Foldable Battery
42
Centralised
Blockchain
Decentralised Distributed 43
44
45
Longevity
31
72
1900 2015 2050
Four million years
produced an 11-year
increase from 20 to 31
115 years
produced a 41-
year increase
Source: James Carey; Longevity United Nations Development Program
120
46
Immune-Oncology
Key Advantages of IO:
1. More Specificity
2. Less toxicity to normal tissue
47
Sequencing Technology
1993:
One researcher could read 500
letters of the human genome per
day
2016:
Computers can read more than 3
billion genome letters per day at a cost
of $5,000. This is the equivalent of 6
million researchers in 1993
Dr. Francis Collins
Leader of the Human Genome Project
48
Hand Held DNA Sequencer
49
CRISPR / CAS9
• Young technology but has fundamentally changed gene editing
and medicine
• Part of immune system of bacteria used to fight viruses
• Simple, versatile and reproducible results
• Can target multiple genes at once
• Applications from basic research, drug development, agriculture
and genetic diseases
50
Longevity
• Key pathways implicated in ageing beginning to be
understood – nicotinamide, MTOR, AMPK, SIRT1 & other
Sirtunis
• Understanding a result of rapid sequencing and study of:
– Yeast Saccharomyces cerevisiae
– Mice Mus musculus
– Fruit flies Drosophila melanogaster
– Earth worms Caenorhabditis elegans
51
Single Stock Ideas
• Sony Corporation
• FANUC Corporation
• Gilead Sciences Inc
• Galapagos NV
• Arrowhead
Pharmaceuticals Inc
• Synergy Pharmaceuticals
Inc
• Regent Pacific Group
• Condor Gold Plc
• SalvaRx Group Plc
52
Reading List
1. NEJM
2. BMA Journal
3. Spectator
4. Gavekal
5. Bioworld
6. Techcrunch
7. Economist
8. New Statesman
9. The Atlantic
10. National Review
11. NYT
12. FT
13. WSJ
14. Telegraph
15. Guardian
16. Times
17. Prospect
18. Country Life
19. Vanity Fair
20. The New Yorker
21. New Scientist
22. Scientific American
23. National Geographic
24. Wired
25. The Week
26. Money Week
27. Master Investor Magazine
28. Foreign Affairs
29. Rolling Stone
30. PC Advisor
31. How It Works
32. Berliner Zeitung
33. Le Monde
34. Investors Chronicle
35. Private Eye
36. Which
53
More Information
Additional information:
• www.masterinvestormagazine.co.uk
• www.fastforwardbook.com
• www.crackingbio.com
54
Enquiries to info@masterinvestor.co.uk

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An evening with Jim Mellon

  • 1. AN EVENING WITH J I M M E L L O N 24th November 2016
  • 2. This Evening’s Talk • Macro Outlook • Rules of Engagement for Investors • Big Ideas = Money Fountains 2
  • 3. 3
  • 4. 4
  • 5. 5
  • 6. Trump Presidency • Keynesian Laffer curve man • Substantial borrowing for infrastructure • Higher interest rates coming 6
  • 8. • Repatriation amnesty -> USD 2 trillion at 10% tax • Corporate tax likely to decrease from 35% to 20% • Simplification of tax code • Worry on trade but watered down Trump Presidency 8
  • 9. 9
  • 11. Europe • From crisis to crisis • Banking system a house of cards • Brexit just the beginning and a side show • Rise of populism and other nationalist movements 11
  • 12. From Crisis to Crisis Oct ‘16 - Hungarian referendum on immigration Dec ‘16 - Italian referendum Current - Spanish political deadlock Oct ‘17 - German federal elections Aug ‘16 - Italian banking crisis Current – Catalonian separatist movement Halt on further EU integration Dec ‘16 – Denmark - greater immigration control Ongoing – Greek economic crisis Ongoing – Greek economic crisis Current - French rise of national sovereignty 12
  • 13. 0% 5% 10% 15% 20% 25% 30% United Kingdom Germany France Euro area Portugal Italy Spain Greece Unemployment Rate 0% 20% 40% 60% 80% 100% 120% 140% 160% 180% DebttoGDP% Source: Bloomberg – end of 2015 European Debt and Unemployment 13
  • 14. Target2 Balances -€600b -€400b -€200b €0b €200b €400b €600b €800b 2001 2004 2007 2010 2013 2016 ECB Austria Belgium Cyprus Germany Estonia Spain Finland France Greece Ireland Italy Lithuania Luxembourg Latvia Malta Netherlands Portugal 14
  • 15. 15
  • 16. UK & Brexit What we know: – GBP under pressure – No financial Armageddon – No recession – FTSE100 and 250 near all time highs – Article 50 before end of March ’17 16
  • 18. 18
  • 19. Emerging Markets • Strong USD a negative for EMs • China significant non-performing loans • Significant debt problems elsewhere • Still commodity dependent 19
  • 20. Macro Summary • Capital misallocation with QE, ZIRP & NIRP • US equities overvalued • Bonds ridiculously overvalued • Selective emerging markets attractive • Political problem and rise of populism 20
  • 21. 21
  • 23. Bond Yields -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% US 10-year govt bonds yield US 10-year govt bonds yield -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% Germany 10-year govt bonds yield Germany 10-year govt bonds yield 23Source: Bloomberg
  • 24. Bond Prices 80 90 100 110 120 130 BondPrice Belgium 100-year govt bonds Ireland 100-year govt bonds Austria 70-year govt bonds Italy 50-year govt bonds 24Source: Bloomberg
  • 25. Valuations Over 10 Years Value Fwd PE Growth Fwd PE Value P/BV Growth P/BV Current 14.2 17.7 1.5 3.5 Per cent rank 89% 86% 56% 88% High 15.2 19.4 2.2 3.7 Low 7.8 8.9 0.9 1.7 Median 12.3 15.7 1.5 2.9 25 Valuations Since Start of Data Set Value Fwd PE Growth Fwd PE Value P/BV Growth P/BV Current 14.2 17.7 1.5 3.5 Per cent rank 65% 64% 30% 61% High 24.7 40.5 2.5 7.6 Low 8.9 11.0 1.1 2.1 Median 13.2 16.9 1.8 3.3 Source: Bloomberg
  • 26. 10-Year Growth Forward PE Premium -10% 0% 10% 20% 30% 40% 50% Premium/Discount PE Premium MSCI Growth Index vs Value Index 26 Source: Bloomberg
  • 27. 27
  • 28. Rules of Engagement  Curiosity  Adaptability  Application  Network effect 28
  • 29. Investment Dos and Don’ts • Status quo investments = penury • Look for: – Disruptors; – Comparative advantage; or – Deep under valuation • Research, probe and specialise 29
  • 30. 30
  • 31. 31
  • 32. Big Ideas • Technology • Quantum Computing • Longevity 32
  • 33. Productivity & Tech Stasis • Moore’s Law broke down in 2005 due to Dennard Scaling • Cost of computational power is rising more than benefit it delivers e.g.: – Aerospace relies on efficiency gains from computing power – Drug development for more complex diseases requires exponentially more computing power • Marginal productivity gains in decline 33
  • 34. Technology 1. Virtual / augmented reality & AI 2. DNA sequencing machines universal clinical practices 3. CRISPR / CAS9 - Synthetic life 4. Truck platooning & self driving robots 5. Li-Fi 6. Blockchain and payment technology 7. Reusable rocket - SpaceX 8. Improvement in battery technology – Tesla Model 3 9. Voice recognition 34
  • 35. 35
  • 36. US Productivity Growth -1.0% 1.0% 3.0% 5.0% 7.0% Manufacturing Retail (2013) Restaurants (2013) Air transportation (2012) Trucking (2013) Commercial banking ProductivityGrowth Before and After Recession 1995 - 2007 2007 - 2015 (or as noted) Source: Bureau Labour of Statistics and Kauffman Foundation 36
  • 37. Quantum Computing Classical Computing In classical computing a bit is 0 or 1. A 2-bit computer has four ‘states’ but can only perform one of these operations at a time: Quantum Computing In quantum computing a qubit is 0 or 1 or both at the same time (!?!) because of “super- positioning.” A quantum computer can thus analyse all four states in one operation: 0 0 ? ? ? ? ? ? 0 0 1 0 0 1 1 1 37
  • 38. Quantum Computing A computer with n cubits can be in super-position of 2n states at the same time. So a 4 qubit quantum computer could analyse 16 parallel states in a single operation: 0 0 0 0 1 0 0 0 1 1 0 0 1 1 1 0 1 1 1 1 0 0 1 0 0 0 0 1 0 1 1 1 0 0 1 1 1 0 0 1 0 1 1 0 1 0 1 0 0 1 0 1 0 1 0 0 1 1 0 1 1 0 1 1 Quantum Computer ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? 1 0 1 0 ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? Classical Computer 38
  • 39. Quantum ComputingOperations Required to Analyse All States # bits / qubits Classical Computer Quantum Computer 1 2 1 2 4 1 3 8 1 4 16 1 5 32 1 6 64 1 7 128 1 8 256 1 9 512 1 10 1,024 1 11 2,048 1 12 4,096 1 13 8,192 1 14 16,384 1 15 32,768 1 16 65,536 1 17 131,072 1 18 262,144 1 19 524,288 1 20 1,048,576 1 A quantum computer with 300 qubits (2300 classical bits) can process as much information as there are particles in the universe! - 200,000 400,000 600,000 800,000 1,000,000 1,200,000 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20OperationsRequired toAnalyseAllStates Number of Qubits Classical Computer Quantum Computer 39
  • 40. Driverless Technology • One billion vehicles on the road today – majority with just a single passenger and idle 95% of the time • Driverless cars will: – Use roads efficiently - Reduce congestion – Increase car sharing - Reduce energy requirements – Improve safety - Disrupt insurance industry – Free up time – NO PARKING! • 2.5m driving jobs in the U.S. alone • Uber has demonstrated its driverless technology for trucks delivering beer 40
  • 41. Energy Revolution • Energy conversion of fossil fuels is ~13% • Significant production efficiency gain possible • Solar power cost is at grid parity in southern US and southern Europe and many parts of Asia 41
  • 42. Energy Revolution 1. Bioo plant – photosynthesis 2. Gold nanowire – no degradation 3. Magnesium – no shielding required 4. Solid state lithium ion – super capacitor potential 5. Graphene car batteries – charge and discharge 33 times faster than lithium ion 6. Foam batteries, safer (not flammable), higher energy density, cheaper and longer life 7. Aluminium graphite – fully charged in one minute 8. Alfa battery – 40 times charge of lithium ion 9. Skin power – current from skin using gold film 10. Foldable batteries – bendable gadgets • Over the last four years, battery costs have declined over 50%. A further 50% price decline is anticipated by 2020 • Tesla’s Giga-factory will produce 35 giga- watts of batteries by 2020, more than 2013’s global batter production • Many new technologies in development Foldable Battery 42
  • 44. 44
  • 45. 45
  • 46. Longevity 31 72 1900 2015 2050 Four million years produced an 11-year increase from 20 to 31 115 years produced a 41- year increase Source: James Carey; Longevity United Nations Development Program 120 46
  • 47. Immune-Oncology Key Advantages of IO: 1. More Specificity 2. Less toxicity to normal tissue 47
  • 48. Sequencing Technology 1993: One researcher could read 500 letters of the human genome per day 2016: Computers can read more than 3 billion genome letters per day at a cost of $5,000. This is the equivalent of 6 million researchers in 1993 Dr. Francis Collins Leader of the Human Genome Project 48
  • 49. Hand Held DNA Sequencer 49
  • 50. CRISPR / CAS9 • Young technology but has fundamentally changed gene editing and medicine • Part of immune system of bacteria used to fight viruses • Simple, versatile and reproducible results • Can target multiple genes at once • Applications from basic research, drug development, agriculture and genetic diseases 50
  • 51. Longevity • Key pathways implicated in ageing beginning to be understood – nicotinamide, MTOR, AMPK, SIRT1 & other Sirtunis • Understanding a result of rapid sequencing and study of: – Yeast Saccharomyces cerevisiae – Mice Mus musculus – Fruit flies Drosophila melanogaster – Earth worms Caenorhabditis elegans 51
  • 52. Single Stock Ideas • Sony Corporation • FANUC Corporation • Gilead Sciences Inc • Galapagos NV • Arrowhead Pharmaceuticals Inc • Synergy Pharmaceuticals Inc • Regent Pacific Group • Condor Gold Plc • SalvaRx Group Plc 52
  • 53. Reading List 1. NEJM 2. BMA Journal 3. Spectator 4. Gavekal 5. Bioworld 6. Techcrunch 7. Economist 8. New Statesman 9. The Atlantic 10. National Review 11. NYT 12. FT 13. WSJ 14. Telegraph 15. Guardian 16. Times 17. Prospect 18. Country Life 19. Vanity Fair 20. The New Yorker 21. New Scientist 22. Scientific American 23. National Geographic 24. Wired 25. The Week 26. Money Week 27. Master Investor Magazine 28. Foreign Affairs 29. Rolling Stone 30. PC Advisor 31. How It Works 32. Berliner Zeitung 33. Le Monde 34. Investors Chronicle 35. Private Eye 36. Which 53
  • 54. More Information Additional information: • www.masterinvestormagazine.co.uk • www.fastforwardbook.com • www.crackingbio.com 54 Enquiries to info@masterinvestor.co.uk