FT : Bitcoin has ambitions for gold’s role

Bitcoin has ambitions for gold’s role
After years of hostility to cryptocurrencies, central banks will permit them a limited role

Investors in bitcoin and other cryptocurrencies have enjoyed a phenomenal run, but they are now worried that Janet Yellen’s arrival as US Treasury secretary may herald a new era of hostility from regulators and central banks towards what boosters call “libertarian” forms of digital money.

In her last press conference as chair of the Federal Reserve in 2017, Ms Yellen said bitcoin was a “highly speculative asset” and “not a stable store of value”. These dismissive remarks were echoed by many other public officials at the time. Since then, however, the market value of bitcoin has roughly doubled. Digital currencies are here to stay.

In the first crypto frenzy of 2017-18, comedian Jon Oliver described bitcoin as “everything you don’t understand about money combined with everything you don’t understand about computers”. The technology aspects, particularly the blockchain network of digital ledgers that are used to record transactions, have not really lived up to the initial hype, but they are beginning to make progress. The issuance of $20bn in “initial coin offerings” seemed to contain elements of a speculative bubble, but the funds raised are now being used to launch projects broadly similar to other IT ventures in Silicon Valley.

Jay Clayton’s recent departure from the chair of the US Securities and Exchange Commission may result in less hostile regulatory scrutiny of these activities, especially if Gary Gensler, who teaches about digital currencies, replaces him.

However, resistance to digital currencies as payments and transfer vehicles is likely to remain. Partly because of high transaction costs, bitcoin is not widely used for payments, and its future role seems limited.

The outgoing Treasury secretary Steven Mnuchin has been working on new regulations to increase transparency in bitcoin transfers and reduce the scope for money laundering. Ms Yellen, in conjunction with the Fed, is likely to adopt an even more orthodox approach, treating the payments system as a quintessential public good.

The Fed is collaborating with foreign counterparts in investigating the development of central bank digital currencies. It is almost certain that CBDCs will eventually be issued in the major jurisdictions, following China’s lead. However, they will be denominated in national currencies, not crypto.

Private competitors denominated in genuinely new currencies, such as bitcoin, will be heavily regulated or actively discouraged. Hybrid stablecoins, such as Facebook’s libra, that are pegged to a single currency or other real assets may be more welcomed by central banks, if they were directly transferable into traditional currencies. Furthermore, they may not be powered by blockchain. Each of the major central banks may develop its own distributed ledger technology.

That still leaves a role for crypto as an investment vehicle and store of value. Can bitcoin seriously compete with gold as a safe asset for the largest investors? History, regulation and market volatility make that seem improbable, but it is beginning to develop a more important role. Many big hedge funds and some conventional asset managers have followed Paul Tudor Jones in adopting bitcoin as a core hedge against inflation. While this may have seemed attractive when central banks were in effect creating money by buying up government debt last year, there are few signs of inflation on the imminent horizon.

Yet bitcoin prices have continued to rise, apparently driven by a narrative that holds that a privately created asset, which in theory has a finite supply, cannot be “printed” like the “legacy” fiat currencies.

According to Gold Hub, gold stocks held above ground amounted to 198,000 tonnes at the end of 2019, with about 57,000 tonnes of proven reserves below ground. This total stock would be valued at about $17tn in today’s prices. The latest market value of bitcoin is about $0.6tn — bitcoin bulls see this as a gauge of how much further its price could rise.

There seems little reason on monetary policy or financial stability grounds why regulators should be worried about cryptocurrencies competing with gold as a store of value.

The crypto world is currently in a frenzy of short-term speculation. However, if investors continue to buy into the dubious narrative that these private currencies are “safer” than those controlled by the central banks, they could rise much further in market value in coming years.

Stranger things have certainly happened in financial markets.

The writer is chairman of Fulcrum Asset Management

>>> Barron's Weekend Summary

Barron's Weekend Summary: Despite the recent political mayhem, the economy is gearing up for post-pandemic recovery

* Cover story: Despite the “historic mayhem in the nation’s capital, stocks are rallying on the trillions of dollars in stimulus that may only be accelerated under the new administration, a chaotic political season is winding down, while the economy is gearing up for a post-pandemic reopening”; Domestic policy, trade relations, and additional efforts to revive the economy should more predictable under the Biden administration—and now might not be a good time to own anything defensive.
* Tech Trader: +/- FB, TWTR: Social media companies, which were already facing calls for greater regulation, are now taking heat for their role in creating the tense political climate that led to a mob taking over the US Capitol, and the risks to their operations and to their shareholders are rising.
* Trader: “Whatever is propelling the market higher, it’s starting to get worrisome. BAC’s Bull & Bear indicator hit 7.1 this past week, up from 6.7 in mid-December, and is getting ever closer to where the indicator starts to signal extreme bullishness.”
* Interview: Carmen Reinhart, chief economist of the World Bank, says there are limits to what central banks can do help the economy, and that all of the easy money in the world can’t lead us to prosperity, notwithstanding the stock market’s belief to the contrary.
* Profile: Nancy Zevenbergen, founder of Seattle-based Zevenbergen Capital Investments—which runs three mutual funds, all of which rank in the top one to two percent of large growth funds—talks about founder-led firms, the lack of women leaders at technology companies, and what she’s excited about now.
* Features: 1) Target-date funds are about to undergo a major facelift—these asset-allocation funds in 401(k) plans, with end dates that match a person’s expected retirement, will soon add more unusual investments, such as annuities and perhaps even private equity, to their stock/bond portfolio mix; 2) Positive on WMT: Socially conscious consumers and investors have long criticized the retailer for its massive carbon footprint, its sale of assault-style rifles, and its low hourly minimum wage, but the company is increasingly adopting socially responsible policies and trying to create positive change for all stakeholders; 3) Cautious on GME: The company is in a problematic position now that almost all videogames are available for download, and the thrill of being an early adopter has gone virtual—analysts see earnings, which have declined for four consecutive years, going deeply negative in the 2021 fiscal year that ends this month, and any rebound later this year is likely to be fleeting.
* Mutual Funds Quarterly: 1) “The broad indexes, so often touted as diversified, really aren’t—not anymore. That’s because the market itself isn’t truly diversified. That sets investors up with a conundrum: What does it mean to own a diversified portfolio if the S&P 500 itself is at its most concentrated in decades? And the bigger question: Is diversification still important?” 2) As of December 31, 2020, the average return of a vintage 2020 target-date fund was 10.8 percent, one percentage point lower than the 11.7 percent return for a balanced fund with a 50–70 percent equity allocation, according to Morningstar Direct—“For investors in these set-it-and-forget-it products, 2020’s performance offers reason for comfort.”
* European Trader: The Brexit trade deal between the UK and the European Union has boosted hopes that 2021 will be a good one for equity investors in British companies—the accord means firms have avoided some additional tariffs and the potential for significant border delays when importing and exporting goods.
* Emerging Markets: Bitcoin mining has long been dominated by China, where entrepreneurs embraced the cryptocurrency’s ecosystem early on, while Westerns remained wary—but regulatory and other problems in the country have opened a window for non-Chinese miners, and a near-quadrupling of Bitcoin prices since October promises fatter profits.
* Commodities: “Palladium tallied a fifth straight year of gains in 2020—and the rally shows no signs of letting up. Greater restrictions on air pollution and a likely rise in travel is expected to boost demand for the metal, which is used in automotive parts.”
* Streetwise: Leland Miller, chief executive of China Beige Book, says China’s official story about rebounding from an economic downturn is accurate, but the recovery isn’t especially strong, and is driven too much by increased production and not enough by private household demand.

>>> Sriwijaya Air Flight 182 crashed into the Java Sea shortly after takeoff fro

Sriwijaya Air Flight 182 crashed into the Java Sea shortly after takeoff from Jakarta, Indonesia; plane was carrying 62 people; some debris has been found but search has been delayed by darkness and bad weather
- The aircraft was a 26-year old Boeing 737-524 operated by Sriwijaya Air
- Four minutes after takeoff in a heavy rain, the plane suddenly lost 10,000 feet of altitude in less than a minute
- Sriwijaya Air, which is Indonesia’s third-largest air carrier and began operations in 2003, has never had a fatal crash before
- Indonesia safety officials say all passengers on the missing plane are Indonesians

WSJ : The Tiny Satellites That Will Connect Cows, Cars and Shipping Containers t

The Tiny Satellites That Will Connect Cows, Cars and Shipping Containers to the Internet
In the shadow of giants like SpaceX, more than a dozen startups are building their own globe-spanning networks of nanosatellites, enabling a new kind of everywhere, all-the-time connectivity for people, animals and assets on Earth

Scientists who track the health of Adélie penguins on the ice-covered wastes of Antarctica are managing their cameras from thousands of miles away—via tiny satellites orbiting above our heads.

Energy companies are exploring using the same technology for monitoring hard-to-reach wind farms; logistics companies for tracking shipping containers; and agribusiness companies for minding cattle. It even helped National Geographic track a discarded plastic bottle from Bangladesh to the Indian Ocean.

In the near future, it isn’t unreasonable to imagine this evolving satellite technology could put a distress beacon in every automobile, allow remote monitoring of wildlife in any environment on earth, and track your Amazon shipment—not just when it’s on a truck, but backward, all the way to the factory that produced it. And it could be done at a fraction of the cost of earlier satellite tracking systems.

These novel networks of nanosats—aka cubesats—are a result of a number of factors.

First, the satellites themselves are smaller, cheaper and more capable than ever. The smartphone industry has miniaturized all electronics, benefiting everything from cars to drones. Then there are falling launch costs, due to companies like SpaceX, active national space programs like India’s, and an array of new launch technologies, from reusable boosters to 3-D-printed engines.

Just as important, there’s the rollout and adoption of new long-distance, low-power wireless communication standards that can work just as well in outer space as they do on the ground.

Like so many innovations in their early days, from the internet to the smartphone, no one is quite sure what low-cost, low-power data relays from space will enable—or whether there will be enough demand to sustain the many companies jostling to provide it. In the next year, hundreds of satellites from more than a dozen companies are set to launch.

These startups aren’t going head-to-head with more expensive and ambitious efforts from the likes of Amazon and SpaceX, which aim to deliver high-speed internet to households and businesses. Those “megaconstellations” of hundreds or even thousands of relatively large satellites cost billions of dollars; networks of up to 100 nanosats can cost in the tens of millions, say their operators.

The truly global “Internet of Things” these tiny satellites can enable would have been much more difficult to achieve even 24 months ago, says Alasdair Davies, director of the Arribada Initiative, which designs and builds satellite tracking and connectivity systems for researchers, including the penguin-watching ones.

For the penguin project, Mr. Davies created low-cost cameras that can withstand the harsh Antarctic conditions. While the images they grab are stored on SD cards and must be physically collected once a year, the cameras can report their status—low battery, covered in ice, tipped over, etc.—to their keepers in London via tiny satellites.

Lacuna Space is a small Harwell, U.K.-based startup with three communications satellites in orbit and two more on the way. Two are about the size of a briefcase, the third as big as a shoebox.

Like nearly all nanosatellite constellation startups, Lacuna Space needs to deploy dozens more satellites to cover the entire earth at all times. Presently, many customers testing the company’s technology can only connect to the satellite two to four times a day, but for applications like monitoring remote infrastructure, such as the penguin cameras, that’s often enough, says Rob Spurrett, Lacuna Space’s chief executive and founder. Lacuna Space’s satellites connect to things on the ground using LoRaWAN networks, already widely used for earthbound devices sold by Amazon and others.

Netherlands-based Smart Parks also uses LoRaWAN to connect rhinos and elephants into a sort of Internet of Megafauna. This is useful for managers of wildlife refuges who need to monitor these animals to prevent poaching—and bring them back when they wander beyond park boundaries.

An elephant collar Smart Parks is testing in Malawi connects with LoRaWAN ground stations there, but can also connect to Lacuna Space’s satellites, says Smart Parks co-founder Tim van Dam. Once that constellation is fully deployed, his company will use it to track animals into places—deserts, forests, and transborder parks between countries in southern Africa—where no other wireless signal is available. Because LoRaWAN systems require relatively little power and can work with flat antennas, they’re well-suited to elephant collars, and should last up to 10 years on a single battery, says Mr. van Dam.

At least 16 companies are working on launching similar types of satellite networks, according to space research firm NSR. Each is leveraging different combinations of wireless technologies, satellite sizes and onboard capabilities to differentiate from one another, while also competing on cost.

Swarm Technologies, based in Mountain View, Calif., could complete the first commercially available nanosatellite constellation that enables customers to reach a satellite whenever they choose, says CEO and co-founder Sara Spangelo. Swarm has already launched 45 satellites, 36 for commercial customers and the rest experimental. The company expects to launch 36 more from Florida on a SpaceX Falcon 9 rocket on Jan. 14, with a total of 164 aloft by the end of 2021, with 150 of them active. (Some will be backups.) Dr. Spangelo is a former NASA Jet Propulsion Laboratory engineer and “failed Canadian astronaut”—she made it to her cohort’s final 32 before being cut. Swarm is keeping costs low by producing satellites that are extra small. Each one is about the size of a grilled cheese sandwich.

Swarm’s satellites communicate in the VHF spectrum—adjacent to but not overlapping with the spectrum used by shipboard radio systems—which allows for good signal penetration, even in cities and indoors. Two years ago, Ford Motor Co. announced a partnership with Swarm. Whatever they’re working on is still under wraps.

Switzerland-based Astrocast operates satellites that are about 10 times as large as Swarm’s but are intended to have more capabilities. Because they have onboard propulsion, they can push themselves into different orbits, which could help lower launch costs by allowing them to maneuver into an orbit on their own. Propulsion also allows them to be “de-orbited” when they’re no longer useful, so they don’t become hazardous space debris.

Astrocast was founded in 2014, launched its first two satellites in 2018 and 2019, and plans to launch five more in January, on the same SpaceX rocket that will lift Swarm’s satellites.

The company, which designs and manufactures its own satellites, has benefited from an array of off-the-shelf electronics, many of which are similar to those used in the automotive industry, says CEO Fabien Jordan. Car parts are designed to withstand intense vibration and wide temperature variations—and are therefore durable enough to be used for Astrocast’s satellites. Whereas traditional satellites, designed to stay up for many years, must be hardened against cosmic radiation and other space hazards, Astrocast’s low-earth-orbiting satellites are only intended to last three to five years.

And while companies like Amazon and SpaceX plan to use radio frequencies that allow for high-bandwidth internet access, these smaller players are using spectrum that allows them to send and receive smaller amounts of data with less power.

Lacuna Space’s preferred LoRaWAN standard uses unlicensed spectrum, which helps keep costs down. Astrocast uses L-band wireless spectrum, which is better for penetrating vegetation and even buildings. It required the satellite company to acquire a license, however, as did the VHF spectrum used by Swarm.

For applications where a client just needs to know where something is and what it’s doing, the low bandwidth afforded by these constellations is adequate. A typical packet of information sent through the Swarm constellation is being transmitted at 1 kilobit per second. “We like to joke it’s like the dial-up internet of the 1990s,” says Dr. Spangelo. Each Swarm satellite is intended to last four years, after which they should burn up in the atmosphere.

The trade-off for minimal bandwidth is that it allows costs to stay low, which is critical for customers that may want to connect hundreds or even thousands of objects directly to satellites.

The proliferation of these nanosat companies is likely to end in consolidation, says Aravind Ravichandran, an independent consultant in the space industry. He expects some companies to go out of business while others merge or get bought by traditional satellite communication firms.

“At this point there’s basically one IoT-from-space company per country. It’s just crazy, and I don’t know if you have that much demand,” he adds.

It’s a bit like the first internet bubble, says Mr. Ravichandran, when companies furiously built out basic infrastructure like fiber-optic backbone, then went bankrupt when it turned out there weren’t yet enough customers who needed it yet.

On the other hand, the fact that there are so many different kinds of ways to build and deploy satellites, each communicating with the ground in different ways, means there could be room for quite a few different companies to succeed in connecting objects to space, says Mikhail Kokorich, CEO and founder of Momentus, a company that has developed a kind of very-last-stage mini-rocket to help cubesats and nanosats get to their final orbit, after they’ve been released by a larger rocket.

With their constellations rapidly expanding in the next year, many of these companies will soon need more funding, or customers, or both. Their technology and business models will be tested in the harshest environment there is—not the cold vacuum of space, but the competitive landscape of high-growth startups.

NY Post : Pistons owner Tom Gores’ buyout firm reportedly eyes $4B sale

Pistons owner Tom Gores’ buyout firm reportedly eyes $4B sale

Portable toilets vendor United Site Services is exploring a sale that could value it at around $4 billion, including debt, as its hand wash stations business sees strong demand during the pandemic, people familiar with the matter said on Friday.

Platinum Equity, the buyout firm which owns United Site Services, has hired investment bankers to advise it on a sale process, the two sources said, requesting anonymity as the matter is confidential.

Los Angeles-based Platinum is run by billionaire founder Tom Gores. The firm says it has around $23 billion in assets under management and also owns the NBA’s Detroit Pistons.

United Site Services was valued at just $1.15 billion when Platinum Equity acquired the Westborough, Massachusetts-based company four years ago, according to credit ratings agency Moody’s Investors Service. It now has 12-month earnings before interest, taxes, depreciation and amortization (EBITDA) of more than $300 million, according to the sources.

Platinum declined to comment. United Site Services did not immediately respond to a request for comment.

The COVID-19 pandemic has accelerated the growth of the hand wash stations industry, with the market seen growing from $919.4 million in 2019 to almost $1.5 billion by 2027, according to research firm ResearchAndMarkets.

Platinum Equity acquired United Site Services in August 2017 from private equity firm Calera Capital. In addition to portable toilets and hand wash stations, the company also rents out temporary fencing, roll-off dumpsters and portable storage.

Moody’s said last month it expected United Site Services to continue to benefit from strong market demand in the sanitation sector, recognize benefits from recent cost actions and acquisitions, and drive margin improvement.

FT : China will vie to become world financial centre, says Ray Dalio

China will vie to become world financial centre, says Ray Dalio
Bridgewater founder calls 2020 a ‘defining year’ for country’s financial markets

China will emerge as a rival to New York and London as the world’s financial centre, according to Bridgewater founder Ray Dalio, who is betting heavily on what would be an epochal shift in the global economy. 

2020 was a “defining year” for Chinese financial markets, the co-chief investment officer of the world’s biggest hedge fund told the Financial Times last month, with the coronavirus crisis starkly highlighting the country’s economic outperformance — and spurring Rmb1tn of investment inflows.

Although China’s financial system remains less developed than its western peers, it will be only a matter of time before it is a contender for Wall Street and the City of London’s supremacy, Mr Dalio said.

“China already has the world’s second largest capital markets, and I think they will eventually vie for having the world’s financial centre,” Mr Dalio said. “Throughout history, the largest trading countries evolved into having the global financial centre and the global reserve currency.

“When you see the transition from one empire to another, from the Dutch to the British to the American, to me it just looks like that all over again,” he added in an interview with the FT in mid-December, shortly before the death of his son.

Foreign investment has been lured into China by a combination of its recovery from the pandemic — which means its economy will have grown about 1.9 per cent last year, according to the IMF, even as developed peers suffered their biggest recessions in generations — and moves to include its stocks and bonds in several influential financial indices. 

Tens of billions of dollars worth of inflows from international investors helped lift the CSI 300 mainland stock index by 27 per cent in local currency terms during 2020. Chinese government bonds, meanwhile, still offer yields far greater than developed countries’ debt. 

Many analysts and money managers expect international investors to continue ratcheting up their allocations to China in the coming years. “I have been immersed in China since 1984 and bullish on China for a long time . . . and all the time I got scepticism — up until now,” Mr Dalio said.

Investing in China clearly brings challenges and political risks, highlighted by the suspension of Ant Group’s planned flotation last year, when Beijing put on ice what was set to be the world’s biggest IPO.

“Nothing’s perfect, but you’ve got to diversify,” Mr Dalio said. “The capital markets are not only growing, they're good investments, and the world is underinvested there.”

Mr Dalio predicts China could in time account for a “very meaningful” part of Bridgewater’s business, which has about $140bn in assets under management. The onshore, renminbi-denominated version of its All Weather China Fund has about $300m under management, and returned 24.6 per cent last year.

All Weather is a range of “risk parity” funds, a passive strategy designed to generate steady returns by investing in a variety of markets, weighted according to their volatility. 

The China offshore version has about $4bn in assets and returned 11.9 per cent in 2020, while the flagship Pure Alpha fund — a more traditional “macro” hedge fund that seeks to profit from economic trends — lost 7.6 per cent, according to people familiar with the matter.

Mr Dalio expects to introduce something more similar to Bridgewater’s Pure Alpha Fund in China in the coming years. “As we learn more, develop our expertise and build our edges, we will build that out more completely,” he said.

FT : Veolia prepares for shareholder showdown in vicious Suez takeover fight

Veolia prepares for shareholder showdown in vicious Suez takeover fight
Water-waste battle has become France’s most bitter in years

Veolia, the French water and waste group trying to take over rival Suez, appealed directly to its target’s shareholders this month, urging them to ask themselves: “Is the board acting for my benefit, or its own?”

The open letter from chief executive Antoine Frérot was the latest attack in the most vicious French takeover battle in years, which has dragged both sides through the courts and divided investors in Paris into opposing camps. 

Suez, which traces its roots to the mid-19th century construction of its namesake canal, is fighting tooth and nail to stay independent.

Chief executive Bertrand Camus is refusing to engage with Veolia, now its largest shareholder after buying almost all of a stake held by energy group Engie. That stance became tougher to maintain this week after Veolia sent a detailed offer to the Suez board for the 70.1 per cent of the group it is still trying to buy.

To win leverage in the fight Suez created a poison pill in September, putting its French water assets into a Dutch foundation mandated to protect them for four years unless the Suez board decides otherwise.

Veolia, which had planned to sell those assets to meet competition concerns, must now try to overturn that move. It has options, including winning a protracted court battle, persuading Suez to reverse course — or replacing the Suez board at a shareholder meeting next summer.

“The current board is refusing to start a dialogue,” Mr Frérot told the Financial Times. “So, if it refuses up until the very end, this will be done with another board. But our project . . . it will be completed.”

Veolia, which wants to create “the world champion of the energy transition” by investing in technology such as carbon capture and air filtration, paid €18 per share for the 29.9 per cent stake it bought from Engie. It says it will pay the same for the rest of the shares, valuing Suez at more than €11bn before debt of roughly the same amount.

But a showdown vote at an annual meeting would be a risk, for Veolia as much as Suez. Mr Frérot has to fulfil consultation obligations with Suez unions before he can unlock his newly bought voting rights. And even then, to vote at a shareholder meeting of a company it is trying to buy requires permission from the EU competition authority since the competitive process has not been completed. Lawyers on both sides are confident they will prevail.

Suez, on the other hand, has to convince shareholders it is more valuable independent by putting an alternative bid on the table or demonstrating it can offer sufficient compensation for rejecting Veolia. 

Even if Suez wins the day, it could still be stuck with Veolia as an anchor shareholder unless it can persuade it to walk away, something that would be difficult unless it can quickly boost its current share price of about €16.

“Letting this get to a sort of Yes or No vote is dangerous,” said one senior investor in Paris. “Unless they are both gamblers, they won’t want this to get to the AGM.”

Suez is working on counter-propositions but it remains to be seen if any can match Veolia’s offer, which comes laden with promised synergies, or how many big investors would want to get involved in such a hostile situation.

What is needed, say advisers to both companies, is someone who can play peacemaker and get the two sides talking. But there may already be too much bad blood.

Mr Camus and Mr Frérot have barely exchanged a word since the bid from Veolia was made public at the end of August.

Throughout July, Mr Frérot had tried to talk to Mr Camus about a possible merger, arguing that if Engie was planning to sell down its stake then the status quo would anyway be upended. Mr Camus said he was not interested, according to insiders.

And the last time there was anything close to a deal acceptable to Suez was early October, after Engie’s largest shareholder, the French state, which found itself awkwardly in the middle of the hostile bid, demanded the two sides make another effort to reach a compromise.

Mr Frérot and Suez chair Philippe Varin met at Engie’s headquarters just before the stake sale to Veolia went ahead — up the corridor from a painting showing the Venetians presenting their plans for what would become the Suez Canal to an Ottoman sultan in the 16th century.

According to people familiar with the matter, Mr Frérot put an expanded carve-out of Suez’s French water business on the table, worth about €5bn in annual revenues, and which could be run by the current management. 

But Suez refused — in part, say people close to the group, because of fears that a business largely limited to French water would not be able to stay relevant. 

Some advisers think a return of that plan, perhaps funded by private equity and adjusted to address Suez’s concerns, could allow for a relatively friendly denouement. Senior figures at Suez say they are open to talks continuing.

But Mr Frérot is scathing about what he sees as gamesmanship from Suez during the last round of negotiations, saying “when they saw that I was ready to make it €5bn, they ran away.”

And there is a limit to how far he will go.

“Today if they say ‘we are OK with discussions [of a carve out] around the €5bn mark’, I would be OK with that,” he said. “But if it’s €10bn, no, it’s not possible.”

Mr Frérot insists he is in a strong and improving position.

“Time is on our side,” he said. “With every day that passes we get closer to the end”.

Barrons : Here Comes Joe Biden’s Washington. Consider These Stocks and Funds for

Here Comes Joe Biden’s Washington. Consider These Stocks and Funds for Your Portfolio.

The recent turmoil in Washington, D.C., could easily have upended stocks, and may well have done so in another era. It isn’t every day that a mob incited by the president storms Capitol Hill.

But this is a market determined to march higher, and it’s not about to be derailed—even by historic mayhem in the nation’s capital. Stocks are rallying on the trillions of dollars in stimulus that may only be accelerated under the new administration. A chaotic political season is winding down, while the economy is gearing up for a postpandemic reopening.

Investors need to keep their eyes forward and look ahead to a Joe Biden presidency: to more-predictable domestic policies, smoother trade relations, and additional efforts to revive the economy. Now might not be a good time to own anything defensive. Barron’s asked portfolio managers and investment strategists which stocks and exchange-traded funds to consider for the coming months.

That’s not to say that a Washington controlled by the Democrats—as this past week’s Senate runoff elections in Georgia determined—will be entirely friendly to investors. The Democratic agenda includes corporate and individual tax increases, heightened regulatory oversight, and such ambitious social and economic policies as a Green New Deal, health-care reform, and student-loan forgiveness.

All of that could drive up deficit spending and fuel inflationary pressures, putting the Federal Reserve in a bind as it tries to keep interest rates down.

Wall Street, however, isn’t trembling at the prospect of Democrats taking charge of both houses of Congress and the White House for the first time since 2009. Quite the contrary. The markets are anticipating another quick hit of fiscal stimulus, including checks for millions of Americans and aid for state and local governments. Bond yields are up on expectations of heightened inflation and faster growth early in Biden’s term.

History suggests that equities will do fine with Democrats in Washington. The S&P 500 index has returned an average of 14% a year when Democrats have controlled Congress and the White House since 1948, according to DataTrek Research. The Dow Jones Industrial Average has gained an average of 15.7%, according to Bespoke Investment Group.


The markets appear to be betting on politicians who talk of home runs, but hit legislative bunts. Democrats have neither the political capital nor the votes in Congress for sweeping change. The party holds a slimmer majority in the House than it did before the November election. Just one Democratic defection in the Senate would be a legislative deal killer; that could leave centrists like Democrat Sen. Joe Manchin of West Virginia and Republican Sen. Susan Collins of Maine wielding more power.

“The threshold for another stimulus bill is low, but the bigger grand plans will take longer,” says Chris Senyek, chief investment strategist at Wolfe Research. The average tax-reform bill takes 15 months after a new president is sworn in—plenty of time for markets to keep rallying and adjust. “Stocks are in a bubble,” Senyek says, “but we’re not going to fight it.”

Early winners have included small-caps, clean tech, cyclicals, and value. A steeper yield curve would be delightful for banks, insurance companies, and other financials.

Some sectors could face more pressure. Real estate and utilities are falling behind as bond yields jump. Energy, financials, and health care could see tougher regulation under Biden.

Big Tech is a toss-up: It’s in the crosshairs of both political parties and faces antitrust actions in the U.S. and Europe. Multiples are steep, and the sector is vulnerable to higher interest rates as investors rotate from growth to value.

Yet investors are still expected to put a premium on secular growth. Based on historical trends, defensive sectors are likely to trail the S&P 500 by 12 percentage points if U.S. growth hits consensus estimates of 4% this year, according to Jim Paulsen, chief investment strategist of Leuthold Group. If gross domestic product accelerates to 6%, which he expects, defensives could trail the market by 23%. “Investors who thought they were responsible—avoiding the popular, risky stocks—could be subject to unexpected pain in 2021, due to a year of growth not experienced in decades,” Paulsen says.

All of this presumes that Washington continues to pile on stimulus and that the markets aren’t spooked by countervailing forces: higher corporate and individual taxes, steeper interest rates, or a geopolitical crisis. Expectations for the pandemic to recede rapidly are baked into Wall Street profit estimates. Markets are also counting on an easing of trade frictions with China and more favorable trade policies overall, neither of which is assured.

And the market may be underestimating the impact of the deregulatory drive that took place under Trump.

“The deregulatory impact of the past four years was greater than the tax cuts,” says George Maris, co-head of equities at Janus Henderson. Economists estimate that deregulation fueled more than $100 billion in economic activity annually, he adds. “Companies felt extraordinary relief from a less antagonistic relationship with Washington.”

Still, the negatives are a ways off, if they materialize at all. Without killing the filibuster in the Senate, Democrats will have to use budget reconciliation to pass a tax overhaul or infrastructure plan with a simple majority; that probably means making deals with moderates. Regulatory overkill may also be less likely.

“Regulation was so severe under Obama that I think there’s a feeling it went too far,” says Michael Kagan, a portfolio manager with ClearBridge Investments. “This is going to be a government led by moderates.”

Riding the Blue Waves
How the Dow Jones Industrial Average has performed since World War II when Democrats control both houses of Congress and the White House.
Source: Bespoke Investment Group

Tax increases are probably a 2022 event, phased in gradually and coming only if the economy gains a stronger foundation. Even then, the deficit hawks will have less firepower if the Fed can hold long-term bond yields near historic lows. The Fed can now sell 30-year Treasuries at a 1.63% rate and pay 0.89% in interest on 10-year notes. Inflation will have to cooperate for rates to stay this low, and the Fed may need to reinvent the twist, in buying and selling short-term and long-term securities.

If it works, Washington would have a few more years of nearly free money to finance new spending, avoiding the need for steep tax increases.

One way to play this market is to ride the “renormalization” wave: travel, leisure, and other consumer-discretionary stocks. Among the stocks recommended by Wolfe Research’s Senyek are Walt Disney (ticker: DIS), Booking Holdings (BKNG), Darden Restaurants (DRI), and Southwest Airlines (LUV). The Invesco Dynamic Leisure & Entertainment ETF (PEJ) also captures the theme.

“Everybody has been cooped up, and if vaccine rollouts are successful, people will be booking two months of vacations this summer,” says Jim Besaw, chief investment officer of GenTrust, who holds the ETF for clients.

The home builders have a strong setup. Mortgage rates are low, demand is rising as people move to suburbs, and supplies of new houses have been constrained by construction delays and a lack of finished lots. Toll Brothers (TOL) is Kagan’s top pick, trading at 1.3 times book value, a multiple he thinks could double through the cycle. He also likes home builders Lennar (LEN) and NVR (NVR).

Ben Phillips, chief investment strategist at Savoie Capital, a family-office advisor, sees a few policy themes as winners, like cybersecurity, clean energy, health-care technology, and infrastructure. His cybersecurity picks include Okta (OKTA), Zscaler (ZS), and CyberArk Software (CYBR).

Clean energy looks attractive, long- term, though the sector is crowded and ripe for a pullback. The iShares Global Clean Energy ETF (ICLN) is up 14% since the Georgia runoff elections and is ahead 60% in the past three months, pushing up multiples sharply. Bulls argue that the sector is making up for a lost decade; the ETF lost 30% from 2010 to 2020 including dividends.

Phillips sees the green theme playing out for years, supported by more-favorable government policies, asset flows into sustainable funds, and initiatives to decarbonize the global economy. His picks include a couple of limited partnerships: Brookfield Renewable Partners (BEP) and Hannon Armstrong Sustainable Infrastructure Capital (HASI). Brookfield owns more than $50 billion in assets like renewable-energy power plants, and has increased its distribution by 6% annually for two decades; the units yield 2.3%. Hannon invests in green projects, including wind, solar, and commercial energy-efficiency, managing $6.6 billion in equity and debt investments. The partnership units yield 2.0%.

Infrastructure-related stocks have already jumped on prospects for a spending plan finally making it through Congress. Last summer, House Democrats passed a $1.5 trillion package. Senate Republicans dismissed it as a green giveaway, but they have indicated support for increased highway and other infrastructure spending. It may take just a couple of centrists to push a bill through.

Vulcan Materials (VMC), a supplier of construction aggregates, asphalt, and other materials, is already up 10% this year, but still looks attractive, says Kagan of ClearBridge, partly because housing construction could also lift revenue above current estimates. “Vulcan is a name we own and like a lot,” he says.

Maris also likes the backdrop for materials and industrials. Copper demand is outstripping supply, he says, and the industry has consolidated. Rio Tinto (RIO) and Teck Resources (TECK) look attractive. Industrial equipment maker Parker-Hannifin (PH) should see margins expand, and it sells a mix of “short-and-long cycle” products, supporting revenue growth throughout a cyclical upswing.

Financials are starting to awaken. The Financial Select Sector SPDR fund (XLF) is up 23% in the past three months, more than doubling the S&P 500’s gains. A steeper yield curve would work wonders for the sector, reviving profits on loans and underlying portfolio assets.

Brokerage firm Charles Schwab (SCHW) makes a killing on interest income; the stock has gained 56% in the past three months and is emblematic of expectations for a steeper yield curve and higher short-term rates. Kagan likes Bank of America (BAC) for its diversified operating profile that includes brokerage, advisory, consumer, and commercial banking.

Another stock to consider is insurance giant Travelers (TRV). Insurers benefit from higher yields on their investment portfolios. Payouts on claims are running below average, thanks to less mobility in the workforce and fewer accident claims. Pricing for commercial and property insurance, meanwhile, is looking strong.

Of course, there’s another way to play all these themes: Berkshire Hathaway (BRK.B). Warren Buffett’s conglomerate offers exposure to insurance, housing, railroads, and energy, along with a portfolio of growth and value stocks handpicked by Buffett and his team. Berkshire stock is up just 3% in the past year and looks relatively cheap at 1.2 times book value. Buffett is also sitting on $145 billion in cash and short-term securities.

Whatever happens in Washington, that’s money that probably won’t be wasted.