Henry David Thoreau had a talent that I’ve never mastered.
He could stand in his bean field at Walden Pond, bend over putting his head down near his knees, and see the world not just upside-down but differently.
He could actually see things from a new intellectual perspective.
Travel is about as close to Thoreau and his bean field as I ever get. Travel reminds me that a U.S.-based perspective on the world isn’t the only perspective. That the global economy looks very different if you stand somewhere across the Atlantic or Pacific than it does from my home town of New York. That the unfolding of history is full of more twists and turns and forks not taken (per the great Yogi) than the experts on Wall Street or Capitol Hill imagine.
I’ve spent the last three weeks in Europe and the world looks very different from over here in ways that I believe are very important to investors. (I’m sure that the world would look equally different—although in quite different ways—from Brazil, or China or South Africa, or…. But one continent at a time.)
Let me give you my short “Five rules for global investing gleaned from a tour of Spain and France.”
- The U.S. dollar is shockingly weak. I know that we all know this intellectually. But there’s something about sitting down to a 6 Euro draft in a not terribly pricy Parisian café and realizing that you’re about to drink a $9 draft beer that brings it all home like a kick in the head from a Clydesdale.
I don’t know if the U.S. dollar is going to get a lot weaker from here (although looking at our deficits and financial system I suspect so) but it doesn’t have to: It’s current weakness is enough to push any reasonable portfolio toward the stocks of U.S. companies that sell a lot of stuff to customers that pay in something other than dollars. And that are paying for raw materials that are priced in dollars. That makes me interested in companies such as PepsiCo (PEP), McDonald’s (MCD), and Deere (DE). (Deere is in an ideal situation since it sells in international markets where the weak dollar gives it a serious price edge and its customers in the U.S. farm belt also make more money as a weak dollar makes U.S. wheat, corn, etc. more attractive to strong currency customers.) At the same time it makes me a bit leery of the shares of companies that sell in strong currencies against U.S. companies that sell in weak dollars. The weak dollar gives U.S. companies a substantial price advantage. And, of course, a weak dollar means constant upward pressure on the price of commodities, such as oil, that are priced in dollars. That’s good for the shares of commodity producers and not so good for the bottom line of commodity consumers. (PepsiCo, McDonald’s, and Deere are all in my Jubak’s Picks portfolio. See why at JubakPicks.com .)
- Infrastructure is incredibly expensive to build and incredibly valuable to have. In New York I take infrastructure such as the city’s sewers for granted. In Paris I take my kids on a tour of a few hundred meters of the city’s 2,100 kilometers of sewer tunnels. (And just for the record, they do smell but you do stop registering the odors after about 10 minutes. Which I’m not quite sure is a good thing.) A couple of investable conclusions leapt out at me during the tour. First, building a water and sewer infrastructure is really complicated work. The Romans left Paris (which they called Lutetia) with a system of aqueducts that brought in clean drinking water from the surrounding hills. The Vikings destroyed those aqueducts in the 900s and from then on until the nineteenth century the city dumped its waste into the Seine and drew its water from the river as well. That’s roughly 1,000 years to get it right. Second, inadequate infrastructure is a huge barrier to growth. In the seventeenth century Paris still had less than 20 public fountains supplying drinking water to its citizens. An army of 20,000 water carriers delivered pails of water to homes too far away to collect their own water. That system didn’t exactly lead to run away urban growth. (Population doesn’t expand rapidly when people keep dying from water-borne disease.) And third, spending on infrastructure never stops. The tourist brochure you get from the city of Paris at the beginning of your tour proudly notes that the city plans to spend $225 million in the first five years of its current plan to renovate its sewers. I readily admit to playing the pumping station video at the end of the tour several times trying to identify the companies that supplied the city of Paris with its current generation of pumps. No luck, I’m afraid. But it’s easy to put together a global list of infrastructure suspects that would include Flowserve (FLS), Siemens (SMAWF), Caterpillar (CAT), ABB (ABB), General Electric (GE) and Fluor (FLR).
- The battle to create global brands isn’t over and U.S. companies haven’t won. On the way from Barcelona to Granada our budget airline lost our luggage for four days. That set us off on a frantic shopping trip to replace essentials in the Spanish town of Ronda. (Ever try to buy a charger for a U.S. lap top in Europe?) I got to spend a lot of time in Spanish cell phone and electronic stores, in the cheaper Spanish clothing stores, in the personal products aisles of Spanish supermarkets. Now I grant you the Ronda isn’t Barcelona but the city does have a McDonald’s and a Burger King. Coke dominates the cold drink stands. And from the look of it Crest is the best-selling toothpaste in town. But a cell phone brand from the United States? Forget it. Nokia, Samsung, and LG dominated the streets of the cell phone happy town. Unless you’re counting Quiksilver (ZQK) as a major U.S. clothing brand, the big U.S. players were shut out of Ronda. Spain’s Zara, on the other hand, was well represented on the town’s main street with its kids store Kiddy’s Class. Incredibly cheap clothes that my kids thought were cool enough to wear. No mean task since my son is 14 and my eight-year old daughter is incredibly picky. I wouldn’t rush to pick winners and losers among U.S. and European brands since a new generation of global brands is being born in the world’s global economies. I’ll have more thoughts on that—with some names—in future posts and in a talk I’m giving at the MoneyShow’s first Toronto conference in October.
- The battle for global banking dominance is just getting started. Walk around the streets of Ronda or Granada or Cordoba or Barcelona and you’ll see a bank on just about every corner. Just like in New York. But I didn’t see any names that I recognized from New York except for HSBC (HBC) and Santander (SAN), which has just entered the New York market. Remarkably when I spent five days in Paris at the end of my trip I didn’t see any New York banks or with one exception any of the banks I’d seen in Spain. (The one exception was Spain’s Banco Bilbao Vizcaya (BBV). Could it be that Spain’s banks are the furthest along on the road to becoming truly European banks? Worth a long post in the not so distant future.) With the damage inflicted on leading contenders for the title of global bank—Citigroup (C), for example—this race is wide open and I think we’re just at the beginning of a reordering of the global bank pecking order again.
- And finally, it’s hard in the short-term to see the long-term. The U.S. simply doesn’t have enough history to make those of us who live here accustomed to thinking in long stretches of time. Go to what was once Cordoba’s great mosque (and is now a Roman Catholic cathedral) if you want to stretch your mental time line. It’s not just that the mosque, finished in the 13th century, was built on the foundations of a Visigoth church, which was built on the site of a Roman temple. It’s that this entire Moorish civilization, which conquered Spain in a great rush around 750, had vanished from Spain by the early years of the sixteenth century. I found that hard to wrap my mind around: As one of my guidebooks put it, it’s the equivalent to the Norman’s conquest of England in 1066 and all the subsequent centuries of Norman French culture being erased from the books in 1800 in favor of a Celtic reconquista that swept down from the mountains of Wales. Reading the history of the 200 years before Ferdinand and Isabella put an end to Moorish Spain in 1492, it’s clear to me that none of the petty warring Moorish kingdoms saw the end of their civilization on the horizon. Oh, sure there were calls for reform and actual movements of religious and political revival, but I haven’t seen any evidence that some Moorish think tank extrapolated from recent trends and released a report predicting the end. It makes me wonder if we’re doing any better as a civilization at connecting the dots. I personally believe the evidence that says global climate change is afoot, that we’re well on the way to exploding a demographic time bomb of aging, and that we’re running out of easy to exploit, conventional sources of key raw materials. But I also have to acknowledge that history has a, well, history, of adding new data points until a trend zigs left just when we thought it was going to zag right.
Welcome back from your summer vacation. Now it’s September and time to go back to work investing.