There’s not much to debate. The consensus is low growth, waning profits and a slow hard grind from here.
First…there’s the stressful rate pause. Output growth isn’t living up to expectations and so more than a few central bankers have changed their tune on where interest rates might head next.
For us Aussies, the next move might be down.
Even the Morrison government is trying to lend a hand. They plan to handout tax cuts to low- and middle-income earners. Those handouts are something like $1,080 and maybe another $125 on top of that.
Extremely low yield bonds are adding to the bearish bent out there. These low — and in some cases, negative — yields say a lot about investors’ expectations.
They’re expecting the economy to do poorly. They’re expecting rates to come down. And they’ve adjusted their bond positions to reflect that.
Even the central bankers are rushing to safe havens. In our latest Money Morning video, Selva and I discuss exactly that and whether it’s time to consider buying gold…
There’s also a small minority on the other side of the aisle. And when they look out to the horizon they don’t see doom and gloom. They see excitement, growth and even more opportunity…
Masayoshi Son is one of those people.
His story is really incredible. Here was an immigrant kid living in the poorest part of Japan. His only hobby was reading, while cooped up in his family’s mug shack.
But this kid had fire…he had a desire to achieve in life.
And that’s exactly what he did. He’s a business owner, inventor and now one of the richest men in Japan. He’s also managing maybe the biggest technology fund in the world.
Masayoshi has already put US$70 billion of the US$100 billion he has to work. But he’s now looking for more. He wants another US$15 billion. Clearly what he has now is not enough to buy all the wonderful tech stories he likes.
They were with bitcoin when it ran up in 2017. They were with it when it came back down in 2018. Now, the digital token is up as much as 22% in the last seven days. It’s got investors wondering…will we see another rapid rise in this new form of money?
If I have to pick sides, I don’t think I’d fall into either camp.
Economic figures don’t look great. Asset prices, as compared to income streams, look even worse. But that doesn’t mean there are no opportunities out there.
You can find growth. You can find excitement. You just need to know where to look. And today, I want to show you maybe one area of the market where you could find both…
How not to invest in driverless cars and EVs
How can you invest in the future?
Driverless cars and electric vehicles (EV) seem like a pretty big deal. The latter, for example, could ‘comprise more than half of all new car sales in 2040,’ Bloomberg writes.
Now, that could be a lot of cars. And someone is going to benefit from those sales. But it won’t be the companies making the cars.
Why? Well, just look at one today, what do you see?
I’ll tell you what I see (General Motors)…
Source: GM 2018 10-K
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Declining sales growth…eroding gross profit margins…a lot of debt and erratic returns. FYI, this was the same company that went belly up in 2008. Yet look at the same company in the 1970s and there’s little to no comparison.
Bruce Greenwald of Columbia Business School points out that GM’s ‘profit margins were 40%’ in the 70s. They also had massive returns on invested capital (ROIC).
In layman’s terms, ROIC is the earnings (return) a business can produce by using debt and equity (invested capital). ROIC was up at 28% in the 80s. It declined to 11% in the 90s. Today, ROIC sits at about 1% for GM.
I don’t want to give the impression I’m just picking on GM. This is an industry wide problem. Most automakers generate terrible returns. It’s not unlikely for most automakers to have a string of losses over many years.
And it’s all because of global trade. It destroyed the best thing companies like GM had going for it: a local customer locked in to buy from local manufacturers.
Today, with global trade and globalism, automakers in China, India and Mexico can all produce cars, send them out to the world and flood the market with choice.
Prices have come down. Luxury brands are seeing volumes decline, which increases their average unit cost.
What you get is a waning industry, where profits are barely enough to keep things going. So if you want to invest in the future of mobility, forget about automakers. Focus instead on the smaller firms that enable things like driverless cars and EVs.
The Holy Grail of EVs
There are companies Down Under working on the biggest problems facing EVs: re-charging time and capacity. Bloomberg writes:
‘The viability of electric vehicles depends in part on a manufacturing plant in eastern Australia, where gleaming white cabinets the size of large refrigerators are loaded onto shipping crates. They’re among the most advanced car chargers available, promising to deliver a full tank of juice in minutes.
‘Automakers and energy companies are spearheading the global rollout of these ultra-fast charging pumps to lure consumers away from gas guzzlers and toward vehicles powered by electricity. Thousands of souped-up stations are being installed along highways from Shanghai to Germany and California, with the capacity to charge enough for 20 miles (32 kilometers) of driving range in one minute.’
This is a huge deal because at present an additional minute of charge time adds very little to travel time…
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If a few companies can continue to improve these numbers, then the charging spoils from the rise of EVs could go to a concentrated few.
Unlike producing cars, battery technology is something far more lucrative, I would argue. Not only because it costs time and money to learn and develop these special technologies, but also because an initial start could lead to a dominant market share in the long-term.
There might be contracts in place, where Tesla and other EV makers only buy from one or two battery suppliers.
With these long stable contracts, battery suppliers can outspend their competitors and continue improving their batteries over time, making it the obvious choice for EV manufacturers.
It’s an idea worth a look, don’t you think?
Editor, Money Morning
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