GUILD INVESTMENT

M A N A G E M E N T February 10, 2022

GLOBAL MARKET COMMENTARY

Nuclear: The End of Europe’s Energy
Nightmare?
Most observers would agree that Europe’s en-
ergy sector has reached a point of crisis. Po-
litical, geopolitical, and macroeconomic trends
are colliding in a volatile mix that has led to sig-
nificant price volatility and public anxiety. Gas
has been a key culprit.
of Europe’s industrial-sector energy and pow-
er-generation needs is likely to create volatil-
ity as long as the relation between Russia and
the west remains fraught; and that is for the
foreseeable future, barring some catastrophic
resolution through armed conflict.

The forces that are at work driving Eu- If the source of Europe’s most important car-
rope’s energy prices higher include both bon energy and the volatility in its price are
short and long-term factors and are like- the rock, the hard place is surely the commit-
ly to endure for many years. Notably, the ment of European governments to a “sustain-
bugbear of dependence on Russia for so much able” path in energy. Until recently, that notion
of “sustainability” has
not included the one
technology that could
abundantly and reliably
meet the continent’s
baseload generation re-
quirements -- that is, it
has not included nu-
clear energy. Indeed,

© Guild Investment Management Inc.

current and projected
nuclear capacity has
been on a sharp down-
ward trajectory, even
while the anticipated
need for electric gener-
ation capacity are rising
rapidly due to intended
phase-outs of hydrocar-
Source: Jefferies Equity Research
bon sources.
 GUILD INVESTMENT
M A N A G E M E N T
EDITORS
MONTY GUILD
Founder
Source: Jefferies Equity Research
Most of Europe’s nuclear powers
-- even France, historically friendly
to nuclear -- have been either ag-
ANTHONY gressively (Germany) or gradually
DANAHER (UK, France) planning reductions
President in nuclear capacity in recent years.
Germany is moving forward with
plans to decommission its entire
fleet of nuclear plants. The UK is
decommissioning old plants, and
cautious about plans for new ones.
France committed to reduce nucle-
ar to 50% of generation from 70%,
though the topic has emerged as a
contentious one in upcoming elec-
RUDI tions, with incumbent Emmanuel
VON ABELE Macron pivoting to a pro-nuclear
Senior Research
Analyst
stance under pressure from his ri-
vals on the right.
12400 Wilshire Blvd
Suite 820 Why have Europeans been skeptical
Los Angeles, CA 90025
of the one really robust, currently
310-826-8600
deployable solution that will “square
guild@guildinvestment.com the circle” of decarbonization and
Mon–Fri 06:30–16:30 abundant, reliable energy? The con-
2
February 10, 2022
cerns focus around waste disposal,
risks of accidents, and the protract-
ed build periods and typically huge
cost overruns of large nuclear proj-
ects.
However, we can observe two
very positive trends. One is the
move of EU-wide regulators to in-
clude nuclear energy in the suite of
technologies that are acceptable as
solutions in the movement towards
decarbonization. Approval by the
EU Commission and parliament
seem likely. However, the waste and
safety concerns mentioned above
© Guild Investment Management Inc.
will still need to be addressed.
This points to the other very
positive trend: the advent of
SMRs (small modular reactors).
SMRs, being developed by companies
such as Rolls Royce [UK: RR] in the
UK, EDF [FR: EDF] and Areva SA
[FR: AREVA] in France, and NuScale
 GUILD INVESTMENT
M A N A G E M E N T
Source: NuScale Power
Power and Arc Clean Energy in the U.S., are
self-contained nuclear plants that inherently
solve some of the safety, cost, and construction
problems associated with traditional utility-
scale nuclear plants. Typically they generate
about 300 MWe, compared to about 1600
MWe for a traditional plant, have an accelerated
construction timeline, and have “walk away”
safety, i.e. would shut down automatically and
safely in the case of an accident. For this reason,
some designs have already been certified by
regulatory authorities not to need the large
surrounding exclusion zone required by
traditional facilities, so their footprint is much
smaller. They are therefore suitable for a wider
range of locations, including (for example)
remote locations and inside decommissioned
coal-fired plants.
Investment implications: We are bull-
ish on the future of SMRs, though
the technology is new. There will
be pure-play ways to approach this
theme; investors should watch for pri-
vate SMR-related companies coming
public. Some large European indus-
3
February 10, 2022
The first SMRs will begin to roll out in the
late 2020s in the U.S., and in the 2030s
in Europe. We believe this technology is go-
ing to be very significant for energy price and
supply stability in Europe in coming decades.
It is likely -- as all things run in cycles -- that
the current enthusiasm for unrealistic and un-
workable energy solutions in some European
countries will encounter the dissatisfaction of
the electorate as energy-driven inflation and
the inconvenience and anxiety of supply dis-
ruptions continue. French and British firms
are leaders in development of the technology.
Even Germany may walk back its recent de-
cisions, and may embrace SMRs as a solution
moving forward that both sidelines Russia and
allows a place to both climate and economic © Guild Investment Management Inc.
goals.
trials will also benefit, though obvi-
ously with less dramatic effects on
their growth profile; we are thinking
of leading European industrial/tech
companies such as Siemens [GR: SIE].
And of course, in this context, we are
long-term bullish on uranium.
 GUILD INVESTMENT 4
M A N A G E M E N T February 10, 2022

The Markets This Week

Interest Rates, Inflation, and the Fed’s have going on for years -- QE in essence acts
Coming Gut Check as such a form of manipulation. These efforts
will be expanded.
This morning’s CPI print hit 7.5% year-over-
year, up 0.6% from the previous print, and Market Behavior
slightly worse than expected. Some (not us)
had believed that December’s number would Markets have seen a relief rally, retracing a lit-
be a peak; it was not. Given trajectories of en- tle more than half of the decline from recent
ergy and housing costs, February seems likely all-time highs. Earnings have seen some un-
to be higher still. precedented and wild swings, including Meta’s
[FB] epic drop on its first decline in daily active
With 10-year rates taken to 2% this morning users and disappointing forward guidance. The
by the CPI release, do we see them stopping move to the “metaverse” may indicate that
at 2%? No; we see 2.5% as a more likely peak FB has saturated its market and is working to
before the Fed blinks and walks back taper talk, build a new one in virtual reality -- and that will
or even re-accelerates the pace of asset pur- be an expensive proposition.
chases.
It’s not just FB, though; earnings are coming off
In the longer run, as the Fed’s lack of resolve in the acceleration of the pandemic period, and
its inflation battle becomes apparent, we agree returning more to normal trajectories. The
with those analysts who see forms of credit question is whether they continue at their his-
control becoming more prominent, onerous, torically normal pace, or if they are challenged
and difficult. As in the early 70s, we may see ef- because a good deal of growth was pulled
forts to constrain inflation directed not where forward, and the normalization period will be
they should be -- towards excessively loose more prolonged.
monetary and fiscal policy -- but towards wage
and price controls (demonizing the very work- While a retest of the market’s lows seems a
ers and businesses who are suffering from in- distinct possibility, we cannot escape the ob-
flation as if they were its cause). Wage and servation of the trillions of dollars that re-
price controls have a universal history of eco- main on the sidelines, waiting to “buy the dip.”
nomic failure, but that doesn’t mean they might Therefore, we are focused on diversifica- © Guild Investment Management Inc.
not be tried again. tion across a range of stocks with superi-
or earnings growth and quality and some
Mr. Biden is a pro-labor president, and it is very visibility of catalytic events to spark in-
unlikely that he will institute wage controls pri- vestor enthusiasm, as well as long-term
or to the November mid-terms. Price controls, opportunity, provided it comes at a rea-
however, are more likely to be implemented. sonable price.
Although it hasn’t been announced as such,
subtle credit controls via market manipulation The year so far has provided plenty of bear-
of the Treasury bond and agency bond markets ish data points. Even with all those, the broad
 GUILD INVESTMENT
M A N A G E M E N T
market is behaving fairly well -- which implies
to us that it is in a process of digestion, not
disintegration. We note that this digestion
process is more mature than you might think
-- while the broad markets only really began to
show it in January, the process has been visi-
ble in the more speculative and extended tech
names since November 2021.
One thing we are bearish on is the purchasing
power of fiat currencies -- and therefore we
include gold and gold shares as long-term el-
ements of a diversified portfolio. We believe
crypto will increasingly play that role as well,
even though now it tends to trade in line with
speculative tech stocks.
Supply Chains
The transmogrification of global supply chains
from a “just in time” philosophy to a “just in
case” mentality is ongoing. The replenishment
and increase of stockpiles likely means that we
have another two years of supply chain kinks
ahead of us to work out. A headline came
across the tape today that globally, cop-
per stocks stand at about a three-day
supply. Market volatility or no market vol-
atility, the Fourth Industrial Revolution pro-
ceeds apace, and it is hungry for copper, as
well as other essential inputs, from tech-adja-
cent commodities to chips. We think some
chip manufacturers participating in the
reshoring of semi capacity to the U.S.
are interesting at this juncture.
Crypto Hacks Again In the News
Our coverage of the Qubit hack last week was
timely; the even larger Wormhole hack hap- Thanks for listening; we welcome your calls
pened just after and was another manifestation and questions.
5
February 10, 2022
of exactly the problem we observed. Smart
contracts were written with deprecated code
that allowed malicious actors to siphon value
out of a blockchain -- in this case, the vulner-
ability was exposed in a project bridging the
Solana and Ethereum blockchains (two power-
houses of the move to “defi,” or decentralized
finance). The hack was worth $320 million, and
injured parties were made whole by the proj-
ect’s management. Again, this illustrates
the reality that as crypto matures, so
must the commitment of projects to the
highest level of code auditing and verifi-
cation. We think the winning platforms will
be those that “bake in” the necessary stringen-
cy in process and programming.
Big Regulatory Change For Short Sell-
ers?
The SEC seems to be coming out of hiberna-
tion on a number of important issues. Notably,
there may be forward movement on next-day
settlement. Should this become the norm, it
would deeply challenge many short-sellers,
particularly the more unscrupulous, as it would
remove a 24-hour window for them to cover
their trades. (We are not philosophically op-
posed to short-selling, which can serve a valu-
able purpose for markets as it incentivies the
discovery of hidden negative information about
companies -- we’re just opposed to short-sell-
ing that skirts the bounds of legality.) Many © Guild Investment Management Inc.
small and micro-cap stocks suffer egregiously
at the hands of such unscrupulous short-sell-
ers -- and should next-day settlement go into
effect, we might anticipate a rally in many of
these shares.
 GUILD INVESTMENT 6
M A N A G E M E N T February 10, 2022
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