This week's interesting finds

Some profitable companies would still pay no taxes under Democrats’ plan

The Democratic proposal approved this month by the House Ways and Means Committee would sharply raise taxes on U.S. corporations, and business groups are working hard to defeat it. The legislation would increase the top corporate tax rate to 26.5% from 21%, and remove many benefits of booking profits in low-tax foreign countries.

The bill, however, doesn’t touch the main reasons why profitable companies sometimes don’t pay taxes, including accelerated depreciation of investments and tax credits for activities such as research and development.

The legislation also expands tax credits for clean energy and low-income housing in ways that could allow some companies to move from paying little to paying nothing.

The bill moving through Congress represents an explicit choice by Democrats to tolerate some zero-tax companies and steer tax advantages to companies that engage in favoured activities.

 

When the levee breaks…

To a man with a hammer, every problem looks like a nail. To the Federal Reserve, every problem is met with more liquidity. Unfortunately, the Fed has little control of where this liquidity goes. First, it went into equity markets, fueling an outright equity bubble. Then it overflowed into private equity and venture capital, creating demons there as well. Then it overflowed into “meme stonks” Not satisfied with the damage wrought on the financial economy, liquidity began overflowing into the real economy. There’s currently an epic housing bubble that’s leading to increasing wealth inequality and polarization.

Now, this liquidity is overflowing into the everyday economy—assuming you can even find the item you seek. In the past, only hard money zealots complained about the gradual creep of inflation—today, everyone feels it and has their own story. Everyone is painfully aware that inflation is present and likely to stay.

Could the bubble in duration assets (like high-multiple tech and Ponzi) finally be over? Could the bubble in inflation assets just be starting? Could the unwind of both historic extremes be unusually violent, as so much of the world’s capital is leaning the wrong direction? 

Climate change ETFs found to be undermining war on global warming

Climate-focused investment funds are undermining the fight against global warming by routinely engaging in greenwashing, academic research suggests. Worse still, these ETFs keep capital away from sectors that are actually at the heart of the transition to a cleaner economy.

“Since considerable investment is necessary to ensure electrification of the economy and decarbonisation of electricity, underfunding of this sector in climate-aligned benchmarks, which can correspond to a reduction in capital allocation of up to 91 per cent, would constitute the most dangerous form of portfolio greenwashing,” said Felix Goltz, co-author of Doing Good or Feeling Good? Detecting Greenwashing in Climate Investing.

“The key issue is not how to restrict investment in these industries, but rather, how to make sure that these industries invest in technology that allows them to produce needed goods and services with minimum release of greenhouse gases,” he argued.

The findings come as investors have poured money into funds that claim to improve the world. The assets of self-proclaimed “sustainable” funds tripled between the end of 2018 and mid-2021 to $2.3 trillion, according to data from Morningstar.

Belize leans on coral reefs to drive bargain with bondholders

Belize is inching towards a deal with international bondholders after admitting it cannot afford to pay back its debt, and is counting on an unusual asset to help: its coral reefs.

Earlier this month the Caribbean nation, with its tourism-heavy economy ravaged by the pandemic, agreed to buy back its only international bond from investors at a huge discount, using cash lent by the Nature Conservancy, a US-based environmental group. As part of the deal, Belize will pre-fund a $23.4m endowment to support marine conservation projects on its coastline, home to the world’s second-largest barrier reef

If Belize can achieve the approval it needs on this $530 million bond, the country could secure the first green-tinged debt restructuring, capitalizing on the hunger among big fund managers to demonstrate their commitment to environmental, social and governance-driven investing.

Investors and advisers believe the agreement could serve as a template for future restructuring talks, in which cash-strapped nations use the promise of environmental conservation to drive a harder bargain — in effect creating a mechanism for investors in rich countries to pay poorer nations to protect the natural world.

Podcast: Dan Wang explains what China's tech crackdown is really all about

Over the last several months, Chinese authorities have undertaken a sweeping campaign of change. We've seen crackdowns on big tech and fintech companies (like Ant Financial and Didi), online education companies, and now even the playing of video games. Investors in key sectors have been clobbered by these new rules.  

This week's interesting finds

This week’s charts

Media usage trends

Trends in vehicle type purchases 

ICE (internal combustion engines) - traditional engines, powered by gasoline, diesel, biofuels or even natural gas

HEV (hybrid electric vehicles) - powered by a combination of an ICE and an electric motor 

BEV (battery electric vehicles) - no internal combustion engine or fuel tank at all and runs on a fully electric drivetrain powered by rechargeable batteries   

Europe’s energy crisis  

European power prices have spiraled to multi-year highs on a variety of factors in recent weeks, ranging from extremely strong commodity and carbon prices to low wind output. 

The October gas price at the Dutch TTF hub, a European benchmark, was seen to climb to a record high of 79 euros ($93.31) a megawatt-hour on Wednesday. The contract has risen more than 250% since January, according to Reuters, while benchmark power contracts in France and Germany have both doubled. 

Earlier this month, soaring gas prices and low wind output prompted the U.K. to fire up an old coal power plant to meet its electricity needs. 

“If there was enough wind, it could maybe meet more than half or two-thirds of U.K. power demand on a relatively low power demand day. But instead, what we are seeing is that actually we’ve got no wind and we are forced to fire up polluting coal-fired generation.”

Production wall setting us up for all-time high oil prices  

The world is hurtling towards an energy crisis, one in which the demand for oil, in my opinion, will grow for at least the next decade, yet the global oil supply chain can no longer adequately respond to it due to stringent environment, social and governance regulations and pressure from investors. 

How did we get here? Energy ignorance: the lack of knowledge of how oil is used, how critical it is to our daily lives, and the realistic timeline to replace it with a “renewable” alternative lie at the epicenter of the coming energy crisis. 

With the world’s population set to grow by another two billion people according to the United Nations by 2050, and oil alternatives such as hydrogen expected to take several decades to reach meaningful scale, once OPEC spare capacity gets exhausted by the end of 2022 and ESG pressures continue to disallow production growth from the equivalent of 40 per cent of global supply, I would posit the question: where exactly are incrementally necessary barrels going to come from in sufficient quantity in the years ahead to meet demand growth? 

This is our energy reality: the runway to displace oil as a transportation fuel is measured in decades while the ability to reduce oil consumption in non-travel related areas would require a meaningful reduction in the average person’s quality of living — a choice that will not be made willingly.

Digital retail businesses are betting on brick-and-mortar  

Retail darlings Warby Parker and Allbirds launched on the internet and paved the way for other brands to follow their playbooks and hope for similar success. The two businesses have become synonymous with the term “direct-to-consumer” in the retail industry. The strategy involves avoiding wholesale channels, such as department stores, to forge stronger relationships with customers. 

Now, they’re betting big on real estate — not the web — to fuel future growth. While opening up stores comes with added fixed costs, brick-and-mortar retail remains the best channel to find new customers. Warby Parker and Allbirds are betting on shops as they prepare to go public.

“There’s a certain phase of your infant growth where you can achieve success without stores, and it can be really easy to acquire customers,” Jason Goldberg said. “But no digitally native brand has achieved a billion dollars in annual revenue without a store. You need those stores as a cost-effective customer acquisition channel at some point.”

This week's interesting finds

This week’s charts

There have never been more job openings in the US before

Who has the real pricing power?

Investors willing to take on higher risk debt while losing money relative to inflation  

Investors in European junk bonds have begun accepting interest payments that are lower than eurozone inflation levels for the first time ever. Analysts said investors’ willingness to extend credit to the riskiest borrowers while losing money in real terms reflected the scarcity of other opportunities to earn returns in debt markets. 

Some investors may be inspired to buy junk bonds because they believe some issuers’ fortunes could improve to the point they would obtain investment-grade ratings.

Credit rating agencies have been upgrading bonds from junk status at an unusual rate with €7bn of European high-yield issues having been pushed up to investment grade in the past 12 months. This stands in contrast to the average €7bn worth of bonds that had been downgraded in each of the past five years, on average.

Equities and inflation  

This chart shows the correlation between the 12-month real equity return and the 12-month change in the inflation rate, for quintiles formed by the starting inflation rate. Only in the lowest quintile (starting inflation rate less than 1.0%) is the correlation positive at 0.4. In all other cases, there is a negative relationship between the real equity return and inflation changes, and more so for higher starting levels of inflation. The trend suggests that equities actually benefit from rising inflation if the starting level is low, but are hurt by rising inflation if it is above median (increased risk of inflation escalating).

The Case for a longer-term oil and gas bull market  

Back in mid-2020, folks were pronouncing the energy sector dead. Now, oil and gas companies in the US shale industry, and more broadly among publicly-traded independent oil companies, are on track to make record free cash flows in 2021: 

Historically for two centuries now, whenever humanity finds a better energy source, we add it onto the previous energy sources, rather than replace them. The previous energy sources remain flat or even continue to grow in absolute terms, while the new one grows faster and becomes more important:

This week's interesting finds

Field crops

Statistics Canada released its annual crop production forecasts. The numbers were expected to be down sharply because of a lack of rain, higher than normal temperatures and low soil moisture levels to begin. This was not a big surprise for the market, however year over year declines were large, nonetheless.

Rent increase

Car inventory at multi-decade low

Crackdown on ESG labels

U.S. regulators have long said they’re dubious about the green and socially conscious labels that Wall Street applies to $35 trillion in so-called sustainable assets. For several months, SEC examiners have been demanding that money managers explain the standards they use for classifying funds as ESG-focused. The review is the SEC’s second into possible ESG mislabeling since last year - showing the issue is a priority for the agency and a reason for the industry to worry about a rash of enforcement actions.

Few businesses are booming in high finance like sustainable investing, as governments, pension plans and corporations all seek to lower their carbon footprints and be better public citizens. Amid the rush for dollars, more and more ESG insiders have started sounding alarms that a lot of the marketing is hype, a term known in the industry as greenwashing.  

The fund industry has said one problem is that no one really agrees on what qualifies as sustainable investing. Since March, European money managers have had to disclose the actual ESG features of products being touted. In the U.S., no such mandate exists - prompting confusion among financial firms and investors alike.

Still, any murkiness over rules and requirements isn’t insulating firms from criticism.

InfluenceMap, a London-based nonprofit, said last week that more than half of climate-themed investment vehicles aren’t living up to the goals of the Paris Agreement.

Why Fund Returns Are Lower Than You Might Think

Morningstar’s annual "Mind the Gap" study of dollar-weighted returns (also known as investor returns) finds investors earned about 7.7% per year on the average dollar they invested in mutual funds and exchange-traded funds over the 10 years ended Dec. 31, 2020.

This was about 1.7% less than the total returns their funds generated over that span.

This shortfall, or "gap," stems from inopportunely timed purchases and sales of fund shares, which cost investors nearly one sixth the return they would have earned if they had simply bought and held.

Good news: The most popular material on Earth is great for storing CO2

Concrete is the most used material of the modern era. More than 10 billion tons of concrete are produced each year. Luckily, scientists are showing that it’s our most promising place to stick all of that CO2, too.

CO2 enters the atmosphere whenever we burn fossil fuels, like gas and coal. Once it’s made, it sticks around because CO2 has a stable structure that requires energy to change. Depending on exactly what you want to turn CO2 into, that can take more or less energy.

When CO2 is incorporated into concrete, it’s literally piped into the mix. The natural tumbling motion of churning concrete is all the energy that’s needed to transform the CO2 into a calcium carbonate. All of this tough calcium carbonate means the concrete needs less cement in its mix, which is another environmental savings, since cement is the worst polluting component of concrete.