This week's interesting finds

 This week in Charts: 

Wages 

Oil

Buffett snubs Goldman bankers with quirky takeover price

Warren Buffett is telegraphing his disdain for Wall Street bankers with an oddball price on his latest multibillion-dollar takeover.

The US$848.02 for every share that Alleghany Corp. stockholders get from Berkshire Hathaway Inc. is the result of Buffett balking at the banking fee being set aside by the target company -- in this case for Goldman Sachs Group Inc., which is advising the insurer.

Berkshire had offered to pay US$850 a share with Buffett cautioning Alleghany that he didn’t want to foot the bill for the banking fees, according to a person with knowledge of the matter who asked not to be identified discussing private information. So any fee for a financial adviser would come out of the proceeds for Alleghany’s shareholders. The result is spelled out in a regulatory filing: an announced purchase price that subtracts roughly US$27 million for Goldman -- calling attention to Buffett’s stand.

The transaction is Berkshire’s largest since 2016, according to data compiled by Bloomberg. While deal prices typically reflect the back-and-forth between buyers and sellers, it gets smoothed over before the deal is struck. Most announcements are priced to avoid clunky numbers after both sides agree on a plan for how advisers are paid.

The Oracle of Omaha, known for his witty business aphorisms, rarely uses an investment bank with his deals, instead relying on Berkshire Vice Chairman Charlie Munger’s previous law firm, Munger, Tolles & Olson, to advise on acquisitions.

Howard Marks Memo: The Pendulum in International Affairs

At a recent meeting of the Brookfield Asset Management board, a discussion of Ukraine triggered an association with another aspect of international affairs – offshoring – which I first discussed in the memo Economic Reality (May 2016).  Thus, the inspiration for this memo.

The first item on the agenda for Brookfield’s board meeting was, naturally, the tragic situation in Ukraine.  We talked about the many facets of the problem, ranging from human to economic to military to geopolitical.  In my view, energy is one of the aspects worth pondering.  The desire to punish Russia for its unconscionable behavior is complicated enormously by Europe’s heavy dependence on Russia to meet its energy needs; Russia supplies roughly one-third of Europe’s oil, 45% of its imported gas, and nearly half its coal. 

The other subject I focused on, offshoring, is quite different from Europe’s energy dependence.  One of the major trends impacting the U.S. economy over the last year or so – and a factor receiving much of the blame for today’s inflation – relates to our global supply chains, the weaknesses of which have recently been on display.  Thus, many companies are seeking to shorten their supply lines and make them more dependable, primarily by bringing production back on shore. 

Over recent decades, as we all know, many industries moved a significant percentage of their production offshore – primarily to Asia – bringing down costs by utilizing cheaper labor.  This process boosted economic growth in the emerging nations where the work was done, increased savings and competitiveness for manufacturers and importers, and provided low-priced goods to consumers.  But the supply-chain disruption that resulted from the Covid-19 pandemic, combined with the shutdown of much of the world’s productive capacity, has shown the downside of that trend, as supply has been unable to keep pace with elevated demand in our highly stimulated economy.

At first glance, these two items – Europe’s energy dependence and supply-chain disruption – may seem to have little in common other than the fact that they both involve international considerations.  But I think juxtaposing them is informative . . . and worthy of a memo.

Canada's nuclear industry ‘blindsided’ after exclusion from green bond framework

Many in Canada’s nuclear industry have been left questioning the federal government’s commitment to the technology after nuclear power was excluded from the first ever Canadian-dollar-denominated green bond.

The Green Bond Framework, introduced in March, lays the groundwork for a targeted inaugural issuance of C$5 billion for the 2021-22 period and will mobilize capital in support of the government's climate and environmental objectives, the Government of Canada says. 

The global drive to cut green house gas emissions, with over 130 countries pledging to reach net-zero by 2050, has prompted investors to earmark entire portfolios worth hundreds of billions of dollars into companies and projects that claim clean energy practices.

The definition of which practices can be included in such portfolios, granting them access to a rapidly expanding source of financing, has been the focus of intense debate, not least over differing opinions on the green credentials of nuclear power.

In Canada, items that were specifically excluded in the country’s new green taxonomy are the manufacturing of arms, alcohol or tobacco, gambling, fossil fuels and, to the outrage of many in the industry, nuclear power.

“We have been, quite frankly, blindsided by the release of the green bond because there was no consultation with the nuclear, or any, industry,” says President and CEO of the Canadian Nuclear Association (CAN) John Gorman.

This week’s fun finds: 

The Proven Path to Doing Unique and Meaningful Work

It’s not the work, It’s the re-work.

Average college students learn ideas once. The best college students re-learn ideas over and over. Average employees write emails once. Elite novelists re-write chapters again and again. Average fitness enthusiasts mindlessly follow the same workout routine each week. The best athletes actively critique each repetition and constantly improve their technique. It is the revision that matters most.

To continue the bus metaphor, the photographers who get off the bus after a few stops and then hop on a new bus line are still doing work the whole time. They are putting in their 10,000 hours. What they are not doing, however, is re-work. They are so busy jumping from line to line in the hopes of finding a route nobody has ridden before that they don't invest the time to re-work their old ideas. And this, as The Helsinki Bus Station Theory makes clear, is the key to producing something unique and wonderful.

By staying on the bus, you give yourself time to re-work and revise until you produce something unique, inspiring, and great. It’s only by staying on board that mastery reveals itself. Show up enough times to get the average ideas out of the way and every now and then genius will reveal itself.

Malcolm Gladwell's book Outliers popularized The 10,000 Hour Rule, which states that it takes 10,000 hours of deliberate practice to become an expert in a particular field. I think what we often miss is that deliberate practice is revision. If you're not paying close enough attention to revise, then you're not being deliberate.

A lot of people put in 10,000 hours. Very few people put in 10,000 hours of revision. The only way to do that is to stay on the bus.

The Munger Operating System: How to Live a Life That Really Works

In 2007, Charlie Munger gave the commencement address at USC Law School, opening his speech by saying, “Well, no doubt many of you are wondering why the speaker is so old. Well, the answer is obvious: He hasn’t died yet.”

Fortunately for us, Munger has kept on ticking. The commencement speech is an excellent response to the Big Question: How do we live a life that really works? It has so many of Munger’s core ideas that we think the speech represents the Munger Operating System for life.

• Acquiring wisdom is a moral duty as well as a practical one.

And there’s a corollary to that proposition which is very important. It means that you’re hooked for lifetime learning, and without lifetime learning you people are not going to do very well. You are not going to get very far in life based on what you already know. You’re going to advance in life by what you’re going to learn after you leave here…if civilization can progress only when it invents the method of invention, you can progress only when you learn the method of learning.

• Learn to think through problems backwards as well as forward.

The way complex adaptive systems work and the way mental constructs work, problems frequently get easier and I would even say usually are easier to solve if you turn around in reverse. In other words if you want to help India, the question you should ask is not “how can I help India?”, you think “what’s doing the worst damage in India? What would automatically do the worst damage and how do I avoid it?” You’d think they are logically the same thing, but they’re not. Those of you who have mastered algebra know that inversion frequently will solve problems which nothing else will solve. And in life, unless you’re more gifted than Einstein, inversion will help you solve problems that you can’t solve in other ways.

• Learn to maintain your objectivity, especially when it’s hardest.

We all remember that Darwin paid special attention to disconfirming evidence particularly when it disconfirmed something he believed and loved. Well, objectivity maintenance routines are totally required in life if you’re going to be a correct thinker. And there we’re talking about Darwin’s attitude, his special attention to disconfirming evidence, and also to checklist routines. Checklist routines avoid a lot of errors. You should have all this elementary wisdom and then you should go through and have a checklist in order to use it. There is no other procedure that will work as well.

This week's interesting finds

This week’s in charts

VW is catching up with Tesla

On one hand it's easy to argue that Tesla is miles ahead, shipping more than double the number of all-electric vehicles that VW Group managed in 2021. On the other hand, you could argue that VW Group's 453k deliveries in 2021 is close to Tesla's 500k effort from 2020, suggesting that the German giant is only 12-15 months behind Tesla's pace, despite starting late.

Source: Chartr

Russia and Ukraine : key suppliers of various metals

Goldman Sachs: “A survey of our equity analysts reveals that imports of car parts from Russia and Ukraine have dropped, with some European automakers already cutting production. Our equity analysts estimate that ongoing disruptions could depress monthly auto production in the affected plants by nearly 60k vehicles (around 25% of their monthly production) in March. In addition, car producers with assembly plants in Russia, such as Hyundai and Renault, have already stopped local production reducing the global supply of autos.

According to our commodity analysts, a stop in palladium exports alone may lead to a 10% hit to global auto production for 2 years based on potential production losses in the region and global inventories."

Inflation is shrinking your products

Do consumers notice when their everyday products get smaller? Often, they don’t and companies are taking advantage by reducing the amount of product they sell while keeping prices the same. Shrinking product sizes to pad profits is not a new tactic but it grows in popularity during periods of shortages and inflation. Some consumers are noticing and documenting their shrinking groceries on the shrinkflation subreddit.

Even with today’s release of US inflation figures from the Bureau of Labor Statistics showing prices increased 7.9% in the last 12 months, consumers may not realize they’re paying more for some of their regular purchases because companies are reducing sizes while keeping prices the same

Saudi Arabia Considers Accepting Yuan Instead of Dollars for Chinese Oil Sales

Saudi Arabia is in active talks with Beijing to price some of its oil sales to China in yuan, people familiar with the matter said, a move that would dent the U.S. dollar’s dominance of the global petroleum market and mark another shift by the world’s top crude exporter toward Asia.

The talks with China over yuan-priced oil contracts have been off and on for six years but have accelerated this year as the Saudis have grown increasingly unhappy with decades-old U.S. security commitments to defend the kingdom, the people said.

China buys more than 25% of the oil that Saudi Arabia exports. If priced in yuan, those sales would boost the standing of China’s currency. The Saudis are also considering including yuan-denominated futures contracts, known as the petroyuan, in the pricing model of Saudi Arabian Oil Co., known as Aramco.

It would be a profound shift for Saudi Arabia to price even some of its roughly 6.2 million barrels of day of crude exports in anything other than dollars. The majority of global oil sales—around 80%—are done in dollars, and the Saudis have traded oil exclusively in dollars since 1974, in a deal with the Nixon administration that included security guarantees for the kingdom.

China introduced yuan-priced oil contracts in 2018 as part of its efforts to make its currency tradable across the world, but they haven’t made a dent in the dollar’s dominance of the oil market. For China, using dollars has become a hazard highlighted by U.S. sanctions on Iran over its nuclear program and on Russia in response to the Ukraine invasion.

China has stepped up its courtship of the Saudi kingdom. In recent years, China has helped Saudi Arabia build its own ballistic missiles, consulted on a nuclear program and begun investing in Crown Prince Mohammed bin Salman’s pet projects, such as Neom, a futuristic new city. Saudi Arabia has invited Chinese President Xi Jinping to visit later this year.

The Secretive Company That Might End Privacy as We Know It

Until recently, Hoan Ton-That’s greatest hits included an obscure iPhone game and an app that let people put Donald Trump’s distinctive yellow hair on their own photos.

Then Mr. Ton-That — an Australian techie and onetime model — did something momentous: He invented a tool that could end your ability to walk down the street anonymously, and provided it to hundreds of law enforcement agencies, ranging from local cops in Florida to the F.B.I. and the Department of Homeland Security.

His tiny company, Clearview AI, devised a groundbreaking facial recognition app. You take a picture of a person, upload it and get to see public photos of that person, along with links to where those photos appeared. The system — whose backbone is a database of more than three billion images that Clearview claims to have scraped from Facebook, YouTube, Venmo and millions of other websites — goes far beyond anything ever constructed by the United States government or Silicon Valley giants.

Federal and state law enforcement officers said that while they had only limited knowledge of how Clearview works and who is behind it, they had used its app to help solve shoplifting, identity theft, credit card fraud, murder, and child sexual exploitation cases.

But without public scrutiny, more than 600 law enforcement agencies have started using Clearview in the past year, according to the company, which declined to provide a list. The computer code underlying its app, analyzed by The New York Times, includes programming language to pair it with augmented-reality glasses; users would potentially be able to identify every person they saw. The tool could identify activists at a protest or an attractive stranger on the subway, revealing not just their names but where they lived, what they did and whom they knew.

And it’s not just law enforcement: Clearview has also licensed the app to at least a handful of companies for security purposes.

The Moral Hazard Lessons from Nickel Market Disaster

The tide went out this week in London’s nickel market, and we discovered — in Warren Buffett’s immortal words—who had been swimming naked: a giant Chinese producer that couldn’t meet its margin calls, additional security brokers require when leveraged trades lose money.

Instead of letting the market cleanse itself of this indebted trader, the exchange decided to wade in and save the firm from the consequences of its bets by canceling the trades.

This isn’t just a one-off in an obscure commodity. This is the natural conclusion of a trend that is undermining free markets and creating all the wrong incentives: A growing reluctance by the authorities to let financial groups go bust, even when they aren’t too big to fail.

The problems started on Tuesday morning, when traders on the London Metal Exchange smelled blood and nickel prices almost doubled. China’s Tsingshan Holding faced a $1 billion-or-so margin call that exchange officials feared it couldn’t meet. Rather than let it fail, which would probably have taken down several of the smaller LME brokers that had serviced Tsingshan, LME decided to cancel all that day’s trading, more than 9,000 trades worth about $4 billion

It. Canceled. The. Trades. Not because of a fat-finger error, which exchanges often cancel. Not even because of a rogue algorithm (as regulators claimed in the 2010 flash crash in U.S. stocks). But because someone with too much leverage was going to blow up, with knock-on effects on some members of the exchange.

This week’s fun finds:

Less serious, not investing related, but just as fun. Sometimes we want to share some of our less serious (but still interesting) finds. On any given week, we might show some things unrelated to investing - absorbing articles, notable numbers, or even recommendations from our internal partners.

Your organs may be ageing at different rates

An analysis of hundreds of biological features strengthens the evidence that some organs and body systems can age faster than others. Tracking the biological age of different parts of the body could help doctors predict the onset of disease more accurately.

We already knew that the condition of cells in the body can be interpreted to give someone a biological age that is older or younger than their age measured in years. In other words, cell condition – which varies depending on genetic and lifestyle factors – determines the pace of the ageing process.

Now, work by Brian Kennedy at the National University of Singapore and his colleagues supports the idea that the various organs and systems in the body – such as the cardiovascular or immune system – can age at different rates within the same individual.

“It confirms previous studies that there are diverse ageing rates among organs and systems, and people’s ageing patterns are different,” says Wenyu Zhou at Tempus Labs, a biotechnology company in California. “This further calls

The Joyful, Illiterate Kindergartners of Finland

“The changes to kindergarten make me sick,” a veteran teacher in Arkansas recently admitted to me. “Think about what you did in first grade—that’s what my 5-year-old babies are expected to do.”

A working paper, “Is Kindergarten the New First Grade?,” confirms what many experts have suspected for years: The American kindergarten experience has become much more academic—and at the expense of play. The late psychologist, Bruno Bettelheim, even raised the concern in an article for The Atlantic in 1987.

Researchers at the University of Virginia, led by the education-policy researcher Daphna Bassok, analyzed survey responses from American kindergarten teachers between 1998 and 2010. In the study, the percentage of kindergarten teachers who reported that they agreed (or strongly agreed) that children should learn to read in kindergarten greatly increased from 30 percent in 1998 to 80 percent in 2010.

Bassok and her colleagues found that while time spent on literacy in American kindergarten classrooms went up, time spent on arts, music, and child-selected activities (like station time) significantly dropped.

But Finland—a Nordic nation of 5.5 million people, where I’ve lived and taught fifth and sixth graders over the last two years—appears to be on the other end of the kindergarten spectrum. Finland’s kindergartners spend a sizable chunk of each day playing, not filling out worksheets. Finnish schools have received substantial media attention for years now—largely because of the consistently strong performance of its 15-year-olds on international tests like the PISA.

“[Children] learn so well through play,” Anni-Kaisa Osei Ntiamoah, one of the preschool’s “kindergarten” teachers, who’s in her seventh year in the classroom, told me. “They don’t even realize that they are learning because they’re so interested [in what they’re doing].”

This week's interesting finds

EdgePoint Wealth website facelift

After seven years (an eternity in internet years!), our website has received a facelift. Check us out! 

This Week in Charts

Long-term Commodity Cycle

Oil correlations and CAPEX in Canada

Scrapped: How nearly $150 billion worth of energy projects have been shelved in Canada

Canadian and international investors have had a hard time getting shovels in the ground on their projects, even after securing regulatory approval. The reasons have been many: pure economics, political divisions, Indigenous disapproval and environmental concerns.

All of the above factors have left a slew of projects stranded as Canadians are unable to agree on our need to develop resources and at the same time fight climate change. Together, they make up around $150 billion of lost investment opportunity that would have generated taxes, jobs and businesses for the domestic economy.

Here are some of the major energy projects over the past few years that never saw the light of day:

Project: Frontier Oilsands Mine

Cost: $20.6 billion

Company: Teck Resources Ltd.

Project: Pacific Northwest LNG

Cost: $36 billion

Lead company: Petronas Bhd.

Project: Aurora LNG

Cost: $28 billion

Lead company: Nexen Energy

‘Tech wreck’ looks more like another dotcom bubble bursting

At what point does the slump in US technology stocks stop being dismissed as a mere “tech wreck” primarily centered on the most speculative companies and become considered a fully-fledged dotcom crash 2.0?

The combination of increasingly hawkish central banks and Russia’s invasion of Ukraine has been toxic for equity markets this year. The MSCI All-Country World index is now down 12 per cent in 2022. However, as is often the case, headline indices miss a more fascinating story underneath. The pain has been primarily focused in US technology stocks. Despite a tepid bounce over the past week, the Nasdaq Composite index has already fallen nearly 20 per cent in 2022. In dollar terms, the tech-heavy market has now lost well over $5tn in value since its November peak

Almost two-thirds of the Nasdaq’s 3,000 plus members have fallen by at least 25 per cent from their 52-week highs, according to numbers from Société Générale’s Andrew Lapthorne. Almost 43 per cent have lost more than half their value, and nearly a fifth have tumbled over 75 per cent — the worst such ratio since the financial crisis. The $5.15tn that has evaporated from the Nasdaq in recent weeks is like the entire UK stock market going “poof”. 

Russia’s War Prompts a Pitch for ‘Socially Responsible’ Military Stocks

Russia’s invasion of Ukraine has upset the world order. It could conceivably alter the way some people think about investing, too.

At least that’s the view of two analysts with Citi, who argue that the height of social responsibility at this moment requires putting your investment money into the stocks of companies that make weapons.

“Defending the values of liberal democracies and creating a deterrent, which preserves peace and global stability,” is so important that weapons makers should be included in funds that carry an E.S.G., or “environmental, social and governance,” label, the two analysts, Charles J. Armitage and Samuel Burgess, wrote.

Leslie Samuelrich, president of the Green Century Funds, which was founded by nonprofit groups, including the California Public Interest Research Group and the Citizen Lobby of New Jersey, was appalled by the notion.

“This is absurd,” she said. “It feels very opportunistic and shallow.” She added that Ukraine needed to be defended. “I’m part Ukrainian,” she said. “Of course, they need weapons.”

But she said that had nothing to do with investing in funds devoted to socially responsible investing. “Those who argue that weapons belong in a sustainable portfolio are capitalizing on the horrific attack,” she said. “Excluding military and civilian firearms has been a long-held screen by authentic responsible investors.”

Mr. Armitage and Mr. Burgess, the Citi analysts, make a vigorous counterargument. Essentially, it boils down to this: Without strong militaries capable of “defending the values of liberal democracies and creating a deterrent” against geopolitical adversaries like Russia and China, there can’t be much progress on other pressing global issues.

Harper’s Index – interesting stats

• Portion of moviegoers who say they are unlikely to return to theaters after the pandemic: 1/10

• Factor by which the number of cryptocurrency investors is expected to increase this year: 3.4

• Percentage decrease between 2019 and 2020 in the value of the wellness industry: 11

• Percentage of Bitcoin held by the top 0.01 percent of Bitcoin holders: 27

• Amount spent last November on a private island in the metaverse: $398,685

• Percentage of people alive today who have never used the internet: 37

• Portion of daily newspapers in the United States that are controlled by investment groups: ½

• Portion of U.S. adults who say their physical health is “excellent”: 1/4.

• Average amount of soda, in gallons, that an American drinks each year: 36

• Portion of therapists who say their clientele has increased since the start of the pandemic : 9/10

• Minimum portion of Americans aged 18 to 25 who are extremely lonely nearly all of the time: 3/5

This week's interesting finds

This Week’s in charts

Mismatch of unemployment and consumer sentiment

Sharp inflation is part of the problem

Canadian Oil 

Magazine Covers Revisited

In April 2019, BusinessWeek published a cover story asking “Is Inflation Dead” with a picture of a dead dinosaur – the implication being that inflation was not only dead but extinct.

We observed that it can take up to three years before a published cover story is proven wrong—often abruptly. In the case of the 1979 “Death of Equities” cover story, it was published almost exactly three years before equity markets literally “blew-off” the bottom in August 1982 --which we know was the start to one of the greatest bull markets in history. Therefore, we argued that three years after the April 2019 published cover story, that inflation should stage a major acceleration and become a huge problem.

What follows is an essay on contrarian thinking and consensus expectations.

The Politics of Passive Investing

There are a handful of folks in the finance world whom I try to read everything they put out. Matt Levine at Bloomberg is one of them. Let’s face it, he is smarter than most of us, and writes better than, well, all of us?

“The right model of BlackRock is probably that it is mostly an aggregator of preferences, but it is also, at the margin, a shaper of preferences. It passively reflects what investors want generally, but it has some ability to push those investors to want different things.”

The Harvard professor (John Coates) was very correct about the entangling of goals of “the state” with the goals of a business. Because today, in some ways, “the state” is Larry Fink, the founder, chairman, and CEO of BlackRock, manager of $10 trillion of assets. It is Larry Fink intimating that the companies that happen to be included in major US benchmark indices like the S&P 500 are now beholden to his personal views; views which seem to be particularly motivated by his penchant for environmental issues. 

Russia May Default. Passive Funds Still Have to Own Its Bonds.

Russia could default on its debt as soon as this month, and investors still own billions of dollars of the securities through emerging-market bond funds. 

Russian financial markets have been called “uninvestable” after the country’s invasion of Ukraine was met with sanctions from the U.S., Europe, and other Western nations. The sanctions, meant to isolate Russia from the global financial system, include cutting off many Russian banks from key financial infrastructure and freezing its central bank’s assets. 

As a result, S&P Global Ratings downgraded Russia’s credit rating to CCC-minus, one step above default. That is either five or six notches below its prior rating, depending on the currency of its debt.

Russia’s next foreign-currency debt payment is due March 16, according to Bloomberg data. Pricing on that debt reflects substantial risk, as it was quoted around 30 cents on the dollar late Thursday on Bloomberg. If Russia does default on that debt, it would be unprecedented; during its late-1990s financial crisis it continued to pay most of its foreign-currency debt. 

Yet emerging-market bond benchmark providers still include Russian ruble-denominated bonds in their indexes. That means passively managed emerging-market debt funds couldn’t sell the bonds even if there was a liquid market for them.