This week's interesting finds

Derek, partner since 2016 (Milton, Ontario)   

This week in charts 

Private credit   

Employee efficiency  

Warren Buffett won’t go near it, so why has CPP Investments placed a third of our pension assets with ‘private equity?’ 

When Canada’s national pension plan reported financial results in May, one fact really stood out for me: a full third of its assets — about $190 billion — are invested in private equity. 

Different from public equity, where investors buy a stake in a publicly listed company, private equity refers to the private ownership of non-listed firms or of those that were once public and have been since taken private. CPP Investments invests in private equity in two ways. The first is via direct investments, where it holds ownership stakes that vary from passive, minority positions, up to 100% control of private companies. The second is through private equity funds run by private equity firms, such as KKR and Blackstone. In this type of investment, CPP commits an amount (typically, a few hundred million dollars) alongside other big (mostly institutional) investors. 

On the face of it, this investment approach seems reasonable — struggling businesses could always use fresh cash injections and new leadership. But some feel private equity has a tendency to put profits ahead of ethics. 

But despite increasing concern about private equity tactics, over the past decade CPP Investments has shifted more and more of its assets into that investing category in search of high returns. Private equity now accounts for 33 per cent of their portfolio. For comparison, CalPERS, the largest U.S. pension fund, has only about 11% of its assets invested in private equity, while Norway’s oil fund, one of the world’s largest wealth funds, has no investments in private equity at all. 

Ethical questions are not the only concern when it comes to CPP’s investments in private equity. There is also the lack of transparency. While CPP regularly commits hundreds of millions of dollars to private equity funds, contributors and beneficiaries often have no idea how the money is really invested. 

Private equity investments cannot be marked-to-market in the same way that public equities are, since these are stakes in private companies. This could create ambiguities with respect to the true value of some private equity holdings. Since the “market value” of a private equity fund is reported by the private equity firm that runs it, some question whether reported values can always be trusted. 

Additionally, since usually there is a gap (of months, or in some cases years) between the time at which an institution (such as CPP Investments) commits funds to a private equity investment and the time at which the money is actually transferred, there is some ambiguity in the method used for calculating returns. 

The CPP Investments’s heavy reliance on returns generated by private equity requires a serious debate.

But if fresh academic research shows that there is no added value in private equity, and Warren Buffett — arguably the most successful investor in the world — is highly skeptical about private equity, I think Canadians should be concerned.   

Buyout groups raise debt against portfolios to return cash as dealmaking slows 

Private equity fund managers are borrowing against asset portfolios to return cash to investors as they struggle to exit investments, adding another layer of debt to the loans financing their corporate buyouts.

Firms are increasingly resorting to the technique, called net asset value financing, because rising debt costs and concern over the economy are making it difficult for them to sell or list the companies they own. 

NAV financing is perceived as less risky than lending to a single company. It is also cheaper for the borrower, according to private equity executives. 

But some analysts have voiced concerns that such borrowing heaps extra debt on buyout portfolio companies that are already grappling with higher borrowing costs and a weakening economic outlook. 

He added that NAV financing had provided “an alternative means to introduce liquidity” at a time when “all M&A metrics are down and exit activity is dramatically reduced [and] refinancing at the individual asset’s level is more expensive and difficult”. 

Transformers: the Google scientists who pioneered an AI revolution 

In early 2017, two Google research scientists, Ashish Vaswani and Jakob Uszkoreit, were in a hallway of the search giant’s Mountain View campus, discussing a new idea for how to improve machine translation, the AI technology behind Google Translate. 

The AI researchers had been working with another colleague, Illia Polosukhin, on a concept they called “self-attention” that could radically speed up and augment how computers understand language.

Polosukhin, a science fiction fan from Kharkiv in Ukraine, believed self-attention was a bit like the alien language in the film Arrival, which had just recently been released. The extraterrestrials’ fictional language did not contain linear sequences of words. Instead, they generated entire sentences using a single symbol that represented an idea or a concept, which human linguists had to decode as a whole. 

The cutting-edge AI translation methods at the time involved scanning each word in a sentence and translating it in turn, in a sequential process. The idea of self-attention was to read an entire sentence at once, analysing all its parts and not just individual words. You could then garner better context, and generate a translation in parallel. 

The three Google scientists surmised this would be much faster and more accurate than existing methods. They started playing around with some early prototypes on English-German translations, and found it worked. During their chat in the hallway, Uszkoreit and Vaswani were overheard by Noam Shazeer, a Google veteran who had joined the company back in 2000 when Google had roughly 200 employees. Shazeer, who had helped build the “Did You Mean?” spellcheck function for Google Search, among several other AI innovations, was frustrated by existing language-generating methods, and looking for fresh ideas. 

So when he heard his colleagues talking about this idea of “self-attention”, he decided to jump in and help. “I said, I’m with you . . . let’s do it, this is going to make life much, much better for all AI researchers,” Shazeer says. 

The chance conversation formalised a months-long collaboration in 2017 that eventually produced an architecture for processing language, known simply as the “transformer”. The eight research scientists who eventually played a part in its creation described it in a short paper with a snappy title: “Attention Is All You Need.” 

Today, the transformer underpins most cutting-edge applications of AI in development. Not only is it embedded in Google Search and Translate, for which it was originally invented, but it also powers all large language models, including those behind ChatGPT and Bard. It drives autocomplete on our mobile keyboards, and speech recognition by smart speakers. 

Its real power, however, comes from the fact that it works in areas far beyond language. It can generate anything with repeating motifs or patterns, from images with tools such as Dall-E, Midjourney and Stable Diffusion, to computer code with generators like GitHub CoPilot, or even DNA. 

Vaswani, who grew up in Oman in an Indian family, has a particular interest in music and wondered if the transformer could be used to generate it. He was amazed to discover it could generate classical piano music as well as the state-of-the-art AI models of the time. 

“The transformer is a way to capture interaction very quickly all at once between different parts of any input, and once it does that, it can . . . learn features from it,” he says. “It’s a general method that captures interactions between pieces in a sentence, or the notes in music, or pixels in an image, or parts of a protein. It can be purposed for any task.” 

The genesis of the transformer and the story of its creators helps to account for how we got to this moment in artificial intelligence: an inflection point, comparable to our transition on to the web or to smartphones, that has seeded a new generation of entrepreneurs building AI-powered consumer products for the masses. 

But it also highlights how Google’s evolution into a large bureaucratic incumbent has stifled its ability to let entrepreneurialism flourish, and to launch new consumer products quickly. All eight authors, seven of whom spoke to the Financial Times, have now left the company.   

This week’s fun finds 

Monday night nailbiter 

EdgePoint Football Club gave the fans an exciting finish to its penultimate game of the regular season. After trailing 1-2 at the half, two unanswered goals in the second frame brought the team’s record to 4-0-2. 

The latest EdgePointer of the Month features our CFO Norm Tang. 

Our CFO Norm reviews many important things at EdgePoint, but his most critical assessments might be using a detailed scoring system to rate our EdgePoint moais (company lunches to bring people together). He’s proof that there is accounting for taste. Norm’s discerning nature isn’t limited to food – he has recommendations for almost everything from sneakers to power tools to cars. The former competitive motorcycle rider may have hung up his racing suit, but Norm still organizes company outings to go-kart tracks to feed his need for speed. We’re also very fortunate that he’s as skilled with words as he is with numbers since Norm’s company-wide E-mails often keep us laughing (or running to the kitchen when he brings in a couple dozen of his favourite Jamaican patties). 

Prior to joining EdgePoint, Norm worked as a senior manager at KPMG LLP’s Financial Institutions and Real Estate Assurance practice. He earned his B.Comm. from the University of Toronto and is both a Chartered Accountant and a Chartered Professional Accountant. Norm is also Chief Financial Officer of Cymbria Corp. and Director of Finance of EdgePoint Investment Group Inc. 

Norm’s office is a testament to his love of collecting things, and in that spirit, he decided to share his list of top three places that he’s crashed a motorcycle: 

3) Entering the hairpin at Shannonville Motorsport Park – “It particularly sucked because it was a high-side crash and I ruined my favourite helmet and tore my rotator cuff. I also realized later that I had a concussion.” 

2) The carousel also at Shannonville – “Memorable because it ended my amateur racing career. I tore my other rotator cuff and it took about three months before I could lift my arm over my head. I learned that 30 years of age is about when the body starts making business decisions for you.” 

1) Making an outside pass at Turn 2 at Mosport during practice – “One of the more terrifying corners at any racetrack on planet Earth. It’s extremely fast (160+ km/h), downhill, completely blind (you have to be turning before you can see the turn), and it’s off-camber. I slid all the way and hit the tire wall. Two hours later I repaired the bike and put it on pole so it wins #1 crash.” 

Scientists Discover That Metals Heal Themselves in 'Astonishing' Breakthrough 

Scientists have observed metal “healing” itself for the first time, an unexpected discovery that challenges basic tenets of materials science and could pave the way toward more durable metal structures, reports a new study. 

The breakthrough was made at Sandia National Laboratories during an experiment that was initially focused on the growth of nanoscale fatigue cracks on metals, such as platinum. Researchers including Brad Boyce, a staff scientist at Sandia, watched the tiny cracks form and grow in the metal as expected, but were stunned to see the metal autonomously welding itself back together. 

Human beings, along with countless other lifeforms, have evolved ways to heal ourselves from injuries and illnesses, but reproducing this restorative ability in artificial materials can be a tall order. Some substances, such as plastics and ceramics, demonstrate remarkable self-healing abilities, but few experts had considered that metals might be able to autonomously mend their wounds. 

While the discovery may evoke visions of T-1000 robots or indestructible metalworks, the long-term implications of this self-healing process remain unclear. That said, the researchers noted in the study that “self-healing has the potential to impact numerous structural applications of metals, in particular fatigue failures under cyclic loading where delayed catastrophic failure is difficult to anticipate, even given extensive empirical data.” 

The Disneyland 'first pickle' award that’s almost impossible to win 

“The first pickle,” she said. “It’s a real thing. You get an award if you buy the first pickle of the day from one specific pickle cart at Disneyland.” 

The legend is real. The first person of the day to purchase a $3.99 pickle from the fruit cart midway down Main Street in Disneyland Park gets a special “first pickle” pin. Simple, right? As I would soon find out, it was the complete opposite of simple. Trying to get the first pickle turned out to be one of the most difficult things I’ve ever done at Disneyland. 

First, there was the planning stage. Disneyland starts letting people into the park half an hour before rope drop: If the park opens at 8 a.m., for example, the gates open at 7:30 a.m. But you can’t just saunter up at 7:30 a.m. expecting to get straight through. There’s parking to consider. Security lines. Trams to Downtown Disney. Plus, you'll need to get past all the people queued up to rope drop who will inevitably have gotten there earlier.

This week's interesting finds

Second quarter commentaries are now live!

This quarter, Sydney Van Vierzen talks about three structures at EdgePoint that guide almost every decision we make, while Derek Skomorowski discusses why market timing, especially with fixed income, is so difficult. 

Amy and Bryan, partners since 2016 and 2015 (Toronto, Ontario)   

This week in charts 

Healthcare   

Private equity 

Trade partners 

Tech stocks   

China flexes critical metals muscles with export curbs 

China's threat to curb exports of gallium and germanium from the start of August marks an escalation in the global competition for critical minerals and metals. 

Both are esoteric metals with multiple applications across a spectrum of cutting-edge technologies, particularly silicon chips for the semiconductor sector. 

As such, China's move seems a calibrated response to the U.S. Chips Act and the increasing pressure on U.S. allies to restrict sales of sensitive microchip technology to the country. 

Both gallium and germanium are extremely rare metals and are derived only as by-products from the aluminium and zinc processing streams respectively. 

China's supply-chain dominance results from the country's status as the world's largest producer of aluminium and refined zinc. 

China last year accounted for around 98% of the world's production of low-grade primary gallium, the core feed-stock for the gallium supply chain, according to the United States Geological Survey (USGS). Exports last year were 94 metric tonnes, up 25% on 2021. 

Rare earths are again in the spotlight. As is just about every other critical mineral China dominates.

Gallium and germanium controls "are just the start" if the West continues to target China's high-tech sector, former Vice Commerce Minister Wei Jianguo told the China Daily newspaper. 

The warning raises the prospect of further escalation in the simmering critical minerals war between the West and China. 

China has no shortage of pressure points to push, from rare earths to cobalt to lithium and even electric vehicle batteries. 

China’s Drop in Exports Signals Deepening Slowdown in Global Trade 

Exports are crumbling in China and across Asia, showing the deepening toll that rising interest rates are taking on global trade and economic growth. 

Chinese exports fell at their steepest annual pace in June since the early days of the pandemic in February 2020. China isn’t the only Asian export powerhouse reporting sinking overseas sales. Exports from Taiwan fell 23% in June compared with a year earlier, while Vietnamese exports were down 11%. Exports from South Korea were down 6%, according to official figures compiled by data provider CEIC. 

Global trade has been softening for months as Western consumers quit spending so much on electronics, home improvements and other consumer goods after splurging during the pandemic. Instead, they have chosen to spend more of their income on eating out, traveling and other services. 

Now, trade is facing new pressure from cooling growth in the U.S. and Europe as surging borrowing costs squeeze consumer and business spending. Many economists expect the U.S. to tip into recession this year. 

Longer term, the outlook for global trade has taken a hit as major economies push to reorder global supply chains and bring a bigger slice of manufacturing and investment back home. Some economists now see global trade growing more slowly in the years ahead than the global economy, reversing a years long trend that was a hallmark of deepening economic integration. 

A growing share of China’s exports are heading to regions including the Middle East and Latin America, reflecting strengthening economic links thanks to Chinese investment and its hunger for natural resources. Exports to Russia surged in June, reflecting close ties between Moscow and Beijing and the effect of Western sanctions on Russian imports. 

The International Monetary Fund said in a recent report that it anticipates global investment by rich countries will increasingly flow toward other advanced economies, to the detriment of developing nations that need foreign investment to spur economic development. 

Opinion: When allies seek Canada’s natural gas, we say ‘sorry’ – that has global consequences 

Last year, Germany – and more recently Japan, in trade discussions in line with Canada’s Indo-Pacific strategy – made it known that access to Canadian energy was among its top priorities. 

Yet no deals were struck. 

While export facilities for liquefied natural gas (LNG) do take time to build, getting the ball rolling did not appear to be part of the conversation when Germany and Japan asked for our help. 

Canada has 1,373 trillion cubic feet of natural gas resources available for production – enough to power British Columbia for centuries. With our country’s environmental policies, Canadian natural gas is some of the lowest emission, most sustainably produced in the world. 

Natural gas is a reliable, affordable, lower-carbon ready-now fuel source. It can significantly reduce global emissions by displacing coal (which today generates 40 per cent of the world’s electricity and produces roughly double the emissions of natural gas) and supporting renewables, which require a backup fuel source because the sun isn’t always shining and the wind is not always blowing. 

Our allies share Canada’s climate ambitions – we’re all working to achieve net zero. Both Germany and Japan see a role for reliable natural gas as part of the equation. So should Canada. 

Canada also needs to be less myopic when it comes to energy security and fighting climate change. As global citizens, we need to think more broadly about how we can help reduce the 98.5 per cent of emissions produced beyond our borders. 

There’s a success story just south of us: in the past 15 years, switching from coal to natural gas in the U.S. has accounted for nearly two-thirds of all U.S. greenhouse gas emissions reductions. This formula can and should be replicated in the rest of the world – and Canadian LNG can make it happen. 

We also can’t overlook that there are more than 700 million people in the developing world with no access to electricity. Connecting them to reliable energy could lift millions from poverty and drive economic growth. Canadian LNG should be helping here, too. 

Many Indigenous groups have natural resources they want to develop to make a future for themselves and provide wealth for generations to come. The energy industry has an opportunity (in fact, I feel an obligation) to help them become full economic partners. 

However, Indigenous groups too often struggle to access capital, which is why a national Indigenous loan-guarantee program is so needed. There are already successful loan-guarantee programs at the provincial level in Alberta, Saskatchewan and Ontario that can be used as a model – but to truly take advantage of the opportunity, a national program is essential.   

This week’s fun finds 

EdgePoint Football Club puts on a clinic 

Tired of ties and inspired by a guest coach and a player from Québec, the team drubbed the opposition 10-2. Their record now stands at 3-0-2 with two games to go before the regular season ends. 

How to learn something new every day 

Learning changes the brain: Existing bonds between neurons — nerve cells that send messages signaling everything from breathing to thinking — are strengthened; new pathways between neurons are developed. Repeated exposure to an activity, like knitting or driving a car, strengthens these connections, and thus, we learn. Over time, recalling these skills or memories becomes easier. 

By adulthood, people usually have an idea of how and where they learn best, [associate professor of psychology Rachel] Wu says. Think back on your previous schooling or hobbies. Do you grasp concepts through trial and error? Did you feel a mastery over a topic when you were able to explain it to others? Maybe you prefer to learn at your own pace with a lot of practice along the way. Think about what will motivate you more, Agarwal says: learning on your own, or with an instructor. Some people favor self-guided instruction at their own pace; others are inspired when surrounded by fellow students. 

One way to ensure you’re advancing is through feedback. An instructor can correct your pronunciation; a tutor can show you where you went wrong on a math problem. Even self-guided learning has feedback built in, Wu says: If you start beekeeping with the help of YouTube, but produce no honey, that’s a clear sign something went awry. “Even with trial and error by yourself,” Wu says, “you would still get feedback. It’s just from the environment and a little bit slower than feedback from an instructor.” Struggle, mistakes, and “failure” are essential parts of the learning process, Wu says. These missteps are valuable forms of feedback you can learn from. In turn, you’ll improve your subsequent performances — and that’s learning. “Learning, in general, happens,” Wu says, “when you make a mistake, and then you change your behavior to adjust to that.” 

Instead of trying to cram knowledge in, focus on verbalizing what you’ve learned, [assistant professor and cognitive scientist Pooja] Agarwal says. Known as retrieval practice, simply recalling and reflecting on information can help you retain those details. Thinking back on what you read in a book yesterday, telling a friend something funny you heard on a podcast, mentioning what you ate for breakfast — that’s retrieval practice. An easy way to put retrieval practice to work is to write down — or tell your partner or roommate — one thing you learned at the end of every day. “That will boost your memory and your long-term learning,” Agarwal says, “without taking more than 30 seconds and without any cost at all.” 

Why Songs Get Stuck in Your Head—and How to Stop Them 

Scientists call earworms involuntary musical imagery, or INMI, because they burrow into our heads uninvited and without warning. At our house, we leave a local alternative-music radio station on in the background. The DJs favor a song called “Heatwaves,” by Glass Animals. Let’s just say I’m not a fan, and yet, that’s the song that frequently plays in my mind when I awaken from a dreamlike state: “Sometimes, all I think about is you. Late nights in the middle of June. Heat waves been fakin' me out. Can't make you happier now.” And I know I’ll be singing those few catchy lines while I’m brushing my teeth later that night. 

Music that is simple, repetitive, and easy to sing (or hum) is most likely to get stuck. Think Miley Cyrus’ “Flowers,” and Queen’s classic “Bohemian Rhapsody,” and the title-says-it-all track “Can’t Get You Out of My Head,” by Kylie Minogue. Even the Rocky theme song can fight its way in. Nursery rhymes and kid-friendly tunes are also strong earworm contenders. They’re composed to be catchy, with an ear toward repetition, and as a result, memorization. If the “Itsy Bitsy Spider” crawls into your head, now you know why. 

It turns out that certain emotional states, such as when we’re tired or overworked, can trigger earworms. (In a Goldilocks-like quandary, you may be more vulnerable if you’re too stressed or not stressed enough—in other words, bored.) Maybe that’s why I frequently wrestled with earworms when my three sons were young. The combination of simple music and sleep deprivation created a fertile breeding ground for the pesky tunes to take hold. 

If an earworm has a hold on you, scientists believe the following strategies may help obliterate it: 

• Complete the song. 
• Distract yourself.
• Diversify your playlist.
• Mix up the lyrics. 

While you may be tempted to try to suppress earworms, [marketing professor James] Kellaris cautions against it. They’re like a cognitive itch. Scratching them (or in this case, fixating on how to annihilate them) will only make the episode last longer. Instead, when a pesky earworm does get trapped in your head, try to remember that “you can’t always get what you want … but if you try sometimes, you get what you need.”

This week's interesting finds

 

Luke, partner since 2022 (Calgary, Alberta)  

This week in charts 

Fixed income   

Housing   

Investors spend $200mn on ‘worthless’ Bed Bath & Beyond shares 

Investors have spent almost $200mn trading theoretically worthless shares in Bed Bath & Beyond since the homewares retailer went bankrupt at the start of May, in the latest manifestation of the meme stock craze. 

Bed Bath & Beyond was one of a handful of unloved consumer brands that became popular with retail investors during the coronavirus pandemic, with small investors arranging on social media to push share prices far above what most professionals considered rational. 

Many of the companies used the enthusiasm as an opportunity to prop up their ailing businesses by issuing new shares, but Bed Bath & Beyond eventually filed for Chapter 11 bankruptcy protection earlier this year and was delisted. 

Nevertheless, an average of 18mn of the company’s shares have changed hands each day on over-the-counter markets since then, according to Bloomberg data. Users of the Reddit website have been sharing highly speculative theories about possible turnround plans for the retailer. 

When a company declares bankruptcy, it is delisted from the major exchanges and its stock trades on the pink sheets for a fraction of its original value. “These stocks will lurk around until the bankruptcy estate is settled, which can take months or years,” said Steve Sosnick, chief strategist at Interactive Brokers. 

Whether shareholders receive anything at the end of bankruptcy proceedings depends on whether bondholders, who get paid before equity holders, can recover their money. 

However, the bonds of Bed Bath & Beyond are trading at less than 2 cents on the dollar. “The bond market is telling you the stock is worthless,” Sosnick added. 

Subprime Auto Bondholders Face Possible First Hit in Decades 

Bonds backed by car loans made by U.S. Auto Sales and American Car Center, two used-car dealers that shut their doors earlier this year, have been veering into distress in recent weeks. Borrowers have been falling behind on payments, and Citigroup believes that some of the riskiest parts of three different asset-backed deals could fail to return principal to investors. 

Any lost principal would be a rare event in the ABS market, where subprime auto bonds haven’t failed to return investors’ money since the 1990s, Citigroup said. Prices on a bond issued by U.S. Auto Sales, owned by private equity firm Milestone Partners, have dropped to distressed levels, trading at a little over 18 cents on the dollar on June 26, according to Trace data. 

The disruption is a major test for the subprime auto ABS market, where issuance grew by more than 70% to $40.5 billion in the five years through 2021, according to data compiled by Bloomberg News.

The deterioration of the bonds issued by ACC and U.S. Auto Sales comes months after both companies announced they were closing their dealerships. Both firms transferred the collection of payments on their loans, known as servicing, to Westlake Portfolio Management after going bust. A spokesperson for Westlake declined to comment. 

“The bonds are deteriorating in part” because it takes a few months to transfer the servicing of the loans “and meanwhile consumers may cease making payments,” Eugene Belostotsky, a securitized products strategist at Citi, said in an interview. “The lenders went under because borrowers were not paying back the debt, now that’s just accelerating.”’ 

One of the reasons auto ABS losses are almost unheard of is the use of investor protections known as overcollateralization. That means the amount of loans backing the bonds exceeds the size of the principal on the bonds, allowing at least some borrowers to default without any losses for bondholders. 

But for the two subprime issuers that ran into difficulties this year, those protections have waned dramatically on some securities. The overcollateralization for the 2022 U.S. Auto bond has fallen to just 5.5%, compared with a target of 35%, according to a Citigroup report dated June 30.   

This week’s fun finds 

Meghan brings Detroit to the office 

Meghan’s moai (our version of bringing EdgePointers together for a meal) was Detroit-style pizza. Now that’s deep and delicious! 

EdgePoint Football Club “ties” another one on 

After leading for most of the game, the opposing team scored a late goal to tie the match 3-3. With a record of 2-0-2, the team’s still on track to make the playoffs.   

An otter in Santa Cruz is hassling surfers — and stealing their boards 

An aggressive sea otter in California is hassling locals by riding boards she stole from surfers in the lineup. 

Steamer Lane is a legendary point break nestled along the rocky shores of Santa Cruz, home to swaths of experienced surfers, as well as a 5-year-old female sea otter with a growing reputation for repeatedly confronting surfers and kayakers. 

A team from the California Department of Fish and Wildlife (CDFW) and the Monterey Bay Aquarium is looking for the otter to catch and rehome her. Unfortunately, once the otter is caught, Monterey Bay Aquarium spokesperson Kevin Connor told NPR, she won't be able to return to the wild. 

The animal, officially known as otter 841, was born in captivity — because its mother had also been too friendly with humans — and then successfully released into the wild in June 2020, Connor told NPR. It wasn't until September 2022 that she started exhibiting her bizarre behavior at Steamer Lane.   

The mathematically correct way to tie your shoes 

If you’re wearing shoes right now, this is something you can tell simply by looking at them. Look at the bow in your shoes and notice how it sits. 

• Does the knot sit “squared up” above your shoelaces, do the loops want to orient themselves horizontally across your laces, and if you try to move them to an angle in either direction, do they revert to that horizontal position? 
• Or does the knot twist at an angle above your laces, do the loops want to twist to the side at a severe angle rather than sit horizontally across your laces, and if you try to move them to an angle to the horizontal, are they happy to remain there? 

If you’re in the first camp, you’ve likely tied a good (reef) knot that will remain tied all day long. If you’re in the second camp, you’ve likely tied a bad (granny) knot that will come undone at some point throughout the day. Some people, in an attempt to mitigate a bad knot, have adopted the tactic of simply “double-knotting” their shoelaces, but even that is often insufficient to keep them from coming undone throughout the day. (This also applies to any bow tie-wearers out there. If your bow tie wants to twist at an angle, you’re probably granny-knotting it without even thinking about it!) 

With three either/or decisions to affect the configuration of your knot, these eight total possibilities can lead to either a reef knot (which is good) or a granny knot (which is bad), all dependent on which combination you choose.

This week's interesting finds

Miguel, partner since 2022 (Toronto, Ontario)  

This week in charts 

Housing   

Equities 

Asset classes   

Time to accept that wind farm costs are not falling 

There has been a consistent narrative that the cost of building new wind farms is falling, with falling subsidy prices being offered as evidence. I have challenged this narrative in the past, pointing out that evidence from the accounts of windfarms themselves does not support this argument, citing the work of Professor Gordon Hughes at the University of Edinburgh, and indeed his work as subsequently been replicated by Andrew Montford of the Global Warming Policy Foundation (“GWPF”). However, there is another big reason to question this narrative: turbine manufacturers are losing money hand over fist. 

Falling subsidy prices at the same time as massive manufacturing losses makes no sense and is clearly not sustainable. Of all the projects that secured Contracts for Difference (“CfD”) agreements in the most recent subsidy round, known as AR4, only two have actually taken their Final Investment Decision (“FID”) – ScottishPower’s East Anglia 3 project, and Moray West which is a joint venture between EDP Renewables and ENGIE. Ørsted has warned that Hornsea 3 could be at risk without Government action “to maintain the attractiveness of the investment environment”. It has said it will make its final investment decision later this year. 

The Government has said that the CfD is structured to take inflation into account, but other than introducing 100% capital allowances for a limited period in a bid to stimulate business investments in the Spring Budget, it has offered little additional help to renewable developers. “Long-life assets” only benefit from 50% relief, with many commentators believing that wind turbines will be considered to be “long-life assets” – these are typically assets with a life of at least 25 years, which tends to be the upper limit of the life of a wind turbine. 

Turbine manufacturer losses began to be commented upon last year, and largely explained away as being a result of supply chain costs increasing due to covid and the Ukraine war. But looking at the figures more closely it is clear that the losses pre-date these events: 

Ratings agency Fitch, said that “while turbine manufacturers’ profitability is under pressure due to increased raw material prices, supply chain difficulties and temporarily reduced orders”, the long-term sector fundamentals remain supportive. It pointed to significant cost increases in a market where most customer contracts are fixed-priced putting pressure on OEMs’ (Original Equipment Manufacturers) margins, and while OEMs have increased their selling prices over the past year, the pace of cost growth has been higher, leading to negative margins. Fitch expects margins to recover later in the year as manufacturers adjust selling prices, and raw materials costs fall, however, it says that the rate of new orders has slowed over the past year, due to adverse economic conditions and slow permitting processes in Europe. 

Professor of Economics at the University of Edinburgh Gordon Hughes compared actual capital costs with costs reported in public announcements before or during construction – both adjusted for inflation (to 2018 prices). He found that on average, actual costs were 18% higher than reported costs and in a third of cases the cost overrun was at least 30%. Reported capital costs were clearly affected by an “optimism bias”, but even so, there was a large increase in the reported capital cost per MW of capacity for off-shore wind farms over the 20-year period, with the main change being between projects completed up to 2009 and those completed in 2015-2018. 

Clean Energy’s Latest Problem Is Creaky Wind Turbines 

Siemens Energy fell 36% on Friday morning after the company withdrew its fiscal 2023 profit guidance late Thursday. Components in wind turbines made by its subsidiary Siemens Gamesa are wearing out faster than expected. The news isn’t just a blow for the company’s shareholders, but for all investors and policy makers betting on the rapid rollout of renewable power. 

The problem appears to involve critical parts like bearings and blades. The average lifespan of a wind turbine can be up to 20 years, but the wear and tear has been spotted in both newly installed and older turbines. 

The creaky components, which affect 15% to 30% of the installed onshore fleet, will be expensive to fix. Management thinks the cost could run upward of €1 billion, equivalent to $1.09 billion, effectively wiping out more than a third of the profit the company is expected to make doing maintenance on wind turbines it has already installed, according to Bernstein analyst Nicholas Green.

Siemens Gamesa has been a problem child for years due to cost overruns and supply-chain challenges. Siemens Energy recently took full control in a roughly €4 billion buyout of minority shareholders to turn it around away from the full glare of the public market—or so it hoped. 

One risk for investors is that the same faults crop up at other wind-turbine manufacturers as a result of shared supply chains. Shares in rival Vestas Wind Systems were down 7% on Friday morning. 

A fundamental design flaw is an even more worrying possibility. Turbine makers have been under pressure to make bigger, more powerful wind turbines and may have overstretched the technology. When things go wrong with such massive pieces of equipment, they are costly to fix. The nacelle that holds all of the turbine’s generating components can be as large as a house.

This week’s fun finds 

EdgePoint Football Club remains undefeated 

The only thing that’s slowed the team down so far is the long weekend. A shorthanded roster resulted in a 2-2 tie, bringing the season record to 2-0-1.   

A taste of the Ionian sea 

For her moai (our version of bringing EdgePointers together for a meal), Florika brought in Albanian food for the internal partners to try. 

This Year Might Be the Worst Tick Season Ever. Here's Why 

“From 2020 to this year, I would say it’s a 100% increase in the number of ticks humans have encountered,” says Saravanan Thangamani, professor in the department of microbiology and immunology at SUNY Upstate Medical University who tracks ticks and tick-borne diseases across New York. Until recently, Thangamani invited people from across the state to send in ticks they had encountered for identification and counting, but the sheer number of submissions and the lack of operational funds to keep up with them forced him to shut down the program. 

As with so much else, climate change is playing a big role in extending ticks’ breeding and biting seasons. Brief, mild winters and long, hot springs and summers are incubators for ticks, especially in the Northeast and the Midwest, which once featured punishingly cold winters, but increasingly do not.

Rising temperatures affect not only the presence of ticks native to a given area, but the migration of new ones. “We’re starting to see southern species of ticks coming north,” says Dina Fonseca, professor and chair of the department of entomology at Rutgers University. “The Gulf Coast tick is now established in New Jersey. Staten Island [New York] has had the Gulf Coast tick for three or four years already, maybe five. It wouldn’t be here if it wasn’t for the fact that it’s warmer.” 

In some cases, climate change actually reduces the population of ticks. Fonseca points out that the southwest is getting increasingly dry as climate change-related droughts persist, and that tends to kill off tick populations. The same is true for the plains and the western range. But elsewhere, a warming climate is a boon to ticks. 

The black-legged tick—also called the deer tick, which carries Lyme disease, “used to be in the Northeast and now it has moved all the way to Eastern Canada,” says Moulaei. 

As for what you can do to protect yourself from any tick bites, the advice remains the same: If you live near an area that has ticks or you venture into forested or grassy parts, tuck your pants into your socks, use insect repellent on yourself and your clothes, do a complete tick check of yourself and your pets when you get home, shower shortly after you conduct your check, and run your clothes through the washer and especially the dryer on high heat, because hot temperatures can kill ticks. 

Junk websites filled with AI-generated text are pulling in money from programmatic ads 

Over 140 major brands are paying for ads that end up on unreliable AI-written sites, likely without their knowledge. Ninety percent of the ads from major brands found on these AI-generated news sites were served by Google, though the company’s own policies prohibit sites from placing Google-served ads on pages that include “spammy automatically generated content.” The practice threatens to hasten the arrival of a glitchy, spammy internet that is overrun by AI-generated content, as well as wasting massive amounts of ad money. 

Most companies that advertise online automatically bid on spots to run those ads through a practice called “programmatic advertising.” Algorithms place ads on various websites according to complex calculations that optimize the number of eyeballs an ad might attract from the company’s target audience. As a result, big brands end up paying for ad placements on websites that they may have never heard of before, with little to no human oversight. 

To take advantage, content farms have sprung up where low-paid humans churn out low-quality content to attract ad revenue. These types of websites already have a name: “made for advertising” sites. They use tactics such as clickbait, autoplay videos, and pop-up ads to squeeze as much money as possible out of advertisers. In a recent survey, the Association of National Advertisers found that 21% of ad impressions in their sample went to made-for-advertising sites. The group estimated that around $13 billion is wasted globally on these sites each year. 

Now, generative AI offers a new way to automate the content farm process and spin up more junk sites with less effort, resulting in what NewsGuard calls “unreliable artificial intelligence–generated news websites.” One site flagged by NewsGuard produced more than 1,200 articles a day. 

NewsGuard says that most of the AI-generated sites are considered “low quality” but “do not spread misinformation.” But the economic dynamic of content farms already incentivizes the creation of clickbaity websites that are often riddled with junk and misinformation, and now that AIs can do the same thing on a bigger scale, it threatens to exacerbate the misinformation problem.