This week's interesting finds

Tye & Sylvie, partners since 2008 and 2010 (Montréal, Québec) 

Translation: Business values don’t change daily / Investor emotions (and stock prices) do

This week in charts 

Autos  

 

Diamonds 

My Bonds (Music Video) - Why Treasury Bonds Are So Attractive Now 

With the U.S. national debt surpassing $33 trillion and the largest foreign buyers of Treasury bonds reducing their holdings, the government may need some help finding new buyers. 

Nomura Is Building a $1 Billion Strategy for Private Credit 

The Japanese bank is looking to put down $1 billion from its own balance sheet over the next 18 months to participate on private lending deals, rivaling firms such as Blackstone Inc. and Ares Management Corp., said the people, who aren’t authorized to speak publicly. 

Nomura’s effort — which will involve lending to private equity-backed companies — is being led by Gordon Sweely, the New York-based global head of securitized products and private credit, the people said. 

Though the bank occasionally participated on private credit deals before, it provided one of its first loans under the firm’s newly-established global private credit unit last Thursday, the people said. Teaming up with PGIM, Nomura provided a £110 million ($138 million) term loan and a £20 million working capital bridge facility to back HIG’s takeover of DX Group Plc. 

Nomura is one of many investment banks trying to grab a slice of private credit, a market that has historically taken deals out of the banking industry.   

OpenAI Made an AI Breakthrough Before Altman Firing, Stoking Excitement and Concern 

“The technical breakthrough, spearheaded by OpenAI chief scientist Ilya Sutskever, raised concerns among some staff that the company didn’t have proper safeguards in place to commercialize such advanced AI models, this person said. 

In the following months, senior OpenAI researchers used the innovation to build systems that could solve basic math problems, a difficult task for existing AI models...A demo of the model circulated within OpenAI in recent weeks, and the pace of development alarmed some researchers focused on AI safety.. OpenAI President and co-founder Greg Brockman had been working to integrate the technique into new products. 

… Sutskever’s breakthrough allowed OpenAI to overcome limitations on obtaining enough high-quality data to train new models, according to the person with knowledge, a major obstacle for developing next-generation models. The research involved using computer-generated, rather than real-world, data like text or images pulled from the internet to train new models.” 

This week’s fun finds 

An American Thanksgiving trip to the Lonestar State 

We brought our Texas-sized appetites to the moai (our version of bringing EdgePointers together for a meal) organized by Adam. It’s the second year celebrating the U.S. holiday, so we hope this means it’s now an annual tradition. 

Why Teslas Totaled in the US Are Mysteriously Reincarnated in Ukraine 

For a long time, cars written off in North America have found their way to Eastern European repair shops willing to take on damage that US and Canadian mechanics won’t touch. In 2021, the most recent data available, Ukraine was a top-three destination for used US passenger vehicles sent overseas, close behind Nigeria and the United Arab Emirates. And Ukraine’s wreck importers and repairers are particularly known for their ingenuity. Some have made fixing EVs written off across the Atlantic into a specialty, helping to drive a surge in the number of electric vehicles on the country’s roads, even as the war with Russia rages. 

Though few automakers sell new EVs in Ukraine, the share of newly registered vehicles that are fully electric, 9 percent, is about the same as in the US and nearly double that of neighboring Poland and the Czech Republic. Most of Ukraine’s refurbished EVs come from North America, and many arrive with major damage. 

There’s a ready supply of crashed North American EVs in part because electrics are becoming more common, and also because in recent years, relatively new EVs with low mileage have been written off at a higher rate than their gas-powered equivalents, according to data from insurers. US and Canadian repair shops and insurers see them as more dangerous and difficult to fix. Scrapyards find it hard to make money from their parts and instead ship them abroad. 

The war has even boosted Ukraine’s EV resurrection business at times, by driving up gas prices and making electrics more attractive to drivers. Ukraine has a public charging network of some 11,000 chargers, according to Volodymyr Ivanov, the head of communications at Nissan Motor Ukraine—that’s more than the state of New York, and double the number in neighboring Poland. Since 2018, Ukraine’s government has removed most taxes and customs duties on used EV imports. In the US, electric vehicles tend to be expensive, and the average EV driver is still a high-income male homeowner. North American wrecks, Ukraine’s EV incentives, and its relatively low electricity prices have created a different picture. 

“There is a joke here that all poor people are driving electric cars, and all the rich people are driving petrol cars,” says Malakhovsky. “Tesla is a common-people, popular car because it’s very cheap in maintenance.”

This week's interesting finds

 

Geoff, partner since 2008 (Kingston, Ontario) 

November 17th marked the 15th anniversary of the launch of the original four EdgePoint Portfolios. Thank you for your trust over this time. We will continue to work hard every day to be worthy of it.

The return of the EdgePoint holiday gift list 

Internal partners submitted some of their favourite gift ideas to help anyone looking for something to give to their friends and family. Comfy sweaters, books and, of course, earbuds. 

We also brought back some of our holiday favourites on the EdgePoint store:   

This week in charts 

Company updates   

U.S. small-caps 

U.S. bonds 

 Liquid natural gas 

Chinese researchers claim they can break 2048-bit RSA using quantum computers, entire tech world at risk 

It is fairly well-known among security researchers that quantum computers, once they are powerful enough, will be able to crack the existing encryption technologies. In other words, powerful quantum computers will be able to unlock phones and crack passwords within minutes by 2048-bit RSA encryption, a standard that is used in almost everything smart tech that we have in our life. But the powerful quantum computers don't exist yet. Now, a few Chinese researchers claim that they do not need a powerful quantum computer to crack 2048-bit RSA. The existing quantum computers can do it well enough. A group of Chinese researchers have recently published a scientific paper titled "Factoring integers with sublinear resources on a superconducting quantum processor." In the paper, they have claimed that it is possible to break into the 2048-bit RSA encryption using existing quantum computers. The news comes as a shock to the entire scientific community as the existing quantum computers were never thought to be capable enough of such a move. 

An excerpt from the paper reads, "We demonstrate the algorithm experimentally by factoring integers up to 48 bits with 10 superconducting qubits, the largest integer factored on a quantum device. We estimate that a quantum circuit with 372 physical qubits and a depth of thousands is necessary to challenge RSA-2048 using our algorithm. Our study shows great promise in expediting the application of current noisy quantum computers, and paves the way to factor large integers of realistic cryptographic significance." 

Given that the claim is so startling, most security researchers are sceptical. 

"It might not be correct, but it's not obviously wrong," writes renowned security technologist Bruce Scheiner on his blog. He further adds that the Chinese researchers claimed in their paper that they were able to "factor 48-bit numbers using a 10-qbit quantum computer. And while there are always potential problems when scaling something like this up by a factor of 50, there are no obvious barriers." 

However, the researchers haven't demonstrated their theory on any device larger than 48-bits, which, as per experts, is a major red flag.   

Where Have All the Foreign Buyers Gone for U.S. Treasury Debt? 

Foreigners no longer have an insatiable appetite for U.S. government debt. That’s bad news for Washington. 

The U.S. Treasury market is in the midst of major supply and demand changes. The Federal Reserve is shedding its portfolio at a rate of about $60 billion a month. Overseas buyers who were once important sources of demand—China and Japan in particular—have become less reliable lately. 

Meanwhile, supply has exploded. The U.S. Treasury has issued a net $2 trillion in new debt this year, a record when excluding the pandemic borrowing spree of 2020. 

“U.S. issuance is way up, and foreign demand hasn’t gone up,” said Brad Setser, senior fellow at the Council on Foreign Relations. “And in some key categories—notably Japan and China—they don’t seem likely to be net buyers going forward.” 

Foreigners, including private investors and central banks, now own about 30% of all outstanding U.S. Treasury securities, down from roughly 43% a decade ago, according to data from the Securities Industry and Financial Markets Association. 

The makeup of overseas demand has shifted. European investors bought $214 billion in Treasurys over the past 12 months, according to Goldman Sachs data. Latin America and the Middle East, flush with oil profits, also added to holdings. That has helped offset a $182 billion decline in holdings from Japan and China. 

This week’s fun finds 

AI for a cooler Earth 

What Do U.S. Teens Want To Be When They Grow Up? 

Internet Sleuths Want to Track Down This Mystery Pop Song. They Only Have 17 Seconds of It 

The file is labeled “Pop – English,” indicating the genre and language. “Mid 80s, Bad quality. (Everyone Knows That),” wrote carl92, offering an estimate of when the song might have been recorded. “Everyone Knows That” is an interpretation of a lyric heard in the clip. “I rediscover[ed] this sample between a bunch of very old files in a DVD backup,” carl92 explained in a followup comment. “Probably I was simply learning how to capture audio and this was a left over.” 

The grainy recording, just 17 seconds long, captures what indeed sounds like the catchy hook to an upbeat 1980s New Wave tune, though most of the words are hard to make out. It didn’t attract much interest at first. Yet as the months passed without an identification, each proposal of a potential artist being ruled out one after another, a cultish fascination began to take hold. Two years later, it’s the most-commented thread in WatZatSong history, and there’s a 5,000-strong subreddit devoted to theories about the song. Fans have recorded remixes and covers imagining the missing verses, generated longer versions with AI, and perpetrated successful hoaxes about where the original came from. But the fact remains: no one knows the band behind “Everyone Knows That.” 

The lack of leads is itself intriguing, he says, comparing “Everyone Knows That” to another popular piece of so-called “lost media,” widely known as “Like the Wind” or “The Most Mysterious Song on the Internet.” This was recorded sometime in the 1980s from a German radio broadcast and has likewise thwarted years of investigation into who produced it. (Such artifacts are sometimes given the genre tag of “lostwave.”) But, notes cotton–underground, people researching “Like the Wind” have a full, three-minute audio file of decent quality to work from. The existing short fragment of “Everyone Knows That,” whose precise lyrics are still a subject of debate (some hear the words “ulterior motives” where others hear “fear of emotions,” for example) presents a greater degree of difficulty for audio detectives. Some even believe that carl92, who left WatZatSong after uploading it, pulled off some kind of maddening prank. There’s no end to the list of the potential sources suggested for carl92’s garbled snippet of “Everyone Knows That.” Some believe he got it off an MTV broadcast in the 1990s, while others are convinced it was a commercial jingle. It could be an unreleased demo by a group that never hit the big time. Or it might be from a compilation of muzak created by a Japanese company and played in McDonald’s locations in Eastern Europe — except that one investigator called the distributor and confirmed they have no such track in their databases. These dead ends have only multiplied. 

“It was fun to have hope, but as of late, the hoaxes have gotten so common, it’s becoming increasingly more and more disruptive to the search,” [Reddit user] sodapopyarn laments. Still, it often appears as if creative inspiration — not the dogged quest for cold, hard truth — is what keeps the discussion going. 

As one YouTube commenter wrote on a recent music video that convincingly fleshes out the song in polished form, complete with suitably neon 1980s visuals: “Even if we find the original, it’s probably not gonna be as good as this.”

This week's interesting finds

 

Marie Hélène, partner since 2017 (Montréal, Québec) 
English: Investing isn’t about seizing the day, but mapping out your future  

This week in charts 

U.S. equities 

Balanced portfolios

U.S. government spending

Beauty products   

It’s U.S. vs. China in an Increasingly Divided World Economy 

China passed a significant milestone last fall: For the first time since its economic opening more than four decades ago, it traded more with developing countries than the U.S., Europe and Japan combined. It was one of the clearest signs yet that China and the West are going in different directions as tensions increase over trade, technology, security and other thorny issues. 

For decades, the U.S. and other Western countries sought to make China both a partner and a customer in a single global economy led by the richest nations. Now trade and investment flows are settling into new patterns built around the two competing power centers. 

In this increasingly divided world economy, Washington continues to raise the heat on China with investment curbs and export bans, while China reorients large parts of its economy away from the West toward the developing world. 

Benefits for the U.S. and Europe include less reliance on Chinese supply chains and more jobs for Americans and Europeans that otherwise might go to China. But there are major risks, such as slower global growth—and many economists worry the costs for both the West and China will outweigh the advantages. 

The International Monetary Fund said in October that fragmentation between China and the West was weighing on the world’s economic recovery this year. A more severe break between U.S.- and China-led blocs could cost the global economy as much as 7% of gross domestic product, worth trillions of dollars, IMF research suggests. 

The economic split deprives companies of access to vital markets that drive profits and makes it harder to share technology and capital, depressing growth. 

China, meanwhile, has invested big sums in Indonesian nickel factories to supply China’s EV industry. Tech firms Tencent and Alibaba have expanded across Asia, Africa and Latin America. Other Chinese companies have targeted renewable energy projects in Latin America and Africa. 

Latin America, Africa and developing markets in Asia now account for 36% of overall Chinese trade, compared with 33% for its trade with the U.S., Europe and Japan, according to a Wall Street Journal analysis of Chinese customs data. As recently as last summer, that trio of advanced markets accounted for a larger share of Chinese trade. 

Part of the explanation is Chinese factories are moving to countries such as Vietnam, India and Mexico to keep selling to U.S. customers while avoiding U.S. tariffs. But China’s growing expertise in affordable smartphones, cars and machinery that appeal to developing-world customers is also helping drive the shift at the expense of Western rivals. 

As Chinese companies displace Western makers of tools and components for finished goods, the country’s use of imports in industrial production has declined by around 50% since its 2005 peak, even as exports have grown, according to data from CPB, a Dutch government agency that tracks global trade.   

More Semiconductors, Less Housing: China’s New Economic Plan 

China’s political leaders, under pressure to support the country’s fragile recovery, are slowly steering the economy on a new course. No longer able to rely on real estate and local debt to drive growth, they are instead investing more heavily in manufacturing and increasing borrowing by the central government. 

For the first time since 2005, when comparable record keeping in China began, banks controlled by the state have started a sustained reduction in real estate lending, data released last week showed. Enormous sums are instead being channeled to manufacturers, particularly in fast-growing industries like electric cars and semiconductors. 

There are risks to the approach. China has a chronic oversupply of factories, well more than it needs for its domestic market. A greater emphasis on manufacturing will probably lead to more exports, an increase that could antagonize China’s trading partners. China’s extra lending also poses a challenge for the West, which is trying to foster extra investment in some of the same industries through legislation like the Biden administration’s Inflation Reduction Act. 

The shift to manufacturing loans underlines Beijing’s reluctance to bail out China’s debt-burdened property market. Construction and housing account for about a quarter of the economy and are now suffering from steep declines in prices, sales and investment. 

China’s investment push might stir more growth in the coming months, partly offsetting troubles in the housing sector. But more central government borrowing, as a replacement for local borrowing, will do little to defuse the long-term drag on growth caused by accumulating debt. 

“I don’t think there is a problem for short-term development, but we have to be concerned about medium and long-term development,” Ding Shuang, the chief economist for China at Standard Chartered, said at a recent forum of Chinese economists and finance experts in Guangzhou. “It’s fair to say real estate is not at a floor.” 

Many economists have expressed concern that throwing more money at manufacturing might not fix the broader economy. The real estate sector is still decaying and is so large that offsetting its troubles with growth in industries like car manufacturing, which is 6 to 7 percent of economic output, won’t be easy. 

How Work From Home Has Reshaped What Americans Buy 

Early in the pandemic, unable to spend on things such as traveling and dining out, and with their finances buoyed by government relief, people bought goods with abandon. This played a role in the supply-chain snarls, the hefty price increases that beset the economy, and in retailers’ scramble to secure as much inventory as possible. As the economy gradually reopened there was a reversal that left many stores burdened with more than they needed. 

Now, the rebound in services’ share of spending seems to have ended, and retailers’ inventory problems largely have been wrung out. Those selling furniture, electronics and appliances, for example, saw their inventory swell to as much as 1.75 times sales in December 2022, according to data from the Census Bureau. As of August, that ratio shrank back to 1.56, which is pretty much in line with prepandemic levels. 

U.S. consumers are still devoting a lot of spending toward goods—a reshaping of the economy that, in addition to any far-reaching consequences it might have, suggests retailers’ 2023 holiday-season sales will be much higher than they might have imagined in 2019. 

Figures from the Commerce Department’s Bureau of Economic Analysis show that U.S. consumers devoted a seasonally adjusted 33.3% of their spending to goods in September compared with an average of 31.4% in 2019. With goods prices moderating lately while services prices continue to climb, inflation doesn’t play much of a role in that. Indeed, adjusted for inflation spending on goods was 20.4% higher in September than the 2019 average, while services spending was just 7.6% higher. 

A survey conducted by the Census Bureau during the latter half of last month showed that, among respondents who answered the question, 29% of U.S. households included someone who had teleworked at least once over the past seven days. That was almost exactly the same share as a year earlier—an indication of the staying power of the work-from-home revolution the pandemic set off. 

People who work from home more don’t avail themselves of some services as much as they used to. They don’t spend as much money taking public transportation to work, for example, or at downtown lunch spots and after-work watering holes. If they used to have a gym membership near their office, maybe now they don’t. They buy stuff instead. 

But a Goldman Sachs analysis shows that the stuff they buy is often a sort of substitution for the services they used to buy. If they aren’t buying a monthly bus pass, maybe they buy an office chair. If they aren’t spending money on a spin class near work, maybe they buy a bicycle.   

This week’s fun finds 

Valuation metrics   

The return of the Hot Sauce reviewers 

Originally the hottest sauce on Hot Ones, the crew reconvened to try The Last Dab. There are now two spicier versions, Apollo and Xperience, that will be tried in the coming weeks (assuming our mouths and stomachs can handle it…). 

Reviews: 

• “Really flavourful!” 

• “Hints of mustard.” 

• “It sneaks up on you and lingers…” 

• “Why did you do that to me?” 

Bored Ape NFT event attendees report ‘severe eye burn’ 

Several people have reported experiencing eye pain, vision problems, and sunburnt skin on Sunday after attending ApeFest, a Bored Ape Yacht Club NFT collection event in Hong Kong that ran from November 3rd-5th. 

Some ApeFest attendees posted on X (formerly Twitter) after seeking medical attention, with one person reporting that they had been diagnosed with Photokeratitis — aka, “welder’s eye,” a condition caused by unprotected exposure to ultraviolet radiation — and another saying the issue was a result of UV from the stage lights, leading to speculation that the injuries were caused by improper lighting used at the event. 

“I woke up at 04:00 and couldn’t see anymore,” said @CryptoJune777. “Had so much pain and my whole skin is burned. Needed to go to the hospital.” 

Yuga Labs, the blockchain company behind the Bored Ape Yacht Club NFT project, says it’s aware of the situation and taking the reports seriously. “We are actively reaching out and in touch with those affected to better understand the root cause,” said Yuga Labs spokesperson Emily Kitts in a statement to The Verge. “Based on our estimates, the 15 people we’ve been in direct communication with so far represent less than one percent of the approximately 2,250 event attendees and staff at our Saturday night event.”

This week's interesting finds

 

Mimi, Pat and Claire – partners since 2019, 2008 and 2019 (Cymbria, Prince Edward Island) 

In honour of Cymbria’s 15th anniversary on November 3rd, three EdgePointers stopped by the town that inspired our company’s name. They were on the island for meetings with our advisor partners.   

This week in charts 

Education

U.S. equities   

Private equity: higher rates start to pummel dealmakers 

The prospect of rates staying higher for longer is having powerful ripple effects across the economy; companies large and small are struggling to refinance debt, while governments are seeing the cost of their pandemic-era borrowings rise. 

But private equity is the industry that surfed the decade and a half of low interest rates, using plentiful and cheap debt to snap up one company after another and become the new titans of the financial sector. 

“Many of the reasons these guys outperformed had nothing to do with skill,” says Patrick Dwyer, a managing director at NewEdge Wealth, an advisory firm whose clients invest in private equity funds. “Borrowing costs were cheap and the liquidity was there. Now, it’s not there,” he adds. “Private equity is going to have a really hard time for a while . . . The wind is blowing in your face today, not at your back.” 

Facing a sudden hiatus in new money flowing into their funds and with existing investments facing refinancing pressure, private equity groups are increasingly resorting to various types of financial engineering. 

They have begun borrowing heavily against the combined assets of their funds to unlock the cash needed to pay dividends to investors. Some firms favour these loans because they remove the need to ask their investors for more money to bail out companies struggling under heavy debt loads. 

Another tactic is to shift away from making interest payments in cash, which conserves it in the short term but adds to the overall amounts owed. 

The co-founder of one of the world’s largest investment firms points out that almost the entire history of the industry has played out against a backdrop of “declining rates, which raise asset values and reduce the cost of capital. And that’s largely over.” 

“The tide has gone out,” says Andrea Auerbach, head of private investments at Cambridge Associates, which advises large institutions on their private equity investments. “The rocks are showing and we are going to figure out who is a good swimmer.” 

Before committing new funds to private equity, investors generally like to see returns from previous ventures. Increasingly, firms are resorting to financial engineering and complex fund structures to provide those returns. 

Hg Capital, one of Europe’s largest buyout groups, has been particularly innovative, developing a model that other firms including EQT and Carlyle are replicating. It involves holding on to its best-performing assets for longer than is normal, transferring them between funds and generating returns for its backers by selling small parcels of these companies to other investors. 

Other buyout groups are also turning to NAV loans to accelerate distributions as the traditional exit routes from investments — a sale to another company, or a flotation on the stock market — become more difficult. 

Eyeing an opportunity, banks are increasingly pitching these loans to investment firms struggling to sell their companies, industry executives say. Carlyle, Vista Equity and Nordic Capital are among the firms that have tapped this market over the past year. Twenty per cent of the PE industry is considering such loans, according to a recent poll from Goldman Sachs. 

Some pensions and endowments have even resorted to selling large stakes in private equity funds at discounts to their stated value to raise cash. 

“We are having a lot of uncomfortable conversations,” says Dwyer, referring to meetings with private equity firms on behalf of investor clients. “It is year three and I haven’t had a distribution in funds that are fully baked [invested]. When am I going to get my capital back?” 

This week’s fun finds 

Lunch was a smash-ing success 

Luca’s moai (our version of bringing EdgePointers together for a meal) was from one of Toronto’s best burger shops for smash burgers and fried chicken. Since we didn’t have enough Halloween candy floating around the office, there were Scooby-Doughnuts for dessert. 

What’s the Shelf Life of Halloween Candy? 

A candy’s shelf life is directly influenced by its ingredients. “For most sugar-based confections, losing moisture or drying out is the main reason,” says Richard W. Hartel, a professor of food engineering at the University of Wisconsin. “Find an old box of Peeps or Dots or jelly beans, and you’ll quickly see what that means.” Packaging can help sugar-based candies retain their shelf life: Such candies are often wrapped in plastic to prevent moisture loss, but once you open the package and expose the candies to air, they can dry out within days or weeks. 

There are several factors that can instigate candy spoilage, including moisture, light, heat, and a candy’s fat content, according to food scientists from Kansas State University. Overall, general recommendations suggest the pantry is the best place to store sweets, away from light and moisture. Certain candies (like chocolate) may be okay in the fridge or freezer, but any that contain fruit or nuts should not be frozen. 

The shelf life of chocolate varies based on type. Dark chocolate will last one to two years in foil if kept in cool, dark, and dry places, while milk and white chocolate will last up to 10 months. The higher milk fat content in white and milk chocolates shorten its shelf life when compared with dark chocolate. 

Hard candies essentially have an indefinite shelf life, provided they are stored properly. Items like lollipops, Jolly Ranchers, and other individually wrapped candies do best without exposure to moisture. If such candies do spoil, they’ll appear sticky or grainy as a result of temperature changes or sugar crystallization, and may experience changes in flavor. 

A good rule of thumb is to simply toss it when it stops tasting good. You probably won’t get sick — unless you eat all of it in one sitting, that is.