This week's interesting finds

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Interest rate sensitivity

Valuations

Capex

S&P 500 Equal Weight Index vs. S&P 500 Index

U.S. equity ownership

100 Best Companies to Work for

Entry price dictates return

Yield comparison

Investment allocations

Consumers

PBoC’s $56bn debt purchase sparks talk of bond market intervention

China’s central bank purchased Rmb400bn ($56.3bn) of long-dated sovereign bonds on Thursday, a move that traders interpreted as preparation to directly shore up bond yields in its booming debt markets.

The People’s Bank of China said it bought Rmb300bn worth of 10-year notes and Rmb100bn of 15-year notes from primary dealers, which had been sold by the Ministry of Finance to roll over maturing bonds only earlier in the day.

Analysts said the move, which stops the bonds from being traded in the market, further fuelled speculation that China’s central bank will soon intervene in the bond market to prevent an eventual snapback that could trigger Silicon Valley Bank-style losses in the financial system.

Chinese debt has rallied this year as global investors bet that Beijing will be forced to stimulate consumer demand in the world’s second-largest economy.

But the PBoC has repeatedly warned that falling yields — which move inversely to prices — risk provoking a liquidity crisis in the banking system. Earlier in the summer, the PBoC said it was ready to directly buy and sell in the market for the first time in decades to prevent a sharp fall in long-term yields.

“The PBoC is trying to engineer the yield curve”, said Wei Li, head of multi-asset investment for BNP Paribas in China, who described the buying action as a “sizeable amount”. “Now they have a lot more long-term debt on hand [because] speculators are betting against the central bank,” Li added.

Traders’ expectations that the central bank would soon buy and sell sovereign notes were fuelled by the PBoC’s creation of a new section on its website called “notices on the purchase and sale of sovereign bonds”.

Chinese authorities have been concerned about the yields on longer-dated debt as it is a source of funding for financial institutions such as pension funds. 

Analysts said that purchasing the bonds gave the central bank the flexibility to sell at a later date, influencing the prices of 10-year to 15-year bonds. Selling long-dated debt in the market would raise yields.

Buy Now Pay Later Beats Steep Discounts for Private Fund Sellers

Investors looking to offload their stakes in private funds are letting buyers push back their payments by months rather than accept a big discount on the price.

They’re increasingly using “deferrals”, which allow buyers to make part of the payment upfront and the rest at an agreed date in the future. As elevated interest rates erode returns for private equity and private credit funds, making them less attractive, buyers have been able to push for increasingly appealing terms.

“We’re seeing much more back-weighted deferred payments and terms stretch out to 18 months from a year,” said Richard Chow, managing director at PJT Park Hill, an alternative asset advisory firm. The instrument is an “extremely powerful mechanism” to help sellers get a better price, said Chow, who was speaking specifically about the private equity market.

Deferrals have become more common in the past several years and terms are now more borrower-friendly. A survey this year of 100 secondary-market participants conducted by private markets advisor Campbell Lutyens found that 63% of respondents used deferrals in 2023, up from 50% the previous year. More than half of transactions had at least 60% of the full payment deferred, a 17 percentage points increase from the 2022 figure.

The trend is a symptom of the lack of liquidity investors are suffering due to a sluggish M&A environment. Despite green shoots with some major deals this year, the private equity machine has rebounded at a slower pace than initially expected. Speakers at private equity’s big meet up this June painted a dreary picture of returns.

Private equity funds have cast around for different ways to return money to their investors, including tapping private credit for fund-level financing. However, many owners of positions in private funds are taking matters into their own hands by turning to the secondaries market, where slices of private funds can be bought and sold.

Still, pricing data indicates that the deferral strategy is effective in helping sellers avoid having to offer large discounts. The percentage of net asset value that buyers paid for private infrastructure, credit and buyout funds ticked up in the first half of the year, according to a Secondary Market Insight report published by PJT Partners.

It may also be helping to keep the market active. Secondary market volume reached $70 billion in the first half of 2024, a 40% increase on the same period the previous year, according to the PJT report, which estimates that volumes will reach $145 billion for the full year.   

This week’s fun finds

EdgePoint held this year’s fantasy football draft this week and also presented a trophy to last year’s league winner, Derek. It’s the first year of the trophy’s existence, but it lists previous winners (with room for future names).

Fruit and alcohol? Chocolate and cheese? The surprising science of food pairing

For some, recipe writing is an art, born of intuition and pragmatism. But like most disciplines, the culinary world has become susceptible to the pull of data.

In recent years, food scientists and chefs have begun studying the flavor compounds that appear in certain ingredients and searching for similarities elsewhere. Sites like Foodpairing.com even offer paid AI services to chefs looking for new combinations, as well as to customers seeking to better understand their own palates.

The results have been surprising. For example, chocolate and blue cheese share more than 70 flavor compounds (though that doesn’t mean I’ll be trying this brownie recipe anytime soon). Other combinations are perhaps more predictable: white wine and parmesan cheese, for instance, share a huge number of compounds – in fact, dairy products in general and fruits are close in flavor chemically to alcoholic drinks. Meanwhile, mushrooms, long understood as a scientific wonder, are isolated – they don’t share a statistically significant number of flavor compounds with anything.

Four researchers in the physics department at Northeastern University in Boston set out in 2011 to map out our flavor networks. They wanted to understand what patterns might appear in our food combinations and whether they can be attributed to anything other than individual taste.

They started out with two huge American recipe sites, epicurious.com and allrecipes.com. Wanting to avoid a western interpretation of “world cuisine”, they added menupan.com, a Korean site. In total, they looked at 56,498 recipes, grouped into cuisines from different geographical regions (North American, western European, southern European, Latin American and east Asian).

In the end, they found that North American and western European recipes have a lot more compound-sharing pairs than would be expected by chance alone. But in east Asian dishes, the trend was the reverse – the more flavor compounds shared by two ingredients, the less likely for them to be used together in the same recipe. Just why that might be remains a mystery – but we’re a little closer to understanding the connections our brains make when we open the fridge door.

This week's interesting finds

EdgePoint’s journey – the first 15 years

While a lot has changed over that time, our investment approach and commitment to compounding our clients’ wealth remain the same. We’re looking forward to the next 15 years helping our partners reach their Point B. 

This week in charts

Consumer spending

Apparel and grocery prices

Customers by apparel tier

Customers by restaurant tier

Electricity consumption – data centres

Electricity consumption per request

China’s population growth

Start-up shutdowns

Emerging economies

Start-up failures rise 60% as founders face hangover from boom years

Start-up failures in the US have jumped 60 per cent over the past year, as founders run out of cash raised during the technology boom of 2021-22, threatening millions of jobs in venture-backed companies and risking a spillover to the wider economy.

According to data from Carta, which provides services to private companies, start-up shutdowns are rising sharply, even as billions of dollars of venture capital gushes into artificial intelligence outfits.

Carta said 254 of its venture-backed clients had gone bust in the first quarter of this year. The rate of bankruptcies today is more than seven times higher than when Carta began tracking failures in 2019. 

The collapses are part of a painful adjustment for start-ups triggered by interest rate rises in 2022. VC investment into early-stage companies has plummeted, while venture debt has diminished following the collapse of Silicon Valley Bank last year, leaving many start-ups stranded.

Founders are now facing the hangover. The jump in bankruptcies is due to the fact that “an abnormally high number of companies raised an abnormally large amount of money during 2021-2022”, said analysts at Morgan Stanley in a recent note to clients.

Private Credit Managers Are Helping Banks Keep Risky Clients

In the market for private credit, managers are increasingly partnering with banks to help them maintain lucrative contracts with risky oil, gas and coal clients.

It’s a model that allows banks to continue doing deals in areas like commodity trade finance, where exposures might otherwise clash with European restrictions on fossil fuels and capital requirements. By sharing risky exposures with private-credit managers, banks are figuring out how to stay on the right side of regulations without losing access to lucrative commodities markets.

Banks in Europe are adjusting to the region’s shifting regulatory landscape, which has brought stricter climate rules than exist in other jurisdictions. BNP Paribas SA, the European Union’s biggest bank, and ING Groep NV, the largest lender in the Netherlands, are among financial firms to have stepped up restrictions on fossil-fuel clients in lending and bond underwriting. ING has also announced its plans to cut back its oil and gas trade finance.

This week’s fun finds

Neeti, a member of the trade operations team, treated her fellow partners to a delightful Italian Moai. Italian cuisine has always been one of her favourites — not just for its delicious flavours, but also for the rich culture and tradition behind it. From the fresh ingredients to the time-honoured recipes, Italian food has a way of bringing people together and creating memorable experiences.

Born of the Indian Ocean

Although an island, Madagascar has never been isolated. Situated in the Indian Ocean, at the crossroads of trade networks, its people have long had close ties to Asia, Africa, and Europe. Nowhere is this more visible than in their vibrant textile arts, which continually incorporate new fibres, dyes, and decoration. Traders from Indonesia settled the island from 300CE. They brought with them textile styles, colours, and techniques that are recognizably Southeast Asian.

This week's interesting finds

This week in charts

Household debt to income

Wood pallet prices

Private equity and venture capital

Financial assets as a % of GDP

AI

Affordability

Valuations

Magnificent 7 trade

Sector fund flows

Tech stocks

Jobhunters flood recruiters with AI-generated CVs

About half of all job seekers are using artificial intelligence tools to apply for roles, inundating employers and recruiters with low-quality applications in an already squeezed labour market.

Candidates are turning increasingly to generative AI — the type used in chatbot products such as ChatGPT and Gemini to produce conversational passages of text — to assist them in writing their CVs, cover letters and completing assessments.

Estimates from employers and recruiters who spoke to the Financial Times, as well as multiple published surveys, have suggested the figure is as high as 50 per cent of applicants.

Many recruiters are now contending with large volumes of AI-generated CVs from candidates who have used the tools to polish their personal statements and add key search words. The actual figures could be higher, some added, but these estimates are based on those that are obviously detected, usually because they have been cut and pasted without editing.

Neurosight, in a recent survey of 1,500 student jobseekers, found that 57 per cent had used ChatGPT to support job applications.

It also discovered that those who used the free version of ChatGPT were less likely to pass psychometric tests, while those who used the paid-for version were highly likely to.

Many employers and recruiters are hopeful that, if a candidate has cheated or lied in the process, the final in-person or virtual job interview will catch them out.

Manufacturers Axe Products as a Factory Slowdown Lingers

Manufacturers are making too much stuff.

Companies including Rockwell Automation Inc., pool-pump maker Pentair Plc, water-technologies giant Xylem Inc. and electrical equipment manufacturer Hubbell Inc. are culling product lines as they lean into variations of the operating principle known as “80/20.” The idea is that 80% of a company’s profits can often be traced back to just 20% of its products or customers, meaning that a considerable amount of any particular manufacturer’s output simply isn’t worth the added cost and complexity. Thinning out less-desirable product lines can help companies focus on the parts of their business that make most of their money and avoid time-consuming distractions.

The operating ethos isn’t new. The 80/20 rule, also known as the Pareto principle, traces its roots to the work of early 20th century Italian economist Vilfredo Pareto. Illinois Tool Works Inc. and Idex Corp., among others, have championed this philosophy for years. But the strategy’s productivity benefits have taken on new relevance as manufacturers contend with a period of prolonged sluggishness. The second-half sales recovery that many industrial companies factored into their earnings guidance for 2024 is failing to materialize. A growing number of manufacturers are instead warning of weakening demand and mounting project delays, as high interest rates and political uncertainty take their toll.

The economy is at the “edge of a significant slowdown,” Antonio Pietri, CEO of industrial software company Aspen Technology Inc., said in an interview. “Everyone is being a bit more cautious.”

This week’s fun finds

How Sharing Recipes Brings Fans Together

Food is threaded throughout all sorts of fannish practices and experiences. The officially sanctioned offerings are often the most visible—think of a theme park, where most things you put in your mouth will have an ostensible connection to a fictional world. This can vary from simple branding to full-on recreations of something characters eat or drink. Official cookbooks span this range, too—and often have mixed results. Who hasn’t bought the cookbook for their favorite show or book only to find very ordinary recipes with half-hearted ties back to the source?

Really trying to capture the food of a fictional world often falls to fans themselves—after all, they’re the ones who have the time, interest, and collective imagination to get canonical food from page or screen to the table. That might mean cataloging every food reference in a work, or creating themed meals to pair with a re-read or re-watch. Sometimes it’s about direct recreations: on the wildly popular Binging with Babbish YouTube channel, for example, chef Andrew Rea recreates screen-accurate versions of fictional food—say, the nachos from The Good Place, or the ratatouille from, well, Ratatouille. Fans can simply enjoy watching fictional foods come to life, or they can cook them in their own kitchens, too.

This week's interesting finds

This week in charts

Household income

Household spending

Services vs. retail spending

Household debt

Affordability

S&P 500 performance

U.S. market concentration

Global Market capitalization

Relative valuations

Berkshire Hathaway

Unwinding of yen ‘carry trade’ still threatens markets, say analysts

Over the past three years, the yen version of the carry trade — borrowing in a low-interest-rate country to fund investment in assets elsewhere that offer higher returns — has exploded because of Japan’s ultra-low rates.

A stronger yen, buoyed by last week’s Bank of Japan interest rate rise, has forced hedge funds and other investors to rapidly unwind their carry trades. This has contributed to turbulence in global markets, including a dramatic sell-off on Monday, as investors rushed to dump assets they had purchased by borrowing in yen.

While a chunk of the trade involves hedge funds and other short-term investors taking short positions in the yen, the long period of ultra-low rates in Japan has, for years, enticed Japanese households, pension funds, corporates and banks to look overseas for higher yields in a form of carry trade.

However, the recent dynamic was radically altered when the Japanese authorities intervened to strengthen the yen and then, last week, the BoJ hit the market with a surprise interest rate increase and a strong hint that there would be more tightening to come.

Some analysts and traders suspect that the majority of the more speculative bets for which the carry trade was used have now been liquidated. Others believe there could be plenty more liquidation to come as the selling moves from hedge funds to “real money” investors.

China Tells Firms to Screen Bond Fund Duration to Curb Risk

Chinese regulators have asked some money management firms to report the duration of any new bond fund products, in the latest effort to curb risks in the market, according to people familiar with the matter.

The China Securities Regulatory Commission has also significantly slowed down the approval process for new bond funds and asked some fund companies to document their existing bond fund durations, the people said, requesting not to be named discussing private matters.

A rally in Chinese government bonds is raising concerns from regulators that banks and investment funds are exposing themselves to excessive risk if the market turns. Demand for bonds has been so strong that investors snapped up government debt at record low yields at the latest auction.

Duration is a measurement of a bond’s interest rate risk that considers a bond’s maturity, yield, coupon and call features.

Bonds have soared after the central bank cut interest rates to revive growth in an economy battered by a housing slump and weak consumer demand. The Bloomberg China Aggregate Total Return Index has risen 5% this year, double the gain for a similar US gauge.

In a bid to cool the market, regulators are taking at least six months to approve new funds, people familiar said. That’s at least double the time it used to take, one of them added.

This week’s fun finds

How to Clean Your Home in 15-Minute Chunks (and Why You Should)

If your home is a mess but you don't really know where to start, it's time to set a daily cleaning schedule, but don't feel the need to do everything all at once. It's well established that working in short bursts can help keep you motivated when you're feeling overwhelmed, and cleaning in 15-minute bursts will do the trick. There are a bunch of areas around your home where that's all you need, so start today and thank yourself in a few weeks.

Use the principles of time boxing and limit yourself to just 15 minutes per day. When you're using time boxing, you dedicate a predetermined amount of time to a specific task and work on it with no distractions, but you stop when the allotted time is up. If necessary, you pick the task back up during the next time box. Even if you're really getting into the cleaning groove, try to stay within the 15-minute mark every time to stave off burnout and keep yourself challenged to stay totally on-task the whole time.

This week's interesting finds

 This week in charts

U.S. equities

Treasury bills

Global equities

Active investing

Data centres

U.S. real estate

Chinese yields hit record lows as investors defy central bank warnings

China’s bond yields have fallen to record lows as investors respond to deflationary forces in the world’s second-largest economy and shrug off repeated warnings from the central bank that a bubble is forming in the sovereign bond market.

The yield on the 10-year bond, which moves inversely to prices, fell to 2.13 per cent on Thursday while 30-year note yields also dropped to 2.37 per cent.

Investors have been defying warnings from the People’s Bank of China that the frenzied buying risks creating a Silicon Valley Bank style banking crisis. Last month the central bank revealed its readiness to intervene in the market for the first time in decades to prevent a sharp fall in long-term yields. 

“The PBoC has been battling with bond investors over long-end rates for some time, but with limited success so far,” said Larry Hu, China economist at Macquarie in Hong Kong.

Investors’ confidence in China’s sovereign debt has been bolstered by its spluttering domestic economy. 

China’s economy grew 4.7 per cent year on year in the second quarter, hit by weak consumer demand and a prolonged property slowdown. Its manufacturing activity fell for a third consecutive month in July, while CPI is still just around zero. The slowdown has pushed investors out of stocks and real estate and into long-dated sovereign bonds this year.

As the domestic economy struggles to pick up, investors have bet that yields will fall further as Chinese policymakers are forced to intervene more deeply in the economy. That may mean cutting interest rates to stimulate investor demand, depressing yields.

But that has ratcheted up pressure on the PBoC as it tries to raise yields to prevent a bubble from emerging.

One of the central bank’s weapons is to exert its influence on market rates that banks lend to each other and to sell sovereign bonds on the secondary market to shore up yields. But last week, in a policy swing, the PBoC surprised the market with a slew of interbank interest rate cuts, and did not explain how it would keep defending yields under lower rates. That about-turn sparked another round of intense government bond buying. 

“The main issue right now is that PBoC’s credibility isn’t strong enough, which is why the battle with the market remains intense, and why verbal warnings alone barely work,” a Hong Kong-based senior executive at a European bank said. “At the end of the day, the central bank can always prevail [in the battle]. But the strength of its credibility determines the cost of its victory,” he added.

In early July, it disclosed deals with several institutions to borrow several hundred billion renminbi of long-dated bonds, which it could sell into the market to meet demand. Many analysts believe this strategy, if the central bank went ahead with it, would provide the PBoC with a crucial tool to create a floor for long yields.

Nevertheless, investors have continued to ignored both the PBoC’s warnings and the potential firepower at its disposal.

A growing number of traders are engaging in what is known as “curve flattening,” where they anticipate minimal differences between short-term and long-term bond rates, according to a bond trader at a state securities firm in Beijing. “It signals a lack of confidence in the market’s growth potential,” he said. “That’s what worries the PBoC.”

EV Owners Don’t Pay Gas Taxes. That’s a Problem for Congress.

Congress got together to talk about electric vehicles, and what was said showed why investors typically disregard political rhetoric.

Wednesday, the Senate Budget Committee hosted a hearing called “The Future of Electric Vehicles.” Senators from both sides of the aisle grilled five witnesses about EVs, competition with China, and U.S. government policy. 

Senators’ questions and statements tended to be one-sided with cherry-picked facts, citing mainly out-of-date data. Many rhetorical questions were asked. 

Conservative-leaning senators focused on things such as potential job losses in the ethanol business and the environmental perils of mining for EV-related metals, without addressing job gains in the manufacturing sectors or the environmental perils, and relative size, of the coal and oil industries. (Coal and oil are more than 100 times the size of the markets for EV-related metals such as copper and lithium.) 

Liberal-leaning senators focused on things such as low EV operating costs and new technologies without really addressing the total cost of ownership, including upfront costs and depreciation, or the cost of all the new tech. 

Senators appeared to agree on a couple of things though. One, EVs aren’t contributing to the Highway Trust used to pay for road and public transit infrastructure. That’s a problem. And two, China is a material threat to the U.S. auto industry and National security. 

The Highway Trust is a federal account funded mainly by gasoline taxes that doles out some $50 billion annually to states and local governments. The fund is facing a crisis, as fewer and more-efficient gasoline-powered cars mean outflows are expected to greatly exceed inflows in the coming years.

EV drivers don’t pump gas or pay gas taxes. Fixing the fund’s problem isn’t difficult, though, and it isn’t existential for EVs. The average driver pays about $100 in gas taxes annually. Congress could compel EV drivers to pay that. 

The Chinese problem is much more nettlesome. China dominates EV production, and the EV materials supply chain. All the senators agreed that American EV leadership is important. Steps to make that happen include things such as easier permitting for mining and electricity-grid upgrades. It also includes making China play fair. 

China is a large exporter of technology used to clean up exhaust from coal-fired power plants. But it doesn’t always use the technology itself, giving Chinese power producers a 15% to 20% energy-cost advantage. Cost advantages eventually translate into lower prices for EV batteries. It also translates to lower power costs, which means bigger consumer savings, leading to more EV demand. 

While investors listening to the hearing might not get leading-edge opinions, they did get a sense of the current political landscape. 

On that front, a battle is brewing over EV purchase tax credits, which gives up to $7,500 off a qualifying transaction. 

Democrats emphasize policy certainty, preferring to keep the credits so that auto makers can plan and project consumer EV demand. Republicans are focused on removing EV “mandates” in the name of consumer choice. 

There is no actual mandate. There are ever-tightening emission standards. Those standards were implemented in the mid-1970s after the 1973 Oil Crisis. 

That period offers a lesson to Congress and investors. The U.S. wasn’t ready to compete with more fuel-efficient models from Japan as oil prices exploded. 

This week’s fun finds 

How Olympic ‘Fast Pools’ Are Designed for Maximum Performance

Competitive swimming is no joke. It takes a combination of strength, agility, and technique to be successful in the field. It's evident that athletes work hard, but there's another factor that goes into their achievements. At the Olympics—including the 2024 games in Paris—state-of-the-art pools called fast pools also contribute to a swimmer’s performance, with features that help them gain optimal speed. 

According to NBC News, a fast pool is built to mitigate factors that slow swimmers down. With all that kicking and stroking, waves are the main culprits. Therefore, engineers design fast pools with components that minimize the water's movement. 

Most pools used for competitions are around 10 feet deep. At that depth, any water the swimmers kick down will lose energy and dissipate before reaching the pool's floor. If the water is too shallow, waves will bounce off the bottom of the pool and back up to the athletes, hindering them from reaching full speed. 

The ingenuity doesn’t stop there. Designers also consider the edges and lane divisions of fast pools. Troughs along the ends and sides of the structure eliminate waves by absorbing their energy, preventing them from rebounding back into the athletes' lanes. Additionally, when waves hit lane lines, the water spins around them rather than passing through them. This stops one swimmer's waves from disturbing their competitors in the other lanes.

The temperature of the pool water also matters. If the pool water is too cold, an athlete’s muscles can tighten up. On the other hand, hot water can cause muscles to relax too much. For maximum performance, the mandated temperature for Olympic swimming events is between 77 and 82°F. 

Though it's still considered a fast pool, the pool at the Paris Olympics is more shallow than most Olympic facilities, with a depth barely exceeding 7 feet. This hasn't stopped swimmers from excelling at the summer games. Caeleb Dressel, also known as the fastest swimmer in the world, earned his eighth golden medal for the U.S. in the opening days of the event. That ties him for the sixth-most medals earned by any athlete since the modern Olympics began.