This week's interesting finds

M2 vs. velocity vs. inflation 

All three charts below cover 60 years worth of data. Notice how M2 growth is running at 2X where it was at the peak of the 1970’s. 

M2 is a measure of the money supply and is typically watched as an indicator of future inflation 

Notice the cliff of velocity in the second chart. 

Velocity is a measure of the number of times that the average unit of currency is used to purchase goods and services during a given time. 

Makes you wonder what will happen to the third chart when velocity returns to normal. 

Fed doesn’t seem to think there will be any impact 

The velocity of money hasn’t been this low since 1946. However, Fed Chairman Powell said, “when we studied economics a million years ago, M2 and monetary aggregates generally seemed to have a relationship to economic growth. Right now, I would say the growth in M2, which is quite substantial, doesn’t really have important implications for the economic outlook. M2 was removed some years ago from a standard list of leading indicators. That classic relationship between monetary aggregates and economic growth and the size of the economy no longer holds. We’ve had big growth of monetary aggregates at various times without inflation, so [this relationship is] something we’re going to have to unlearn.” 

Have we seen these misguided forecasts before? 

Bitcoin 

To: InvestmentTeam 

Subject: Bitcoin was brought up during the investment team meeting 

From Coinbase S-1, a cryptocurrency trading platform 

Some of the risk factors: 

• the reduction in mining rewards of Bitcoin, including block reward halving events, which are events that occur after a specific period of time which reduces the block reward earned by miners; 
• the development and launch timeline of Ethereum 2.0, including the potential migration of Ethereum to a proof-of-stake model; 
• disruptions, hacks, splits in the underlying network also known as “forks”, attacks by malicious actors who control a significant portion of the networks’ hash rate such as double spend or 51% attacks, or other similar incidents affecting the Bitcoin or Ethereum blockchain networks; 
• hard “forks” resulting in the creation of and divergence into multiple separate networks, such as Bitcoin Cash and Ethereum Classic; 
• informal governance led by Bitcoin and Ethereum’s core developers that lead to revisions to the underlying source code or inactions that prevent network scaling, and which evolve over time largely based on self-determined participation, which may result in new changes or updates that affect their speed, security, usability, or value; 
• the ability for Bitcoin and Ethereum blockchain networks to resolve significant scaling challenges and increase the volume and speed of transactions; 
• the ability to attract and retain developers and customers to use Bitcoin and Ethereum for payment, store of value, unit of accounting, and other intended uses; 
• transaction congestion and fees associated with processing transactions on the Bitcoin and Ethereum networks; 
• the identification of Satoshi Nakamoto, the pseudonymous person or persons who developed Bitcoin, or the transfer of Satoshi’s Bitcoins; 
• negative perception of Bitcoin or Ethereum; 
• development in mathematics, technology, including in digital computing, algebraic geometry, and quantum computing that could result in the cryptography being used by Bitcoin and Ethereum becoming insecure or ineffective; and 
• laws and regulations affecting the Bitcoin and Ethereum networks or access to these networks, including a determination that either Bitcoin or Ethereum constitutes a security or other regulated financial instrument under the laws of any jurisdiction. 

People collecting unemployment vs people officially unemployed

This week's interesting finds

Asia catching a retail bid? Hong Kong share trading volumes are up 4x since 2019

Stock trading volumes in Hong Kong have soared to four times those on the London Stock Exchange (LSE), as large technology stocks attracted a soaring appetite from foreign investors.

% of IPO that are unprofitable 

Green hydrogen plant in Saudi desert aims to amp up clean power

Developers behind the world’s largest planned green hydrogen project hope a growing global thirst for emission-free fuels will pay dividends

The initiative—a joint venture of Neom, U.S. chemical company Air Products & Chemicals Inc., and Saudi Arabia’s ACWA Power—will invest $5 billion to build what will be the world’s largest green hydrogen production facility. Another $2 billion will be invested in distribution infrastructure in consumer markets around the world, primarily to fuel industrial vehicles and public buses. 

Plans call for the sprawling facility, which isn’t yet under construction, to produce 650 tons of green hydrogen a day starting in 2025. The facility’s output will dwarf that of a green hydrogen plant in Québec that produces about nine tons a day, making it the largest such facility in the world. The Neom project exemplifies the Kingdom’s ambitious plan to diversify away from oil and natural gas and showcase Neom as a global hub for technology and green energy. 

How People Learn to Become Resilient  

Frame adversity as a challenge, and you become more flexible and able to deal with it, move on, learn from it, and grow. Focus on it, frame it as a threat, and a potentially traumatic event becomes an enduring problem; you become more inflexible, and more likely to be negatively affected.

This week's interesting finds

Promising data in Israel's race to defeat pandemic 

Israeli experts are confident the vaccines rather than lockdown measures brought the numbers down, based on studying different cities, age groups and pre-vaccine lockdowns.

Flocking to tech IPOs

Over the last 12 months investors have flocked to buy shares of newly listed tech companies, believing in the potential of upstarts to transform their sectors. That excitement has given newer firms valuations several times higher than established companies in the same industries—even when those older companies have far more revenue and profits.

Airbnb for example was the largest tech IPO in 2020, with a valuation of about $47 billion at the time it went public in December.

Having since grown to $117.7 billion, Airbnb’s market capitalization makes it more valuable (on paper) than many top hotel chains combined. Marriott, Hyatt and Hilton’s combined market capitalization is roughly $40 billion shy of Airbnb’s, despite their higher revenue.

Examining the recent market and risks

The recent boom and bust in a number of stocks illustrates how capital markets over the short-term can be driven by flows and investor positioning, rather than by the underlying fundamentals of businesses. Some argue that the primary causes of this market dysfunction are the prevalence of passive investing and leverage.

The effort to squeeze short-sellers took GameStop’s share price well beyond any rational fundamental valuation. It soared by 23 times within 11 trading days as those who had bet the price would fall were forced to buy shares to cover their obligations.

One factor that made the GameStop squeeze so profound was passive ownership. About one quarter of the available shares were owned by passive investors. These funds run on autopilot. As new money comes in, it is allocated to keep a constant balance among a specific combination of individual stocks or other assets. As GameStop’s price rose to ridiculous heights, those passive funds were almost certainly buying to maintain their balance.

Passive funds have a much greater impact on prices because active investors can be patient in deploying their capital and are sensitive to the prices they pay. Passive funds have little discretion whether and at what price to buy — they must buy if they have inflows. Perversely, passive funds’ demand for a stock generally grows as the price increases because the weighting of the stock in the indices they track increases. So long as such funds have inflows, they do not sell.

Leverage linked to low interest rates turbocharges these unhealthy dynamics.

Here's a Silly Game That Should Make Stocks Go Up

People have long been conditioned to see whether companies have “beaten” their expectations. And as Savita Subramanian of BofA Securities Inc. demonstrates here, the percentage of S&P 500 companies beating estimates for both sales and profits is very nearly at the record set in the third quarter of last year.

Specifically on sales, the number most directly tied to the performance of the economy, more companies than ever before are outstripping forecasts.

We should know by now that the earnings forecast game is a little silly. Particularly in the U.S., CFOs have grown adept at talking down expectations ahead of results, and then reaping the positive performance bump when they “beat” a lower bar.

Feedback Loops & GameStop, GM and Sears

Morgan Housel examines why GameStop went up 100-fold in the last year and why Sears never recovered. They have to do with the same force in opposite directions. It’s a force that can explain a lot of baffling trends lately, and it’s so easy to underestimate and overlook.

Stuck at home with just some cash and free trades

Source: BofA Global Research, @WallStJesus

Goldman’s non-profitable tech index is approaching 250% year-over-year performance

Tom Brady wins another one

This week's interesting finds

Retail investor frenzy in Korea

The October 1999 Fortune magazine issue.

Sound familiar? 

Google searches for 'stock market bubble' reached an all-time high in January

Tech flows

Inflation 

Source: Company financials

Who are you rooting for?

This week's interesting finds

 

Exploding retail activity

The number of retail investors has been growing since commissions were broadly cut to zero in late 2019.

Demand is coming through in multiple ways but it’s arguably in the options market where retail traders are having the most impact.

Option volumes have exploded, and at the same time retail is growing as a share of the overall market. Retail was already a big player in the options market, accounting for 40% to 45% of contract volume pre-COVID, but that figure rose during 2020 to over 55% of the market by the third quarter. 

This week call option activity went parabolic. 

The herd has arrived

Much of this volume has been driven by investors congregating on sites like Reddit’s WallStreetBets forums. On January 26th, GameStop was the most traded stock in the U.S in terms of trading value. More GameStop shares traded by value than even Apple. Frenzied investors pushed GameStop’s market cap to an eye-popping $25 billion from a little over $1 billion at the start of the month. 

Having the ticker symbol “GME” was helpful even if you are in Australia. A relatively small Australian mining company called GME Resources, which has the same ticker symbol as GameStop (but in Australia), was mistakenly rewarded by the retail crowd with a 20% up day.

Trading volume in the most expensive stocks has skyrocketed 

With more stimulus coming, personal savings are expected to exceed the levels we saw after the CARES package payouts

 

This week's interesting finds

EdgePoint Podcast: Tye’s takes on 2020 

Tye recently did a 30 minute investor-friendly interview which is now available in an easily downloadable podcast. Tye discusses: 

1. Why short-term underperformance is required for longer-term outperformance 

2. 2020 performance: a tale of two markets 

3. Why we won’t invest with the herd 

4. Our ongoing commitment to getting your clients to their Point B 

5. Tesla, TE Connectivity and more…. 

Download it now 

or listen on Apple or Spotify

Comparing investors to frogs in boiling water 

Seth Klarman, the founder of hedge fund Baupost Group, has told clients central bank policies and government stimulus have convinced investors that risk “has simply vanished”, leaving the market unable to fulfil its role as a price discovery mechanism. 

Mr. Klarman also said the Fed’s policies had exacerbated economic inequality, referring to a “K” shaped recovery that has seen “the fortunes of those already at the top bounding swiftly upward, while those at the bottom remain on a downslope without end”.

“With so much stimulus being deployed, trying to figure out if the economy is in recession is like trying to assess if you had a fever after you just took a large dose of aspirin,” 

“But as with frogs in water that is slowly being heated to a boil, investors are being conditioned not to recognise the danger.” 

Using Tesla as an example, Mr Klarman said shares in the “barely profitable” electric carmaker had soared “seemingly beyond all reason”, briefly making the company’s founder Elon Musk the richest person in the world. Low interest rates have made projected cash flows more valuable, he said, a point many investors have unwisely used to justify valuations on companies that sit far above historic norm.

Investors used to love “story stocks.” Now they love story ETFs. 

Often called thematic ETFs, these funds cut across industries, trying to capitalize on ideas like alternative energy, cloud computing or 3-D printing. Others buy stocks that could benefit as more people work from home, demand gender or racial diversity, or lavish money on their pets. Assets in these funds have grown at an average of 45% annually over the past three years. 

In the fourth quarter of 2020 alone, thematic ETF assets shot up 78% to $104 billion. Quirky rules of portfolio construction can also crop up. At the U.S. Vegan Climate ETF, the size of any single stock position is limited to 4.5%. Yet Tesla Inc., the fund’s largest holding, has mushroomed to 7.9% of total assets. 

Investors pursuing themes that seem obvious should remember that if a theme appeals intuitively to you, chances are it appeals to millions of other investors too, making a fund’s underlying holdings more expensive. 

These funds tend to launch months after a theme has gotten hot—amid a crescendo of media hype and stocks earning eye-popping returns. In other words, investors have a natural tendency to buy at exactly the wrong time, and these funds can make that even worse. 

“Well, I’ve got a tip for you. If you think you’ve spotted a theme that other investors haven’t fully appreciated yet, ask yourself how come there’s already a thematic fund for it.” 

When Investors Forget Fundamentals 

This year, stocks priced below $1 have performed the best, followed by those between $1 and $2, and so on. It looks remarkably like investors are treating a low-price share as an indicator that the stock is a bargain, and a higher price as a sign that it is worse value for money. 

The share price on its own carries virtually no useful information: It depends entirely on how many shares the company has issued. 

The pattern of lower-priced stocks doing better is perhaps brought on by the rising popularity of trading by individual investors, who are more likely to be new to the stock market and regard a low-price share as cheap, even though it should be irrelevant to a company’s prospects. 

This week’s charts 

Who needs earnings? 

Global stimulus in response to COVID-19 

The balance sheets of developed market economies are now approaching wartime conditions

Investing…it’s just that easy 

Chad and Jenny are the newest financial stars of TikTok. As Chad puts it: "I see a stock going up and I buy it. And I just watch it until it stops going up, and then I sell it. " "Up is good. down is bad. I just ride the upward trends and when they start going down jump off lol." 

In a bull market, lots of stocks go up. You can probably find a few even if you have no clue what you're doing. As the old saying goes, even a blind squirrel can find an acorn once in a while.

In the late 1920s, trading stocks, often with borrowed money and without doing any research, became a national obsession. The same mania struck in 1999 and early 2000. 

Investing can be simple, but it isn't easy. It isn't a mindless joyride. It is a process, not a game; you win by persisting over the course of many years, not by racking up the most points in the least amount of time. 

Being cooped up has led many investors to conclude that they can perceive which themes, or broad trends, are likely to dominate the market for years to come. That can make it harder to remember that other investors may have spotted the same themes even earlier, driving prices dangerously high. 

You should keep your investing simple. But you should never let anybody fool you into thinking that investing is easy.

This week's interesting finds

 

2020 Q4 EdgePoint commentary 

Equity commentary: The granny shot (or why you shouldn’t always listen to the crowd) 

This quarter, portfolio manager Andrew Pastor explores a deceptively simple (but effective) idea that’s difficult to do in practice – investing differently from everyone else. 

Fixed-income commentary: Things that make you go “hmm…” 

This quarter, Derek Skomorowski talks about the risks of buying long-term government bonds in the current environment and why we focus on buying mispriced bonds of businesses that can withstand an economic shutdown no matter how long it lasts. 

30+ year peak in duration of the bond market.

 

U.S. high-grade corporate bond investors have never been paid so little for taking so much risk 

The “Sherman Ratio,” named after DoubleLine Capital Deputy Chief Investment Officer Jeffrey Sherman, shows the amount of yield investors earn for each unit of duration. It tumbled to as little as 0.1968 on Dec. 31 for the Bloomberg Barclays U.S. Corporate Bond Index, a record low in data going back more than three decades. 

This is happening because the numerator (yield) has continued to tumble while the denominator (duration) increases. The average investment-grade corporate bond yield was a record-low 1.74% as of Dec. 31, compared with 2.84% a year earlier, while the modified duration on the index increased to 8.84 years at the end of 2020, just about a record high, from 7.96 years at the start. 

The first week of 2021 demonstrated how potentially perilous this dynamic can be for credit investors. Investment-grade corporate bonds suffered their worst loss on a total return basis since August, and second-biggest decline since March, even though spreads narrowed and there’s no sign of broad stress in high-grade markets. 

The blame for that weakness lies almost entirely with Treasuries. The benchmark 10-year yield increased by 20 basis points in the first five trading days of the new year, as investors expect a greater debt-funded stimulus with a Democratic sweep. It really doesn’t take much of a move higher in interest rates to wipe out the income return on the index or a fund tracking it. 

COVID-19 Tracker Canada 

Canada is vaccinating 0.12% of the population daily. Total vaccination as of yesterday (January 14th 2020) is 1.15% of the population. Israel is vaccinating 0.76% of its population daily and is at 22.4% of total population vaccinated. 

Some global comparison below: 

Interesting observation: Prince Edward Island has already administered 5102 vaccines or 3.2% of its population. They are running 283% better than the national average. 

FOMO is real 

Last week, Elon Musk recommended folks use Signal, an encrypted-messaging platform which isn't a publicly traded company. Investors and fans of Elon misinterpreted this tweet and quickly bought shares of Signal Advance (unrelated company). Signal Advance shares surged over 6000% in 3 trading sessions, pushing its market value to $3.164 billion from a mundane $55 million. This week the stock is down 80% as it was made apparent that Musk was tweeting about a different Signal. 

Daily trading activity by individual investors in South Korea