This week's interesting finds

U.S. P&C commercial rates continue to accelerate

Ironies of Luck

If risk is what happens when you make good decisions but end up with a bad outcome, luck is what happens when you make bad or mediocre decisions but end up with a great outcome. They both happen because the world is too complex to allow 100% of your actions to dictate 100% of your outcomes. They are mirrored cousins, driven by the same thing: You are one person in a 7 billion player game, and the accidental impact of other people’s actions can be more consequential than your own. Experiencing risk makes you recognize that some stuff is out of your control, which is accurate feedback that helps you adjust your strategy. 

Experiencing luck doesn’t. It generates the opposite feedback: A false feeling that you are in control, because you did something and then got the outcome you wanted. Which is terrible feedback if you’re trying to make good, repeatable long-term decisions. 

ESG 

Why are they celebrating the Keystone XL cancellation?

Activists across the country are claiming victory over TC Energy cancelling the Keystone XL pipeline. But what are they really celebrating?

Increased transportation by rail
Keystone XL, which was first proposed in 2008, would have been a net-zero emissions pipeline that transported oil from Canada – a country with some of the highest environmental standards among all major oil producers – to refineries on the Gulf Coast that process heavy crude into gasoline and other necessary products. We all know it, but it’s worth stating again: Pipelines are by far the safest, most efficient means of transporting oil. Yet U.S.-Canadian pipelines continue to face attacks from activists that either don’t fully comprehend supply and demand or don’t care that this oil will now need to be delivered via truck, rail or – even worse – tankers from countries across the ocean

Increased reliance on OPEC and Russian oil
Preventing pipelines from being built doesn’t mean the demand just goes away. The United States recently accepted its second tanker of oil from Iran in the past six months. Oil imports from Russia are also currently at a 10-year high.

Alberta’s relative position globally to attract capital for “green energy” related projects

The power of investors to influence responsible behaviour

Bill Ackman was scrolling through Twitter when an article in The New York Times caught his eye. “The Children of Pornhub,” told how unauthorized sex — and rape and torture — videos were being spread across the internet on a website called Pornhub, one of the most popular in the world. An influential shareholder activist, Ackman immediately thought about the growing interest in ethical, or ESG, investing. 

 And that’s where he saw an opening. In this case, he wasn’t an investor in any of the publicly traded companies that he knew were profiting from Pornhub’s content, which is often uploaded from users the same way individuals post videos on YouTube. But Ackman had noticed that Mastercard and Visa were payment processors for Pornhub, and he was friendly with Mastercard’s then-CEO Ajay Banga, whom he had met through a mutual friend. He texted Banga “Amex, VISA and MasterCard should immediately withhold payments or withdraw until this is fixed. PayPal has already done so.” (Ackman was unaware that American Express already did not allow its card to be used on adult sites.) 

Within days, Mastercard announced it had instructed the financial institutions that connect the site to our network to terminate acceptance” of Pornhub charges. Visa also stopped processing Pornhub payments. Within 24 hours of the credit card companies’ actions, Pornhub said it had taken down 10 million videos, or 80 percent of those on its site.

Since then, the Parliament of Canada and the U.S. Congress both have held hearings, legislation has been proposed, lawsuits have been filed, and there have been calls for a criminal investigation. To be sure, Ackman is only one player in the grand scheme of Pornhub’s but the involvement of the high-profile financier drew more attention to a campaign for accountability that activists had been waging for almost a year — with little success.

This week's interesting finds

 Resource equities: Inflation protection at a discount

Whether this year’s price rises are merely transitory or something longer lasting, the opportunity in energy and metals companies looks very appealing from a historical perspective. Energy and metals companies are trading at a discount of over 70% to the S&P 500 Index, the biggest discount seen with the exception of other points in the last year or so. In fact, energy companies are trading at the cheapest levels in absolute terms ever seen prior to Covid.

Inflation 

The core CPI price index is now firmly above the pre-COVID trend.

Three categories that comprise ~5.5% of core CPI drove half of the monthly increase:

i) used cars & trucks

ii) car & truck rentals

iii) public transportation (largely reflecting airline fares)

Reopening 

During the peak of COVID-19, the US box office didn't just slow down — it completely disappeared. So, it's somewhat comforting to see that on May 28^th A Quiet Place Part II, the sequel to the successful horror film from 2018, managed to rack up almost $20m on its opening day, and more than $57m over the course of the entire Memorial Day Weekend. 

Benefits of not seeking validation  

There is a fundamental mismatch between the frequency of the feedback an investor gets from market quotations and the time required to determine whether a specific investment or a strategy is working. There will always be critics who are not shy about second guessing your decisions. When it comes to investing, there are massive benefits that accrue to those that can totally ignore short term market movements. 

Visualizing the Snowball of Government Debt 

This week's interesting finds

The Genetics of Investment Biases 

The chart below illustrates one of the key findings of the study and shows that twins in an identical pair display much more similar investment biases compared to twins in a fraternal pair. This finding suggests that investment biases are partly genetic. 

How To Do Long Term

Long term is harder than most people imagine, which is why it’s more lucrative than many people assume. Everything worthwhile has a price, and the prices aren’t always obvious. The real price of long term – the skills required, the mentality needed – is easy to minimize, often summarized with simple phrases like “be more patient,” as if that explains why so many people can’t.

To do long term effectively you have to come to terms with a few points.

MacroVoices #273 Larry McDonald: Dollar Down & Gold, Oil, Uranium Up

 Erik Townsend and Patrick Ceresna welcome Larry McDonald to MacroVoices. Erik and Larry discuss: 

• Relationship between inflation and treasury yields 

• Outlook on US/China relations 

• What to expect in equity and bond market 

• Drivers of upcoming price increase in oil 

• Trading opportunities in energy market 

• “Alpha Male Central Banker” 

• Breakdown of the dollar and its implications 

• Oil demand expectations in the re-opening 

The Fall of the Titans!

The corporate titans in a traditional passive tracker strategy are so engrained in our daily lives it takes a healthy imagination to envision they may not stand the test of time. Nevertheless, in the same way the Greek Titans believed their rule was safe before it collapsed, the tables can also turn for these corporate titans. A half-century of history shows that the market’s titan stocks constantly change.

Warm-weather reads and listens - Spring 2021 list

 Regardless of what stage of opening your province is in, here are the latest books, blogs and podcast recommendations from the Investment team that can keep you socially distanced and mentally active.

This week's interesting finds

It’s easy to lose faith in reporting when you read a story like this:

The story is about Snowflake moving out of California. This article fails to highlight that maybe tax is the leading cause. Here is actual data comparing California’s tax rates to Montana’s:

Thank you Canada for your discounted Oil – Sincerely, USA

Climatologists ring drought alarm

Farmers should not underestimate the drought of 2021, says a North Dakota climatologist.

Data from NASA shows that millions of acres of farmland, in northern North Dakota and across the border into Manitoba and Saskatchewan, have extremely low soil moisture this spring. As of the middle of May, NASA rates the soil moisture in the region at the one to two percentile — for soil that is zero to 100 centimeters deep.

The U.S. Climate Prediction Centre is forecasting a warmer than usual June, July and August for the northern plains. That means any rain that does fall, is more likely to evaporate. 

Fiscal stimulus is a larger % of GDP than monetary stimulus when compared to the 2008 Great Financial Crisis. 

ESG improvers

It was found that companies that received ESG rating upgrades outperformed an equal-weighted MSCI ACWI Index during the next 12 months by 0.93%, while stocks that were downgraded lagged (Exhibit 5). Interestingly, the outperformance isn't driven by great companies getting a little better. Instead, companies that were previously poorly ranked (with a CCC rating) but subsequently received a two-notch upgrade generated the strongest outperformance (Exhibit 6).

In the US, the most amount of outperformance (+4.3%) is from companies that had the lowest ESG scores a year ago but have improved their scores the most over the past year. 

In Europe, there is also outperformance by the worst offenders that are getting better, although the correlation is less strong than in the US, likely due to more stringent constraints and regulations that make it more difficult for European investors to own the worst offenders.

Cryptocurrency

This week's interesting finds

Examining the importance of flexibility at the 13th annual Cymbria Day  

At our 13th annual investor day, we discussed how our flexibility benefits us in different ways, from the spectrum of investments we can make to the structure of our Investment team.

10-Year Inflation Expectations 

ESG in the Canadian energy sector: Whitecap Resources

Whitecap Resources published an ESG newsletter highlighting some of their key ESG initiatives:

 • Whitecap will be close to net neutral in 2021 and will continue to pursue net negative emitter status. They remain focused on reducing overall emissions and expanding their carbon capture and storage projects. 

• Whitecap currently sequesters more carbon than it emits, and their New Energy team is hard at work to find economic solutions to further reduce their carbon footprint and advance additional low carbon opportunities. 

• A recent gas injection scheme was developed to avoid emissions during a facility turnaround. This is one of many innovative ways that the team has introduced to maintain and improve upon their environmental stewardship. 

Whitecap Resources is a holding in the EdgePoint Go West Portfolio. This is for informational purposes only and it not a recommendation to buy the stock. 

Magazine covers  

You know by the time the journalists get wind that things are good, it’s probably almost time for it not to be anymore. We just saw the best 52-week period for stocks in over 75 years. You know what they were telling you the week that rally started? These magazine covers were published at the perfect time to be buying stocks. 

Below is another favorite from the New Yorker that shows a chart literally falling from the bottom of earth. Notice the date. That week the stock market bottomed after one of the greatest collapses in stock market history. It then went on one of the most historic runs of all time, right after this cover was published.

This week's interesting finds

Inflation – United States

This chart shows the rolling 5-year cumulative percentage increase in the consumer price index for the United States compared to the rolling 5-year cumulative percentage increase in the broad money supply per capita: 

How to lose money when the stock market is at all-time highs  

From the bottom in late March of last year, the U.S. stock market was up nearly 75%. This was the best 12 month return ever recorded since 1950. Nearly 96% of stocks in the overall U.S. stock market showed positive returns in that time. It’s highly likely we will never experience a 12 month period of returns like that again in our lifetime. For all intents and purposes, the one year period following the bottom of the Corona Crash was the easiest environment in history to make money in the stock market. If you think this type of market is normal, you’re sorely mistaken. It’s not always going to be this easy. In fact, the stock market has already stopped being so easy in 2021 and a number of stocks are currently getting crushed. And it’s not just any stocks; it’s many of the stocks retail investors flocked to last year following the crash:

Supply chain squeeze 

Reopening is ushering in mismatches in supply and demand:

Source: Morgan Stanley 

Patterns

Humans are pattern-recognition machines. We see patterns everywhere! In fact, we’re so good at recognizing patterns that we often see them where they don’t even exist. 

This shows up frequently anywhere there are big bodies of data. And while well-intentioned, this is one of the big behavioral mistakes we make time and again in personal finance. We look for patterns. And guess what, they absolutely exist, right up until the point where you try to invest your money based on the pattern. Then *Poof!* they vanish into thin air. 

David J. Leinweber from Caltech, apparently figured out how to predict the stock market using just three variables: 

1- Butter production in the United States and Bangladesh. 

2- Sheep populations in the United States and Bangladesh. 

3- Cheese production in the United States. 

It turns out these three variables predicted 99% of the stock market’s movement! 

There’s only one problem: The joke’s on us. 

In our very human pursuit of patterns, we start seeing things that aren’t really there. We think if something happened a certain way in the past, then it will surely continue into the future. We start to believe—we desperately want to believe—that this pattern will have predictive value. 

But it doesn’t. And that’s the thing about most patterns—they don’t predict the future; they just describe the past. 

While some of these silly data mining tricks might be interesting to talk about, they don’t actually help us. 

Believe me, I’ve gone down the rabbit hole many times. For years, anytime someone approached me with this type of pattern, I would feel like I had found the Dead Sea Scrolls. But each time, the same thing happened. The pattern existed right up until it was time to invest... and then it didn’t. 

Now, when people approach me with this research—and it’s always called “research”— promising to show me a new pattern in the data, I come back to them with a magic pattern of my own. 

“It turns out,” I tell them, “that the only pattern that will influence your investing success is your behavior.” 

• Can you break the pattern of buying high and selling low? 

• Can you break the pattern of chasing after the next “big” investment? 

• And perhaps most importantly, can you buy low-cost investments in a diversified portfolio based on your values and goals and then simply ignore it?

This week's interesting finds

 Earnings, losses and relative returns 

Why interest rates are rising 

If you combine that fact with excessive US money supply growth and massive excess savings you can understand why investors feel unsettled. Without doubt, the almost absurd rise in excess savings everywhere is a result of the lockdown(s). Consumers have simply not been able to spend what they would have spent under normal circumstances, hence the big war chest building up.

The combination of those three factors – rising wage growth, rapid money supply growth and huge excess savings – can only lead to higher inflation (say the bond bears), hence the rise in bond yields. Officials at the Federal Reserve Bank don’t disagree with that but, importantly, they argue that the rise in inflation will be transitory and that inflation will begin to fade again in 2022, hence why they don’t need to act (they say). Only time can tell who is right and who is wrong. 

Healthcare

 About 44% of older millennials born between 1981 and 1988 report having been diagnosed with at least one chronic health condition, according to a recent survey. 

Canadian oil companies set self-imposed penalties if they don't meet sustainability targets  

Canadian oil sector companies are willing to pay more interest on their debts in exchange for more environmental, social and governance credit from investors. 

In a first for the North American energy industry, midstream company Gibson Energy Inc. announced a sustainability-linked credit facility. Gibson’s sustainability targets include a reduction in emissions and also an effort to boost diversity at the oil storage and pipeline company — as energy companies try to improve their credibility on the S and G components of ESG. 

Used car prices seem primed for another spike based on JDPower Auction data.

Red line indicates used car auction data pricing. The blue line indicates used car prices. Used car auction data pricing is a leading indicator of used car prices. 

Rents have started climbing meaningfully

Source: ApartmentList data

Massive spike in mentions of “inflation”.  Many of the mentions relate to rising commodity prices, but also scarcity of workers despite elevated unemployment. 

The sure-fire way to get out of debt