This week's interesting finds

This week in Charts

The growth in average selling prices for products sold this year and last year    

Charlie Munger on today’s investment climate 

Addressing Australian investors at the Sohn Hearts and Minds conference on Friday, Mr Munger underlined the stretched valuations of quality listed companies, and reiterated his extreme skepticism towards cryptocurrencies such as Bitcoin. 

Mr. Munger, Mr. Buffet’s right-hand man, said the investment environment was “a little more extreme” than what he had seen in his decades of experience, and he backed China’s attempts to clamp down on “some of the exuberances” of capitalism. 

“I think the dot com boom was crazier in terms of valuations than even what we have now. But overall, I consider this era even crazier than the dot-com era,” Mr Munger said.   

Bill Miller’s Journey (Part II)

“It is different every time. The relevant analytical exercise is to figure out what the differences are, what it all means, so that one can make sensible investment decisions.” 

I’ve been fascinated with Miller’s life and career. He has a lot to teach about investing and navigating an uncertain and changing world. Miller stuck to his principles but evolved his strategy during his run of beating the market 15 years in a row. But he failed to see crucial differences between his past experiences and the housing crisis of the mid-2000s and ended up as one the era’s biggest losers. Through it all, the ups and the downs, Miller generously shared his thoughts, reflections, and frank self assessments in his letters. In this, the second part of a two-part series, I let him mostly speak for himself. If a quote isn’t attributed, it’s his.

By Neckar’s Insecurity Analysis   

Danske Bank Slaps 'ESG' Label On 95% Of Its Funds

One of the most disturbing developments on Wall Street in recent years is how the "green cult" has managed to infiltrate the culture, forcing firms to drum up ESG-branded offerings or risk losing clients to better-prepared rivals. 

But like any other fad, the shift to ESG, and the pressure investors are putting on "dirty" oil and gas companies (not to mention coal) has had side effects that are more serious, and others that are more or less benign. 

In the "serious blowback" camp is the fact that the backlash against traditional energy companies and the new orientation in Washington has helped drive inflationary pressures to their highest level in 3 decades by weighing on US supplies of crude oil. 

The truth is there simply aren't enough truly "green" assets to go around, which is why Wall Street is scrambling to label any old company "green" based sometimes on little more than promises.

This week's interesting finds

Holiday gifting made easy – and fun!

Once again, it’s our pleasure to unveil the EdgePoint holiday gift list. In this 2021 edition, you’ll find great ideas for anyone on your shopping list. Our recommendations range from practical and classic to “Why didn’t I think of that?”. Some of them even fall into the “Wow, I never heard of that!” category. Whatever gifts you choose for your loved ones, we wish you much joy this holiday season.

This week in Charts

Many former high growth/tech/IPO/SPAC favorites from last year are now showing significant drawdowns.

Amazon’s secret war on Americans’ privacy  

In recent years, Amazon.com Inc has killed or undermined privacy protections in more than three dozen bills across 25 states, as the e-commerce giant amassed a lucrative trove of personal data on millions of American consumers. 

Amazon executives and staffers detail these lobbying victories in confidential documents reviewed by Reuters. 

Some of this information is highly sensitive. Under a 2018 California law that passed despite Amazon’s opposition, consumers can access the personal data that technology companies keep on them. After losing that state battle, Amazon last year started allowing all U.S. consumers to access their data. (Customers can request their data at this link.) Seven Reuters reporters obtained and examined their own Amazon dossiers. 

One found that Amazon had more than 90,000 recordings Alexa devices made of the reporter’s family members since 2017. 

Another reporter found that Amazon had detailed accounts of her Kindle e-reader sessions and a customer profile which included her family’s “Implicit Dietary Preferences.” 

Alexa devices also pulled in data from iPhones and other non-Amazon gear – including one reporter’s iPhone calendar entries, with names of people he was scheduled to contact.   

The Winds of Change

The last 20 months have been a most unusual period, thanks primarily to the pandemic, yet many things feel like they haven’t changed over that time span. Each day seems like all the others.

Yet there are changes taking place, and they’ll be the subject of this memo. My focus isn’t the “little macro” changes, like what will happen to GDP, inflation and interest rates next year, but rather the “big macro” changes that will have an impact on our lives for many years. Many aren’t actionable today, but that doesn’t mean we shouldn’t bear them in mind.

• The Changing Environment for Investing 

• The Changing Nature of Business 

• Inflation/Deflation 

• The Outlook for Work 

• The Outlook for Democracy 

• Generational Inequity 

• The Role of the Fed 

• Developments in China 

• The T-Word   

Nearly two-thirds of Gen Z think they’ll become crypto millionaires  

Lifted by a flood of stimulus money, plus a sense that Congress would do anything to stave off an economic collapse, financial markets have spiked over the course of the COVID-19 pandemic—giving investors soaring confidence that they'll become the next Warren Buffett. 

Unlike the Oracle of Omaha, though, young investors think cryptocurrencies are their ticket to riches. 

A recent survey by research and analytics company Engine Insights found that 31% of the U.S. adults it polled “believe they can become millionaires from crypto investments." Of the Gen Z surveyed—that is, anyone born between 1997 and 2012—59% think crypto riches are their future. 

Viral stories of investing successes are frequent—helping fuel even more of a “Fear of Missing Out” investment philosophy. 

And the young—especially young men—are particularly prone to the crypto sirens. More than 40% of 18-to-29-year-old men have either invested in, traded, or used a cryptocurrency, according to a recent Pew Research Center survey.

This week's interesting finds

Why charging phones is such a complex business, with Anker CEO Steven Yang

Steven Yang founded Anker in 2011, and since then, it’s turned into a 3,000-person company that operates all over the world by selling phone chargers and battery packs on Amazon and have since expanded to other categories like webcams, Bluetooth speakers, and smart home products. 

Along the way, they’ve pioneered a major advancement in charging technology — you know that little white brick that takes forever to charge an iPhone? It’s made using silicon and puts out about 5 watts of power. Anker made a big bet on a material called gallium nitride, or GaN, and it is now a charger the size of that iPhone brick that can put out 30 watts of power — enough to charge a MacBook Air. It was a big bet, and it paid off. 

And, of course, we had to talk about Amazon. Anker started its business on Amazon and still sells most of its devices on the platform. Steven told me that Anker has 100 people, or fully 3 percent of the company, dedicated to thinking about managing the Amazon marketplace. And for good reason: this past summer, several of Anker’s competitors were banned from Amazon for breaking guidelines around fake and paid five-star reviews.

What's a Safe Retirement Spending Rate for the Decades Ahead?  

A 4% starting withdrawal rate, with annual inflation adjustments to that initial dollar amount, thereafter, is often cited as a "safe" withdrawal system for new retirees. Financial planner Bill Bengen first demonstrated in 1994 that such a system had succeeded over most 30-year periods in modern market history, and in the nearly 30-year time period since Bengen's research, a 4% starting withdrawal rate would have been too modest. But is such a withdrawal system safe today, given the confluence of low starting bond yields and equity valuations that are high relative to market history?

Retirees who employ variable withdrawal systems that are based on portfolio performance--taking less in down markets and more in good ones--can significantly enlarge their starting and lifetime withdrawals. For instance, our research finds that some flexible withdrawal systems would support a nearly 5% starting withdrawal rate. But these variable strategies involve trade-offs--specifically, the year-to-year cash flow can be more volatile.

Rags to Riches - The Story of the humble uniforms and laundry 400 bagger 

The book Rags to Riches is written by Richard T Farmer who was the president and second-generation family founder, Richard’s grandfather ‘Doc’ Farmer was the original founder of the business which was invented out of the “grinding poverty of the great depression”.

A summary of some elements of overt high-performance culture through the Cintas history include:

• A 10yr stock option plan with none vesting for the first 5 years and then 20% each year after. 

• Cintas managers always wear business attire, no casual Fridays, our business is making people look sharp - lead by example. 

• Operate exceedingly clean plants, Farmer used to inspect the bathroom as a key indicator of manager quality 

• Even while a private company the profit and loss was shared with all employees every year 

• To improve profitability, incentivize the team to satisfy customers, increase competitive advantage and be more productive.

“You’ll hear lots about culture in this book. It is, without doubt, our most important competitive advantage. Competitors can copy our sales material, our products, and even some of our systems but they cannot copy our culture”.

Farmer outlines at the end of the book that to achieve the grand ambitions he needed very talented people however, he was always more comfortable with “partners” than “employees” so whenever he came across exceptional people, he saw to it that they were owners and partners in the business, not just employees. 

Farmer outlines that the best way to communicate the culture of a business is by telling stories about where and how it came about, this is almost exactly the way Bezos describes culture at Amazon –“stories of past successes and failures that become a deep part of company lore”.

Some of the stories about how Cintas grew its culture came from near-death experiences. In 1945 when Cintas was a small family business with 12 employees the factory burned down and although there was insurance it wasn’t enough to truly rebuild the business. Doc Farmer exclaimed that “we are not out of business! you can take our equipment, but as long as we have our people we’ll be okay”. Having to rebuild from nothing with only your staff teaches you the true enduring nature of your people.

Another story about the workplace environment was developed through many experiences including Richard working in the drying room which was stiflingly hot, lifting heavy drums of wet rags that were 200 pounds apiece, eating lunch in the restrooms because there was no lunchroom, scooping out grease from the sump pit by hand in waist-deep oil and grease. All these examples enforced the culture to provide a safe and enjoyable workplace.

This week in Charts

Debt

Inflation

The 10-year yield minus CPI is at levels only seen for a few weeks in 1974 and 1980. In both cases, yields meaningfully rose over the next year, even as CPI decelerated, as sometimes the bond market can react with a delay to inflation. 

Source: Bloomberg, Raymond James Research

This week's interesting finds

An investor's journey with EdgePoint, part 2

 A lot’s happened over the last couple of years, so we updated Mimi’s video journey to demonstrate what an EdgePoint investor has experienced. The ride over the short term wasn’t a smooth one, but those who worked with their advisor and stayed invested are closer to their Point B.

This week in Charts

NASDAQ 100’s forward price/sales ratio has reached a new all-time high

The Nasdaq 100 Index is a basket of the 100 largest, most actively traded U.S companies listed on the Nasdaq stock exchange. The index includes companies from various industries except for the financial industry, like commercial and investment banks.

The widest gap on record between the U.S. Federal Reserve’s short-term interest rate setting and year-over-year CPI

Large gap in return expectations

Amount of data generated every minute

“Excess” household savings could yet boost spending

 • With household saving rates still elevated in most developed economies, “excess savings” have continued to rise. If people were to run down these savings, this would breathe new life into consumer recoveries. 
 • By the end of Q2 (the latest data available), households in advanced economies were holding currency and deposits that were some $3.7 trillion higher than we might have expected them to be had there been no pandemic. 
 • Household’s savings rates have fallen back from their peaks. The US aside, though, they remain much higher than before the pandemic. This is because while household incomes remain resilient, consumer spending is yet to stage a full recovery. 

DM – developed markets
NPISH – non-profit institutions serving households

The Most Important 2000 Years of Energy History (Video: 33 minutes)
 Few people think of energy at all and even fewer think about its history. We are on the verge of a new chapter in the history of energy and few people realize the implications. Learn more about:
 
• The one thing that increased real GDP growth 20-fold 
• Why the largest city was 1 mm people for 2000 years 
• Why renewables are a major step backwards 
• Why we might be on the verge of the most important energy revolution in 400 years.

This week's interesting finds

We're hiring!  

We're always looking for talented people who can help us achieve our goals and we understand that extraordinary human ability is a scarce resource in high demand. If you think you've got some and are interested in our company, please send your resume to: WeAreGrowing@EdgePointwealth.com. 

Current opportunities:

- Product manager  

- Creative writing specialist

This week in Charts 

Wages and salaries for private industry workers (not seasonally adjusted)

Emissions by sector     

Bill Ackman’s presentation to NY Fed on why they should raise interest rates  

Key points: 

- More than 25 million jobs were lost due to the pandemic between February and April 2020, but the economy has since recovered 20 million jobs (~80%). 

 - At the current pace of ~500K monthly job additions, we expect the five million employment gap to pre-pandemic levels to close within the next 10 months. 

- The annualized pace of growth across several key inflation measures, including wage inflation, has remained elevated in the mid to high-single-digit range. 

 - Even excluding the impact of new vehicles and used cars and trucks, which have experienced heightened inflation, CPI has been increasing at an annualized growth rate of approximately 5%. 

- Both the unemployment rate is lower AND inflation measures are substantially higher today than at the beginning of prior rate hike cycles.   

Highest price hike to milk in recent memory  

The Canadian Dairy Commission, a crown corporation that sets the price that dairy farmers get for their milk, had just put out a statement recommending an increase of 8.4 per cent, to make up for big jumps in the cost of feed, fuel and equipment. 

The price hike, if approved by provincial authorities, will take effect in February, amounting to an extra six cents per litre for processors that buy milk from farmers and turn it into retail-ready products.

These Lenders Are Making A Growing Number of LBOs Possible  

Private equity firms are finding that more leveraged buyouts of tech companies are becoming possible, thanks to lenders that have deeper pockets than ever: private credit firms. 

These lenders are providing financing to companies that wouldn’t be able to borrow as much in bond or leveraged loan markets. Private credit firms’ willingness to finance these kinds of deals is helping to fuel the highest volume of LBOs for tech companies since 2016. And they’ve enlarged the universe of publicly traded U.S. corporations that private equity firms can readily buy by somewhere around $550 billion. 

The loans in question are either to companies that are burning through cash and don’t have enough earnings to pay interest, or to corporations that need more debt for a leveraged buyout than bond or syndicated loan markets will provide. Some of these financings can pay interest of 8 percentage points or more, far above yields available in other comparable markets.  

This week's interesting finds

This week in Charts 

China house prices down on month-to-month for the first time since 2015

China expands property tax trials in next step of ‘common prosperity’ drive  

A property tax could alter China’s economic model, reshaping government revenue streams from land sales to taxes and deterring property speculation. 

Many tax specialists and economists believe it will help wean local governments off their chronic dependence on selling and leasing public land to developers. This relationship has contributed to widespread property speculation and pushed land and house prices higher in a cycle that many experts believe is unsustainable. 

According to research group Capital Economics, an effective tax rate of 0.7 per cent of the total property value would have generated Rmb1.8tn ($282bn) last year in China. 

That compares to Rmb1.6tn local governments generated in net revenue from land sales, after paying billions of dollars in land transfer expenses including compensation payments. The tax, and subsequent pressure on prices, could also help dent the appeal of property investment, redirecting private capital towards sectors such as high-tech exports and services that boost domestic consumption, according to its proponents.   

Traders Bet Tesla Stock’s Rally Isn’t Over Just Yet  

Traders are swarming the market for Tesla Inc. options to bet on a continued stock rally. Almost one out of every two dollars spent in the U.S.-listed options market through Wednesday went to Tesla options, according to Cboe (Chicago Board Options Exchange) Global Markets. 

By one measure, activity in Tesla options has surpassed trading in its shares. More than $900 billion in Tesla options have changed hands this week, roughly five times the total for its shares, according to Cboe and FactSet data through Wednesday. 

Tesla options have morphed into one of the biggest casinos on Wall Street because the value of bullish call options can rapidly multiply if the stock advances, as it has for much of the past two years. That translates to quicker and bigger profits for traders than if they had just bought the stock. 

Call options tied to the shares jumping to $1,100 or $1,200 have been among the most popular trades recently, according to data from Shift Search. On Thursday, calls pegged to the shares advancing to $2,000 were actively traded.

Invitation Homes Boosts Rents 11% as Housing Shortage Persists  

Invitation Homes Inc., which owns more than 80,000 single-family rentals, raised prices by nearly 11% in the third quarter, according to a statement. The company boosted rents by 8% on renewals and 18% when leasing homes to new tenants. Rates are rising fastest in the Southwest, where rents increased 30% on new leases in Las Vegas, and 29% in Phoenix. 

“It’s a little bit crazy,” Chief Executive Officer Dallas Tanner said on a conference call with investors Thursday. “There just isn’t enough quality housing available right now.” 

Rising rents have been a staple of the economy since early Covid lockdowns lifted in the middle of last year. Surging purchase prices have pushed homeownership out of reach for first-time buyers.

Internal vs. External benchmarks 

 Accomplishments have a cost basis. What you gain or lose is always relative to where you began. And since we all begin at different spots, there’s a range in how people feel when experiencing the same thing. 

In his book on the final days of World War II, Stephen Ambrose writes about a wounded American soldier who’s carried back to the medic tent. He knows he’s going home – his war is over. “Clean sheets boys!” he yells back to his comrades still fighting. “Clean sheets, can you believe it! Clean sheets!” Living in foxholes for weeks caused soldiers to daydream about normal life, and few things tickled their imaginations like the dignity of clean sheets. Not money or status or respect or glory. Just the absolute pleasure of clean sheets. It’s an extreme example of when the outside world ceases to exist and everything becomes relative to an internal benchmark. 

A lighter version of this happens in business and finance, which are home to so many staggeringly successful people whose lives are broadcast over a staggeringly loud social media system. 

Pretending to be “frozen”  

“We invested in Upstart 4 days ago and it is up by 25%. What does Upstart Do?” 

“I am sorry, you are breaking up…”

We're hiring! 

We're always looking for talented people who can help us achieve our goals and we understand that extraordinary human ability is a scarce resource in high demand. If you think you've got some and are interested in our company, please send your resume to: WeAreGrowing@EdgePointwealth.com.

Current opportunities: 

• Creative writing specialist 

This Week in Charts 

Screening at Canadian Airports 

Japan’s carbon goal is based on restarting 30 nuclear reactors 

Japan’s goal of reducing carbon emissions by 46% by 2030 is based on the assumption it will restart 30 of its nuclear reactors, a top ruling party executive said. 

Akira Amari, secretary-general of the Liberal Democratic Party, made the remarks Sunday in a televised debate broadcast by NHK ahead of the Oct. 31 general election. 

The LDP has also been promoting the idea of building small modular reactors, saying they are safer than Japan’s existing atomic plants. Amari said Japan was in a particularly difficult situation in meeting carbon targets because it has no power links with other countries and doesn’t have reliable prevailing winds. 

Is it an investment? Is it a game? No, it’s eToro

The internet, cryptocurrencies, user-friendly trading platforms, and a pandemic-induced glut of spare time have gelled into a perfect storm that has redesigned retail trading as something that feels more like a game, and has transformed social-media friendly investors into quasi-influencers.

Israeli trading platform eToro, which launched in 2007, has been pioneering what the industry calls “social trading” features for over a decade. Users on the platform can follow other traders, check out their performances over time and, if they are keen, copy them. The most copied popular investors are rewarded by eToro with perks and a monthly payment.

As the world’s health conditions deteriorated – to wit: during the Covid-19 pandemic – more and more people popped up on eToro. In the first quarter of 2021, the platform gained more than three million new users, passing 20 million global users in June 2021. “I do see it increasingly among the younger generations: they have a sort of ‘don't care’ attitude towards losing their money, towards investing in risky things,” Smith says. “This meme culture and joking about their investments – I think it's gonna be a strange future, but I'm excited for it as well.”

Inconvenient Truths 

In 2020, U.S. natural gas prices hit the lowest levels since the mid-1990’s, driven by the emergence of advantaged shale gas basins, the overcapitalization of the shale oil industry, and a short period of disequilibrium while incremental demand from LNG and chemical plants came online. Fifteen months later, prices are at their highest seasonal level since 2008 as associated gas from shale oil has declined and as global demand for gas causes U.S. LNG facilities to run at full capacity. So much for “perpetual sub-$2.50 gas.” 

While prices and availability will normalize over time, the current environment exposes a number of realities which run counter to conventional wisdom and highlight the risks of allowing politics and ideology to interfere with scientific debate and economics. Specifically, there are three interrelated topics that deserve special consideration: 

• Raw materials are integral to the Energy Transition. Creating the energy complex of the future will require raw materials. In this piece, we’ll focus on natural gas which is a key enabler to reducing carbon emissions today and keeping energy prices in check while we invest in the technology and infrastructure necessary to attain net zero in the future.
• The Energy Transition will be inflationary. The inherent limitations of renewables, rising input costs driven by geology and capital scarcity (see point 3 below) and the introduction of carbon pricing will result in structurally higher energy prices going forward.
• The Hypocrisy of Divestment and ESG Investing. Refusing to invest in responsibly sourced enabler commodities increases global emissions while exacerbating income inequality on a global basis, thus resulting in outcomes that run directly counter to the stated objectives of these policies. 

It Don't Come Easy - The Energy Crunch, Decarbonization Goals, Forecasts, And Putin

Given all the talk lately about ESG, decarbonization, and the rise of renewables, it may come as a surprise to learn that the U.S. Energy Information Administration’s (EIA) reference- or base-case forecast for global energy sees substantial increases in natural gas supply and demand over the next three decades. 

In that report, which was released earlier this month, the agency said that under its base case — and (importantly) “absent significant changes in policy or technology” — global annual energy consumption will increase by nearly half (to just under 900 quadrillion Btu, or qBtu) by 2050. 

With that caveat about the base case in mind, EIA said that demand for petroleum and other liquid fuels will grow by 36% by 2050 and remain the world’s largest primary energy source. EIA’s base case sees energy-related CO2 emissions increasing to well over 40 billion MT/year by 2050 (left graph). That doesn’t sound much like decarbonization. 

Putin’s Fools Rush In 

Earlier this week, Ursula von der Leyen descended from on high, tablets in hand, to deliver a somber message to the shivering masses of the Old Continent. According to euronews, von der Leyen has grave concerns about the energy crisis currently befalling Europe. 

To believe von der Leyen, Europe’s energy conundrum is an immaculate crisis, conceived without any consummation by the European elite. They just woke up one day to find they were importing 90% of their natural gas needs. That Russia now controls their energy future is nothing more than a random and unfortunate event beyond anybody’s control. With no rooms left in the inn, Europe will just have to settle for Putin’s manger. 

Better still is her proposed solution to this newfound shortage of baseload power. According to von der Leyen, what Europe needs now isn’t a rejuvenation of its fledgling nuclear power industry, nor systematic investment in domestically produced natural gas. Instead, Europe needs more intermittent power! There’s a hurricane coming, and Europe needs to board up its windows. No hammers, you say? Quick! Buy more saws! 

Inflation