This week's interesting finds

This week in charts   

Is Nuclear Power Part of the Climate Solution?

Despite longstanding concerns over its safety, nuclear power can play an important role in a low-carbon world. 

Nuclear plants don’t depend on a steady supply of coal or gas, where disruptions in commodity markets can lead to spikes in electricity prices, as has happened this winter in Europe. Nor do nuclear plants depend on the weather. Solar and wind have a great deal of potential, but to be reliable energy sources on their own, they require advanced batteries and high-tech grid management to balance varying levels of power generation with anticipated spikes in demand. That balancing act is easier and cheaper with the kind of firm power that nuclear can provide. 

The level of carbon emissions generated by nuclear power is on par with solar and wind, especially when considering the complete life cycle of a plant. Both solar and wind produce entirely carbon-free electricity once they are up and running, but they require a significant carbon investment up front. Solar panels rely on metals that need to be mined, and the average wind turbine is now large enough to contain around 200 tons of steel or more.   

Does Not Compute 

Historian Will Durant once said, “logic is an invention of man and may be ignored by the universe.” And it often is, which can drive you mad if you expect the world to work in rational ways. A common cause of everything from divisive arguments to bad forecasting is that it can be hard to distinguish what’s happening from what you think should be happening. 

One way to think about this is that there are always two sides to every investment: The number and the story. Every investment price, every market valuation, is just a number from today multiplied by a story about tomorrow. 

The numbers are easy to measure, easy to track, easy to formulate. They’re getting easier as almost everyone has cheap access to information. 

But the stories are often bizarre reflections of people’s hopes, dreams, fears, insecurities, and tribal affiliations. And they’re getting more bizarre as social media amplifies the most emotionally appealing views. 

The pandemic delivered a surprise to Nordic countries: a baby boom 

Since the COVID-19 pandemic began, births in many wealthy countries across the world have plummeted. In 2020 the United States’ fertility rate cratered at its lowest ever, Chinese births plunged 15 percent, and France saw the fewest babies born since World War II. Meanwhile, the Nordic countries—Denmark, Norway, Sweden, Finland, and Iceland—all have maintained their birthrates, and some are puzzled to find themselves in the midst of a pandemic baby boom.   

New Howard Marks Memo: Selling Out 

“When I meet people for the first time and they find out I’m in the investment business, they often ask (especially in Europe) “what do you trade?” That question makes me bristle. To me, “trading” means jumping in and out of individual assets and whole markets on the basis of guesswork as to what prices will do in the next hour, day, month or quarter. We don’t engage in such activity at Oaktree, and few people have demonstrated the ability to do it well. 

Rather than traders, we consider ourselves investors. In my view, investing means committing capital to assets based on well-reasoned estimates of their potential and benefitting from the results over the long term. Oaktree does employ people called traders, but their job consists of implementing long-term investment decisions made by portfolio managers based on assets’ fundamentals. No one at Oaktree believes they can make money or advance their career by selling now and buying back after an intervening decline, as opposed to holding for years and letting value lift prices if fundamental expectations prove out.”

This week in charts 

Workforce woes 

The most unusual job market in modern American history, explained

It can be difficult now to remember what the U.S. economy looked like a year ago. The unemployment rate was 6.7 percent, with 10 million fewer people employed than before the pandemic. Expectations were that it could take years for the labor market to heal. 

Then, the economy experienced two historic surprises. First, demand for workers came soaring back at a velocity almost never before seen. And second, despite companies going all out to hire, millions of workers either retired early or stayed on the sidelines. 

These two forces collided to create the most unusual job market in living memory — and an economy afflicted not by too few jobs, but too few workers. 

The shortages are beginning to raise difficult questions about how much some of America’s most vital sectors can continue to rely on a relatively low-paid workforce. 

In 2022, something’s got to give. Otherwise, worker shortages could become an enduring feature — or defect — of the U.S. economy. 

Meet the Kidd Who Goes Toe to Toe With Warren Buffett 

The typical stock fund manager is a sheep in wolf’s clothing: passively mimicking the market, with only a few small and timid active bets. By taking the opposite approach, Wilmot H. Kidd III has racked up one of the greatest long-term track records in the history of investing. 

Over the past 20 years, Mr. Kidd’s Central Securities Corp., a closed-end fund, has outperformed Warren Buffett’s Berkshire Hathaway Inc. Over the past 25, 30, 40 and even nearly 50 years under Mr. Kidd, Central Securities has resoundingly beaten the S&P 500. 

That’s not to say Mr. Kidd has never underperformed. Over the past 10 years, according to Morningstar, Central has lagged the S&P 500 by an average of three percentage points annually as giant tech companies have raced ahead. (So far in 2021, Central is outperforming again.) 

Number of Nasdaq Stocks Down 50% or More Is Almost at a Record

Roughly four in every 10 companies on the Nasdaq Composite Index have seen their market values cut in half from their 52-week highs, while the majority of gauge members are mired in bear markets, according to Jason Goepfert, chief research officer at Sundial Capital Research. 

 “Whatever the fundamental and macro considerations, there is no doubt that investors have been selling first and trying to figure out the rest later,” Goepfert said in a note. 

Another way of thinking about the tech wreck: At no other point since the bursting of the dot-com bubble have so many companies fallen like this while the index itself was so close to a peak.

This week's interesting finds

From our EdgePoint family to yours, wishing you all the joys of the season, health and happiness throughout the coming year. 

This week's interesting finds

New EdgePoint swag - EdgePoint ornament

Spread some joy with the Edge-iest ornament around. Perfect for hanging from whatever holiday fixture you want. As always, you can shop guilt-free since all profits will go towards lowering our investors' fees.

Demographics 

In need of a baby boom, China clamps down on vasectomies 

Zhao Zihuan, a first-time mother in the Chinese city of Jinan, had two miscarriages before giving birth to a son last year. The seven-hour labor ended in an emergency Caesarean section. 

Exhausted by child care, the 32-year-old and her husband decided one kid was enough — so in April they began to inquire about a vasectomy. Yet they were turned down by two hospitals. One doctor told Zhao’s husband that the surgery was no longer allowed under the country’s new family-planning rules. 

For more than three decades, Chinese authorities forced men and women to undergo sterilization to control population growth. Now, as the government tries to reverse a plummeting birthrate that it fears could threaten social stability and the economy, hospitals are turning away men seeking vasectomies Couples and single men who sought the procedure said doctors and hospital staff refused, telling them they would regret the decision later. Some asked for documentary proof of marriage and evidence that couples had already had children before going ahead with the surgery. 

Chinese weddings fall to 13-year low as demographic crisis brews 

China’s efforts to lower the cost of marriage and boost birth rates have failed to lead to more weddings, dealing a blow to a crucial policy intended to combat a rapidly ageing society. The world’s most populous country faces a demographic crisis as authorities grapple with the economic challenges caused by a shrinking population. Chinese census data released this year showed the population had increased at its slowest pace in decades. 

“A drop in marriage will affect birth rates and in turn economic and social development,” said Yang Zongtao, a senior official at the MCA last year. “We are hoping to . . . actively create favourable conditions for more people of suitable ages to walk into marriage. 

A big challenge has been the country’s gender imbalance, with young men outnumbering women of similar age by a considerable margin after decades of China’s one-child policy. “The space for new policy is limited when you have more young men than women,” said a Beijing-based government adviser. “It is inevitable that a lot of men will remain single in their lifetime.” 

The adviser said China’s gender imbalance had barely improved from the 2010 census, which reported 2.2m single men aged 25-34 and 1.2m single women in the same age group.   

ARK ETFs returns from their peak in 2021 

Ark's Cathie Wood: 'Queen of the bull market' faces her toughest test 

Ark Invest, the investment company the Californian native founded in 2014, was made for those who fancy a version of the tech-driven bull market on steroids. Harnessing social media with a skill rarely seen on Wall Street, Wood has attracted legions of retail investors and billions of dollars by pitching aggressive bets on companies and technologies she says will reshape the world, most famously Tesla. The results have been spectacular — until now. 

Based in newly established offices in St Petersburg, Florida, Ark has been one of the biggest winners from the market’s embrace of moonshot bets on disruptive companies, an approach whose risks the Federal Reserve has helped gloss over with waves of monetary stimulus. 

But with Fed chair Jay Powell last month signalling a determination to scale back support, Ark now faces the toughest test in its short history as sentiment turns against the hot but often unprofitable technology stocks that have powered its rise. 

While ARKK’s record of average annual gains is stellar, many came when it had a much smaller asset base. Amundi, one of Europe’s largest asset managers, estimates that the average investor in the ETF is now underwater. 

By December 7, all 44 of its holdings were off their peak, and just six have escaped sliding into a bear market, according to data from Ramin Nakisa, a former UBS analyst who now runs consultancy PensionCraft. About half have fallen at least 50 per cent from their 2021 peaks, with five slumping more than 70 per cent or more. 

Unprofitable Companies Are Winning in 2020, or, Are These Companies Ponzi Schemes? (Youtube Video, 15 min) 

So why is it that some of the biggest companies in the world are not turning profits? Why is it that they don’t even plan to? 

The rise of so-called zombie companies or companies that have not and have never run at a profit are raising more and more eyebrows in the investing world. 

These businesses are getting too big to ignore as by some estimates over 10% of the s&p500 (an index of the largest companies in America), is now made up of these companies that don’t serve the one central goal of being in businesses. 

What’s more, is that this issue is not just endemic to a particular industry, dozens of major companies and countless smaller businesses in every sector of the economy from energy, retail, medical, telecommunications, and of course technology are in this profitless boat together. 

Global Banks Hold Fast to Fossil Fuels as Climate Pressure Grows 

With the ink hardly dry on a landmark pledge by the finance industry to fight climate change, the world’s biggest banks are making clear they plan to stand by their fossil-fuel clients. 

In total, global banks led by the Wall Street titans have helped fossil-fuel companies issue almost $250 billion in bonds so far in 2021, a figure that also broadly matches average annual fundraising for the industry since 2016. And while the International Energy Agency argues that funding for new oil and gas needs to stop now to avoid catastrophic climate change, bankers counter that polluters need help to transition to new sources of energy. 

“You can’t just walk away, because the world is still heavily reliant on fossil fuels for the vast majority of our energy demand,” said Marisa Buchanan, global head of sustainability at JPMorgan in New York. “It is really important that our clients take steps to innovate and decarbonize, but we also need to bring capital to the table for the commercialization of those solutions.”

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