This week's interesting finds

EdgePoint Wealth website facelift

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This Week in Charts

Long-term Commodity Cycle

Oil correlations and CAPEX in Canada

Scrapped: How nearly $150 billion worth of energy projects have been shelved in Canada

Canadian and international investors have had a hard time getting shovels in the ground on their projects, even after securing regulatory approval. The reasons have been many: pure economics, political divisions, Indigenous disapproval and environmental concerns.

All of the above factors have left a slew of projects stranded as Canadians are unable to agree on our need to develop resources and at the same time fight climate change. Together, they make up around $150 billion of lost investment opportunity that would have generated taxes, jobs and businesses for the domestic economy.

Here are some of the major energy projects over the past few years that never saw the light of day:

Project: Frontier Oilsands Mine

Cost: $20.6 billion

Company: Teck Resources Ltd.

Project: Pacific Northwest LNG

Cost: $36 billion

Lead company: Petronas Bhd.

Project: Aurora LNG

Cost: $28 billion

Lead company: Nexen Energy

‘Tech wreck’ looks more like another dotcom bubble bursting

At what point does the slump in US technology stocks stop being dismissed as a mere “tech wreck” primarily centered on the most speculative companies and become considered a fully-fledged dotcom crash 2.0?

The combination of increasingly hawkish central banks and Russia’s invasion of Ukraine has been toxic for equity markets this year. The MSCI All-Country World index is now down 12 per cent in 2022. However, as is often the case, headline indices miss a more fascinating story underneath. The pain has been primarily focused in US technology stocks. Despite a tepid bounce over the past week, the Nasdaq Composite index has already fallen nearly 20 per cent in 2022. In dollar terms, the tech-heavy market has now lost well over $5tn in value since its November peak

Almost two-thirds of the Nasdaq’s 3,000 plus members have fallen by at least 25 per cent from their 52-week highs, according to numbers from Société Générale’s Andrew Lapthorne. Almost 43 per cent have lost more than half their value, and nearly a fifth have tumbled over 75 per cent — the worst such ratio since the financial crisis. The $5.15tn that has evaporated from the Nasdaq in recent weeks is like the entire UK stock market going “poof”. 

Russia’s War Prompts a Pitch for ‘Socially Responsible’ Military Stocks

Russia’s invasion of Ukraine has upset the world order. It could conceivably alter the way some people think about investing, too.

At least that’s the view of two analysts with Citi, who argue that the height of social responsibility at this moment requires putting your investment money into the stocks of companies that make weapons.

“Defending the values of liberal democracies and creating a deterrent, which preserves peace and global stability,” is so important that weapons makers should be included in funds that carry an E.S.G., or “environmental, social and governance,” label, the two analysts, Charles J. Armitage and Samuel Burgess, wrote.

Leslie Samuelrich, president of the Green Century Funds, which was founded by nonprofit groups, including the California Public Interest Research Group and the Citizen Lobby of New Jersey, was appalled by the notion.

“This is absurd,” she said. “It feels very opportunistic and shallow.” She added that Ukraine needed to be defended. “I’m part Ukrainian,” she said. “Of course, they need weapons.”

But she said that had nothing to do with investing in funds devoted to socially responsible investing. “Those who argue that weapons belong in a sustainable portfolio are capitalizing on the horrific attack,” she said. “Excluding military and civilian firearms has been a long-held screen by authentic responsible investors.”

Mr. Armitage and Mr. Burgess, the Citi analysts, make a vigorous counterargument. Essentially, it boils down to this: Without strong militaries capable of “defending the values of liberal democracies and creating a deterrent” against geopolitical adversaries like Russia and China, there can’t be much progress on other pressing global issues.

Harper’s Index – interesting stats

• Portion of moviegoers who say they are unlikely to return to theaters after the pandemic: 1/10

• Factor by which the number of cryptocurrency investors is expected to increase this year: 3.4

• Percentage decrease between 2019 and 2020 in the value of the wellness industry: 11

• Percentage of Bitcoin held by the top 0.01 percent of Bitcoin holders: 27

• Amount spent last November on a private island in the metaverse: $398,685

• Percentage of people alive today who have never used the internet: 37

• Portion of daily newspapers in the United States that are controlled by investment groups: ½

• Portion of U.S. adults who say their physical health is “excellent”: 1/4.

• Average amount of soda, in gallons, that an American drinks each year: 36

• Portion of therapists who say their clientele has increased since the start of the pandemic : 9/10

• Minimum portion of Americans aged 18 to 25 who are extremely lonely nearly all of the time: 3/5

This week's interesting finds

This Week’s in charts

Mismatch of unemployment and consumer sentiment

Sharp inflation is part of the problem

Canadian Oil 

Magazine Covers Revisited

In April 2019, BusinessWeek published a cover story asking “Is Inflation Dead” with a picture of a dead dinosaur – the implication being that inflation was not only dead but extinct.

We observed that it can take up to three years before a published cover story is proven wrong—often abruptly. In the case of the 1979 “Death of Equities” cover story, it was published almost exactly three years before equity markets literally “blew-off” the bottom in August 1982 --which we know was the start to one of the greatest bull markets in history. Therefore, we argued that three years after the April 2019 published cover story, that inflation should stage a major acceleration and become a huge problem.

What follows is an essay on contrarian thinking and consensus expectations.

The Politics of Passive Investing

There are a handful of folks in the finance world whom I try to read everything they put out. Matt Levine at Bloomberg is one of them. Let’s face it, he is smarter than most of us, and writes better than, well, all of us?

“The right model of BlackRock is probably that it is mostly an aggregator of preferences, but it is also, at the margin, a shaper of preferences. It passively reflects what investors want generally, but it has some ability to push those investors to want different things.”

The Harvard professor (John Coates) was very correct about the entangling of goals of “the state” with the goals of a business. Because today, in some ways, “the state” is Larry Fink, the founder, chairman, and CEO of BlackRock, manager of $10 trillion of assets. It is Larry Fink intimating that the companies that happen to be included in major US benchmark indices like the S&P 500 are now beholden to his personal views; views which seem to be particularly motivated by his penchant for environmental issues. 

Russia May Default. Passive Funds Still Have to Own Its Bonds.

Russia could default on its debt as soon as this month, and investors still own billions of dollars of the securities through emerging-market bond funds. 

Russian financial markets have been called “uninvestable” after the country’s invasion of Ukraine was met with sanctions from the U.S., Europe, and other Western nations. The sanctions, meant to isolate Russia from the global financial system, include cutting off many Russian banks from key financial infrastructure and freezing its central bank’s assets. 

As a result, S&P Global Ratings downgraded Russia’s credit rating to CCC-minus, one step above default. That is either five or six notches below its prior rating, depending on the currency of its debt.

Russia’s next foreign-currency debt payment is due March 16, according to Bloomberg data. Pricing on that debt reflects substantial risk, as it was quoted around 30 cents on the dollar late Thursday on Bloomberg. If Russia does default on that debt, it would be unprecedented; during its late-1990s financial crisis it continued to pay most of its foreign-currency debt. 

Yet emerging-market bond benchmark providers still include Russian ruble-denominated bonds in their indexes. That means passively managed emerging-market debt funds couldn’t sell the bonds even if there was a liquid market for them.

This week's interesting finds

EdgePoint Investment team book club

How does our Investment team come up with their insights? For starters, they like to read…a lot. In the past we’ve shared their favourite reads, and now we’re taking it to the next level. Introducing the Investment team book club, a roundtable discussion of books that each member must read. We hope they will lead to spirited conversations about themes important to any investment professional. This first curated list of books conjures lessons from the past and peeks into the future.

This week in charts

Last time CPI was at this level, the Fed Fund’s Rate was 15% (Feb. 1982)

Cost of energy and economic growth

A Pandemic Baby Bump Shines a Spotlight on the Nordic Welfare Model

Finland’s government has been working arduously to stem the country’s rapid population decline. Since the 2019 elections, a cabinet run by a millennial woman has produced eight offspring, with two more on the way. Regular Finns have joined in the baby making: The number of live births jumped 6.7% last year, the most in nearly five decades.

Other nations on Europe’s northern rim have experienced their own pandemic baby bumps, making the region of 28 million people an outlier among advanced economies, several of which have seen fertility rates drop to historic lows.

“The pandemic definitely had an impact on our decision to try for a second child”, says Heini Korpela, 38, who oversees influencer marketing at Otavamedia Oy in Helsinki and gave birth to a baby girl in June. “We’d spent so much time at home that it did not feel like a big deal to stay home with another baby. 

For Tryggvi Sigurdsson, a 36-year-old engineer from Reykjavik who became a father for the third time last June, one upside of the COVID-19 crisis is that there was more familial support for new parents. “Everyone spending a lot of time at home, including grandparents for instance, so people might be more available to babysit,” he says.

Trouble lies ahead for the Canadian housing market

The Canadian residential real estate market may have ended 2021 with its 12th consecutive annual increase in prices, with a year-over-year gain of 17.9 per cent, but there is a good chance that trend may be broken in 2022.

Indeed, as the Bank of Canada grapples with inflation at a 30-year high of 4.8 per cent year-over-year, interest rates are set to rise over the coming quarters; the market is currently priced for nearly seven rate hikes through the end of the year. This will likely serve to quell the investor-led housing frenzy that has gripped the nation throughout the pandemic.

So, with a record share of mortgage debt hitched to variable rates, the housing market (and the broader economy) could be in for trouble should this extended honeymoon period come to an end.

After the Fact

Exercising does two things: It makes you hungry and makes you proud. So let’s say after every workout you eat a huge dinner with extra dessert. You know that’s not ideal, but you just accomplished something hard, so it feels justified.

After a year of this you haven’t lost any weight, which was your goal. You can’t figure it out. You’re exercising every day. You’re so frustrated.

You can’t measure the benefit of exercise just by tracking how much you work out. It’s the gap between your workout and avoiding offsetting its benefits after the fact that makes all the difference.

And isn’t building wealth the same?

The typical American family is earning more than ever before. But for many it probably doesn’t feel like that – at least as much as it should – because all of the income gains and then some have been offset with higher spending.

I get why it happens. Spending more when your income rises is as tempting as eating more after you exercise. It feels earned and justified. People’s lifestyle expectations are driven by their peers, so when everyone spends more you feel entitled to do the same.

But all wealth relies on the ability to receive an extra dollar and say, “I could spend this, and spending feels great, but I’m not going to.” It’s the same as turning down a big meal after working out, and it’s just as hard. All great things are hard.

This week's interesting finds

Charlie Munger Expects Index Funds to Change the World—and Not in a Good Way 

Mr. Munger, the billionaire vice chairman of Berkshire Hathaway Inc Warren Buffett’s business partner, said the rise of index funds like those run by Mr. Fink’s BlackRock Inc. has resulted in an “enormous transfer” of the power to sway corporate decision making. That shift will “change the world,” he said, and not for the better.

“We have a new bunch of emperors, and they’re the people who vote the shares in the index funds,” Mr. Munger, 98 years old, said at the annual meeting of Daily Journal Corp. , a publishing company he has chaired since the 1970s. “I think the world of Larry Fink, but I’m not sure I want him to be my emperor.”

The surging popularity of index funds has made their managers the biggest investors in most large stocks. The firms, including BlackRock, have sought to wield that power in ways that have at times made corporate executives uncomfortable. Investment managers have had more sway over important company decisions, including takeovers, the fates of executives and plans for long-term sustainability.

Facing Texas pushback, BlackRock says it backs fossil fuels 

At the risk of being dropped from Texas pension funds, BlackRock Inc has ramped up its message that the world's largest asset manager is a friend of the oil and gas industries. As a large and long-term investor in fossil fuel companies, "we want to see these companies succeed and prosper," BlackRock executives wrote in a letter that a spokesman confirmed was sent at the start of the year to officials, trade groups and others in energy-rich Texas.

Although the message is consistent with its other statements, the emphasis is new after years in which BlackRock has stressed its efforts to take climate change and other environmental, social and governance (ESG) issues into account in its investment and proxy voting decisions. 

In Texas, new legislation requires the state's comptroller, Glenn Hegar, to draw up a list of financial companies that boycott fossil fuels. Those firms could then be barred from state pension funds like the $197 billion Teacher Retirement System of Texas, which has about $2.5 billion with BlackRock.   

Immigration 

Canada, a country that relies heavily on immigration to grow its labor force, has set an ambitious plan to bring in more than 1.3 million newcomers over the next three years to support its post-pandemic growth. 

Trudeau’s government aims to add more than 431,000 permanent residents this year, 447,000 in 2023 and 451,000 in 2024, according to the 2022-24 Immigration Levels Plan released on Monday. Figures for this year and 2023 have been revised higher from earlier targets of 411,000 and 421,000, respectively. 

Immigration had been one of the main drivers of Canada’s economy, and accounts for almost all of the nation’s employment growth. Last year, Canada welcomed more than 405,000 newcomers, the largest single-year increase in its history.  

The $22 Billion Wager: DraftKings and Others Are Reaching for a Piece of the Sports-Gambling Prize.

Bookmakers have always been busy on Super Bowl Sunday, but this year will be a bonanza like never before. Bettors are on track to wager $7.6 billion on the game, up 78% from last year, and it’s not because the office pool is getting bigger. 

Legal sports gambling has now spread to 30 states and Washington, D.C.—home to more than 130 million. In the four years that it has been legal, both the amount of money bet on sports and the amount counted as revenue by gambling companies have risen nearly 1,000%, to $57 billion and $4.3 billion, respectively, according to the American Gaming Association, or AGA. 

Gambling companies spent $725 million on television ads in 2021, three times as much as on cereal ads, according to Nielsen. Such levels of spending, in addition to giveaways to bettors, mean that these companies could report losses for years, until consolidation winnows the field and a few winners emerge. DraftKings has said that online sports betting could be a $22 billion to $36 billion market when it matures, up from around $4 billion today.

An Interesting Take

As fiduciaries, we are charged with attempting to protect and grow your capital. Inside Edge is a small collection of things the Investment team comes across on a weekly basis that could have investment implications. The links below deal with politics, however are not meant as political statements. They are included because the actions and policies they address could have material investment implications. These implications could range from the flow of deposits out of the banking system to the demand for precious metals to the weakness of a currency relative to immigration patterns into a country - all things that could impact the investment environment. As fiduciaries we are paying attention to these government actions and trying to think through what they can mean for the future.

- "Just Watch Me"

- Justin Trudeau's Ceausescu Moment

This week's interesting finds

This week in charts 

Top contributors to U.S. Consumer Price Index (CPI) YoY%   

Half of the attached subscribers due to release of “Hamilton” and “Wonder Woman 1984”are gone just six months later 

Streaming-video services get a surge of subscribers when they launch a hotly anticipated show or movie. But many of these new customers unsubscribe within a few months, according to new data, a challenge even for the industry’s deep-pocketed giants. 

The data, which subscriber-measurement company Antenna provided to The Wall Street Journal, illustrate the extent to which the streaming wars require all players to consistently churn out popular and often expensive programming to keep fickle subscribers satisfied. 

“You constantly need new content,” said Michael Nathanson, an analyst for Moffett Nathanson. Streaming services not only have to build vast libraries of old shows and movies, he said, they also “need a couple big, nice theatrical movies every quarter to make it feel like it’s really valuable.” 

Coffee Reserves Plunge to Lowest in More Than Two Decades 

The era of expensive coffee is not going to end any time soon, judging from dwindling amounts held in reserves. 

Stockpiles of high-end arabica beans, a favorite of artisan coffee shops and chains like Starbucks Corp., totaled 1.078 million bags or about 143 million pounds, according to data released Monday by ICE Futures U.S. exchange. That’s the lowest level for inventories monitored by the New York exchange since February 2000. 

Coffee reserves certified by ICE have been falling since September due to soaring shipping costs and unfavorable weather that clipped production in Brazil, the world’s largest grower and exporter. 

Shrinking inventories are a concern because countries tap them when they aren’t getting enough product from overseas. It’s a sign that demand is outstripping supplies, and a condition for rising prices. Coffee prices have already been touching multiyear highs at a time when food inflation is gripping the globe.   

Canadian energy could become a hot commodity

Canadian pure gasoline will quickly be labelled with its nation of origin, very similar to that “Grown in California” sticker on an orange from the native grocery retailer, says Mark Fitzgerald, outgoing chief govt officer of Petronas Energy Canada Ltd. 

His feedback underscore a shift within the Canadian energy panorama, wherein extra corporations at the moment are eager to deal with the environmental, social and governance (ESG) measures that more and more affect world buyers and customers. Suncor Energy Inc. CEO Mark Little, for instance, stated not too long ago that ESG discussions have modified the dialog round oil to some extent, as a result of buyers and customers are not targeted solely on the worth of a barrel of crude. 

In the case of pure gasoline, Mr. Fitzgerald stated the commodity will probably be differentiated sooner or later based mostly not solely on the greenhouse gasoline emissions that come from its manufacturing, however the nation of origin’s environmental protections, respect for Indigenous rights, social insurance policies and poverty discount measures. 

And on that scorecard, he stated, Canada can nudge forward of opponents.   

Money advice

This week's interesting finds

This week in charts 

Luxury watch prices   

Canadians choose variable mortgage rates 

Food shortages 

According to this farming insider, dramatically increased costs for fertilizer will make it impossible for many farmers to profitably plant corn this year. 

Things like fertilizer and liquid nitrogen have tripled and quadrupled in price. Yes, commodity prices are up, but that certainly wont cover the new increased input costs. Corn for example, typically takes about 600 pounds of fertilizer per acre, plus 50 gallons of liquid nitrogen. Times that by many acres and that’s a lot of money. Soybeans take much less. Problem is, there is apparently a soybean seed shortage because others have this plan as well. 

Corn is one of the foundational pillars of our food supply. If you go to the grocery store and start reading through the ingredients of various products, you will quickly discover that corn is in just about everything in one form or another. 

Of course, fertilizer prices are not just going through the roof in the United States. In South America, high fertilizer prices are going to dramatically affect coffee production. Christina Ribeiro do Valle, who comes from a long line of coffee growers in Brazil, is this year paying three times what she paid last year for the fertilizer she needs. Coupled with a recent drought that hit her crop hard, it means Ms. do Valle, 75, will produce a fraction of her Ribeiro do Valle brand of coffee, some of which is exported.   

Consumers Are Pivoting Spending to Services Like Dining and Travel  

Americans responded to the pandemic with a dramatic shift in spending to goods from services. That now appears to be reversing and should gather steam as the Omicron wave of Covid-19 ebbs, economists say. 

Consumers shopped more online in the pandemic, and changed what they bought. Unable to eat out or travel, and with both school and work going remote, they splurged more on things for the home such as furniture and computers. Several rounds of federal stimulus amplified that spending spree. 

Goods—including nondurable goods such as food and clothing, and durable goods such as cars and appliances—averaged 31% of total personal consumption in the two years before the pandemic. That soared to 36% in March and April 2021, shortly before Covid-19 vaccines became widely available. The share has been dropping since, to 34% in December. Consumer spending on goods fell that month for the second month in a row, according to the Commerce Department, while spending on services increased slightly. 

James Knightley, chief international economist at ING, said consumers are starting this year with “a combination of general fatigue of buying physical things and Omicron reducing the ability to spend on services.”

This week's interesting finds

This week in charts

Being an Amazon Seller in 2021; Year in Review 

I’m the founder and CEO of Viahart (est. 2010), an e-commerce focused educational toy company. We did $8.8 million in sales in 2021. This article is going to tell you what it was like to run this business in 2021 vs. 2020, amidst threats like the Amazon aggregators, supply chain difficulties, inflation, and even getting “dragged” on social media. 

Sometimes I ask people what they would do if they ran my company. The most common answer is “build your business off Amazon”. Amazon was 98.1% of our sales in 2018. We’ve now got it down to 90.8% in 2021. At the current trend, it’ll take us 17 years for Amazon to account for less than 50% of our business. 

That’s a problem. You don’t want too many sales concentrated with a single customer because if they change their mind about you, your business can evaporate overnight. With Amazon at 90.8% of our sales, were we to lose them, we could not afford to pay our rent nor the wages of our employees. Further, without Amazon’s sales volume, we wouldn’t be able to demand quality from our suppliers, nor cheap container shipping. We would go bust, fast. 

Robinhood and Democracy Promotion 

In March 2021, Robinhood announced they would be building a platform to give everyday investors access to IPOs. It really was the perfect ‘democratizing finance’ story. Until they pushed this, the IPO allocation process was the poster-child of clubby, insider-y, and banker-y. The stereotype was of investment bankers pulling out their Rolodexes and calling up their golf buddy money managers to decide who got the juicy access to buy into an IPO that always pop on the open. It was so easy to conjure up images of backrooms with oak furniture and cigars. 

And it worked and it was non-stop. Sweetgreen opened at nearly double it’s IPO price. Allbirds surged 90% after the open. Nubank ‘only’ traded up 15% after it’s ‘blockbuster IPO’. I will note, Robinhood, itself, was a bit different. The shares traded slightly down on IPO day, and then shot up 100% on the 4th day of trading. 

Overall, things appeared to be going according to plan. Finance, democratized. 

But, of course, that’s not how things have ended up. 

A lot of people have now lost a lot of money. I have no way of knowing what percentage of them were retail investors, but back in July 2020, when I wrote about Robinhood users being ‘the gravy’, this is the kind of stuff I worried about. Even more, this feels exactly like the woo-woo Silicon Valley doublespeak of democratizing finance that has always grated on me. In that original Robinhood post, I had written: 

I hadn't processed just how perfectly Robinhood has silicon valley-ified financial markets until I started writing this post. Robinhood is Facebook is Google is everything else. Just look at the story: 

• Stanford (or insert other top-level school here) grads head out to disrupt a market that genuinely needs to be disrupted. 
• The great disruption is things will become free. Everything is couched in the language of democratization. The Robinhood founders even push the origin story that the idea was born amidst the Occupy Wall Street protests. 
• As with most "free" products, the real business model is based on engagement. The more time you transact and interact on the platform, the more money the platform makes. 
• The product is built to trigger every possible dopamine receptor in a user's brain. In the early years, terms like gamified UX are considered a positive. 
• The company grows to an incredible size and the founders and investors and lots of people working there get incredibly rich. 
• We slowly start to see a litany of unintended consequences, but for the most part, it's too late and the cultural impact has already taken place. 

China’s COSCO Pays Huge Bonuses 30 Times Worker’s Salary Amid Container Shipping Boom 

Asian shipping companies are offering mega bonuses to employees amid a boom in freight rates, with China’s state-owned giant Cosco Shipping Holdings Co. doling out as much as 30 times a worker’s monthly salary, according to Caixin Global. 

Cosco is doling out the huge year-end bonuses to employees including its sales and marketing staff, Caixin said, citing employees at the company. Other shippers are also giving out generous rewards. A worker at Taiwan’s Evergreen Marine Corp. received a year-end bonus that was nearly 40 times their monthly salary, according to the daily. 

US warns of fragile chip supply as inventory falls to just five days 

According to a survey by the department of roughly 150 companies worldwide, manufacturers’ median chip inventory plunged from 40 days supply in 2019 to about five days late last year.