This week's interesting finds

This week in charts

Inflation in food prices  

Autos

US Oil Rig count 

Housing 

Jamie Damon: “The virtual world also presents some serious weaknesses

• Performing jobs remotely is more successful when people know one another and already have a large body of existing work to do. It does not work as well when people don’t know each other.
• Most professionals learn their job through an apprenticeship model, which is almost impossible to replicate in the Zoom world. Since the onset of COVID-19, JPMorgan Chase has hired over 80,000 new people into the company — and we are making sure they are properly trained on all aspects of our business, from their special role to the significance of conduct and culture. But this is harder to do over Zoom. Over time, this drawback could dramatically undermine the character and culture you want to promote in your company.
• A heavy reliance on Zoom meetings actually slows down decision making because there is less immediate follow-up.
• Remote work eliminates much spontaneous learning and creativity because you don’t run into people at the coffee machine, talk with clients in unplanned scenarios or travel to meet with customers and employees for feedback on your products and services.
• Finally, the negative effects of the weaknesses outlined above are cumulative — they weren’t as obvious earlier in the pandemic — and they get worse over time.

And finally, our leaders must lead. They have to walk the floors, they must see clients, they need to be visible, they need to teach and educate, and they need to be able to conduct impromptu meetings. They cannot lead from behind a desk or in front of a screen.

Now you get it
 
Historian Stephen Ambrose writes about World War II soldiers who left basic training full of bravado and confidence, eager to fight when they join the frontline. Then they get shot at, and everything changes.

“There was no way training could prepare a man for combat,” Ambrose writes. It could teach you how to fire a gun and follow orders. But “It could not teach men how to lie helpless under a shower of shrapnel in a field crisscrossed by machine-gun fire.” No one could understand it until they experienced it.

A lot of things work like that.

Most actions have two sides: skill and behavior. What’s true in theory vs. how it feels in the moment. The gap between the two can be a mile wide. No amount of empathy and open-mindedness can recreate emotions. Textbooks and classrooms can’t teach what genuine fear, adrenaline, and uncertainty feel like. So you think you understand how a field works until you experience a new part of it firsthand. Then you see it through a completely different lens.

Losing a third of your money or more

Can you survive your assets declining by 30%? On a spreadsheet, maybe yes – in terms of actually paying your bills and staying solvent. But what about mentally? It’s easy to underestimate what a big decline does to your psyche. You might realize your confidence is more fragile than you assumed. You – or your spouse – may decide it’s time for a new plan. I know several investors who quit after losses because they were exhausted. Physically exhausted. Spreadsheets can model the historic frequency of big declines. But they can’t convey the feeling of coming home, looking at your kids, and wondering if you’ve made a huge mistake that will impact their lives.

I don’t think there’s any way to understand what a bear market feels like until you’ve lived through one.

Part of the reason is that it’s impossible to contextualize what causes losses until they happen. If I say to you, “How would you feel if the market fell 30%?” you imagine a world where everything is the same as it is today, but stock prices are 30% cheaper. And in that world, it feels like an opportunity. But what actually makes the market fall 30% is a pandemic that might kill you, or a recession where you might lose your job, or a terrorist attack that might just be beginning, or inflation with no end in sight. And in that world – a world that can’t be known until it happens – things feel different. Saying “I’ll be greedy when others are fearful” is easier than actually doing it, because people underestimate the odds of themselves becoming one of the “others.”

This week’s fun finds

Hire people who give a ...care

Over time interviewing, I’ve found that I mainly screen for one key thing: giving a $hit. To be more specific, there’s actually two things to screen for:

1. they care about company, and
2. they care about their work in general.

The first is critical and will only become more important as time goes on. One very scary thing to me is Scale becoming a credential rather than a cult. An institution like Harvard or MIT is a credential—people go there because it signals to others that the person is smart, capable, or otherwise prestigious. As an early-stage startup, it’s nearly impossible someone would join Scale for credentials—nobody knew who we were, nor did we have any reputation.

But as we’ve grown and will continue to grow, it will be more common for people to interview for the brand rather than the substance. In fact, most growing companies often miss this effect entirely, and simply observe the fact they’re getting far more top-of-funnel. It makes it much easier to recruit raw numbers, but what often is missed is that the ROI of the hires drops dramatically. Before you know it, the majority of the company begins to resemble a university: there’s a constant churn of smart but uninvolved people who stay for a few years, and never dive deep enough to do meaningful work. Unless you actively fight against it, it will happen.

The second (caring about work in general) is equally important. It’s possible to fake fervor in the course of an interview and say the right things to convince us of enthusiasm for Scale, but the proof is in the pudding. If someone is applying to Scale and has never been deeply obsessed about something before, then it’s a bad bet to think Scale will be the first.

EdgePoint craic! (Irish gaelic word for fun) 

It’s been a long time since we could get together safely, but it was great to celebrate a belated St. Patrick’s Day this week with our fellow partners in person!

This week's interesting finds

Refinancing and cashing out equity

Battery input costs are on the rise

Cost of energy

Net oil exports

“Price of regret” by Tye Bousada and Geoff MacDonald (Pg. 7 to 9)

We (Geoff and Tye) learned about the idea of future regret as children. For example, one of us grew up surrounded by friends who raced motocross for fun. Despite this person’s mother telling him not to get on those motorcycles, he did it anyway. One day after a big fall, he ran home bleeding, scratched, and bruised, and asked his mom to bring him to the hospital. The mom, who happened to be an ER nurse, saw an opportunity to teach her son about the idea of future regret. Instead of taking him, she sewed him up on the kitchen counter. Rubbing alcohol was used to sterilize the wounds and no freezing was applied before the stiches. Lesson learned. 

Daniel Kahneman, a psychologist notable for his work on the psychology of judgment, once said that “The key to investing is having a well-calibrated sense of your future regret”. 

We agree that a good part of pleasing long-term returns is about having a well-calibrated view of future regret. The motorcycle example above highlights that when you boil down life’s experiences, our most learned ones are usually when we didn’t get the outcome we wanted. How do we take our experiences from the past and use them to ensure we get better and better outcomes in the future? A key is that well-calibrated understanding of risk.

The overarching problem with future regrets is that they can interrupt the magic of compounding. Our goal is to compound your wealth at a pleasing rate over the long term. The words “long term” are essential to the way we do things. We aren’t trying to achieve the highest returns in any given year. We have seen many people try to do this and believe it’s a fool’s game that leads most to ruin. Instead, our goal is to earn pleasing returns for the longest period of time possible. Recognizing this distinction is critical to understanding how we do things. 

This week’s fun finds:

Hot off the presses – Cymbria annual report this week. This edition's fun finds features some of our favourite snippets from the partners' section of the latest Cymbria annual. 

(Unbiased opinion – the rest of the annual is a great read, too.)

Good talk

Conversations about money are rarely easy, especially when its between family members. At a time when companies are asking investors whether "it's time to switch", we thought we could use our back page as a friendly reminder about what a good advisor can offer their clients.

EdgePoint in numbers – A year in review

Unlike most fund companies that judge their success based on assets under management, we prefer to focus on the figures that really matter to us. Below are some of the stats that mattered the most to us in 2021.

The 10-year club

We wouldn’t be where we are today without being able to partner with like-minded advisors helping their clients reach their investment goals. We wanted to recognize the advisors with clients who have remained committed for at least 10 years.

A lot's happened in the last few years since we updated the Foothills chart. We've updated the most recent events as we look at what an investment of $100,000 in Cymbria on November 3, 2008 would have grown into at the end of 2021.

This week's interesting finds

 This week in Charts: 

Wages 

Oil

Buffett snubs Goldman bankers with quirky takeover price

Warren Buffett is telegraphing his disdain for Wall Street bankers with an oddball price on his latest multibillion-dollar takeover.

The US$848.02 for every share that Alleghany Corp. stockholders get from Berkshire Hathaway Inc. is the result of Buffett balking at the banking fee being set aside by the target company -- in this case for Goldman Sachs Group Inc., which is advising the insurer.

Berkshire had offered to pay US$850 a share with Buffett cautioning Alleghany that he didn’t want to foot the bill for the banking fees, according to a person with knowledge of the matter who asked not to be identified discussing private information. So any fee for a financial adviser would come out of the proceeds for Alleghany’s shareholders. The result is spelled out in a regulatory filing: an announced purchase price that subtracts roughly US$27 million for Goldman -- calling attention to Buffett’s stand.

The transaction is Berkshire’s largest since 2016, according to data compiled by Bloomberg. While deal prices typically reflect the back-and-forth between buyers and sellers, it gets smoothed over before the deal is struck. Most announcements are priced to avoid clunky numbers after both sides agree on a plan for how advisers are paid.

The Oracle of Omaha, known for his witty business aphorisms, rarely uses an investment bank with his deals, instead relying on Berkshire Vice Chairman Charlie Munger’s previous law firm, Munger, Tolles & Olson, to advise on acquisitions.

Howard Marks Memo: The Pendulum in International Affairs

At a recent meeting of the Brookfield Asset Management board, a discussion of Ukraine triggered an association with another aspect of international affairs – offshoring – which I first discussed in the memo Economic Reality (May 2016).  Thus, the inspiration for this memo.

The first item on the agenda for Brookfield’s board meeting was, naturally, the tragic situation in Ukraine.  We talked about the many facets of the problem, ranging from human to economic to military to geopolitical.  In my view, energy is one of the aspects worth pondering.  The desire to punish Russia for its unconscionable behavior is complicated enormously by Europe’s heavy dependence on Russia to meet its energy needs; Russia supplies roughly one-third of Europe’s oil, 45% of its imported gas, and nearly half its coal. 

The other subject I focused on, offshoring, is quite different from Europe’s energy dependence.  One of the major trends impacting the U.S. economy over the last year or so – and a factor receiving much of the blame for today’s inflation – relates to our global supply chains, the weaknesses of which have recently been on display.  Thus, many companies are seeking to shorten their supply lines and make them more dependable, primarily by bringing production back on shore. 

Over recent decades, as we all know, many industries moved a significant percentage of their production offshore – primarily to Asia – bringing down costs by utilizing cheaper labor.  This process boosted economic growth in the emerging nations where the work was done, increased savings and competitiveness for manufacturers and importers, and provided low-priced goods to consumers.  But the supply-chain disruption that resulted from the Covid-19 pandemic, combined with the shutdown of much of the world’s productive capacity, has shown the downside of that trend, as supply has been unable to keep pace with elevated demand in our highly stimulated economy.

At first glance, these two items – Europe’s energy dependence and supply-chain disruption – may seem to have little in common other than the fact that they both involve international considerations.  But I think juxtaposing them is informative . . . and worthy of a memo.

Canada's nuclear industry ‘blindsided’ after exclusion from green bond framework

Many in Canada’s nuclear industry have been left questioning the federal government’s commitment to the technology after nuclear power was excluded from the first ever Canadian-dollar-denominated green bond.

The Green Bond Framework, introduced in March, lays the groundwork for a targeted inaugural issuance of C$5 billion for the 2021-22 period and will mobilize capital in support of the government's climate and environmental objectives, the Government of Canada says. 

The global drive to cut green house gas emissions, with over 130 countries pledging to reach net-zero by 2050, has prompted investors to earmark entire portfolios worth hundreds of billions of dollars into companies and projects that claim clean energy practices.

The definition of which practices can be included in such portfolios, granting them access to a rapidly expanding source of financing, has been the focus of intense debate, not least over differing opinions on the green credentials of nuclear power.

In Canada, items that were specifically excluded in the country’s new green taxonomy are the manufacturing of arms, alcohol or tobacco, gambling, fossil fuels and, to the outrage of many in the industry, nuclear power.

“We have been, quite frankly, blindsided by the release of the green bond because there was no consultation with the nuclear, or any, industry,” says President and CEO of the Canadian Nuclear Association (CAN) John Gorman.

This week’s fun finds: 

The Proven Path to Doing Unique and Meaningful Work

It’s not the work, It’s the re-work.

Average college students learn ideas once. The best college students re-learn ideas over and over. Average employees write emails once. Elite novelists re-write chapters again and again. Average fitness enthusiasts mindlessly follow the same workout routine each week. The best athletes actively critique each repetition and constantly improve their technique. It is the revision that matters most.

To continue the bus metaphor, the photographers who get off the bus after a few stops and then hop on a new bus line are still doing work the whole time. They are putting in their 10,000 hours. What they are not doing, however, is re-work. They are so busy jumping from line to line in the hopes of finding a route nobody has ridden before that they don't invest the time to re-work their old ideas. And this, as The Helsinki Bus Station Theory makes clear, is the key to producing something unique and wonderful.

By staying on the bus, you give yourself time to re-work and revise until you produce something unique, inspiring, and great. It’s only by staying on board that mastery reveals itself. Show up enough times to get the average ideas out of the way and every now and then genius will reveal itself.

Malcolm Gladwell's book Outliers popularized The 10,000 Hour Rule, which states that it takes 10,000 hours of deliberate practice to become an expert in a particular field. I think what we often miss is that deliberate practice is revision. If you're not paying close enough attention to revise, then you're not being deliberate.

A lot of people put in 10,000 hours. Very few people put in 10,000 hours of revision. The only way to do that is to stay on the bus.

The Munger Operating System: How to Live a Life That Really Works

In 2007, Charlie Munger gave the commencement address at USC Law School, opening his speech by saying, “Well, no doubt many of you are wondering why the speaker is so old. Well, the answer is obvious: He hasn’t died yet.”

Fortunately for us, Munger has kept on ticking. The commencement speech is an excellent response to the Big Question: How do we live a life that really works? It has so many of Munger’s core ideas that we think the speech represents the Munger Operating System for life.

• Acquiring wisdom is a moral duty as well as a practical one.

And there’s a corollary to that proposition which is very important. It means that you’re hooked for lifetime learning, and without lifetime learning you people are not going to do very well. You are not going to get very far in life based on what you already know. You’re going to advance in life by what you’re going to learn after you leave here…if civilization can progress only when it invents the method of invention, you can progress only when you learn the method of learning.

• Learn to think through problems backwards as well as forward.

The way complex adaptive systems work and the way mental constructs work, problems frequently get easier and I would even say usually are easier to solve if you turn around in reverse. In other words if you want to help India, the question you should ask is not “how can I help India?”, you think “what’s doing the worst damage in India? What would automatically do the worst damage and how do I avoid it?” You’d think they are logically the same thing, but they’re not. Those of you who have mastered algebra know that inversion frequently will solve problems which nothing else will solve. And in life, unless you’re more gifted than Einstein, inversion will help you solve problems that you can’t solve in other ways.

• Learn to maintain your objectivity, especially when it’s hardest.

We all remember that Darwin paid special attention to disconfirming evidence particularly when it disconfirmed something he believed and loved. Well, objectivity maintenance routines are totally required in life if you’re going to be a correct thinker. And there we’re talking about Darwin’s attitude, his special attention to disconfirming evidence, and also to checklist routines. Checklist routines avoid a lot of errors. You should have all this elementary wisdom and then you should go through and have a checklist in order to use it. There is no other procedure that will work as well.

This week's interesting finds

This week’s in charts

VW is catching up with Tesla

On one hand it's easy to argue that Tesla is miles ahead, shipping more than double the number of all-electric vehicles that VW Group managed in 2021. On the other hand, you could argue that VW Group's 453k deliveries in 2021 is close to Tesla's 500k effort from 2020, suggesting that the German giant is only 12-15 months behind Tesla's pace, despite starting late.

Source: Chartr

Russia and Ukraine : key suppliers of various metals

Goldman Sachs: “A survey of our equity analysts reveals that imports of car parts from Russia and Ukraine have dropped, with some European automakers already cutting production. Our equity analysts estimate that ongoing disruptions could depress monthly auto production in the affected plants by nearly 60k vehicles (around 25% of their monthly production) in March. In addition, car producers with assembly plants in Russia, such as Hyundai and Renault, have already stopped local production reducing the global supply of autos.

According to our commodity analysts, a stop in palladium exports alone may lead to a 10% hit to global auto production for 2 years based on potential production losses in the region and global inventories."

Inflation is shrinking your products

Do consumers notice when their everyday products get smaller? Often, they don’t and companies are taking advantage by reducing the amount of product they sell while keeping prices the same. Shrinking product sizes to pad profits is not a new tactic but it grows in popularity during periods of shortages and inflation. Some consumers are noticing and documenting their shrinking groceries on the shrinkflation subreddit.

Even with today’s release of US inflation figures from the Bureau of Labor Statistics showing prices increased 7.9% in the last 12 months, consumers may not realize they’re paying more for some of their regular purchases because companies are reducing sizes while keeping prices the same

Saudi Arabia Considers Accepting Yuan Instead of Dollars for Chinese Oil Sales

Saudi Arabia is in active talks with Beijing to price some of its oil sales to China in yuan, people familiar with the matter said, a move that would dent the U.S. dollar’s dominance of the global petroleum market and mark another shift by the world’s top crude exporter toward Asia.

The talks with China over yuan-priced oil contracts have been off and on for six years but have accelerated this year as the Saudis have grown increasingly unhappy with decades-old U.S. security commitments to defend the kingdom, the people said.

China buys more than 25% of the oil that Saudi Arabia exports. If priced in yuan, those sales would boost the standing of China’s currency. The Saudis are also considering including yuan-denominated futures contracts, known as the petroyuan, in the pricing model of Saudi Arabian Oil Co., known as Aramco.

It would be a profound shift for Saudi Arabia to price even some of its roughly 6.2 million barrels of day of crude exports in anything other than dollars. The majority of global oil sales—around 80%—are done in dollars, and the Saudis have traded oil exclusively in dollars since 1974, in a deal with the Nixon administration that included security guarantees for the kingdom.

China introduced yuan-priced oil contracts in 2018 as part of its efforts to make its currency tradable across the world, but they haven’t made a dent in the dollar’s dominance of the oil market. For China, using dollars has become a hazard highlighted by U.S. sanctions on Iran over its nuclear program and on Russia in response to the Ukraine invasion.

China has stepped up its courtship of the Saudi kingdom. In recent years, China has helped Saudi Arabia build its own ballistic missiles, consulted on a nuclear program and begun investing in Crown Prince Mohammed bin Salman’s pet projects, such as Neom, a futuristic new city. Saudi Arabia has invited Chinese President Xi Jinping to visit later this year.

The Secretive Company That Might End Privacy as We Know It

Until recently, Hoan Ton-That’s greatest hits included an obscure iPhone game and an app that let people put Donald Trump’s distinctive yellow hair on their own photos.

Then Mr. Ton-That — an Australian techie and onetime model — did something momentous: He invented a tool that could end your ability to walk down the street anonymously, and provided it to hundreds of law enforcement agencies, ranging from local cops in Florida to the F.B.I. and the Department of Homeland Security.

His tiny company, Clearview AI, devised a groundbreaking facial recognition app. You take a picture of a person, upload it and get to see public photos of that person, along with links to where those photos appeared. The system — whose backbone is a database of more than three billion images that Clearview claims to have scraped from Facebook, YouTube, Venmo and millions of other websites — goes far beyond anything ever constructed by the United States government or Silicon Valley giants.

Federal and state law enforcement officers said that while they had only limited knowledge of how Clearview works and who is behind it, they had used its app to help solve shoplifting, identity theft, credit card fraud, murder, and child sexual exploitation cases.

But without public scrutiny, more than 600 law enforcement agencies have started using Clearview in the past year, according to the company, which declined to provide a list. The computer code underlying its app, analyzed by The New York Times, includes programming language to pair it with augmented-reality glasses; users would potentially be able to identify every person they saw. The tool could identify activists at a protest or an attractive stranger on the subway, revealing not just their names but where they lived, what they did and whom they knew.

And it’s not just law enforcement: Clearview has also licensed the app to at least a handful of companies for security purposes.

The Moral Hazard Lessons from Nickel Market Disaster

The tide went out this week in London’s nickel market, and we discovered — in Warren Buffett’s immortal words—who had been swimming naked: a giant Chinese producer that couldn’t meet its margin calls, additional security brokers require when leveraged trades lose money.

Instead of letting the market cleanse itself of this indebted trader, the exchange decided to wade in and save the firm from the consequences of its bets by canceling the trades.

This isn’t just a one-off in an obscure commodity. This is the natural conclusion of a trend that is undermining free markets and creating all the wrong incentives: A growing reluctance by the authorities to let financial groups go bust, even when they aren’t too big to fail.

The problems started on Tuesday morning, when traders on the London Metal Exchange smelled blood and nickel prices almost doubled. China’s Tsingshan Holding faced a $1 billion-or-so margin call that exchange officials feared it couldn’t meet. Rather than let it fail, which would probably have taken down several of the smaller LME brokers that had serviced Tsingshan, LME decided to cancel all that day’s trading, more than 9,000 trades worth about $4 billion

It. Canceled. The. Trades. Not because of a fat-finger error, which exchanges often cancel. Not even because of a rogue algorithm (as regulators claimed in the 2010 flash crash in U.S. stocks). But because someone with too much leverage was going to blow up, with knock-on effects on some members of the exchange.

This week’s fun finds:

Less serious, not investing related, but just as fun. Sometimes we want to share some of our less serious (but still interesting) finds. On any given week, we might show some things unrelated to investing - absorbing articles, notable numbers, or even recommendations from our internal partners.

Your organs may be ageing at different rates

An analysis of hundreds of biological features strengthens the evidence that some organs and body systems can age faster than others. Tracking the biological age of different parts of the body could help doctors predict the onset of disease more accurately.

We already knew that the condition of cells in the body can be interpreted to give someone a biological age that is older or younger than their age measured in years. In other words, cell condition – which varies depending on genetic and lifestyle factors – determines the pace of the ageing process.

Now, work by Brian Kennedy at the National University of Singapore and his colleagues supports the idea that the various organs and systems in the body – such as the cardiovascular or immune system – can age at different rates within the same individual.

“It confirms previous studies that there are diverse ageing rates among organs and systems, and people’s ageing patterns are different,” says Wenyu Zhou at Tempus Labs, a biotechnology company in California. “This further calls

The Joyful, Illiterate Kindergartners of Finland

“The changes to kindergarten make me sick,” a veteran teacher in Arkansas recently admitted to me. “Think about what you did in first grade—that’s what my 5-year-old babies are expected to do.”

A working paper, “Is Kindergarten the New First Grade?,” confirms what many experts have suspected for years: The American kindergarten experience has become much more academic—and at the expense of play. The late psychologist, Bruno Bettelheim, even raised the concern in an article for The Atlantic in 1987.

Researchers at the University of Virginia, led by the education-policy researcher Daphna Bassok, analyzed survey responses from American kindergarten teachers between 1998 and 2010. In the study, the percentage of kindergarten teachers who reported that they agreed (or strongly agreed) that children should learn to read in kindergarten greatly increased from 30 percent in 1998 to 80 percent in 2010.

Bassok and her colleagues found that while time spent on literacy in American kindergarten classrooms went up, time spent on arts, music, and child-selected activities (like station time) significantly dropped.

But Finland—a Nordic nation of 5.5 million people, where I’ve lived and taught fifth and sixth graders over the last two years—appears to be on the other end of the kindergarten spectrum. Finland’s kindergartners spend a sizable chunk of each day playing, not filling out worksheets. Finnish schools have received substantial media attention for years now—largely because of the consistently strong performance of its 15-year-olds on international tests like the PISA.

“[Children] learn so well through play,” Anni-Kaisa Osei Ntiamoah, one of the preschool’s “kindergarten” teachers, who’s in her seventh year in the classroom, told me. “They don’t even realize that they are learning because they’re so interested [in what they’re doing].”

This week's interesting finds

EdgePoint Wealth website facelift

After seven years (an eternity in internet years!), our website has received a facelift. Check us out! 

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.