This week's interesting finds

 This week in charts

P/E ratios

Berkshire’s cash levels

EM vs. U.S. equities

Valuations by country

Post-election day returns

U.S. dollar impact by sector

China’s % share of global commodity demand

Immigration and unemployment rates

Earnings impact on 1 percentage point change in tax rate

Primary budget deficit

Wall Street frenzy creates $11bn debt market for AI groups buying Nvidia chips

Wall Street’s largest financial institutions have loaned more than $11bn to a niche group of tech companies based on their possession of the world’s hottest commodity: Nvidia’s artificial intelligence chips.

Blackstone, Pimco, Carlyle and BlackRock are among those that have created a lucrative new debt market over the past year by lending to “neocloud” companies, which provide cloud computing to tech groups building AI products.

Neocloud groups such as CoreWeave, Crusoe and Lambda Labs have acquired tens of thousands of Nvidia’s high-performance computer chips, known as GPUs, that are crucial for developing generative AI models. Those Nvidia chips are now also being used as collateral for huge loans.

The frenzied dealmaking has shone a light on a rampant GPU economy in Silicon Valley that is increasingly being supported by deep-pocketed financiers in New York. However, its rapidly growth has raised concerns about the potential for more risky lending, circular financing and Nvidia’s chokehold on the AI market.

The $3tn tech group’s allocation of chips to neocloud groups has given confidence to Wall Street lenders to lend billions of dollars to the companies that are then used to buy more Nvidia chips. Nvidia is itself an investor in neocloud companies that in turn are among its largest customers.

Critics have questioned the ongoing value of the collateralised chips as new advanced versions come to market — or if the current high spending on AI begins to retract.

The future value of Nvidia’s chips being used as collateral for loans has also been called into question. Leasing contracts that neoclouds have with tech groups will begin to expire in the next few years, probably resulting in a glut of chips available on the market.

Listed tech giants which have spent billions on AI infrastructure, are also under pressure to produce significant returns. In June, David Cahn, partner at venture firm Sequoia Capital, said there was a $500bn gap between the revenue expectations implied by technology companies’ AI infrastructure buildout, and actual revenue growth in the AI ecosystem.

Neocloud lenders, however, are betting on AI’s continued advancement.

Solar Panel-Backed Bond Deals Are Heading for Europe’s Market

European investors accustomed to buying repackaged mortgages and car loans are getting another type of asset-backed security to invest in: bonds backed by solar panel loans.

Perfecta Energia and HomeTree Marketplace Ltd. are both planning to sell repackaged solar panel loans in the public debt market, according to executives at the companies. They would follow a successful deal by Enpal GmbH, which recently became the first company to sell a solar panel-backed security in Europe’s broadly-syndicated market. The German renewables firm also plans more issuance in future.

The deals are set to open up a new frontier for asset-backed debt in Europe, where securitization has been used for years to sell mortgages, car and consumer loans to investors. Such deals package up loans into a new instrument and sell them via a special purpose vehicle, taking risk off the company’s balance sheet. They’re also seen as a way to drive adoption of solar panels by lowering upfront costs for consumers.

While demand for Enpal’s deal was strong, the nascent nature of the asset class means that risks are hard to measure, leaving some questions around this type of debt. Ultimately, the technology that these ABS is based on is still in its infancy, and there are issues with both the lack of sun and power storage facilities in Europe.

Investors assessing the new asset class may also look to the US, where solar-panel backed deals by renewables companies have been growing for some time.

Still, the market for solar ABS in the US is currently going through a somewhat turbulent time, with SunPower Corp., one of the country’s top five residential solar installers, filing for bankruptcy earlier this year and raising concerns about the industry at large. Victory for Donald Trump in the US presidential election also means that the US will likely prioritize fossil fuels over renewables in coming years, potentially hurting demand for solar panels.

But European incumbents are hoping that investors take into account differentiating factors between the two regions.

This week’s fun finds

The EdgePoint film crew made their way to the TIFF Lightbox this week. Our inspiring and unique company culture resonated with a couple of fellow moviegoers. It made such an impact that they wondered when the next outing would be and asked if they could join. Good times had by all.

Painting With Thread: New Work by Cayce Zavaglia

A few years ago Cayce “discovered” the back of her work – a chaotic network of thread that forms as she works on the front. This show features the BACK side (or “verso”) to a greater degree, recognizing the beauty of these happy accidents and the metaphor of our private messy inner selves.

This week's interesting finds

This week in charts

Mortgage rates

Income sources for retirees

Maturity wall

U.S. high yield credit spreads

S&P 500 market cap

Tech stocks

Lost decades

Gold

Largest car exporters

Yield change after first rate cut

Cars, Planes and Restaurants Boost Asset-Backed Debt Sales to Highest Since Financial Crisis

Sales of debt backed by everything from auto loans to airplane leases to Subway franchise fees have hit their highest level since the financial crisis, as banks try to meet new capital rules and insurance companies clamor for higher-yielding debt.

The heavy issuance partly stems from banks offloading loans from their books ahead of new capital rules, bundling the debt into bonds they can sell to investors. The firms could be required to start implementing Basel III endgame rules next year, which in many cases require them to pare back risk and fund loans with more capital, cutting into potential returns.

Investors, including insurance companies, are eager to buy asset-backed debt now and their demand has helped drive issuance. As Baby Boomers retire, they’ve been buying record volumes of annuities from insurers to fund their retirement. In turn, insurers putting the products together are looking to fund them with bonds offering relatively high yields, low credit risk, and longer durations.

Investors have flocked to exotic asset-backeds in particular — bonds supported by music royalties, revenue from data centers and cell towers, among other cash flows, instead of more conventional collateral like credit card debt. Sales of exotic ABS have jumped to about $89 billion, up from $54 billion around this time last year, data compiled by Bloomberg shows.

This week fun finds

EdgePoint’s favourite little monsters

15 Fun Ways to Use Up Leftover Halloween Candy

Kids finish digging through their bags of loot? Here's what to do with the rest.

This week's interesting finds

Third quarter commentaries are now live! 

This quarter, Jeff Hyrich discusses a disturbing trend he’s seeing more frequently among investors today, while Tracey Chen talks about a common investor mistake – overcomplicating the process of managing risk.

This week in charts

U.S. equity market concentration

Market concentration and 10-year returns

Distribution of 10-year returns

Yield gaps

Underinvestment in U.S. manufacturing

Re-shoring

Construction spending

Labour force participation

Early retirement

Labour force growth

Fed cuts

Payment-in-kind (PIK)

Corporate debts mount as credit funds let borrowers defer payments

A growing list of cash-strapped companies have turned to their lenders at private credit funds for relief in recent months, seeking to conserve capital by delaying payments on their debt.

The rate at which companies are opting to increase their principal balance instead of paying cash, known as “payment-in-kind” or PIK, edged higher during the second quarter, according to a recent report from rating agency Moody’s. These types of loans have a catch: while they provide temporary relief, they often come with a higher interest rate on a mounting debt load as the deferred payments pile up.

The publicly traded private credit funds that the rating agency keeps tabs on reported the highest levels of PIK income since it began tracking the data in 2020 — though the income is paper profit and it is not clear how much of the gains will actually be realised.

The growth in these types of loans is one signal of stress in corporate America even as the broader economy expands, particularly for businesses that were leveraged to the hilt by their private equity owners and are now struggling with those interest burdens.

While the Federal Reserve’s move to cut interest rates in September is the first step in alleviating pressure on borrowers, rates are expected to remain far higher than the rock-bottom level they hit in the immediate aftermath of the Covid-19 pandemic, when private equity firms went on a debt-fuelled buyout binge.

The shift to PIK borrowing is just one risk being borne by the burgeoning private credit industry, where asset managers lend directly to businesses.

This week’s fun finds

What to Look for (and Avoid) When Selecting a Pumpkin

Whether you're a practical person who fishes their pumpkins out of a big crate at the grocery store or the sentimental type who values a stroll through a pumpkin patch, the general principles of picking out a good pumpkin are the same. Depending on what you want to use your pumpkins for—carving or eating—you may want to look for slightly different things. Here's your guide to pumpkin picking.

This week's interesting finds

This week in charts

Global equity market

Equity index valuations

Entry price dictates returns

Cross-border fund flows

Sector fund flows

Yields

Cash allocation

Hyperscalers

Retail foot traffic

Research and Development

Our Big Mac index shows how burger prices differ across borders

Since 1986 The Economist has produced the Big Mac index as a light-hearted gauge of whether currencies are at their “correct” level. The famous burger is a good test of currency valuations because of its global uniformity and ubiquity. The same properties make it a useful way of comparing international salaries: how many Big Macs, in principle, can a typical worker afford with their wages? 

The more conventional way of comparing incomes is to convert wages in different countries into a common currency. But that is misleading because exchange rates are volatile. Moreover, one American dollar goes a lot farther in, say, the Philippines than it does in America itself. The Big Mac helps to solve this problem as a ready-made illustration of purchasing power: it represents a bundle of goods (or, rather, a bun of goods) that is identical everywhere, and so it serves as a yardstick of the real cost of things from country to country. 

For the Big Mac wage analysis (the MacWage, for short), we started with full-time, pre-tax earnings in 2023 as reported by the OECD, a club of 38 mostly rich countries. We then made a simple adjustment, dividing wages by the price of a Big Mac—all in local currencies. That gave us the number of burgers that the average full-time worker can buy annually.

This week’s fun finds

Art and Science Set Sail in Schmidt Ocean Institute’s Artist-at-Sea Program

“There are many ways to tell a story or to document and share research and discoveries,” says artist Ellie Hannon, one of 54 artists who has embarked on a unique residency organized by the Schmidt Ocean Institute (previously). From slip-cast porcelain and painting to 3D printing and virtual reality, the storytelling possibilities are endless in the Artist-at-Sea program, which invites artists to work alongside scientists on weeks-long expeditions into some of the least-explored areas of our oceans.

Interacting with researchers from around the world provides artists the opportunity to reimagine scientific inquiry as a range of art forms and share discoveries and technologies through an approachable medium. Schmidt Ocean Institute then adds one piece from each artist to its collection, exhibiting the work globally in a continued effort to advance knowledge about the marine world.

This week's interesting finds

This week in charts

U.S. search advertising revenue

Net Ad revenue

Fund flows to China

Exports from Canada to China

Working-age population

Capital expenditure

U.S. 10yr Treasury

Discretionary spending per household

Spreads

Automotive industries

Google’s Grip on Search Slips as TikTok and AI Startup Mount Challenge

For years, the tech giant has seemed invincible in this corner of the ad market, which is the foundation of its business. Now, rivals are beginning to eat into its lead, and new offerings—fueled by the rise of artificial intelligence and social video—threaten to reshape the landscape. 

TikTok, the wildly popular short-form video platform, has recently started allowing brands to target ads based on users’ search queries—a direct challenge to Google’s core business.

Perplexity, an AI search startup backed by Jeff Bezos, plans to introduce ads later this month under its AI-generated answers. Until now, it has made revenue mostly from a $20-a-month subscription offering that grants access to more-powerful AI technology.

Google’s share of the U.S. search ad market is expected to drop below 50% next year for the first time in over a decade, according to the research firm eMarketer.

Amazon is expected to have 22.3% of the market this year, with 17.6% growth, compared with Google’s 50.5% share and its 7.6% growth.

Google remains in an enviable position: far ahead of the pack in the search market, with plenty of resources to counter moves by its rivals. Still, advertisers are eager for more competition.

The increased competition, coupled with legal pressures on Google, makes it a particularly tense time for the Alphabet -owned ad giant. This past summer, Google lost an antitrust case over its dominance in the U.S. search-engine marketplace after a federal judge said it acted illegally to maintain a monopoly in the sector. Google plans to appeal the ruling.

OSC Launches Trading Simulation Tool for Retail Investors

The Get Smarter About Trading simulator provides retail investors with a chance to participate in a simulated stock market and practice online trading. 

It exposes users to gamification techniques to show them what could be influencing their investing behaviour, according to Leslie Byberg, Executive Vice President, Strategic Regulation at the OSC.

As digital trading platforms have grown in popularity, regulators around the globe are alert to the usage of digital engagement practices (DEPs) within these platforms, according to the OSC.

In addition, the OSC has released a new report that studied the impact of gamification on investors.

The report, Gamification Revisited: New Experimental Findings in Retail Investing, looks at whether promoting certain assets on digital investing platforms presents a risk to investors.

The research found two types of promotion had a significant impact on participants’ trading behaviours; those who saw promoted stocks featured on a social feed traded 12% more in those stocks, and those who had the option to copy the trades of a “high performing” user traded 18% more in the promoted stocks.

The findings suggest that these social engagement techniques can influence investor behaviours by encouraging trading in specific assets. 

The new report builds on the work of an earlier OSC research report Digital Engagement Practices in Retail Investing: Gamification and Other Behavioural Techniques.

The experiment found participants rewarded with points for buying and selling stocks made 39% more trades and those who saw a list of top traded stocks were 14% more likely to buy and sell those stocks. More frequent trading generally has a negative impact on investor returns.

This report also contains several recommendations for how regulators and authorities in Canada and abroad might respond to the ongoing use of digital engagement practices by online investing platforms. 

This week’s fun finds

Thankful for sharing a meal with our coworkers (and the trust our partners place with us every day). Happy Thanksgiving everyone!

Wherefore Turkey? How poultry made its way onto the holiday menu.

They were fresh, affordable, and big enough to feed a crowd. Americans have long preferred large poultry for celebrations because the birds could be slaughtered without a huge economic sacrifice. Cows were more useful alive than dead, and commercial beef wasn’t widely available until the late 19th century. Chicken was more highly regarded than it is today, but rooster meat was tough, and hens were valuable as long as they laid eggs. Venison would have been another option, especially during the 17th and 18th centuries, though it would have required you to hunt for your Thanksgiving meal. 

Among the big birds, turkey was ideal for a fall feast. Turkeys born in the spring would spend about seven months eating insects and worms on the farm, growing to about 10 pounds by Thanksgiving. They were cheaper than geese, which were more difficult to raise, and cheaper by the pound than chickens. Cost was an important factor for holiday shoppers, because people weren’t necessarily preparing just one meal; Thanksgiving was the time to bake meat and other types of pies that could last through the winter.