This week's interesting finds

This week in charts

Performance after 20% declines

Stocks and 10-year yield movement

Historical U.S. Treasury ownership

Total foreign holdings

U.S. equity fund flows

Record high valuation relative to GDP

Historical U.S. bear markets and recoveries

Correlation between markets

Historical bear market rallies

Duration and performance of bear market rallies

Private credit secondary sales set to rise as market turmoil spurs hunt for cash

Investors are preparing to step up sales of their private credit holdings, as heightened market volatility unleashed by U.S. President Donald Trump's trade wars forces them to find new ways to raise cash, fund managers and executives say.

While so-called "secondary sales" of stakes in private equity funds have soared amid a downturn in dealmaking, assets in private credit seldom change hands. This week's dramatic market tumble may change that.

Investors are enquiring about shedding their private credit investments in the secondary market because they worry about being overly exposed to private assets as public markets fall in value and as the need for accessing cash in more volatile markets grows, executives say.

Negotiating a sale in the secondary market takes time, typically weeks, and is not the first place institutional investors turn to raise cash.

The scale and speed of market selloffs this week have seen some hedge funds rush to offload private debt positions, however, with several forced to unwind highly leveraged debt purchases after lenders hit them with margin calls.

Secondary market deal volumes hit a record $160 billion last year, driven by asset sales by leveraged buyout funds that could not exit investments through M&A and initial public offerings in volatile markets, and by their investors such as pension funds and insurers needing cash back faster than they could deliver.

Private equity transactions account for a much larger share of transactions. Ares has said an estimated 2-3% of private equity assets are traded in the secondary market, against less than 1% in private credit. 

DENOMINATOR EFFECT

One big driver for investors to sell is the "denominator effect", which leaves them with too much private market exposure when public stock and bond markets tank.

That's because private assets are often marked to market, or revalued, monthly or quarterly, shielding investors from the volatility seen in public markets but leaving them overly exposed.

Fund managers caution that there has been little sign of distressed selling yet, with discounts being discussed in the range of 5-10% below par.

This week’s fun finds

Interns Vishnu, Nikki and Khushi organized a Hakka moai on Friday. We can’t thank them enough for such a wonderful lunch and all the hard work they've done throughout the term. 

‘Robobear’ Is Training People to Fight Off an Actual Bear

To educate the public on how to handle an encounter with an aggressive predator, the Wyoming Game and Fish Department created a low-tech robotic bear that can help teach people how to respond quickly to a charging bear.

It is springtime, after all. The bears are waking up from their slumber, and they are starving. There’s no telling what they’ll do if they spot you, so it’s best to be armed, not just with some form of bear repellent but with the knowledge of how to use it on a bear that has you in its sights.

This week's interesting finds

This week in charts

Military spending

Mines

Cross-border fund flows

Buyback announcements

Gold fund flows

Tech bear market

S&P 500 Index daily changes

Europe & Emerging Markets equity fund flows

Reciprocal tariffs

Top trading partners with the U.S.

Exports to U.S. vs share of manufacturing output

CEO confidence declining

Economic Policy Uncertainty Index vs. US IG Corporate bond spread

The Rest of the World Is Bracing for a Flood of Cheap Chinese Goods

U.S. consumers and businesses learned Wednesday that, from April 9, Chinese imports will face tariffs of around 70% on average, after Trump walloped China with stiff new duties as part of his “Liberation Day” trade broadside. The new tariffs will likely push up prices in the U.S. for products ranging from consumer electronics and toys to machinery and essential components for manufacturing. 

That towering tariff wall also risks diverting some U.S.-bound Chinese exports into a global market already swimming in China-made goods, worsening a so-called China shock that is facing pushback from countries around the world, according to economists. Other major exporters, such as Vietnam, South Korea and Japan, could also see barriers to their exports proliferate as U.S. spending on imports falls and their exports get shunted to new destinations. 

Economists note that such domino effects underscore how trade wars can quickly escalate, drawing in more countries as retaliatory measures fly and defensive barriers go up. 

President Trump on Wednesday announced plans to levy tariffs on a range of U.S. trading partners that he accuses of taking advantage of the U.S. by boosting exports while keeping their own barriers to imports high. 

China, regarded by many in Trump’s orbit as the U.S.’s chief geopolitical foe, was hit especially hard. Chinese imports will be slapped with a 34% duty. That new tariff rate was stacked on top of a 10% tariff levied in February, another 10% added in March and a range of other tariffs imposed during Joe Biden’s presidency and Trump’s first term in office. That lifts the average rate on Chinese imports to around 70%, according to economists. 

It will be hard for other countries to absorb Chinese exports that normally went to the huge U.S. market. The U.S. in 2024 imported around $440 billion of goods from China, according to Census Bureau data. China in 2023 was the source of a fifth of iron and steel products imported into the U.S., more than a quarter of its imported electronics, a third of its imported footwear and three-quarters of its imported toys, according to data from the International Trade Centre, an agency of the United Nations and the World Trade Organization. Ninety-one percent of U.S. umbrella imports came from China. 

U.S. imports from China are unlikely to drop to zero overnight. Consumers might be able to find alternatives to some Chinese-made products, but not others, and manufacturers outsource big chunks of their production to Chinese factories. Even if they manufacture goods at home, they are often bringing in parts and basic materials from China that can be hard to find elsewhere.

Lower U.S. spending on Chinese imports means unsold goods have to go somewhere else. Yet surging Chinese exports are already jacking up tensions between China and the world’s big economies, and could rise further if exporters try to unload what had been U.S.-bound shipments to other countries. 

Since Trump launched his trade war in 2018, China has been the subject of almost 500 antidumping rulings and investigations, according to Global Trade Alert, a Switzerland-based nonprofit that tracks global trade policy. 

Chinese leader Xi Jinping has poured investment into manufacturing to support advanced technology and pump up growth amid an epic property crunch and tepid consumer spending. The result has been a surge in exports, as companies hunt for overseas buyers to soak up goods they can’t sell at home. China last year posted a trade surplus of $1 trillion. Countries have moved to shield domestic industries from cut-price Chinese competition in response. 

Beijing has announced plans to borrow and spend more to shore up growth and pep up consumer spending. But given the unexpected scale of Trump’s tariff blitz, economists say it will probably need to do more, such as cut interest rates, lift government borrowing further and find ways to rekindle beaten-down consumer confidence, perhaps by drawing a line under its drawn-out real estate bust. 

Yu Xiangrong, chief China economist at Citi, said that without more stimulus, the additional tariffs will shave between 0.5 and 1 percentage point off Chinese growth this year.

Beijing said on Thursday that it would deploy “resolute” countermeasures against the latest tariffs on Chinese goods, though it didn’t immediately say what those were. In response to Trump’s earlier tariffs, China retaliated with tariffs of 15% on imports of U.S. chicken, wheat, corn and cotton and 10% duties on soybeans and beef. It also added a string of U.S. companies to export control and corporate blacklists. 

This week’s fun find

The Strange Power of Laughter

There’s nothing like getting caught in a giggle loop, where the desire to laugh builds until it bursts out at a disastrous moment. Only then do we often realize that laughter is a rather strange phenomenon. Although we usually think of laughter as a response to something funny, sometimes laughter is no laughing matter!

 

This week's interesting finds

Cymbria’s 2024 annual report

Cymbria’s most-recent annual report is now available for your reading pleasure. You can find insights on how Cymbria navigated the last year and updates on our largest holding, EdgePoint Wealth Management.

This week in charts

Global labour participation rates 

10-year minus 2-year Treasury yield

Non-U.S. automakers share of sales in the U.S.

U.S. passenger vehicle imports

Automobiles and Parts % of Country Equity Market Cap

Defense spending vs. net interest payments

S&P 500 Index returns after a correction

Multiple contraction YTD

S&P 500 Index sector return difference

Stocks outperforming the S&P 500 Index

Narrow leadership from 1997 - 1999

S&P 500 Index broadened from 2000 to 2005

Magnificent 7 performance

Stoxx 600 Index vs. S&P 500 Index

What Covid’s One-Hit Wonders Should Have Taught Us

Nearly every American stock rebounded after the bottom of the Covid-19 bear market five years ago—a rally that made picking winners like shooting fish in a barrel. A tsunami of government stimulus and a realization that the world wasn’t ending were responsible for much of that.

But some companies’ shares did especially well precisely because of the pandemic. While that didn’t last, their lessons about Wall Street’s hype machine should.

Breakthroughs like AI, quantum computers and 3-D printing induce a fear of missing out, sending too many stocks rocketing higher. They give pundits something to talk about, brokers the next thing to sell and asset managers an excuse to launch new funds.

Covid beneficiaries were like those thematic stocks on steroids, jumping at the same time in a way that looks silly with the benefit of hindsight. Investors treated their sales gains in 2020 and 2021 as if they would keep going. Even if that were possible, competitors pounced on the same opportunities. Companies that sold in-demand physical goods during the emergency even cannibalized their own future demand.

Take Wayfair. As people found themselves spending far more time at home with enforced savings and stimulus checks, the online furniture retailer experienced more demand than it could handle. A year after the Covid bottom, its stock had surged 1,367%. But Wayfair’s sales per share in 2024 were lower than during the year before the pandemic.

Exercise equipment maker Peloton’s shares jumped 758% as demand for home-exercise equipment exploded, lifting its market value to nearly $50 billion. They have erased all of those gains, dropping 96% from their peak as social distancing has become a thing of the past and other fitness brands have launched online offerings. Peloton’s new equipment now also has to compete with plenty of its own lightly used machines for sale online. It has never earned an annual profit, and analysts polled by FactSet see sales falling for a fourth consecutive fiscal year.

Online pet-goods retailer Chewy’s rise and fall were slightly less extreme, and the boost to its business less fleeting too. After all, most of those pets adopted during the pandemic are still alive. But Chewy’s flatlining sales make its trailing price-to-earnings ratio of more than 4,000 times back in 2021 look insane in retrospect.

Zoom became a verb and its stock surged more than 700%, giving it a market value of more than $160 billion. Yet its multiple of 3,000 times trailing earnings implied it had some sort of permanent monopoly on videoconferencing—a service others offer for free.

Some other companies benefited beyond a temporary sales surge. Online crafts marketplace Etsy was one of the few sources of face masks for a while. After demand for them plummeted, it still had gained name recognition and new customers. Likewise, software company Docusign’s benefit from social distancing and a mortgage boom are over, but the public got comfortable with electronic signatures. Sales are higher for both companies—just not that much higher. Etsy and Docusign are down by 85% and 71%, respectively, from their pandemic peaks.

Sometimes a company’s fortunes really do change overnight. Investors lucky enough to own their shares still need to go back to the basics of what gives them value—decades of future cash flows. If it is hard to argue that the price gain reflects a business opportunity that is big and sustainable enough, then the next step is clear: Take the money and run before others figure it out too.

This week’s fun find

Visit to Picasso: Watch Pablo Picasso painting on glass (1949)

Filmed through the opposite side of the canvas, a large glass plate, we see the grand brushstrokes of Spanish painter, sculptor, printmaker, ceramicist, stage designer, poet, and playwright Pablo Picasso. This clip is from Visit to Picasso (“Bezoek aan Picasso”), a 1949 documentary film by Belgian filmmaker Paul Haesaerts. It was filmed at Picasso’s home in Vallauris, France.

This week's interesting finds

This week in charts

Foreign and U.S. holdings

Foreign holdings of U.S. financial assets

S&P 500 Index Top 10 price-to-earnings ratios

U.S. equity index valuations vs. history

Rotation out of U.S. stocks

MSCI China Index vs. S&P 500 Index

Inflows into U.S. short-term Treasury funds

Bull market trends

S&P 500 Index correction

Historical S&P 500 Index returns after inauguration day

Retirement fears

Leveraged loans

Private market performance

Why China is suddenly flooding the market with powerful AI models

Retaliation seemed certain. When the US tightened its grip on advanced artificial intelligence technologies in January — blocking China’s access to advanced AI chips and locking proprietary models behind trade barriers — the response appeared predictable. China would build its own walls, guard its breakthroughs and double down on secrecy.

Instead, China is doing something unexpected: it is giving away its most advanced AI models.

In recent weeks, Chinese tech groups including Alibaba, Baidu and Tencent have been flooding the market with powerful AI models. But in an industry where secrecy is the norm, the real shock is their openness — these models are free to download, modify and integrate.

At first glance, this surge might seem like a statement that AI should be open to the world, not just a handful of companies. But in business and geopolitics, generosity is rarely without strategy. The real question is not why China is open sourcing its AI, it is why the world assumed it would not.

For now, most US tech groups treat AI like an exclusive resource, restricting access to their most powerful models behind paywalls. OpenAI, Google DeepMind and Anthropic limit full access to their most advanced AI models, offering them through plans such as paid subscriptions and enterprise deals. Meanwhile, the US government views open-source AI as a security risk, fearing that unregulated models could be fine-tuned into cyberweapons. US lawmakers are already pushing to ban DeepSeek AI software from government devices, citing national security concerns.

But Chinese tech groups are taking a very different approach. By open sourcing AI, they not only sidestep US sanctions but also decentralise development and tap into global talent to refine their models. Even restrictions on Nvidia’s high-end chips become less of an obstacle when the rest of the world can train and improve China’s models on alternative hardware.

AI advances through iteration. Every new release builds upon the last, refining weaknesses, expanding capabilities and improving efficiency. By open sourcing AI models, Chinese tech groups create an ecosystem where global developers continuously improve their models — without shouldering all the development costs.

The scale of this approach could fundamentally reshape AI’s economic structure. If open-source AI becomes just as powerful as proprietary US models, the ability to monetise AI as an exclusive product collapses. Why pay for closed models if a free, equally capable alternative exists?

For Beijing, this strategy could be a powerful weapon in the US-China tech war. US AI companies, built on monetisation through enterprise licensing and premium services could find themselves in a race to the bottom — where AI is abundant, but profits elusive.

Of course, this comes with trade-offs. If AI is freely available, nothing will stop foreign companies from taking China’s models, refining them and outcompeting Chinese companies. Over time, companies such as Alibaba, Baidu and Tencent may face the same pressures as US counterparts — forcing them to restrict access to protect intellectual property and generate revenue.

Beyond market dynamics, Beijing may have its own reasons to rethink this approach. The Chinese government, which prioritises control over key technologies, may also push for stricter AI regulations to manage misinformation, maintain oversight and ensure compliance with state policies.

But for now, open-source AI remains China’s best bet — a way to compete without access to the best chips or the advantage of an early lead.

The timing of the open source rush is no coincidence. It is a response to a closing window. With US chips and AI technology restrictions set to tighten under President Donald Trump and proprietary AI models becoming entrenched, China’s most effective strategy is speed and scale. To flood the market, to shift the balance before AI monopolies emerge.

If OpenAI, Google and Microsoft have already won the AI race as we know it, then China’s best move would not be to compete — it would be to make winning meaningless.

Billions Flowed Into New Leveraged ETFs Last Year. Now They’re in Free Fall

Several popular leveraged exchange-traded funds, which use borrowed money to amplify their bets on one or more asset, have erased most of their value in a matter of weeks. Among the worst performers: A fund that offers investors twice the exposure to shares of MicroStrategy, the software company-turned-bitcoin collector, has plunged 83% since touching its November high. Another ETF, which offers similar leverage on Tesla, is down 80%.

Leveraged ETFs emerged last year as one of Wall Street’s favorite roller coasters, as investors sought out ways to take bigger risks during the stock market’s rally and money-management firms launched a bunch of new funds that capitalized on this demand. Assets under management in leveraged ETFs jumped by 51%, to $134 billion, in the 12 months ending Jan. 31, according to Morningstar.

Funds that offer leveraged exposure to broad stock indexes have been offered in the U.S. for more than a decade. But leveraged single-stock ETFs, like those linked to MicroStrategy and Tesla, were first approved by regulators in 2022.

The funds are designed for short-term traders and shouldn’t be held for long periods, investment firms said.

Morningstar analyst Jeffrey Ptak is concerned not all investors fully appreciate how quickly or severely leveraged funds’ performance can veer off course. “These products have become very popular, to a worrisome extent,” he said.

The relatively new class of leveraged single-stock ETFs has taken investors on an even wilder ride. The three largest single-stock funds give holders leveraged exposure to Nvidia, Tesla and MicroStrategy—a trio of stocks popular with the day-trading crowd.

The MicroStrategy funds offer the starkest example of the speed with which fortunes can be minted and then lost with single-stock funds. Defiance ETFs and Tuttle Capital Management launched competing products in August and September, and both became overnight hits, collecting billions in investor cash as they posted eye-popping gains.

So far, investors haven’t been deterred, opting to buy the dip.

The biggest MicroStrategy fund, known by ticker MSTU, has posted almost $500 million of inflows year-to-date, including $312 million over the past month, according to FactSet.

This week’s fun finds

What This Jelly Blob Tells Us About Water Quality

In the fall, TRCA monitoring teams found a slimy ball of jelly on some of their equipment: a bryozoan colony. Also called ‘Moss Animals’, these jelly-like blobs are made up of thousands of microscopic invertebrates that live in a colony.

Bryozoans are filter feeders, eating plankton, algae, and bacteria. They clean the water as they feed. Their presence means the water quality is good. So, seeing one in the new mouth for the Don River is a sign that efforts to clean up the Don River are working.

Bryozoans are quite common and can be found on every continent except Antarctica. In freshwater, they form colonies during the warmer months, attaching to things such as docks, buoys or sticks. People usually notice them in the fall, when the colonies are biggest, and equipment is being taken out of the water before the winter.