This week's interesting finds

Etienne, partner since 2012 (Shediac, New Brunswick – “Lobster Capital of the World”)   

This week in charts 

Asset classes 

Shareholder returns  

KKR’s Latest Bankruptcy Deal Is a Bad Omen for Lenders 

The bankruptcy of GenesisCare, a cancer treatment specialist backed by private equity powerhouse KKR & Co. and China Resources Pharmaceutical Group Ltd., is the latest cautionary tale of how much value is being destroyed when companies go bust now. 

In previous default cycles, leveraged-loan providers would expect to get 70% to 80% of their cash back from failing companies. Those days are over. Some GenesisCare investors are bracing for a mid-teen percentage, according to people familiar with the matter who aren’t authorized to speak publicly — a new blow to a lending market headed for record low recoveries. 

It’s yet another financial weak spot exposed by the end of the easy-money era, as tighter credit pushes overindebted businesses toward the brink. While some investment banks hope for a softer economic landing than feared, the crash in leveraged-loan recoveries is ominous for lenders. 

Like last year’s blowup of KKR-backed Envision Healthcare, the GenesisCare situation shows how companies are taking advantage of the looser loan protections that lenders swallowed as they hunted for yield in a low interest-rate world. GenesisCare has snagged a so-called “debtor in possession” financing, including a $200 million pledge to let it keep operating, that disadvantaged existing loan-holders, the people familiar say. 

GenesisCare joins an expanding list of restructuring deals that have scarred US lenders lately. A first-lien loan to Envision is expected to recover close to zero, according to an August report from Bank of America strategists. Media firm Diamond Sports and air-miles specialist Loyalty Ventures have implied recovery rates running at about 10%, the report says, while tech company Avaya Inc. and energy firm Heritage Power are around 30%. 

The strategists estimate recoveries from bankrupt companies are running at 25% on average this year — based on loan prices 30 days after a default — and they predict 50% in the long term. 

The outlook for lender rights isn’t bright either. In June a Texas judge upheld a 2020 emergency refinancing by Serta Simmons Bedding, which handed the mattress maker $200 million of new cash to stay afloat but pushed some lenders including Apollo back in the repayment line. 

Many lenders have started to include “Serta blockers” in their loan documents by hardening up the legal wording, according to a recent report from Moody’s Investors Services. But about half the leveraged loans it examined still didn’t include protective language. 

One glimmer of hope is the brightening economic outlook and the knowledge that market prices for loans don’t reflect precisely how much lenders will ultimately claw back. The sample size is relatively small still. 

Nevertheless, even the most upbeat estimates see recoveries way below previous cycles. Leveraged loans involve a balancing of two risks: the likelihood of a borrower going under, and how much money you get back when they do. Even if default rates are better than feared, the result will be ugly for lenders if recoveries crater.   

This week’s fun finds 

No rest for the wicked 

The leaves are still on the trees, but the fall season’s already started. It was a matchup against last season’s semifinal opponent, but unfortunately the result was again a loss. The squad loves a challenge and looks to start a new regular-season winning streak next week. 

Bonus points to anyone who can spot the team’s new mascot, Louis!   

Bringing a taste of Montréal to the Toronto office 

Four members of EdgePoint’s Québec team brought us the freshest possible Montréal-style smoked meat for their moai (our version of bringing EdgePointers together for a meal) by ordering from Scarborough deli SumiLicious. (The head chef worked at Montréal’s Schwartz’s for almost 20 years!)

Merci to Sylvie, Sabrina, Marc-Antoine and Catherine!   

The Republic of Cows 

A remote island in the Gulf of Alaska, Chirikof is about the size of two Manhattans. It lies roughly 130 kilometers southwest of Kodiak Island, where I am waiting in the largest town, technically a city, named Kodiak. The city is a hub for fishing and hunting, and for tourists who’ve come to see one of the world’s largest land carnivores, the omnivorous brown bears that roam the archipelago. Chirikof has no bears or people, though; it has cattle. 

At last count, over 2,000 cows and bulls roam Chirikof, one of many islands within a US wildlife refuge. Depending on whom you ask, the cattle are everything from unwelcome invasive megafauna to rightful heirs of a place this domesticated species has inhabited for 200 years, perhaps more. Whether they stay or go probably comes down to human emotions, not evidence. 

Russians brought cattle to Chirikof and other islands in the Kodiak Archipelago to establish an agricultural colony, leaving cows and bulls behind when they sold Alaska to the United States in 1867. But the progenitor of cattle ranching in the archipelago is Jack McCord, an Iowa farm boy and consummate salesman who struck gold in Alaska and landed on Kodiak in the 1920s. He heard about feral cattle grazing Chirikof and other islands, and sensed an opportunity. But once he’d bought the Chirikof herd from a company that held rights to it, he got wind that the federal government was going to declare the cattle wild and assume control of them. McCord went into overdrive. 

By 1980, the government had created the Alaska Maritime National Wildlife Refuge (Alaska Maritime for short), a federally protected area roughly the size of New Jersey, and charged the US Fish and Wildlife Service (USFWS) with managing it. This meant preserving the natural habitat and dealing with the introduced and invasive species. Foxes? Practically annihilated. Bunnies? Gone. But when it came to cattle? 

Alaskans became emotional. “Let’s leave one island in Alaska for the cattle,” Governor Frank Murkowski said in 2003. Thirteen years later, at the behest of his daughter, Alaska’s senior senator, Lisa Murkowski, the US Congress directed the USFWS to leave the cattle alone.

This week's interesting finds

Syd, partner since 2017 (Toronto, Ontario)   

This week in charts 

Imports and exports 

Return on capital by region

Private mortgage lender Romspen cuts monthly distribution for fourth time, cites ‘disappointing’ loan repayments 

On Tuesday, Romspen informed investors in its flagship Mortgage Investment Fund that their monthly distribution was cut to two cents a unit, down two-thirds from July, 2022. 

As a private mortgage lender, Romspen raises cash from individual investors, then lends the money out to real estate companies, often in the form of short-term construction loans. The company has $2.7-billion in assets under management and has delivered an average annual yield of 7.3 per cent in its Mortgage Investment Fund over the past 10 years. 

Because of its high payout, Romspen’s assets swelled over the past two decades as investors searched for yield when benchmark interest rates were close to zero. Yet the real estate industry is now adjusting to central banks’ aggressive rate hike campaigns, and the development sector that Romspen specializes in is one of the most hobbled. 

With troubles mounting, Romspen froze redemptions from its fund in November, an act known as “gating” in the investment industry, to conserve cash. But it wasn’t enough, and multiple distribution cuts have also been necessary. The fund now yields 2.5 per cent annually, roughly half of what investors can earn from ultrasafe guaranteed investment certificates. 

Romspen also told investors in a quarterly report earlier this month that 2023 is proving to be “one of the most challenging for the fund since the mid-90s.” 

Romspen’s portfolio is largely comprised of construction and predevelopment loans across the United States and Canada. Because the borrowers are often higher-risk development companies, Romspen occasionally has to take control of some properties when their associated loans aren’t repaid. 

In a normal market, Romspen would sell the properties to recoup the cash it is owed, but commercial real estate transactions have slowed considerably. “The challenge these days is not so much signing a purchase agreement, but finding the funds to close,” Romspen explained in its quarterly commentary. 

Even when buyers emerge, banks are much less likely to extend the financing to complete the purchase. “We have already seen two anticipated unconditional sale transactions fall through this year, each with seven figure deposits forfeited,” Romspen explained. 

To this end, Romspen has been locked in a court battle with its largest borrower this year after multiple loan defaults allegedly totalling $333-million. To recoup the money, Romspen asked the Ontario Superior Court to appoint a receiver to take control of three properties that underpin the distressed loans, and then sell them. The three affected properties are located in Toronto: Woodbine Mall and Rexdale Mall, in the city’s northwest corner, and 1500 Birchmount Rd., in the city’s northeast corner.

This week’s fun finds 

EdgePoint Football Club finishes its first season 

While the season ended with a loss in penalties during the consolation final, the team met its pre-season goal of making the playoffs. The squad is looking forward to recovering from injuries and building on their experience during the fall season starting next week!   

EdgePoint – even faster and more furious 

Several partners made their way to Bowmanville to live their racing dreams on the asphalt. In the final race of the day, Ruairi edged out Teddy and Norm for the gold. 

  

Why Everyone's Worried About Their Attention Span—and How to Improve Yours 

Most people without chronic attention issues could likely focus fairly well if given a task in a quiet, empty room—but they'd probably perform worse if they did the same task in a room where people are talking and music is playing. In modern life, [professor of psychiatry and behavioral sciences Margaret] Sibley says, we’re essentially living in a room filled with distractions all the time, thanks to the competing demands of work and home life, societal stressors like the pandemic, and the constant temptation of phones, social media, and the internet. 

Human brains want novelty, excitement, and social connection, and devices play into those desires. Checking a notification flashing across your screen can provide a small hit of dopamine, creating a sense of reward that keeps you coming back for more. 

Despite the draw of technology, Barbara Shinn-Cunningham, director of the Neuroscience Institute at Carnegie Mellon University, says she’s not convinced we’re losing the ability to focus. Instead, she says, we’re using devices in exactly the way tech companies want us to: constantly. “I’m not sure that it’s changing how our brains operate,” Shinn-Cunningham says, "but [rather] leveraging how our brains operate to keep us engaged with our electronics." 

In [co-director of the Center for Attention, Learning, and Memory at St. Bonaventure University Adam] Brown’s opinion, there’s one adjustment that’s more important than any other: “Remove the device. In times of needed focus, take that device and put it someplace else,” he says. Turning your phone facedown isn’t always enough; research suggests that simply having a phone within eyesight can make it harder to focus, and the buzz of a single notification can ruin concentration. 

When you have a big task at hand, putting your phone in another room is the best option, Brown says. But it’s also important to learn how to be around screens without letting them derail your concentration, a process that he says largely comes down to muscle memory. Just as you get used to constantly checking your phone, you can build a habit of not looking at it all the time, Brown says. “When your phone goes off, you want to go look at it,” he says. “But over the course of weeks and months, if you deliberately ignore it…you will get better at focus.” 

It’s also important to assess your priorities and focus your energy there, rather than trying to split your limited time and attention in a million directions, Sibley says. That might mean dropping non-crucial commitments in pursuit of being fully present for the ones that really matter to you, she says.

This week's interesting finds

Greg, partner since 2017 (Toronto, Ontario)  

This week in charts

Industrial robots installed: China vs Rest of the World

Trends in payrolls by high, medium, and low-median wage industries

How China cornered the market for clean tech 

Late last year in Beijing, officials from several of China’s technology, trade and defence agencies were called to a series of secret meetings with a single purpose: to respond to America’s sweeping restrictions on selling computer chips to Chinese companies. 

In July, Beijing announced its response: it imposed restrictions on the exports of gallium and germanium, metals used in the production of a number of strategically important products, including electric vehicles, microchips and some military weapons systems.

Matthew Funaiole, a China expert with the Center for Strategic and International Studies, a US think-tank, says the move was a “shot across the bow” which caught some in Washington off guard.

“Outside of technical circles and the defence industry, it [gallium] is not a critical mineral that people were aware of,” he says.

The episode has highlighted an inconvenient truth for the west: China is by far the lowest-cost and biggest supplier of many of the key building blocks for clean technologies. The two metals are among a series of products vital to the energy transition in which China dominates. 

China is responsible for the production of about 90 per cent of the world’s rare earth elements, at least 80 per cent of all the stages of making solar panels and 60 per cent of wind turbines and electric-car batteries. In some of the materials used in batteries and more niche products, China’s market share is close to 100 per cent. 

China’s cornering of the clean tech supply chain has drawn comparisons to the high level of influence that Saudi Arabia enjoys in the oil market. Just as petrochemical production provides an immovable strategic buffer for the Gulf state, China’s dominance over these clean energy sectors is adding to growing geopolitical competition and has the potential to complicate the world’s fight against global warming. 

Western governments are now desperately attempting to catch up with China’s ascendance to the top of the world’s critical minerals and renewable energy industrial supply chains. US president Joe Biden and his counterparts in Europe have started deploying hundreds of billions of dollars in taxpayer-funded subsidies. 

Analysts, however, diverge on how long it will take the west to extricate itself from Chinese control of large swaths of the clean tech supply chain — or if this can be achieved at all.
 

This week’s fun finds 

Semifinals! 

After an exciting inaugural season, EdgePoint Football Club qualified for the playoffs. The excitement was evident with most of the roster showing up for a holiday Monday match. After taking a 2-0 lead into half, the opposing squad tied it up in regulation to force penalty kicks. In the end it was a 3-4 loss, but it left the team with a lot to build on for the future. 

   

Starting off the long weekend right 

Oyster afficionado Jeff shucked a lot of bivalves in the kitchen to get everyone ready for the Civic Holiday! 

Meanwhile, Adam and Claire also added some spicy margaritas to the mix.

Forget 10,000 steps – walking just 5,000 is enough to lower your risk of death, says science 

Published in the European Journal of Preventive Cardiology, the paper brought together data from 17 existing studies involving 226,889 people. 

It’s the first to assess the impacts of walking up to 20,000 steps a day, as well as whether the risk of dying differs depending on age, sex, or where in the world people live. 

The answer? The study found that the more you walk, the better – regardless of your age, sex, or the climatic conditions of your region. 

In fact, the scientists found that every additional 1,000 steps a day you do on top of the minimum reduces your risk of death by 15 per cent. 

These benefits keep increasing with no upper limit, according to the scientists. The data reveals that for those walking fanatics who stride as many as 20,000 times a day, the benefits only continue to build. Insufficient physical activity is the fourth biggest risk factor for death across the world, according to World Health Organization – being associated with 3.2 million deaths a year.

This week's interesting finds

Vanita, partner since 2023 (Toronto, Ontario)   

This week in charts 

Retail sales  

Large-cap stocks 

Canadian mortgages   

This week’s fun finds 

EdgePoint Football Club closes out the regular season undefeated 

The squad showed that their chemistry extended outside of the office as they seamlessly integrated two first timers onto the pitch for an 8-2 win. With a 5-0-2 record, they enter the playoffs hungry for more.

Take them out to the ballgame 

With the Blue Jays currently holding the last American League Wildcard spot, EdgePointers cheered on the hometown team against the league-leading Baltimore Orioles to a 4-1 win. Looks like the event was a hit! 

Drake’s Korean moai 

Drake called in a few favours at home and his mom made an amazing Korean meal for his moai (our version of bringing EdgePointers together for a meal). Several partners stated it was the “best they ever had”.   

An ultra-processed diet made this doctor sick. Now he's studying why

Amid the global boom in diet-related diseases, including obesity and Type 2 diabetes, Dr. Chris van Tulleken, the author of Ultra-Processed People, made himself a test subject for a brief, one-month experiment. 

Van Tulleken, an infectious disease physician in his mid-40s, swapped his normal, healthy diet full of fruits, vegetables, lean proteins and whole grains for foods that mostly came from packages, boxes and bottles. 

We spoke to van Tulleken about his book and his research. 

“Overall, about 80% of my calories came from ultra-processed foods, and that's very easy to do. Most bread in the supermarket is ultra-processed, almost all of our breakfast cereals and snack foods are ultra-processed, and most of our convenience foods are ultra-processed too.” 

“I became very unwell very quickly. I felt terrible. I stopped sleeping, I developed anxiety and became very unhappy. I was the pilot patient in a study I'm running with colleagues at University College London. We found there were effects on my gut hormones. So inside all of our bodies we've got hormones that tell us when to stop eating. They're very well evolved. All animals have them and ultra-processed food interferes with those hormones. So at the end of a meal, my hunger hormones would still be sky high.” 

“There is a very reputable scientist, Kevin Hall, in the United States. He ran a clinical trial and found that when people eat an ultra-processed food diet, they eat about 500 calories more per day, compared to people on a whole food diet, eating the same amounts of fat, salt, sugar and fiber. And there's a lot of epidemiological evidence that shows it is the ultra-processed food that interferes with our body's ability to say, "you know what, I can stop eating now." 

“There isn't an absolutely clear boundary between traditional food processing and ultra-processed foods. We chop, cook, smoke, pickle, salt, grind, pulverize — we've been doing all that for millennia and we have to do it. So processing is fine. But ultra-processing is where food is made in factories. It's wrapped in plastic. It has strange additives in it that you don't find in kitchens. And the purpose of the food is profit. So, I eat cheese, but I don't eat processed cheese. I eat butter, but I don't eat margarine. I eat traditional flour bread, but I don't eat emulsified, supermarket bread.”

This week's interesting finds

Derek, partner since 2016 (Milton, Ontario)   

This week in charts 

Private credit   

Employee efficiency  

Warren Buffett won’t go near it, so why has CPP Investments placed a third of our pension assets with ‘private equity?’ 

When Canada’s national pension plan reported financial results in May, one fact really stood out for me: a full third of its assets — about $190 billion — are invested in private equity. 

Different from public equity, where investors buy a stake in a publicly listed company, private equity refers to the private ownership of non-listed firms or of those that were once public and have been since taken private. CPP Investments invests in private equity in two ways. The first is via direct investments, where it holds ownership stakes that vary from passive, minority positions, up to 100% control of private companies. The second is through private equity funds run by private equity firms, such as KKR and Blackstone. In this type of investment, CPP commits an amount (typically, a few hundred million dollars) alongside other big (mostly institutional) investors. 

On the face of it, this investment approach seems reasonable — struggling businesses could always use fresh cash injections and new leadership. But some feel private equity has a tendency to put profits ahead of ethics. 

But despite increasing concern about private equity tactics, over the past decade CPP Investments has shifted more and more of its assets into that investing category in search of high returns. Private equity now accounts for 33 per cent of their portfolio. For comparison, CalPERS, the largest U.S. pension fund, has only about 11% of its assets invested in private equity, while Norway’s oil fund, one of the world’s largest wealth funds, has no investments in private equity at all. 

Ethical questions are not the only concern when it comes to CPP’s investments in private equity. There is also the lack of transparency. While CPP regularly commits hundreds of millions of dollars to private equity funds, contributors and beneficiaries often have no idea how the money is really invested. 

Private equity investments cannot be marked-to-market in the same way that public equities are, since these are stakes in private companies. This could create ambiguities with respect to the true value of some private equity holdings. Since the “market value” of a private equity fund is reported by the private equity firm that runs it, some question whether reported values can always be trusted. 

Additionally, since usually there is a gap (of months, or in some cases years) between the time at which an institution (such as CPP Investments) commits funds to a private equity investment and the time at which the money is actually transferred, there is some ambiguity in the method used for calculating returns. 

The CPP Investments’s heavy reliance on returns generated by private equity requires a serious debate.

But if fresh academic research shows that there is no added value in private equity, and Warren Buffett — arguably the most successful investor in the world — is highly skeptical about private equity, I think Canadians should be concerned.   

Buyout groups raise debt against portfolios to return cash as dealmaking slows 

Private equity fund managers are borrowing against asset portfolios to return cash to investors as they struggle to exit investments, adding another layer of debt to the loans financing their corporate buyouts.

Firms are increasingly resorting to the technique, called net asset value financing, because rising debt costs and concern over the economy are making it difficult for them to sell or list the companies they own. 

NAV financing is perceived as less risky than lending to a single company. It is also cheaper for the borrower, according to private equity executives. 

But some analysts have voiced concerns that such borrowing heaps extra debt on buyout portfolio companies that are already grappling with higher borrowing costs and a weakening economic outlook. 

He added that NAV financing had provided “an alternative means to introduce liquidity” at a time when “all M&A metrics are down and exit activity is dramatically reduced [and] refinancing at the individual asset’s level is more expensive and difficult”. 

Transformers: the Google scientists who pioneered an AI revolution 

In early 2017, two Google research scientists, Ashish Vaswani and Jakob Uszkoreit, were in a hallway of the search giant’s Mountain View campus, discussing a new idea for how to improve machine translation, the AI technology behind Google Translate. 

The AI researchers had been working with another colleague, Illia Polosukhin, on a concept they called “self-attention” that could radically speed up and augment how computers understand language.

Polosukhin, a science fiction fan from Kharkiv in Ukraine, believed self-attention was a bit like the alien language in the film Arrival, which had just recently been released. The extraterrestrials’ fictional language did not contain linear sequences of words. Instead, they generated entire sentences using a single symbol that represented an idea or a concept, which human linguists had to decode as a whole. 

The cutting-edge AI translation methods at the time involved scanning each word in a sentence and translating it in turn, in a sequential process. The idea of self-attention was to read an entire sentence at once, analysing all its parts and not just individual words. You could then garner better context, and generate a translation in parallel. 

The three Google scientists surmised this would be much faster and more accurate than existing methods. They started playing around with some early prototypes on English-German translations, and found it worked. During their chat in the hallway, Uszkoreit and Vaswani were overheard by Noam Shazeer, a Google veteran who had joined the company back in 2000 when Google had roughly 200 employees. Shazeer, who had helped build the “Did You Mean?” spellcheck function for Google Search, among several other AI innovations, was frustrated by existing language-generating methods, and looking for fresh ideas. 

So when he heard his colleagues talking about this idea of “self-attention”, he decided to jump in and help. “I said, I’m with you . . . let’s do it, this is going to make life much, much better for all AI researchers,” Shazeer says. 

The chance conversation formalised a months-long collaboration in 2017 that eventually produced an architecture for processing language, known simply as the “transformer”. The eight research scientists who eventually played a part in its creation described it in a short paper with a snappy title: “Attention Is All You Need.” 

Today, the transformer underpins most cutting-edge applications of AI in development. Not only is it embedded in Google Search and Translate, for which it was originally invented, but it also powers all large language models, including those behind ChatGPT and Bard. It drives autocomplete on our mobile keyboards, and speech recognition by smart speakers. 

Its real power, however, comes from the fact that it works in areas far beyond language. It can generate anything with repeating motifs or patterns, from images with tools such as Dall-E, Midjourney and Stable Diffusion, to computer code with generators like GitHub CoPilot, or even DNA. 

Vaswani, who grew up in Oman in an Indian family, has a particular interest in music and wondered if the transformer could be used to generate it. He was amazed to discover it could generate classical piano music as well as the state-of-the-art AI models of the time. 

“The transformer is a way to capture interaction very quickly all at once between different parts of any input, and once it does that, it can . . . learn features from it,” he says. “It’s a general method that captures interactions between pieces in a sentence, or the notes in music, or pixels in an image, or parts of a protein. It can be purposed for any task.” 

The genesis of the transformer and the story of its creators helps to account for how we got to this moment in artificial intelligence: an inflection point, comparable to our transition on to the web or to smartphones, that has seeded a new generation of entrepreneurs building AI-powered consumer products for the masses. 

But it also highlights how Google’s evolution into a large bureaucratic incumbent has stifled its ability to let entrepreneurialism flourish, and to launch new consumer products quickly. All eight authors, seven of whom spoke to the Financial Times, have now left the company.   

This week’s fun finds 

Monday night nailbiter 

EdgePoint Football Club gave the fans an exciting finish to its penultimate game of the regular season. After trailing 1-2 at the half, two unanswered goals in the second frame brought the team’s record to 4-0-2. 

The latest EdgePointer of the Month features our CFO Norm Tang. 

Our CFO Norm reviews many important things at EdgePoint, but his most critical assessments might be using a detailed scoring system to rate our EdgePoint moais (company lunches to bring people together). He’s proof that there is accounting for taste. Norm’s discerning nature isn’t limited to food – he has recommendations for almost everything from sneakers to power tools to cars. The former competitive motorcycle rider may have hung up his racing suit, but Norm still organizes company outings to go-kart tracks to feed his need for speed. We’re also very fortunate that he’s as skilled with words as he is with numbers since Norm’s company-wide E-mails often keep us laughing (or running to the kitchen when he brings in a couple dozen of his favourite Jamaican patties). 

Prior to joining EdgePoint, Norm worked as a senior manager at KPMG LLP’s Financial Institutions and Real Estate Assurance practice. He earned his B.Comm. from the University of Toronto and is both a Chartered Accountant and a Chartered Professional Accountant. Norm is also Chief Financial Officer of Cymbria Corp. and Director of Finance of EdgePoint Investment Group Inc. 

Norm’s office is a testament to his love of collecting things, and in that spirit, he decided to share his list of top three places that he’s crashed a motorcycle: 

3) Entering the hairpin at Shannonville Motorsport Park – “It particularly sucked because it was a high-side crash and I ruined my favourite helmet and tore my rotator cuff. I also realized later that I had a concussion.” 

2) The carousel also at Shannonville – “Memorable because it ended my amateur racing career. I tore my other rotator cuff and it took about three months before I could lift my arm over my head. I learned that 30 years of age is about when the body starts making business decisions for you.” 

1) Making an outside pass at Turn 2 at Mosport during practice – “One of the more terrifying corners at any racetrack on planet Earth. It’s extremely fast (160+ km/h), downhill, completely blind (you have to be turning before you can see the turn), and it’s off-camber. I slid all the way and hit the tire wall. Two hours later I repaired the bike and put it on pole so it wins #1 crash.” 

Scientists Discover That Metals Heal Themselves in 'Astonishing' Breakthrough 

Scientists have observed metal “healing” itself for the first time, an unexpected discovery that challenges basic tenets of materials science and could pave the way toward more durable metal structures, reports a new study. 

The breakthrough was made at Sandia National Laboratories during an experiment that was initially focused on the growth of nanoscale fatigue cracks on metals, such as platinum. Researchers including Brad Boyce, a staff scientist at Sandia, watched the tiny cracks form and grow in the metal as expected, but were stunned to see the metal autonomously welding itself back together. 

Human beings, along with countless other lifeforms, have evolved ways to heal ourselves from injuries and illnesses, but reproducing this restorative ability in artificial materials can be a tall order. Some substances, such as plastics and ceramics, demonstrate remarkable self-healing abilities, but few experts had considered that metals might be able to autonomously mend their wounds. 

While the discovery may evoke visions of T-1000 robots or indestructible metalworks, the long-term implications of this self-healing process remain unclear. That said, the researchers noted in the study that “self-healing has the potential to impact numerous structural applications of metals, in particular fatigue failures under cyclic loading where delayed catastrophic failure is difficult to anticipate, even given extensive empirical data.” 

The Disneyland 'first pickle' award that’s almost impossible to win 

“The first pickle,” she said. “It’s a real thing. You get an award if you buy the first pickle of the day from one specific pickle cart at Disneyland.” 

The legend is real. The first person of the day to purchase a $3.99 pickle from the fruit cart midway down Main Street in Disneyland Park gets a special “first pickle” pin. Simple, right? As I would soon find out, it was the complete opposite of simple. Trying to get the first pickle turned out to be one of the most difficult things I’ve ever done at Disneyland. 

First, there was the planning stage. Disneyland starts letting people into the park half an hour before rope drop: If the park opens at 8 a.m., for example, the gates open at 7:30 a.m. But you can’t just saunter up at 7:30 a.m. expecting to get straight through. There’s parking to consider. Security lines. Trams to Downtown Disney. Plus, you'll need to get past all the people queued up to rope drop who will inevitably have gotten there earlier.

This week's interesting finds

Second quarter commentaries are now live!

This quarter, Sydney Van Vierzen talks about three structures at EdgePoint that guide almost every decision we make, while Derek Skomorowski discusses why market timing, especially with fixed income, is so difficult. 

Amy and Bryan, partners since 2016 and 2015 (Toronto, Ontario)   

This week in charts 

Healthcare   

Private equity 

Trade partners 

Tech stocks   

China flexes critical metals muscles with export curbs 

China's threat to curb exports of gallium and germanium from the start of August marks an escalation in the global competition for critical minerals and metals. 

Both are esoteric metals with multiple applications across a spectrum of cutting-edge technologies, particularly silicon chips for the semiconductor sector. 

As such, China's move seems a calibrated response to the U.S. Chips Act and the increasing pressure on U.S. allies to restrict sales of sensitive microchip technology to the country. 

Both gallium and germanium are extremely rare metals and are derived only as by-products from the aluminium and zinc processing streams respectively. 

China's supply-chain dominance results from the country's status as the world's largest producer of aluminium and refined zinc. 

China last year accounted for around 98% of the world's production of low-grade primary gallium, the core feed-stock for the gallium supply chain, according to the United States Geological Survey (USGS). Exports last year were 94 metric tonnes, up 25% on 2021. 

Rare earths are again in the spotlight. As is just about every other critical mineral China dominates.

Gallium and germanium controls "are just the start" if the West continues to target China's high-tech sector, former Vice Commerce Minister Wei Jianguo told the China Daily newspaper. 

The warning raises the prospect of further escalation in the simmering critical minerals war between the West and China. 

China has no shortage of pressure points to push, from rare earths to cobalt to lithium and even electric vehicle batteries. 

China’s Drop in Exports Signals Deepening Slowdown in Global Trade 

Exports are crumbling in China and across Asia, showing the deepening toll that rising interest rates are taking on global trade and economic growth. 

Chinese exports fell at their steepest annual pace in June since the early days of the pandemic in February 2020. China isn’t the only Asian export powerhouse reporting sinking overseas sales. Exports from Taiwan fell 23% in June compared with a year earlier, while Vietnamese exports were down 11%. Exports from South Korea were down 6%, according to official figures compiled by data provider CEIC. 

Global trade has been softening for months as Western consumers quit spending so much on electronics, home improvements and other consumer goods after splurging during the pandemic. Instead, they have chosen to spend more of their income on eating out, traveling and other services. 

Now, trade is facing new pressure from cooling growth in the U.S. and Europe as surging borrowing costs squeeze consumer and business spending. Many economists expect the U.S. to tip into recession this year. 

Longer term, the outlook for global trade has taken a hit as major economies push to reorder global supply chains and bring a bigger slice of manufacturing and investment back home. Some economists now see global trade growing more slowly in the years ahead than the global economy, reversing a years long trend that was a hallmark of deepening economic integration. 

A growing share of China’s exports are heading to regions including the Middle East and Latin America, reflecting strengthening economic links thanks to Chinese investment and its hunger for natural resources. Exports to Russia surged in June, reflecting close ties between Moscow and Beijing and the effect of Western sanctions on Russian imports. 

The International Monetary Fund said in a recent report that it anticipates global investment by rich countries will increasingly flow toward other advanced economies, to the detriment of developing nations that need foreign investment to spur economic development. 

Opinion: When allies seek Canada’s natural gas, we say ‘sorry’ – that has global consequences 

Last year, Germany – and more recently Japan, in trade discussions in line with Canada’s Indo-Pacific strategy – made it known that access to Canadian energy was among its top priorities. 

Yet no deals were struck. 

While export facilities for liquefied natural gas (LNG) do take time to build, getting the ball rolling did not appear to be part of the conversation when Germany and Japan asked for our help. 

Canada has 1,373 trillion cubic feet of natural gas resources available for production – enough to power British Columbia for centuries. With our country’s environmental policies, Canadian natural gas is some of the lowest emission, most sustainably produced in the world. 

Natural gas is a reliable, affordable, lower-carbon ready-now fuel source. It can significantly reduce global emissions by displacing coal (which today generates 40 per cent of the world’s electricity and produces roughly double the emissions of natural gas) and supporting renewables, which require a backup fuel source because the sun isn’t always shining and the wind is not always blowing. 

Our allies share Canada’s climate ambitions – we’re all working to achieve net zero. Both Germany and Japan see a role for reliable natural gas as part of the equation. So should Canada. 

Canada also needs to be less myopic when it comes to energy security and fighting climate change. As global citizens, we need to think more broadly about how we can help reduce the 98.5 per cent of emissions produced beyond our borders. 

There’s a success story just south of us: in the past 15 years, switching from coal to natural gas in the U.S. has accounted for nearly two-thirds of all U.S. greenhouse gas emissions reductions. This formula can and should be replicated in the rest of the world – and Canadian LNG can make it happen. 

We also can’t overlook that there are more than 700 million people in the developing world with no access to electricity. Connecting them to reliable energy could lift millions from poverty and drive economic growth. Canadian LNG should be helping here, too. 

Many Indigenous groups have natural resources they want to develop to make a future for themselves and provide wealth for generations to come. The energy industry has an opportunity (in fact, I feel an obligation) to help them become full economic partners. 

However, Indigenous groups too often struggle to access capital, which is why a national Indigenous loan-guarantee program is so needed. There are already successful loan-guarantee programs at the provincial level in Alberta, Saskatchewan and Ontario that can be used as a model – but to truly take advantage of the opportunity, a national program is essential.   

This week’s fun finds 

EdgePoint Football Club puts on a clinic 

Tired of ties and inspired by a guest coach and a player from Québec, the team drubbed the opposition 10-2. Their record now stands at 3-0-2 with two games to go before the regular season ends. 

How to learn something new every day 

Learning changes the brain: Existing bonds between neurons — nerve cells that send messages signaling everything from breathing to thinking — are strengthened; new pathways between neurons are developed. Repeated exposure to an activity, like knitting or driving a car, strengthens these connections, and thus, we learn. Over time, recalling these skills or memories becomes easier. 

By adulthood, people usually have an idea of how and where they learn best, [associate professor of psychology Rachel] Wu says. Think back on your previous schooling or hobbies. Do you grasp concepts through trial and error? Did you feel a mastery over a topic when you were able to explain it to others? Maybe you prefer to learn at your own pace with a lot of practice along the way. Think about what will motivate you more, Agarwal says: learning on your own, or with an instructor. Some people favor self-guided instruction at their own pace; others are inspired when surrounded by fellow students. 

One way to ensure you’re advancing is through feedback. An instructor can correct your pronunciation; a tutor can show you where you went wrong on a math problem. Even self-guided learning has feedback built in, Wu says: If you start beekeeping with the help of YouTube, but produce no honey, that’s a clear sign something went awry. “Even with trial and error by yourself,” Wu says, “you would still get feedback. It’s just from the environment and a little bit slower than feedback from an instructor.” Struggle, mistakes, and “failure” are essential parts of the learning process, Wu says. These missteps are valuable forms of feedback you can learn from. In turn, you’ll improve your subsequent performances — and that’s learning. “Learning, in general, happens,” Wu says, “when you make a mistake, and then you change your behavior to adjust to that.” 

Instead of trying to cram knowledge in, focus on verbalizing what you’ve learned, [assistant professor and cognitive scientist Pooja] Agarwal says. Known as retrieval practice, simply recalling and reflecting on information can help you retain those details. Thinking back on what you read in a book yesterday, telling a friend something funny you heard on a podcast, mentioning what you ate for breakfast — that’s retrieval practice. An easy way to put retrieval practice to work is to write down — or tell your partner or roommate — one thing you learned at the end of every day. “That will boost your memory and your long-term learning,” Agarwal says, “without taking more than 30 seconds and without any cost at all.” 

Why Songs Get Stuck in Your Head—and How to Stop Them 

Scientists call earworms involuntary musical imagery, or INMI, because they burrow into our heads uninvited and without warning. At our house, we leave a local alternative-music radio station on in the background. The DJs favor a song called “Heatwaves,” by Glass Animals. Let’s just say I’m not a fan, and yet, that’s the song that frequently plays in my mind when I awaken from a dreamlike state: “Sometimes, all I think about is you. Late nights in the middle of June. Heat waves been fakin' me out. Can't make you happier now.” And I know I’ll be singing those few catchy lines while I’m brushing my teeth later that night. 

Music that is simple, repetitive, and easy to sing (or hum) is most likely to get stuck. Think Miley Cyrus’ “Flowers,” and Queen’s classic “Bohemian Rhapsody,” and the title-says-it-all track “Can’t Get You Out of My Head,” by Kylie Minogue. Even the Rocky theme song can fight its way in. Nursery rhymes and kid-friendly tunes are also strong earworm contenders. They’re composed to be catchy, with an ear toward repetition, and as a result, memorization. If the “Itsy Bitsy Spider” crawls into your head, now you know why. 

It turns out that certain emotional states, such as when we’re tired or overworked, can trigger earworms. (In a Goldilocks-like quandary, you may be more vulnerable if you’re too stressed or not stressed enough—in other words, bored.) Maybe that’s why I frequently wrestled with earworms when my three sons were young. The combination of simple music and sleep deprivation created a fertile breeding ground for the pesky tunes to take hold. 

If an earworm has a hold on you, scientists believe the following strategies may help obliterate it: 

• Complete the song. 
• Distract yourself.
• Diversify your playlist.
• Mix up the lyrics. 

While you may be tempted to try to suppress earworms, [marketing professor James] Kellaris cautions against it. They’re like a cognitive itch. Scratching them (or in this case, fixating on how to annihilate them) will only make the episode last longer. Instead, when a pesky earworm does get trapped in your head, try to remember that “you can’t always get what you want … but if you try sometimes, you get what you need.”

This week's interesting finds

 

Luke, partner since 2022 (Calgary, Alberta)  

This week in charts 

Fixed income   

Housing   

Investors spend $200mn on ‘worthless’ Bed Bath & Beyond shares 

Investors have spent almost $200mn trading theoretically worthless shares in Bed Bath & Beyond since the homewares retailer went bankrupt at the start of May, in the latest manifestation of the meme stock craze. 

Bed Bath & Beyond was one of a handful of unloved consumer brands that became popular with retail investors during the coronavirus pandemic, with small investors arranging on social media to push share prices far above what most professionals considered rational. 

Many of the companies used the enthusiasm as an opportunity to prop up their ailing businesses by issuing new shares, but Bed Bath & Beyond eventually filed for Chapter 11 bankruptcy protection earlier this year and was delisted. 

Nevertheless, an average of 18mn of the company’s shares have changed hands each day on over-the-counter markets since then, according to Bloomberg data. Users of the Reddit website have been sharing highly speculative theories about possible turnround plans for the retailer. 

When a company declares bankruptcy, it is delisted from the major exchanges and its stock trades on the pink sheets for a fraction of its original value. “These stocks will lurk around until the bankruptcy estate is settled, which can take months or years,” said Steve Sosnick, chief strategist at Interactive Brokers. 

Whether shareholders receive anything at the end of bankruptcy proceedings depends on whether bondholders, who get paid before equity holders, can recover their money. 

However, the bonds of Bed Bath & Beyond are trading at less than 2 cents on the dollar. “The bond market is telling you the stock is worthless,” Sosnick added. 

Subprime Auto Bondholders Face Possible First Hit in Decades 

Bonds backed by car loans made by U.S. Auto Sales and American Car Center, two used-car dealers that shut their doors earlier this year, have been veering into distress in recent weeks. Borrowers have been falling behind on payments, and Citigroup believes that some of the riskiest parts of three different asset-backed deals could fail to return principal to investors. 

Any lost principal would be a rare event in the ABS market, where subprime auto bonds haven’t failed to return investors’ money since the 1990s, Citigroup said. Prices on a bond issued by U.S. Auto Sales, owned by private equity firm Milestone Partners, have dropped to distressed levels, trading at a little over 18 cents on the dollar on June 26, according to Trace data. 

The disruption is a major test for the subprime auto ABS market, where issuance grew by more than 70% to $40.5 billion in the five years through 2021, according to data compiled by Bloomberg News.

The deterioration of the bonds issued by ACC and U.S. Auto Sales comes months after both companies announced they were closing their dealerships. Both firms transferred the collection of payments on their loans, known as servicing, to Westlake Portfolio Management after going bust. A spokesperson for Westlake declined to comment. 

“The bonds are deteriorating in part” because it takes a few months to transfer the servicing of the loans “and meanwhile consumers may cease making payments,” Eugene Belostotsky, a securitized products strategist at Citi, said in an interview. “The lenders went under because borrowers were not paying back the debt, now that’s just accelerating.”’ 

One of the reasons auto ABS losses are almost unheard of is the use of investor protections known as overcollateralization. That means the amount of loans backing the bonds exceeds the size of the principal on the bonds, allowing at least some borrowers to default without any losses for bondholders. 

But for the two subprime issuers that ran into difficulties this year, those protections have waned dramatically on some securities. The overcollateralization for the 2022 U.S. Auto bond has fallen to just 5.5%, compared with a target of 35%, according to a Citigroup report dated June 30.   

This week’s fun finds 

Meghan brings Detroit to the office 

Meghan’s moai (our version of bringing EdgePointers together for a meal) was Detroit-style pizza. Now that’s deep and delicious! 

EdgePoint Football Club “ties” another one on 

After leading for most of the game, the opposing team scored a late goal to tie the match 3-3. With a record of 2-0-2, the team’s still on track to make the playoffs.   

An otter in Santa Cruz is hassling surfers — and stealing their boards 

An aggressive sea otter in California is hassling locals by riding boards she stole from surfers in the lineup. 

Steamer Lane is a legendary point break nestled along the rocky shores of Santa Cruz, home to swaths of experienced surfers, as well as a 5-year-old female sea otter with a growing reputation for repeatedly confronting surfers and kayakers. 

A team from the California Department of Fish and Wildlife (CDFW) and the Monterey Bay Aquarium is looking for the otter to catch and rehome her. Unfortunately, once the otter is caught, Monterey Bay Aquarium spokesperson Kevin Connor told NPR, she won't be able to return to the wild. 

The animal, officially known as otter 841, was born in captivity — because its mother had also been too friendly with humans — and then successfully released into the wild in June 2020, Connor told NPR. It wasn't until September 2022 that she started exhibiting her bizarre behavior at Steamer Lane.   

The mathematically correct way to tie your shoes 

If you’re wearing shoes right now, this is something you can tell simply by looking at them. Look at the bow in your shoes and notice how it sits. 

• Does the knot sit “squared up” above your shoelaces, do the loops want to orient themselves horizontally across your laces, and if you try to move them to an angle in either direction, do they revert to that horizontal position? 
• Or does the knot twist at an angle above your laces, do the loops want to twist to the side at a severe angle rather than sit horizontally across your laces, and if you try to move them to an angle to the horizontal, are they happy to remain there? 

If you’re in the first camp, you’ve likely tied a good (reef) knot that will remain tied all day long. If you’re in the second camp, you’ve likely tied a bad (granny) knot that will come undone at some point throughout the day. Some people, in an attempt to mitigate a bad knot, have adopted the tactic of simply “double-knotting” their shoelaces, but even that is often insufficient to keep them from coming undone throughout the day. (This also applies to any bow tie-wearers out there. If your bow tie wants to twist at an angle, you’re probably granny-knotting it without even thinking about it!) 

With three either/or decisions to affect the configuration of your knot, these eight total possibilities can lead to either a reef knot (which is good) or a granny knot (which is bad), all dependent on which combination you choose.