Friday, October 28, 2022

This week's interesting finds

Daniela Orla – EdgePoint Partner since 2015 (Toronto, ON – Queen & Spadina) 

Science or tobacco (Go West) - Geoff MacDonald talks about how fossil fuels have become the "new tobacco" in the media.

This week in charts 

Back to brick and mortar 

CPI contributor change – August vs. September 2022 

Where Canadian immigrants are coming from   

Immigrants make up the largest share of the population in over 150 years and continue to shape who we are as Canadians 

More immigrants are now working in Canada than before the pandemic, and, from 2016 to 2021, immigration contributed to 79.9% of the growth in Canada's labour force. 

According to 2021 Census data, almost 1.9 million children younger than 15 years had at least one parent born abroad, accounting for almost one-third (31.5%) of all children in Canada. This proportion was up from 26.7% in 2011 and 29.2% in 2016. 

BASF to downsize ‘permanently’ in Europe 

BASF, which produces products from basic petrochemicals to fertilisers and glues, spent €2.2bn more on natural gas at its European sites in the first nine months of 2022, compared with the same period last year. 

[CEO Martin] Brudermüller said the European gas crisis, coupled with stricter industry regulations in the EU, was forcing the company to cut costs in the region “as quickly as possible and also permanently”. 

The company announced two weeks ago that it would reduce costs by €1bn over the next two years, targeting mainly “non-production areas” such as IT, communications as well as research and development. 

Brudermüller, who has previously warned that an embargo on Russian gas would plunge Germany into its biggest crisis since the second world war, said on Wednesday the cost cuts were necessary to “safeguard our medium and long-term competitiveness in Germany and Europe”. 

German exporters rethink €100bn ‘love affair’ with China 

Since the turn of the millennium, China has gone from accounting for just over 1 per cent of German exports to commanding a 7.5 per cent share of sales abroad, making it second only to the US. In 2021, more than €100bn worth of German goods were sold there. 

Source: Financial Times 

Thorsten Benner, director of the Global Public Policy Institute in Berlin, described the ties as the main factor in the “golden age of the German economic model”, seen during the latter stages of Angela Merkel’s 16-year reign as chancellor, which ended last year. 

Alicia García-Herrero, a senior economist at think-tank Bruegel, said the buoyancy of the links between the two export powerhouses had been replaced by a sinking feeling in Berlin as exports slide. “Germany is losing its trade surplus and part of its competitiveness, partially because China has moved so rapidly up the value ladder.” 

It comes at a sensitive moment for the broader relationship between the two countries. Russia’s invasion of Ukraine has given fuel to German critics of Beijing, who argue the country’s economic ties are trumping foreign policy goals and leading to collaboration with prospective geopolitical rivals. Olaf Scholz, who will fly to Beijing next week for his first meeting with Chinese leaders as German chancellor, is set to unveil his new China strategy next year. He is under pressure from his coalition partners, the Greens and the Free Democrats, to loosen ties and courted controversy when he asked ministries to back an investment from Cosco, a state-owned Chinese shipping conglomerate, in a container terminal at the Port of Hamburg. The deal was approved earlier this week, though Cosco took a smaller-than-planned stake, which will limit its capacity to influence decision-making. 

“The China strategy will include clear messages on the need to reduce dependencies, and diversify supply chains and trading partners,” said Benner. 

Misreading Xi and the rise of Li 

The professional China commentariat and its echo chamber in the Western media were blindsided by the appointment of Shanghai party head Li Qiang as the country’s premier, the number two position to Xi Jinping. 

Li is a tech-savvy supporter of high-tech entrepreneurship who believes that China’s future lies in the digital economy. Xi, the Western press insisted with near unanimity, had reverted to Maoism. 

In fact, Li’s appointment as premier-designate was foreseeable as well as foreseen. Asia Times wrote as much on October 21, forecasting that Xi would opt for retiring four out of the seven Politburo Standing Committee members, including not only Premier Li Keqiang, but also the widely touted premiership candidate Wang Yang, and would not miss the opportunity to install a new, younger and different cast of leaders. 

Li is the Shanghai party chief. Few if any previous Shanghai leaders have failed to advance to the Standing Committee, Xi included. That his advance to the number two position nonetheless came as a surprise to most Western analysts merely proves how much so many have misread Xi in particular and Chinese governance in general.   

This week’s fun finds 

Discovery Unlocks Potential of 'Special' Muscle 

And Marc Hamilton, professor of Health and Human Performance at the University of Houston, has discovered such an approach for optimal activation – he’s pioneering the “soleus pushup” (SPU) which effectively elevates muscle metabolism for hours, even while sitting. The soleus, one of 600 muscles in the human body, is a posterior leg muscle that runs from just below the knee to the heel. 

Building on years of research, Hamilton and his colleagues developed the soleus pushup, which activates the soleus muscle differently than when standing or walking. The SPU targets the soleus to increase oxygen consumption – more than what’s possible with these other types of soleus activities, while also being resistant to fatigue. 

So, how do you perform a soleus pushup? 

In brief, while seated with feet flat on the floor and muscles relaxed, the heel rises while the front of the foot stays put. When the heel gets to the top of its range of motion, the foot is passively released to come back down. The aim is to simultaneously shorten the calf muscle while the soleus is naturally activated by its motor neurons. 

While the SPU movement might look like walking (though it is performed while seated) it is the exact opposite, according to the researchers. When walking, the body is designed to minimize the amount of energy used, because of how the soleus moves. Hamilton’s method flips that upside down and makes the soleus use as much energy as possible for a long duration.   

Save Like A Pessimist, Invest Like An Optimist 

But there was another side of Bill Gates. It was almost paranoia, virtually the opposite of his unshakable confidence. 

From the day he started Microsoft he insisted on always having enough cash in the bank to keep the company alive for 12 months with no revenue coming in. In 1995 he was asked by Charlie Rose why he kept so much cash on hand. Things change so fast in technology that next year’s business wasn’t guaranteed, he said, “Including Microsoft’s.” In 2007 he reflected: 

"I was always worried because people who worked for me were older than me and had kids, and I always thought, ‘What if we don’t get paid, will I be able to meet the payroll?’” 

Optimism and pessimism can coexist. If you look hard enough you’ll see them next to each other in virtually every successful company and successful career. They seem like opposites, but they work together to keep everything in balance. 

What Gates seems to get is that you can only be an optimist in the long run if you’re pessimistic enough to survive the short run. 

The best way for most people to apply that is: Save like a pessimist, invest like an optimist. 

1 in 3 Gen Z Adults Have Seen a Horror Movie in Theaters in the Past Month 

It's spooky how fast Spirit Halloween stores pop up. Here's how the retailer does it 

Beneath the songs and the memes, the story of Spirit Halloween is really one of urban development patterns. 

Perhaps above all, Spirit's business model hinges on space. Lots of it. Spirit looks for anywhere between 5,000 and 50,000 square feet of space, but in the company's own words, "no store is too large (or too small)" — and the company has no problem finding the space it needs. 

Drop any ZIP code or address into the company's store locator, and a flurry of orange arrows is almost sure to pop up. 

The company finds this space largely in abandoned buildings — malls that have shut down, retailers that have filed for bankruptcy and so on. 

"Spirit is pretty much a bottom-feeder business that works only at the expense of other stores; if there weren't vacant storefronts, this business wouldn't exist," writes Rachel Quednau, program director for Strong Towns, an urban planning advocacy group that emphasizes incremental city planning. 

From January to August, the company spends its time scouring the country and scoping out properties for temporary leases, and a big part of what makes this a reliable process for Spirit Halloween is that these abandoned spaces are otherwise unusable within local economies.

Friday, October 21, 2022

This week's interesting finds

EdgePoint Q3 2022 commentaries are now live on the website. This quarter: 

Think different (equity) – Jeff Hyrich talks about why we “think different” from the investment industry. 

• Let’s get ready to rumble (fixed income) – Frank Mullen discusses two behavioural biases that lead to sub-optimal returns and how we believe EdgePoint is structured to avoid them.

Geoff Goss – EdgePoint Partner since 2008 (Halifax, NS – Armdale Rotary)   

This week in charts 

Canadian mortgages   

These Global Cities Show the Highest Real Estate Bubble Risk  

Bears before bulls?


Figure 1A shows that the decline in childbearing in the U.S. accelerated between March 2020 and January 2021, with Table 1 showing the number of births falling by 76,000 more than anticipated by the pre-pandemic trend (column 3). The qualitative pattern for the total fertility rate is remarkably similar: TFR fell from around 1.75 in January 2020 to 1.6 in January 2021, over 3 times the rate of decline from 2007 to 2020. Notably, the accelerated decline in childbearing began around March 2020, about nine months too soon for domestic pandemic lockdowns or the April 2020 pandemic surge in unemployment to affect conceptions. In order for the shortfall in births beginning in early 2020 to reflect falling conceptions, behavioral changes would have had to start in June 2019, well before COVID-19 had even been identified. In short, declines in fertility rates during 2020 happened too quickly to reflect changes in childbearing desires in response to the economic uncertainty and job losses caused by COVID-19.

Of more than 400 listings where companies raised at least $100mn between 2019 and 2021, 76 per cent are below the price at their initial public offering, a Financial Times analysis of Dealogic data shows. The group’s median return since their respective IPO dates is negative 44 per cent. 

The laggards include such-hyped stocks as Robinhood Markets, Lyft and DoorDash, all of which went public during a market boom that ended in late 2021. The Nasdaq Composite index that contains many growth companies has fallen 32 per cent this year. 

With share prices plunging, private equity groups are aggressively circling newly public companies as potential buyout targets, several Wall Street executives said. And some corporate boards have been receptive. 

“When you think about the amount of private capital that has been raised that hasn’t been deployed, then look at how public equity valuations have re-rated, it feels like it’s going to be a natural pairing up,” said David Bauer, who runs equity capital markets at KKR, the investment group known for its private equity business.  

This week’s fun finds 

Ask an AI Art Generator for Any Image. The Results Are Amazing—and Terrifying. 

No humans were involved—no sketch artists, no photographers, no photo editors. Just me, my laptop and OpenAI’s Dall-E 2. (The name is a play on Pixar’s animated robot WALL-E and surrealist artist Salvador Dalí.) I typed those phrases into a text box and out popped the images within seconds. 
You might look at that image of a “Monkey recording a podcast” and think: “Oh, the system is just mashing together images of monkeys and microphones!” Nope. 

The AI systems interpret your words and create fully original images. You could insert the same prompt and never get this same image. 

So how did the AI know what a podcasting monkey would look like? By studying the AI equivalent of flashcards. Programmers train AI using hundreds of millions of captioned photos, which it deconstructs in a mathematically complicated process. By now, the Dall-E 2 AI has deconstructed many images of monkeys and many scenes of podcasting. Then, through another complex process called diffusion, it turns a meaningless cloud of pixels into an image with a reasonably high probability of resembling what you requested. In this case, that pensive little guy in headphones, talking into a studio mic.

Friday, October 14, 2022

This week's interesting finds

Tim NgEdgePoint Partner since 2012 (Vancouver, BC – Coal Harbour)

Photo by one of our external advisor partners.

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This week in charts 

There’s always uncertainty in the world

The customer isn’t always right

Toronto traffic 

There Will Be Drawdowns

By now, the litany of reasons for the market rout are known to just about everyone: war, inflation, tightening monetary policy, and a global economic slowdown. All news seems to be bad news and as one might expect, forecasts of impending doom are running rampant.

During such times, it’s hard to imagine stocks ever going up again. Which is undoubtedly leading many investors to either panic and sell or hold off on investing new money until the “dust settles.” In theory, their reasoning is sound: by waiting for the market “to bottom,” they’ll avoid further downside and be able to buy back in at lower prices.

But in practice, this strategy almost always fails. For if they’re scared to invest today, what are the odds that they will be buyers if prices go down more and the news only gets worse? Not very good. Based on the evidence of investor returns trailing fund returns across all categories, they’re much more likely to do the opposite. The 1.73% annualized “behavior gap” over the last 10 years is a direct result of investors buying high and selling low, again and again.


This week’s fun finds

Too Many Songs, Not Enough Hits: Pop Music Is Struggling to Create New Stars

Insiders have plenty of theories about why the market for new artists has become more difficult. Chief among them: a deluge of new music. It has become so easy for aspiring artists to release tracks that songs are hitting streaming services by the hard drive-full, making it harder for any single tune to stand out amid the glut. “Due to the sheer number of things coming out, songs that were shoo-ins for being hits five to 10 years ago now have to fight to see daylight,” says veteran producer Warren “Oak” Felder (Usher, Demi Lovato). Even the biggest record companies are taking notice — “If there are 80,000 tracks a day being uploaded on major [digital service providers], then [major-label] market share is going to be diluted by default,” Sony Music Group chairman Rob Stringer told investors this summer.

In addition, the reach and influence of once-powerful mediums like radio and late-night TV have also declined. (“A No. 1 radio song doesn’t mean fuck anymore,” laments one longtime A&R executive.) Managers say that even marquee streaming playlists don’t have the commercial oomph they had just a few years ago. (“Now, just because you’re in a top 10 slot on a big Spotify playlist, it doesn’t mean your audience is growing,” one manager says.)

The rise of TikTok has complicated matters, too. The platform has become a hit-maker — helping Em Beihold’s “Numb Little Bug” and Nicky Youre’s “Sunroof” climb the charts, for example — but it’s an unpredictable marketing tool, less susceptible to manipulation and less responsive to star power than other platforms. Engineering a viral moment is akin to walking into a corner store and emerging with a winning lottery ticket. “There doesn’t seem to be any rhyme or reason to what breaks there,” says Justin Lehmann, who manages Aminé and Khai Dreams, among others. “And without breaking there, it’s difficult to say what else can cause a big moment to happen for anybody.”

Taken together, all these factors mean that seizing — and then holding — the attention of the music-loving masses is that much more challenging. “It used to be that you released an album, got Rolling Stone to review it, got on tour, got on late-night TV, and that was how you broke,” says one senior executive at a major label. Even if luck was a factor, the path was clear. “It was four or five things. Now you need four or five things a week, or at least a month, or else your streams don’t go up.”

The Art of Manliness podcast (45 min)

Our lives are populated by rituals. Baptisms. Funerals. Graduations. Singing happy birthday, chanting cheers at a sports event, saying grace before dinner. When we perform rituals, there’s no causal link between the behavior and the hoped for effect; for example, there’s no causal connection between exchanging rings at an altar and becoming wedded to another human being.

But my guest would say that doesn’t mean that rituals are useless and irrational; in fact, doing two decades of research on rituals caused him to do a one-eighty on his perception of their value. His name is Dimitris Xygalatas and he’s an anthropologist and the author of Ritual: How Seemingly Senseless Acts Make Life Worth Living. Today on the show, Dimitris explains what defines a ritual and how a ritual is different from a mere habit. He shares how a greater understanding of ritual is upending our theories of human civilization, and the idea that “first came the temple, and then the city.” Dimitris describes how rituals can be seen to have their own kind of logic and purpose, as they build trust and togetherness, serve as an effective way to deal with stress, signal someone’s commitment to a group, and ultimately contribute to people’s overall well-being.

Friday, October 7, 2022

This week's interesting finds

This week in charts…and photos 

Stefania D’Angelo – EdgePoint Partner since 2019 (Toronto, ON – The Annex) 

An EdgePoint Thanksgiving Recipe 

The market might be serving some turkeys lately, but making long-term decisions based on fear is a recipe for disaster.   

Oil demand 

Retail Real Estate Is Enjoying Its Biggest Revival in Years 

More stores opened than closed in the U.S. last year for the first time since 1995, according to an analysis by Morgan Stanley, and some analysts say they expect that trend to continue this year even with recession fears rising. 

The retail real-estate industry’s turnaround reflects a wrenching, decades long adjustment that included hundreds of retailer bankruptcies, widespread vacant storefronts and plummeting demand for enclosed malls. Over the past dozen years, construction of new retail has slowed significantly after many years of overbuilding. 

Instead, most developers are opting to renovate outdated properties rather than building new ones. Those that do embark on new projects are more cautious, usually securing leases from tenants before breaking ground. More and more companies that started as online only retailers, like Warby Parker Inc., are also turning to real estate to attract customers and boost growth. The eyeglass retailer opened nine new locations in the second quarter, bringing its total at the time to 178 stores, according to financial filings. 

And after being forced to buy more things online at the start of the pandemic, many people have decided they like shopping in stores for items ranging from clothing to groceries, in a reassuring sign for the staying power of bricks-and-mortar retail.   

This week’s fun finds 

As part of our annual tradition, Mimi and Matilde are setting up the turkey lunch they organized. 

UFO parade or Starlink satellites? 

EdgePointer and frequent Inside Edge contributor Craig captured this image in the Alberta night sky.

David Portnoy “investing" journey 

1) Click here 

2) Turn on sound 

3) Warning – Some salty language   

Bitcoin mining: Watt is money? 

Using exclusive data from the Cambridge Centre for Alternative Finance, Rhizomatiks gives fresh insights into the impact of the vast energy used to mine cryptocurrency - a business that consumes the same electricity as a medium-sized country. This film, with original music, was made to be viewed as a live video installation and as an online film.