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Inside Edge is dedicated to providing a collection of investment-related charts, articles and musings that have hit our desks or inboxes. Once in a while we will post materials we’ve created and glimpses of EdgePointers’ lives.

 Resource equities: Inflation protection at a discount

Whether this year's price rises are merely transitory or something longer lasting, the opportunity in energy and metals companies looks very appealing from a historical perspective. Energy and metals companies are trading at a discount of over 70% to the S&P 500 Index, the biggest discount seen with the exception of other points in the last year or so. In fact, energy companies are trading at the cheapest levels in absolute terms ever seen prior to Covid.


The core CPI price index is now firmly above the pre-COVID trend.

Three categories that comprise ~5.5% of core CPI drove half of the monthly increase:

i) used cars & trucks

ii) car & truck rentals

iii) public transportation (largely reflecting airline fares)


During the peak of COVID-19, the US box office didn't just slow down - it completely disappeared. So, it's somewhat comforting to see that on May 28th A Quiet Place Part II, the sequel to the successful horror film from 2018, managed to rack up almost $20m on its opening day, and more than $57m over the course of the entire Memorial Day Weekend. 

Benefits of not seeking validation  

There is a fundamental mismatch between the frequency of the feedback an investor gets from market quotations and the time required to determine whether a specific investment or a strategy is working. There will always be critics who are not shy about second guessing your decisions. When it comes to investing, there are massive benefits that accrue to those that can totally ignore short term market movements. 

Visualizing the Snowball of Government Debt 

The Genetics of Investment Biases 

The chart below illustrates one of the key findings of the study and shows that twins in an identical pair display much more similar investment biases compared to twins in a fraternal pair. This finding suggests that investment biases are partly genetic. 

How To Do Long Term

Long term is harder than most people imagine, which is why it's more lucrative than many people assume. Everything worthwhile has a price, and the prices aren't always obvious. The real price of long term - the skills required, the mentality needed - is easy to minimize, often summarized with simple phrases like "be more patient," as if that explains why so many people can't.

To do long term effectively you have to come to terms with a few points.

MacroVoices #273 Larry McDonald: Dollar Down & Gold, Oil, Uranium Up

 Erik Townsend and Patrick Ceresna welcome Larry McDonald to MacroVoices. Erik and Larry discuss: 

• Relationship between inflation and treasury yields 

• Outlook on US/China relations 

• What to expect in equity and bond market 

• Drivers of upcoming price increase in oil 

• Trading opportunities in energy market 

• "Alpha Male Central Banker" 

• Breakdown of the dollar and its implications 

• Oil demand expectations in the re-opening 

The Fall of the Titans!

The corporate titans in a traditional passive tracker strategy are so engrained in our daily lives it takes a healthy imagination to envision they may not stand the test of time. Nevertheless, in the same way the Greek Titans believed their rule was safe before it collapsed, the tables can also turn for these corporate titans. A half-century of history shows that the market's titan stocks constantly change.

Warm-weather reads and listens - Spring 2021 list

 Regardless of what stage of opening your province is in, here are the latest books, blogs and podcast recommendations from the Investment team that can keep you socially distanced and mentally active.

It's easy to lose faith in reporting when you read a story like this:

The story is about Snowflake moving out of California. This article fails to highlight that maybe tax is the leading cause. Here is actual data comparing California's tax rates to Montana's:

Thank you Canada for your discounted Oil - Sincerely, USA

Climatologists ring drought alarm

Farmers should not underestimate the drought of 2021, says a North Dakota climatologist.

Data from NASA shows that millions of acres of farmland, in northern North Dakota and across the border into Manitoba and Saskatchewan, have extremely low soil moisture this spring. As of the middle of May, NASA rates the soil moisture in the region at the one to two percentile - for soil that is zero to 100 centimeters deep.

The U.S. Climate Prediction Centre is forecasting a warmer than usual June, July and August for the northern plains. That means any rain that does fall, is more likely to evaporate. 

Fiscal stimulus is a larger % of GDP than monetary stimulus when compared to the 2008 Great Financial Crisis. 

ESG improvers

It was found that companies that received ESG rating upgrades outperformed an equal-weighted MSCI ACWI Index during the next 12 months by 0.93%, while stocks that were downgraded lagged (Exhibit 5). Interestingly, the outperformance isn't driven by great companies getting a little better. Instead, companies that were previously poorly ranked (with a CCC rating) but subsequently received a two-notch upgrade generated the strongest outperformance (Exhibit 6).

In the US, the most amount of outperformance (+4.3%) is from companies that had the lowest ESG scores a year ago but have improved their scores the most over the past year. 

In Europe, there is also outperformance by the worst offenders that are getting better, although the correlation is less strong than in the US, likely due to more stringent constraints and regulations that make it more difficult for European investors to own the worst offenders.


Examining the importance of flexibility at the 13th annual Cymbria Day  

At our 13th annual investor day, we discussed how our flexibility benefits us in different ways, from the spectrum of investments we can make to the structure of our Investment team.

10-Year Inflation Expectations 

ESG in the Canadian energy sector: Whitecap Resources

Whitecap Resources published an ESG newsletter highlighting some of their key ESG initiatives:

 • Whitecap will be close to net neutral in 2021 and will continue to pursue net negative emitter status. They remain focused on reducing overall emissions and expanding their carbon capture and storage projects. 

• Whitecap currently sequesters more carbon than it emits, and their New Energy team is hard at work to find economic solutions to further reduce their carbon footprint and advance additional low carbon opportunities. 

• A recent gas injection scheme was developed to avoid emissions during a facility turnaround. This is one of many innovative ways that the team has introduced to maintain and improve upon their environmental stewardship. 

Whitecap Resources is a holding in the EdgePoint Go West Portfolio. This is for informational purposes only and it not a recommendation to buy the stock. 

Magazine covers  

You know by the time the journalists get wind that things are good, it's probably almost time for it not to be anymore. We just saw the best 52-week period for stocks in over 75 years. You know what they were telling you the week that rally started? These magazine covers were published at the perfect time to be buying stocks. 

Below is another favorite from the New Yorker that shows a chart literally falling from the bottom of earth. Notice the date. That week the stock market bottomed after one of the greatest collapses in stock market history. It then went on one of the most historic runs of all time, right after this cover was published.

Inflation - United States

This chart shows the rolling 5-year cumulative percentage increase in the consumer price index for the United States compared to the rolling 5-year cumulative percentage increase in the broad money supply per capita: 

How to lose money when the stock market is at all-time highs  

From the bottom in late March of last year, the U.S. stock market was up nearly 75%. This was the best 12 month return ever recorded since 1950. Nearly 96% of stocks in the overall U.S. stock market showed positive returns in that time. It's highly likely we will never experience a 12 month period of returns like that again in our lifetime. For all intents and purposes, the one year period following the bottom of the Corona Crash was the easiest environment in history to make money in the stock market. If you think this type of market is normal, you're sorely mistaken. It's not always going to be this easy. In fact, the stock market has already stopped being so easy in 2021 and a number of stocks are currently getting crushed. And it's not just any stocks; it's many of the stocks retail investors flocked to last year following the crash:

Supply chain squeeze 

Reopening is ushering in mismatches in supply and demand:

Source: Morgan Stanley 


Humans are pattern-recognition machines. We see patterns everywhere! In fact, we're so good at recognizing patterns that we often see them where they don't even exist. 

This shows up frequently anywhere there are big bodies of data. And while well-intentioned, this is one of the big behavioral mistakes we make time and again in personal finance. We look for patterns. And guess what, they absolutely exist, right up until the point where you try to invest your money based on the pattern. Then *Poof!* they vanish into thin air. 

David J. Leinweber from Caltech, apparently figured out how to predict the stock market using just three variables: 

1- Butter production in the United States and Bangladesh. 

2- Sheep populations in the United States and Bangladesh. 

3- Cheese production in the United States. 

It turns out these three variables predicted 99% of the stock market's movement! 

There's only one problem: The joke's on us. 

In our very human pursuit of patterns, we start seeing things that aren't really there. We think if something happened a certain way in the past, then it will surely continue into the future. We start to believe-we desperately want to believe-that this pattern will have predictive value. 

But it doesn't. And that's the thing about most patterns-they don't predict the future; they just describe the past. 

While some of these silly data mining tricks might be interesting to talk about, they don't actually help us. 

Believe me, I've gone down the rabbit hole many times. For years, anytime someone approached me with this type of pattern, I would feel like I had found the Dead Sea Scrolls. But each time, the same thing happened. The pattern existed right up until it was time to invest... and then it didn't. 

Now, when people approach me with this research-and it's always called "research"- promising to show me a new pattern in the data, I come back to them with a magic pattern of my own. 

"It turns out," I tell them, "that the only pattern that will influence your investing success is your behavior." 

• Can you break the pattern of buying high and selling low? 

• Can you break the pattern of chasing after the next "big" investment? 

• And perhaps most importantly, can you buy low-cost investments in a diversified portfolio based on your values and goals and then simply ignore it?

 Earnings, losses and relative returns 

Why interest rates are rising 

If you combine that fact with excessive US money supply growth and massive excess savings you can understand why investors feel unsettled. Without doubt, the almost absurd rise in excess savings everywhere is a result of the lockdown(s). Consumers have simply not been able to spend what they would have spent under normal circumstances, hence the big war chest building up.

The combination of those three factors - rising wage growth, rapid money supply growth and huge excess savings - can only lead to higher inflation (say the bond bears), hence the rise in bond yields. Officials at the Federal Reserve Bank don't disagree with that but, importantly, they argue that the rise in inflation will be transitory and that inflation will begin to fade again in 2022, hence why they don't need to act (they say). Only time can tell who is right and who is wrong. 


 About 44% of older millennials born between 1981 and 1988 report having been diagnosed with at least one chronic health condition, according to a recent survey. 

Canadian oil companies set self-imposed penalties if they don't meet sustainability targets  

Canadian oil sector companies are willing to pay more interest on their debts in exchange for more environmental, social and governance credit from investors. 

In a first for the North American energy industry, midstream company Gibson Energy Inc. announced a sustainability-linked credit facility. Gibson's sustainability targets include a reduction in emissions and also an effort to boost diversity at the oil storage and pipeline company - as energy companies try to improve their credibility on the S and G components of ESG. 

Used car prices seem primed for another spike based on JDPower Auction data.

Red line indicates used car auction data pricing. The blue line indicates used car prices. Used car auction data pricing is a leading indicator of used car prices. 

Rents have started climbing meaningfully

Source: ApartmentList data

Massive spike in mentions of "inflation".  Many of the mentions relate to rising commodity prices, but also scarcity of workers despite elevated unemployment. 

The sure-fire way to get out of debt 

Growth-value rotation to prompt major rebalancing in ETFs 

Investors in a $15bn exchange traded fund are being warned to brace for a major rebalancing at the end of May that could see a number of major holdings removed. 

iShares MSCI USA Momentum Factor ETF is currently heavily weighted to growth stocks in the broader information technology sector, which accounts for 42% of assets. Amazon, which currently accounts for 4.6 % of the portfolio, could be removed altogether. This ETF currently has minimal exposure to traditionally value-oriented financials, at 1.5% and no energy sector holdings at all. In a sign of the market rotation, energy companies such as Occidental Petroleum and Valero Energy, which have more than doubled in value over the past six months, are likely to be added. Other stocks at risk of ejection from this ETF include Costco Wholesale, Netflix and Nike. 

CARBIOS a company pioneering new bio-industrial solutions to reinvent the lifecycle of plastic and textile polymers, and MICHELIN, a leader in sustainable mobility, have taken a major step towards developing 100% sustainable tires. Michelin has successfully tested and applied Carbios' enzymatic recycling process for PET plastic waste, in order to create a high tenacity tire fibre that meets the tire-giant's technical requirements. 

Crypto vs. Fiat, and why newer isn't always better

While opinions vary on Bitcoin, we have seen particularly enthusiastic endorsement emanating from the technology/software industry, including many high-profile industry figures. Some Silicon Valley companies like Square and Tesla have purchased Bitcoin at the corporate level, and Paul Graham even went as far as likening Turkey's recent crypto ban to banning the microprocessor in 1976. To these folk, Bitcoin is obviously the way of the future. This zeitgeist recently prompted someone to ask on Twitter, why are so many intelligent & capable software people so quick to embrace Bitcoin and the "future of money" with little in the way of critical thinking and only a cursory understanding of the issues?

The answer, I believe, is that these folk have - based on many decades of experience - a strong predisposition to believe that anything that is both *new* and *digital* must be superior to prior "old world" solutions. 

Instead of uncritically embracing the hype, let's take a step back and think through the issues. There are really only two potential applications/needs cryptocurrency might hope to fulfil, aside from functioning purely as instruments of speculation: 

(1) to function as a currency/means of exchange/payment, displacing/acting as a (superior) alternative to fiat currencies; and/or 

(2) to function as a "store of value". The default presumption is that - owing to putative problems/shortcoming associated with fiat currency (some true, some imagined) - Bitcoin et al are unquestionably superior - indeed a natural evolution towards next-generation solutions. 

Unfortunately, the reality is a lot more complicated than that.

How high could prices go? It's anyone's guess, because prices are driven purely by demand and supply, and demand is partly a function of price increases. However, the total amount of global wealth was estimated by Credit Suisse to be some US$360tr at 2019 year-end 1. It has probably increased since then - let's say to US$400tr. The total market cap of crypto, at some US$2.0tr, is therefore now already about 0.5% of total global wealth.

Could it go to 5%? Anything is possible. History cautions against trying to call the peak of human speculative excess - things can be taken to utterly unimaginably absurd extremes. But in the long run, I must say it is very difficult for me to imagine crypto settling out even at 2.5-5% of total global wealth levels, let alone anything higher. US$2tr in combined market cap also also represents about US$250 per global capita - including children and people from less developed countries in Africa etc. There is still room to run further in the short term - there always is - but on the long sweep of things I wouldn't be investing today with the expectation of making 100x your money. 

I used to believe Bitcoin would likely eventually go to zero. I no longer believe that. My prediction now is that we see repeated waves of speculative excess - huge giddy run ups, followed by spectacular collapses; long periods of disinterest/sideways action; and then renewed eco booms. People will always like to speculate, and the smaller the market cap gets after any bust, the less buying will be required to support and push up the price. After a bust, at some level the price will get low enough for a number of people to step up to the plate and bet on another boom that windfalls them 20x. And the cycle will repeat. It doesn't make a lot of rational sense, but then again nor does Vegas.

Fees don't tell the full story 

The Classic 60/40 Investing Strategy Could Now Be Working Against You

Some financial advisors and investors are wrestling with the standard portfolio known as "60/40". For years it was a go-to for investment assets: 60% equities, 40% fixed income. A diversified basket of stocks gives you growth potential, and the bonds give you safety and ballast. 

These days, though, you don't hear as much about this old financial rule of thumb. In fact some market observers have called the idea "no longer good enough," "leading investors over a cliff," or even "dead" altogether. 

Why is that? 

When bonds used to pay 6-8% and interest rates were falling, the 60/40 model worked great. But as they say, past performance is no guarantee of future results, and that is especially true with the 60/40 portfolio. The 40% (bonds) which is supposed to reduce risk is now fraught with interest-rate risk, and if interest rates rise, the bonds will go down in value. 

E&P spending in the US - It's still not coming back

Producers have historically put the brakes on capital spending when commodity prices fell, then stomped on the accelerator like a race car heading into a straightaway when prices rose. But recently unveiled 2021 budgets for many E&Ps suggest that, even with the rebound in prices, they are maintaining a conservative investment paradigm that highlights strengthening balance sheets and rewarding shareholders at the expense of rapid production growth.

Driving on U.S. Highways Tops 2019 Levels 

Here's the latest sign of the great U.S. gasoline comeback: For the first time since the pandemic started, driving on the nation's highways is higher than at the same time in 2019. 

US E-Commerce Penetration 

Overall US ecommerce penetration has not actually settled very far from the underlying trend line in the past year.

Tech, a big ESG overweight, isn't all that green

Technology is one of the most over weighted sectors by ESG funds, but we find it has some of the highest indirect emissions among service industries. 

Bitcoin purchases' carbon footprint

$1 billion in Bitcoin purchases is equal to 1.2 million cars driven over the course of a year

2021 Q1 EdgePoint commentary 

Equity Commentary : Forgetting the lessons of 2020 - 1st quarter, 2021

This quarter, investment analyst George Droulias looks at why 2020 truly was a year to forget from an investment perspective. 

Fixed Income Commentary: The negative art of investing - 1st quarter, 2021 

This quarter, portfolio manager Frank Mullen discusses how the Investment team not only uncovers undervalued investment opportunities, but also makes active choices to avoid lending to many businesses and areas of the market where others may feel comfortable doing so. 


More pork in the basket?

Steepest cost pressures since 2008 

Inflationary pressures have risen worldwide to the highest level in at least a decade as a surge in demand is accompanied by widespread supply constraints in the provision of goods and services. The survey data points to a steep rise in consumer price inflation across the world in coming months, most notably in the US, where prices charged for consumer goods rose sharply. 

Unprofitability and valuation 

Desperate reach for yield

With the fed promising not to raise rates for a few more years investors are becoming increasingly desperate for yield. That desperation has pushed High Yield credit spread to 3.22%, approaching the lowest level in the last 10 years (3.16% in October 2018).

We're hiring! 

We're always looking for talented people who can help us achieve our goals and we understand that extraordinary human ability is a scarce resource in high demand. If you think you've got some and are interested in our company, please send your resume to: WeAreGrowing@EdgePointwealth.com.

Currently, we are looking to hire a Product Manager 

This week in charts 

Margin debt

As of late February, investors had borrowed a record $814 billion against their portfolios. That was up 49% from one year earlier, the fastest annual increase since 2007, during the frothy period before the 2008 financial crisis. Before that, the last time investor borrowings had grown so rapidly was during the dot-com bubble in 1999. 

Surprisingly Risky 

Over the past eight months, 10-year Treasury notes have shed 9.5% of their value, while 30-year bonds have dropped by 23.9%. 

The repatriation of demand by the Chinese

Annual % change in the Feds balance sheet from 2002-2021 

The earnings yield of global tech stocks is now below the 10-year Treasury yield.

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