MARKET WATCH

August was another strong month for global equities. With few exceptions, indexes rose 2-4%, with emerging markets and natural resources enjoying the strongest performance. The China 500 and Canadian metals indexes both rose 9%. Meanwhile, Canadian gold stocks rose an impressive 22%, despite gold prices rising only 2%. This may seem puzzling, however, gold stocks are still catching up to the yellow metal’s performance. More importantly, with gold trading well above $3,400, producers are generating very strong levels of cash flow.

Surprisingly, American small-cap stocks also performed strongly, rising 6% in August - three times that of the large-cap based S&P 500. This is notable because American equity outperformance has been mostly due to large-cap companies, but especially "the magnificent seven". Given the high valuation of the S&P 500 and that the U.S. small-cap index is still negative year-to-date, a continued trend in small-cap outperformance could negatively impact large American companies.

If U.S. large caps were to correct, we should fare relatively well given our underweight position. I’m also confident our holdings in more reasonably valued investments (Canadian, Asian, and natural resource equities), along with our increased fixed income levels, should be an effective ballast against a volatile market.



As always, feel free to reach out if you have any questions, and if you’re looking for more timely information on the markets, you can find them on the research section of my website.

BOOKS

A Man Called Ove by Fredrik Backman: One of Tanya’s friends recommended this novel. It’s fun, touching, and left me thinking. What more can you ask from a book?

CHINA: THE WORLD'S FIRST ELECTROSATE

In Technology and the Rise of Great Powers, Jeffry Ding argues that the widespread adoption of existing technology can be more crucial to a nation's economic success than invention itself. With that in mind, let's examine one of China's most significant modernization strategies: mass electrification.

Despite being blessed with natural resources like coal, iron ore, and especially rare earths, China lacks vital fossil fuels. To overcome this energy disadvantage, China has aggressively expanded its electrical grid, becoming the world's first "electrostate".

Consider the following:

• Electricity accounts for only 20% of final global energy consumption (fossil fuels still dominate). But China has already reached 28%, double that of 20 years ago. The U.S. percentage has barely changed
• China has 3,400 GW (gigawatts) of installed electricity generation - exceeding that of Europe and America combined! (A gigawatt can power approximately 750,000 homes in developed nations.)
• China has 42 ultra-high-voltage transmission lines, (40,000 kilometers), with another 12 under construction—the U.S. has none
• China is the undisputed global leader in renewable and nuclear technology
• Chinese electricity prices range from 1/8 to 1/2 that of American prices
• China is building over 20 nuclear power plants, while the US plans to refurbish only one or two

Why is this important?

This mass electrification is allowing China to:

• Dominate global manufacturing
• Reduce their reliance on fossil fuels—though more progress is needed
• Electrify transportation (cars, trucks, and high-speed trains)
• Power the technologies of the future, such as data centers, AI, semiconductors, drones, and robots

Meanwhile, developed countries face rising electricity prices and struggle to connect new power to the grid. It takes at least five years to connect to the grid in the U.S., and 10 to 15 in the UK.

If these trends continue, China’s cheap and widespread electricity will provide increasing advantages as the global economy modernizes. It’s one of the many reasons I’m excited about Chinese equities.

ARTICLES, LETTERS, DOCUMENTARIES, PODCASTS

Mining: The Bedrock of Innovation and Industrial Revival by Crescat Capital: This report highlights the severe underinvestment in mining, especially in the U.S., despite its importance for the future economy. Mining companies are also trading at historically low valuations relative to other industries.

Key points include:



• The U.S. is becoming increasingly dependent on imported metals
• Relative to GDP, American miners have dramatically reduced their spending on exploration decade after decade
• Before this decade, per capita consumption of electricity fell for over a century - that trend is reversing
• US electricity production has flatlined since 1995. Meanwhile, China’s has increased exponentially. Both trends are likely to continue. (See above for more on China’s electricity production)    
• From 1900 to 1985, mining equities represented 6-11% of the S&P 500 market capitalization - today it’s only 1%
• Apple is worth roughly twice the value of all publicly traded energy companies on the S&P 500, and 11 times that of mining companies

Although the American comparisons are most stark, natural resource companies are cheap everywhere. If trends continue, momentum could meaningfully shift to favour resource companies.

Berkshire Hathaway Episode 2 by Acquired: This second of three episodes on the history of Berkshire Hathaway focuses on Charlie Munger’s influence on Buffet. One of the great things about Munger is how simple his approach was.

For example, Munger believed it was vital to be a learning machine. This enabled him to use the best ideas from the past, while being prepared for an ever-changing world.

He also believed it was far more important to ensure they didn’t shoot themselves in the foot, as opposed to attempting to be the most clever. As he was fond of saying "It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent".

The Calculus of Value by Howard Marks: In his latest memo, Howard Marks explains how investors determine the value of a company. He also comments on the current valuation of American firms.

While not predicting a market crash, he believes U.S. companies are currently expensive, which historically leads to years of underperformance. You won’t be surprised that I share his view. Our portfolios are underweight American companies and may increasingly become so.

THINGS TO CONSIDER

"All intelligent people should think primarily in terms of opportunity cost. When deciding whether to do something compare it with the best opportunity you have." 

- Charlie Munger

“It is not your responsibility to know the answers, but it is your, and my, responsibility to know and to ask the right questions over and over. Until it becomes second nature.”

- David Mamet to the writing staff of “The Unit”

“Faced with the choice between changing one’s mind and proving that there is no need to do so, almost everyone gets busy on the proof.” 

- John Kenneth Galbraith

Successful investing is anticipating the anticipations of others.

- John Maynard Keynes

“He who knows only his own side of the case knows little of that.”

- John Stuart Mill