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Investment Ideas: All hail the chicken as the great innovation, Ackman buys into Google, and a brilliant tour de force analysis of our housing mess

Worth noting: Pershing Square Buys Alphabet Shares

In case you hadn’t noticed but hedge fund master of the universe Bill Ackman has bought a big position in Alphabet. I was a bit surprised by this as it’s not quite his typical investment (he’s not traditionally big on tech) but it does suggest that he thinks the search giant is a quality stock at a decent price. I agree.

Here’s a summary of the development from Jefferies funds analyst Matt Hose:

“The position is 20%-25% larger than disclosed via the 13F filing given that part of the exposure is via a forward contract, so is likely to represent approximately 12% of PSH's NAV. Pershing Square's investment case is predicated on digital advertisements taking further market share, as well as being a top three player in cloud computing, alongside a margin improvement opportunity and a defensive balance sheet. The manager was able to initiate a position as concerns over the impact of AI on the search business overshadowed the overall quality of the business, and entered at an average purchase price of c.$94 per share, generating a gain of around 30% to date. Regarding the impact of AI, Alphabet has invested in this space for a decade, with the majority of google searches already incorporating machine learning, albeit with the potential for greater AI integration. As such, while this may not appear to be a 'traditional' Pershing Square investment, we believe it has many of the hallmarks associated with the manager, given an attractive entry valuation (16x forward earnings), a very strong competitive moat, but still with room for improvement in the business.”

Note 1: Ramping up critical materials supplies will take much longer than everyone thinks - According to S&P Dow Jones Commodity Insight, Nickel is the commodity with the longest average mine lead time of 17.5 years, despite shorter exploration and studies phases.

Note 2: The BRICS are still growing fast and will soon overshadow the G7 economies - G7] Club-members’ share of global GDP peaked at 70% in late 1980s, but dipped to under 45% in 2021. At [purchasing power parity] BRICS grouping has surpassed G7’s share of global GDP,” writes Agathe Demarais, global forecasting director at the Economist Intelligence Unit.

Note 3: Siblings and their differences - Earlier this year there was a paper in Nature examining the degree of genetic variation between siblings and comparing that to random pairs of the population. What they found was that: Siblings are more similar to each other than randomly selected individuals in the population, but there is still significant variation within each family.

While it’s commonly said that you always share 50% of your DNA with each parent and your siblings, actually the sharing of DNA between siblings can vary substantially along a distribution. Here’s a graph from another paper, tracking the degree of genetic similarity between siblings:

While the average is 50%, some siblings might only be 38% genetically identical, while others are 62%! That means some sibling pairs are almost twice as genetically similar as others. Source

Notes 4: Japanese share buybacks at a record level and catching up with US

According to SocGen, “With JPY 7.5tr of shares being repurchased in the last fiscal year, share buybacks are at highest ever level, narrowly above last year amount (JPY 7.3tr). We estimate the buyback yields at around 1.2% (payout ratio of around 18%), which combined with a dividend yield of around 2.5% (payout ratio of around 36%) sends the total shareholder yield to 3.7%. That is the second highest level after FY 19 when earnings dropped due to the pandemic.”

Notes 5: Biggest beer producer?? Mexico! From Adam Tooze’s newsletter.

“After the Great Recession, the Dutch had a solid grip on the global beer market, powered by Holland hop heavyweight Heineken. But within a decade, the Netherlands — indeed, all of Europe’s hoppy heartland — would be unceremoniously thrashed by a New World upstart: Mexico. Today, Mexico ships out more than twice as much beer as any other country and single-handedly accounts for 30 percent of the world’s entire export-beer market, according to Geneva-based trade statistics provider Trade Data Monitor. That puts Mexico far above the Netherlands (14 percent), Belgium (13 percent), and even Oktoberfest progenitor Germany (9 percent).”

Notes 6: Some big thematics are back in fashion. Who said we were in a bear market? This is from Wisdom Tree commenting on their thematic ETF range.

“After their dismal performance in 2022, many thematic strategies, and tech strategies in particular, enjoyed a rebound at the start of 2023, supported by some expectations of an earlier Federal Reserve (Fed) pivot. Several themes, including “Artificial Intelligence & Big Data”, “Semiconductors”, “Cybersecurity”, “Metaverse”, and “Gaming & Entertainment”, have been propelled by the buzz around ChatGPT and the surge of generative artificial intelligence (AI).

Figure 1: Year-to-date (YTD) and month-to-date (MTD) returns of themes in Europe within the WisdomTree Thematic Classification

Source: WisdomTree, Morningstar, Bloomberg. As of 28 April 2023. All data based on WisdomTree's internal classification of thematic funds. Performance is based on monthly returns from Morningstar. Historical performance is not an indication of future performance, and any investments may go down in value.

Notes 7: Sleep really matters – another gem from social psychologist Rob Henderson. People who increased their quantity of sleep over a four-year period got the equivalent happiness increase as they would have from 8 weeks of therapy, or from winning up to $280,000 in a lottery. (source).

A great primer on what went wrong in the UK housing market

Regardless of whether you are, like me, a Yimby (yes to a big increase in housing) or a Nimby (upwards of 39% of the UK population according to some surveys), its worth understanding how we got to where we are: a mess in my view with housing starts collapsing.

I cannot recommend highly enough a brilliant long article by LSE economic historian Samuel Watling in an online publication called Works in Progress called Why Britain doesn’t Build. Its tour de force ranging from planning policy to why the second generation of New Towns didn’t work as well as Vs1. It’ll take a good 20 minutes to read but it’s absolutely worth it. Here’s the slightly more upbeat conclusion:

Every attempt to allow more houses to be built, be it New Towns and regional planning or flexible zoning and green belt reform, have met the same fate. The problem, as always, is the politics.
Planning restrictions exist for a reason. When local communities obtain no direct benefit from new housing, but bear all the costs, attempts to build more homes hit a wall of opposition from the residents who are already there and their elected representatives. They are then delayed, scaled back, and often eventually scrapped altogether.¹⁷
Does this mean that politically-imposed housing shortages are inevitable in Britain and other European countries?
Perhaps not. Other countries with federal government systems, such as Austria and Switzerland, have been more successful in incentivising local authorities to permit housebuilding. This is because the local authorities there depend upon local income or property taxes to fund public services. If they permit houses to be built, then the additional taxation from the new inhabitants will mean they can fund better local services – a win-win for existing locals.
Alongside local government tax reform, there are also ways to give existing residents or communities the benefits of the new building. In Britain, several have been proposed.
One is the proposal to give smaller government units more power to permit well-designed urban extensions, even in green belt, so long as other settlements are protected. The CPRE itself approvingly cites South Milton in South Devon as a good example of community-led development in a protected ‘Area of Outstanding Natural Beauty’. This could work because, in many cases, these areas are small enough to reach win-win arrangements with local landowners to build in ways that enhance the quality of the place while making generous contributions towards better public services and infrastructure.
Another example is to have community land auctions. These are an attempt to break the iron ring of green belts around Britain’s cities, by giving communities on the urban fringe an incentive to develop land: by allowing the community itself to take options to buy land, give it permission to be built on, and then auction the land to developers. Since it is permission to build on land that is so valuable, this could deliver windfalls of hundreds of thousands of pounds per home delivered, which could go towards cash payments, tax cuts, or investment in infrastructure or local amenities like parks.
Another is the street votes proposal, which would allow residents of a given street to give themselves planning permission to rebuild their street at a higher density, capped at a height that would avoid blocking sunlight for neighbors on other streets. This would potentially allow use of suburban housing land to be intensified for the first time since 1947. The extent of the housing shortage in Britain means there is now a huge economic benefit to building more intensively on existing plots, which would be captured in large part by the residents voting on the proposals to densify.
Britain, the first industrial nation, has often been a trailblazer in economic history. After 1947 this continued to hold true, for a terrible reason, as it became the first country to give itself a self-inflicted housing shortage that has caused painful economic and social consequences. But its failure at least allows us to observe that, in modern developed democracies, the main constraint on housebuilding is a political one – and no attempt to remedy it will succeed without being designed explicitly to overcome those who lose out.

More at https://worksinprogress.co/issue/why-britain-doesnt-build?utm_source=substack&utm_medium=email

Why are large companies so dominant?

If you’re an investor you’ve probably been slightly perplexed over the last decade by the sheer dominance of large and mega-large-cap stocks. Is this purely a winner takes all market or is there something else going on? Liberum’s strategist Joachim Klement has some tentative answers after picking a new study by Spencer Kwon from Harvard and his collaborators. The bottom line? Scale begets scale which in turn is helped by technology.

They looked at the concentration in a wide range of US industries over the last 100 years and found that in every industry there has been a persistent trend towards increased market share of the largest companies in each sector.

Market share of top 1% of companies by assets

Source: Kwon et al. (2023).

Note how in the chart above, the market share increases relatively steadily over the last century, indicating that the increased concentration of industries is not a result of lower tax rates or anti-competitive behaviour of companies in specific sectors. Instead, the research indicates that mechanisation and automatization allowed larger companies to take increased market share. Industry concentration increased particularly fast from the 1930s to the 1970s in the manufacturing, utilities, and mining industries when machines allowed to make workers more productive. Since the 1980s, service sectors like retail and leisure have seen the largest increase in industry concentration as services have become more automatised and less dependent on individual labour.

This indicates that the key driver of industry concentration was economies of scale. Larger companies are better able to exploit the benefits of productivity-enhancing technologies. But in my view, if you dig deeper, another development stands out that enables larger companies to achieve these economies of scale: the ability to get access to capital at low cost.

More at

Klement on Investing

Why are large companies so dominant?

The US, and in fact all industrialised markets have a megacap problem. The largest companies in a country or sector take up an ever-increasing share of the market, squeezing out smaller competitors. Just take a look at the profits relative to GDP of major US tech companies…

4 months ago · 17 likes · 8 comments · Joachim Klement

Which Small Countries are vulnerable

The Credit Suisse Research Institute (CSRI) has just released a fascinating little paper entitled ‘Small countries: The way to resilience’. It looks at why so many small countries are successful and what powers that success: in simple terms, the answer is economic openness, which allows them to offset size disadvantages. The challenge is that their smallness does leave them vulnerable to shocks that test their economic resilience.

Using a “multidimensional approach [based on] principal component analysis to overlay territory size with population and calculate a country-size index” the study looks at 86 small countries globally – and then builds something called an Economic Vulnerability Indicator (EVI) as well as an Economic Resilience Indicator (ERI). This last measure provides a framework for assessing a country’s economic robustness to deal with such shocks, as well as the readiness to adapt to changing economic circumstances. The key points:

· “The crucial role of trade openness - by integrating into the global economy, smaller countries can mitigate the diseconomies of scale stemming from their limited size. Hence, economic openness is a prerequisite for prosperity, particularly for smaller countries.

· The erosion of state sovereignty appears to impact smaller countries more than larger ones - they should therefore continue to preserve those parts of sovereignty that are a prerequisite for promoting and protecting their economic niches.

· Economic vulnerability - The Credit Suisse Economic Vulnerability Indicator measures how vulnerable a country is to shocks compared to the average country in our sample of 32 countries worldwide. It is evident that smaller countries often exhibit a high degree of vulnerability: nine of the 14 small countries in the sample show above-average vulnerability.

· Economic resilience - The Credit Suisse Economic Resilience Indicator (ERI) measures a country’s resilience to withstand or absorb an economic shock and adapt to changing circumstances, again in comparison to the other countries in the sample. In the ranking of overall economic resilience, small countries like Switzerland and Denmark come in first and third place. Two more small countries (the Netherlands and Finland) rank fourth and fifth.

· High economic vulnerability often goes hand in hand with high economic resilience.”

As for the countries? Ireland and Switzerland both look very vulnerable….

“The first country, Ireland, is the most vulnerable in our sample of 32 countries, primarily due to its high degree of economic openness (Figure 1). The second most vulnerable country is Switzerland, which is heavily reliant on foreign human capital and has a high score in import concentration. Interestingly, both Ireland and Switzerland are also highly resilient, with Switzerland ranking as the most resilient country in our sample. The Netherlands is another country that falls into the high vulnerability and high resilience category. The country is not only economically open, but also an important trade hub for Europe. Our final two spotlights are dedicated to Norway and Greece. Norway, the least vulnerable small country in our sample, owes this distinction to its abundance of natural reserves of oil and gas, which enable it to be self-sufficient in energy imports (Figure 1). In addition, Norway is remarkably resilient. In contrast, Greece is relatively susceptible to economic shocks and is the least resilient small country in our sample. It ranks below average in all 11 sub-indicators of the ERI (Figure 2). Following the in-depth analysis of Greece, Ireland, Netherlands, Norway and Switzerland, we present the detailed EVI and ERI results for all the countries in our sample.

More at https://www.credit-suisse.com/about-us/en/reports-research/csri.html

selective focus photography of brown hen — Photo by Ben Moreland on Unsplash

All hail the Humble Chicken

I’ll finish with a brilliant piece on why the humble chicken is a key driver of prosperity, courtesy of the Bastiats Window newsletter. They report on a comment made by Robert Mundell, the 1999 Nobel economist who suggested that the chicken was truly revolutionary as a 20th century innovation.

“How is the chicken — first domesticated more than 5,000 years ago — a 20th-century invention at all? And how was the chicken more important than the airplane, computer, atomic bomb, television, interplanetary rocket—or the countless works of Edison and his crew?
His insight was that in the 20th century, modern production methods so drastically reduced the price of chicken that the bird became, for all practical purposes, an entirely new good. According to W. Michael Cox and Richard Alm (“Myths Of Rich And Poor: Why We're Better Off Than We Think”), a typical American in 1900 worked 160 minutes to earn enough money for a 3-pound chicken. An equivalent worker in 2000 needed only 14 minutes of wages to buy that chicken. Pre-1950s, consumers generally had to eviscerate a commercially bought bird or have a butcher do it. (My mother used to shudder when she recalled the itinerant butcher who would slaughter chickens for my grandmother in their kitchen sink.) Herbert Hoover’s promise of “a chicken in every pot” rings dull to our ears, but in 1928, the phrase sounded like “a flying car in every garage” sounds to ours.
Revolutionary production, distribution and storage methods changed chicken from a Sunday luxury item to the everyman’s protein. Our concept of chicken bears little resemblance to our great-grandparents’ image. Massive reductions in food prices explain why rates of malnutrition and starvation have plummeted worldwide since the mid-20th century.”

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