Investors hoping to make a killing as cryptocurrencies rebounded from this year’s plunge in valuations got a rude surprise last week after one of the most trusted exchanges for crypto trading, FTX, filed for bankruptcy.
But while old-school financial advisers may be tut-tutting at young and inexperienced crypto investors who they say should have known better, there are new signs a decline in speculative investments may be part of a trend that goes far beyond bitcoin and its many imitators.
Suddenly things like house prices, tech company valuations and fintech innovations, including cryptocurrency, that so recently seemed to be shooting for the moon are coming back down to Earth.
Get rich slow
Although many people are getting their fingers burned as soaring speculative investments slump, there are those who say the trend will benefit the economy.
Instead of encouraging get-rich-quick speculation, rising interest rates mean a return to the old-fashioned kind of investments that use money and workers more efficiently to create real economic value.
Some experts say that the most recent bitcoin decline does not mean that the financial innovation of cryptocurrencies has come to a dead end. Nor is housing or the new technology implicit in social media companies such as Twitter or Meta’s metaverse innately bad or useless.
But as interest rates rise and money gets tight, suddenly what seemed like an investment that couldn’t lose has been exposed as one where the business model simply does not justify that optimism.
“A rising tide lifts all boats,” goes a familiar business aphorism. But Warren Buffett, a longtime advocate of slow growth, has added another that has become almost as famous: “Only when the tide goes out do you know who’s been swimming naked.”
But as central bankers raise interest rates, it is not just reckless speculators and mismanaged businesses that are suffering, said Lisa Forbes, a manager at SEED Winnipeg, a non-profit that teaches business skills and helps to find small loans for new entrepreneurs.
Fear of borrowing
“I’m working with people who [have what] you probably call … micro businesses,” said Forbes, whose clients often run single-person businesses such as cleaning contracts, small catering services or e-commerce retail.
Forbes grew up in Winnipeg, but her family comes from Peguis First Nation — about 100 kilometres north of the city — and many of her clients have indigenous backgrounds. She said rising interest rates are already hurting.
More and more, small self-financing entrepreneurs are reluctant to leave safe jobs and throw themselves into riskier ventures.
“The incredibly fast increase in interest rates is making it so that we’ve got people that are shy about wanting to get a loan,” Forbes said, adding that can mean their business never starts or is under-capitalized and ultimately unsuccessful.
While much bigger, Software as a Service (SaaS) startups and their venture capital backers — the backbone of recent tech business growth — are also retreating from risk, with reports of North America-wide business failures.
“The fact is that the glut of capital in the past few years has resulted in too many companies in every market,” Nick Mehta, CEO of the software company Gainsight, wrote in Inc.com earlier this year.
Wasting scarce resources
Canadian central bankers going back to at least governor David Dodge have worried about whether the economy is using its financial and human resources efficiently. In the past, economists warned that low rates would create zombie companies and prevent the self-renewing process of creative destruction.
Cheap and available money can be a godsend to new entrepreneurs, but Mark Kamstra, professor of finance at Toronto’s Schulich School of Business at York University, is one of those who has worried that the cost of borrowing had recently become too low.
Especially as interest rates fell below the rate of inflation, investors were able to make money doing things that added little value to the economy.
The Loop35:32The cursed bird app
“This is a feature of low interest rates that’s really very troubling,” Kamstra said after teaching a class last week. “You’ve got people who’ve an incentive to look for investments that pay very little because you can make money on a one per cent return.”
The extension of that kind of thinking can lead to individuals or businesses borrowing huge amounts of money, called “leverage,” for investments that make no money at all in the hope of eventual profits. Higher interest rates, Kamstra said, mean that collectively, we invest our resources more wisely.
He said this same kind of thinking can apply to real estate, where the arithmetic changes as interest rates go up.
“I have friends with $3-million homes, and I say, ‘You are implicitly saying that living there is worth $200,000 a year,'” said Kamstra, who rents. “If I had $100,00, I could rent a palace.”
In a world with scarce resources, he said, it may be a waste to pour money into tech startups or retail businesses or granite countertops that produce low yields, when instead you could put your money into a more difficult high-yield business such as mining and processing lithium that the world desperately needs to fight climate change.
A new dot-com bubble?
As Bank of Canada governor Tiff Macklem discussed last week, one of those scarce resources is human capital, and Kamstra worries many of his students are going into low-yield technology businesses because they offer stock options and pay well now but might not last. “What if that’s all just kind of a bubble?”
When it comes to cryptocurrency, Kamstra said he was skeptical when prices rose to last year’s highs, but he says that doesn’t rule out their future use as an innovation to reduce the high cost of finance.
But it’s not just older, traditional financial experts who are convinced that cheap capital and speculative fever got out of hand in the rush to cryptocurrency.
“The bitcoin bubble, and the overall hype around cryptocurrency and blockchain technology, can be compared to the dot-com bubble,” Larisa Yarovaya, who researches financial technology and market contagion at Britain’s University of Southampton, said in an email interview.
It is no surprise to her that reports of the bankruptcy of crypto platform FTX is causing contagion.
Yarovaya said the gamification of online trading platforms made investing look easy and fun, but as crypto assets shot higher and low rates made returns on other investments seem measly, inexperienced investors were captured by high-risk “crypto-exuberance” that was really gambling, not investing.
Large and institutional investors may well be directed by rising interest rates to abandon speculation in favour of searching out higher yields and long-term returns, but Yarovaya believes those who participated in the crypto and meme stock booms may be unconvinced.
Maybe the slogan “get rich slow” just won’t be as tantalizing to novice investors.
Imperial Oil to invest $720M in renewable diesel plant near Edmonton – Yahoo Canada Finance
The Calgary-based company has touted the project as the largest of its kind in Canada, aiming to produce more than one billion litres per year, or 20,000 barrels per day, of renewable diesel. Imperial says the fuel has the potential to eliminate about three million tonnes of emissions per year, compared to conventional fuels.
Imperial projects renewable diesel production will begin in 2025. The company says hydrogen and biofeedstock will be combined with a proprietary catalyst to produce premium lower-carbon diesel fuel. The project was first announced in August 2021.
Last year, Imperial said a final investment decision for the renewable diesel facility was expected in the coming months, based on factors including government support and approvals, market conditions and economic competitiveness. The company said on Thursday that regulators are expected to approve the project “in the near term.”
“Imperial supports Canada’s vision for a lower-emission future, and we are making strategic investments to reduce greenhouse gas emissions from our own operations and to help customers in vital sectors of the economy reduce their emissions,” CEO and president Brad Corson said in a news release on Thursday.
In September, Imperial announced a long-term contract with Air Products and Chemicals (APD ) to supply low-carbon hydrogen for the proposed renewable diesel complex. The company says it is looking for third parties for bio-feedstock supply needed to produce renewable diesel fuel.
Imperial says a significant portion of the renewable diesel from Strathcona will be supplied to British Columbia in support of the province’s plan to lower carbon emissions.
Imperial has laid out goals to reduce its greenhouse gas intensity by 30 per cent by 2030 and reach net-zero in the company’s oilsands operations by 2050. The company says it plans to use renewable diesel in its operations to reduce emissions.
Imperial will report fourth-quarter 2022 financial results on Jan. 31.
Toronto-listed shares added 1.75 per cent to $71.00 as at 11:07 a.m. ET Thursday. The stock has added about 38 per cent over the last 12 months.
Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.
Imperial Oil to invest $720-million to construct renewable diesel facility in Canada – The Globe and Mail
Imperial Oil Ltd. IMO-T says it is going ahead with a $720-million project to build a renewable diesel facility at its Strathcona refinery near Edmonton.
The project, first announced in August 2021, is expected to produce 20,000 barrels per day of renewable diesel once it is complete.
The company says a significant portion of the production will be sent to British Columbia to support the province’s plan to lower carbon emissions.
Imperial says it also plans to use renewable diesel in operations as part of its emission reduction plans.
Renewable diesel production is expected to start in 2025.
Imperial says the project is expected to create about 600 direct construction jobs.
Is Tesla (TSLA) Still a Worthy Investment?
Distillate Capital, an investment management firm, released its fourth quarter 2022 investor letter, a copy of the same can be downloaded here. At the end of the fourth quarter, Distillate’s U.S. FSV strategy declined 10.58% on a total return basis net of fees compared to a decline of 18.11% for the S&P 500 benchmark. Better relative performance for Distillate’s SMID QV strategy continued into 2022 with a decline of 8.64% on a total return net-of-fee basis, significantly ahead of a comparable decline of 20.49% for the Russell 2000 ETF and -14.67% for the Russell 2000 Value ETF. On the other hand, Distillate’s Intl. FSV strategy again lagged its MSCI ACWI Ex-US benchmark in 2022, while the Distillate’s U.S. FSV strategy’s free cash flow to market cap yield valuation of 7.2% compares very favorably to 5.1% for the same measure for the S&P 500. Spare some time to check the fund’s top 5 holdings to have a clue about their top bets for 2022.
In its Q3 2022 investor letter, Distillate Capital mentioned Tesla, Inc. (NASDAQ:TSLA) and explained its insights for the company. Founded in 2003, Tesla, Inc. (NASDAQ:TSLA) is an Austin, Texas-based multinational automotive and clean energy company with a $454.3 billion market capitalization. Tesla, Inc. (NASDAQ:TSLA) delivered a 16.81% return since the beginning of the year, while its 12-month returns are down by -53.00%. The stock closed at $143.89 per share on January 24, 2023.
Here is what Distillate Capital has to say about Tesla, Inc. (NASDAQ:TSLA) in its Q3 2022 investor letter:
“The fund’s relative outperformance occurred despite a nearly 2.5% headwind from being underweight the energy and utilities sectors where cash flow instability and leverage tend to limit our holdings domestically. By individual stock, the largest contributors to relative outperformance were unowned positions in Amazon and Tesla, Inc. (NASDAQ:TSLA) which declined around 50% and 65% during the year, respectively.”
Our calculations show that Tesla, Inc. (NASDAQ:TSLA) fell short and didn’t make it on our list of the 30 Most Popular Stocks Among Hedge Funds. Tesla, Inc. (NASDAQ:TSLA) was in 88 hedge fund portfolios at the end of the second quarter of 2022, compared to 73 funds in the previous quarter. Tesla, Inc. (NASDAQ:TSLA) delivered a -35.31% return in the past 3 months.
In January 2023, we also shared another hedge fund’s views on Tesla, Inc. (NASDAQ:TSLA) in another article. You can find other investor letters from hedge funds and prominent investors on our hedge fund investor letters Q4 2022 page.
Disclosure: None. This article is originally published at Insider Monkey.
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