Plus: a renewed debate over rent control Junly 15, 2024 Sign Up | View online IN THIS ISSUE 8 min read 🦾 AI inadequacies 🫁 Inorganic organs 📝 Econ arguments Generative AI is still not terrific at many things, like depicting non-horrific hands. No wonder some investors are bearish about the technology. More below. | Marvel THE WEEK IN MARKETS The Small Caps Step Up If you’ve read this newsletter at all in recent months, you know that the Big Five tech firms (Amazon, Apple, Google, Microsoft, and Nvidia) have absolutely dominated the stock market this year. That finally changed last week when the tech titans stubbed their toes a bit and the little(r) giants surged to the fore: the Russell 2000, an index of “small-cap” U.S. companies with an average valuation of a mere US$2.5 billion, notched its best week of 2024, jumping by more than 5%, after trailing the S&P 500 and TSX all year. It’s hard to say why the small caps rallied so much. Maybe good inflation news (more below on that) gave investors confidence in the U.S. economy broadly, not just in tech. Or maybe the rally reflected investors’ positioning — that is, they realized that they’re underinvested in smaller companies after binging on tech. Whatever the case, we’ll have to see if the small-cap rally lasts or reverses. WHAT HAPPENED LAST WEEK IMPORTANT The U.S. might join the rate-cut party soon. On Wednesday, Federal Reserve chair Jerome Powell said that, at long last, he has “some confidence” inflation is headed in the right direction — in other words, the U.S. might get its first rate cut in 2024 after all. Powell’s view got validated big time on Thursday when the U.S.’s latest inflation data came in lower than expected. If U.S. inflation cools again next month, that’ll make four consecutive declines, which, fingers crossed, bodes well for a cut rate perhaps as early as September. Is generative AI actually a bad bet? Goldman Sachs, the giant investment bank, thinks so. It published a report arguing that the US$1 trillion bet that companies are making on generative AI likely won’t pay off and that the much-hyped technology will only add a mere 0.9% to the U.S.’s GDP growth over the next decade. Why so gloomy? Because gen AI “isn’t designed to solve the complex problems that would justify the cost.” Translation: it’s currently a lot better at simple stuff, like writing cover letters, than the stuff that’ll actually make money, like automating sophisticated code. Is Goldman Sachs right? Who knows! That’s why tech investing is hard; as Byrne Hobart pointed out, most new technology appears insignificant at first, but it only takes a small increase in productivity to start making money. At this point, everyone is just guessing what effect AI will have, and someone’s bound to be very, very wrong. INTERESTING The organ donor of the future is a 3D printer. A Vancouver company called Aspect Biosystems just scored $73 million in government funding to build a manufacturing plant that will use 3D printers to create live tissue for pancreas and liver implants. The technology is called “bioprinting” — which works using a mixture of actual human cells and a synthetic polymer called “bioink” — and it would be a very big deal if it works, because it might be able to eliminate organ-donor wait-lists. Livers on demand! More than 4,000 Canadians are currently waiting for transplants, and the only place to get one now is from another human. Record-high rents are driving a rent-control debate. The average rent in Canada is now $2,202 — a 9.3% increase from this time last year. Is it time for widespread adoption of rent-control laws in Canada? Some policy wonks think so. But it’s a highly debated topic. Econ blog Marginal Revolution got people talking recently after it shared an analysis of 206 rent-control studies, which found the policy benefits the people who live in controlled units but drives up the cost of non-controlled ones, partly by discouraging the construction of new apartments. Either way, building more units, rent-controlled or otherwise, would certainly help matters. —Sarah Rieger FROM OUR SPONSOR THE FOMO INDEX by Stacey Woods IMPORTANT 💸 Corus Entertainment is $1 billion in debt and might go bankrupt. Nation so concerned it almost looks up from TikTok. Source 🎥 Paramount and Skydance Media are merging. Audiences can expect instant classics like Godfather 4: Fredo’s Revenge. Source 🥃 LCBO workers are on strike. Raise your glass (of club soda) to them. Source 🦎 Giant, huge-fanged salamander fossil discovered in Namibia. Already has a three-picture deal with Paramount/Skydance. Source CRASH & BURN TO THE MOON 🏢 San Francisco office vacancies hit an all-time high. Lots of great spaces for new smash-and-grab startups. Source 🍔 Former Bob’s Burgers star Jay Johnston pleads guilty in Jan. 6 Capitol attack. Anything to get out of Hollywood. Source 🤼 John Cena is retiring from wrestling. Will continue to star in movies as the guy who looks like a wrestler. Source 🧵 Threads turns one! It didn’t get its wish because Twitter’s still alive. Source WHO CARES THIS WEEK ON THE PODCAST THE BIG IMPORTANT STORY MAIL BAG We Said Canada’s Economy Was Mostly OK. You Had Some Opinions About That Last week, we published a semi-official investigation into the health of the Canadian economy. You should read the piece if you haven’t, but the upshot was: all sorts of people have been saying that Canada’s economy is in serious trouble. But some important data suggests that Canada might not be doing so badly at all — the U.S., thanks in large part to its jumbo tech companies, is just soaring and making Canada and the rest of the world look not great. Well, we got a lot of feedback from readers about the story, most of which was positive. But a few readers had smart, dissenting takes that we thought were worth addressing to help everyone else understand how complicated Canada’s economic issues are. Letter #1 I think your story lets Canada off the hook too easily. In the ’90s, there were a lot of innovative Canadian startups, but many shut down or moved away. There’s a poor investment environment here. Some provinces had a chance to attract more tech startups but didn’t take it. It’s not in the purview of this newsletter to litigate what should or shouldn’t have been done years ago. But, yes, some Canadian tech companies, namely Nortel and Blackberry, did indeed flame out spectacularly, which didn’t help Canada’s tech scene. The country has an estimated 100,000 fewer entrepreneurs than it did more than 20 years ago, and Canadians have increasingly invested in the U.S. over Canada since the early aughts. Which might have something to do with the fact that, by some measures, Canada isn’t the easiest place to do business and that we rank last in the G7 in research-and-development spending. But other countries have similar issues, with the U.S. sucking up the most foreign investment. But Canada is still doing OK by many measures. It attracts a relatively large amount of venture-capital financing — about 0.36% of its GDP, or $6.9 billion, in 2023, which puts us behind the U.S. but well ahead of France, the U.K., Germany, and other wealthy countries. Also, Canada launches more new tech products each year on a per-capita basis than many of its peer nations: Letter #2 Some of the arguments in last week’s story were not quite related to one of the main concerns that people have raised, which is Canada’s labour productivity. Our labour productivity isn’t just low compared to the U.S.’s; it’s meaningfully lower than many European economies’. Look at this chart. This is a good point! Labour productivity is a bit wonky (which is partly why we didn’t focus on it): it measures how much money an economy produces per hour of work. We published a story about productivity in September and concluded, Yeah, Canada’s isn’t great. Why? A big reason is that Canada is heavy on extraction-based companies, and extraction-based companies tend to drag down productivity, because mining and drilling for crude oil is labour intensive and costly. Meanwhile, tech firms and other innovative companies tend to boost productivity, since they can generate a mountain of money with a relatively small number of employees and with minimal expense. The consensus is that, for Canada to improve its productivity, it needs to develop more high-tech, money-making innovations and scale up the cutting-edge companies it already has. But the thing about extraction industries is that, though they don’t make money as efficiently as successful tech companies, they still make a ton of cash, period. The oil-and-gas industry generated around $183 billion in revenue last year. Which is why we focused on GDP per capita, since it reflects that better. Letter #3 The current narrative on many economic topics is gloomy. Your latest story shows that that narrative is wrong, which happens to match what I believe to be true! Don’t over-index on positivity. We were not arguing that the economy is as great as it could be, because it ain’t: we’re losing a lot of smart, upwardly mobile people to the States. We’re spending too much on housing. We need more competition. And we have too many immigrants stuck in low-wage jobs, underusing their skills. But the most macro of macro data — GDP per capita, exports, etc. — doesn’t paint as grim a picture as many headlines might lead you to believe, especially when you compare Canada to other countries not named the United States. OTHER VERY GOOD READS 📱 Stop Worrying About Screen Time If screen-time alerts actually worked, they wouldn’t exist. | Lifehacker 🐶 Would You Clone Your Dog?* Since 2005, more than 2,000 dogs have been duplicated. | The New Yorker 🤖 The Chum King Behind Those AI Articles The man filling the internet with garbage. | The Verge *Article is paywalled, which, yeah, is kind of annoying. But we think good journalism is worth paying for. POSTS OF WISDOM AI needs to think long and hard about what it’s signing up for… THOUGHTS ON TODAY’S ISSUE? Love it Good So so This week’s newsletter contributors: Ben Mathis-Lilley (writer), Devin Gordon (writer), Stacey Woods (writer), Sarah Rieger (news writer), Ambrose Martos (fact checker), Ciara Rickard (copy editor), Clare Douglas (copy editor), Sara Black McCulloch (fact checker), Mohini Tailor (senior lifecycle specialist), Matthew Karasz (markets editor) Jared Sullivan (senior editor), Peter Martin (senior editor), Kat Angus (managing editor), and Devin Friedman (editor-in-chief). Disclosures: Contributors to this newsletter own shares in Google and Microsoft. Wealthsimple Media Inc. 80 Spadina Ave Suite 400 Toronto, ON, M5V 2J4 Replies to this email address are not monitored. Have questions? Visit our Help Centre or submit a request to our Client Support team. VIEW IN BROWSER PRIVACY POLICY UNSUBSCRIBE Self-directed investing is offered by Wealthsimple Investments Inc. (WSII). WSII is a member of the Canadian Investment Regulatory Organization (CIRO). 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