petec

Overall I Think this is right. The only point I'd make is: deflation swaps. I find it highly unlikely they pay out, but if they do...

But he also said that unlike the 25 years of going nowhere from 1929 to 1954, the Fed now has FDIC and other tools. I actually got the opposite impression that it will be much shorter than a 25 year depression because of what the government is doing. Exactly right. He also said he expected inflation, which would be rather a different outcome. I happen to think an inflationary depression is pretty much the same as a deflationary depression ) But at least the Dow or SP or whatever will go up, just not as fast as all your costs. They are VERY different in terms of how you want to be positioned beforehand, especially wrt debt.

Normal human psychology. The guys buying at $600 were the ones selling at $350-400! This exchange made me smile. If there was value then there is extreme value now, even if covid-19 has permanently reduced the value of Eurobank, Recipe, Atlas, Bangalore Airport, etc. to a point below their current share prices. Context is important. All insurance stocks have been crushed in the last 10 weeks. Chubb was trading over $160 in Feb and now it is trading below $100. WRB has fallen from $79 to $51. The declines have been 35-38%. Fairfax has fallen from $625 to $350 a 44% decline. It also had a much larger Q1 loss and hit to BV. So compared to other insurance stocks the decline in FFH looks reasonable. The question moving forward is if you want to put new money into the insurance sector where do you do it? My vote, given the broad based sell off, is to put it into the highest quality names. My current picks are WRB and CB (two that i have followed for years and like). That’s a reasonable assessment, but as someone who hasn’t followed others, and doesn’t want to invest the time, it’s also reasonable to ask a very simple “FFH-yes or no” question.

But he also said that unlike the 25 years of going nowhere from 1929 to 1954, the Fed now has FDIC and other tools. I actually got the opposite impression that it will be much shorter than a 25 year depression because of what the government is doing. Exactly right. He also said he expected inflation, which would be rather a different outcome.

I think the transcript is the best. You can skip the stuff you aren't interested in. Sure. Still a missed opportunity though.

They could absolutely sell assets, including a major insurance sub to repay all holdco debt.

I have never been to Woodstock for Capitalists and now I know why. Wasted 4 hours of my life watching the AGM this morning. Great for non-shareholders (all the stuff about betting on America and index funds) and grandstanders (all the questions about how do we change society) but very few insightful questions (and therefore answers) about the business. Not Warren's fault, and I don't really think he can do anything else given how high profile he is, but a great shame in my view. There is far more of long term value in the average quarterly call, which is saying something. Edit: oops. Wrong thread.

Normal human psychology. The guys buying at $600 were the ones selling at $350-400! This exchange made me smile. If there was value then there is extreme value now, even if covid-19 has permanently reduced the value of Eurobank, Recipe, Atlas, Bangalore Airport, etc. to a point below their current share prices.

My notes on the Q and the call, for what they're worth. - Fairfax are swimming in cash. It's just not their cash, so we'd better hope they don't need it. - $500 of the revolver has been repaid using proceeds from the bond sale. (NB ex-Fed action the bond sale would have been impossible and FFH would be in a tougher position. Fortress it is not.) - Brit and Recipe drew their revolvers. Only Recipe drew by a significant amount, and frankly it would be bloody odd if a restaurant company didn't draw its revolver at the moment. More worrying is the $408m of debt at AGT, $365m of which is on the revolver. This is down from $387m at yearend, and the revolver has been extended to March 2021, but it's not prudent financing. - Additional $100m in 5.5% Atlas debentures, adds to concentration risk, but if you haven't decided you're comfortable with concentration risk you really shouldn't own Fairfax. Bigger question for me here is why are these debentures on worse terms than the previous ones, which came with juicy warrant incentives? - Can't help but smile at the fact they bought long equity total return swaps in March. - Share buybacks stepped up in April - 140k (0.5% of the company) bought back for cancellation in April vs 50k in 1Q. - The preferred dividend Allied pays to its minorities ($126m in 1Q) is a painful drag on capital. Brit paid $21m. - I thought they said Allied was best-placed to exploit a hardening market, so I am a little surprised to see that it is Northbridge and Crum that are still growing at 20%. - Excluding CAT losses and reserve development (not because they're unimportant, but because they're lumpy) the CR improved from 97.1% to 94%. I don't really know how to judge whether this improvement is sufficient in light of the hardening market, but at least it is there. - p46 mentions a share of profit in Digit. Digit was lossmaking at year end but growing like a weed towards breakeven. If it is has already got there, that's impressive. - Annual run rate of dividend and interest income is now $900m. I wonder if this includes dividend cuts e.g. at Recipe? - Will have some losses from Covid-19, but expect to make underwriting profits in 2020. - "Markets might be high because of Microsoft and Amazon and all of these, but I'm looking at stock prices of companies that I know and there's a ton of them that are very cheap."

As a long-standing Fairfax watcher, all this talk of depression gives me deja-vu. I have learned my lesson and won’t listen to it this time, which almost guarantees that it will happen.

Haven’t looked at these results yet but I am starting to think Buffett’s insistence on deploying capital largely in the US, and his still-substantial reliance on himself for investing decisions, is a major failing. It is very hard for one man to deploy $150bn sensibly in one country, even the US. Even if liquidity wasn’t an issue, the size of the necessary circle of competence is. But a larger team, carefully chosen and operating on the same principles, and investing globally, would probably be able to do it. And it would be a major advantage to have deep knowledge of non-US markets at a time when the US is expensive (at the index level). In the meantime the machine rolls on, and I’m not complaining.

How are you getting 15% with portfolio investments returning 2.5%? I understand you are using $255 stock price as your capital base, but are you taking into account interest expenses, corporate expenses, preferred dividends? Even 3.5% pre-tax return does not get me to 15%. Vinod For a shorthand analysis like this, it would not be entirely unreasonable to net underwriting profits against head office costs (incl interest) and simply look at investment return/stock price.

Mind you that leaves a gap for an insurance overseer. Scott Carmilani?

I hadn’t thought of that. That’s quite an outcome.

I don't think this is a surprise. They'd already disclosed Eurobank had moved to associate accounting. By my rough maths that puts it on the books at $36 per FFH share vs a current market cap of $14, so it's the single biggest reason for the discrepancy. I tend to ignore associate accounting, which can lead to almost random carrying values, and focus on market value and look-through book value. I think one needs both to get the full picture. If we value everything at market the BVPS is actually below $390, because several of the consolidated entities (FIH, FAH etc) are trading well below book. But if we value everything at look-through book value (i.e. as though every stake were consolidated) the picture is very different. At 1x post-deal TBV Eurobank is "worth" $54 per FFH share. That alone takes the $390 number to $430 ($390-14+54=430). However you look at it, it seems to me there is a margin of safety with the shares at $280. (And before you ask why I don't just own Eurobank, I'm trying, but my broker keeps cancelling the order and I haven't yet found out why.)

They almost doubled BVPS between 2006 and 2009 so yes, those years were a bit special. Since then they booked decent gains in 2014, 2017, and 2019 as well, but didn't do much the rest of the time. So after doubling BVPS between 2006 and 2009, they grew it only 25% between 2009 and 2019. (Obviously shareholders also got the dividend.) But that is the past. What matters is the future. As you say the new investment team may produce steadier performance. I don't really care. I am happy with lumpy - I just want a higher rate of compounding, and all we need for that is for Fairfax to avoid mistakes.

I think the % managed by Wade and his team is still relatively small (maybe 15%) but growing. Prem names about 12 members of this team in the letter including Wendy Teramoto who he describes as Wilbur Ross' right hand for 20 years. (Sam Mitchell is a notable absentee - I am not sure whether he is still at Fairfax.) More importantly, it sounds (from the letter and the AGM call) as though Wade's team has an increasing influence on decisions made by Prem, Roger, and Brian. The sense I get is that we are about halfway through the handover to the younger team. It's taken a decade, and it'll take a decade more. But their influence is growing. One thing I would say, though, is that Fairfax should not be in your portfolio for steady but continuous growth. That's Berkshire, or Markel. Prem, for all his faults, has always been explicit that results will be lumpy. That's just the nature of the kind of deep value investing they do.

Ha!

Deposit 1,000 every month in their account for everyone who has a job and makes under 100k per year and watch that shit fly! Hell that's only about 2.3T of new money PER YEAR. At 2.3T you're a pussy these days and that may only get you inflation. You want high inflation better dial that baby up to 2k per month and index it to inflation. That's still just a paltry 5T or so. See? Easy If this is funded by the Treasury, I'd argue it's still deflationary long-term. Debt is inflationary upon issuance and deflationary upon service/repayment. The only way this type of system successfully raises sustainable inflation would be a system that requires CONSTANT growth in the debt and CONSTANT acceleration in that growth. Otherwise as the debt stock grows, the inflationary impulse of the incremental debt add isn't enough to exceed the deflationary impulse of servicing the debt stock. This system is ruined by a Fed EVER raising rates or by a gov't ever balancing its budget. Note that this environment is roughly approximate by the U.S. from 2008 - 2017. Massive deficits, on/off acceleration in that deficit growth rate, and a Fed keeping rates low for years on end. And even that was not enough to spur inflation - and as soon as the Fed hit a period of consistently rising rates (2017), the inflation trend dropped off a cliff in 2018 and kept dropping even after the Fed admitted the policy error and cut rates. I just don't think it's politically or economically feasible for the Treasury to commit to massive deficit spending, massive acceleration in that deficit spending growth, and the Fed committing to keep rates at 0% while it happens. At some point, the deflationary impulse just becomes a black whole and you can't escape it. Hey buddy, where did I ever talk about Fed raising rates or gov'ts balancing budgets. You can't do that while constantly depositing money into consumers' accounts. In fact I specifically mentioned an indexing of that amount to inflation. That's how you get yourself some nice inflation. A good 'ol wage-price spiral. The fact was that we never did inflationary shit. What the fed did was mostly asset side balance sheet stuff. During 2008-2014/5 the fed gov't did run some deficits but that was to replace some consumer demand deficit during deleveraging. Smart, generally inadequate, and nothing too revolutionary. Boring textbook stuff. Once the Tremendous Trump comes in and we really run some deficits again that's on the asset side. Give money to rich folks that buy stocks/bonds, blah. Give lots of money to corporations that buy back stock. All asset side yawn. Oh and while all this shit is going down the Fed is busy sanitizing all this supply via bank reserve requirements. Mopping all the slosh they generated all over the place. The fact is that the Fed has been very careful not to generate inflation. Which is very pertinent to this thread because rentiers hate inflation. So you want real inflation? You need to engage the P&L baby. You need to have more money out there chasing so many goods that the economy cannot produce. You give money not to some stiff suit but some Duck Dynasty Arkansas hillbilly motherfuckers that don't know what a Robinhood is. Inflation index that shit and then watch the sparks fly. Wasn't saying you did, but also don't think it's politically or economically feasible to do $2000/month without raising taxes or rising rates - both if which would reduce the inflationary impulse. That was kind of the point. Not just enough to spend. Have to constantly spend , constantly increase spending, and prevent rising rates from slowing down the economy at the same time. It’s also not currently legally feasible. The Fed is not allowed to fund the treasury directly, which I think would be necessary for the kind of handouts we are discussing here. But if you change that, inflation becomes a lot more likely than deflation. Rentiers love inflation if they have fixed debts!

I’m not so worried by the kind of short, sharp deflation you get in a big recession. First, that might just bring the deflation swaps to life. Second, I think a big recession is already priced into the EM stocks and currencies I look at. Third, there is a huge monetary and fiscal response. And fourth, it’s possible EM comes out quicker and stronger than DM, as happened in 2010. The other kind of deflation would be a long slow Japan-style one, caused by the weight of debt built up in successive crises. That’s what Lacy Hunt argues for in the video recently shared on the Hoisington thread. If that happens it will be too slow for the deflation swaps, but I’d expect EM to outperform DM significantly. Separately re India, I think a lot has been done to solve the issues. The job is not complete but the problems are largely in the public banks (NPLs) and non-bank financials (liquidity). CSB is recently recapitalised and under new management and it might actually be a great environment for them to grow.

Viking If we get deflation a) FFH has the deflation swaps and b) I think I’d rather be in EM than DM. EM has the demographic advantage, plus it has higher inflation levels and therefore is more likely to have disinflation than deflation. Only the strong dollar would be an issue but EM is less exposed to the dollar than it used to be. Why don’t you like CSB? Funnily enough I was thinking yesterday that FFH has widespread EM bank exposure (CIB, UBN, CSB, plus some smalls and arguably Eurobank) and I suspect there’s a lot of knowledge that can be shared across them. EM banking is a great business and the opportunity technology offers to bank the previously unbanked is huge. I think we will see Fairfax’s banks create huge value over the next couple of decades. Pete

Actually I don’t quite agree. There was a point when Quess looked actively expensive!

I agree.

I think the problem may lie in the compounding. Mild inflation, compounded, reduces debts. Mild deflation, compounded, increases them (all else equal).

V good interview. Will probably rewatch.