petec

By paying a massive interest rate! The point of a mortgage is it's cheap because it's secured against the property. So without the property...

http://www.bloomberg.com/features/2016-vancouver-real-estate-market/

I may be being really thick but I don't see how this is possible when the share price has "only" gone from 50 to 200?

Unless 30 year interest rates are 2.3% for the next decade or two... Your alternative to stocks right now (other than cash) is to guarantee destruction of about 1/3 of your principal in real terms over 30 years if you're in the top tax bracket. If that doesn't change then even if margins fell this probably wouldn't be a bubble and if margins stay here stocks are way undervalued. Who knows if that changes, although it seems crazy to think it wouldn't. This is relatively true, but it is quite possible for all asset prices to fall.

How are we defining bubble here? ;) I think it depends on whether margins are sustainable. If not, it's an epic bubble. If they are, then it's just at the high end of fair. That's for the US. Plenty of ex-US markets are more reasonable.

What did Pavlov say when he heard the bell ring? Damn! I forgot to feed the dogs! ;)

The house is cheaper? Or the monthly payments to buy it are cheaper? This is a genuine question - I'm not sure which you mean. But, obviously, they are different: If a house costs $100,000, rates are 5%, and you need 25% down, then your cost to buy is $25,000 plus $3,750 a year in interest. If the same house costs $200,000 20 years later, but you pay 2% and put 10% down, then your costs are $20,000 and $3,600. Which house is cheaper? ;) Clearly I'm excluding amortisation payments here for simplicity but I do think asset prices should be included in whatever measure of inflation the Fed looks at. Otherwise they fail to capture the true inflation in the cost of shelter and saving for the future, both of which are key family outlays. Paying off a mortgage and saving for the future are costs of living.

I agree. These data, combined with the obvious inflation in asset prices and therefore cost of shelter and cost to retire, make me think we are actually in the midst of a huge inflation, with more to come.

Up until the the 16th of June, the Leave campaign had been steadily gathering momentum and at that point the vote looked to be on a knife edge. However, that day the British MP, Jo Cox was murdered by an anti-EU extremist. That was a turning point that in my opinion was decisive. Campaigning by both sides was suspended, and the wind was taken out of the sails of the Leave campaign. The fact that it was a Leave extremist that murdered the MP left a serious taint on the Leave campaign - undecided/swing voters almost certainly will jump to the Remain side because of it. With the momentum gone and only two days remaining, there is no time for the Leave vote to recapture the initiative. Remain is all but a done deal. I question how significant the murder was (especially because while the man was clearly an extremist, he also has a long history of mental illness). I think we were always going to vote remain (sadly).

I'm with you brother. I'm holding my nose more than I ever thought I would. I totally get the deflation bet and the hedging. It's pretty much why I bought this stock. Their stock picking, however, is too often atrocious, indefensible and bordering on amateurish... if not already there. I simply don't get their thinking or analysis. This is fair on the listed equity side, but not on the bond side nor the control side (buying businesses to operate). They haven't *entirely* lost their mojo!

I see what you mean but I think what they are saying is they expect the hedges (and deflation swaps) to work! Every indication I have is that they are getting more bearish, not less.

My reading of the q1 call was that they were >100% hedged, very worried about markets, and staying hedged. What did I miss?

Emphasis mine. Wait what? Source for this? +1 Even a cursory reading of q1 results suggests this is not the case.

The one starting at 3.50 is priceless too!

DE - tempting for the same family of reasons as CAT. Still considering. INSY - I'm not a big fan of shorting stocks on scientific issues. MNKD - Valeant syndrome. Volatility already priced into the options so I'll stay away. There's a good short writeup of DE in the latest Grant's.

You're right. It's a positive. It's the key factor in overcoming demographic change. So long as the host nation integrates them and lets them succeed, which isn't politically easy.

+1 Also, I don't think comparing Buffet's optimism to Watsa's pessimism is an accurate reading of what either is saying. Buffett is saying that the quality of life of the average American will improve over time. I haven't read anything from Watsa that has contradicted that. Watsa is saying that all the debt makes the world look 1929- or Japan-like, and maybe it's worth being cautious on asset prices and maybe deflation. Buffett hasn't said either specifically, but he has spent his entire career warning about being contrarian and building a fortress balance sheet, which I think is how Watsa also thinks. I'm not saying that if you put them in a room they'd see eye-to-eye, and clearly Buffett hasn't hedged his equities which is the clearest indication that they've had at least one differing viewpoint, but characterising one as bullish and one as bearish rather misses what each has actually been saying - especially Buffett.

The more I think about this part of your post the less I agree with it. In a real GD, the deflation swaps could easily post gains big enough to cover a total wipeout of the equity portfolio - which would not happen in any case since the equities are hedged. Since the deflation swaps are collateralised they, at least, would be collected upon (I can't remember the details of the equity hedges but I know FFH have taken care with their counterparties). The bonds would likely also do well. Meantime the insurance businesses go into emergency mode exactly as you suggest - but that is precisely why Prem is so keen to have a protected balance sheet.

Agree! Plenty of money managers talk pessimism but act quite rationally. I am not sure why that is. Maybe sounding cautious makes one look smart and conservative. Maybe in today's treacherous world, there is a market for it, as investors simply cannot bring themselves to trust anyone who doesn't sound worried. Too bad many tend to follow their words, not their actions. Or maybe having asymmetric insurance enables you to sleep well while being long (I'm referring to the deflation bets here, not the hedges). I do think that Prem's willingness to buy whole businesses, but not to be net long assets whose prices are set daily by stock markets, is a guide to where and how he sees risks.

My conversations with them lead me to think they have thought this through, and researched it, in considerable detail. They believe that a GD would be an incredibly tough period for insurers which is why they have these high-payout, asymmetric bets as insurance. All the while, as you say, they are investing heavily (and cleverly IMHO) in their business on the assumption that disaster does not strike. Now, whether that means he thinks a catastrophe is 10%, 20%, or 30% likely I'm not going to guess at. What I meant by my post, which maybe wasn't clear, is that I don't think he thinks another GD is necessarily a high probability event (as in, well over 50%). Yet, when you read his letters, you could be forgiven for thinking that he did. What I do think he thinks is a high probability event is a significant asset price sell-off. Of course, I'm speculating on both counts. I can't read his mind.

From meetings etc. I think that's about right. He's well aware the world might muddle through. He just wants to make 100% sure that Fairfax survives if it does not.

Over those 25 years (using year-end dates not peak), your annualized return was 7%! Do you have the dataset for this?

+1!!!! ;)

In and of themselves yes, they are. But a) their stock prices may not be given discount rates and b) the economy as a whole may not be (even assuming rates only rise if things are going well, the impact of rising rates can be negative). So, I'm not prepared to assume rising rates is net good except perhaps for wfc. Again, I'm not saying these stocks can't compound at 10-12%, just that I refuse to assume that they will.

These would seem the logical outcomes and are what the central banks are looking for. The question is why haven't they shown up? Or is it just a matter of time? Invert...always invert: 1. Since I won't get interest I need a lot more money to retire. 2. So save more, buy less 3. Less demand I think this is a chicken/egg confusion. Inverting your statement: Would you say that higher interest rates lead to higher demand? Depends on your starting point but from here I would not be at all surprised. But there'd be a nasty period of asset deflation first.