petec

I guess developed economies (North America and Europe). Imo it depends on asset prices: if they keep falling, a recession in developed economies cannot be ruled out. Cheers, Gio If they keep falling I'd argue a recession is inevitable.

Will read - but it is curious that Tobin's Q and other basic measures of valuation have similar back-tested predictive records. If they don't, then starting valuation has nothing to do with future returns, in aggregate. Do we really believe that?

It is if you don't mind destroying the currency. I feel very lucky that the UK never joined the Euro (and frankly I hope we get out of the EU). Going to be an interesting few years.

Thanks for your replies ni-co, and I'll watch more carefully. Also agree with you re: why they bailed out Greece. Only comment is that I would think there will be ECB QE to buy sovereign bonds off the banks if needed.

Me, too. Do let us know what you're buying ;)

...but not on this board... http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/recession-in-2016/

Because that excess capacity is indicative of a demand problem and the very real potential for a deflationary cycle - not good for equities either. Quite. I seem to remember excess capacity in Miami condos turned out not so bullish, not so long ago.

All: thanks for one of the most interesting discussions on the board at the moment. I've had a nagging worry about the Euro-banks for a while but not researched it - this helps. Ni-co: what is your view on the timing of any crisis? I ask because while I understand each of the individual points you've made, there's a difference between -ve rates and cocos harming share prices on the one hand, and bad loans causing a banking crisis on the other. Or do you see these things as being so interrelated that they feed off each other to create a vicious spiral? Also, I'm struggling to understand the significance of most bank assets being Euro sovereign bonds. Isn't this a good thing? Nice and liquid? Depending on the sovereign obviously! John - will be very interested to see your atomisation of SAN! SD: Why not own the Latin subsidiaries of SAN? By the sounds of it that is the part you find attractive. More generally I've been trying to figure out the impacts of -ve rates and this discussion has been useful. My background here is that I find Austrian economists more plausible than monetarist ones so I have a clear bias, but I think globally we are seeing a lot of unintended consequences of easy money. As I understand it the idea behind -ve rates is to persuade banks to lend rather than deposit their reserves; and also perhaps to persuade people to spend rather than deposit their savings. This thread appears to argue the opposite. If banks don't pass on -ve rates they lose money which weakens T1 capital. If they do pass -ve rates on to depositors, deposits get withdrawn and loans get called which could actually *shrink* the amount of money in the system - exactly the opposite of what was intended. Worse, if the called loans are bad, -ve rates might cause a banking crisis (whereas higher rates might have given the banks time to earn enough to cover the bad loans). Do I have this right?

So does getting too positive ;)

Nope but in real terms at least I don't expect many such pensions to pay out what their beneficiaries are expecting.

Something I have also thought about a lot. In introductory biology I remember being taught that 3 things were essential to sustain human life: food, shelter, and water. We largely rely on the private sector to provide all those things, and it has done so extraordinarily well (with the help of some sensible regulation of course). Yet, when it comes to education and health (I live in the UK) we think the private sector is an evil anachronism. My view is that while the taxpayer must *pay* for education (because education is key in this world and it is not fair to leave the poor uneducated), most people get confused and assume the government must *provide* education. I say: get rid of government control over schools. Get rid of the national curriculum, the national teacher pay scales, national budgeting, regional government say over which kids get to go to which schools, and centralised (standardised) mandated teacher training. I hadn't thought of it, but I also love Ericopoly's idea of making education non-compulsory. Let the teachers and head-teachers decide all these things as they do in our (excellent) private schools. Give parents a voucher from the taxpayer. Allow them to top this up, but with limits (for example the top quintile highest funded schools have to subsidise the bottom quintile). Have several independent bodies that parents can hire to investigate and rank their schools. Allow good schools to take over bad ones, and incentivise this. In other words: I think humans are at their most innovative when unleashed. Over decades, a free education system would develop and evolve in unpredictable and exciting ways. I do not want to lose the taxpayer subsidy for poor kids - hence the voucher - but I hate the effect of the dead hand of the state on our schools*. * I should say that some state schools in the UK are absolutely outstanding. But not enough of them are.

May I ask why you see another 10% down based on today's news? My view is you don't get a real liquidity event without a financial crisis - and if that happens, it might be European.

I don't disagree with most of what you have written, but I see it differently. As usually happens in commodity supercycles (and there have been a few) oil stayed way above the cost of marginal capacity for several years. Excess capacity was created, and therefore oil has to go way below the marginal cost for a while to bring the market to balance. In other words, I am not surprised oil is here and I don't think it's the result of manipulation*, I think it's the result of market forces. Now, I am sure a lot of trades get made around these moves and you may call those manipulation - but I think the current price is fundamentally justifiable for a period of time. *well, I do think it is the result of manipulation - but only in the sense that $110 oil was the result of an easy-money bubble and $30 oil is the consequence of $110 oil given that the marginal cost was probably around $70 at the peak and capacity got overbuilt (by a lot, when you consider that the marginal cost is likely falling to $40-50 as the bubble deflates). All bubbles overcorrect. You want to pin those suicides on anyone, I'd look at the Fed for blowing the bubble in the first place. Just my thoughts! P

Dalio is brilliant - and he's been concerned that we're coming to the end of a long-term debt cycle and that people are too focused on the short-term debt cycle. Oil isn't the problem. Oil is a symptom. Oil prices were artificially propped up by a weak dollar which was held down by artificially low interest rates forcing people into riskier assets like commodities, EM, etc. etc. etc. The high oil prices drove a lot of investment into the area as new technology was discovered that could reach previously unreachable oil for singificantly cheaper than the current cost. That drove over/malinvestment into energy which increased supply causing a potential a glut. The glut was solidified when OPEC refused to cede market share. You can't look at all commodities being a 3-4 year bear market, except oil, and then suggest that when oil prices fell that they were the cause of the problem. All commodities have been falling for years because they are all affected by the problem - oversupply and malinvestment. It's funny that a few months ago people were expecting lower oil prices to be additive to GDP. Now low oil prices threaten the economy? Here's the deal - consumer behaviors have changed. This is what happens after deep crisis - this is why you need one every 3 generations or so because people forget the lessons learned in the first one. Consumers, who used to spend every penny they earned plus some, no longer spend that. Now they take the majority of their incremental savings from lower prices and use it to continue to deleverage. Raising the price of oil doesn't change that - it would simply delay the catalyst that will eventually occur to cause the system to reset and wipe out the poor investments. We've been delaying that catalyst for 8 years now. Maybe we find a way to delay it more, but a day of reckoning will occur and the longer it takes to get here, the bigger it will be. +1 Agree with you 100%. By focussing on the price of oil people are barking at the wrong tree. It's a global demand issue caused by the turn in the long-term debt cycle in 2007/2008. Central bankers can and should try to smooth this credit contraction but they can't inverse it. +2 - hadn't read TCC's post properly but it is outstanding.

Just reading Ultra Petroleum's conference call for a bit of fun. They averaged $2.85m to drill a well in the last quarter. In 2007, that was $6.3m. Incredible how shale players have taken costs out. Most intriguingly, the $2.85m is down 25% y/y so they have been able (so far) to accelerate the cost-outs as commodities have fallen. Not using this data to prove anything, just think it's interesting.

+1, Would you rather the GDP grow only in the shale states or have low energy prices and have GDP grow everywhere else instead? Oh - I would *rather* have low energy prices and more balanced GDP. But the point is that if a dollar spent on oil gets leveraged by speculators, producers, service companies, and ultimate owners in the way I have described, then it creates much more than a dollar of global GDP. When that dollar is taken away from them and stays with a consumer that is currently *de*leveraging (i.e., part of that dollar gets saved) then the GDP created may be less than a dollar. So, while it will be more balanced, the GDP in this scenario will be smaller. That's my point. Now, if merkhet is right and the multiplier on low commodity prices is higher than the multiplier on high ones then that will partly offset my argument. I'm not sure what the evidence is on that. Background: as someone who assumed low oil would be good for GDP, I am trying to figure out why that hasn't been the case. Visa tells us the consumer is saving 75% of the windfall. So my answer is: if money is coming out of the leveraged commodity complex and being used to delever the consumer, that will bring aggregate GDP down, all else equal, because it brings down aggregate leverage and GDP is very sensitive to credit creation. I agree the resulting GDP will be better balanced and less levered (good things in my book) but it will also be smaller.

I guess I've been building it since 2008/9, but I wouldn't have been able to articulate what I was doing quite so well. I have been pretty good about only adding, but the last couple of years have been a real test because I'm pretty bearish so I am trapped between: 1. these are great companies that will survive whatever is coming and compound healthily, if not rapidly, over time; and 2. shouldn't you have the courage of your convictions and sit in cash until you can buy everything cheaper? Largely, I've taken the view that buying and holding works better than market timing, but once or twice I have succumbed to the temptation and sold a part of a holding. It is certainly easier to stick to this strategy when KO is at 12x (when I bought it) than when it is at 20x! I do also have a monster position in FFH to help me sleep at night. The final part of my portfolio is special sits/value picks to keep me interested! P

Oh, it's a pretty dull list! Global Stapleco: KO PEP ULVR DGE Watching: PG NESN Would like to add Grupo Nutresa in Colombia but don't have an account that can buy it yet. Sure there are many more I could consider. Centurions: BAS (BASF, the only one I would be buying now, and then only lightly) MMM JNJ Watching: UPS WFC GE AXP JM (Jardine Matheson) To be honest the "Centurions" idea is pretty new and I am still fleshing out the list. The idea is to capture companies that have *something* - a culture of innovation, or capital allocation, etc. - that isn't dependant on one person and that has allowed them to thrive for a century. Just surviving isn't enough.

Ha! Oh the difference a little dot makes. 19.5%!

Thinking about this some more and while I agree with what you've said, there might be another factor at play. As commodity prices rise they attract speculators. Hedge funds, oil etfs, people storing oil. In a low rate environment, many of these players use leverage. Companies throughout the supply chain also leverage up. In other words rising commodity prices drive money creation via credit creation. That money ends up in the pockets of the low cost producers like the Saudis who go and buy stocks and art and houses in nice cities, causing asset bubbles that make everyone feel richer (simplifying a bit here but hey!). When all that unwinds it is true that consumers feel swell because gas (or petrol, as we say in English ;)) costs less at the pumps. But is that enough to overcome the deflationary effects of credit (and therefore money) destruction? I'm thinking out loud here but I suspect that this commodity supercycle has been one of the most leveraged in history (because rates are at historic lows). That might change the ratio between the positive effects (richer consumers) and the negative effects (credit destruction, asset deflation) of falling commodity prices. I'm firmly of the opinion that tighter money and less credit would be a good thing long term so I'm not saying that central banks should manipulate commodity prices up. But using this framework I can see how falling commodity prices might be a bad thing, temporarily, for GDP statistics and whatnot.

Frommi, I have a very similar train of thought. I love value investing and finding undervalued stuff but I don't have the time (and may not have the skill). I've therefore allocated a portion of my portfolio to something similar to what you describe. I have two categories of company, and I aggregate them to think of them as two positions, akin to etfs but compiled by me: Global Stapleco, and Centurions. Basic criteria: 1. Must be either staples, producing things I am sure humans will still need in 100 years, or have already lasted for 100 years, suggesting there is something in the DNA of the company that can survive and thrive through every sort of macro. 2. Must produce things that I think humans will buy more of in 50 years, either because there are more humans or humans are richer. 3. Must pay a decent dividend. 4. Must, at purchase, be valued reasonably. 5. Must have strong balance sheets. I do everything I can to fall in love with these stocks so that I don't sell them according to my current macro views. I intend to hold them for the rest of my life. I don't worry too much about the relative weights between them, keeping them roughly equal. They sit in tax-advantaged accounts so I don't pay tax on the dividends. P EDIT: Perhaps a better way of expressing the criteria is that I want something with a very good chance of giving me a multi-decade return in excess of inflation. That's a surprisingly hard thing to achieve.

I agree with that. If there is a balance between supply and demand and the price is lower it is a good thing (even if some companies/countries/people suffer). The problem with oil is that it isn't a free market. You have an industry where some of the largest players are governments, there is always all kinds of manipulation going on. I'd argue that manipulation can't overcome the market in the long run. Of course not, but in the short term manipulation can cause all kinds of havoc. The best way to think of the market is that it is analogous to a TCP/IP network like the internet and government interference is analogous to damage to the network. It might slow things down a bit, but the network is able to route around the damage. I agree, and that's a very good analogy. As an aside, I'm not sure oil is a more manipulated market than most others. For example, you might say Saudi and OPEC "manipulate" the price of oil. I might contest that, arguing that they are pumping everything they can because they are the lowest cost producer, which is exactly what the free market wants them to do. But even if I accepted your argument, at least they *produce* oil. Absolutely all other markets on earth are being rigged, sometimes, blatantly, by government agencies that produce nothing but electronic money according to academic (but largely untested) theories of how much there should be. I object to that rather more than I object to a few oil producers getting together and running an ineffective cartel ;)

I agree with that. If there is a balance between supply and demand and the price is lower it is a good thing (even if some companies/countries/people suffer). The problem with oil is that it isn't a free market. You have an industry where some of the largest players are governments, there is always all kinds of manipulation going on. I'd argue that manipulation can't overcome the market in the long run. I also question why this conversation is happening at $30 oil but didn't at $100-120 oil. The marginal cost of oil was never that high, but I didn't see people complaining about market manipulation then. The simple fact is that when you overbuild productive capacity you need prices to fall *below* the marginal cost of new capacity to balance the market. I am not surprised that oil is down here - but I'll be surprised if it stays here permanently. Well articulated. Capacity will get shut down, or not bought on line, ever faster as the price tanks. We dont know what the price is to add capacity, but suffice to say much of the oil drilled in the past few years wont be drilled at these prices. If the MidEast is at capacity ( accounting for additions and deletions according to political events), and Russia is at capacity, the US, Can., and everyone else is cutting development then at some point demand will equal or exceed supply. Probably it overshoots the opposite way, or Maybe I am full of it and am just talking 20-25% of my book. I think you're right but I don't have the confidence to put 20% of my book behind the thesis. So far all I have done is initiate a starter position in Cheniere which is probably cheap if oil doesn't pick up and is very cheap if it does. And by luck or judgement I waited for low $30s oil to start that position last week. What gives me pause is that when the air comes out of a bubble it takes a lot of costs with it. Salaries that were inflated deflate, margins that were elevated fall, commodity inputs shrink, and the focus on efficiency rises. As a result the marginal cost can move *dramatically* downwards. We saw that in north American shale gas. I don't think oil will go the same way (down, down, down) because the new sources of supply are 5-10% of global supply whereas in north American gas they were much bigger. But it is a risk that the marginal cost will fall sharply in this scenario and we don't know where it will stop. My guess is somewhere around $40, but it's an informed guess only.

Ha ha: I was wondering how many days of red screens it would take for this thread to fire up again. But I do agree. WSBASE dipping, all sorts of pieces of data pointing to an economic slowdown, rates rising (although my guess is they stop here). Then again: some evidence of rising wages, and eventually commodities get low enough that people start buying things. Who knows. Either way, can't be a bad time for Fairfax's derivatives book with deflation fears rising and the Russell teetering on the brink of technical bear market territory (down 195% from the highs).

I agree with that. If there is a balance between supply and demand and the price is lower it is a good thing (even if some companies/countries/people suffer). The problem with oil is that it isn't a free market. You have an industry where some of the largest players are governments, there is always all kinds of manipulation going on. I'd argue that manipulation can't overcome the market in the long run. I also question why this conversation is happening at $30 oil but didn't at $100-120 oil. The marginal cost of oil was never that high, but I didn't see people complaining about market manipulation then. The simple fact is that when you overbuild productive capacity you need prices to fall *below* the marginal cost of new capacity to balance the market. I am not surprised that oil is down here - but I'll be surprised if it stays here permanently.