petec

I'm not saying that the Chinese devaluation is good for the US economy. I'm pretty sure it's not. My point was that I don't think that it's as bad as one might think. Things have changed a lot over the past 10-15 years. It's probably worse for other emerging economies with whom China competes directly. Also I don't see how it's bad for the US economy is the Fed has to delay tightening. I'm sure it's worse for other countries but Chinese labour just got cheaper and that's a source of competition for the average US worker. It is unquestionably deflationary for the US, but only marginal (so far). It is all part of a currency "race to the bottom" that several observers have been predicting for years (not me - I only started to understand it recently, and I have nothing intelligent to add about how it plays out.) Seems to me that these predictions have been right but have taken *years* to play out - they were all the rage in 2009 it seemed to me, but have become the preserve of diehard nutters since then because they played out over such a long time and the markets were rising. Those hurt worst are probably Japan and the other Asian exporters: I recall reading (Kyle Bass or Hugh Hendry I think) arguing that RMB depreciation would be very tough for Japan to cope with. But I can't imagine that a couple of percent does much. What will be interesting is where the RMB is in 6/12/18/24 months. What fascinates me is how currency races to the bottom look inflationary (everyone printing to devalue) but end up being deflationary for a while at least. I do think it's bad if the FED can't tighten, because I think endless ZIRP a) erodes confidence that Central Banks actually have this under control b) reduces the FED's options if there is another downturn, and c) encourages malinvestment. And I totally agree that Apple isn't a good example - commoditised companies won't be able to protect margins. And +1 to meiroy's comment about RE if Chinese capital outflows accelerate further.

Thanks - I know them pretty well but had forgotten the hedging (as opposed to CDS) gains and didn't know about the $1.7bn in individual hedges. *Totally* agree about the insurance business.

We will need to provide means of living for 80%+ non working population. I don't think we are prepared for that at all (intelectually, spiritually, morally, economically, politically). Quite. Unless we all just retire to the beach while the machines do everything. I'm surprisingly intellectually and spiritually prepared for that ;)

I agree with the overall thrust of the original post (although not that the crash will necessarily be imminent - such things are in the lap of the Gods!). I especially agree about Apple's vulnerability. Where I'm not so sure is the social media stocks. Facebook is an irreplaceable part of the life of just about all of my friends, advertising doesn't spoil the user experience, and earnings are forecast to double next year. That's only got to happen twice for the valuation to be reasonable! LinkedIn I don't know at all from a financial and valuation perspective but if I was looking for a job that's where I'd start. Uber (unlisted) is another: lossmaking today and therefore "PE - N/A", but quite possibly an exceptional business over time. And let's face it: MSFT, GOOG, AAPL, and peers were probably all "PE - N/A" at some point, as were half the successful companies in the world. My feeling is that many of these high fliers are overvalued, but some won't be - and there may be a great opportunity in a crash as the winners get sold off with the losers.

Do we have any visibility on the size of these? Do we have any visibility on the size of these? And is this true?!

No, but we might be seeing the start of that with big corporations lifting bottom-end wages and minimum wages rising. If this feeds into other wage levels then we will see how QE+policy=reinflation. Other than that, +1! I'll believe it when the numbers show it. Real median wages haven't sustained upward momentum over the last 15 years despite periods of economic growth and minimum wage hikes. Obviously, nominal wages are the only thing that matters for CPI, but inflation has been tremendously hard to find even before the strong dollar so where is it going to come from after the strong dollar? I think real wages will be a relatively good proxy for nominal wages going in the near-mid term. I don't expect wages to be stagnant forever. I just don't expect the problem to magically fix itself anytime soon due to minimum wage hikes... I have my own theory.. and no real data to back it up , that we need to account for the fact that technology is replacing human labour... and this could affect wages, employment, etc. movement of stuff to the Cloud probably meant less manufacturing of paper- and general office stationary music / movies are now cloud based... we have self-checkout counters.... even for fighting a war we now send drones... Self-driving vehicles probably next - could have a very huge impact ! i know mining companies will be the first to do this in their own operation where insurance is not an issue. Interesting world to see Broadly speaking I agree - there'll be a continued skilled/non-skilled wage divergence anyway. I am no Luddite, but I do wonder when we get to the point where machines can do most things (bar maybe the arts) better than humans...and what happens then?

No, but we might be seeing the start of that with big corporations lifting bottom-end wages and minimum wages rising. If this feeds into other wage levels then we will see how QE+policy=reinflation. Other than that, +1!

This is the one thing I disagree with. Seems to me plenty of people are.

Yes - housing and assets in general. I find it hard to see a housing hit given that consumer/bank balance sheets are in much better shape. EDIT: unless rates rise. That's the most deflationary thing of all. Which is why I think we might get a deflation: if things go ok, rates rise, and I don't think things stay ok for long; but if they don't (which they never do, for too many years in a row), rates can't fall. Deflation both ways? But then I've been thinking this (and wrong) for years.

China devalues by 1.9% - not huge, but significant in context of prior moves and change of mindset. What fascinates me about this is that I've read a number of forecasts of Chinese/Japanese competitive devaluations driving deflation in the West. I feel like certain elements of the deflation thesis are playing out as expected (currencies, commodities) but that it's not being reflected in the CPI numbers because heavy weights for things like rents. Although, owner-imputed rent is inflating a lot less than real rents from what I have read, and healthcare (inflating fast) is underweighted in the index, both of which are good for the deflation hedges.

He's got a bit less now!!

Yeah, that's fair enough. I see them chugging slowly along (which is actually what I want of most of my holdings) and making a lot if we *don't* muddle through. That's fine for 20% of my portfolio. I don't call that a macro bet, because 99% of my confidence in the company is based on 8 years worth of work understanding the culture, the insurance businesses etc. I suppose the only place I'd disagree is that I do like insurance: it'll always be needed, and done well it's profitable. I think these guys are starting to do it well.

I don't really understand this discussion. Fairfax isn't a macro bet. The deflation swaps are worth virtually nothing but have upside if things go bad. That's not a bet, that's insurance. The equity hedges could cap some more upside, but they don't stop the shares rerating if the whole market does. Fairfax also make investment mistakes. Shock, horror! So do all of us. They also have big winners and a better-than-average long term equity and bond performance record. Finally, if the alternative is just buying good companies at fair prices...what's wrong with Odyssey, Brit, Zenith, Fairfax Asia, and endless others in the Fairfax stable? I see Fairfax as a high-quality, well-run company with an admirably long term perspective which, as a bonus, will do extremely well if we get a period when everything else is doing poorly. And for this I pay roughly 1.1x BV which, even allowing for Ericopoly's point about not wanting to pay >1x for goodwill, is a reasonable valuation, especially set against a market where a lot of things appear expensive. I also think this conversation would have a VERY different tone if things were looking crap - e.g. 6 months ago, when CPI was falling briefly. I don't see why selling Fairfax is any less of a macro call than owning it, because both the following statements are true: bond and equity markets provide a positive return over time and it doesn't pay to be a pessimist, and both markets usually provide pretty paltry returns when current valuations are the starting point. Whichever statement you favour, it's a macro call. Each to their own, but I can't see why this wouldn't have a place in a portfolio - unless, of course, you simply have a lot of better ideas which you feel you understand to a similar depth, but I don't. Pete

I'm instinctively anti-QE. I think it's better than a depression, but I'm not sure it stopped one, and if there wasn't going to be a depression then all the moral hazard and inequality it created was for nothing. The one thing I am fairly sure of is that it could have been done better. Instead of buying financial assets, I think the printed money should have been spent on infrastructure. That employs the poor and has a productivity benefit, rather than enriching the rich and blowing asset bubbles. The only downside I can think of is that, having bought bonds, the FED can contain inflation by selling them again (even if at a loss). They couldn't take the money out of the system so easily if they'd built infrastructure.

Yes, the zero bound is a very different picture. Today's 30 yr amortization schedule mortgages on the books will run-off at an accelerated rate due to the fact that a low-interest loan has a very high principle component. Take a loan at 4% with a 100,000 initial balance. It's first monthly payment has a $144 principle component and a $333 interest payment. Compared to a loan at 8% with a 100,000 initial balance. It's first monthly payment has a principle component of only $67 and an interest component of $666. So the debt runs off at twice the pace in the beginning days of a mortgage. So the household expenditures to service the debt today are night and day apart compared to those historical periods when the household debt to GDP was lower. Most of the household debt out there is mortgage debt. Not only are the household debt service ratios at historically healthy/normal levels today, but the absolute amount of the debt (which is historically high) is running off at a historically high rate. It's not anywhere near as simple as looking at a chart. The charts don't tell us how fast the debt is running off vs other periods in history. A good set of points which I hadn't thought of, partly because I live in London where house prices have just kept going up so monthly payments (for a new buyer anyway) have not fallen with interest rates, and although the interest/principal ratio may have changed, the principal has risen so fast you don't pay off any quicker. And it's all floating rate debt...scary. But my point about the zero bound was more that I think it makes things very unpredictable. We've never been here before so we don't have any historical guide to how things play out. My *guess* is that the US continues on its current path until consumer BS's are fully repaired and wages are rising, which with fixed rate mortgages sets you up for a period of great growth after which government debt/gdp will look fine. But I can see deflation or inflation too. My base case is it's pretty stupid to try to predict, but there's no harm in protecting yourself.

I'd add the beginnings of wage growth to this picture. I don't need a lot of convincing. Against that, I'd pitch: 1. rising inflation (not in CPI but that's a very doctored measure) 2. totally abnormal interest rates (which distort your "normal debt service levels". But it isn't the US I worry about. I worry more about places where the bubble hasn't bust yet (EM), or where consumer debt is floating rate (UK) or where currencies are fixed (EU).

Japan doesn't have a fixed currency either and they've suffered from deflation for the last two decades. Secondly, QE isn't inflationary for anything but risk assets which has the potential to transcend to the greater economy - but generally doesn't since most of the risk assets are owned by a handful of the wealthy that don't typically spend the money unless if they just bought a Picasso. The majority of the money has been stuck as bank reserves and isn't loaned which is why after 4 rounds of QE we have paltry growth, record low monetary velocity, and had headline deflation in the first quarter. There could be a real argument made that QE has been absolutely pointless except in potentially driving asset bubbles and monetizing the government debt. Agreed. It might even be *de* flationary if it a) drives the building of over-capacity (look at Chinese PPI), and b) encourages money to be destroyed (bridges to nowhere, asset bubbles). Then again, if we are starting to see wage inflation (WMT, minimum wages), then...

Not *totally* different - they changed the gold price, devaluing the currency vs. gold by 41% in 1933/4. It wasn't a very solid gold standard!

The last time I got a loan, they asked about my household debt outstanding but nobody put my government's debt outstanding into the underwriting equation. You can stop working at 65 without worrying about whether you've paid off your government's debt. Household debt is extremely different as compared to government debt. IMO. I agree, and the end of WW2 supports this observation, in that government debt was very high but private debt was very low and you got a good boom. That said, if his claim is true that private debt/income peaked at 130%, and is now 100%, vs. a long term average of 65%, we may only be halfway there. And that's vs. the average, not the bottom of the leverage cycle. Things are very odd at the zero bound, so who knows what it all means, but I can see deleveraging pressures continuing awhile yet.

+1+1+1 That is an absolute game changer. The UK has 80% mortgage debt to GDP and it's all floating. Base rates are at 0.5%. Rates are expected to rise. The links between rates, household cash flows, house prices, and household wealth are huge. I think the Eurozone is different (more renting) and the US too (more fixed rate mortgages) but the effect is still there. I think this is the key motivation for QE, actually, but I don't think that works forever.

Yeah! That’s what everyone keeps repeating… But what do we mean when we say “irrelevant”?... Irrelevant like… Switzerland?... Like Singapore?... Like Hong Kong?... Like The Cayman Islands?... Well, I think in those places people are living much better than in Greece, Spain, or Italy right now! So, who really care if they are “irrelevant”?!... This is what I would suggest: let’s concentrate our efforts and thinking in trying to find new things, products and services, people truly want and need… instead of wasting so much time and resources trying to make this so-called EU work! Gio +1

Agreed. We really need USoE. Unfortunately, it won't happen soon if at all. I was already amazed with the EU and EuroZone. I guess both of these were helped by good economic times. Bad economy pushes everyone into nationalism and anti-unionistic policies. Personally I think that's the last thing you need! No love lost between Europeans; bottling them all under one system could end badly. Better to go back to individual states, as imperfect as that is. Greece to lead the way! EU has proved that there is some European commonality and potential for united Europe. This is the best direction. We'll have to agree to differ! I don't think such widely varying cultures and languages can be united under one government, especially with a broad history of hatred and violence that makes it so easy for nationalists (whom I hate) to stir sentiment. How does a person govern when 80% of the population can't even understand their speeches? I don't believe in a unified Europe, nor a united currency. There are plenty of successful individual nations, including many of those in the EU.

+1, can you see how germany will not default at the end of the €? Talk me through the maths on this? What debts do you think they have to absorb from other partners that tips them into insolvency?

Agreed. We really need USoE. Unfortunately, it won't happen soon if at all. I was already amazed with the EU and EuroZone. I guess both of these were helped by good economic times. Bad economy pushes everyone into nationalism and anti-unionistic policies. Personally I think that's the last thing you need! No love lost between Europeans; bottling them all under one system could end badly. Better to go back to individual states, as imperfect as that is. Greece to lead the way!

Because introducing the € should have been an act that is not reversible, so they made no rule for an exit. No politician has thought about the current situation, politicians generally only think about what happens until the next polls. That's my point - since there are no rules for an exit, the rules cannot say that to exit the Euro they must exit the EU. My personal feeling on this is that exiting the Euro and reforming the economy are the two things that will get Greece working. I hope this is the direction they are going in and personally I think the reforms will be harder than leaving the Euro (although Varoufakis' is a good list).