Aberhound

Munger wrote a piece years ago about why the two companies were such great businesses. Too bad they didn't put Charlie in charge. He would have boosted the price of the insurance to market rates then issued equity and raised debt to repay the government. It seems that Geithner does not care that the government is using their power to take all the gain instead of letting the companies pay down the senior preferred shareholder so that the private preferred shareholders and the commons could benefit. Management is supposed to be in the best interest of the company, not one class of shareholders. If Treasury ever allows capitalism back into the US the recovery could get started.

In 2006 FFH was vulnerable to another bad insurance year. They had bad losses in 2001 from 9/11 and 2004 and 2005 from two back to back once in a 100 year bad Hurricane seasons. Further, Prem had not yet cleaned up the reinsurance he took out to save the company so the balance sheet might have been weaker than it appeared. The balance sheet must have been weak or Prem would not sold shares. If it weren't from Sanjeev's confidence in the integrity of Fairfax's management I would not have made the bet. I liked Fairfax's portfolio at the time and I did not agree with the short thesis that the reinsurance accounting was a big problem (thanks to Sanjeev). I felt that if they did not suffer another bad loss year the share price would soon start returning to normal value (ie above book value). I suspected this would start fairly quickly, at least by February/March when we get to hear more wisdom from Prem. If you read the short thesis, then looked at the FFH option market it was obvious the shorts were using the options to short the stock. This appeared to create absurd risk/reward opportunities in the option pricing. I also observed that hurricane insurance pricing had climbed sharply and Fairfax had reduced exposure so even if there were bad hurricanes, the loss would not be as severe as 2004 and 2005, yet the share price had dropped sharply, apparently in fear of another bad hurricane year or because of the huge short bet. I like people to short stocks which I want to buy. I bought the options at $120 which were $3.60 vs. $2 which Ericopoly paid for the $140s. I sold about 1/3 after 20 fold gains and 1/3 about 40 fold then exercised the rest at expiry. I was only willing to risk about 20% of my portfolio on a leveraged bet. The $140s looked too risky to me at the time. I expected a 20% to 40% share price rise which caused the option pricing to offer an extremely attractive risk/reward. The huge and rapid rise in the share price was not expected by me and I attribute that to the genius of Prem and his team.

http://www.leithner.com.au/newsletter/jul12_newsletter.pdf A successful investor who believes Hayek. "The superficial result is that a ramshackle collection of buffoons, carpetbaggers, dodgers, grafters, shifters and morons govern Australia, Britain, Canada and the rest of the Western world."

The top and bottom 25% of the LIBOR submissions are discarded so perhaps the legal strategy of Barclays was to report at the top and JPM to report from the bottom so it is difficult to prove that there action cause damages short of proving conspiracy. The greater danger is that the losers on derivative bets refuse to pay while the winners collect. Will JPM be willing to sue and risk a counterclaim of conspiracy to distort LIBOR and punitive damages? This will be brutal litigation with endless discoveries. Does JPM want to disclose all of their trader's emails now that evidence of traders' collusion has surfaced? Will lenders continue to lend to JPM at low rates until the outcome of the litigation is known? Why would they when they can lend to WFC with much less exposure.

Good post Ragnar I enjoy your blog. Perhaps there is a flight to safety. If you buy a house with a 30 year mortgage if the currency is devalued the mortgage value drops. If inflation averages 4 to 5% over 30 years and you lock in at a lower mortgage rate the price of the home will likely track inflation much of the mortgage is paid by negative interest rates. More important is where else will it be safe to keep big money? If bonds are perceived as risky there are few places where that money can go. At least with houses in the US you can expect steady immigration and higher than average birth rates. Finally, Wall Street is in the business of selling paper and it looks like somebody figured out how to sell paper for portfolios of rental properties. First the banks will sell the properties to the pools which are doing the buying now, second the banks will bump up the foreclosures to sell more and keep prices steady, and finally after the pools have finished buying the new product will be marketed to less well connected investors to drive up the price of the paper. In 2005 or so it was surprising how many suckers would buy the mortgage paper even after Prem warned of the moral hazard in 2003. REITs haven't worked for houses because it involves too much work. Maybe the economics work when the unemployment rate is high making the labour cheaper while technology is making it easier to deal with delinquent tenants. Credit ratings do a good job punishing delinquent borrowers so maybe there is a new system rating tenants which will punish bad tenants. Look what I found on a Google search- it looks like the credit rating agencies are working on a new line of business: "UK’s leading credit reference agency launches Rental Exchange Nottingham, UK – Several million people* living in private rented accommodation could soon get a welcome boost to their credit rating, following the launch of the new Rental Exchange service by Experian®, the global information services company. While information about mortgages is included on credit reports, rent payment information currently isn’t. This means that someone living in a privately rented property who meets their rent payments on time hasn’t seen this positive information registered on their credit report – but this is about to change."

My bet is that G-day is coming soon. Greece is out, ESM is in, banks are nationalized to recapitalize them, then Eurobonds are issued backed by sequestered VAT + the national gold hoards. EU directive will force sale of private gold to the central banks. Then gold is revalued. Nationalized banks financial data becomes state secrets and hyper-leverage takes off again which we will see only from increased public spending. The result is a hard Euro vs other currencies and a death to the US reserve currency status. Its funny that Obama/Geithner the destroyers are pushing the Eurobond. Traitors!

NASA retirees save the world: "However, the cost of the Tri-Polar Lead Cobalt Battery II is $75 per kilowatt-hour (kWh) vs. $360-$450/kWh for a Lithium-Ion Battery. A Lithium-Ion Battery weighing 450-pounds might cost $25,000, while a Tri-Polar Lead Cobalt Battery II of the same weight would cost $5,200 and take an electric car the same number of miles on a charge." If the cycle length is 1500x ie 600,000 miles for a car as suggestted this is revolutionary. http://www.batterypoweronline.com/images/PDFs_articles_whitepaper_appros/Appllo.pdf http://www.apolloenergysystems.com/ The factory is supposedly being built in Boise Idaho. Any locals who can provide updates would be greatly appreciated.

It is a mistake to talk about the problem as it is framed in the press. The problem is not about countries. During the boom some people got extremely rich and were able to guide government policy to their benefit. They are using that power now to get innocent people who happen to be taxpayers in countries like Spain and Ireland to pay higher taxes now and in the future to bail out the mistakes of these rich folk. Complicating the problem is that this concentration of wealth creates a vicious circle. The rich get richer as the innocent get squeezed. The squeeze is made worse by effective rent seeking by the rich creating high cost power and toll roads etc.. The concentration of wealth means that consumption decreases both because the rich consume proportionately less and because the rich spend a greater proportion of their wealth outside the country and move more money offshore. The rich pay less tax proportionately through better "tax structuring" so governments get less tax revenue and fire more middle class workers. You end up will less local demand and a growing class of long term unemployed dependent on the kindness of others. You have to stop the governments from intervening as this only results in more rent seeking. Look at the insanely stupid plan in the UK to reverse Thatcher's electricity market policies and replace it with a communist electricity system which will cause a massive transfer of wealth from the poor and middle class to the rich. It is not intelligent to add hundreds of billions in debt to uselessly convert from one type of power production to another chosen by some bureaucrat influenced by the rent seekers. Let the free market choose. If politicians sat on their hands the banks which were poorly run would go bankrupt and the bond holders would become the new owners of the banks. At least the concentration of wealth problem would improve somewhat. Politicians that want to meddle can find plenty of work reversing any policy that has resulted in successful rent seeking. Depressions are the best time for new businesses to be created so it is in the rent seekers own interest to allow the politicians to end this nonsense. Rent seeking is more successful the bigger the political system. The problem will only get worse if the political union gets larger and the politicians more remote. Why not do the reverse and return to the city states? Think Singapore. Cities should hold referendums, declare their independence and leave both the country and the EU. I would love to visit Milan after it is taken over by the Milanese.

Where do you buy that? I work in Richmond BC so the nearest to me is Steveston Farm. You get on a list. If you bike or walk the dike you can see the Galveston cows feed along the seashore. Aside from the grass they get about 7% of their feed from the mash from the local brew pub. A happy cow is a tasty cow.

Grass-Fed beef bought each fall. I buy enough to last a year. The taste is way better.

The big banks and their shareholders will soon realize that it is not a good idea to be in a position where the government gets to tell them what to do. The reality of Dodd Frank will continue to get worse as the regulations are written. Congress always wants more power and they will use that power to turn the banks into utilities which buy government debt. Then the big banks will seek to escape the heavy regulation. Will they point out that their geographical and business diversity and fortress balance sheets means that they do not require deposit insurance so that there is no need for the heavy regulation? Trust in governments are eroding so more and more people do not believe governments when they say they will actually pay what they promise. Better to rely on a fortress balance sheet rather than more government "insurance". Insurance companies don't insure huge risks like nuclear accidents or war damage because it is impossible to pay. Nor should there be deposit insurance available to those with trillions in derivatives as taxpayers do not have the ability to pay. So once JPM and WFC determine that it is in their interest to not use deposit insurance they have a compelling reason to escape the regulatory burden. The deposit insurance and heavy regulation go hand in hand. BAC should hold onto its cash so when JPM and WFC lobby for lighter regulation and limited on no deposit insurance they are in a position to do the same.

At this stage in the US recovery the pent up demand should cause still more growth. Growth is slow because the helpful policies are all sugar and no meat mixed with harmful policies which are all skewers. The recession call is stated to be based on certain indicators. If the data is garbage then how can ECRI rely so much on such indicators? I suspect that the real call is based on the 1981 double dip where a weak recovery turns into a second recession because of a shock. There are lots of potential shocks so the call is a safe bet. If he is wrong economists have called 5 of the last 3 recessions so he suffers little harm to his reputation. If he is right he gains many customers whose asses are saved by his bold call. I think Hussman's observation that it is a terrible time to invest in the S&P is a better analysis. The probability of risks and reward is against you.

http://www.davidmcwilliams.ie/2012/02/27/the-land-of-the-financially-blind Prem has nerves of steel to buy with this mortgage loan book. Experience says Prem right, McWilliams wrong. Is the plan to borrow at 1% from the ECB and lend to Irish government at 7%, leverage and repeat? Sounds good but the policy drains cash from the non-bank private sector to the banks and government. The drain of cash from the non-bank private sector will cause the real estate prices to fall further and increase the default rate further. Prem, an advocate of "the bigger the boom, the bigger the bust" probably expects default so he must think there will be a resolution which doesn't wipe out his equity. I can't think of any short of Ireland following Newfoundland's example and becoming the next Canadian Province which will bring in immigrants. The alternative is for the Irish youth to emigrate to Canada which leaves the debt behind with no one to pay it. The bankers' weakness is that the wealth of a country is largely the minds of the educated youth. The offices, shops and mansions may look valuable but when the youth leave they are liabilities. When the youth realize this the bankers are screwed.

Value investors can do well buying private businesses and assets. Most private businesses sell for low valuations and are under-capitalized. Choose a niche and develop the idea. Who cares if it takes decades if the capital invested is small compared to the intrinsic value. In 1990 when timber and forestry were dead in BC I bought 500 acres of old silver mines with exportable timber and a private lake for $110,000. I figured that eventually you could buy planes which would use computers to fly so the middle class could pilot themselves to beautiful places and this lake had the advantage of being near Alberta. Meanwhile I have a nice place to fish and the timber grows 2 to 4% per year. Value investors don't care if they are asset rich but cash poor and since you see value many years out assets like this are more valueable to you than to others. Last year I invested in a new business which has a removeable spray coating which replaces the blue plastic used in construction. I liked the business because it had many of the characteristics described in the best business thread. I literally had to pay off the bailiff so the only place I might find better value now is in Damascus. It is not as good as the 1% hard to make stuff to make vulcanized rubber discussed in the thread but it is hard to make as few things stick well to glass yet are highly protective and removable. Windows are also getting more expensive and there is a growing replacement market for energy efficiency. Amazing people are available and easy to find because of the interenet. I have licensed a gentleman in Europe who ran a major glass factory and who invented a type of fireproof glass but was seeking work and opportunities. I am currently interested in a fulvic acid plant because the solar cycle is predicted to move into the drought phase starting next year. Fulvic maintains yield even when there is 40% less moisture. It also has many health benefits. The problem with agriculture supply business is that the buyers are monopsonists who squeeze the small suppliers. The current good weather and this problem is why the plant is in trouble. So now I am helping some other gentlemen establish a retail market for the Fulvic. I came up with the brand name for them. Its a nice business for them because you buy cheap by the litre and sell by the oz. If I can create a new revenue stream then investing into the plant will make sense. I sometimes wonder why I scour the public market for pennies when dollars are lying around for the taking in the private sphere. It has never been easier to start up a private business.

I have decided to cancel the Economist after reading it for 15 years. They seem to have lost their editorial independence. I am looking for a replacement without any success so far. I have always admired the quality of the writing. I pick up the FT from time to time and there is always something of interest you might not see elsewhere.

[amazonsearch]The New Robber Barons[/amazonsearch] Here is a deal value investors will appreciate!

Nice bond gains and the losses could have been worse for a year with so many loss events. It could have been much worse. Now only one year to go to solar maximum so I am expecting one more bad year. I am glad to see the subs have built up so much cash. I hope they increase their rates.

Down 13% to October 31 then up 20% which amounts to a small 3% gain. Since inflation is likely understated that amount the actual result is close to even. There is a high correlation in the gains since Oct 31 causing me to believe that there is a computer buying everything without discrimination. 7 of 9 stocks all up similar amounts despite differing results.

LTRO allows the highly levered banks to move onto super leverage. It is profitable until the bonds they buy drop in value. Politicians seeing interest rates drop because of temporary increased demand for sovereign bonds will be less willing to balance their budgets eroding confidence confidence of the bondholders. The increased ECB balance sheet will continue to climb from above 25% GDP increasing fears of future inflation from the money printing and reducing the perceived likelihood that the ECB will be capable of future bailouts eroding bondholder confidence further. Eventually the confidence tips over into the waterfall event probably triggered by a default. My guess is Hungary. Sovereign defaults occur in waves so the interest rate every sovereign pays will spike. The super leverage means even small bond losses will render weakened banks crippled and render the ECB insolvent. When I worked on a macroeconomic model looking at Europe, when every economy slowed at the same time due to an increase in the oil price there was an extra hit to growth of -2% as the slowing exports caused slowing imports in a vicious circle. Aren't we facing that oil price spike today? Further, the desperate governments are relying on tax increases as much as spending cuts where the negative multiplier is likely 2.5 to 3 so we already have a huge drag on growth. The only hope is to copy President Harding and shrink the government sector, reduce taxes, allow bankruptcies, let the private sector grow and restore confidence. This will not happen with ESM which like the ESF in the US will likely trigger a massive expansion of the state.

BAC and MBI are both trading at a discount because of litigation uncertainty and in MBI's case because they cannot write new business. So BAC should use their position to find out what UBS and the other remaining banks in the MBI restructuring litigation want to settle. Then they should find out from Moody's what MBI would need post settlement to write AAA or AA etc.. Armed with the information BAC uses its capital to buy MBI, then after taking it private settle the now internal issues to put capital into MBI and privately resolve the mortgage liability issues. No more risk of fraud being proven in court. Meanwhile settle with UBS etc.. Then put any other capital in MBI needed to get AAA or AA and start writing business. Then float MBI on the market again at billions higher valuation or maybe Buffet changes his mind about the muni insurance and he buys it and he is the one who puts in the capital to get AAA. While they are at it they can secretly buy MBI shares until they hit the disclosure limits and enjoy a short squeeze.

Chris Whalen on King World News Dec 21 interview suggests that BoA be put into receivership because they are losing the mortgage litigation. Do the bank analysts have information which the public does not hear?

I responded to the scandal by asking my broker (RBC Dominion) if they are willing to covenant not to re-hypothecate. Then I checked SEDAR to see if I could find CEF.A's bullion storage agreement with CIBC which is purported to have Re-Hypothecated $70B in London (did that include the bullion?). I could not find the agreement even though it is clearly a material agreement. The prospectus says the bullion is unencumbered. I emailed the fund to ask for a copy of the agreement and to confirm that unencumbered means that the bullion is not part of the security for the $70B and CIBC has no re-hypothecation rights on the bullion. Then I wondered if I had given re-hypothecation rights when I signed my mortgage. I couldn't find such a provision and there is statutory law in BC confirming the common law which preserves the equity of redemption so even if my home is pledged I could probably redeem by paying the borrowed money. Maybe that is why the Canadian government owns much of the mortgage paper? Then I thought of the huge foreign borrowings by Australian banks for the mortgage lending which is purportedly leveraged 50:1 with the mortgage insurers levered purportedly 100:1. I could find no re-hypo clause in the Australian mortgage terms but there is a provision not in BC law granting the entire title to the bank when there is any mortgage debt outstanding. So I wonder about a priority battle in Australia where you borrow money on your house and almost pay it off when your bank fails. The bank had pledged your title in London where the derivatives have priority. Does JPM takes the position they own your house when there is a shortfall in bank assets vs liabilities just like they take the position that they own MF client monies which was part of MF's security for MF's London borrowings? Re-hypothecation rights might mean you won't own assets you think you own. Check your contracts.

I noticed the Google ad for the same phone you linked to in your comment. Brilliant algorithm. Apple is doomed.

My Dad told me that the best thing about getting old was that when he re-read his old favourites he couldn't remember what happenned anymore but he could remember and re-experience the joy of reading them. I guess the memories of the emotion last longer. We had both enjoyed the Hornblower and P. G. Wodehouse series and I had been surprised to see him re-reading many of them. Consequently I put away boxes filled with books I enjoy for the that time of life which is now more appealing to me. Thanks Dad!

Mr. Roche should listen to more of what Ron Paul has written and said before he writes a headline claiming to debunk what Ron Paul says in one context. Few people know as much about economics as Ron Paul. Mr. Roche's argument is also wrong. He describes the system as if we had Gadaffi's and Lincoln's practice of printing debt free money ("Greenbacks" for war spending in Lincoln's case and grants and interest fee loans to the people for housing upon marriage and free schooling and college for all citizens and interest free loans for government infrastructure projects in Gadaffi's case). In our system in addition to money printing causing debt, treasury has to give the Fed debt which taxpayers must repay. So in addition to inflation you also get the Reinhart/Rogoff problem of slow growth when the debt exceeds 90% of GDP or so. High debt to GDP is why US is going to have the same slow growth problem as Greece, Italy and every other country that has had a high debt to GDP ratio. Mr. Roche is also wrong about the effects of austerity. Whether austerity is good or not depends what the money is spent on and what the debt to GDP level is and whether the policy environment promotes growth or not. When spending has a negative multiplier such as the TSA scanners paid for by stimulus monies austerity boosts growth. When debt to GDP ratio is high even spending with a positive multiplier should be deferred unless the multiplier is high enough to cause the GDP ratio to stabilize and decline. Meanwhile, the government should focus on the basics like improving rule of law, speeding up the bankruptcy process, simplifying taxation, improving regulation so the benefits exceed the costs, avoiding wars, seeking peace, making education less expensive, increasing competition, increasing access to capital and protecting private property rights. The spending multiplier on the basics is usually very high. Governments do have a role and they should focus on doing those things that are helpful well. Improving the policy environment and stopping the stupid will speed the recovery. The recovery will come when private businesses make money. Businesses need to adjust and rid the economy of the bad investments caused by the artificially low interest rates which caused the boom. American businesses are very good at these adjustments so government is lucky in that all they need to do is to get out of the way and look for policies which will help the private sector. Maybe they can find policies like Hitler found the Autobahns or Gaddaffi found the water projects which would have turned Libya back into the breadbasket it used to be when the region supplied most of the wheat used to feed Rome during Roman times. The extremists are the people in power trying to preserve their position and privileges not the people advocating common sense. Perhaps Mr. Rogue is one of the many members of the media establishment that are paid by the ESF to promote a Hegelian dialect so we only see a false choice of stimulus/austerity when the real issue is what the money is spent on and whether the spending choices should change as the GDP to debt ratio changes or whether we should have the ESF/Fed and debt money instead of some other system.