rb
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Posts posted by rb
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Did he forget to pay the bill for that 1-800 number? Did he not share the number with T&T?
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Meh, just install some SAM sites on the South Lawn
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Would not surprise me one bit is the PE will govern from Trump Tower.
Nightmare scenario for the secret service. Securing a few block radius of Manhattan.
Maybe they can build him a replica in the Whitehouse as part of the infrastructure project.
Just demolish that old fashioned white hut and build a proper White Tower there. Well, with golden T on top.
Well they do need more office space the the WH. 8)
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Would not surprise me one bit is the PE will govern from Trump Tower.
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I think you framing of interest rate changes is missing something. What is important is not the absolute changes in rates but the relative change. Values will double if rates go from 12% to 6% or 3% to 1.5%. The other thing about interest rates is they do not mean revert they go up and down over long period of times in waves. The current cycle began in 1980 so it is 36 years old. The last two long term cycles were about 80 years in duration. The Victorian deflation ran from 1820 to 1900 and the Great Reflation from 1900 to 1980. These are described in The Great Wave. So we are about half way through this cycle so comparing PEs now to 1980 is comparing apples & oranges as the interest rates environment is completely different.
As to increased demand I think that what is missed is where will the wealthy savings go? Will it go to bonds that yield 1 or 2% or stocks that yield more? I think stocks.
As to corporate tax rates in most studies I have seen the effective rates range from 25 to 30% averaging around 27%. So I think the drop will be 10%+. As to retiring the Navy, I would not put a massive cut back on overseas deployment as out of the range of possibility & a resulting decline in the defense budget.
I think these are some of the reasons Fairfax has become more bullish. You are correct that valuation is high compared to history since 1980 but the underlying assumption is you are expecting interest rates to be the same to make the comparison valid. I do not think the 1980s interest rates will return for a long time so I use the ERP to gauge equity valuations versus P/Es which include both interest rate and ERP forecasts.
Packer
On effective corporate taxes here's the GAO: http://www.gao.gov/products/GAO-16-363. You can also do a quick back of the envelope check using federal corporate tax receipts (around 350 Bn i think) and corporate profits. It'll show you the same thing that effective federal corporate tax rates are quite low. You can get the number from BEA and CBO.
Most of the military spending is on equipment not on people. While you can certainly save some money by pulling back forward deployments, Trump also pledged to rebuild the crumbling military.
As others have mentioned. No one (maybe not even himself) has any idea what he'll do. I'm just going by what he actually said and doing numbers. What the numbers say that unless you're willing to blow the deficit sky high he won't be able to do a lot of what he promised so he'll have to only do a part. I'm leaning toward the high earner tax cut and maybe some of the corporate tax cut.
When we're talking about demand we're talking about 2 different things. I'm talking about economic aggregate demand and you're talking about demand for assets. I agree that a high earner tax cut will increase demand for assets and boost prices. But without an improvement in fundamentals driven by an increase in aggregate demand that's just asset price inflation aka a bubble - not exactly what I'm looking for when making investment decisions.
As I've pointed before my exuberance is tamped down by valuations - those still matter. If the S&P P/E would be half what it is I'd be a lot more exuberant.
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...and Pochahontas shows.
Ugh. Way to drag the conversation even lower and invalidate anything useful you had to say. These types of comments are now fair game since your guy won the election, is that right?
I for one think it's great and I hope it keeps going on for another 4 years
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$10 says the "freedom caucus" won't think it is so great. But Trump can probably steamroll them.
I'll take the bet.
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Jeff Gundlach:
"Look for Trump to "amp up the deficit" to pay for infrastructure and other programs - producing an inflation rate of 3% and nominal GDP growth of 4-6%. Given that, there's no way the 10-year Treasury yield stays near its current level of 2.15%, and it could rise as high as 6% in the next four or five years."
Hard for me to imagine this scenario is anything but super-positive for bank earnings.
So when you had a depressed economy with a lot of slack, high unemployment, zero interest rates, QE, and a Democrat government who wanted to pass some much needed stimulus all these guys were running around with their hair on fire yelling that Keynesian policies were Socialism and were gonna destroy America, future generations, and the space time continuum.
Now you have a recovering economy, with much lower unemployment, much lower slack, with tightening labor markets where wage growth is starting to get some traction, and interest rates are starting to go up. Two days after the Republicans win the election Keynesian policies are the greatest thing since sliced bread.
Funny how that works.
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I suppose whether the bonds are held to maturity or not doesn't really change the economic outcome.
It does, when you don't (have to) sell below par, there is no economic loss. Only opportunity cost, but in the real world you have to make decisions under uncertainty and holding to maturity is the best approach I guess. Some insurance-investment-managers may trade around their positions, but in a theoretical simplified world, the "virtual gains" from the past were non-existent just like the future "virtual losses" are not really there. It's all about the incoming interest payments, which will rise over time, it seems. It should be a continuous lagged process.
There's also another thing. Normally the interest rate environment isn't that big of a deal for insurance cos when you deal with a normal yield curve. They usually buy long term bonds. While short term rates can be quite volatile, long term rates tend to be a lot more stable. But we're not not living in normal times and when you hit zero rates the yield curve flattens against that zero bound and that's not good for insurance cos.
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FFH places macro bets. These were never intended as hedges. They were macro bets on the economy. I think it was just an opportune time to reduce them. I wouldnt read it as a specific comment on the economic potential. And as someone else has said, if you believe markets are going up, you believe that economies are going to get juiced why would you keep deflation hedges?
I think it was just this. There was a lot of style drift at FFH. They made so much money with macro calls in 2000s and it was easy. So that went to their head and started doing macro bets. However as an economist I know that while it looks easy macro is very, very hard.
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Banks and insurance are still cheap relative to their historical valuations and the market, even after the recent bump. Plus, they've been hated for almost a decade now and have the tailwind of rising rates for reinvestment of bonds or loaning to customers. I see them as a great multi-year hold at this time and would expect many of them to have large gains (doubles, etc) over that period.
Hi, can any of you please compare banks vs. insurance in a rising rate environment? Similarities and differences?
Thanks.
Seriously?! Couldn't you have asked a simple question like is there life after death or something?
Ok I'll give it a shot and try to do my best in one post. But the issues are more complex than I'll portray. Let's start with insurance cos cause they're more simple imo.
So insurance profits are the sum of underwriting and investment income. Insurance demand is not that volatile so underwriting profits are driven mainly by industry supply rather than demand. The second part is investment. Underwriting generates float which gets invested - mainly in bonds. In a dropping interest rate environment profits tend to be artificially high as they're collecting higher than market interest and also scoring mark to market gains on their bond portfolio. Their future investment income will decrease as they replace high interest bonds with lower interest ones.
In a rising interest rate environment the insurance co's profitability will be understated because they're collecting lower interest rates on their legacy bond positions and also taking mark to market losses but profitability will increase as the replace lower interest bonds with higher interest ones.
For banks the story is more complicated because there are a lot more moving parts. It requires a lot of understanding between economics, inflation and interest rates and their causes. Those 3 interact each other a lot. Banks make their money of net interest margin - the difference between interest collected off loans and interest paid on loans. Generally net margin is quite stable. Also generally lower interest rates are better for banks because you get higher volume due to lower price. Conversely higher interest rats are bad - because higher prices -> lower volume.
However in banking weird stuff starts to happen as you approach zero interest rates. At that point it's a high liquidity environment so your Net interest margin gets compressed because the interest you can charge gets compressed by too much supply and you can lower the rate you pay for deposits (this is an evolving theory in the era of negative rates). At the same time your volumes collapse because you didn't get to zero rates by accident. You got there because of a severe economic crisis that triggered a deflationary and deleveraging cycle.
When you're a bank in a zero rate situation, rising rates are very profitable because you get hit with the reverse double whammy: higher net interest margins and higher volumes. But these have to be naturally rising rates. They have to be going up because of a a strong economic recovery that's pushing inflation higher which results in higher rates to calm inflation. It can't be cause some idiot called for higher rates on TV for whatever reason and some bigger idiot at the Fed implemented them. At that point you get disaster.
This is not a complete post by far but I hope it at least sheds some light and somewhat answers your question.
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If you can forecast interest rates better than the marker all the power to ya. I know I cannot. The ERP is valuation metric that measures the relative pricing of stocks & bonds independent of interest rates. Stocks are worth more with lower interest rates and one way to see if stocks are overvalued in comparison to bonds is to use thei ERP. In addition, the tax reduction benefits will more than offset any decline in "peak" margins. For example, if US rates are reduced from 40% to 25%, like other OECD countries, it implies an increase in AT margins by 25%. Also there will be increased demand from high tax bracket due to tax cuts and foreign cash repatration.
Packer
Why will be so much increased demand from the high tax bracket? Are they budget constrained? Are there things the cannot buy but now that they'll get this tax cut they'll go ahead get that? There's no question that there will be some increased demand but MPS is strongly correlated with income and MPS is high at the top tax bracket. So it won't push demand up a much. Then you must account for distributional effects of how you pay for the tax cut.
As opposed to rates I brought them up cause you mentioned the stock markets movements during Regan's time. If we have hindsight on stock prices we should have hindsight of rates. But even if you want to do it blind I have more certainty. If I was in 1983 rates could go up, down or stay the same. If I am in 2016 rates can go up or stay the same, they can't go down significantly because they don't have where to go.
On corporate taxes, yes US statutory federal corporate tax is 35%. But the effective corporate tax rate is 14%. That's already lower than most of the OECD, but it doesn't matter for our discussion. Let's say that Trump lowers it as promised from 35% to 15%. The most you can expect is a 7% drop in the tax rate as opposed to the stated 20%. Though it will probably be lower - again because of distributional effects. You also have to assume that these tax changes are permanent and that the next democrat president won't reverse them - but that's a more relative thing.
Then there's also the issue of whether these cuts will come to pass. You have a large income tax cut, a large corporate tax cut, and a large infrastructure program. Even if you increase the deficit, something's gonna have to give. Is the US planning to retire the Navy or something?
So no, based on current valuation levels I am not very enthusiastic that the market will go on a tear that will last.
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re deflation hedges - hope not. They have a low cost basis now and are still a good hedge.
I don't see any economic scenario where it makes sense to remove your equity hedges at a lofty valuation but it doesn't make sense to remove your deflation hedges.
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Also in Reagan's time interest rates were at 12.4% & the ERP 5.1% per Damodaran vs. today interest rates at 2.3% and the ERP 6.1%. The average ERP is around 4%. So if we get back to the average ERP you have an upside of 15.9/11.9 or 33%. This does not factor in lower tax rates a real fundamental cash flow impact.
Packer
You can pull Damodaran and quantsy estimated ERP as much as you want. I'm looking at two situations. Situation 1: P/E=11.5, low margins by historical standards, and declining interest rates. Situation 2: P/E=26, high margins by historical standard and rising interest rates. As an investor I find situation 1 much more appealing compared to situation 2.
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Well if I can be a bit of a dick, there's a reason why Bruce Greenwald is Bruce Greenwald and Warren Buffett is Warren Buffett.
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Yes, it's not unreasonable to think that the markets may go higher on a tax deal and it won't be comfortable to be short if the markets go on a tear. But at the current valuations taking the hedges is still a head scratcher given it was a high conviction position all the way up here. Plus the implication: are we market timing now?
The one encouragement is I have from the reduction in hedges is that Fairfax is maybe getting out of the macro game and going back to being pure value investors.
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So what is the strategy guys. Stay liquid and wait for the trade war??
It's not necessarily a bad one when the S&P is at 26 P/E. We are value investors after all.
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Yeah.... That was what? The 50th time that we heard that the old man went senile and lost it?
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If i remember correctly Obama put some curbs specifically for biotech of just how much they can raise prices. Hillary also said some not so nice things about drug prices and drug companies too.
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If you save it where do you think it goes? Stock market & real estate. This is what happened under Reagan. Also I think you are going to have the momentum of bond investors who are losing money switching to stocks like what happened in 2013. This may be in part why FFH lowered the hedges to 50%.
Packer
So we should get excited about a run up in asset prices without improvements in fundamentals?
The Regan comparison is not good. Regan came in at a time when the stock market had a horrible run and valuations were low. In Jan 1983 the S&P PE was 11.5. Trump's coming in after a great stock market run. S&P PE is around 25 now I think. During Regan's time interest rates mostly went down. Rates are at the bottom now.
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Ok. So they put on the hedges when the market is low. Then the market goes on a tear and looks pricey and then they take the hedges off. Brilliant!
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I thought the whole point of the tax cut was to stimulate demand (and jobs).
Well in theory yes. But the distributional impacts can be huge. It has to do with the marginal propensity to save and marginal propensity to consume. Let me use so simple/crude examples. I know there's issues with them because of simplicity but should provide some ideas.
So i am in a high tax bracket. I buy pretty much whatever I want, I have nice things and I save quite a bit of money. If you give me a tax cut, I'll say thanks and save it, or most of it. Now go to Romney's 47% (not sure if the number is 100% correct) who pay no taxes. They won't get a tax cut. In fact if benefits are cut to pay for the tax cut, they're effectively getting a tax increase.
Now because my budget is not strained I'm not that responsive to the tax cut. But the 47% who's budgets are strained will be very responsive to a benefit cut. There's likely not a lot of difference in the amount of ketchup i consume and the amount of ketchup the 47% consumes. And next year I'll buy roughly the same amount of Heinz ketchup as I did this year. But a strained household when faced with an adverse effect i way more likely to quickly switch to a store brand or consume less. That's not great news for Heinz.
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Consumer products is probably one sector that's gonna be first to get hit with others to follow.
Because they have traded as bond proxies, or why?
One thing that intrigues me is that gold stocks have sold off despite (I would have thought) a higher inflation outlook.
Oh maybe the stock prices will go down cause they have traded as bond proxies. I don't have a view on that. I was talking more toward the fundamentals of things.
The fact is that household budgets are strained already. If you apply additional strain because of let's say a bump in health care costs (but it could be anything SS cut, whatever). Then households have two options:
One, they can lever up. This could happen, but households are already in delevering mode and additional strain could actually blow the other way and push them to delever even more. Again not good for aggregate demand and for the economy.
Two, they cut from elsewhere. Consumer products is an easy place to start: use less(lower volume), switch to a lower brand (lower margin), oh and forget about price increases. But I brought up CPGs because it's an obvious place of impact. Other areas will be affected as well: consumer durables (keep that old car longer, we don't need a new washing machine), also lower corporate investment in reaction to soft aggregate demand, etc.
I'm not worried at all about higher inflation. I think it'll be great if they can actually achieve higher inflation, but it's not a problem at all.
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The thing is that there really isn't a middle position. Just like you can't be just a little bit pregnant. If climate change is happening then it's a huge problem. Moreover, even if you don't believe in climate change switching to clean/cleaner fuels has other benefits as well. Health benefits come to mind quickly. Does anyone want to live next to a coal power plant? From the health economics aspect alone: clean tech prices are coming down and health care prices are going up. So you have an improving economic argument for that. Not to mention the social/personal benefits of not getting sick.
On the other side I think the opposition to clean energy has less to do with facts then feelings. I don't think that the people that create or buy rolling coal for example do that based on a socio-economic analysis of clean energy.
If American - which presidential candidate will you vote for? (Nov Edition) If
in General Discussion
Posted
yes protests tend to happen after every election.
However I've always been baffled by how hard people come down on protests in the US. Especially the people of the right who always talk about freedom and constitution. Isn't protest protected? Isn't that one of the basic freedoms guaranteed by the constitution? Isn't that one of the things that differentiates a democracy from a totalitarian/authoritarian regime? Why are some parts of the constitution more equal than others?
The US has lectured lots of countries to allow protests. They should practice some of what they preach.
This is how democracy works. The people choose and that's the way it goes. Politicians always say that there's nothing more wise than the wisdom of the people. That's bullshit. Sometimes people choose wrong. Presidents make a mess and then someone comes in comes in and cleans up the mess. But people get the government that they've wanted. I'm not saying it's a perfect system but it's the best one we figured out yet, all the other ones are worse.
All you have to hope when a bad one comes in that he doesn't break something that is irreplaceable. It doesn't matter if someone is corrupt. America is rich enough. Or if someone implements bad policies. America can suffer. All that matters is nuclear weapons in general or in this case some crazy war such as America attacking Iran, or letting Russia redraw some borders in Europe. Everything aside from that is fixable. This is also one of the reasons we should wish we could disinvent nuclear weapons. Sadly we can't