JBTC

The RE logic of the rest of the world? What is it? The more I look at real estate across the globe, the more I see the differences. I wish there were a universal ratio on housing valuation. There isn't. Within Canada, the price difference between cities is huge and likely widening. Within a city, prices can change a lot between neighborhoods. Not saying property prices cannot go out of whack and correct. It's a fact that property prices go down less often and less dramatically than stock markets. I'd love it if someone can present a cogent case on why Canadian housing prices will fall significantly in the near-term. I am all ears.

If you haven't been in Canada, you may want to see data, although I think everyone in Canada knows. There are half a million people of Hong Kong descent in Canada. They live overwhelmingly in V/T. This doesn't count the newer immigrants from China. In terms of overall Chinese population, 531k live in Toronto (9.6% of total) and 411k in Vancouver (18% of total), which compares to 91k in Montreal (2.4% of total) and 20k in Winnipeg (2.9%). I don't have the numbers, but assume before the immigration from Asia in the past couple of decades, the price gap between Vancouver and Montreal was less dramatic. Of course there are many factors impacting prices. Even without the immigrants, I'd imagine Vancouver would over time become far away the priciest city in Canada. It's nice and laid back and warm. The point is the immigration/global affluent/etc likely only accentuated a trend already in place. Maybe the current price is high and you hope it falls. But never lose sight of the strong fundamentals in these cities.

You can't be serious. +1 I was thinking we should probably start a topic called "fake gurus". There are so many pretenders in investing that the innocent should be warned and kept a safe distance from them. Jim Rogers should be on the list of fake gurus. This is not to say he didn't make money before - he did, mostly a few decades ago from commodities. He was also right in being bullish on commodities 10-plus years ago, although I doubt he warned people about the subsequent collapse in commodities later on. The issue is he constantly makes sensational claims, without providing data and analysis to substantiate them. He does not disclose what he does with his money and how he has done. To my best knowledge he's now a promoter of himself and probably makes money from appearances, rather than managing money. Maybe he truly believes in the 100% odds of the US being in recession in 12 months. I somehow doubt it. He's been around long enough and wrong enough that he knows he can't prediction such things with such precision. If so, he is being disingenuous and can hurt people.

The last line I have quoted here summarizes the situation nicely. Toronto and Vancouver play by the rules of global, international cities. See the chart in this article from just over a year ago. http://business.financialpost.com/personal-finance/mortgages-real-estate/toronto-and-vancouver-home-prices-pass-rome-and-close-in-on-paris Land availability does not seem to be a factor. Proximity is the issue. This applies very neatly to Toronto. The greatest price increases have been downtown, and near the subway lines. I live very near Mississauga (~1 km), 15 minutes by bus from the subway, and the prices have not risen nearly as rapidly, as homes slightly east and walking distance from the subway. There has also been huge developments of high rise condos along old, and new subway lines that may be skewing the prices upwards as well. Finally, Canada's immigration is somewhere over 200,000 people every year, of which over 40% wind up in the greater Toronto Area. That is an addition of 1 million people, with their children every 10 years since 1991. Of course, prices will go up. No one really knows if they are in a bubble. I honestly thought they were in a bubble 12 years ago, when we bought our house. I am happy my wife pushed to buy a house then, in retospect. Bubble has become such an overused word. That's unfortunate, because it deterred a lot of people (without a wise wife) from buying. If prices in Vancouver and Toronto are merely in line with Rome and Paris, to me they are still cheap.

My guess is the problem is mostly in Vancouver and Toronto, not really Canada wide. The global affluent go after these highly livable cities. You hear the same complaints when you talk to someone from London or Sydney. I presume even before the immigrants arrived in scale a couple of decades ago, the same trend was taking place, albeit not as visible. People from other cities moved in, neighborhoods gradually gentrified, local low-income households moved out. So this broad trend has been in place for many years and will surely continue. Only the characters have changed and the pace has accelerated. I agree if Canada changes its immigration policy, it will likely slow the Vancouver market a bit. In addition, the government could force the foreigners to buy new apartments rather than existing properties, which is the rule in Australia.

Shouldn't a 15-year run indicate there are long-term fundamental factors supporting the market? The price chart says apartment prices have increased more modestly than detached homes, suggesting it's land that has become scarce. I am not saying the current price is fully justified, because it likely reflects both investment merits and speculation. If Chinese buying is indeed key, then it's difficult to know when the run-up will stop. My guess is if adjusted for quality and lifestyle, Vancouver housing is likely still cheaper than China.

Interesting. Is he bullish? Seems not. So neither bullish nor bearish. A bit weird for someone who looks serious and pronounces 80-year debt cycles and mentions 1937. The lesson for me always: don't listen to what people say, look at what they do.

There is literally no way to answer this. I mean, other than just making things up. Well, a whole Wall Street exists to provide answers to such questions. You may think they are making things up. But don't they provide a service to meet market demand? As they do so, they work hard, look up and down for clues, go back in history to draw similarities (Ray Dalio says 1937 ahead). Because people clearly really very much want to know what the future will be and where the markets are tomorrow.

I think he did and this touches on an important point which I feel has not been stressed enough in this discussion. Steinhardt did those things to gain an informational advantage. Without this advantage he would be a lesser legend or not a legend at all. The key word to investing is edge. You need to have an edge, otherwise your results are not good. There are perhaps four kinds of edges: informational, analytical, behavior, and financial. Insider trading is informational. WEB buying into Geico is analytical (and informational because he was able to grill Jack Byrne before his investment which no one else could have). Behavioral is self-explanatory - patience, fortitude, etc. Financial is when things are down and everyone is poorer, you still have money to invest but others don't. Few of us have financial edge - we are just not rich enough. We try to improve behavior, but we are only human. Most of the investment effort is around gaining informational and analytical edges. Without such edges which come from hard work, there can be no good investment. Think about what we are doing here - reading the posts and typing away. We try to learn. We learn lots everyday, but most of them are not good enough to become a money-making insight.

Your general point is valid but I think some statements are not quite. I would characterize reading the wrong material, or doing anything inconsequential, as doing bad research. Doing good research means you are able to come to the crux and form the right insight. Ackman did plenty wrong in Valeant which he now concedes. It's not a case of good research leading to bad outcomes (though of course it can happen). You say "if you need to work so hard to decide if something is the right decision, it probably isn't." I find that hard to accept. It's possible you can still come across what you believe to be no-brainers, I think it's rare in today's market and getting rarer. When I see a "no-brainer", I first tell myself that it's probably because I know so little of the situation that I couldn't even understand the opposite view. WEB has done great things for investing. But one thing he didn't do as well was to warn people not to try to become him. His statements such as "two-foot poles" have led many to think investing is easy. It may be easy for him. Munger made up for Buffett's inadequacy on this by stating more forcefully "Investing is hard; if you don't think so you are stupid." I happen to appreciate WEB's approach. It is an approach of 50 years of working non-stop reading annual reports and numerous other things and hard thinking. It's approach of reading 500 pages a day. He does that even though he could simply call his CEO friends and the foremost experts in the world in any field. How can anyone come up with insights without much effort and mental struggle?

Not sure if you guys saw the Martin Wolf article in FT. He suggests the central banks buy bank and corporate debt rather than sovereign debt.

Considering how difficult it is to make good investment (to Charlie Munger), naturally one has to assume that good investment requires many things - luck, luck, luck, diligence, patience, philosophy, method, execution, many more, and surely good insight and research. In terms of research, good is not enough. One needs "better" research. Unless you call the S&P "good", good investment surely requires superior research/insight. WEB has not deteriorated in his investing talent; he probably got better. I think the average result of BRK in recent years is due only partly to size. What has changed is competition. Competition in investing is higher than ever. The only time when you have good investment but not good research is when you have lots of luck.

Helicopter drops might not be far away http://www.ft.com/intl/cms/s/0/9b3c71f8-d97f-11e5-a72f-1e7744c66818.html#axzz4149bn0DL

So Dalio says 1937-38 is the most analogous period to look at. In case anyone is curious (I was), here's some data (source: Anatomy of the bear) 1937 unemployment 14.3%, half of the peak during 1900-30 Fed raised reserve requirements in Aug 1936 Fed raised margin on security purchase from 25% to 50% Federal deficit to GDP fell from 4.2% in 1936 to 2.8% in 1937 Corporate profitability fell due to rising labor costs Industrial production fell by a third from the 1937 peak to the 1938 low S&P earnings dropped 50% DJIA fell 49% in the 12-months from March 1937 Recession troughed in Jun 1938 S&P earnings then doubled from 1938 to 1941, but DJIA was unchanged WWII began in 1939 A lot to look forward to, guys :(

Would you mind elaborating on why owning CG? Is it beaten up or is it for your anticipated inflationary environment? Thanks.

Agree completely. If we are truly rational, we have to admit such a small sample size has no predictive value. Extreme claims require extreme proof. Considering what held true about value investing for decades is being questioned, the proof is thin. Somehow, I have a suspicion that Dalio may not be doing what some of his followers on this board are doing at all. I have no proof of that, given it appears no one (on this board) knows what he is doing. This fact alone is fascinating. Most of us ignore the sellside strategists because they only talk and have no skin in the game. We pay attention to fund managers because we can study what they say and what they do, to make sense of their strategy and execution. In investing, execution is as important as strategy, if not more. We know what Buffett and Watsa do. Even for the super private fund managers such as Klarman, we know what he does. During Soros' heyday, what he did was tracked and reported by media. Today, Dalio is as prominent as anyone. He is on TV and in Davos. But we don't know what Dalio is doing to execute his views. My feeling is there is a possibility (again no proof whatsoever), Dalio operates a bit like Grantham. Grantham is a lead thinker of his firm, but GMO runs many strategies that are not necessarily reflecting his view. While he was spot on in recognizing the peril in 2007 and recommended stepping up in 2009, his firm's funds didn't do nearly as well. Maybe Dalio is now mostly a thinker, a brand for his firm, becoming in a sense like a sellside strategist. He has very high freedom to express his very broad views, because precisely his funds don't have to follow those views precisely. Just on the issue of precision, his views are anything but. GMO sets and updates 7-year return targets, and Grantham mentions his S&P 500 target. Dalio is a 50-to-80-year debt cycle prophet. How helpful.

Is this all there is to know about his positions today? Is he 50% cash of the hundreds of billions he runs? Any idea at all? Have you read it? "50% cash" is meaningless for futures trading. And in which currencies, anyway? This is not a value hedge fund. I haven't even bothered to look whether there are 13Fs because they'd be almost completely meaningless. I haven't, and that's why I was asking. Honestly, most of this 80-year debt cycle talk is just over my head. But I am open minded and willing to listen. Generally, I much prefer to look at what fund managers do instead of what they say. I think many of us would have a much better idea of what Dailo is preaching, if we knew what his current positions are.

Is this all there is to know about his positions today? Is he 50% cash of the hundreds of billions he runs? Any idea at all?

Do any of you know how Ray Dalio actually invests? What are the his positions? How often he makes changes? How many strategies he runs? Is there a Dalio 13/F?

Me too. Someone should spend a few weeks in China and do some on the ground research - just like its economy, Chinese stock market is very much bifurcated, many old slowly dying uncompetitive state enterprises, exposed to real estates and heavy industries, and many innovative service oriented private companies winning in many new industries. True. In China many sectors remain heavily regulated, and this makes the life of entrepreneurs difficult. In Internet related areas, the government is mostly hands off (other than to censor the content and outlaw Google/Facebook/NYT), which has enabled a competitive local industry. Overall, I'd still guess the slowdown has been severe and the future doesn't look bright. What has really discouraged entrepreneurs and global investors is the lack of progress on stated reforms. In some ways the reforms seem to have gone backwards. The problem with most emerging markets including China is they don't have durable systems and economic institutions. So it's generally hard to produce consistent growth over many decades. Larry Summers pointed out that Western countries, using the example of Denmark, didn't necessarily grow super fast to become rich; it grew 3-4% consistently over a century, without spending a lot of time falling back or stagnating. Whereas in emerging markets you see different high fliers at different times, but in the end they fail to make it.

Me too. Have you looked at the stock prices in Hong Kong? Hong Kong traded Chinese equities are on single digit PE and among the very lowest in the world. Tell me one fund manager who is bullish on China these days. No one is saying China doesn't have a huge issue. The point I was trying to make is that bubbles deflate in different ways. The US way is quick and painful but recovers the fastest. Europeans drag their feet and takes much longer to address the issues. Japanese are even slower. They don't like the excitement of bank failures and massive layoffs. All the pain is spread over decades and endured silently. It looks to me China will be the slowest. That's their way of doing things. They don't like defaults and barely had any in the past 30 years. It's bad for efficiency if they ask you and me. But you and I don't get to run their country.

Markets are nowhere close to pricing in deflation. We'd see equity markets fall SIGNIFICANTLY more than we have if a deflationary scare was considered to be a credible threat. Further, there are market-based indicators of inflation expectations like TIPS breakevens (the differential between TIPS yields and nominal treasuries). 10-year breakevens in the U.S. are around 1.25%. That literally means the market is pricing in 1.25% in U.S. annual inflation for the next 10 years. That is the lowest since the inception of the TIPS market (if I'm not mistaken), but it's FAR, FAR cry from pricing in actual deflation as I've seen many suggest. For some reason, people seem to think a 15% decline in an equity index and a 50 basis point rally in bond yields suggests the markets have priced in a healthy amount of deflationary fears. In reality, we'd need something on par with 2008 for a deflationary episode to be truly priced in. I think what matters is direction and it's been going south for 40 years. Yes markets aren't pricing it in today but, as you said, once they price it in the game is over. The China debt bubble imploding has more than enough potential to drag the rest of the world into deflation. I also think that a lot of market participants (but not yet the majority) sense this. I really think we (investors/media) tend to over use the word "crisis", which implies the past was all piece and nice, which is just not the case. If you read history, the world appears to be in some sort of crisis all the time. It gets out of one, and gets in another. Life is messy, not just now, but always. Regarding China, I humbly suggest that we are unlikely to see anything "imploding". China has deep problems. But the most likely outcome is stagnation - there will be no growth other than being reported. It may be a bit like Japan in the past few decades. But China has a much more powerful state, which can impose a lot more control on the economy. Of course that's not good, but don't hold your breath for a "Lehman" moment. Much more importantly, we all agree the world has a debt problem, and we all fear deflation (even if it's not fully priced in). This is where our fear becomes slightly illogical. This is because the deadly combo of debt plus deflation guarantees that debt grows faster and faster until the end of our civilization. So the society as a whole, which includes the central bankers, cannot allow this to happen. The quickest way to deal with this is debt forgiveness. Greece and subprime borrowers no longer need to pay! For all sorts of reasons no one wants this to happen. The only option left is to bring in inflation, which will gradually inflate the debt away and restore the world's balance sheet. Dare I say that if this is indeed the only option facing the world, it has a decent chance of happening eventually?

Will it, though? You have just created untold moral hazard and dramatically raised the probability of harmful inflation. By now you should know that the global governments are dying to get inflation. Getting sufficient inflation is the key central bank objective everywhere. The question investors face is not what the central banks want - it's if they can eventually succeed. For now the markets have decided that no matter what the central banks try to do, we will not get inflation; we will get deflation instead. I keep an open mind and am keen to find out.

I wouldn't say that I disagree with you. The only thing I would add is that is this: What are they (politicians) going to do to make sure banks survive? Of course they could change the laws and let the banks earn more by making bank customers pay for it. But what this means politically is taking money from customers and giving it to 1) bankers and 2) current bank shareholders. How large are the probabilities for this policy change to happen? If the alternative is not having a properly functioning banking industry, I have to say the probability of getting government support is 100%. That is their job. If the banking industry's survival is threatened by negative rates, which is a result of central bank policy, of course central banks have every reason to support the banks. This is entirely different from the last financial crisis, where the banks were regarded as the bad guys who caused the entire mess. In fact, ECB could issue one sentence to completely reverse the market sentiment: Given the importance of a well functioning banking industry, ECB is prepared to inject capital of whatever amounts required in the major financial institutions, in terms that are fair and supportive to all existing debt and stock holders. If the purpose is not to punish the debt and stock holders, no one needs to be wiped out. The crisis will be over after this statement.

So I asked this question a while back. With the establishment already acknowledging the risk (head of OECD speaking on Bloomberg), what could /should/will the regulators and governments do? The level 1 thinking is the negative rates are leading to a bank crisis. The level 2 thinking may be 1) how much of this is reflected, when leading European bank stocks are at a 30-year low? 2) Could ECB etc do something to soften the crisis? The longs need to ask the question, and the shorts need to think even harder about this. 1) OM posted a long list of possible drivers for this crisis. I think negative rates are the most important one because they take the last hope for European banks to grow their way out of their bad balance sheets. 2) I'm guessing that banks are top priority on the ECB list of issues and have been for quite some time because they are inextricably linked to Europe's sovereign debt problem. I don't see what the ECB can do long-term. Short-term they could buy the bank bonds, especially the hybrids. They could infuse equity. But everything they can do along those lines only lengthenes the malaise. I don't see how they can really restructure the banks. They try it with QE but I don't see how this could possibly be a long-term solution. Even if they could restructure the banks in US fashion I don't see how they can do it without effectively wiping out shareholders. The longs have to 1) think of a long-term solution for Europe's sovereign debt problem, 2) have to be very positive about the effectiveness of QE and negative interest rates, and 3) offer even a short-term solution that doesn't lead to them being wiped-out (or at least hugely diluted). As a short, I only have to pass this last hurdle. I don't think there is a short-term solution where shareholders won't be massively diluted. So, when you, as a (potential) shareholder, are in danger of being wiped-out does it really matter that we are at 30 year lows? The way from here to zero is a 100% loss of your capital invested. People confuse the necessity of having banks and inevitability of "too big to fail" with the necessity of having them in their current form with their current shareholder base. Look at BAC or C – when you bought them before 2007, did it really help you as a shareholder that your bank was "rescued"? Sometimes the consensus is right and second or third level thinking ends at the same results like first level thinking. Obviously I could be completely wrong here but I wouldn't lose that much in this event. Risk/reward is skewed to the downside here. I don't have any European bank shares, but the impending wipeout of US bank stocks, should negative rates come to the US, does worry me a little. I also own BRK, which would suffer badly given it's stuffed with bank shares. But I feel the demand for the so-called long-term solutions for either European banks or sovereign debt (or frankly most important matters in the world) is misguided. The world's big problems are never solved in one go. Right now, it feels like the crisis is mostly in investor confidence - we haven't seen any bank runs yet, have we? What the governments and central banks need to do is to provide a short-term solution and calm the markets. If ECB does believe healthy banks are critical for the recovery in the European economy, maybe they could create new laws and regulations to allow the banks to gradually earn more profits and improve capital. Perhaps they could mandate certain bands between deposit and borrowing rates to make sure banks' NIM is wide enough. They could relax rules on how banks charge the customers on accounts and transactions. The government's job is to maintain stability and growth, and to allocate resources between different sectors. If banks are essential for modern life, then it must support the banks by taxing other economic sectors. I am not saying these are the steps to be taken. I have no clue. But I generally don't like the end of the world scenarios. If things are bad enough, solutions will come up.