Graham Osborn

This is just a comment on trying to forecast a secular shift in Brent. The recent price action certainly has my attention but I've been thinking about this for at least 1.5 years. I had a view last year that we would see support in the 40-50 range based on marginal production cost. I was clearly dead wrong :) Since then I've been looking for secular patterns to help explain what is going on and when we should expect the bear market to end. As many of you know I think the next few years will contain an analogue to 1974 (see the Dalio thread), and if that were true that would mean a bull market in commodities probably in the next 5 years. Basically right now I think: 1. A substantive bull market in Brent will not begin until we have had a substantive bear market in financial assets. 2. A good time to buy (as a secular bull) will be when the SSE shows good support. I look forward to a good thrashing.. P.S. To address the elephant in the room - obviously I'm looking at the 2007-2010 range as more of a blip in a secular bear market in commodities after the great 2002-2007 commodities bull market following the tech bubble bursting in 2000-2001.

Sounds good, I'll move this to the "WTF" thread..

Thursday's WSJ had an article stating that refiner margins are a good bit lower this year and refiners are cutting their run/ capacity ratio. US refiners have a bit of a stranglehold on producers due to the limited number of export points. Historically I think that might help explain the lag..

I think that's a great point. I try to remember to always use the same set of basic metrics and charts when I look at every company. And every investment starts with an idea - not the other way around. I believe very much that like the most revolutionary natural theories, the best investment ideas are reached through a deductive process from basic assumptions/ postulates. This is as opposed to induction, where you come to believe a certain type of investment is good because you see many examples in the market of similar investments working. The former makes you an independent thinker. The latter makes you a bubble boy. To illustrate: Case 1: Last year I had a view we were at the end of a credit cycle, and so just like there were Worldcom/ Enron/ Tyco in the early 00s and Bear Stearns/ MBIA/ etc in the mid/ late 00s there should be at least a couple bad actors that would crack before the bear market. I think I used a 5-year price return screen along with high EV/ Rev and negative tang book trend. So based on that I decided VRX and ACT (now AGN) were the present-day Enron/ Worldcom (AGN/ PFE is strikingly reminiscent of WCOM/ S). And I could just read a bit about the history of the two companies and see they were a reflexive pair. I wasn't a genius - boatloads of other people knew what VRX was long before (when I saw Chanos was in I knew I was right). (Interestingly, most people - including regulators and PFE shareholders - have totally missed AGN. The other non-financial firm that showed up was MDT - which I'm now short). Case 2: Like everyone else, Ackman made a boatload of money post 09 and he wanted to make more. Pearson came to him with a low-risk deal on Allergan. Ackman made money. He got the kind of dopaminergic starburst in his brain that only a quick low-risk profit can give. And he wanted more. And there was Valeant sitting right there. Why not buy some and make more? Inductive reasoning. Ackman is an incredibly smart guy, but even his brain has dopamine receptors. The world is complex, and humans are suggestible. If you leave your map at home and just follow the crowd, you'll go somewhere - but probably not where you intended (most people lose money).

What more incendiary topic can one choose? I had a view last year that we would see support in the 40-50 range based on marginal production cost. I was clearly dead wrong :) Since then I've been looking for secular patterns to help explain what is going on and when we should expect the bear market to end. As many of you know I think the next few years will contain an analogue to 1974 (see the Dalio thread), and if that were true that would mean a bull market in commodities probably in the next 5 years. Basically right now I think: 1. A substantive bull market in Brent will not begin until we have had a substantive bear market in financial assets. 2. A good time to buy (as a secular bull) will be when the SSE shows good support. I look forward to a good thrashing.. P.S. To address the elephant in the room - obviously I'm looking at the 2007-2010 range as more of a blip in a secular bear market in commodities after the great 2002-2007 commodities bull market following the tech bubble bursting in 2000-2001.

Time to poke Gio :) For me the distinction is primarily empiric. For every company I look at, I plot their revenue/ tangible book/ LT debt in Ycharts. For platform companies you get a classic pattern: stepwise revenue growth, stepwise LT debt growth, and stepwise tbook cratering. That tells me the company's growth is not organic and their earnings have at least the potential for manipulation through acquisition accounting. By now, I also suspect an ascending-staircase debt maturity schedule as well. GOOGL, AAPL, and FB don't exhibit this pattern. This is because their existing businesses (rather than acquired assets) are the primary growth drivers. This is good because (1) they may be able to finance acquisitions out of FCF (2) even if they can't, the amount of debt they need to raise should be small relative to shareholders equity. For such businesses you get a nice smooth increase in both revs and tbook. The debt if it is increasing should not be out of proportion to rev growth. Such a business can be said to be growing "organically" in the empiric sense. Buffett moat companies are a good example. Berkshire is another. The taxonomic aspect is less important to me as an investor than the growth sustainability aspect, since the market tends to reward growth indiscriminately during the loose-credit portion of the cycle then pummel the same companies when refis are not forthcoming.

Sharper, not sure I'm following your portfolio theory here. The T-Bills make sense enough, but are you arguing for straddles as the most efficient method for taking advantage of future destabilization? This seems pretty inefficient to me as your outlay would be substantial and for your trouble you might get stuck in a "suddenly, nothing continued to happen" situation. I'll be honest, I'm not a big fan of options unless I can buy them way out of the money and feel reasonably convinced the strike will be reached. Unlike Taleb I don't wait for the swans to show up - I go hunting for them :)

Actually, given Bridgewater's Pure Alpha performance in 2008 was near +10% while global equities were significantly negative (S&P at -38.5%), I think it's fair to say Dalio's model did predict the crisis and profited from it... I'm also not sure whether White and Dalio are using the same analogy here. Does Dalio really say that the machine "can be closely controlled"? – I always pictured this more as an autonomous machine, though he definitely does say that it can be understood. I think Dalio definitely ascribes to a belief that a certain action that occurs with an economy will have certain predictable outcomes. That doesn't mean he gets those outcomes correct 100% of the time, but what that does mean is that simple higher level truths can be found based on history and logical reasoning. Things like if a country is devaluing their currency, exporters should benefit. Bridgewater's analysis is obviously much deeper than that, BUT that's what he means when he says the economy is like a machine. A general framework would be something like: when some action occurs it has led to some outcome because of a, b, c, and d. Further, a, b, c, and d all still hold true today, therefore we expect a similar outcome. Then Bridgewater bets a small amount on that outcome, either directly or indirectly, in the securities markets. Now, he obviously allows for the option to be wrong because he is very, very heavily diversified in the Pure Alpha funds. If he thought he could predict with 100% accuracy, he'd have the heaviest concentrations in the highest payoff ideas, but that's not really how the fund operates. But he has to be right far more than he is wrong to achieve the results he's achieved. When Dalio says an economy, a company, a person, or whatever is a machine he means it is a causal system (i.e. an impartial observer who knew all the values/ probabilities at a given time point could calculate the values/ probabilities at the next). In analogy with signal processing, the assumption of causality implies one should be able to characterize cause-effect relationships through experiments/ retrospective analysis. This doesn't mean thinking participants can have a causal understanding of the future (reflexivity) but only that they can understand that it is causal. This might enable a participant to build models and that assert that a given initial configuration should PROBABLY produce a given result. That's why Dalio thinks his 37-38 model might predict the 16-17 result. Like all great investors he is always very uncertain hence his obsession with the "probability of knowing."

At this point there are some real macro guys on the thread and I feel like a blithering idiot. That said I'll suggest this on Buffett - he's not in it for the capital gains anymore. Buffett is a more an industrialist than an investor, and an industrialist will pay a hefty premium for assets with strategic importance to the empire. Maybe there is a logic to coattailing Buffett in a rising market in businesses with great fundamentals, but the fact that Berkshire has a position in various media and energy companies isn't going to keep these assets from declining in market value. Secondly, I think Buffett's powers are waning based on hearing some recent interviews he has given and some recent investments he's made/ signed off on like CBI. I'll be the first to admit that Buffett in his prime was one of the best industrial/ financial/ creative minds in American history, but at this point he's "a landmark, not a beacon" as Oppenheimer would say.

Re: Schiller PE I think every reader on this thread knows it's an abominable measure of valuation. Nevertheless it is one of the few data points we have going back 100 years, and it provides an apples to apples comparison between cycles. Not perfect, but far from useless. Re: Graham and Doddsville For 74, Schloss was off 6%, Buffett had recently liquidated (macro dunce that he is), Tweedy Browne was up 1.4%, Sequoia was off 16%, Munger was off 32%. These are OK but not great. Burry made 100%+ in the last bear market. Most macro guys lost money, but that's not the point. The strategies cited in the paper were highly heterogeneous as well. The point is you are going to need something other than long stock picking to come out ahead in a bear market. Now, most pure stock pickers will respond that the market rebounded quickly after every bear market so that it made sense to average down. They notice the strategy seems to be working less well each time with the post-2000 and post-2007 bear markets, but it's not clear yet that this represents a breakdown of the strategy (I'm referring to long-only stock picking as a strategy - most of the Graham-and-Doddsville stars were not rigid Grahammitees except maybe Schloss). To understand whether the dip-buying approach should still work, we need to ask whether the TR time period referenced in the paper and the present are comparable. Between 1970-80 US GDP nearly tripled whereas in the past 10 years it has grown ~50%. LT rates were coming off 6%+ then vs 0% now. So the present environment looks very different from Graham-and-Doddsville. And even there, the 70s were brutal.

Interesting. The 37-38 period he cites as the phase-aligned "gas in the tank" comparator agrees closely with the Schiller PE phase alignment: https://www.google.com/search?q=pe+of+s%26p&rlz=1C9BKJA_enUS633US633&hl=en-US&prmd=nsiv&source=lnms&tbm=isch&sa=X&ved=0ahUKEwjPp8LCwYLLAhUMNiYKHccxCaUQ_AUICSgD&biw=768&bih=909#imgrc=8SZJAu1T8l-mKM%3A The debt cycle becomes the Kondriatev wave. Even more interesting: WW2 started in 1939. I can picture Trump with a toothbrush :)

Another great and fundamental point. Jim Rogers used to say a secular trend was the way to get rich. When Buffett buys a moat stock, he's making s secular bet IMO - that an entire sector environment and interest rate regime will support operational/ multiple expansion. Oil was a great secular bet in the early 2000s as the tech bubble deflated. The recent bear market in commodities was another. The tech bubble in the 90s in the US. The credit bubble in China. Farmland in the US after the last housing bubble burst. Private tech offerings over the same interval. QE2 and its effect on just about any equity since the financial crisis. As a value investor I would have missed many of these waves because either (1) the asset class was outside my staples (2) the value metrics weren't "classic" at the start of the trend (2) value conservatism would have forced me to sell early rather than letting the mania play out fully. JMO1 - people who hold a portfolio of mostly Fortune 500 companies right now that they bought 3+ years ago are macro investors and not value investors. If you look past the adjusted debt and EBITDA metrics only a handful of these are values or were then. OTOH, QE was a great reason to buy if you could get in when valuations were still conservative. There's nothing wrong with making money that way unless you don't realize what you're doing is macro - if you don't, you'll believe you have a margin of safety to the downside when in fact you don't. JMO2 - I don't believe that value criteria for the margin of safety are absolute protection either - as my recent performance in microcap defense stocks vividly demostrates. The rulebooks upon which Graham and young Buffett built their careers were premised on "low" markets. In "mid" markets Buffett started losing money on value traps like Berkshire and stared drinking the Munger Kool-Aid. So I really believe macro and value are a bit like the Relativity and Newtonianism - one is just a special case of the other. I consider Graham one of the fathers of macro.

Quite! My answer is: in the future ;) Although, combining www.shadowstats.com with the asset inflation that we have all seen (which is very important even if it is not captured in CPI) I would argue that we have had a LOT more inflation in the last few years than we think we have. And I'm not saying that's a triumph of macroanalysis since I have been a deflationist all that time ;) That is so fundamental. If you look at the cost of bread or gasoline, inflation seems docile. If you look at the fed or corporate balance sheets, mortgages, farmland, commercial/ multifamily RE - wow.

Cardboard, you are officially my hero, and perhaps more right than you imagine ;) I agree with most of your comments btw. Reflexivity says that the most true statements are the least actionable. Graham and macro are both primarily negative arts. When I use puts, the primary basis is technical - with corroboration from the value and macro pictures. I like to think of value/ macro as like organism/ environment - you need both to understand the past and make some exclusionary statements about the future.

Hey Vinod, last post of the night for me :) When I first started investing, I wanted to know why I could find so few stocks that fulfilled Graham's requirements. Then I stumbled across that 100 year Schiller PE diagram which seemed to make more sense than the index charts because it explained where people lost money. The thing that struck me about that diagram was how high above historic norms the Schiller PE had been the past 40 years. If that was true, 2 generations of investors had entered the markets with a fundamentally unsustainable picture of equity returns relative to historic averages. So while you may not agree with my long-term worldview, you can at least understand why I hold it - according to my worldview there should be investors like yourself who view the last 40 years as a sustainable reality where stock-picking without macro insights is safe, whereas Dalio was born in a different reality where said investors had been annihilated by the 70s fallout and commodities was the only game in town. Given that my worldview explains both I tend to give it more credence, but I am always open to correction. My main goal for now is to enhance my asset value to be prepared for a day when I too can hopefully ignore macro - although I hope to ride the commodities wave first. FWIW - Soros' annualized returns exceeded Buffett's.

(Emphasis added). This is what I find confusing. These threads talk about macro and how bad long term investment prospects might be. I tend to agree. But I don't think it is data that is reliable enough to provide conclusions that will make you more money. And since you are 90% invested and like investments available today, does talking about this give you/us much insight? Honest question. I follow macro stuff a little bit just because it is fascinating, but if you can't act on it, it does seem like a waste of mental power, no? Very fair question. I find it fascinating too, but it also guides my investing. My investments fall into a few categories: 1. Companies I am fairly sure will maintain their real value (even if prices fluctuate) even if we get a truly terrible experience (which isn't what I expect) 2. Companies that will do OK in a muddle through scenario, and will excel in a bad one. 3. Companies that are so cheap I don't really care about the macro. Equally I actively avoid things that might have some cyclical fluff in their results or valuation (of which there are a lot). I can honestly say that I'd happily own my portfolio through a 1930s or a 1970s scenario, so long as I didn't have to sell in the middle of it - and I have done everything I can to ensure that, too. In other words, I believe it is 100% possible to be long and still substantially protected from a potentially serious market event. So far in this minor selloff I've made money (in sterling) and found some good ideas. If we get a truly serious event then I am sure I will lose money - everyone long will - but I'll preserve a decent amount of wealth and have great opportunities. I'd expect to come out the other side better off than I am now in real terms. So yes, I think having a macro backdrop view can add huge value (but not a timing one). (And on that note, 99% of the people who say macro is useless, when you dig into their views, assume that the macro will look largely like it has done for the last 35 years for the next 35, which in itself is a macro view - just not a well-thought-out one!) P Good stuff here. I'm probably one of the few here (bears and bulls alike) who holds purely shorts (long-dated puts) and cash. So for better or worse, my money is where my mouth is. Fundamentally I agree with a lot of the risk factors cited here, but in terms of my trading I just follow the momentum - which is down in the sectors I follow. I may think macro but I bet value - finding debt-laden businesses at immediate risk of credit downgrades or high EV/ EBITDA plays that have been in a death slide for 6 months or more. In my experience, I've made the most money when my macro view, the fundamentals of the business, and the technicals lined up. IMO to pass on that opportunity would be as foolish as going short would have been 5 years ago - the fundamentals were stronger and technicals in most of these same stocks were rock solid. Just my relatively brainless trader POV..

I think Dalio is spot on here with his concept of MP3, but I wish he'd taken it one logical step further. What is the largest category of discretionary spending (interest payments and mandatory spending are not prostimulatory) in the typical sovereign budget? Defense. True, you can monetize by pumping money into public sectors like healthcare (look at what it took HHS to build a nonfunctional website), but that’s still just a spit in the ocean compared with defense. I think most would agree that a hypothetical war between China and the US would be manna from heaven for the credit ratings of nearly every economy on earth - for now it's mostly an arms race between our navies etc. As it stands, Russia is the main protagonist. I think that is why Soros is so bent on Ukraine/ Syria/ Iraq these days. He says for the first time in many years there are too many altercations for him to follow them all. So WW3 would be the best MP3 and solution to the international debt crisis/ deflationary spiral/ anemic growth/ commodity bust (by reflexivity most borrower/ debtor nations would be involved). The US averages 2 existential wars per century. Maybe Dalio knows this but considers it poor taste to advocate war as a balm for credit ratings - only a Rothschild would do that :)

Interesting. The 37-38 period he cites as the phase-aligned "gas in the tank" comparator agrees closely with the Schiller PE phase alignment: https://www.google.com/search?q=pe+of+s%26p&rlz=1C9BKJA_enUS633US633&hl=en-US&prmd=nsiv&source=lnms&tbm=isch&sa=X&ved=0ahUKEwjPp8LCwYLLAhUMNiYKHccxCaUQ_AUICSgD&biw=768&bih=909#imgrc=8SZJAu1T8l-mKM%3A The debt cycle becomes the Kondriatev wave.

Scion Asset Management began around Q4 2013. I have nothing to back this up but I doubt Burry is generating anything close to the returns he did at Scion Capital. This is not an indictment of his investing abilities, it's more a reflection of the market environment post financial crisis. He tends to invest in very distressed equities and resource companies (a la fairfax) which have not done as well as they did pre-crisis. More generally, it’s interesting to observe all the sub-prime 'heroes' post-crisis. A surprising number have performed poorly over a multi-year period (Bass/Paulson/Whitney/Eisman/Whitebox/etc). As far as I know only Cornwall Capital have maintained their impressive returns. I still think there are very few investors of Burry’s caliber. He's one of only a handful of managers I would invest with. I don't know much, but what I do know at least suggests that Burry is generating returns comparable to the Scion years, if less lumpy. Examples: 1. Almond farms - look at farmland prices especially in Cali and the price of almonds relative to other commodities 2. Tech startups - VC since the crisis was one of the ultimate secular bets, and just one unicorn would put you in a very good place 3. Real estate and banking - I read somewhere that he turned around and bought these right after the implosion. A buy and hold strategy would have played out well If you are imaginative enough and willing to sacrifice liquidity returns can be generated under any market conditions. He's a bit like a Soros or macro guy in that respect - he'll trade a market up and then trade it down again. He has no allegiances. The most interesting questions for me are: 1. What does the Asia-Pacific fund hold? 2. Has he reentered the CDS market? The outsize profits generated by CDS holders in the last crisis have produced a wider appreciation and suspicion of CDS holders (even those who hold the bonds outright). Interesting about the Novo Banco sovereign CDS which were effectively cancelled. I wonder whether how he feels about domestic vs sovereign CDS, what he thinks about shorting CMBS in energy-exposed REITs. I wonder many things, but given where the market has led me of late I would say there is a 99% probability he holds CDS of some type - if he has found a way to buy without the seller knowing its counterparty :)

As to the current attractiveness of BAC and C, while I think their capital position and asset quality are somewhat improved post-crisis, they are now caught up in the typical reflexive regulatory backlash that closes a credit cycle. The derisking climate is going to substantially reduce the ROE and scope of operations for the megabanks. Concurrently they will have greater difficulty seeking a second bailout which is why their stocks are in decline - secular credit close and no parachute. Burry knows all of this, and has likely sold off his megabanks positions by now along with his almond farms and heaven knows what else.

What do you mean these are high cost shares? You don't think Burry could see value in BAC and Citi at huge discounts to tangible book value? Like most of my thinking (:)) this is purely hypothesis-driven - Burry has consistently generated remarkable returns over the TR which can be reliably tracked. Therefore I hypothesize he has continued to do so, and tried to reconcile that with the 13F which is admittedly just part of a single time point. I asked myself why I would hold that portfolio. And during 2008-09 I would have bought BAC and C (or think I would have - my dad did at least :)) because I would have assumed they'd be bailed out. And leverage would work in my favor in that case. Same for things like CYH/ HCA. These are highly leveraged and inconsistent with Burry's classic aversion to debt. My assumption is that this basket was a secular bet on US QE policy and a rebound in highly leveraged sectors that were beaten down during the dislocation. Of course, it's also possible he's just been drinking heavily since "Big Short" times and is now buying up the same institutions he publically decries just to pass the time..

Just answered my own question - these are high cost shares :)

I think anyone who has read Burry will find that portfolio as stated very disturbing. How can he be long BAC and C now? There is something else going on here.

I gotta agree. CAPE is a number like any other, but 10 years isn't long enough to average even if you think of the classic cycle as lasting under 10 years which has its own set of problems. But if you can't average over 10 years can you average over anything? What does "average" even mean. If you want to beat yourself over the head with such questions I strongly recommend Antti's Expected Returns. Anyway, the PE as a market measure has the gaping hole of ignoring leverage which is a key cyclical variable. One of my many "nice to haves" is a plot of EV/ Rev for the last 100 years (unfortunately companies have gotten awful good at excising "restructuring" charges from EBIDTA as well, but, sans SPEs, debt is harder to hide).

Yes and no. China (let's continue calling it an emerging market for the sake) gets a discount for the transparency issues you mention but historically a growth premium for GDP growth (the market's assessment of how much of that was inflated/ leveraged determines the discount). Since the US is maturing we deserve LESS premium for growth and more for ?more transparency. Once China cleans up their act they'll get a real premium. Then macro funds will have the ride of their lives reversing the dollar/ yuan trade. I'm not optimistic in the near term though.