Viking

The main point with my post was not try and compare and contrast Putin and Hitler as people, leaders and their impact on Europe and the world. Hard to do that in a few lines of text. Also, you are correct, i have no idea what Putin might want to do.

How do you negotiate with someone who doesn’t want to negotiate? Just imagine if Churchill had decided the best course of action was to negotiate with Hitler (and sue for peace)? Yes, the war would have been over much earlier. And the world would look very different today, especially in Europe. Looking with hindsight, i think Churchill made the right decision.

Ukraine is fighting being invaded by a foreign aggressor, Russia. The West is supporting the local population. The lesson from Afghanistan is the local population, if motivated and well armed, is eventually able to push the aggressor out. And that is what we are seeing play out in Ukraine (just much quicker than anyone thought).

It looks like Russia will view this as an escalation of the war by Ukraine. In this game of chess, what will be Putin’s next move? ————— Impact of Kerch bridge blast will be felt all the way to the Kremlin - https://www.theguardian.com/world/2022/oct/08/impact-of-kerch-bridge-blast-will-be-felt-all-the-way-to-the-kremli …..When the Russian president opened its road span on 15 May 2018, driving an orange Kamaz truck across the bridge, he boasted of its significance. “In different historical epochs, even under the tsar priests, people dreamed of building this bridge. Then they returned to this [idea] in the 1930s, the 40s, the 50s. And finally, thanks to your work and your talent, the miracle has happened.” … How Moscow responds is the big question, but one that had been looming ever more powerfully as Ukraine has successfully pressed its counteroffensive in recent weeks amid mounting disquiet among Russian elites and commentators over the conduct of Putin’s war. In April, Dmitry Medvedev, former Russian president and prime minister, and currently deputy chair of the Security Council of Russia, said: “One of the Ukrainian generals talked about the need to strike at the Crimean Bridge. I hope he understands what the retaliatory target will be.” At the very least it is a huge propaganda victory for Kyiv that will be held up as a sign that not only is it unafraid of Putin’s nuclear threats but that it believes it is winning the war.

The Ukraine war has been a disaster for Russia. The longer it goes on the weaker Russia becomes. The weaker Russia becomes the less influence it has in the former Soviet sphere. China is licking its chops. Ukraine, with its success dramatically weakening Russia’s military, is now helping China grow its influence. (Makes one wonder why China is not sending Ukraine weapons :-) As this becomes more obvious, got to wonder when Russian’s wake up to the reality of what is going on. Putin invaded Ukraine to re-establish Russia’s former empire/influence/glory. It is becoming more and more clear he is achieving the opposite: Russia’s standing in its former empire is deteriorating badly. The decline in its influence is accelerating. And glory has been replaced with defeat and shame. I am starting to wonder how long the war can continue along its current trajectory… ————— A Distracted Russia Is Losing Its Grip on Its Old Soviet Sphere - https://www.nytimes.com/2022/10/08/world/asia/russia-putin-soviet.html Russia’s domination of Central Asia and the Caucasus region is unraveling as the Kremlin focuses on the war in Ukraine — and border violence is flaring. … “Until Ukraine, China and Russia were not interested in open competition in Central Asia,” said Asel Doolotkeldieva, a senior lecturer at the OSCE Academy in Bishkek, a center for postgraduate studies focused on security issues. “There was a tacit division of labor: security for Russia, economics for China. But Russia is not doing its job anymore. It has shown that it is unable, or unwilling, to protect the region.” ….. “Putin is no longer the great invincible leader that everyone wants to meet,” said Emil Dzhuraev, a researcher in Bishkek with Crossroads Central Asia, a research group. “He has lost his aura.” By contrast, Mr. Xi has become more assertive. On a visit to Kazakhstan last month, he pledged to “resolutely support Kazakhstan in the defense of its independence, sovereignty and territorial integrity,” a remark widely interpreted as a warning to Moscow not to try anything.”

When you look at the various asset classes, so far in 2022, bonds (@-20%) and stocks (@-30%) have gotten absolutely crushed. The clear winner - and its not even close - has been cash. With an average duration of 1.2 years at Dec 31 and still the same at June 30, Fairfax’s $35 billion bond portfolio is as close to cash as an insurance company can get. This positioning is shaping up to be a massive winner for future Fairfax shareholders. There were costs to moving to this very low duration. 1.) Interest income was much lower than it otherwise would have been in past years. But this cost was largely borne by past shareholders. 2.) Fairfax in 2022 is reporting large mark to market losses as its bond portfolio is revalued as yields across the curve move to much higher levels. This cost is being borne by current Fairfax shareholders. There are big benefits of the move to very low duration. 1.) Fairfax is immediately able to earn much higher interest income on its very large cash balances. And as bonds mature the bonds will be reinvested at much higher yields (with 1.2 year average duration lots of bonds can be reinvested each quarter). 2.) in the future, if bond yields fall, Fairfax will record large mark to market gains on its bond portfolio. These benefits will be reaped by Fairfax shareholders in future quarters and years. How big will the benefits be? Well, that will depend on a number of factors: 1.) how high do interest rates go? 2.) do spreads widen? 3.) does Fairfax extend duration? 4.) does Fairfax shift into higher yielding munis/corporates etc. The math of the impact of higher interest rates on interest income on a $35 billion bond portfolio is pretty compelling. (For reference, interest income was less than $500 million in 2021.) 1.) 3% = $1.05 billion = $44/share (pre-tax) 2.) 3.5% = $1.23 billion = $52/share 3.) 4% = $1.4 billion = $59/share 4.) 4.5% = $1.58 million = $66/share My guess is Fairfax’s run rate yield on their bond portfolio will be over 3% at the end of Q3 and perhaps approaching 3.5% by year end 2022 (setting them up Jan 1 to be on track to earn $1.2 billion in interest income in 2023). ————— The Fed is telegraphing the terminal Fed funds rate to go to 4.5% and stay there until late 2023. If this happens, both bonds and stocks will likely continue to sell off and cash will continue to outperform.

I use sell offs as an input. If a stock i own goes down and i: 1.) get worried (my gut) it usually means my understanding/thesis is weak. 2.) want to but more (my gut) it usually means i am on to something.

Time to take a closer look at Teck Resources? Coal and copper (with a big copper mine coming on stream shortly)…

So what did we learn today? 1.) we are in a new geopolitical world. And the middle east is either neutral (and simply looking out for its own interests) or aligned more closely with the pro-authoritarian block (Russia/China) than the West. Biden’s calling out of the Saudi prince is having serious economic consequences. Not a surprise. 2.) OPEC wants $100 oil (average). I think it will get it. And as we come out of this economic ‘gully’ and the global economy expands, $150 oil is looking pretty likely to me. (Also because Western governments/ESG will not allow supply to increase materially.) 3.) as oil prices stick at $100, and move higher on signs of economic strength ($150), inflation will continue to remain elevated. 4.) central banks will need to keep interest rates higher for longer. —————- I am starting to drink the Kool-Aid that high inflation (4-5% on average) might be with us for years. With lots of volatility. Up to 8% (now). Maybe down to 3 or 4% in a year (mild recession). And than back up to 5 or 6% in 2024 (as the global economy picks up). I think the Fed’s target of 2% is a pipe-dream right now - unless we get a severe global recession. —————- Fed seems committed to positive real interest rates across the curve. If inflation stays elevated for years then interest rates likely also remain elevated for years. The question is how does all that cheap debt get rolled over at much higher rates (US government i am looking at you)? —————- Persistently high inflation. And historically high debt to GDP levels in most Western countries. Financial repression like we saw in the late 1940’s? Not what the Fed is saying today… The super interesting thing today is how out of step the Fed is from other Western central banks (Europe, Japan, Australia) where i think they view financial repression as the preferred policy option (let high inflation rip and keep interest rates low for as long as it takes to bring real debt to GDP levels into line).

@maxthetrade i agree entirely. The ‘problem’ i am having is i am learning old habits are hard to change (especially when they have worked well for +20 years).

Well it certainly looks like the air is coming out of the greater Vancouver real estate market. Unit sales are at something like a 30 year low; which is telling given significant population growth. Inventory is growing. And, as expected, prices are coming down (much more in the suburbs). But benchmark prices are still up 4% from a year ago. The problem today is sellers remain anchored to Feb/March bubble highs. And because of much higher interest rates, what buyers can pay has dropped considerably. So we have a bit of a staring contest going on between sellers and buyers. I was wondering if we were going to see buyers step up in Sept and we now have our answer (a resounding no). ————— it is fascinating to compare US and Canadian mortgage markets. In Canada today a regular 5 year fixed or variable can be had for around 5%; much lower than the US which i think is closer to 7% (30 year fixed). That is a big spread. That has a very big impact on house prices (affordability). ————— i am beginning to wonder if we do not see the Bank of Canada follow Australia and pivot dovish. Australia also has a property bubble like Canada - and i think like Canada mortgages are short term in nature (5 years or less). Short term mortgages become a huge problem if we see years of much higher mortgage rates. So i am wondering if the Canadian $ is not the sacrificial lamb. I was thinking Canada’s oil/resource position would support a stronger C$. But weakness in housing likely trumps strength in resources. ————— - https://members.rebgv.org/news/REBGV-Stats-Pkg-Sept-2022.pdf - https://www.fvreb.bc.ca/statistics/fraser-valley-real-estate-market-continues-to-stabilize-heading-into-fall-season/

Great topic. Super important And severely under-appreciated by most investors. The financial services industry cannot suggest an investor should concentrate their portfolio. They will likely get sued / fired / disbarred if an investor blows up their portfolio (lots likely would given enough time). And so we are all taught that concentrating is dumb, stupid, idiotic, gambling… I love Druckenmiller’s thinking on position sizing. This is from the ‘Stanley Druckenmiller interview (2018)’ thread: ————— Great interview with Druckenmiller from June 9, 2022 (link at bottom). Some thoughts: 1.) to do what Druckenmiller does (in terms of strategy) you pretty much need to be a full time investor; at a minimum very committed/focused. That is my (Viking’s) opinion. 2.) where are we now? 6 months into bear market that has some more room to run. - there is no historical analogue for the situation today - he is trying to be open minded about all the possible outcomes 3.) what are you doing today? Waiting for a fat pitch. - low conviction now - had been aggressively shorting - owns some oil 4.) general strategy: - looks out 12-18 months - develops high conviction idea 3-4 times per year - put all eggs in one basket; watch very closely 5.) lesson from Soros: sizing is 70-80% of the equation - its not whether you are right or wrong - its how much you make when you are right - and how much you lose when you are wrong 6.) are you on a hot or cold streak (like a batter in baseball)? - know the difference; size positions accordingly 7.) actual mechanics when you find an opportunity - intuition says yes; also fits macro view - buy - then do the analysis - get out if it doesn’t pan out - if you wait to but you may miss the first big move 8.) current set up: - high oil prices - rising interest rates - rising US$ - has ALWAYS BEEN TERRIBLE for corporate earnings looking forward 9.) advice for new investor - DO NOT INVEST IN PRESENT - envision the world in 12-18 months and what will drive security prices - focus on what will move the stock (learned this from his original mentor); what will be the catalyst - how are people going to think differently in 18-24 months about the security from what they are thinking today; it is change that moves the security. 10.) macro investors perform best in bear markets - perhaps that is why so many macro people are so bearish

The important point is what is being discussed on another thread: position sizing. What matters is not if Druckenmiller is ‘right’ or ‘wrong’ at any point in time (like what he thinks the day he is interviewed). What matters is how much you make when you are right and how much you lose when you are wrong. All Druckenmiller is saying is right now he does not have the conviction to make a big bet. Given the set up i outlined above that sounds pretty rational to me. ————— Now if the data quickly turns then a rational investor would also pivot. Perhaps on Friday we learn the US job market has stalled out and unemployment is rising. Or global economic data gets much worse. Or something breaks in global financial plumbing - causing the Fed to pivot back to QE. That ‘be open minded’ thing…

We have: 1.) spiking interest rates - thank you Fed 2.) spiking US$ 3.) rising oil prices - thank you OPEC 4.) persistently high inflation - increasingly driven by persistently strong labour market (check out the multi-year increase rail workers just got…). What do you think happens to corporate profits with this set up? Drukenmiller is not a dummy.

Here is a quote of Druckenmiller’s from the CNBC Seeking Alpha conference just held: STANLEY DRUCKENMILLER: …. But right now, I like everything I’m hearing out of the Fed, and I hope they finish the job. They made a big mistake. They seem to have owned it, but it’s easy to own it when employment is strong. Let’s see what happens if we get a hard landing. I just hope they stick to their guns because this stuff was terrible in the ’70s. You have to slay the dragon. And the chair is right. You’re probably going to have some pain. ————— The Fed is in the Disney phase of tightening - employment is strong. Can the Fed continue to do what is necessary to slay inflation when the economy turns down hard and employment weakens a great deal? We should have our answer by the end of 2023. Given this Feds track record i am not optimistic - but i remain open minded (to steal one of Druckenmiller’s favourite lines.

@Parsad i think you are far too optimistic with your suggestions of what the Fed should do. Most people seem to think inflationary pressures are magically going to disappear… like the ending of a Disney movie. As soon as financial markets get a whiff the Fed might be slowing increases (or done) they will rip much, much higher. Stocks will pop. Bond yields will come down (further out on the curve). Credit spreads will tighten. The US$ will sell off. In short financial conditions will ease. (We saw this movie play out mid-June to mid-August.) And the Fed will be screwed. History teaches us there is likely only one way to solve an embedded inflation problem (like we have now). And that is a Paul Volker type of tightening that last much longer than 6 months and that likely causes a more than mild recession. Has a recession happened? No. Is it coming? Given the strong employment reports, no. The fever has not broke yet. ————— The dilemma the Fed has today is the rest of the world cannot handle what the US is executing. So something will likely break (like what almost happened in Japan 2 weeks ago and the UK last week). If the plumbing of the financial system breaks the Fed will have to pivot. And then inflation will likely roar again. And then Powell likely looks for a new job. ————— Commodities will rip higher at the first sign of an economic expansion. Because production is supply constrained. And that will fuel inflation. Oil, steel and lumber are all on my watch list for when we get to the next expansion. Jeff Currie has an interesting theory about the inflation of the 1970’s… he said perhaps one of the reasons it lasted so long because it took 7-8 years to solve the significant supply constraints that existed at the beginning of the 1970’s. i wonder if we do not have a similar set up today. This means It wasn’t just Volker that slayed the 1970’s inflation dragon. If that is true, then we could see persistently high inflation for many years (because ESG/government policy will ensure new supply capacity does not get built out on the scale needed to happen).

What we are learning is how well positioned the US is today. The country is economically positioned much better than any other major economy in the world. And it is not even close. - China? Property bubble is popping. Xi is returning country to its communist roots. Globalization is dead. Zero covid is a joke. Its like the guy running North Korea has a long lost brother who we discover is now running China (for life). Happy thought for the day. - Western Europe: without cheap energy you are screwed. Will take years to fix. Higher interest rates will kill southern Europe. The ECB is screwed. - Japan: economy can only function if interest rates remain at zero. Good luck with that if inflation remains elevated for years. - Canada: housing bubble is popping. Only question is how hard is the landing. Immigration, resources and having US as neighbour will get country through the tough period coming.

Stubble, yes, Q3 reported results could be ugly: 1.) mark to market equities -$350 - my estimates are usually light (of whatever the trend is) 2.) mark to market bonds -$500 - i think the move in rates was larger than Q1 or Q2. In Q2 the loss from bonds was +$400 million? 3.) hit from hurricane Ian could be substantial; RBC is saying large size of losses could hit reinsurers like Fairfax hard. - this will be the big unknown going into earnings. ———-— Looking past Q3 earnings we will have BV with: 1.) equities valued at close to bear market lows 2.) bonds valued at close to 4% treasury yields across the curve 3.) hard market in reinsurance Bottom line, book value will have digested pretty momentous changes in financial markets. If Fairfax has been able extend duration the earnings power of the company will be very good. And the opportunity to grow book value will be large. ————— i think you were thinking FFH could get to US$450 during hurricane season… well done! Perhaps we see US$400 if Mr Market does not like Q3 results and the overall market continues to sell off. One can hope. I am back up to 40% cash and would love to add to my position The fly in the ointment to getting a much lower share price might be the pet insurance business closing. That could be a big catalyst for shares. When they did the deal Fairfax said 2H closure. During Q2 conference call i think Prem said ‘next quarter’.

Here is an update of Fairfax's equity holdings for Q3. Bottom line, equity holdings are up $372 million. It is a tale of 2 cities: the mark to market bucket was down a bunch and the associates equity accounted / consolidated equities are up a bunch: - mark to market/derivatives - $310 million = @ - $13/share - associates - equity accounted + $576 million - consolidated equities + $104 million Total + $372 million Movers: 1.) Atlas = + $398 million - take private (Poseiden) 2.) Resolute = + $221 - being purchased by Domtar 3.) Recipe = + $142 - take private (Fairfax) 4.) FFH Total Return Swaps = - $126 5.) CIB = - $90 Fairfax Equity Holdings Sept 30 2022.xlsx

The oil market right now resembles one of those great Ali-Fraser boxing matches. With haymakers - that are connecting - getting thrown by both sides (bulls and bears). Love the volatility… And all the back and forth rhetoric might actually give Ali a run for his money. ————— What a shocker. Oil is at $80 and OPEC is floating the idea of CUTTING output by 1 million barrels per day. Guess where OPEC wants pricing… higher than where it is today. Guess where Russia wants oil prices… yes, higher as well. OPEC and Russia are aligned on wanting higher oil prices. Guess where oil prices are going in the near term? ————— At the same time, what is the US doing? Continuing to release 1 million barrels from the SPR. Now pushed into November. WTF? ————— i continue to think oil markets are going to be wickedly volatile. I have already started lightening up on some of my oil purchases from last week (quick 10% gain). That rent, not own thing that others have mentioned. If oil spikes higher heading into the OPEC meeting on Wed i will continue to lighten up on my holdings. And then patiently wait for the next panic sending oil stocks lower… ————— Oil Jumps as OPEC+ Mulls Biggest Production Cut Since Pandemic - https://finance.yahoo.com/news/oil-jumps-open-opec-considers-221955684.html Oil surged in early Asian trading after delegates said OPEC+ was considering cutting output by more than 1 million barrels a day when the group meets this week to stem a slide in prices.

Thanks for providing the historical averages and where spreads are today. The lack of widening is quite the head scratcher. And definitely something worth monitoring moving forward. —————- I haven’t owned bonds in years. Bond substitute type stocks (my loose definition) in Canada have come down the past 2 weeks (@10%). But given the size of the increase in bond yields this year these stocks actually look expensive. People who own these stocks for yield/safety likely do not realize bonds might now offer a better risk/reward tradeoff. Utilities: Fortis 4.3% yield Pipelines: Enbridge 6.7% yield Telecom: BCE 6.35% All of these companies have massive debt levels. What happens if interest rates stay high for years (i.e. the next 5). What happens to the business model when they have to issue/roll over debt at a much higher interest rate?

@maplevalue thanks for posting. I find Ray’s mental model very appealing. I have been constantly underestimating how high interest rates have gone. But it looks to me like we are getting to the ‘something breaks’ part… so we might stop at the low end of Ray’s estimate for interest rates. Super interesting time right now…

Followed you back into LEVI. Only jeans i have ever bought (yes, i know dumb reason). Also bought a little Nike (just bought a pair of runners). Also bought GOOG today… some days my hours watching Youtube is starting to rival my time watching regular TV (if i exclude sports). This weekend i will be spending time reviewing my buy list… JPM just hit a new 52 week low and BAC is within a whisker of $30 - both are trading close to where they were 4.5 years ago.

+1. Putin is messing with everyone. Every post i see suggesting US is responsible without a shred of (demonstrable) proof is exactly what Putin was hoping for. Pretty soon it will be ‘common knowledge’ in most of the world (and a large swath of the US) that the US was responsible for blowing up the pipelines. Smart bastard.

Pretty good summary of where energy markets are at. Intelligent and unbiased commentary. What a mess. Especially Europe. My take-away: Over the medium term, oil investors will likely make a lot of money (they just need to get through the next year).