Viking

My guess is real estate was likely the biggest wealth creator the past 2.5 years. In the US we could see some wealth destruction in that sector before it is all said and done. It is already happening in Canada (house prices are off 8-10% from the bubble top in Feb/March).

I do think the inflation will come down. And it will be a recession that does the trick (just like past inflations). What will cause the recession? Not sure. Perhaps the bond market continues to push rates higher until something breaks (a credit event). Who in their right mind wants to own a bond today with inflation running 8.6%? Apparently no one… given the relentless spike in bond yields over the past 6 months. When? Not sure. But probably in the next 6-12 months.

One reason to be bullish on the North American/US economy in the coming years is all the talk about de-globalization and onshoring. I thought it would be good to start a thread that captures actual examples. ————— Chips are the poster child. Intel breaks ground on 2 Arizona chip plants worth $20B - https://www.constructiondive.com/news/intel-breaks-ground-on-2-arizona-chip-plants-worth-20b/607760/ Intel is planning to invest more than $20 billion in the construction of two new leading-edge chip factories in Ohio - https://www.intel.com/content/www/us/en/corporate-responsibility/intel-in-ohio.html ————— Lego is also getting in to the act Lego to invest over $1-billion in U.S. brick plant - https://www.theglobeandmail.com/business/international-business/us-business/article-lego-to-invest-over-1-billion-in-us-brick-plant/ The investment is in line with a decade-old strategy of placing production close to its key markets, which the company says has been beneficial as the global retail industry faces pandemic-related supply chain issues. The plant will also be carbon neutral. “Our strategy to be close to our core markets has only been confirmed recently,” Chief Operations Officer Carsten Rasmussen told Reuters. The toy market is characterized by large seasonal fluctuations, while more than half of the company’s products in stores are new items, he said. “It’s difficult to predict what children and adults want to buy for a birthday or for Christmas. So the reaction time is very worthwhile to make sure we have the right products on the shelves,” said Rasmussen. The factory will be powered by renewable energy produced at an onsite solar park, the company said. Lego, an abbreviation of "leg godt" meaning "play well" in Danish ————— Gildan has said they expect apparel companies to source more products from North America in the coming years at the expense of Asia.

Consensus today (in financial markets) is that inflation IS largely transitory. The Fed still thinks this. Look at what they are doing (and not what they are saying). How slow they have responded. Fed funds was 0.75 to 1% yesterday. Only today did they move it to 1.5 to 1.75%. QT just started today. A few people on this board who think inflation will run hotter for longer (than expected) hardly qualify as everyone. And I do not think it is ‘here to stay’ forever - rather, it looks to me like inflation could stay elevated the next 12-18 months. After that, we will see. At some point the Fed will need to get serious. ————— CPI is just a math equation. Help me understand what component will be coming down any time soon? Shelter? Energy? Food? Or are you thinking along the lines of something like ‘immaculate conception’? That will bring it down?

Good thing Powell is all over this inflation thing just like his hero (Volker) was! I was worried for a second there… ————— US Inflation Nearer 1980 Peak Than Thought, Summers Group Says - https://www.bnnbloomberg.ca/us-inflation-nearer-1980-peak-than-thought-summers-group-says-1.1775062 US inflation is running even closer today to its 1980 peak, fresh analysis of historical price data shows, suggesting that the Federal Reserve’s task of bringing price gains back to its target is tougher than previously thought. A group of economists including former Treasury Secretary Lawrence Summers recalculated historical readings for the consumer price index to apply modern-day spending patterns, especially for housing. After adjustments, the figures showed that core inflation ran at an estimated 9.1% in June 1980 -- versus the reported peak of 13.6%, the paper by economists Marijn A. Bolhuis, Judd N. L. Cramer and Summers said. That means that the aggressive monetary tightening that then-Fed Chair Paul Volcker implemented in the early 1980s brought the core inflation rate down by 5 percentage points -- not by the 11 points in the official annals. And that in turn suggests the Fed’s job today is of a scale closer than previously thought to Volcker’s -- which involved a deep recession. In April, the core CPI rose 6.2%. Fed policy makers target a 2% inflation rate, although that’s tied to a separate gauge of prices that averages somewhat less than CPI. Economists forecast the May core CPI figure, due Friday from the Bureau of Labor Statistics, at 5.9%. Volcker Scale “To return to 2% core CPI inflation today will thus require nearly the same amount of disinflation as achieved under Chairman Volcker,” the researchers said in the paper published by the National Bureau of Economic Research.

Is inflation transitory? I think most people today would say no. The US has experienced an average inflation rate of 7% over the past 12 months. THAT IS IN THE BAG. So very high inflation has been happening for a long time already. The print for May was 8.6%. And it is expected the rate the next couple of months will come in at around 8%. So the question then becomes what will cause 8% to fall dramatically? Shelter is the biggest component of CPI at about 1/3. The US has a severe housing shortage; both house prices and rents are increasing at double digit rates. Who thinks shelter costs as measured in CPI are coming down any time soon? I think we can all agree that 1/3 of CPI is going to continue to run hot. Energy is the next biggest component of CPI. Oil prices did not spike to over $100 until March/April so this impact on CPI will not be calendarizing for another 9 months. Yikes! Oil is also a super important input into the general economy as an input into something else; these impacts hit CPI with more of a lag (as it takes time for manufacturers to first experience the cost and then decide what to do, negotiate with customers, confirm on an increase amount and effective date - this process takes months). So the knock on effects of +$100 oil prices are likely just showing up in CPI. And if oil pops higher ($150 or higher) in the coming months? Think Groundhog Day… Food is the next biggest component of CPI. Food prices are through the roof (both retail and food service). The war in Ukraine has caused grain prices to spike. But that is not what is causing the high CPI today. The war happened a couple of months ago. The impact of the war in Ukraine on food prices will be felt in the year ahead. And inputs like super high fertilizer prices will take years to fully hit CPI (given all the lags from Mosaic to farmer to manufacturer to consumer). Guess what chickens, pigs, cows etc all have in common? They have to eat something to get big and fat (grains that need fertilizer). Due to the war in Ukraine high food prices look pretty much baked in the cake for the next 12-18 months at a minimum. Services is the biggest component of consumer spending (much larger than goods). Services inflation is JUST GETTING STARTED. People are flush with all the cash they have been pulling out of their house (MEW were through the roof in 2021) and want to spend it on vacations, restaurants etc. Wage inflation is just getting started - and also hits with a lag… employees experience high inflation and THEN DEMANDS BIG PAY RAISE. We are at the ‘demand big pay raise’ part of the inflation time line. Who thinks labour cost increases are going to come down in the coming months. LABOUR COST INCREASES ARE GOING TO LIKELY INCREASE BECAUSE EVERYONE KNOWS INFLATION IS RUNNING AT 8.6% (you can show your boss the news headline on your smart phone). Regardless, the US has a SEVERE labour shortage. TODAY. I could go on and on… there are so many examples. And there are lags (the effects take months and months to play out). And the impacts affect EVERY ASPECT of life for a consumer or business. AND THEY KEEP HAPPENING OVER AND OVER AND OVER. Key takeaway: INFLATION IS JUST GETTING STARTED. IT IS LIKE A SNOWBALL RUNNING DOWN A HILLL. IT JUST KEEPS GETTING BIGGER AND BIGGER. AND THE SNOW IS VERY STICKY RIGHT NOW - PERFECT FOR ROLLING A BIG SNOWBALL (covid, war, commodity super cycle, labour shortage, housing shortage). The important point is: someone has to actually do something to stop the inflation ball once it gets started rolling. And that someone is the Fed. Except they are way, way behind the curve. Inflation is 8.6% and the Fed Funds rate is 1.5%. FED POLICY IS STILL HIGHLY ACCOMMODATIVE. Yes, QT started today. And rates in the bond market have popped higher. However, real bond rates are still big time negative (= accommodative). And it takes 6-12 months for higher rates to impact the actual economy…. What does all this mean? High inflation is likely here to stay - and higher and longer than people currently think.

@hasilp89 every investor is going to come at this differently. There is no one ‘way’. Because every investor has a - unique personal situation (age, net worth etc) - financial knowledge - emotional makeup - interest level/time to spend on all this stuff - risk tolerance (that sleep well at night thing) For me, capital preservation is paramount. I have enough. Today, i am about 55% cash and 45% invested. BAC is currently my biggest position. FFH is #2. RECP (a trade) and GIL are next in size. I also own a few other stocks with smaller weightings. If we get a nice bounce higher in equities i will be happy to sell some equities and move back closer to 65-70% cash. In a bear market not losing money (versus return) is a really good result. And i think we are in a bear market. I think the bear market will continue until the Fed reverses course (to easing) and that is NOT where we are today. So i am going to continue to be VERY patient. And i am VERY CONFIDENT that Mr Market is going to offer up some wonderful opportunities in the next 3-6 months. IT ALWAYS DOES. I have carried very large cash balances many, many times over the past 20 years and it has ALWAYS paid off. But like i said earlier, people have to find a strategy that works for them - there is no one size fits all when it come to successful investing.

it is impressive the speed financial markets are adjusting. Financial markets are pulling central bankers along - which is the safe course of action for central bankers (provides job security). Clearly Powell has no desire to be Paul Volker (and actually get out ahead of inflation). I head the perfect description of Powell: a chicken hawk. Financial markets are moving fast and now we are starting to see signs of collateral damage: 1.) looks like the crypto bubble has popped. $2 trillion… poof. Impact of all this wealth destruction? Too early to tell. But we will learn who has been swimming naked in due course. 2.) Italian (southern Europe?) bonds are shooting higher. This is a problem because unlike the US, Italy cannot handle much higher rates - Italy is a walking Zombie. What to do? ECB calls emergency meeting. Solution? There is none… There are lots of other examples of where the lack of global liquidity is biting and hard. The ironic thing is QT just actually started in the US today. We are likely in the second or third inning of a nine inning game… and investors are already worn out. i was underwhelmed with the questions in Powell’s presser today. NO DISCUSSION OF QT. NO DISCUSSION OF THE DRYING UP OF GLOBAL LIQUIDITY. Crypto exploding. This tells me most people have no idea what is happening. And what is coming.

@glider3834 I was doing the same mental gymnastics as you today… The simple answer is, yes, interest and dividend income WILL be spiking in the coming months AND years. And likely by a lot. We will have to wait a few more quarters to see exactly what Fairfax does. It gets even more interesting if we see corporate spreads start to blow out in the coming months (corporates have been increasing but i think they have largely been tracking the rate increase in government bonds). I am not sure what municipal bonds are doing.

Well this is starting to feel a little bit like Groundhog Day. Lets hope it has a happy ending for shareholders (like Bill Murray’s character in the movie). Fairfax has certainly nailed the spike we are seeing in interest rates (at least so far). The unprecedented spike (recent years anyways) in bonds yields keeps going! The past couple of weeks has been breathtaking (again). Lots of insurers are going to be reporting pretty substantial mark to market losses on their bond investment portfolios AGAIN in Q2. Now they hold most of the bonds to maturity… but there will be a sizable hit to book value even if the impact to reported net earnings is muted (they are all now reporting ‘adjusted book value’ in their earnings releases Fairfax’s bond portfolio continues to be positioned almost perfectly (at least is was March 31) for the current interest rate environment. Q2 results are going to be super interesting to see what changes they make to the bond portfolio: 1.) will Fairfax continue to add duration to its portfolio? (Avg duration increased from 1.2 years to 1.4 years in Q1) 2.) how much of their fixed income portfolio will they re-deploy? ($7.4 billion of cash was redeployed into gov bonds of 1 and 2 year durations in Q1) 3.) how much does 1.) + 2.) above increase the interest & dividend income bucket? 4.) how much higher do interest rates go? 2020. 2021. 2022. Dec 31. Dec31. Mch 31 June 14 3 mo. .09. .06. .52. 1.83 6 mo. .09. .19. 1.06. 2.43 1 yr. .10. .39. 1.63. 3.15 2 yr. .13. .73. 2.28 3.45 5 yr. .36. 1.26. 2.42. 3.61 10 yr. .93. 1.52. 2.32 3.49 30 yr. 1.65. 1.90. 2.44 3.45

Do most P&C insurers not try to largely match the duration in their bond portfolio with their liabilities? And they hold the bonds to maturity… does that not mean there is essentially no duration risk? Is that not why most bonds do not get marked to market at quarter end and do not impact net earnings? We have had very low rates for a decade (yes, long rates did get wicked low in 2020 and 2021).

I do expect more pain in economy and markets (next 6 -12 months). But i am starting to get positioned for the other side (down to 55% cash). i am starting to wonder about the deflation narrative from the past 25 years or so. I was listening to a podcast and the person on the other side suggested much of the deflation was driven by 1.) China and the massive disintermediation of labour. 2.) last 10 years, underinvestment in physical things especially commodities. As deglobalization happens and investment in physical things picks up we may see a more inflationary environment moving forward. Interesting perspective as it is not mainstream.

My ‘angle’ is simply trying to understand the current spike in bond yields and how high they might go in the next 3 months. 2.) regarding corporations my guess is interest costs are a very small cost item. So, yes, some pain, but manageable for most (especially if rates do not stay high which is what i expect to happen). 4.) i think the US economy is in a much better position today than any other major economy in the world. This is reflected in the strong dollar. They lead technology. Housing boom. Winner in deglobalization. Secure and cheap energy (compared to others). Investment/transition to EV coming. Pro business (Republicans will do well in fall elections and take back House and perhaps Senate). Not perfect. But lots to look forward to (especially once we get through the next 6-12 months).

The most common comment i read is “the Fed can’t hike too much… there is too much debt in the system”. This might not be the problem lots of people think it is… especially in the short term (for a year or two). This suggest interest rates could continue to rise higher than most people expect (even from current levels) at least for a while. This question is discussed at the 12:20 minute mark in the video below: - it is helpful to separate public and private debt 1.) higher rates are not a big problem for public debt. Worst case scenario you get the Fed (central bank) to buy it. 2.) it is also not a problem for corporate debt. Interest expense is just another cost of doing business (like labour expense etc) and if it goes up businesses will pass the cost through (via higher revenue). - there are some parts of the economy that are quite interest rate sensitive like housing and vehicle purchases. Higher rates will slow activity in these sectors… but that is what higher rates are SUPPOSED to do. - what about zombie companies? Yes, they will be impacted… but this is a small subset of businesses. ————— 3.) they don’t discuss the US consumer in the video. I think this is because the US consumer is in very good condition and carries low debt levels (compared to historical levels). The Canadian consumer is quite different - carrying historically high debt levels. But my guess is Canadian monetary policy will largely follow the US ————— In the video also discusses what is going on in Europe today. Very informative. And quite the mess with no apparent solution (other than hope it doesn’t get ugly at some point).

Well the speculative excesses are continuing to get taken out behind the woodshed… time for Crypto to take its beating. Liquidity crisis? Was a $3 trillion market. Now $1 trillion. $2 trillion up in smoke. Anyone looking to buy the dip? (I am kidding.) My favourite quote from the article: “There's nothing wrong with speculation in and of itself,” Sosnick said. “But you have to realize that these are assets without much of a use case right now.” ————— see the bottom of the post for my favourite Crypto ad ————— Things start to break:’ Crypto faces 'liquidity crisis' It all started with inflation. Monday’s crypto selloff is the latest example that cryptocurrencies are following the fortunes of riskier assets after May’s inflation reading on Friday came in hotter than expected. A rout followed into the weekend, a crypto lender halted transactions, and the drawdown ensued into the new week with the largest crypto exchange also pausing transactions and another crypto lender cutting a fifth of its staff. Overall, the total crypto market cap has lost more than two-thirds of its value since peaking in November, according to Coinmarketcap, falling from $3 trillion at its apex to $962 billion as of Monday evening New York time. How much farther the pain can spread is the big question on insiders’ minds. “Inflation is running higher and that has led to a liquidity crisis in crypto,” Chris Matta, president of the U.S. side of Toronto-headquartered investment manager 3iQ Digital, told Yahoo Finance. “In moments of a liquidity crisis, things start to break.” - https://finance.yahoo.com/news/crypto-faces-liquidity-crisis-225834338.html ————— How the crypto crash exposed the sector’s lies – and left retail investors in the lurch The best sales pitches are built around stellar stories, and the crypto sector concocted one for the ages: Buy bitcoin or any other digital asset, investors were told, or risk missing out on the future of finance. Maybe even of humankind. Crypto.com, a major trading hub, filmed a Super Bowl commercial to caution viewers that “fortune favours the brave,” while Wealthsimple went more meta with its approach, hiring actors to play a primitive community that calls the invention of the wheel a Ponzi scheme. The message: Anyone who doubts crypto will eventually look just as foolish. That retail investors believed the hype, helping send the amount invested in digital assets to US$3.2-trillion in November, 2021, isn’t all that surprising. They’re unsophisticated buyers. But it all grew so feverish that major institutional investors started taking the bait, too. In October, the Ontario Teachers’ Pension Plan invested in FTX, another prominent crypto trading hub, and the Caisse de dépot et placement du Québec co-invested in a US$400-million deal that valued Celsius Network, a New Jersey-based cryptocurrency lending platform, at more than US$3-billion. “The way we look at Celsius is that it is the bank of the future,” Alexandre Synnett, executive vice-president and chief technology officer at the Caisse, told The Globe at the time. - https://www.theglobeandmail.com/business/article-crypto-market-crash-bitcoin/ ————— I love this ad

I have a hard time seeing how the 10 year gets much above 4%. Perhaps if inflation continues to run hot into Sept/Oct. My guess is something breaks before then (4% or if it goes higher). But pretty much everyone has been way too low with their interest rate estimates this year.

Last 2 days: BAC, GIL, RECP, DIS, AMZN, META Down to 60% cash. Will continue to sell down some positions on strength to keep bringing down my average cost as i do expect big volatility (with lower lows) until the Fed flips to dovish again.

People are trying to understand what is going on in the economy right now, what central banks are going to do, and what it means for financial markets moving forward. What is a framework that will help an investor and, most importantly, maximize the returns in their portfolios? 1.) Lots of investors on this board come at investing with a straight forward Graham/Buffett approach: buy quality companies (moat) with good management, predictable earnings when they trade at a discount to fair value. And hold them for the long term. 2.) Lots of investors also use technical analysis. This can be especially useful as a tool when buying and selling securities. 3.) I think understanding global liquidity flows can be another important and useful input, especially at inflection points. “Understanding global money flows provides tremendous insight into where asset classes are likely to move.” Why is understanding liquidity flows so important today? Because the world has historic amounts of debt. Lots of which has to be constantly rolled over EVERY YEAR. Being able to refinance debt is FAR, FAR more important to a borrower than what the interest rate is. THIS IS EXCEPTIONALLY IMPORTANT TODAY - ESPECIALLY WITH GLOBAL LIQUIDITY CONTRACTING AT AN EXCEPTIONALLY RAPID RATE. This is just one example of how understanding global liquidity flows matters. The video below is the best 105 minute explanation of what is going on in the economy and financial markets - through the prism of global liquidity flows - that i have come across. And it is timely (recorded June 10). THIS IS JUST ANOTHER TOOL INVESTORS MAY CHOSE TO USE (or not) to help them make money. Best of luck

Negative interest rates are simply a wealth transfer from savers to borrowers. So my 90 year old mother in law on fixed income has been getting screwed for years (on her savings). Free market capitalism?

The problem is most of the inflation we are seeing today has nothing to do with supply chain (see blow for largest components). Rent is going up because of supply chain? Grain shortages in Ukraine are supply chain? Oil spiking is supply chain? Insurance increases are due to supply chain? Big wage increases are primarily due to supple chain? inflation is morphing. Spreading. Like a virus. It is becoming embedded in all parts of the economy. That ‘entrenched’ thing. The Fed is losing control of inflation expectations… and once that cat gets out of the bag (like in the 1970’s) there is ONE solution: wicked high interest rates and a brutal recession. BECAUSE THE ALTERNATIVE IS WORSE. Out of control inflation ALWAYS ends very badly. For everyone. Populism. Political unrest. Political change. Economic ruin. Lots and lots of examples of this in the past 100 years. Alternative? High interest rates and a recession and then clear sailing (look at the US economy after the debacle of the 1970’s… it rocked for a long time. Despite the mistakes made recently, i think the Fed is smart enough to figure this one out. ————— CPI Largest Components: Shelter = 32.4% Food = 13.4% Energy 8.3% Medical care services 6.9% Transportation services (vehicle insurance biggest part) 5.8% - https://www.bls.gov/news.release/pdf/cpi.pdf

The million does question is: does the Fed put still exist. If it exists, what price level in the S&P will it take to get the Fed to pivot. ————— The fly in the ointment is inflation. How can the Fed possibly pivot with inflation at 8.6%? Hence Druckenmiller’s comment about being in an economic set up we have not experienced before. And the importance of being open minded to what will come…

The problem with looking in the rear view mirror is EVERYTHING is obvious and easy. The reality is successful investing (especially over multiple decades) is difficult and perhaps wickedly difficult. How many people were pounding the table on energy in December? No one. Yet it is an ‘obvious’ trade today. This stuff is a little more difficult than what it appears looking in the rear view mirror.

CFO’s are not ‘everyone’. (I put COO and should have put CFO) ———— “According to the majority (68%) of CFOs responding to the survey, a recession will occur during the first half of 2023. No CFO forecast a recession any later than the second half of next year, and no CFO thinks the economy will avoid a recession.” - https://www.cnbc.com/2022/06/09/recession-will-hit-in-first-half-2023-the-dow-is-headed-lower-cfos.html

I am not sure anyone i have read or watched has ever said any outcome is 100%. I posted a link to Druckenmiller yesterday and as of June 10 he has no high conviction ideas as of today; so he is being open minded and watching and waiting to see what happens. If i have to summarize the current perspective of people i follow it is: - no idea how the current set up plays out. - unprecedented times (pandemic, war, super high inflation, oil price spike, historically strong labour market, smoking housing market in US, Fed funds rate comically low given inflation dynamics etc). - stock valuations remain high (S&P500 is still 15% HIGHER than it was right before the pandemic 2 short years ago) - expectations are inflation will be back down to 2% later in 2023 (look at forward bond yields) Just because people do not understand the current set up does not mean they are building bunkers in their back yard and buying SPAM. Investing is supposed to be a rational process. Caution IS WARRANTED when your analysis says that is the right course of action. Caution DOES NOT = doom and gloom. Bottom line, Buffett’s view is correct: do not bet against the US. His first rule of investing is also spot on: ‘Don’t lose what you got’ (capital preservation is key). Investors who are able to square those two concepts will do very well in the coming years. ————— The problem is LOTS of investors have done well the past 10 years because the Fed has been blowing asset bubbles (low interest rates and QE). They think their returns are the result of skill. Now that the Fed is doing the opposite (trying to slowly take the air out of the assets bubbles that exist) and lots of investors are about to find out just how skillful they really are. High inflation is a bitch.

Good discussion of the news from the past week (there was lots). I like listening to The Macro Trading Floor; they are European so provide a perspective from across the pond. Bottom line, all eyes will be watching the Fed this week: 1.) will they move by 50 basis points? My guess is yes. 2.) will they signal 75 is back on the table for the next meeting? No idea. 3.) will their overall commentary be more or less hawkish… or more of the same? No idea. What i do know is what the Fed does will have a big impact on financial markets (bond and stocks). Get the popcorn out… ————— Europe really is a complete mess right now. inflation is running hot at about 8% and the ECB is NEGATIVE. The problem for Europe is they have zombie COUNTRIES like Italy. Higher rates will be catastrophic. Oh, and they have a war raging in Ukraine. And nat gas/energy prices are through the roof. Sounds like Legard is losing all credibility (much worse than Powell). What a shit show. ————— Pivoting to the US, Felder suggests some of the drivers of inflation are more structural than is currently appreciated (like lack of labour; deglobalization etc). The Fed is still fighting the old paradigm (deflation) and therefore is underestimating inflation still today. In the near term Felder feels the stock market (even at current levels) is asleep at the wheel - much too optimistic on corporate earnings and profit margins looking 6 months to 1 year out. Why? 1.) he quotes Druckenmiller: high oil prices, rising interest rates, rising US$ is terrible for corporate earnings 6-12 months out. 2.) CNBC recently surveyed COO’s and 100% were forecasting a recession in the next 12 months 3.) recently released Michigan survey shows lowest consumer sentiment on record (going back 75 years). 4.) PMI indicators are forecasting lower top line growth AND higher costs (the latter being driven by inflation pressures) As a result, Felder expects the Fed to pivot and lower rates much too soon. So inflation will remain higher for longer. His trade idea? Precious metals (Sprott Physical Gold and Silver Fund). i enjoyed the discussion. I am not ready to buy precious metals.