Viking

With the severe sell off we have seen in stocks and bonds over the first 5 months of the year this is a good time to step back take stock. Most importantly, WHAT ARE THE BEST INVESTMENT IDEAS FOR 2022 as of today? There has been so much carnage in so many sectors i currently don’t have a single ‘best idea’ pick. Rather, i think this is likely a good time to be expanding equity exposure in a bunch of areas. Not ‘all in’. But a great time to buy companies and sectors that are getting killed. Example today? GOOG. Last week? US financials. CRM is back at 52 week lows. Lots of solid opportunities if someone has a 3-5 years holding period. As of today i am 40% stocks and 60% cash. I am in no hurry to get to 100% invested.

GOOG, AMZN, FB, CRM

Well it appears the Fed is, after all, getting its wish. What a surprise! (Not; that was my attempt as sarcasm). Inflation was running much to high and becoming embedded in expectations (not transitory). What to do? Tighten financial conditions. 1.) much higher interest rates have killed the stock market. Up til now it looks to me like the decline has largely been focussed on bringing the multiple down. Makes sense. The yield on the 10 year US treasury was 1.5% in Dec. recently it was around 3%. The Nasdaq, the index with the much higher earnings multiple, has been hit the hardest - down about 30%. 2.) 5 months into the Fed’s campaign to tighten financial conditions we are now seeing the second shoe drop: earnings guidance from companies is now coming down. My guess is this will drive the next leg down in the stock market in the coming months. Europe’s economy is screwed and will likely only get worse in the coming months (as the energy crisis worsens). China’s economy is screwed as Xi continues with his baffling zero covid policy (and a bunch of others). The Fed is successfully slowing the US economy. The million dollar question is where does the US economy go in 2H and 2023? 1.) Does it defy the naysayers and keep chugging along? Goods part slowing and services part booming? Housing largely shrugging off higher mortgage rates? I.E. the Fed gets its soft landing… 2.) Does it slow more more aggressively causing an actual recession, likely in 2023? It looks to me like Mr Market is just starting to increase the odds for #2. What do i think? #1 = 50%; #2 =50% - what to watch? Inflation… does it stay elevated into 2H? The Fed… when do they pivot. ————— Bond yields, across the curve are starting to come down hard… interesting…

My one big watch-out for Apple is its super high exposure to China. It is likely more exposed to China than any other large company in the world. As we learned with Russia, it will not matter until it does. And when it matters… it will matter fast and… ouch! China will be putting the screws to Taiwan and likely soon (2023?). Just like Putin, Xi has been VERY clear on what the plan is. All an investor has to do is listen to what Xi has said. Not that complicated.

Communication is THE KEY policy instrument the Fed has. The Fed’s hawkish pivot (rate increases and QT) - communicated a couple months ago (and ypdated at each subsequent meeting) - has been quickly priced into the market. The increase in rates the past 2 months has been exceptionally aggressive - and was driven by Fed communication.

Interest rates below zero were blowing asset bubbles everywhere: bonds, stocks and real estate. Average increase in house prices in US was $50,000. The Fed wanted to stimulate the economy via the wealth effect. I give the Fed (and Bank of Canada) an A+. Interest rates now getting normalized makes sense. Inflation is being driven by a bunch of things. Wealth effect - see above. Economy running too hot = no workers = big wage inflation. High commodity prices (oil, metals, agriculture etc) = high inflation. Supply chain issues. Bottom line, Fed needs to get inflation down. What caused inflation to spike higher doesn’t really matter at this point in time. The cat is clearly out of the bag. The Fed’s job is price stability. The Fed’s mantra is ‘control the controllable’ and that is aggregate demand. Lower aggregate demand = lower inflation.

The Fed controls interest rates and interest rates have spiked much higher, especially the past 2 months. The bond market is much bigger than the stock market and rising rates have created epic wealth destruction in bonds. And the 10 year US treasury is what all stocks are priced off of; as the 10 year yield has spiked higher we are having a …. surprise, surprise… bear market in stocks. So i do think what the Fed does… matters a great deal to financial markets. The question is where does the Fed go from here. Do we actually get 50 basis point of increases the next three meetings? Are they able to run off the balance sheet starting June 1? Or does something break first? I see two scenarios in the short term: 1.) nothing breaks; financial conditions continue to tighten and the economy slows (no recession but tepid growth). This will allow the Fed to continue with higher rates and QT. This will be bad for stocks. 2.) something breaks and we have a panic of some sort. Fed reverses course. This will be terrible for stocks initially (when the breakage happens) and then likely good for stocks (supportive Fed). Bottom line, as long as the Fed continues down its current path i see stocks going lower. Get out your popcorn… interesting times… ————— The problem with history is… in the last 75 years we have a sample size of 1 of what happens to the economy when inflation runs to +8%. And the 1970’s is a terrible example to try and use today given how different the world/economy is - like the crazy amount of debt today. So investors are flying blind right now. This is the being rational part of investing… knowing what you don’t know. One very interesting lesson from the 1970’s is stock averages can go sideways for a decade (meaning your real return is brutal)… But don’t worry, we are also told stocks are a great hedge for inflation. Seriously? Fast forward to today… how is inflation impacting earnings of companies? The longer inflation runs at elevated levels the more it is shrinking profit margins and profits. For the companies i follow every quarter they are having a harder and harder time managing the various inflationary pressures (meaning inflation is shrinking profits). In the beginning inflation was a GOOD THING - as it allowed companies to aggressively raise prices and EXPAND profit margins. No longer. The cost increases from inflationary pressures are GROWING. At the same time it is getting harder to pass through massive price increases as consumer are getting sick and tired of rising prices and starting to pull back on spending. We are now seeing increasing revenue growth (hooray) and FALLING unit growth (oh shit). Where this really gets interesting is if inflation stays elevated into 2H of 2022. Sounds like most people on this board are in camp transitory… and think it will be coming down quote a bit in 2H. I am not so sure (i really have no idea).

it was different each time: 1.) 2000 bear: i never owned any .com stocks on the way up (late 90’s). Old economy stocks WERE HATED and that was what i owned (banks with big dividend yields etc). I also owned government bonds (last time i actually owned bonds). 2.) 2008 bear: was all in on Fairfax who owned a shitload of CDS. Home run. I was a close follower of the calculated risk blog… provided incredible insight for years as to what was going on in US real estate in 2006-2007-2008 and post bust. Calculated risk is still doing the same today (his recent stuff on housing has been super insightful). 3.) 2018 bear: fully invested with big over concentration in BAC. Got bailed out when the Fed did its abrupt 180 (eased) when the stock market was having its taper tantrum. It was a great reminder of just how much the Fed NOW controlled financial market performance. 4.) 2020 bear: moved to 100% cash when it became clear what the pandemic was doing to Asia; and then Europe 10-14 days later (and would be hitting North America about 2 weeks later). It was a slow moving train wreck happening in plain sight. I was too cautious on the upside (bought largely at the bottom but sold way too early). It was ANOTHER great reminder of just how much the Fed controlled financial market performance. 5.) 2022 bear: concentrated in oil to start the year (lucky). Started shifting largely to cash in Feb. Exited oil way too early (in hindsight). Still a little over 60% cash today. Largest positions today (will likely change): FFH, BAC ($36), GIL (@C$39), RECP (@$13). What was the ‘center of my success’ during bear markets? 1.) i had an investment framework that fit how i was wired emotionally (this framework includes maco and has evolved over the years). Lots of reading (inquisitive). Open minded. Lots of tinkering (buying different things). When the light bulb goes off… act decisively. 2.) i was rational - each bear market was being driven by COMPLETELY different factors 3.) i trusted my assessment/judgement 4.) i am an independent thinker - not afraid to go against the crowd. Or others on his board (best recent example is all the hate for holding a large cash position at times of uncertainty). 5.) i was decisive 6.) i stuck with things i understood well 7.) concentration: i went with my highest conviction idea(s) Stage of life matters - because it ripples through 1-7 above. Today, preservation of capital is WAY MORE IMPORTANT to me than it was 20 years ago (i have ‘enough’ for me and my family to live a great life). Mentally, as i age out, i am also finding my tolerances to market sell offs is different than when i was younger (i learned this during the brief 2018 bear). ————— Lots of great earlier posts. My key take away: there is no one right way for everyone. And that is what makes investing so hard for most people. Each of us needs to find a strategy that fits how we are wired (fits our intellect, emotional make-up, level of interest, time, stage of life etc). Like Druckenmiller says: be inquisitive and open minded… ————— An investor can do a lot of dumb things over the years and still do very well (i am looking in the mirror when i say this). The key is to avoid permanent loss of capital. Especially later in life (when the amount of capital is largest). There is a reason Buffett has ‘don’t lose what you got’ as Rule #1. And what is Buffett’s Rule #2? DON’T FORGET RULE #1. Food for thought…. ————— i continue to think the Fed is the most important driver of where financial markets go from here. And right now they are all aggressive hawks. And they are (supposedly) just getting started. So my guess is stocks are going lower, and possibly much lower in the coming months. So i am going to continue to be patient on the buy side.

i like Fairfax today. But with the S&P500 down 20% from its highs and Nasdaq down 30% from its highs (and lots of well run companies down much more) investors have lots of very good opportunities today. i don’t think Fairfax has a ton of UNNEEDED cash. Fairfax has a fair bit of debt (not a problem). If they can achieve a sub 95CR and with growing interest and dividend income - Fairfax will generate solid cash flow but this remains to be seen. Their equity portfolio has been coming down pretty hard (i’ll do an update of my spreadsheet the next couple of days). Bottom line, during past big equity sell offs - i would usually have exited Fairfax by now. But not this time.

@shhughes1116 i will readily admit i do not have a very sophisticated understanding of the current situation in Ukraine. Your post was informative. My thinking was Russia was able to control small parts of Ukraine before the war (which i define as stalemate) so it seems plausible to me that they would continue to control a larger part of Ukraine as long as they chose to. Throughout the war, Ukraine has outperformed expectations and Russia has underperformed. Do you think they will be able to push Russia out of the eastern parts of the country Russia controlled before the war? Is Crimea a lost cause?

@Xerxes i agree it is difficult to see how this situation ultimately is resolved. Stalemate looks like the most likely outcome to me. Unless Ukraine is stronger than we think. And Russia is weaker than we think, even today. There is a chance we could see Ukraine actually push Russia out of Ukraine.

@james22 good point. I think magnitude matters. A lot. It also matters who wins (the victor controls the narrative). Look at all the death and destruction going on in Ukraine today. How many people have died? Maimed for life. Civilians deaths? Children deaths and maiming? Cities obliterated. The Russians are doing what Russians do… their are being vicious and exacting maximum pain. And it is not over. If the brother of the girl you met had been killed by Russians do you think she would have a different perspective? I watched a video of a Ukrainian father who said if his child was killed in the war he would spend the rest of his life killing Russians. I don’t think he is an outlyer. i doubt we see Russian’s vacationing in Ukraine any time soon UNLESS we see regime change in Russia - followed by significant policy change (they get out of Ukraine’s shorts).

It is simply incredible what an unmitigated disaster the Ukraine war is for Russia. And it is getting worse with each passing day. 1.) A complete military failure that is likely to get worse. It looks today like Ukraine is actually going to WIN THE WAR. this was unthinkable at the beginning. The Russian military has been completely exposed. It has been destroyed on the inside by corruption. 2.) A complete political failure - if Ukraine didn’t exist as a national identity (Putin’s claim) pre-war, it certainly has an exceptionally strong national identity today… fighting a successful war against a much stronger adversary forges ‘national identity’ like nothing else. 44 million Ukrainians now hate Russians with a passion that is going to burn for generations. 3.) NATO is more united, relevant and stronger than it has been in decades. It is re-arming. Finland and Sweden are joining; unthinkable for 80 years. A couple of years ago many were discussing the very existence of NATO. 4.) the Russian economy is toast. It will take months/years to bite. But all of Russia is already paying and going to pay a heavy, heavy price. Lots of the best and the brightest have left the country. From an economic perspective, Russia is now effectively a vassal state of China (Xi is likely smiling over this outcome). 5.) Putin is starting to look impotent. His image, carefully constructed over decades, has been completely shredded - Europe/internationally for now. As Russian’s learn of the catastrophe in the coming months Putin’s standing in Russia will also come down, and possibly by a large amount. Big hat no cattle. Not a good place for a dictator to be.

Is the current weakness in Fairfax India not primarily due to strength in US$, fall in value of Rupee (new historic low), and general aversion to all EM equities? We are in a bear market. Up until recently, Fairfax India was holding up pretty well. - https://www.ndtv.com/business/rupee-falls-30-paise-to-hit-record-low-of-77-55-against-us-dollar-2968307

The rich have made out like bandits the past couple of years - all assets went to the stratosphere. They were the big winners. The people who got screwed were the bottom 50% (don’t own assets). Who does inflation of 8% hit the hardest? The same bottom 50%.

There are 2 ways to fix inflation: deal with demand dynamics and/or deal with supply dynamics. Governments WAY overspent with transfers and this drove insatiable amount of demand for goods. Central banks cut borrowing costs to zero and this drove demand for housing, cars and durable goods into the stratosphere. Financial conditions were way, way too lose: credit spreads hit historic lows. SPACS are one poster child of the excesses. Covid also did its part: supply chains were not able to handle the surge in goods demand and this caused the patient (supply chain) to have a stoke; it MIGHT NOT come back to be his former self FOR YEARS. We also had 8 years of massive underinvestment in commodities and post covid demand just tipped the scales (demand > supply) with prices spiking. The Ukraine war will result in a massive food shortage in the coming months (spiking prices). And a large swath of workers have permanently left the workforce (at the same time the US has decided immigration is a terrible thing). The end result? Inflation running at +8%. AND UNLIKELY TO COME DOWN QUICKLY. TIGHTEST EVER LABOUR MARKET. And largest number of job openings ever. Bottom line, the US and global economy is completely out of kilter. There is only one solution for the Fed (control the controllable): REDUCE DEMAND. This is done in a couple of ways: reverse the wealth effect and tighten financial conditions. For consumers: Slow housing. Slow auto. Slow any purchases that are interest rate sensitive (durable goods). When demand from consumers slows businesses will then adjust to the slowing economy (slow investment and hiring). Slower demand will also allow supply chains, commodities markets to adjust. The Fed has no other option. They let the inflation Genie out of the bottle. And it takes years of pain to deal with inflation ONCE IT BECOMES ENTRENCHED (like it is today). The ‘transitory’ ship sailed late last year. We are just re-learning something we already knew (but obviously forgot).

i really have no idea where inflation goes from here. Will it stay at 8%? Probably not. Will it drop back to 2% in the next 6-9 months? Probably not. It is looking more and more like we have a severe labour shortage in North America. And lots of economic tailwinds. Housing is extremely resilient. Commodities are booming and this may run for years. Oil at +$130 would not surprise me. De-globalization looks real (with more production shifting to NA from Asia - chips being just one example). Electric vehicles and green energy is coming. Absent a recession it looks like inflation pressures could stay elevated (@4%) for some time. Well ahead of Fed targets. And high enough to still hit real incomes of consumers. Interesting times… ————— Now if the Fed starts to panic i also think they will be very quick to reverse interest rate policy and the path of QT. My guess is when push comes to shove they will chose employment over inflation. And the stock market will likely smoke higher. Just like Bill Murray in Groundhog Day.

Yes wages are increasing but my understanding is for most workers they are not increasing anywhere close to actual inflation (especially in Canada). So consumers have much less money to spend (in real terms). So the number of ‘units’ consumers can now purchase are lower. And getting lower every year. This reality manifests itself in the political world. A very large swath of the American public are much worse off when inflation rips at 8%. And the longer the inflation remains elevated the further behind these people fall. Inflation is a silent tax. Its evils have largely been forgotten the past 40 years. But we are now in year 2 of out of control inflation and consumers are just getting cranky. And we have US elections this year. Get out your popcorn. Where this gets really interesting is IF inflation stays elevated into 2H (say 5-6%). Which will likely force the Fed to continue with tightening. Even if the economy starts to slow a little. ————— Wage increases in Canada are running at about 3%. The acticle below says inflation is 6% but the official number now is closer to 8% and it is likely understated. 2 or 3 years of this type of disparity and consumers will be screwed. If consumers take a 10% hit to real income it will have an impact on the economy. And then politicians will have to do something to get inflation down (probably make it worse). What the US learned in the 1970’s is high inflation destroys an economy and society - it is much worse than high unemployment because it is so hard to rein in once it gets out of control (the whole expectations thing). There is a good chance we will re-learn this lesson over the next couple of years. https://www.cbc.ca/news/business/inflation-rising-wages-1.6384530

i agree that investors with cash should buy. Just not be in a hurry to deploy it all. Peter Lynch said buy when you find a good deal in a stock you understand well. Not complicated. The challenge with investing the past 14 years is Central Banks are the key factor driving returns. With inflation printing 8% it is CRYSTAL CLEAR the Fed will be increasing interest rates in the coming months and June 1 they will begin quantitative tightening. The Fed has said they have NO IDEA how QT will impact financial markets. So buckle up. Drawdowns of 30-40% in stocks are not uncommon. The S&P500 closed Friday 16% HIGHER than where it was trading in Feb 2020 (just before covid).

One of the keys moving forward will be earnings. If earnings revisions start to come down then this will likely lead to another leg down in stocks. What would cause earnings to come down? A strong dollar will hit earnings of US multinationals. Europe’s economy is in trouble (war/insane energy prices). China’s economy is slowing (covid lock downs; popping of real estate bubble). These are happening. As spending shifts to services, do we see slow down in goods purchases? What will be the impact of much higher interest rates? Borrowing costs are now much higher. Do we see a slowing of durable goods orders? Will we eventually see an impact on housing? At what point does inflation start to impact earnings in a more negative way? We are seeing some examples in Q1. Up to now consumers have largely accepted rapidly rising prices (simply happy to be able to spend money during covid). Does this continue, or do consumers start to get pissed off and pull back on spending in response to ever rising prices? Fed tightening/QT could result in an economic hard landing. This will take time to play out. ————— At the same time there are significant tailwinds in US/Canada. Unemployment at a historic low. Job openings at historic high. Travel/services is booming. Resources/oil are booming. De-globalization is happening. Etc… ————— My guess is it will take 3-6 months for all the different puts and takes to play out more fully. I continue to believe as long as the Fed continues to remove liquidity (raising rates and QT) financial markets will struggle. Bottom line, expect lots more volatility. And lower lows as long as the Fed continues down its current path.

I bought a bunch of Recipe the past couple of days at average cost of $13. And i might add to my very small holding of Dexterra. I’ll be reviewing ATCO this weekend. On the other hand, i have been reducing my position in Fairfax India (on concerns over US$ strength and its impact on emerging markets).

@ander to March 31, Fairfax’s equity portfolio was holding up remarkably well. As the sell off in the stock market has intensified in recent weeks lots of Fairfax’s equity holdings have been taken out behind the woodshed. ATCO, their largest holding, being the most recent example. Dexterra is another holding that was crushed the past month. However, unlike the steep sell off in 2020, most of Fairfax’s equity holdings are in pretty good shape - most of the businesses are humming along and are not impaired. So the sell of in shares today is less of a concern (from my opinion). Also, it is only the mark to market holdings that impact quarterly earnings so this will mute the reported impact quite a bit. Importantly, Fairfax also has two very big cash generators today: underwriting profit and growing interest income. Earnings from these two sources will more than offset the quarterly hit to the equity portfolio moving forward.

YTD Fairfax has been a massive out performer. Fairfax is up 2% and the S&P500 is down 17%. I am quite impressed with the performance of Fairfax stock so far this year. importantly, the outlook for Fairfax is quite good. 1.) Rising interest rates are a confirmed tailwind. 2.) We know we are still in a hard market (+20% top line growth) 3.) Fairfax’s equity portfolio looks reasonably well positioned (so far) - but this could change in a hurry Personally, i am hoping the stock gets killed (i appologize in advance to board members who have a full position). I am down to a low weighting (a little under 10%). I have been waiting for sub US$500 pricing and we are almost there. At $450 i would be a very aggressive buyer. We are in a bear market (middle innings?) and this will punish everything.

The fly in the ointment is inflation. As long as inflation stays elevated, to maintains its credibility, the Fed will need to stay the course (higher rates + QT). My guess is the economy (employment) will actually be able to handle higher rates for a while. This suggests to me that rates could move higher than people expect (they already have). And this likely means financial markets will correct more than people currently expect. My guess is we get at least a 30% correction in the S&P500. Tesla continues to trade at nose-bleed levels. I think Cathy Wood funds are still seeing inflows from investors. The beatings will continue until… Cost of living (Inflation) is a massive problem for a large swath of Americans today. And these people are employed. So the Fed has its marching orders. AS LONG AS THE ECONOMY CONTINUES TO ROLL ALONG (and employment remains strong) THE FED WILL BE UNABLE TO SAVE THE STOCK MARKET (the Fed wants tighter ‘financial conditions’ so a lower stock market is what the Fed actually wants). The problem is there really are few historical precedents that mirror the current situation - record high debt levels, very high inflation levels, roaring economy, extreme labour shortage, pandemic, war in Europe, de-globalization, possible beginning of commodity super cycle, global warming, ESG, electric vehicles, green energy transition etc. So the range of possible outcomes is very wide… and so where we go (inflation, economy, financial markets) will likely be in directions few are currently expecting. Ignore the title; the video below has some good discussion regarding the current set up. I am becoming a fan of the host (Jack). He has some interesting people on and the discussion tends to be quite good.

RECP, GIL, LNR, DXT, TECK.B added to BAC, ABNB, SHOP ——- third time i have bought Recipe. Plan to sell on strength ————- Gildan looks well positioned. Short term, reopening play (tourism, concerts, work from home). Medium term, de-globalization play (as more manufacturing exits Asia)