Viking

Global liquidity trap. Here is the original article. Is this the pink elephant in the room that nobody sees? Solution? Global fiscal stimulus? Watch out? Countries using currency devaluation as policy tool in attempt to get domestic economic growth? ———————————- Source article: Global liquidity trap requires a big fiscal response - https://app.ft.com/content/2e1c0555-d65b-48d1-9af3-825d187eec58 Fighting the worst economic downturn in living memory, policymakers around the world have responded forcefully. Discretionary fiscal support of about $12tn has eclipsed previous records. Central banks, by going big with monetary easing, liquidity injections and asset purchases, have prevented financial catastrophe. Now we are in a global liquidity trap. The ascent back from what I have called “the great lockdown” will be long and fiscal policy will need to be the main game in town. For the first time, in 60 per cent of the global economy — including 97 per cent of advanced economies — central banks have pushed policy interest rates below 1 per cent. In one-fifth of the world, they are negative. With little room for further rate cuts, central banks have deployed unconventional measures. Despite this effort, persistently low inflation — and in some cases intermittent deflation — has raised the spectre of further monetary easing to achieve negative real rates if another shock strikes. It has led to the inescapable conclusion that the world is in a global liquidity trap, where monetary policy has limited effect. We must agree on appropriate policies to climb out. The central banks’ measures have been essential to meet the liquidity needs of businesses and households and to preserve jobs. Yet such policies are limited in their ability to stimulate demand. Solvency risks now predominate. Vulnerable but viable firms require support, a problem that is much better addressed by fiscal policy. Before the pandemic, there was a worrying consensus that low-for-long interest rates had promoted excessive risk-taking that heightened financial stability risks. The striking disconnect of financial markets from real activity in the recovery from the Covid-19 crisis reinforces these notions. There is also a greater risk of currency wars in a global liquidity trap. When interest rates are near zero, monetary policy works to an important extent by weakening currencies to favour domestic producers. With the pandemic already testing the limits of multilateralism, the world can ill-afford the escalation of tensions that competitive devaluations are likely to generate. Fiscal policy must play a leading role in the recovery. Governments can productively counter the shortfall in aggregate demand. Credit facilities installed by monetary authorities can only assure the power to lend but not to spend, as US Federal Reserve chair Jay Powell has noted. Fiscal authorities can actively support demand through cash transfers to support consumption and large-scale investment in medical facilities, digital infrastructure and environment protection. These expenditures create jobs, stimulate private investment and lay the foundation for a stronger and greener recovery. Governments should look for high-quality projects, while strengthening public investment management to ensure that projects are competitively selected and resources are not lost to inefficiencies. Many economies can lock in historically low interest rates now and keep debt servicing costs low. The IMF’s latest projections are for economic growth to increase at a faster rate than debt service costs in many countries — and by an even bigger margin in absolute terms than before the pandemic. This implies that debt service costs could fall. That would provide room in many economies for investment in inclusive, strong and sustainable growth, without compromising debt sustainability or bond market access. The importance of fiscal stimulus has probably never been greater because the spending multiplier — the pay-off in economic growth from an increase in public investment — is much larger in a prolonged liquidity trap. For the many countries that find themselves at the effective lower bound of interest rates, fiscal stimulus is not just economically sound policy but also the fiscally responsible thing to do. While all countries will need to deploy fiscal policy, the stimulus size will clearly vary. Those that entered the crisis with elevated debt and weak growth prospects will need to prioritise spending and seek financial support. Those whose debt is unsustainable should restructure as soon as possible to free up resources to fight this crisis. All countries should build medium-term fiscal frameworks to ensure debt remains sustainable, including through structural reforms, revenue-raising measures and cuts to wasteful spending. This is a once in a lifetime crisis. Policymakers have responded strongly, averting an even deeper recession. Monetary policy has and will remain central to this effort, but with the world in a global liquidity trap it is time for a global synchronised fiscal push to lift up prospects for all.

SAP.to (now a large position) Sold BAM (up 12% in a week) and a few other smaller positions.

Here is how i would vote based on Trust: 1.) BRK 2.) BAM 3.) FFH Here is how i would vote if i had to buy and hold for the next 10 years: 1.) BAM - Flatt is young and in his prime 2.) BRK - Buffett is very old 3.) FFH - Prem’s best years, i think, are in the rear view mirror

Listened to the WR Berkley conference call. Like all insurers they are having problems with where to invest. As bonds mature they are building cash. They anticipate higher interest rates in the future. On the conference call lots of questions and concerns from analysts about trying to time bond market purchases and what that does to earnings visibility and predicability. As bonds mature, insurers are going to really struggle to reinvest at acceptable yields. If low rates persist insurance companies will be looking for yield. BAM is positioned ideally and ready to help them out :-) ——————————— RBC had this to say in its weekly report on insurance industry: “It’s really simple – margins go up after rate increases. Some improvement happens quickly, some takes longer to leverage but rate increases are good and we’re getting to the part of the rate story that is turning into the earnings story. ——————————- We have been seeing rate increases for 12-18 months. Q4 results might be when we see improving CR’s, improving operating results and improved earnings. But because investment results will be under continued pressure (due to low rates) the hard market should continue to run for some time.

FFH (fortunately at open), SAP.to, BAM

Coronavirus is a large topic. I thought it might make some sense to have a couple of threads on the topic so comments can be grouped a little better. The idea behind this thread is when will we see recovery, what will it look like, how fast, and what are some investment opportunities / suggestions to take advantage? There will likely be lots of mis-pricing by Mr Market given all the uncertainty. Given we are on the cusp of multiple vaccines getting approved i am now starting to think about what the next phase of living with this pandemic will look like. The flip side of the equation is we are also going in to flu season and we are seeing another spike in cases / hospitalizations / more government restrictions. So we are going to be getting very divergent news flows in the coming months. My view is the current spike in cases will be a short term issue. The vaccine, however, will be the more important development over time. My guess is the vaccine news flow will eventually win the day. But it might take some months to play out (or not?). My guess is the vaccine will also be a step in the right direction but not a ‘cure’. The key will be getting though the current flu season and into March / April with as little damage as possible. Once we hit spring with favourable seasonality, likely vaccines, likely better treatments, better testing (hello 15 minute test at airports) we should be in a better place. By mid summer we should see even more improvement. What are people thinking? Is this a realistic scenario? Too optimistic? Why? Too pessimistic? Why? And, most importantly, what are some investment opportunities? Where is the most pent up demand? - Travel? Airlines? Air Canada, north of the border, or Southwestern in the US? Ryanair in Europe? - Hotels? - Eating out? Restaurant stocks? - Banking? RY or TD in Canada; JPM or BAC in US? - Oil? CNQ or SU in Canada or CVX in US? - Emerging markets? Or is there a better way to think / invest? To be clear, i am not expecting Covid to disappear. Rather, with multiple vaccines (therapeutics and better tests) i expect the world to begin the next chapter of living with covid. And i am trying to understand what will be written in that chapter and understand what behaviour change that will bring about. And what the likely best investments opportunities are :-) I am thinking this might be a good time to get positioned/buy a couple best in class companies in industries that might recover the quickest should we get some good news on the medical front in the coming months that allows people (and economy) to get to the next phase of normalcy.

My vote: 1.) Fairfax 2.) BAM 3.) BRK I picked Fairfax because it looks the most undervalued and it is in a hard insurance market. RBC has forecast $35 in operating earnings in 2021. Shares are trading at $263. When equity earnings turn positive (they will :-) the stock should be an easy double. The risk for Fairfax is theirvcurrent leverage profile and if we get another 30 or 40% decline in the stock market in the next 12 - 18 months. BAM looks undervalued. But it is such a big pig i really have no idea how undervalued. It is the classic example of ‘trust management’. How much it goes up will depend on 2 variables: 1.) if interest rates stay low for long 2.) the PE multiple Mr Market gives the company over time BRK will likely deliver 1 or 2% under the S&P 500 over the next decade. Solid.

Hey, if everyone wants to own an insurance company right now perhaps someone can introduce Prem to Flatt. Imagine FFH investments managed by Brookfield :-) Just think what kind of value that pairing could create for Fairfax shareholders over the next 5-10 years from todays price :-)

That is the single largest reason to buy FFH at current levels. Lower bond yields / lower investment results are not Fairfax specific... every insurer will see lower returns from investments moving forward. The hard market could run some time (years).

I agree low to mid single digits on equities should be easy, but it would have been easy to do a lot better than they did on equities the last 10 years as well. If they changed their approach to buying "easy singles" and just bought the low multiple large caps you mention their returns would almost certainly be fine. Is there evidence they will stop doing their "swing for the fences on structurally distressed" style of investing? I do see some improvement in decision making with equities/hold co’s the past few years. Like selling (for shares) APR to Atlas. Selling Fairfax Africa to Helios for shares in the new venture. Bottom line, there seems to have been a realization at Faifax HO that they were ill equipped to support operating companies that were turn around situations. Fairfax seem to slowly be cleaning things up. Fairfax appeared to be trying to make more of these moves (and outright sales) but the pandemic has likely put a hard stop on that for now. I think they have also said they will not be throwing more money at operations like Recipe (forcing them to stand on their own two feet) which is nice to finally see. Stop watering the weeds. As they continue to deal with the problem children that also will allow the quality in the portfolio stand out more. I am watching Atlas the closest given its position size and how it appears to be handling the pandemic well.

I also have been wondering what is priced in to the market in terms of a Democrats win and higher corporate tax rates. Perhaps not much as they would need to win both the WH and Senate for this to happen.

BAM, SAP.TO, FTS, SJR-B.TO, FFH

Fairfax is a three legged stool: 1.) insurance / underwriting - solid 2.) investing part 1: fixed income - solid 3.) investing equities / op co’s - a mess The way to make very good money with Fairfax for the past 20 years is to wait for the turn in stool leg 3. (Mr Market was always slow to catch on so the shares became $20 bills lying on the ground in plain sight for all to see.) The problem for Fairfax investors is stool leg 3 has underperformed for the last 7 years (more than offsetting the gains made in stool legs 1 and 2). The good news for new investors in Fairfax is with shares trading at US$266 they will likely do well moving forward if Fairfax simply stops losing money with bucket 3. Crazy thing to say... but i think it is true (posters think i am only hard on Trump :-) And that is how out of favour this company is today... People do not want to own it because they expect Fairfax to lose more money in bucket 3. There are lots of legacy dogs still barking in the shadows: Toys R Us, Recipe, Blackberry to name a few that quickly come to mind... Now having said all that i might reestablish a position tomorrow. Because, to Sanjeev’s point, if they ever start to make a positive return from stool leg 3 the stock will rock. The other potential catalyst for shares is Prem’s creativity in surfacing value.

Otherwise yesterday, i was visiting my in-laws (retirement home) and there was this sympathetic young person at the entrance regulating the traffic (asking a few questions, telling to sign a timed in-out list and measuring body temperature with a device). So she gets a reading of 33.2 °C (91,8 °F for you) and asks me to write it down beside my name. i did not think it was appropriate to explain that those devices were unreliable devices measuring an unreliable variable (surface body temperature) using an unreliable algorithm to infer core body temperature which, itself, is a relatively unreliable indicator of Covid presence or contagiousness but i felt that it would have been useful to notify her that her device was malfunctioning (all others before me had readings between 32.8 and 33.5) but after a very simple question wondering if it was possible that her instrument could have been precise without being accurate (suggesting the need to replace the battery or to recalibrate it), it became clear that the effort wasn't worth it. i did not insist because even if what she was doing had low 'scientific' value, she was, fundamentally, communicating that she cared about my in-laws. So, i simply said she was doing a great job and she said that's pretty cool. Cigarbutt, you have my favourite comment of the week :-) well done!

Do we need to worry about the amount of cash the company is chewing through? $1.1 billion in cash. But $700 million of this has been funded from the credit facility they tapped when the pandemic was raging earlier this year. Looks to me like they need to find some cash from somewhere... Asset sale? Better operating results? Share issue? ————————- - At March 31, 2020 the company had drawn $1,770.0 million on its credit facility, solely as a precaution, to support its insurance and reinsurance companies should it be needed if the effects of the COVID-19 pandemic continued for an extended period. The company subsequently repaid $1,070.0 million of that borrowing, leaving $700.0 million borrowed under that facility currently. - On August 28, 2020 the company acquired the minority interest in Brit for cash consideration of $220.0 million. - The company held $1,153.0 million of cash and investments at the holding company level ($1,095.9 million net of short sale and derivative obligations) at September 30, 2020, compared to $975.5 million ($975.2 million net of short sale and derivative obligations) at December 31, 2019. - The company's total debt to total capital ratio, excluding non-insurance companies, increased to 31.3% at September 30, 2020 from 24.5% at December 31, 2019, primarily reflecting the $700.0 million drawn on the credit facility and decreased total capital due to decreased common shareholders' equity.

Quote from Investor20 earlier in the thread: How do you know masks work in real life? What data you have? ———————————— If you do not know the answer to this question then there is nothing that i can say that will help you. PS: How do you know the world is actually round? Maybe, just maybe its flat... better be careful the next time you are out on the water... don’t want to sail right off the edge!

BAM and SAP.TO CAN$ (moved another 10% of my portfolio out of US$)

Sorry, not sure if you are serious or not with your question? Masks are one of the most effective tools to slow the spread of the virus. There are other tools as well. There are also lots of behaviours that accelerate the spread of the virus. The White House Supreme Court Party that became a super spreader event is one example. Now my guess is every participant in that White House event would say they ‘wear a mask every time they leave the house’. If people do stupid things then the virus will spread. The more stupid the faster the spread. Not rocket science. But the REAL problem the US has right now is Trump has, in his usual style, thrown gasoline all over the efforts and communication from virus experts and health care professionals. There is no unified approach. The US is learning that having an arsonist in charge can be lethal. PS: mistakes will be made along the way. They need to be owned, with the learnings becoming part of future actions. But that is not possible under Trump because he refuses to admit he has made any errors; if fact, he ‘double downs’ on errors compounding them further. PS2: Europe has also messed up. The pressure to open the economy up/let families live normal lives is real. So rational politicians/people push the limits. How do you know when you have gone too far? Case counts spike. Then you go the other way. Just what was anticipated back in March in the Hammer and the Dance article.

T.to Also own BCE.to and SJR-b.to Canadian Telecom looks reasonably valued; good dividend yields; safe payouts ————- Also buying Canadian $ (selling US$) 7 or 8 years ago i moved 90% of my portfolio from Canadian $ to US$ (when currencies were close to par). It was not a currency trade... simply the result of me finding better opportunities investing in US companies. I have been holding very large cash balances and leaving the cash in US$. Earlier this year i decided to start shifting back to Canadian $ to lock in some very large gains. And i am now finding lots of Canadian stocks to buy (telecom, pipelines) so that is also a factor. Canadian banks also look tempting. Energy as well. Today i am about 55% US$ and 45% CAN$. If we get a Blue wave and spending shoots up we may see US$ weakness moving forward. No idea, really. Just wanted to lock in some nice gains and reduce the currency risk in my portfolio.

The model to deal with the virus is pretty straight forward: 1.) wear a mask 2.) social distance 3.) aggressively contact trace positive cases 4.) most importantly, do not allow clusters to form (which result in superspreader events) Where do clusters usually form? Bars, weddings, funerals, White House events etc. Large gatherings, close together, poor ventilation, talking loudly etc. It looks to me like parts of Europe opened up too much over the summer or people got tired of following the rules (or some combination). Bottom line, the virus will eventually let you know if you are doing the right or the wrong things.

Great interview with Scott Gottleib. He is not optimistic at where the US is at. I think he said ‘tipping point’. In 2 or 3 weeks time things could really start to get messy. Not encouraging. What to do? To start, wear a mask he says. (Wow! If only we had known!) - https://www.cbsnews.com/live/video/20201025203302-former-fda-commissioner-dr-scott-gottlieb-on-face-the-nation/#x

A few more updates of where some other countries are at. Clearly, we are in early days in this new wave. Interesting, but in the end the virus is dictating what each and every governments across the globe (eventually) does. (Of course this is obvious.) The US had better wake up. The more clusters you allow to happen the faster the virus spreads. Denial is not a good strategy... 1.) Italy - https://www.washingtonpost.com/world/europe/coronavirus-europe-italy-second-wave-lockdown/2020/10/25/6c011306-16df-11eb-82db-60b15c874105_story.html Italian Prime Minister Giuseppe Conte announced the new restrictions as the country reported a record 21,273 cases on Sunday. Beginning Monday, restaurants and bars will be required to close by 6 p.m., and gyms, pools and movie theaters must shut down entirely. The restrictions are the fourth round of tightening this month in Italy, and the most severe since the country lifted its nationwide lockdown in May. 2.) Belgium Covid-19 surge in Belgium leads to shortage of doctors, teachers and police - https://www.washingtonpost.com/world/europe/belgium-covid-hospitals-schools/2020/10/23/85358010-14a9-11eb-a258-614acf2b906d_story.html BRUSSELS — Well into Europe's second wave of the coronavirus, so many Belgians are sick or quarantining that there aren't enough police on the streets, teachers in classrooms or medical staff in hospitals. In some hospitals, doctors and nurses who have tested positive but don’t have symptoms are being asked to keep working, because so many others are out sick with covid-19, the disease caused by the novel coronavirus. School principals are marshaling secretaries and parent volunteers to replace falling ranks of teachers. “We have runaway numbers in terms of contamination and a major issue is the risk of the collapse of the hospital system of our country,” the minister-president of Brussels, Rudi Vervoort, said Saturday as he announced a host of new restrictions. Unlike in the spring, there are enough masks and gowns to go around. But months of preparation haven’t been able to avert a shortage of people. And a decision by the national government to remove a mask mandate and loosen restrictions on social contacts this month contributed to an acceleration of the virus before being largely reversed in hard-hit areas since Friday. 3.) Ireland (6 days ago) Ireland to reimpose national lockdown amid surge in COVID-19 cases - https://thehill.com/homenews/news/521846-ireland-to-reimpose-national-lockdown-amid-surge-in-covid-19-cases Ireland's government is set to impose a six-week lockdown on the entire country as COVID-19 cases continue to rise, according to The New York Times. The country will become the first in Europe to reimpose a nationwide lockdown when it shuts down nonessential businesses on Wednesday night, according to the Times. “While we have slowed the spread of the virus, this has not been enough and further action is required,” Micheal Martin, the taoiseach, or leader of the government, said in a national address on Monday night, the Times reported. Irish residents will be urged to remain at home and restaurants will be relegated to takeout or delivery only, according to the Times. The country will impose fines on people who travel more than 5 km from their homes during the lockdown, The Guardian reported. While schools and child care providers will remain open under the new action, gatherings and visits to private homes will be prohibited, the Times reported.

My guess is hospitalizations will be the key statistic. If cases spike and hospitalizations do not then little will change. If hospitalizations increase to uncomfortable levels then politicians will be forced to do more. Just like in March / April. Case count increase to me is a red flag. Hospitalizations, which usually take 2-3 weeks to show up will be the call to action (should they get uncomfortably high). The experience in the coming months will likely be very different than in March / April. We have learned much about the virus that will inform actions. Most importantly, the most vulnerable understand the risks and therefore should be much more prepared. So i do not expect severe outcomes (deaths) to come close to levels seen in March/April.

Here we go again... if you mismanage the virus and allow your case count to spike there are consequences. You HAVE to impose stricter measures. And the economy suffers. Mismanaging the virus = worse health outcomes AND worse economic outcomes. You get a double whammy. It is NOT virus or economy; the two are joined at the hip. And likely will be for the next year or two. The crazy thing is we are only starting flu season. Due to seasonality the virus case count will get much worse in Europe, US and Canada in the coming months. The US and Canada appear to be a few weeks behind Europe. Absent a complete shit show (hospitals getting overwhelmed) I do not expect Western governments to respond like they did in March and April. However, i think it likely we will see a slow ratcheting up of measures until the case count is brought back under control. Yes, a vaccine will help. But how helpful they will be in the coming months is unkown. Buckle up... the next couple of months could really get interesting. Can anyone say ‘double dip recession’? PS: fortunately, according to President Trump, the US has nothing to worry about. The situation in the US is about to get much, much better - ‘turning the corner’ kind of thing. (You can believe that if it makes you feel better :-) ————————————- Spanish PM Pedro Sánchez declares national state of emergency over COVID-19 outbreak - https://www.theglobeandmail.com/world/article-spanish-pm-pedro-sanchez-declares-national-state-of-emergency-over/ Buckling under the resurgence of the coronavirus in Europe, the Spanish government on Sunday declared a national state of emergency that includes an overnight curfew in hopes of not repeating the near collapse of the country’s hospitals. Prime Minister Pedro Sanchez said the decision to restrict free movement on the streets of Spain between 11 p.m.-6 a.m. allows exceptions for commuting to work, buying medicine, and caring for elderly and young family members. He said the curfew takes effect Sunday night and would likely remain in place for six months. “The reality is that Europe and Spain are immersed in a second wave of the pandemic,” Sanchez said during a nationwide address after meeting with his Cabinet. “The situation we are living in is extreme.” ———————— Wales Imposes 'Firebreak Lockdown' As Coronavirus Cases Spike - https://www.npr.org/sections/coronavirus-live-updates/2020/10/23/927137727/wales-imposes-firebreak-lockdown-as-coronavirus-cases-spike Wales is heading into a 17-day lockdown on Friday evening, as many parts of Europe reimpose safety measures because of rising coronavirus case counts. The "firebreak lockdown" went into effect at 6 p.m. local time and requires that people remain home with few exceptions. Pubs, restaurants and nonessential shops will shut, along with libraries and community and recycling centers. The Welsh government is also banning gatherings involving people from different households, both indoors and outside. Wales has had 182 cases per 100,000 people in the past week. That's the third highest rate in the United Kingdom, behind Northern Ireland. "We know that if we do not act now, it will continue to accelerate and there is a very real risk that our NHS will be overwhelmed," said Welsh First Minister Mark Drakeford, referring to the need to protect the National Health Service.

Here is their Q3 letter. From my perspective it provides the best model to explain what Japan has experienced the past 20 years, Europe the past 10 and perhaps where the US and Canada are now. Looking at the economies of the West/Japan the question I have not been able to answer is ‘does total debt matter?’ Governments are spending / borrowing at levels not seen since WWII. Total debt as a % of GDP is at or very close to all time records. As we have learned from Japan, total debt can get much, much higher. National/federal debt + state/province + local/ municipal + business + consumer Conclusion? Stimulus spending (massive deficit spending) will provide a 1 or 2 quarter boost but at cost of lower future growth. The trend of lower growth, lower inflation and lower bond yields remains intact. Some are forecasting the 10 year US government bond yield could fall below 0.3% by year end. Will the US ever see a negative rate on 10 year Government debt? - https://hoisingtonmgt.com/pdf/HIM2020Q3NP.pdf ———— here are a few lines from the Q3 letter: - Thus, monetary policy is left with one-sided capabilities i.e., they can restrain economic activity by reducing reserves and raising rates, but they are not capable of stimulating economic activity to any significant degree. - Debt financed fiscal policy can provide a short-term lift to the economy that lasts one to two quarters. - Diminishing returns occur when a factor of production, such as debt capital is overused. - If policy makers are incentivized to borrow more because interest rates are low, then the MRP of debt will fall, leading to even weaker growth. Moreover, interest rates are lowered indirectly by poorer growth and inflation, and by a further fall of the MRP of debt. Thus, the whole premise of Modern Monetary Theory is flawed at the core. The low interest rates are not a potential benefit for the economy, they are a result of the overuse of debt. - We identify two tail risks for long term Treasury investors: (1) a huge new debt financed fiscal package and (2) a major change in the Fed’s modus operandi. The first risk would change the short-run trajectory of the economy. This better growth, although short lived, could place transitory upward pressure on interest rates in a fashion that has been experienced many times. Over the longer run, disinflation would prevail and the downward trend in Treasury yields would resume. - The second risk would bring a rising inflationary dynamic into the picture, potentially becoming much more consequential. General disappointment with trying to solve economic underperformance by more indebtedness may crystalize along with the realization that debt will not work any better in the U.S. than in Japan, the Euro Area and many other countries. As this dissatisfaction intensifies, either de jure or de facto, the Federal Reserve’s liabilities could be made legal tender, or a medium of exchange. - As long as the federal government’s policy prescription is ever higher levels of debt, the path toward disinflation will hold and long Treasury bonds will be the preferred area of the curve. —————————- - Greshams Law: https://www.investopedia.com/terms/g/greshams-law.asp