Viking

But he also said that unlike the 25 years of going nowhere from 1929 to 1954, the Fed now has FDIC and other tools. I actually got the opposite impression that it will be much shorter than a 25 year depression because of what the government is doing. Exactly right. He also said he expected inflation, which would be rather a different outcome. I happen to think an inflationary depression is pretty much the same as a deflationary depression ) But at least the Dow or SP or whatever will go up, just not as fast as all your costs. Actually, my take is that an inflationary depression is probably a bit easier to manage. Labour prices (wages) tend to be sticky downwards, and minimum wages in particular are sticky downwards. At least with an inflationary depression, you the real price of labour gets inflated away, which enables firms to consider hiring more people. Similarly, in a deflationary environment, there is a disincentive to spend immediately while in an inflationary environment you are better off to convert your cash into goods immediately. We probably don't want to experience either of those, but if I were forced to choose.... SJ Given everything we are seeing today, is it not likely that we see mild deflation in the US moving forward? This has been the trend in Japan for the past decade and Europe in recent years? Oil at $20 will be deflationary (lower input costs). Massive unemployment. Massive number of business bankruptcies. Double digit negative GDP growth. Falling consumer spending and business investment. Worldwide recession. Strong US$. Long bond yields at historic lows. Debt to GDP levels back to historic highs. Higher taxes in 2021 (likely). What will cause inflation in the near term? War perhaps? Other?

Maybe RBC was the outfit that extended the $2B revolver to FFH? ::) SJ +1 I have been reading the RBC research reports for years. I find them generally to be very good. However, for years they have been positive on Fairfax with a very high price target (often 50% higher than where the stock was trading). RBC’s commentary on underwriting and CR estimates have been pretty accurate. Their commentary on investment results, especially the equity holdings, has been consistently too optimistic and largely along the lines ‘they have a great long term track record so we will give them the benefit of the doubt’. I have also wondered why RBC has been so ‘nice’ to FFH :-) Fairfax’s investments (in aggregate) - including equities, hedges, warrants and private business purchases - have been value destroying for 8 years or so. Something looks broken in how they are managing investments (how they are picking individual securities and how structuring the overall portfolio). Confidence in management is at an all time low (in how it is managing the total investment portfolio). Many current investments are low quality and will struggle in the near term. If we get a severe recession that lasts into 2021 we can expect more large losses from the investment portfolio which will drive BV lower. Not surprising the discount to BV is where it is today. PS: i was getting more positive on FFH late last year as they were making some moves i liked. Unfortunately, the virus has exposed them badly and it will likely slow their ability to ‘fix’ things (in the investment portfolio). Brutal timing. But what we are seeing with the virus is the fatal flaw in their investment approach.

Normal human psychology. The guys buying at $600 were the ones selling at $350-400! This exchange made me smile. If there was value then there is extreme value now, even if covid-19 has permanently reduced the value of Eurobank, Recipe, Atlas, Bangalore Airport, etc. to a point below their current share prices. Context is important. All insurance stocks have been crushed in the last 10 weeks. Chubb was trading over $160 in Feb and now it is trading below $100. WRB has fallen from $79 to $51. The declines have been 35-38%. Fairfax has fallen from $625 to $350 a 44% decline. It also had a much larger Q1 loss and hit to BV. So compared to other insurance stocks the decline in FFH looks reasonable. The question moving forward is if you want to put new money into the insurance sector where do you do it? My vote, given the broad based sell off, is to put it into the highest quality names. My current picks are WRB and CB (two that i have followed for years and like).

The challenge with macro calls is you have to get not only the call right but also the timing. My view is the timing is the more difficult of the two to get right. In time, we may learn that Fairfax was positioned properly in 2015 (with their very bearish position). They reversed in 2016 and locked in losses. Then got fully invested and may now be facing steep (paper) losses once again. If we get a severe bear market in stocks Fairfax may need to do a complete reset In terms of investment strategy to re-build investor confidence. What a crazy ride the past 25 years :-)

How much intrinsic value will evaporate in those 2 years for shareholders? Yes, airlines may take on lots of debt and then keep paying those debts in the next 5-6 years. Just because they survive , will shareholders get richer? If yes, then by how much and what risk they are taking? I don't think he is thinking short-term here. I think range of outcome is wide. It’s not a matter if air travel comes back. It surely will. It’s a matter of duration of the current and if current shareholders will get impaired and what the economics of the business will look like. Buffet doesn’t know then answer and he realized that he didn’t get the deal that he thought he get when he bought into this. His process might have been correct and have worked out well in a parallel universe without the Coronavirus showing up, but it did not. So he makes the best guess and moves on. It is what it is. Listening to Buffett yesterday, I think the key reason he punted on the airlines is because they are such a capital intensive industry. And they are going to need a massive amount of new money just to survive the next year or two. And governments will want national champions (Italy nationalized it’s airline) so there will likely be lots of dumb things done there. So existing shareholders are at high risk of permanent loss of capital. Not an investment today but a speculation.

My read is Berkshire is being run for the very long term shareholders many of which are very wealthy (hold lots of shares). Preservation of capital is much more important than return on capital. Both Munger and Buffett both have spoken about the obligation they feel to these people and also their estates. I am pretty sure both have also used Trustee to describe that responsibility. So having an exceptionally high cash balance is very rational in the current environment. Berkshire is a very different company from 40 years ago and Warren also is also much older. I hold Berkshire as a bond substitute. Happy to get a 6 to 8% annual return. I do not hold it as a substitute for the S&P 500 which is dominated by 4 stocks: Microsoft, Apple, Alphabet and Amazon. I like the core holdings as long term businesses: Apple, US banks, BNSF, Mid-American and Insurance Do i have confidence in Buffett? Yes. If i did not i would not own the shares. PS: i see some parallels with both Berkshire and Fairfax today. Both companies still have strong willed founders running them and are much, much larger now. Both also have very good long term track records. Both are morphing as companies. Both also have underperformed expectations in recent years with lots of questions over how they are allocating capital. Interesting. (Berkshires performance - near term and long term- has been much better than Fairfax’s and it still has a large number of long term shareholders who likely are quite happy with Buffett’s performance; My guess is Fairfax has lost many long term shareholders due to its terrible performance the past 7 years.)

His comment about not understanding the impact of negative interest rates was also very clearly stated. He said understanding the impact of negative interest rates is likely THE most important economic question of our time. (The reason it is so important is we do not know). He then punted the question to Greg who quickly agreed with Buffett.

One key takeaway for me is that Buffett feels certain industries are uninvestable. He discussed airlines. (He sounded very surprised - and almost a little guilty - when saying how quickly they were able to sell all of their airline positions in April.) But his logic likely also applies to hotels, sit down restaurants, cruise ships, travel, events (sports, music etc). These businesses are all going to need large amounts of cash to stay alive, some have high fixed costs and will likely be revenue impaired for some time; so their models are completely broken. Why would a rational person put any new money into these businesses given the high probability of loss of capital. The future path of the virus is still unknown. This is a very large swath of the US economy which is consumer and service focussed. This then perhaps feeds his current very somber mood and likely explains his building of cash. That Buffett used the Great Depression as a tool to help people understand recent decisions/current thinking is interesting to say the least. One book he mentioned worth reading was Galbraith’s the Great Crash 1929. Buffett definitely is in no hurry to invest Berkshire’s cash. PS: it was nice to have Greg Abel answer questions. Didn’t disappoint or wow me with his answers.

Barron’s estimates of BV: - March 31 = 1.2 - May 1 = 1.15 ($183 / $159 for B shares) Buying BRK at less than 1.2x BV has historically been a very good entry point. Especially considering: - cash is at all time high now representing 30% of total market cap - we are just starting what is expected to be the worst recession since Great Depression. Likely see lots of opportunities in coming years. - equity values in BV are not excessive (after coming down during sell off) - insurance is entering what looks to be long hard market Warren Buffett’s Berkshire Hathaway Reports Big First-Quarter Loss After $54.5 Billion Hit to Its Investments - https://www.barrons.com/articles/berkshire-hathaway-reports-huge-first-quarter-loss-after-writing-down-the-value-of-its-investments-51588423177 With Berkshire’s class A shares finishing Friday at $273,975, the stock trades at 1.2 times the March 31 book value. Barron’s is estimating the book value per share based on $371.6 billion of shareholder equity and 1.62 million shares outstanding, with Berkshire’s Class B stock (BRK.B) converted into an equivalent amount of class A shares. The class B shares ended Friday at $182.67. Berkshire’s book value likely has risen since March 31 due to the rally in the stock market. Barron’s estimates that book value as of Friday was around $238,000 per class A share, meaning that Berkshire now trades for a little more than 1.1 times estimated book value. That’s low relative to where the stock has traded in recent years at an average of 1.3 to 1.4 times book.

+1. I especially like how he questions the accepted financial orthodoxy :-) His $ going to the Gates Foundation will benefit many.

I have been in and out of BRK three different times in the past month. Small 3-4% gains each time. Bought more today. BRK is pretty unloved right now. Expectations are very low. Not expecting anything big to be announced tomorrow. However, one of these years we will get a nice surprise (larger stock buybacks or big purchase or something else) as Buffett will do something with the +$100 billion in cash.

If this talk becomes more prevalent and Trump picks it up we are going to see a couple of limit down days in a row. Treasuries will get absolutely destroyed with obvious consequences for the financial system. He's been playing for small stakes with all his previous bankruptcies. Now he wants to scale it up & show he's truly the master when it comes to running businesses into the ground. This falls under the ‘holy shit’ category. Unbelievable.

AAPL; $40 billion and just added $50 billion = $90 billion in authorization Starbucks

At some point the reality of what is happening from an economic perspective (devastation) will matter to financial markets. What is happening is new so it is not surprising that people are not able to grasp the significance. It is like standing on a beach and the water is running out into the ocean and you know the tsunami is coming. Do you run for high ground? No. Ignore the facts and stand paralyzed waiting with curiosity to see what happens next. After all, the sun is shining and it really is a beautiful day! And nobody else looks worried. :-) European Slump Is Worst Since World War II, Reports Show - https://www.nytimes.com/2020/04/30/business/europe-economy-coronavirus-recession.html?action=click&module=Top%20Stories&pgtype=Homepage FRANKFURT — Europe is in the midst of a downturn not seen since the end of World War II, and the worst is yet to come, the president of the European Central Bank said Thursday after the release of a barrage of dismal economic data. “The euro area is facing an economic contraction of a magnitude and speed that are unprecedented in peacetime,” Christine Lagarde, the president of the central bank, said as she warned that the eurozone economy could shrink by as much as 12 percent this year. In a bid to prevent another financial crisis, the bank’s Governing Council decided Thursday to effectively pay banks to lend money and vowed to do whatever was necessary to counteract the economic impact of the coronavirus. ...Under certain conditions the central bank will allow commercial banks in the eurozone to borrow at a rate of minus 1 percent provided the money is passed on to businesses and consumers. The negative interest rate means that banks could borrow up to 3 trillion euros, or $3.3 trillion, without having to pay all of the money back.

Pete, if we get deflation it will be the result of a severe, likely global, recession. This will hit EM harder than DM. I think India is in a precarious position; last year their financial system had serious issues and my guess is they were not fixed. The current worldwide recession could not have come at a worse time. CSB might be a good bank; it is just in a very tough situation. I do like CIB’s long term track record but will be staying clear of EM stocks for now. Having said all that, for those ok with high uncertainty, able to handle severe volatility and with a long term perspective there is likely lots of money to be made investing in EM stocks today. Just not a good fit for me :-)

Xerxes, you seem to have it all well thought out :-) i do own BRK. In all honesty, probably mostly just because i like Buffett. And the fact they have so much cash (ideal in the current environment). It is likely just a short term hold... i will be happy to sell for a quick 3-4% gain. Done it a couple of time already :-) Fairfax India looks interesting. I do like some of the assets (but not CSB). But until i get some clarity regarding the path of virus i am going to get very selective (which means FIH will just stay on my watch list :-)

To add to what Petec mentions, look at pretty much all the Indian companies held the past 3-5 years. There was what looks to be a bubble in Indian stocks a couple pf years ago. The ride that Fairfax has been on with these holding has been absolutely amazing. Moving forward Fairfax had better hope that Hoisington’s macro call is wrong (that we are moving towards mild deflation). Emerging markets (India) could be challenged moving forward. Some of the individual holding like Recipe (Canadian restaurant stocks - many full serve) will also struggle mightily in the near term. Is is staggering how the outlook for Fairfax has changed in 12 weeks. 12 weeks ago my view was Fairfax was ideally positioned to benefit from hardening insurance market and risk on in stocks (including emerging markets). They had made a number of moves to lock in some investment gains and get other investments positioned to succeed. The virus has completely submarined them. Completely unexpected. Resulting in more pot holes that will now need to be filled in (testing shareholders patience). My focus right now is quality. Recently bought CB and WRB. Cheap; well managed; easy to understand; well positioned. I feel good when i listen to their conference calls (although i much prefer listening to the old Berkely to the son :-).

We will start to learn more about the impact of the virus on companies and industries. Pretty sobering stuff. Impacts existing shareholders, bond holders, creditors. Also instructive to read their outlook of what the next 24 months will look like. Norwegian Proposes Debt Restructuring That Will Wipe Out Owners - https://www.bloomberg.com/news/articles/2020-04-27/norwegian-proposes-debt-restructuring-that-will-wipe-out-owners ...Norwegian is asking the holders of three bonds to convert about $350 million into equity, while aircraft lessors would swap at least $500 million of the 33.3 billion kroner ($3.1 billion) they are owed. The proposal would leave existing owners of the stock with 5.2% of the company -- and that’s before a 400 million-krone equity issue that would dilute them further. ...As part of the new business plan, the carrier plans to only operate 7 airplanes in the Scandinavian region until April 2021 to minimize its cash burn, and then gradually resume long-haul and European flights. Norwegian only expects normal operations in 2022. Even then, it expects to operate fewer aircraft and focus on profitable routes. ...Norwegian plans an “optimizing of fleet size, including disposal of aircraft no longer needed,” and only plans to operate 110 to 120 jets onces it returns to normal operations, compared with 168 aircraft before the pandemic, it said in the presentation.

I listened to the podcast. Quite grim. Is anyone aware of a macroeconomic history of the post-WWII era written by someone who shares Hunt's macroeconomic views? What i liked the most is Hoisington/Hunt provides a framework to understand what is going on in the economy today. Especially all the debt. They feel the next logical step is mild deflation (-1 or -2%). Consensus ‘wisdom’ is with interest rates so low it is rational for companies (and people) to take on a bunch of debt. Hoisington has the opposite view: debt is very bad in a deflationary environment as the real interest rate will be going up. At the same time company earnings and personal income will be falling. Once the deflation cycle gets started it is very difficult to reverse. Oil prices this low will feed what is already a deflationary environment. Population growth in US is slowing (lowers economic growth). My guess is a strong US$ is also deflationary (this is my opinion). Japan is stuck in mild deflation. Looks like southern Europe might be following. As total debt % to GDP grows, the benefit of more debt (to grow GDP) diminishes. More debt today reduces future consumption. Hoisington also provides a framework to understand what the Fed is doing and what activities might be deflationary and what future activities might be inflationary.

Yes, countries have all managed the virus in very different ways. Some, like Italy, had a health catastrophe. To suggest that Sweden’s approach would have helped in Italy makes no sense. Each country had its own unique situation (general preparedness, clusters, testing, culture, population density, geographic size etc) that required a specific response. Bottom line, when you mismanage the virus you will have to resort to lock down. This was true in Feb and this is just as true on April 26. All governments have been warned. Moving forward we will see who is up to the challenge.

I am thinking AirBNB units will also be coming on the market at the same time. Anecdotally, where is live in greater Vancouver in my cul-de-sac every young adult (university student or young adult) has moved back home for the summer. Most would have stayed in their rental for the summer and worked. Where my older daughter was renting (house with 3 - 3 bedroom units) two recently came up for rent. The landlord, who owns the house, said he was dropping the rent to ensure he got the 2 units rented and to good tenants. He was successful. For renters this is likely a great time as there is lots of supply. Good chance to upgrade and possibly lower cost.

Cigar, thanks for doing the leg work on their recent work. I am reading up on deflation and came across the Podcast linked below (recorded just a week ago) The kid asks good questions; best of all he just lets Lacy Hunt (from Hoisington) talk. Very educational whether you think deflation is coming or not. Skip the first 4 minutes if you are in a hurry :-) It is long (45 minutes) and full of economics stuff... so you have been warned :-) I now understand why it is rational for someone to want to own a 30 year US treasury bond! - how can they have a 30 year perspective (being invested primarily in 30 year treasuries)? Answer: their investment process has a 3 to 5 year time horizon. - Vance Crowe Podcast: Lacy Hunt (April 18, 2020) - PS: Cigar, can you update the the title to just Hoisington Management? For future...

who needs to extrapolate to the rest of the country, for goodness sakes!!! apples to apples. NYC is the epicenter of the crisis, and because major media is NYC-centric, the mass hysteria was exported. why does the governor of michigan go stalinesque? because she wants to look like she is on top of things like cuomo. so of course this doesnt have to be extrapolated nationwide, because NYC's experience isn't the nation's experience. this 20% antibody positive rate makes covid less deadly than the flu. and if this result doesnt comport with how you want to think, then just call it a bad test. an inhale some more sand NYC: 11,267 deaths divided by 21% of 8,000,000 people=mortality rate of 0.67%. just like the flu. In all of the US last year there were a total of 15,500 murders. The death rate is infinitely lower than the flu (not just like the flu). Therefore we can now conclude that murders are not important. All the effort put in by law enforcement to solve them is a complete waste of time. Judiciary? Waste of time and resources. Jails? Who will need them moving forward? Bottom line, we now have out metric to determine if an activity is useful to society: how does is compare statistically to the flu? We have been so blind for so long. Thanks to those on the board who keep pushing this logic... i finally understand (so you can stop anytime :-)

The best part is watching them squirm when their lack of knowledge is exposed. It's pretty hilarious, in a "laugh so you don't cry" sort of way. Crazy how those in charge get a free pass. “But their intentions were good.” So it really doesn’t matter if they burn down the house with their stupidity. Actually, the stupidity is to be celebrated; and the more stupid the better. And then we are told that all this stupidity is just ‘common sense.’ It is explained and twisted in ways that reek of Animal Farm. George Orwell is smiling from the grave right now at all the irony.

On the other hand, the natural gas forward curve has been rising, with the January 2021 contract up around 25% in the last 45 days. I assume part of the reason for that is the assumed decline in associated/byproduct gas going forward. Also, for US producers, what percentage of oil production is hedged at much higher prices than the June or July contracts? More broadly, if you've already incurred the expense of drilling and completing a shale well, what is the actual cost to lift and transport it for sale? I assume that's quite low. So, wouldn't US production likely decline with the aging curve of recent shale wells, rather than simply fall off a cliff? It makes sense to me that once storage capacity is reached production WILL come down. Prices will keep falling until this happens. Volume cuts will be voluntarily or forced via bankruptcy. https://oilprice.com/Energy/Oil-Prices/EX-BP-CEO-Low-Oil-Prices-Are-Here-To-Stay.html The reality is that it will take YEARS of demand > supply, to work off the existing above ground inventory, and because there's lots of inventory - prices will stay low during that entire time. Left to the market, that means widespread and long-standing shut-in/re-drilling across most production sectors, and largely state-only production. Hard on jobs. More practical, is national energy policies, and 'in-country' prices [tariffs] high enough to sustain domestic production. Alternative energy incentives switch to pollution minimization incentives. In Canada, a made-in-Canada price, and more pollution saved by Tar Sands polluting less/carbon sequester, versus switching to EV. NEP 2.0, and rebuilt pipelines across Canada. We 'the people' pay more, but we get jobs, stability, and the ability to plan our futures. Canada might even improve its Kyoto Accords performance!, albeit not in the way intended. SD Trudeau and pretty much the rest of Canada (outside of Alberta and Saskatchewan) has moved on from oil. Oil is so hated my guess is completing the pipeline projects will be difficult; more massive protests with many groups doing everything they can to stop it. Meanwhile, the economy is falling off a cliff. But the government is cutting everyone a check so who cares about being ‘unemployed’ or if we have a shitty economy.