mattee2264

The inflation hedge argument is that historically rents have been able to keep pace with inflation supporting higher house prices (assuming of course that rental yields remain unchanged and supply remains fairly tight). The interest rate argument is that if interest rates go up significantly that impacts on housing affordability and reduces housing demand and therefore house prices. That effect can be offset somewhat if the cause of rising interest rates is strong economic growth which increases household incomes and hence housing demand. But if higher interest rates are in response to cost push inflation then most likely higher costs e.g. food, fuel are squeezing household budgets and therefore lower disposable incomes and higher interest rates will be a double whammy. And in the background rising housing prices create their own demand especially if there is a plausible rationale e.g. inflation hedge. Problem with that idea is that overvalued assets rarely hedge the way they are supposed to. Most likely the Fed will keep interest rates low for as long as possible and will ignore inflation that is moderately above their target dismissing it as temporary or a necessary evil in their attempts to prevent a depression. That will probably continue the housing boom setting us up for another housing market crash in the future.

Pretty much a round trip for me. Went into the market crash with too much economic exposure via financials/energy and minimal exposure to Big Tech. Luckily I had quite a bit of dry powder so was able to average down. Big winners: JD.com, Freeport McMoMoran, Barrick Gold, EasyJet, Melia Big losers: Alliance Data Systems, Liberty Latin America Definitely a year of thumbsucking. I was tempted to take a flyer on Bitcoin and Tesla but didn't pull the trigger. I was gearing up to put some money in a broad market index fund but the speed of the rally caught me off balance. And with the cyclicals I wanted to leave some more room to average down in case the winter got really nasty (which it did) but the vaccine developments screwed that up. Still have a lot of dry powder so hoping there will be more volatility in 2021.

He'd do a lot better if he'd stuck the $25k in Bitcoin and put his feet up.

Makes sense. It is much easier to invest a windfall in something high risk and high reward than money you actually worked for. And it isn't as though you can go and blow it on a holiday or bottles and models. It will be interesting to see next year if there will be a lot of profit taking as people have better spending options and stop benefiting from rent and mortgage holidays. Also while a bunch of stuff has gone up 50-100% from the March lows and the more speculative stuff has gone up 5-10x 2021 will probably be a lot more boring.

Guess the question is who the smart money is...Robinhood traders or more seasoned investors representing IB's clientele.

I think there is plenty in the pipeline to keep this going e.g. a fast vaccine roll-out, a big fiscal stimulus once Biden gets in, the Fed panicking over crappy Q4 2020 and Q1 2021 data and injecting more money into the system, US hospitalizations starting to fall as the virus burns out and vaccinations start to make an impact etc etc etc.

I think there are two important aspects. The first as already mentioned is that base rates have an influence on all the other interest rates in the economy. This is indirect and for longer term rates future expectations as to interest rates are more important so for long term rates to stay low markets probably have to continue to believe that the Fed will be able to keep base rates near zero for many years. The second is demand and supply for the various interest bearing instruments. Generally you would expect all the government debt and corporate debt issuance to increase interest rates by increasing the supply of bonds and therefore depressing their price which translates into a rise in interest rates. But the Fed can influence demand indirectly by flooding the system with liquidity some of which will go towards purchasing bonds and directly by buying bonds. And of course the Fed's activities also encourage some speculative activity i.e. buying near zero interest rate bonds in the hope that prices will go even higher and the Fed won't allow them to fall. I think there will come a point at which the Fed loses credibility and markets start to anticipate they will be forced into raising interest rates. That should weaken the first effect and also the second effect by weakening private demand. The question is to what extent the Fed is prepared to override this by stepping up its purchases of debt of all varieties and flavours. The problem is that there is bound to be a huge fiscal stimulus next year which will require a lot of money printing to neutralize. So it is difficult to see any end in sight.

Good point rb. If people tried to cash out the wealth they've enjoyed during QE or if wealth effects on consumption were a lot stronger we would be seeing a lot more consumer price inflation and rates would not be able to stay this low. And of course if everyone is trying to sell their highly priced stocks and real estate that will evaporate inflated asset values. Perhaps the broadening participation in the final stages of the bull market will change things especially when things open up and people want to spend. LC, I think the short answer is you look at the equity risk premium. Historically that has been around 300 to 500 basis points. So if you are fairly optimistic about S&P 500 earnings then with interest rates around 1% an earnings yield of 4% (normalized P/E ratio of 25x) looks fairly reasonable. Within that risk premium is the risk that at some point in the future interest rates will be higher. I think the reason Viking's thought experiment hasn't yet happened is that low interest rates tend to co-exist in a deflationary/low growth world. In that world you aren't getting much growth from the vast majority of equities. So multiples in say Europe are very modest despite even lower interest rates than the USA. The difference in the USA is you have a far greater concentration of growth stocks where you are seeing very rich multiples. If the market suddenly decides that the economy can grow very fast and interest rates can stay near zero then I'd expect multiples to explode. And that could make for a crazy 2021 as the market confused catch-up growth driven by pent-up demand and fiscal stimulus with sustainable long term growth. Oh and the mutant strain has spooked European markets and oil markets today. Obviously every country is stopping flights from the UK. But the cat might already be out of the bag. And while scientists are confident the vaccine will still work against it there is still some uncertainty about this. Probably it is overhyped. But if it is a lot more contagious and scares governments into implementing even stricter lockdowns over the next few months of next year that could be enough to take markets down 10-20% especially as there is a lot of leverage and extreme positioning so a rush to the exits could be messy.

It could be a negotiating tactic but I think it is more virus related. Europe has enough troubles without a mutant strain making it over the border. I think the disruption is exaggerated. Trade patterns take some time to change so while the short term impact will be additional costs due to tariffs and additional red tape that isn't going to be the end of the world. And it will hurt both sides so in all likelihood talks will resume next year.

I think a lot of people have found themselves saving more this year because they haven't been travelling or going out as much. With interest rates on saving accounts unappealing and the stock market rallying strongly from the bottom it probably seemed appealing to climb on board and throw some money in an index fund. I think also Big Tech have been quite unique during these times offering a combination of safety and growth that has been quite irresistible to gamblers and investors alike. So I think a lot of money that would have otherwise been parked in cash waiting for the uncertainty to clear has gone into those stocks. So that has also contributed to strong net inflows and the surprising resilience of the general market rally. And now of course with the vaccines recovery plays seem like an obvious catch up trade. It will take a long time for interest rates to become a viable alternative to equities especially if the Fed continues to manipulate interest rates. So for the situation to change you need something to come along that will scare investors out of all equities. Although you'd expect that would be met by a similarly aggressive policy response to reassure investors and a repeat of the sharp but short correction and strong rebound that has characterised the second half of this bull market. So buy the dips will probably remain the mantra. I think stagflation could reset market expectations. A tepid economic recovery won't be particularly favourable to cyclicals and raise concerns about credit losses and demand. Inflation will put upward pressure on interest rates making growth stocks less attractive. Obviously inflation is no good for bonds. But if inflation starts to hurt stock prices there will be the temptation to sell in the hope of buying back at more reasonable market levels and if enough people start to do that it will build its own momentum.

https://www.ft.com/content/e842dceb-d97c-42f7-bc3a-347c864d6e46 Quite a few signs that things aren't as rosy as they seem in China. So I think perhaps if China's financial markets take a tumble that could spillover to other markets. Also a lot of companies in the US and Europe have high debt levels and are therefore ill prepared for a double dip recession induced by further lockdowns. So it could just take a few high profile defaults to shake confidence in markets.

Does the yield curve have the same predictive power when short term interest rates are manipulated by central banks and probably long term interest rates will be as well as they start to rise?

I imagine that most young and healthy people won't bother just like with the flu vaccine unless the government finds a way to force people to take it by imposing restrictions on people who aren't vaccinated. Even then they will probably still wait to see what happens to the guinea pigs receiving the first round of vaccinations.

I think it is pretty likely that Europe will experience a double dip recession. Lockdowns have been extended in many countries and I think a lot of the governments are going to follow the UK and basically say "Suck it up for a few more months because once enough people have been vaccinated life will be able to go back to normal". The US might escape a double dip recession but economic data is going to be pretty bad for the Q4 20 and Q1 21. For the most part I agree that because markets are forward looking they will be able to look past a few bad quarters with the expectation of a very strong rebound driven by pent up demand. But I wonder if that changes if it turns out that a) the bad quarters are much worse than expected and b) the rebound is a lot more modest than expected? It takes some time for expectations to meet reality but I can envision a scenario in which declining earnings estimates drive down stock prices. For example Goldman Sachs has recently increased its S&P 500 earnings estimates to $175 for 2021 and $195 for 2022 and have a 2021 price target of 4300 based on 22x expected 2022 earnings. Other investment banks are similarly bullish. If those estimates come down during 2021 you'd expect stock prices to follow to some extent. And if the demand recovery is as robust as markets seem to expect then I think that we could see an inflation shock in the second half of the year. Demand will recover a lot faster than supply thanks to fiscal largesse, pent up demand, and release of cautionary savings. It will take a lot longer for businesses to return to full capacity especially because they will be busy paying off debt and will require greater confidence of a lasting recovery before they are willing to make big investments and hire back staff. Commodity prices are increasing which will feed into costs and prices. While this should only be a temporary phenomenon and demand and supply will return to balance in 2022 it could be enough to change longer term inflation expectations and that has a habit of being self-perpetuating. The Fed will be slow to react due to their new average inflation targeting regime which will probably make things worse. A lot of the seemingly unlimited powers of the Fed rests on the belief that inflation is dead. So when that turns out to be untrue that could reset markets in a big way. Good for value. Not so good for growth stocks and IPOs on nosebleed valuations based on distant cash flows. Big Tech are obviously a big factor in the market and have done the heavy lifting in the incredible rally this year. The acceleration of a secular shift towards remote working and online commerce not to mention the near elimination of their competition by government fiat has more than offset the impact of the economic recession. So they've been Covid-beneficiaries. But you'd expect that starting next year there will be a partial shift in working and spending patterns and that will have an impact on the bottom line. Higher taxes and regulation/fines are also a danger as governments look for deep pockets to help them pay for this year. Also Big Tech are starting to compete with each other e.g. in cloud and entertainment/media and while that doesn't matter so much in a rapidly growing market when market growth slows down you'd expect some price competition to eliminate some of the excess profits. So the medium to long term outlook isn't as bright. But I don't think that will have a significant impact until it translates into earnings disappointments but when that starts to happen as we've seen historically stock prices can take a bit hit. However I think any short term impact will be offset by the further upside that exists in value/cyclicals.

https://www.ft.com/content/4583fbf8-b47c-4e78-8253-22efcfa4903a https://www.nytimes.com/2020/11/25/business/coronavirus-vaccine-astrazeneca-oxford.html Some more doubts cast on the Oxford vaccine data Aside from being a much smaller subgroup the subgroup the 90% headline figure was derived from was made up of people under 55. And it doesn't inspire confidence that the different doses were a result of a mistake rather than study design. And a bit weird they were using a saline drip as the placebo in the Brazil trial. So not sure that would really count as a blinded trial. Also a bit strange the way they combined two separate trials in different countries with different methods into a meta analysis. Hopefully their US study will be a lot more rigorous and give a more clearcut indication of its effectiveness.

Apparently the 90% effectiveness is a result of a dosing error and based on a much smaller sample. The larger study shows a 62% effectiveness. Of course scientists are rushing to come up with theories why the smaller dose works better and will be using those results to win regulatory approval. But perhaps all we are seeing in these initial results (that are wildly exceeding expectations) is sampling error and the true efficacy might be an awful lot lower. All these initial results are based on only around 100 people contracting the disease. Unfortunately with emergency use approval it is a lot harder to continue the trials because of ethical issues which mean you have to give the placebo group the vaccine. But I assume at some point between the vaccine getting emergency use approval and approval for mass use there will be better data ?

Re mask wearing and social distancing I think there is an analogy with the effectiveness of condoms with perfect use as opposed to typical use. I'd imagine in Asian countries you get a lot closer to perfect use than you would in the West. So while part of the solution the best way to achieve reduce transmission is by ruining peoples' social lives through lockdowns. Moderna had much worse side effects in the Phase 2 trials. So it could be dose dependent. I think most people if given a choice would prefer the Pfizer vaccine and especially if they aren't a high risk demographic would probably wait for it. So that could slow the roll-out. I think now it is clear all the vaccines work there will be a much greater focus on safety and speed of roll-out and that uncertainty is going to result in a lot of volatility especially while you have the virus raging in the background. Could end up being a replay of the summer where recovery plays got ahead of themselves before pulling back.

If there is any doubt that NYC isn't still a very big deal just look at the market reaction when NYC closed the schools. All the other tightening restrictions barely moved the needle.

On the assumption that the current vaccine candidates get regulatory approval and are cleared for a mass roll out the next challenge will be logistics and distribution. Which companies are going to benefit from rising to that challenge? Potential ideas are: Lab Corp on the idea that a lot of testing is going to be required to make sure that the vaccine takes and we get antibodies. C.H.Robinson on the idea that they could be involved in some of the logistics e.g. freight/shipping etc. CVS/Walgreens on the idea they could be part of the solution Cigna on the idea that I'm guessing health insurers are also part of the solution. McKesson already distributes a lot of flu vaccines so you'd imagine they'd be heavily involved with Covid distribution And more of a long shot but could some of the airlines get a lot of incremental revenues carrying vaccines? I've had a look at the stocks mentioned above and while they have recovered to pre-COVID highs that was before this market opportunity.

Very interesting. Everything Berkshire Hathaway are doing this year screams "defence". Gas pipelines. Japanese holding companies. Pharmaceuticals. And of course the ultimate defensive investment of all Berkshire Hathaway itself.

How long is the follow up on these trials? You'd expect with coronavirus a lot more prevalent you should be able to get a much larger dataset of infected patients and also get a better indication of whether the degree of immunity tails off over time. Also what is the timeline for the full results. You'd imagine they'd be able to wrap it up fairly quickly now.

Apparently can be stored at room temperature so might allow a faster roll out.

Spain and Italy are trying the localized lockdown approach it and doesn't seem to be working anywhere near as well as national lockdowns imposed by most other major European countries. And Sweden hasn't been spared despite their herd immunity approach.

I think it could be interesting as an indicator of how attitudes to trade have shifted as a result of Covid. Especially in the context of China signing a massive free trade agreement in its region and Biden replacing Trump as President. The initial fear was that coronavirus would accelerate de-globalization. But maybe it could bring the world closer together.

"When we sell something, very often it’s going to be our entire stake: We don’t trim positions." WEB @ the AGM Obviously not quite true when it comes to Berkshire's bank holdings. But should probably give him the benefit of the doubt.