ICUMD
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Posts posted by ICUMD
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Just a suggestion - for investors that like to think outside the 'box'
There are some cars that tend to keep there value more than others. As an example, the Lexus GS 300 my parents own since 2006 (built in 2004) which cost about $45,000 used, is now worth about 2 -3 K. OTH, a 2010 Toyota FJ cruiser (discontinued in 2014), has kept 'most' of its original value if in very good condition and may actually appreciate over time. Some sports cars follow the same traits - many Porsche 911 that have undergone initial depreciation, will plateau at about 50K (assuming excellent condition). Some very expensive brands like MB, BMW and Jaguar have had the worst depreciation over time.
Not that cars need to be investments as there is value for reliability, pleasure, functionality etc. However, it never hurts to be out ahead. Especially if you go through multiple expensive cars every few years. Also 'used' sports cars may not be the worst investment ever either (not that I have one).
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Thanks rb for the detailed explanation.
Its an interesting time - on the surface it seems to be business as usual as you say. However, the unprecedented cycle of debt accumulation has led us into an uncertain financial period. There are many schools of thought (I myself believe the Kondratieff cycle) that an unraveling of this debt may lead to a liquidity crisis. Certainly, there is a general unease that is reflected among many conservative investors. Savers are being punished with low interest rates, yet to invest potentially places risk into over inflated investments with historically high PE values. Its a damned if you do, damned if you don't scenario, with no resolution in sight. I think this situation could go on for many years - especially with Governments sitting ready to 'bail out' financial distress at its earliest signs and with their 'Too big to fail' philosophy, using tax payer money.
I'm skeptical about conventional economic theory applying in extreme circumstances - such as the extreme debt loads we are seeing, and unprecedented government intervention. Of course, I'm not an expert in any of this so can only offer a personal observation.
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FIH.U - biggest holding.
Mostly invested - access to large Line of credit in case of correction.
Speculative holdings: FRO, BABA, TCEHY. Googl. IFFNY.
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Well and economy is a big and complex thing which means that you have multiple of these scenarios happening all the time. We're out of crisis mode so 1 isn't really happening so much anymore. You don't really want to have a lot of 2 because that weakens aggregate demand (AD) and in turn investment (I). We seem to have moved away from that for now. So what's going on is that you have a mixture of 2, 4 and now finally some sort of 5.
The economy looks to be chugging along and investment is picking up. Keep in mind that I responds to AD. If AD is depressed there's no need to invest so I is depressed. AD right now looks like it is somewhere in the vecinity of where it should be -unemployment is low, though lowish inflation is a bit of a worry. In response to this I is increasing. I is about 2% of GDP too low, so let's say that I increases by 1% of GDP C can go down by 1% of GDP. This means that households can pay down 1% of GDP nominal without affecting AD and in turn without hurting the economy. Throw in some inflation and productivity gains and the result is that households can reduce their debt to GDP by about 3-4% per year without bad things happening. That's actually not bad and that's kinda sorta what's going on right now.
AD - what are the determinants of AD? I would think AD is determined by access to credit. The general public is essentially spending their future income to make luxury purchases today. Over time, I would expect to see AD decline as access to debt becomes more difficult. If this is indeed the case, then what would be the leading indicators of such a scenario?
a. Declining GDP?
b. Slowing money velocity?
c. Increasing defaults- credit card, home, auto.
d. Rising interest rates?
e. Declining Asset prices - ie. homes.
In my mind, there is no question that this will happen as the debt burden continues to grow and the interest payments consume increasingly more income. This is inevitable. The question is the time line. I understand that governments and the fed will try and ease sudden movements, but ultimately - the debt has to be reduced and to do this with a debt fueled AD system seems to be impossible. Also, much of the increase in debt has been to fund over inflated asset prices rather than to improve consumption. As such, there is very little bang to the buck - regarding debt improving AD. Hence the loss of effectiveness of each additional round of QE.
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Its not a risk of the people defaulting, its how long can Japan sell their public debt until the purchasers realize they aren't getting all of it back. Japans total debt to GDP is something like 600% of GDP and there is only four ways to overcome a debt burden, growth, inflation, repayment, or default. Specifically for their public debt Growth is out of the picture as we have seen as well as their population contraction. Repayment is out of the question since the government would need to run a surplus for more years than I care to do the math on while at the same time the private sector would have to run a deficit and when you look at the private sector debt burden that is out of the picture. So that leaves default and inflation and in this case actually firing up the printing presses.
The U.S and China own 3 out of the 10 trillion in japan public debt.
Sure - I agree that national debts (alongside personal debts) also are at risk here. The interesting thing is that there is collusion between other nations to prop up debt burdened countries to avoid 'contagion' . We've seen this with Greece, who knows whats going on behind the scenes with Italy and Spain. And you mention how US and China are helping out Japan. The global coordination of 'inflation' and debt support makes it difficult to know where the chips will fall in my mind. I guess it depends on who blinks first.
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What you talk about here are kind of the deleveraging scenarios that you don't want and that the smart powers that be are trying to prevent. Number 3 wouldn't actually be that bad but it's a very unlikely scenario. The ideal scenarios would be something like this:
4. People stop borrowing and they "grow out of their leverage". Nominal stock of debt remains constant while incomes go up (inflation + some real gains) over time. Leverage rations then go down.
5. Economy reaching a critical mass where demand is not aggregate deficient anymore. People pay debt slowly but the weakness in consumption is offset by business investment which is now revived thus still having full employment.
All of this take a long time to work through. You can't have a quick household delevering and still have an economy.
Re #4: This scenario is possible, but I think improbable based on human behavior. For people to stop borrowing - they would need to give up on their lifestyle and make sacrifices - perhaps going from a BMW to a used car. Downsizing homes etc. I think most people will have a difficult time with this without defaulting. Hence boom-bust cycles in the economy rather than gradual waves of acceleration and deceleration.
Re #5: I agree with Cameron - that QE and low interest rates are funding demand presently. Without this debt creation, I think there will be major economic contraction - ie. deflation. I'm not sure business investments will be able to compensate.
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Inflation isn't something to worry about QE just adds bank reserves, for those reserves to become money the banks actually have to lend the money. With the increased debt burden people's capacity to borrow has decreased which is why 2.1 trillion still sits in excess reserves. It's not supply, it's demand.
I don't think its going to be some calamity of personal defaults.
The long term interest rate is determined by growth and inflation, because of the large debt load that we have QE was becoming ineffective because the velocity of M2 has been slowing down to 1.
The more debt, the more money goes to servicing that debt which means less velocity, which leads to less inflation, less inflation means a lower long term rate.
This can go on for a while, Japan is what I've described above. For some reason we've decided that the way to solve a debt problem is with easy credit which just adds to the debt problem. We'd rather have short term gains and punt the ball on long term pain, its the same short sightedness that got us in the situation.
Luckily because Japan is farther along this rope I don't think we will have to get there. For example for the BoJ to buy the entire bond market and 20% of their stock market would only take 5 years. If you ask me Japan will fall into a deflationary depression, then Europe, if their austerity measures don't work because they are closer along then America but still behind Japan.
If Japan doesn't cause ripples then Europe's dive will.
Ironically I have more hope for Europe, specifically Spain, while they have their social issues the private sector has been deleveraging.
To be clear I don't think QE is ending because the economy is getting better, its ending because the tool is now obsolete.
I don't disagree with you at all. QE is essentially masking a deflationary period, each round becoming less effective. However, I think what's happening in Japan is arguable a bit different than North America. Japan I feel is a more closed and protected economy with a different culture where people will not default on their debts. Also, I believe they have multi generational mortgages. Hence the long standing stagnation/deflation ongoing. In N. America/Europe, I think as deflation occurs and for example we see a correction in house prices, people will end up owing more than the underlying assets are worth. Once people go upside down, I think people will simply hand back the keys of their house or car to the bank. As these defaults start, their is a risk of stampede to the door. Interest rates may rise due to default risk increasing. The next step is for the printing money and inflation. How long this takes to play out is anybody's guess. We may in fact go through several more rounds of QE efforts and interest rate reductions.
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I don't think rent prices will increase which leaves a deflation of house prices. Wages have not increased significantly during this time.
Source?
Based on my personal observations - in 2002 - when Condo 1 bedroom rent prices were $1600/mo and 2017 rental prices where I can get no more than $1700/mo. today. Of course I cannot predict the future, but I don't see rental prices increasing anytime soon. Inventory has at least tripled I would say since 2002. Wages haven't increased significantly. Ergo, the frothiness in condo prices I think is due to cheap credit. Convince me otherwise...
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The CDN realestate market will correct, given the proper conditions. It is not unlike the stock market, both of which are propelled by 'investors' utilizing low interest rates to borrow. In 2002, I purchased a 780 sq ft Toronto Condo for 200K (to rent was $1600/mo). This was less than its new construction price of ~350K in 1988. The price of this condo continues to rise and similar units are listed today at ~420K (to rent, still only ~1700/mo.). Maintenance fees increased from ~$325/mo to $700/mo over the same time. Interestingly, during the financial crisis of 2008, prices came down suddenly to about $250K, then continued their upward trajectory afterwards. New condos command an even higher premium of ~ $400 - 500K for 550 sq ft.
Things that may cause a correction:
1. Increase in interest rates. (certainly).
2. Tighter regulation on mortgages.
3. Foreign buyer taxes.
4. Creditors get tapped out - leading to higher default rates.
When will this happen? It should have happened 5 years ago. Aside from this, it could happen at any time I suspect, but it WILL happen. To have rent/ purchase price disparity of this sort with ongoing maintenance fee and tax increases means that something has to give. I don't think rent prices will increase which leaves a deflation of house prices. Wages have not increased significantly during this time.
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My question is how will this debt unwind itself?
Some possible scenarios:
1. Collapse of Housing Bubble: ex. CDN housing. Leading to Bank defaults, rising interbank lending rates and finally consumer interest rates.
2. Credit Card Defaults: rising credit card rates, leading to contagion of personal default rates and economic slowdown though decreased consumption.
3. Rising Inflation: currency devaluation followed by demands for rising wages
What I'm not sure is how globalization will help to contain some of these bubbles.
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Fantastic - thanks very much.
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Does anyone know of where it is possible to obtain credit default statistics for home and auto loans?
Thanks in advance!
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I agree with all rationale in this thread. Everything is overpriced- classic cars, homes, stocks.
The common issue I believe is low Interest Rates. With debt so cheap, everything is in a bubble, including Government Debt.
The question remains when will the debt bubble pop and what will be the catalyst for this? If governments continue to lower interest rates when niche bubbles (ex. housing market) appear to destabilize, the action may further propel debt to higher levels. If and when the debt bubble pops, cash will be king. I'm just not sure the governments will be passive and allow that to happen as it may very well undermine the financial system.
I don't know where inflation factors into all of this, but at some point, I think it will have to rear its head. What's most relevant is wage inflation - currently in Canada there is a move to increase minimum wage to $15/hr - this maybe the tip of the iceburg.
Happy to hear other views that support or refute my thoughts.
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Re BIAL Land:
See Chairman's Letter 2017
http://www.fairfaxindia.ca/investors/Chairmans-Letters-to-Shareholders/default.aspx
Scroll down to the section on BIAL.
I highly recommend reading the whole of the Chairman's letter to understand the direction of the company.
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I think the argument gets compelling if you believe the following:
1. Prem Watsa's track record and management.
2. Middle class growth in India > 20% (which will vastly outpace NA)
3. Ability to select early, but already highly profitable companies.
4. Disciplined approach: backing away from deals when valuation is unrealistic - ie. Catholic Syrian Bank.
5. Highly respected in India - people seem to want to do business with them (and give up substantial equity to do so).
6. Diversification - holds many companies and the list is growing, diversity of industry.
7. Powerhouse Gems: IIFL, BIAL (incl 460 Ac of valuable land), and possibly now Infibeam.
8. Confidence/ collaboration of investment powerhouses: OMERS and others.
I do not believe that it is possible to accurately value this company at this early stage.
OTH, I believe that this company is far more valuable than its share price currently.
Yes I am very bullish. Yes, my valuation is very subjective an not necessarily based objective valuation.
Hopefully the rationale is sound.
In my experience, to be successful in investing you need a couple of home runs in a field of avg performers.
I think FIH.U magnifies that potential by levering the above 8 points through equity selection in India, where the market is still very young.
If FIH.U can manage a few home runs - the returns are potentially astounding. I believe they are already showing much promise.
The risk of waiting on this is like letting the horse leave the gate then trying to mount it and win the race.... While there is nothing wrong with that,
I've opted to get on now ::)
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Supply and demand ::)
Why do you think it went up?
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I think this is a case of a highly undervalued stock realizing its potential. It holds several very valuable and profitable companies, including nearly a 50% stake in BIAL. EPS is growing, trading at low PE multiples and its aggressively expanding in a developing country.
Many already invested are wondering why its not going up faster. ;D
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Great earnings release in an otherwise down cdn market. Seems like they know what their doing. ☺
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Wow - just saw the chart on IIFL - what a rise!
FIH in at under 200 inr/share.
IIFL at 500 on an exponential growth curve.
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Some great points - its true, its hard to fully understand the value of the FIH holdings. I suppose the proof will be in the performance over the coming quarters.
Still, one of my more confident holdings.
R.
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I didn't attend the AGM but also would be very interested in thoughts. I've so far been pleased with the FIH.U performance this year. Certainly more so than FFH.
I also feel that FIH.U may confer better protection in a stock market downturn than FFH.
Exciting times :)
R.
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Some interesting points about FFH's portfolio.
Tracking Prem Watsa's Fairfax Financial Holdings Portfolio - Q4 2016
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Core insurance business seems sound. Perhaps with the Allied World purchase, they are going back to their 'roots' and to doing what they do best.
I would be leary of any further non insurance/banking investments with this track record.
A drop in stock price = accumulation opportunity???
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Certainly very valid points. I've taken out a large position in FIH.U (Avg about 11.50) and a smaller one in FFH which I hope to build over time. Perhaps I am speculating and highly hopeful on the upside. The quarterly revenue for FIH.U was quite impressive and I feel it is trading at low multiples. Given that book value is about $10, it is trading at or very close to book value minimizing downside risk. As far as I can tell, it is also carrying very little debt (although I am not certain of this). It will be interesting to see if FIH.U can match its parent's historic returns.
India Credit Rating Increase
in General Discussion
Posted
I am quite excited about the prospects of Fairfax India. I think India is risky as an aggregate due to high debt levels and corruption remains problematic. However, with the right management - in this case Watsa's, a proven track record and with the right connections, it is possible to find undervalued high growth companies that will do well in the long run.
Fairfax India, essentially a private equity company, is investing in businesses with greater than 20% yr over yr growth. I believe that its investments in the Bangalore airport and in IIFL are powerhouses that will lever the rapidly growing Indian middle class. I also think it remains an attractive investment in the $15.50 /share range.