Cigarbutt

Take this as a humble request from a noob (refer to the question directed to you on November 11th 2023 about a topic brought forward by you in relation to cryptocurrencies and the Cantillon effect). Can you please simply explain (instead of providing a quote)? BTW, the quote that you use is often used in virtual/online debates and, in itself, does not mean much. The quote can be used to support the 'truth' but can also be used in pseudo-science circles etc Going quote for quote, here's a relevant counter example: "But the fact that some geniuses were laughed at does not imply that all who are laughed at are geniuses. They laughed at Columbus, they laughed at Fulton, they laughed at the Wright Brothers. But they also laughed at Bozo the Clown." The quote is real and is from Carl Sagan, in Broca's Brain, page 75 (1980). Sagan was someone who supported open discussions, skeptical curiosity with respect and who was against suppression through authority (centralized or decentralized). BTW, the quote that you use is often attributed to Schopenhauer but credible research supporting this is lacking. It appears that somebody at some point decided to attribute this quote to Schopenhauer and many just followed along without questioning the underlying fundamentals. Please elaborate about the Cantillon effect and how this would benefit Bitcoin or cryptocurrencies in general? Please elaborate (with in mind cryptocurrencies as a potential investment) how cryptocurrencies do not end up as creatures of the state? laughed at Fulton, they laughed at the Wright brothers. But they also laughed at Bozo the Clown.

What you describe is the whole (main) point as to why insurers may be worth more than book value. For FFH, some adjustments (less discounting of the reserves) need to be made to the potential delta effect that you mention. Also, to avoid double counting, i think you need to recognize that some of the intangible asset aspect has already been recognized when subs were acquired:

Your post is helpful. But there's room between a p/b of 1.0 and 1.5 or more. The likelihood of seeing intrinsic value (can use book value as proxy) is somewhat elevated over the next few years but it's less clear if this will be recognized in the marketplace with a higher p/b? There are reversible factors for this but there are also irreversible factors, such as their unusual ability to perform atypical transactions such as the monetization of the runoff sub mentioned before. This approach (is great in a way but) leaves them vulnerable to less enthusiasm from the market, to reasonable criticism and, unfortunately, to junk/mud attacks. The sale of Riverstone-Barbados was a great way to monetize an asset in times of need but included aspects which had costs from a risk management and quality of earnings point of view. The CVR tied to the deal effectively was equivalent to an adverse reserve development cover (liability side of the transaction) sold by FFH as part of the deal and the guarantee on the asset side was effectively an off-balance sheet arrangement reported through a derivative-type of disclosure which corresponded to, effectively, FFH buying a total return swap on the underlying common stocks held in exchange for some kind of cash flow streams, while FFH continued to "guarantee" the value of the underlying securities to the buyer. Now this aspect of the transaction has become much smaller and manageable but it was quite large at the time of the sale.. Anyways, Fairfax is Fairfax and will continue to be, i guess, to a large degree and potentially in a lumpy way..

Then, why such a big discount to the 1.5x BV numbers these days? The graph needs some recent update.. The reason i'm asking is because, evidently, the float liability needs to be discounted and, presently, given the potential for profitable growth in float, maybe the required discount on the float liabilities suggest a higher P/B than 1.0. i'm asking also because an example of the junk presentation by recently attacking shorts concerns the Riverstone-Barbados entity, a transaction involving two sophisticated parties exchanging an entity in run-off (where the insurance liabilities will clearly need to be paid out and maybe more than written in the books) for a P/B of about 1.0. Isn't FFH now worth more than Riverstone-Barbados then, from a P/B value point of view?

On November 1st of 2023, there was a discussion in these pages (FFH Q3 results) with some others and 'we' (in a collegial way?) had defined the Spekulatius quick measure (SQM) of reserve duration for insurers (basically using 'insurance contract liabilities' net of reinsurance divided by net premiums earned) and it looks like this basic measure (ratio of 2.1 for FFH) needed to be multiplied by 1.8 to arrive at 3.8 years (let's call this the adjusted Spek's measure (aSQM)) if i listened well during the last call ("due to the reserves have a longer duration of 3.8 years compared to Fairfax’s very short duration on the fixed income portfolio of 1.6 years", courtesy of J. Allen). For BRK, using similar numbers (careful IFRS vs US GAAP), the SQM comes to 2.2, suggesting an overall reserve duration of 3.9-4.0 years. In the case of BRK, they have some kind of bimodal distribution of both very short and very very long tails. At any rate, concerning the quality of float, longer tail lines are both a blessing and a curse as the time value of money can magnify both the favorable and unfavorable reserve development. For FFH, if the past is indicative of the future:

They could also simply explain? For example, when referring to the CVC-Riverstone Barbados transaction, they (management, on the call tomorrow) could (opinion) simply infirm the insinuation by explaining that the total consideration paid of 1329 millions for 100% of the joint venture as reported by Gatland in 2021, implied, for Fairfax 60% interest, 695.7 millions (as reported) + the discounted value of the CVR of 235.7. So, 695.7 (1329-169.5) * 60% + 463.8 (Omers 40% part, (1329-169.5) * 40% + discounted 235.7 ie 169.5 = 1329 That is because the fair value of the CVR is generally be determined by discounting the probability-weighted future payments at an appropriate risk-adjusted rate, or by using derivative valuation methods such as the Black-Scholes option pricing model and because the fair value of the CVR is considered part of the consideration paid in the transaction, under the purchase accounting method for business combinations. The 1329 number is from a 2021 annual report. The eventual realized value of the CVR is very likely linked to potential adverse development of reserves over a few years. In the event of unfavorable development, the CVR value for FFH would decrease but that does not have an effect on the 1329 reported for the 2021 year.

As usual, the full story is more complex and opaque than often suggested, Here's a letter to the SEC which is short with an emphasis on one side of the story but may be enough for the purpose of what you are looking for. s73108-39.pdf (sec.gov) If looking for some retrospective insights into the 'story', the following has a section on Fairfax then: SEC Enforcement Actions and Issuer Litigation in the Context of a "Short Attack" | Scholars Portal Journals For short, here's the conclusion: For short, this is another trading opportunity, just a more straightforward one and a shorter-duration one.

Thank you for the exchange. Obviously, the two of 'us' can't figure this out. However, 'we' don't need to and can sleep well, assuming 'they' will eventually figure it out. The idea behind going into energy decades ago included that assumption. So much to discuss and so little time... ----- Finally, 'we' have some snow in my area. Time to get opportunistically moving.

There is a school of thought (moderate evidence (including in the western usa area) with medium confidence...) that suggests that relatively heavy suppressive efforts (fire fighting etc) around wildfires from the last decades may have prevented nature's work and may have caused a build-up of 'fuel', potentially explaining (at least some) higher acreages burned more recently etc. This is why some groups are advocating for prescribed burns done under control (happening in Oregon). ----- sidenote: This notion of human interference with nature is, at least when applied in a positive way on a net basis, one the foundations behind human progress. If interested, this is the idea of entropy vs human progress described by Pinker in Enlightenment. This is also why it's been felt that it's possible for humans to interfere with the 'natural' laws of the economy and introduce some kind of Great Moderation... But progress is not always linear or (at least temporarily) in the right direction? ----- This part of the post is derived mostly from work done some time ago based on the 'reorganization' of PG&E, a California-based investor-owned electric utility. (In one the PCG threads from the time, i had suggested that PG&E could have been acquired at an opportunistic time by BRK as wildfire costs had been priced in and more; that was before Oregon fires got into the picture with real and non-vicarious income statement effect at the parent). Underground lines are costly, especially under certain geographical circumstances. For example, in the case of PG&E after their fire-related financial pressures, it's being proposed that some specific increase in rates be linked to underground lines. This will be a slow process (now much less than 10% of their transmission lines) and they seem to focus in high risk areas. It's been estimated that only involving the cost of underground lines across the board, the typical California client would see its electric utility bill double. An option to look into but IMHO not a cheap panacea.

Thanks for the healthy response! ----) away from BHE for a minute The IPCC is an interesting organization and a very reasonable source of input for rational discussions. i would submit however that your above statement is a slight misrepresentation of their conclusions. Overall, they conclude with "medium confidence" about certain aspects and we can argue about what medium confidence means but (opinion) it doesn't mean what you mean. Here's their latest summary for North America: With these multi-variable dynamic situations mixed with potential tribal feelings, it's sometimes hard to 'connect': I learned about the above quote not because of the movie but because of the Guns N' Roses song Civil War which i often play during my typical winter training 'rides' in the basement but it's actually raining outside this AM (this is slowly becoming the norm around my latitude so maybe soon i can train outside all year long so climate ch**ge may not be all that bad?). -----) Back to BHE Although irritating and maybe enough, as an analogy, to consider leaving some states for insurers when regulators refuse to allow 'deserved' rate changes, there are 'things' that BHE can do (for example): Global Strategies for Utility Wildfire Mitigation (ca.gov)

When dealing with the rainy snow in my drive way yesterday during another atypical day in my (northern) environment, my neighbor said (or something like that): "Everything should be made as simple as possible, but not simpler". There may be more than two factors (relevant and significant) involved here? ----- The following is derived from a cigar butt situation experienced a few years ago with Pacific Gas and Electric (PCG) when it reached the vicinity of bankruptcy (i'm no 'expert' here but there was a fair amount of time spent on the 'research' so further technical discussion and/or reference to specific data/analysis possible if warranted in this (to be ongoing?) online 'public' discussion). ----- People being "pushed" (because of unaffordable housing) to the wildland-urban interface is an issue but (opinion) more importantly people being 'pulled' into those areas is more significant because of: 1-the relative quality of life searched, 2-the financial shield experienced (from poor policies, misalignment of incentives and moral hazard) from the true cost of exposure from losses versus the cost of property taxes and property insurance premiums. Losses are basically mutualized at the federal level. It's basic math. For a number of years the number of acres burned has been on the rise as well as the aggregate home values at risk at the wildland-urban interface. As far as the 'causes' of the gradual rise in acres burned, excessive fire suppression has likely contributed but climate variables (the use of "climate change" terminology is avoided in order to suppress the potential contamination of critical thinking) have likely contributed significantly and have the potential to contribute more. At a basic level, wildfires (and associated societal damages) have to be linked to temperature changes (no?) and the level of temperature, well The Times They Are a-Changin'. ----- All that to say that, if the legal strategy for PacifiCorp implies to suggest that "climate change" does not exist, in this day and age, it may mean higher 'punitive' damages. Contrary to property insurers who can adapt and slowly adjust premiums over time to reflect rising costs, electric utilities with transmission capacity are exposed to stochastic-like losses (transmission infrastructure is one the the three main causes of wildfires, with human actions and lightning being the other two significant triggers) and should become leaders in helping to define ways to prevent such losses (involving their own infrastructure and perhaps also by collaborating with rulers/regulators). Of course present contemporary legal costs are painful but should eventually become integrated in the the general costs of doing business. Longer term thinking required? Confidence in institutions required? ----- All i know, as a simple individual these days, is that my (and my household) alpine ski season is getting more bizarre every year (not in a downhill straight line but down and for a while now).

So just trying to be unreasonable for a second in this post. "The reasonable man adapts himself to the world: the unreasonable one persists in trying to adapt the world to himself. Therefore all progress depends on the unreasonable man." George Bernard Shaw There seems to be some kind of relative misconception about this money flow concept (in and out of equity and in and out of cash). To support the unreasonable conclusion, many discussion paths can be taken (balance sheet approach, semantic approach) but let's use a simple example related to MMFs. Euphoricbutt buys a Treasury security from james22. It's an asset swap and no money or 'cash' is created. For various reasons, let's say 'we' decide to use an intermediate. ValueArb accepts a deposit from Euphoricbutt in exchange for an IOU with interest and ValueArb buys the Treasury from james22 and performs another asset swap. Again, no money or 'cash is created. ValueArb figures out it's good business and leaves his job as a stock picker and becomes a Treasury-money changer, thereby expanding his business balance sheet, potentially faster than GDP. Again no money or 'cash' created, even on a larger scale. The point is that when money enters the MMF, like Elvis Presley at the end of his shows, money leaves the building. Money is not sitting there as dry powder waiting to be deployed or whatever sideline terminology. However, like most things in life, you may be onto something with this money-waiting-to-be-dumped-in-the-market 'narrative'. Despite all the tightening talk, 'we' are still living in a cheap (and excessive?) money era and the MMFs' growth in assets may be more a symptom than an actual disease in itself. 'We' now live in an era where the growth of money and credit aggregates has outpaced (and in fact decoupled) from underlying economic activity and, with a larger picture in mind than just MMFs, this 'growth' has fed into inflation (mostly asset inflation but with enough creativity also into consumer inflation (not that well tolerated by the populace)). Is this sustainable and does that provide any insight for future returns?

In this one-liner, you likely refer to headlines made in reference to growing holdings in money-market funds. Can you please describe what is meant by cash and where [the cash] is from and where [the cash] would go in the event of leaving the "sidelines"? With all those top headlines, and the moving from sidelines, Irving Fisher and the permanent purchasing power of cash, What happens when the cash goes away, some kind of a...? Apologies, ran out of inspiration in the end.

Interesting. From my end, very different circumstances but some similarities in outcome (relevant to this thread?). i bought the book used in 2006...the second edition that came out in 2005...with an updated version including a second chapter on the real estate bu**le in the US (circled in blue below). Graph included for fun and Mr. Shiller looked at this from the real price angle.

-About newspapers/journalism, the ability to get balanced views and the transition 'we' are going through: "Now about 95% of [newspapers are] going to disappear and go away forever. And what do we get in substitute? We get a bunch of people who attract an audience because they’re crazy …. I have my favorite crazies, and you have your favorite crazies, and we get together and all become crazier as we hire people to tell us what we want to hear. This is no substitute for Walter Cronkite and all those great newspapers of yesteryear. We have suffered a huge loss here. It’s nobody’s fault. It’s the creative destruction of capitalism, but it’s a terrible thing that’s happened to our country.” — 2022 Daily Journal Annual Meeting

Judge offers Berkshire possible speedy trial over Pilot dispute | Reuters Way to go (opinion) and now is a time for a 'negotiated' settlement. From a noob's scan point of view, Honorable Judge Zurn is a balanced, rational and fair judge. So two opposing views: -BRK's use of pushdown accounting is questionable -Minority holders' behavior is perhaps less than honorable Conclusion (opinion): the negotiated settlement should be close to the 'fair' value determined by pushdown accounting. Unknown: the price Mr. Buffett is willing to pay to put this noise 'issue' behind him and away from public eyes.

"He also insisted on as much common space as possible, including a single cafeteria for all —- doctors, scientists and administrators — to encourage creative cross-pollination. He also opened the cafeteria to patients and their families, to give staff members a visual reminder of their collective mission." Creative cross-pollination, isn't that a mental model of sorts, à la Munger, with a human (human in the civilized sense) touch? A single cafeteria, isn't this what this Board is about (apart from making money?)?

-From the role of luck to present appreciation for civilization and to the need to soldier through (with a bit of "luck"?; my children call this blind optimism) Mr. Munger recently commented on the % success rate to treat child leukemia (from 0% to 90%+) and associated this 'progress' with civilization. In 1931, being bit by a stray dog infected by rabies was essentially a death sentence. The US eradication of the rabies canine variant has been a amazing success arising from civilization (collaborative effort; policies such as stray dog 'management', rational application of science etc). All his life, he wondered.

^Filed yesterday under point 35: "Pilot has forfeited any entitlement to the relief it seeks by engaging in misconduct in relation to the very matter in controversy on its claims, namely, the value of its Put Option in 2024." There has been irreparable damage under way that needs concurrent legal treatment. There are still a few pieces of the puzzle missing and some lingering open questions but Can't You Smell That Smell?

Epilogue Covid has become less virulent with a developing seasonal pattern and it has become endemic. Many data points available to support the above mentioned conclusions; excess mortality shown below. Covid has followed its most likely evolutionary path, influenced by functional hybrid/herd immunity, especially since the Omicron variants have taken over (less virulent and more contagious path): Covid has become just one of the other respiratory viruses and is behaving very similarly the old 4 coronavirus variants that have been around for a long long time. On an individual risk assessment basis, virulence has come down and personal risk factors still count although the higher risk category is now narrower: Interestingly, even if often compared to the 1918 "Spanish flu" episode, the most relevant historical example for Covid may be the 1889 Russian viral episode. The enigma of the 1889 Russian flu pandemic: A coronavirus? - ScienceDirect ----- Any relevance to investing? Cycles are cycles, secular trends are pervasive (despite 'transitory' noise) and even if history never repeats, it often rhymes.

-submitted only as food for thought, not to argue. There is a growing movement to put a price tag on "carbon" and the price tag will be "progressive" (mathematical definition as in progressive form of taxation) within a specific country. This concept also seems to apply between countries as 'rich' countries are expected to pay more (absolutely and relatively) compared to less rich countries.

Apologies for stating the obvious. i'll try to improve in the future. ----- The future is now? So, what should BHE do? -leave Oregon? -leave states with significant wildfire risks? -lobby for tort reform at the national level? From a certain (naive?) perspective, this sounds like an opportunity? For the Oregon fire, the jury (more or less) had to decide what a reasonably competent and prudent utility should have done under the set of circumstances ie they had to define where PacifiCorp belonged in the spectrum from normally expected mitigation efforts to recklessness and negligence liability-type behaviors, a spectrum which is being defined/refined for wildfire risks. BHE could use this opportunity? to become a leader in the category, perhaps emulating San Diego Gas & Electric and taking advantage of in-house insurance and reinsurance modelling capability to improve wildfire risk management. SDG&E recognized by Chartwell for wildfire mitigation predictive modeling technology | Sempra PowerPoint Presentation (oregon.gov) It's now possible to use advanced analytical tools to act, with real-time observations, in order to take validated decisions for public safety power shutoffs with almost surgical precision. ----- The future is not the past but PacifiCorp has many 'tools' to deal with past wildfire costs. First, the non-economic and punitive damages ratio to economic costs (from what i've seen) is at about 20x, a ratio which should not exceed 9x in the worst of cases (Supreme Court reference) and which is likely to be eventually much lower given where i think they should be in the normal-expectations-to-negligent spectrum. Second, they should ask (already done recently) for a cap in relation to future wildfire losses. In Oregon, about 70% of 'damages' go directly and indirectly to the State so a 'negotiated' solution may be in sight. Others? ----- Personal note The US situation for tort losses compared to Canada is highly unusual, especially given the amount of shared values. This AM, i was reading some legal stuff that came out lately. One case was about an ex-husband (lawyer and law professor) who used his knowledge and status to (legally) harass the ex-wife using a despicable approach (a personal approach similar to what was done during the short-term relationship it seems). Despite the nature of the actions from the ex-husband and the decision to accept the notion of judicial violence in the conclusion, the amount of punitive damages resulted in a ratio of about 1.25x to economic losses.. This difference between our two great countries is difficult to reconcile but i am prudent in condemning the US since the cancellation of Mr. Buffett's involvement in a multi-billion LNG project in my jurisdiction (CDN) was cancelled in 2020 and the exit may have been related to some difference in the underlying nature of our legal/regulatory framework linked to the secret sauce (and the difficulty to understand the combination of ingredients).

Follow-up note, news released yesterday in relation to the infamous California electric utility that went through bankruptcy and now is able to essentially pass the costs to the consumer. https://www.reuters.com/markets/commodities/california-regulator-decide-pge-base-rate-hike-request-2023-11-16/

^Adapting quicker?, AI certainly deflationary?, inevitable but will it rhyme? In the 1920s, productivity growth was for real, similar to what happened after the dot-com bu**le but the secular trend in the last 50 years is... i believe productivity growth will make a comeback but it may take a while? and a bit of creative destruction (or destructive creation)?

It's measuring global debt which is the US and the rest of the world (about 190 countries and total).