Cigarbutt

75B here, 75B there and soon we'll be talking real money. When I transfer funds from one account to another, I always double check (like some of you, I assume) the number of zeros in the number before pushing the enter button. Just once, it would be nice to work in the Big Office and to get the OK from Mr. Jerome and click an extra "0" just for fun. Oops! But seriously, these guys are impressive. In just three (3) days, by pushing on the enter button once daily, they have 'injected' the equivalent of 16% of QE1, 34% of QE2 or 12% of QE3. I know it's not fair to compare the financial pressure easing facilities which are different but 1-the new liquidity pressures may not abate so easily given the unusually high supply of treasuries coming and given that somehow a higher coupon doesn't seem to be in the Fed offing and 2-QE1, which was initiated more than 10 years ago was supposed to be an emergency, temporary and easily reversible experiment. In related news, the easing champion always ready and eager to buy any government bonds that needs to be bought just released inflation numbers and some are disappointed and are hinting at more easing. https://www.reuters.com/article/japan-economy-inflation/update-1-japan-august-consumer-inflation-eases-to-2-yr-low-in-blow-to-boj-idUSL3N26A0G9 In the spirit of being open-minded and to leave aside the primitive thought that higher debt should warrant higher interest rates, I'm relieved to have found out recently a potential explanation for the disappointment displayed by central money managers: they are not doing enough! According to the theory (the Wray curve) espoused by MMT apostles and the like, there is some kind of a reverse Laffer curve. The curve is "U" shaped with growth coming down with higher deficits and debt and then, somehow (in theory it all makes sense) growth picks up with even higher deficits. ???

The problem with that is, it's not possible if the market isn't doing the same. There's a trade-off between driving the CR down to compensate for low returns on investments, and shrinking your book to the point where you effectively liquidate your franchise. Up to a point, underwriting discipline drives better ROEs; beyond that point, if the market is happy to accept lower ROEs then FFH has to as well. Agreed. We haven't seen a shake-out in the secondary capital being provided for insurance-linked contracts. The demand for these likely has little correlation with interest rates because these investors are simply looking for an uncorrelated return. If interested rates are zero, alternatives investors don't need CRs to go 80. They simply need a reasonably positive, uncorrelated return (i.e. loss ratios less than premiums received - this could be a CR of 95). It's hard for me to envision a prolonged hardening of the market until we see a shake-out event in the alternative capital. The leverage comment is what everyone who is getting on FFH is currently depending on. Can they consistently produce 3-5% returns that are leveraged to a decent overall ROE - but with interest rates at 1.8%...even this will be difficult. In a way, managing the underwriting cycle has parallels to managing the extent of % invested when managing money (yours or OPM). I agree that the CR needs to be 90% or below these days in order to achieve an adequate return on equity but that objective would effectively mean closing down shop in today's environment. So, what to do? All lines of businesses have different dynamics and the insurer may play the cashflow underwriting game or 'catch-up' when the market hardens but it's an extremely difficult exercise in a commoditized world and this has become harder with the cheap and abundant capital era. Of all the subs, I admire how Zenith has been able to shrink and grow their business opportunistically. Even if most FFH subs need to continue to write a certain amount of business with an inadequate margin vs reasonable ROE, the holding company should make sure that they can grow the business when the time is right and need to make sure that the asset and liability sides of their books allow them to do so. Right now, the investment leverage is a potential advantage but IMO, given some scenarios, this leverage may actually become a hindrance for growth if, for instance, capital becomes more scarce or more expensive. The following is interesting (data ends around 2016 but the trends have continued, mostly unabated and even worse for the combined ratios across the industry) as it gives an idea about the CR necessary to obtain adequate returns given what overall yields have become. https://www.treasury.gov/initiatives/fio/Documents/2_SELECTIVE_FACI_8-15-16.pdf

A word about potential silicosis insurance exposure. It's a real problem and the incidence of claims may eventually rise related to the recent popularity of kitchen countertops and others derived from artificial stone etc. Anything is possible because of potential legal inflation but silicosis exposure has not resulted in separate disclosure in the latent claims related to environmental exposure category across the industry (as far as I can tell). Compared to the asbestosis issue, silicosis is much less prevalent, is not associated with a specific tumor such as mesothelioma and potential claim exposure is occurring in a context of significant decreasing mortality rates (contrary to asbestos-related mortality which has been increasing) which points to the possibility that the exposure risks have been better defined and safety standards (that need to be improved) have at least been partly effective. Also, contrary to asbestos, where it is felt that simply breathing air for a sufficient amount of time may be enough to trigger health effects, it is now felt that dangerous silica exposure requires some kind of active involvement (cutting the stone etc). In the early 2000's, there was a significant rise in silica-related claims, suggesting the possibility of a similar wave of liability damage related to asbestos. The rise in claims was very abrupt but was followed by a comparable abrupt decline because of the realisation that the vast majority of claims had no material basis. A Texas judge was particularly impressive during that episode. A good side effect was that this led to a better and more reliable set of medical criteria in order to define acceptability of claims. A bad side effect was that those really affected by the disease were possibly overlooked by the nonspecific nature of those in charge of claimants. The unintended consequence of inappropriate legal inflation was circumscribed then and it may come back although this remains unlikely under present circumstances. Conclusion: this issue needs to be followed and may become a significant issue for specific manufacturers, distributors, insurers and others but IMO it's unlikely to be an earth-shattering event for the insurance industry. It may be the risks that you don't know about that are most likely to kill you. :) -----)Back to BRK insurance

Liquidity strain has been brewing (FF rate vs IOER) for a few months in that corner of the market. If one has had to personally deal with working capital management with boots on the ground when the local banker calls more and more often, one may argue about 'technical' factors but the underlying problem may be an inadequate amount of 'excess' cash in the operating account. For various reasons (growth of money base with growth in economy, regulatory requirements and getting used to 'ample' {Federal Reserve terminology}reserves), it looks like the big banks have found their sweet spot in terms of 'excess' reserves and this new-normal attitude is accompanied now by a smaller appetite for low yielding government bonds. The evolution of excess reserves and asset composition at big banks is interesting: https://www.kansascityfed.org/en/publications/research/eb/articles/2019/how-have-banks-responded-declining-reserve-balances There is also the issue of the divergence between the increasing funding needs of the US government versus the, at least temporary, decreased international appetite for US government bonds, if hedging costs are taken into account. https://home.treasury.gov/news/press-releases/sm743 https://www.newyorkfed.org/markets/gsds/search# For the last link, go visual chart, US Treasury, coupon-bearing. The primary dealers have built a significant amount of 'inventory' of various government debt securities and this inventory has been funded by the repo market. Isn't fascinating that the Fed people have realized that their theoretical transmission mechanism (ivory tower to real economy) has not worked and now are finding out that their setup is preventing price discovery for US government debt? Of course, the easy thing is to restart open market operations on a grand scale (somebody will be happy) but is this where we want to go? I am planning to eventually visit Japan but not this way.

It seems like the Market is presently asking for further easing... What is fascinating is that we are still in the middle of the experiment and have only started the exit strategy. https://www.federalreserve.gov/newsevents/testimony/bernanke20100210a.htm Interesting to hear from someone who thought this could become problematic before it reached the surface: https://doubleline.com/dl/wp-content/uploads/MoneyMarketsFed_Campbell_July-2019.pdf I think we are nowhere near an exit. :) "Only those who will risk going too far can possibly find out how far one can go." The quote is from T.S. Eliot and apparently was meant to underline the positive attributes of risk taking. However, the quote was tweeted in 2015 by a higher office hopeful who happens to have a lot of influence now and I submit that risk taking is like Janus, the Roman god with two faces. I will leave the conclusion to Mr. Bernanke himself (2010): "The sequencing of steps and the combination of tools that the Federal Reserve uses as it exits from its currently very accommodative policy stance will depend on economic and financial developments." Indeed. I just find that they are now ill-prepared under certain scenarios but who cares?

Thesis: housing prices is Canada are influenced by many factors but the level of interest rates remains the most important factor. This post: Supply factors are important and regional dynamics apply but the above thesis is maintained. Potential outcome: The recent trend (last 20 years) is assumed to continue if interest rates stay low or go lower. IMO, the potential for non-linear changes are inadequately discounted. If you have time to waste: https://bankunderground.co.uk/2019/09/05/houses-are-assets-not-goods:-what-the-difference-between-bulbs-and-flowers-tells-us-about-the-housing-market/ https://bankunderground.co.uk/2019/09/06/houses-are-assets-not-goods-taking-the-theory-to-the-uk-data/ https://housingevidence.ac.uk/wp-content/uploads/2019/08/20190820b-CaCHE-Housing-Supply-FINAL.pdf https://www.nbc.ca/content/dam/bnc/en/rates-and-analysis/economic-analysis/hot-charts-190913.pdf Since the year 2000, when Nortel peaked, Canada's household debt to GDP and disposable income has been multiplied by 1.7, interest rates (10-yr government bonds) went from 5.9% to 1.5% now (1.1% a few weeks ago), 'investments' have been diverted to housing and household debt services burden is worsening and reaching a new high. Nobody knows the future but I guess it may be worthwhile to look into potential side effects from non-linear developments.

Humble contribution: I disagree with Mr. Burry, at least on the extent of securities lending risk versus systemic risk as compared to CDOs in the years 2000's. The CDO issue was based on a significant growth of securities, backed by real estate collateral and resting on the assumption that the real estate price rise would continue to shift from fundamentals and that, if there would be price declines, it would be mild, would happen in pockets and not in a correlated way. Evaluating this using a solvency to liquidity spectrum, along the value chain, there was a clear problem with liquidity and solvency of home owners and that resulted in questioning the solvency of financial institutions which were highly leveraged and dependent on wholesale short term funding which was mismatched with price discovery of the underlying collateralized asset. A side effect of this was the relative questioning of the solvency of money market funds, which broke the buck, but this was mainly a liquidity issue, was recognized as such and dealt with rapidly with liquidity measures. I think the securities lending issue with ETFs, if it comes to materialize in a declining environment, would correspond to, essentially, a liquidity issue that may require central money assistance. Securities lending has grown relatively little in the last few years and, even if the collateralized assets vary and may raise questions in certain environments, this, in itself, would not result in a systemic and long lasting issue. Also a lot of the passive inflows have occurred at the expense of 'actively' managed mutual funds, a large part of which tend to follow the crowd and their respective benchmarks. So, the active to passive mindset has happened only to a degree and not as a paradigm shift. Market declines tend to be more concentrated and steeper than market rises and the new relatively passive era has not been tested and the securities lending issue may accentuate underlying trends but I think it is not a systemic issue in itself. Interesting times: with increased securities lending activity, it is possible that ETFs carrying negative fees will become the norm. Caveat: Perhaps Mr. Burry has noticed an increasing and inadequate level of securities lending in some areas and perhaps he has detected gradually deteriorating behavior with the management of the 102-105% collateralized assets. A 2018 regulatory report has some data on this (pages 45-46 of the underlying document) https://home.treasury.gov/system/files/261/FSOC2018AnnualReport.pdf?46

In the 'developed' world, 1-brokers are quite heavily regulated, 2-there are mechanisms in place for clearance and 3-typically, there are funds set aside to reimburse swindled investors as smaller brokerages are not immune to bankruptcy or disappearing funds. But there are limitations, the process may take time and there are grey zones such as cash held in accounts. You may want to deal with larger and well established firms.

Looking at various regulatory filings, it remains hard to get a clear picture but it appears that the acquisition was underwhelming. Underwriting results varied ++ from year to year and the lumpiness was not accompanied by very significant growth over the longer term. It is interesting to note that employee count went from 421 employees in 2006 to 703 employees in 2018. Employee count is not a precise measure but it gives an approximate idea of the level of written premiums and payroll services. One of the most recent filings indicated that the sub still wrote 86.4% of its WC premiums in California. From the spglobal document, during the BRK ownership, there was no capital movement to and from the parent. Also, it appears that the sub maintained autonomy over the investment management of the float and this possibility is supported by the profile of invested admitted assets which had a very high allocation to bonds. So, indeed not a great return and an elegant way to get rid of a poor reputational risk to return subsidiary.

Am I reading that right; they'll pay less than 1% on average annually for those notes? Fascinating. 2-sided question: 1-Why is he doing this? 2-Who is buying this and why? ... 1-About 15 years ago, Mr. Buffett was bearish on the USD and actually built financial positions as a hedge. The debt issue may be to hedge Japanese assets to be but that would be a break from decades of investments. The low rates may simply be too enticing. I assume the funds resulting from the issue will translated into USD and I wonder if Mr. Buffett does not expect extra return from currency movement as this appears to be an unhegded (or naked...) bet. Ya I also wanted to ask, has he ever acquired large foreign currency positions? This is just bizarre, he has no need for Yen, so what will he do with it? Hedge doesn't make a lot of sense either. He is in the business of earning US dollars. A bet? Maybe, but how much profit can he expect? Could the most plausible explanation be that he is hoarding Yen to ultimately buy Japanese companies? In 2015, 2016 and 2017, Mr. Buffett ‘built’ what I think is basically an unhedged Euro debt position. I guess the proceeds were physically converted and the result has been a net exposure to the Euro relative value. Results from periodic revaluations or “remeasurements” of the liability (non-cash): 45M loss after-tax in 2015, 264M pre-tax gain in 2016, 990M pre-tax loss in 2017, 366M pre-tax gain in 2018 and as of now about 300M pre-tax gain in 2019. Mr. Buffett seems to intend on building further European debt (Euro and pound). So, the jury is still out. Looking at note 17 of the 2018 annual report, one can see that this periodic revaluation, which was favorable during that year, reduced the carrying value of the debt translated in USD. With a weighted average interest rate of 1.1%, this looks strangely like a modern Danish mortgage. Perhaps not obvious to the creditor but the debtor may hope to continue to pay this sliver of interest and the progressively lower carrying amount in USD may mean, on a net basis, a negative interest rate. (!) I wonder if the same applies for the recent Yen issue. I assume that the proceeds will be physically converted to USD. If the intent is to buy Japanese companies, building a Yen cash position now IMO makes little sense (unless Mr. Buffett finds a specific out of favor or temporarily injured candidate) because 'real' bargains coming to the market in Japan are likely to be related to an environment where the Yen will depreciate, perhaps significantly, especially against the Master currency. In the end, this is all speculation because Mr. Buffett plays his cards close to the vest and probably does not want to be labeled as an opportunist speculator but, in the early 2000’s, he used foreign currency forward contracts to make money on the expected depreciation of the USD against some specific currencies. Later on, he even ‘bet’ on the Brazilian real, an act IMO difficult to reconcile with the official message of fundamental analysis of specific stocks. https://www.forbes.com/forbes/2005/0110/036.html#91c32e3677c0 https://archive.fortune.com/2008/02/29/news/international/buffett_dollar.fortune/index.htm?postversion=2008022916 In the early 2000’s, the message was: the trade deficit is unsustainable and the relative value of the dollar will go down. The message now: the trade deficit is unsustainable and it’s time to load up on foreign currencies on the liability side. The ironic thing is that I think he is likely to make money on the two occasions and then some say this is easy. @DooDiligence Mr. Son is a complex person but I don’t think there would be a symbiosis as Mr. Son has been reported to have said: “I ask investors to trust my instincts. The premonition that something will work bubbles up inside me” and “For startups, cash flow is less important than leadership and a stellar business model. You have to feel it, like in ‘Star Wars’—feel the force.” Can you feel the Force?

Am I reading that right; they'll pay less than 1% on average annually for those notes? Fascinating. 2-sided question: 1-Why is he doing this? 2-Who is buying this and why? 2-I understand that the demand was higher than expected and that helped with size and yield and the offer may target Japanese domestic investors who are very thirsty for yield. It appears that many Japanese banks and other institutions are ready to buy anything with a yield superior (even if barely) to risk-free rates. It appears also that international investors who are exposed to domestic positive investment-grade yields (with the US among the last standing) can synthetically derive a positive return because of the negative hedging costs. https://www.bloomberg.com/news/articles/2019-09-03/japan-s-small-banks-load-up-on-risk-as-they-fight-to-survive?srnd=markets-vp https://www.schroders.com/en/lu/professional-investor/insights/markets/six-reasons-why-it-can-make-sense-to-buy-a-bond-with-a-negative-yield/ 1-About 15 years ago, Mr. Buffett was bearish on the USD and actually built financial positions as a hedge. The debt issue may be to hedge Japanese assets to be but that would be a break from decades of investments. The low rates may simply be too enticing. I assume the funds resulting from the issue will translated into USD and I wonder if Mr. Buffett does not expect extra return from currency movement as this appears to be an unhegded (or naked...) bet.

I second SHDL concerning the need for individual company evaluation. The way to pay executives and its impact on dilution, and the share buyback decision involve two different processes. It seems that many buyback decisions do not apply the two principles that Mr. Buffett described as many companies manifest a pro-cyclical behavior and some even state clearly that the intent of the buybacks is to counter the dilution secondary to options and all... In the past, when doing a post-mortem and evaluating the outcome and the return related to a specific investment, I've decomposed the return into: 1+Total Return= (1+RevΔ%)(1+NPMΔ%)(1+PEΔ%)(1+est.dividend%)(1/(1-net share count reductionΔ%)) and have occasionally found that the net share reduction change to be surprisingly significant when done opportunistically and/or over a long period. If you want to look at this with an 'aggregate perspective', you may want to read the following even if construed with a certain political slant. The report still contains a lot of useful info and the appendices show that the net effect of share reduction varies widely. You can question parts of the methodology and some of their conclusions but the authors tend to agree with your thesis. They basically compared EPS growth at the company level and at the aggregate level and conclude that, for some time, 1-most buyback activity and retirement of shares have been mostly nullified by concurrent issue of options and shares as part of the compensation packages and 2-there has been some net reduction in share count in the aggregate and that could explain about 1% per year growth in EPS. https://www.yardeni.com/pub/TS84.pdf

Underlying assumptions need to be questioned here. It is assumed that reversion to the mean will be inconsequential going forward, which is a possibility. Even under a steady state scenario (demand-supply of 'safe' assets and money chasing those assets), it's hard to see "significantly greater appreciation". The statement, as stated, would imply increasing 'money printing' going forward. I've been looking at public pensions' asset-liability growing mismatch and, so far, haven't been able to spot an area to make money. An interesting feature in the last 20 years is that pension fund investment managers have increased the allocation to 'safe assets' and, despite adjustments in contributions and expected benefits, the funding ratios have been deteriorating. The math doesn't seem to be working anymore.

Maybe that stuff is irrelevant for stock picking but it's entertaining and the article is refreshing when compared to the intellectual consensus (entrenchment?) coming out of Jackson Hole last August: The World needs a lower USD and lower US-based risk-free rates. Mr. Mark Carney's speech was interesting. https://www.bankofengland.co.uk/-/media/boe/files/speech/2019/the-growing-challenges-for-monetary-policy-speech-by-mark-carney.pdf?la=en&hash=01A18270247C456901D4043F59D4B79F09B6BFBC He basically questioned the consequences of the disproportionate dominance of the USD in global markets and is suggesting (not a tax) an alternative based on fiat currencies. It seems like these guys have realized that the Bretton-Woods framework has lived and will take the next steps in stride. Applying the content of the article would likely result in a rapid reconciliation of the achieved-future-consumption-brought-to-the-present imbalance but i wonder if the author did a good job describing possible ramifications. Maybe those will be covered in a follow-up note. "Taxing incoming Chinese (and other foreign) investment. U.S. Senators Tammy Baldwin and Josh Hawley in late July submitted a bill that would allow the Fed to impose a flexible tax on capital inflows. This measure would make it less attractive to park money in U.S. assets, thereby shrinking the capital account imbalance, and by extension, the trade deficit." I've been looking to buy a spot in the southern US. I guess i will have to look for alternatives. Mr. Josh Hawley (interesting protectionist name) seems to intermittently exhibit distorted logic. He is pushing for radical protectionist policies on the trade front but seems to be unusually globalist when he simultaneously pushes for 1-importation of public price control policies used elsewhere to cap drug pricing and 2-drug reference pricing policies based on prices of medications in foreign countries. This is turning into a swampy post and perhaps the US should tax all inputs originating outside its borders.

RV’s are supposedly a good measure because strong RV sales indicate a lot of consumer confidence (since it is large outlay for those who tend to buy them and it’s totally discretionary ) as well as easy to obtain credit (most are bought on credit). I think boats are similar and their sales also have weakened recently. It's ok. He ignores all of the indicators to pick on the one that seems.most dubious on the surface...and yet, still agrees with the overall narrative I wonder if people are looking at the same thing but using a different lens. Simply looking at one idiosyncratic indicator and concluding that a recession is coming is unlikely to be a valid or useful conclusion. Also, even if one 'sees' slowing conditions, it probably has very little to do with economic conditions down the road. However, within the evaluation of a specific company, I would say that there are many 'indicators' that may have some usefulness in order to understand industry dynamics and the cyclicality aspect of the industry as well as helping form an opinion about potential outcomes and downside risks. We met a couple a few weeks ago and the description revolving around their RV acquisition was extremely instructive in terms of defining our present investing environment. Since our investing environment has been largely defined by the Federal Reserve, one may want to use a tool that M. Alan Greenspan promoted as a maestro: the male underwear index. Anecdotally, online sales of male underwear has been relatively disappointing in 2019, so watch out.

You know what Venezuelans said about Chávez early on: “ He runs the country like his hacienda”. The problem with the tariffs and the game of chicken that is played are the knock on effects on confidence. Now China is slowing down, Europe is slowing down and now the US is slowing down as well. How much of this is trade war and how much is just the long economic upturn petering out is hard to know. I don’t think that interest rates and rate cuts at this point are going to make much of a difference, rates are already too low to matter, imo. 1-Our era will be henceforth be known as the Limbo rate years. 2-Trump may not be able to claim the largest real estate transaction ever with a Greenland purchase but he's highly likely to go down as the man who filed the GOAT bankruptcy. 3-Just doing my part to stoke fear. :o (there's no goofy googley eyed emoji so this one will have to do...) 1-It's possible that a temporary truce can be reached with no material effect on the trade balance going forward so we may be in limbo for a while but the best limbo playing show that I've seen was in Hawai'i two years ago. It felt like the fire dancer was able to lower the ground. But it must have been an illusion. 2-Your previous reference to a default is interesting and, in 2016, this issue was 'discussed'. The USA defaulting on its debt sounds outrageous but the following reference originates from May 2016, at a time when negative interest rates were still not considered business as usual and when the left-leaning publication felt that the candidate did not stand a chance to win the contest. https://www.npr.org/2016/05/09/477350889/donald-trumps-messy-ideas-for-handling-the-national-debt-explained 3-Yeah, perhaps the idea is to be able to smile whatever happens and one way for this to happen is to be ready for any eventuality and to remember what Ferris said: "Life moves pretty fast. If you don't stop and look around once in a while, you could miss it." On a more serious note (keeping in mind the long tariff thread), I continue to think that the outcome will be highly conditional on the direction of the global economy as tariffs may only be a side show and not necessarily a precipitating factor. To those who say that walking on the edge of the precipice is OK if you know what you're doing, I can't help thinking about the Smoot-Hawley Act and Mr. Smoot's reaction to the reactions: those who don't support tariffs are un-Americans and use fake-news to spread their weakness. https://www.piie.com/blogs/trade-and-investment-policy-watch/trumps-2019-protection-could-push-china-back-smoot-hawley Here's a reference from one of my favorite movies that I saw as a young adult and that offered one of the first glimpses into the American Psyche. So, can anyone explain what will happen in the event that the global economy really starts to lose steam. Anyone?

It seems like the graph does not account for dividends or reinvested dividends. Dividend yields have been coming down and this made quite a large difference in the 30's and the 70's. I think dividends in the 70's accounted for something like 75% of the total return. In terms of comparing the 2009 period to the early 80's and keeping in mind the "perception of risk" which MarioP alluded to, investors coming out of the 70's had realized (real loss of 1.4% per year, not audited) the worst ever decade of real returns when it was felt that equities were likely the best of the swindlers of the asset classes. So investors had to deal with a morose period in general and a recent broken promise about stocks being an adequate vehicle to maintain purchasing power (equities recently pronounced dead). From a retrospective point of view, the risk and reward profile was amazing, it just wasn't probably appreciated then by the majority. The institutional imperative is very strong and behavioral reasons often win over rational analysis (in low and high markets). Mr. Buffett had published, in 1979, a very interesting article about pension funds sub-par investing behavior and how "difficult" it was for the pseudo-passive investing crowd to invest in equities for the long term. I guess the real risk was reputational. https://d2wsh2n0xua73e.cloudfront.net/wp-content/uploads/2016/05/docslide.us_31752060-forbes-on-buffett.pdf pages 8-9 of the pdf document.

Interesting. In order to understand better the potential for unintended consequences, one can look at what Japanese banks have been doing as they may be, in some scenarios, some kind of leading indicators unless the decoupling issue persists. The JGBs bond market has been essentially captured by the BOJ and some contend that they have put in place a structure that has neutralized bond vigilantes. Domestic investors cannot (and no longer) rely on the negative yield provided by JGBs and international variable interest seems to be guided by unhedged bets vs currency fluctuations (IMO). So, in these circumstances, if you're a Japanese bank, what do you do? You reach for yield in a very crowded field! Japanese banks (and pension funds it seems) have been progressively moving up the risk curve and I recently read that, with 10-yr US gov. bond yields being where they are, Japanese banks now can expect to receive a net negative yield on US risk-free instruments once hedging costs are taken into account. Japanese banks have piled into global real estate-backed bonds (including Australia), packaged leveraged loans and even equity (domestic and global) and it seems that flying without a parachute (unhedged) may be the way to go forward, at least for some, in this new era. Another interesting feature is that central bank-related authorities have modified accounting rules to allow banks to avoid mark-to-market accounting vs the potential fluctuations of these 'higher-yielding' instruments and allow to report capital gains, when realized, as a separate line item, within the calculations for the net interest margin which has become negative (!) for many banks otherwise. In terms of neutralizing vigilantes and disinhibiting animal spirits, Japan has been the champion of the three-arrow policy (monetary, fiscal and reform) but I wonder if historical parallels should not make possible a reconsideration of the present trajectory. In 1932, as part of a several-arrow strategy, the finance minister Takahashi got the BOJ involved in bond buying to mitigate Depression anesthesia of animal spirits. When unintended consequences kicked in, he tried to restore fiscal discipline but his attempts stopped unexpectedly. After WWII, a tight leash was put around the BOJ in order to prevent it from doing things that could eventually erode the foundations of capital markets. There is potential for competitive currency devaluations going forward. Who's going to win? https://www.bnnbloomberg.ca/years-of-living-dangerously-japan-s-low-yield-warning-to-world-1.1293571

-Have followed BX for a long time and thought they did very well bridging the 2007-9 period (well timed IPO, timely reversal to mortgage exposures). -Since that time, the market return on BX has been more lumpy and to some extent better (especially if measured after the recent run) than the S&P index. -Is Mr. Byron Wien still around? I felt he was an interesting contrarian input vs downside risk. -Alternative asset managers have done very well in this investor post-traumatic stress syndrome and reaching for alternative yield world and, in retrospect, it's a good thing they didn't follow Mr. Wien's instincts. -In the PE world, it seems to me that leveraged deals are more leveraged and coverage ratios are tighter. Is BX following the trend and is the reported carried interest at risk? -In one sentence, where do you see BX in 5 to 10 years? https://www.blackstone.com/media/press-releases/article/the-smartest-man-is-a-firedancer https://www.blackstone.com/docs/default-source/black-papers/seeking-an-alternative_standard_v68_web.pdf?sfvrsn=fd0c2cad_22 Feel free not to answer or start a new thread. FWIW, I'm still working on a life lesson mentioned by Mr. Wien some time ago: "Younger people are naturally insecure and tend to overplay their accomplishments. Most people don't become comfortable with who they are until they're in their 40's. By that time they can underplay their achievements and become a nicer more likeable person. Try to get to that point as soon as you can." :)

Sold another portion of the residual TLT (20-30 yr US gov. bond ETF) position. Moving away from macro trends as this position makes less and less sense from a long term (and fundamental) point of view. Have kept a smallish position in case the reflexive crowd takes over before the whatever it takes modern fiscal stimulus crowd does. An interesting aspect is that the pre-defined trigger (price) for the sale of that portion was met before actual economic deterioration made it to the surface, a combination of divergence I never thought possible when this theme was developed in my portfolios years ago. What is unfolding is absolutely fascinating.

-Unidirectional 'unfair' trade policies are clearly part of the picture, but isn't most of the trade deficit due to economies of scale and cheaper labor? -China response to WTO complaints has a relatively mixed record but it has overall followed the guidelines setup around their access to the WTO in 2001 so why not build alliances and negotiate to improve what is felt to be an insufficient market transition, why abandon that line of progress and even withdraw from the Trans-Pacific Agreement and lose valuable credibility and presence in Asia? -Let's say that Apple redistributes its supply chain in the Pacific Rim (you don't expect to repatriate that part to the US, do you?), how is that going to change the net trade deficit? -Do you realize that the most important component behind the drive to outsource manufacturing has come from multi-nationals, often based in the US?

Reviewing regulatory filings and the March 2019 fixed income presentation, it seems that the long term growth of earnings and reported equity (which includes goodwill) corresponds to the value-based long term redemption activity revolving around Mr. Scott's declining stake. No activity in Q2 2019 but, in Q1 2019, 447,712 shares were redeemed for $293 million, implying a $654 per share value and a 1.7 ratio to reported book value. It looks like the future will look like the past. It seems to me that the future of private ownership of energy utilities includes a component of the increasing realization that infrastructure spending can and should be delegated to strong, reliable and private hands. BHE has relatively high exposure to Nevada and related wildfire risks but they interestingly note that the $risk is less because of lower concentrations of population in the interface areas.

This situation may be better approached more from a resiliency than a power point of view, in order to prevent outsized short-term disruptive unintended consequences. But the long term starts now. An interesting blueprint to navigate between war and appeasement is the containment strategy. https://www.amazon.com/George-F-Kennan-American-Life/dp/0143122150/ref=sr_1_1?keywords=George+F.+Kennan%3A+An+American+Life&qid=1566825726&s=gateway&sr=8-1 Interestingly, Mr. Kennan came up with an evolving strategy based on an intimate knowledge of opposing forces. He was also a critical force behind the Marshall Plan in order to build effective alliances and understood the importance of potential internal disunities. The containment strategy came with some costs but we did very well overall. It did not rest on the primacy of the leader's power but more on its resilience and its enduring capacity while internal weaknesses and contradictions become manifest.

I just finished an 'old' book (published in 2003) this AM and this post is a link from WeWork's upcoming IPO to the general sentiment that existed in 1999. https://stratechery.com/2019/the-wework-ipo/ The IPO documentation is interesting (I can't definitely figure out if it's a long or a short) from the general sentiment point of view and the way Stratechery frames the story makes it an interesting thought exercise. https://www.researchaffiliates.com/en_us/publications/articles/715-bubble-bubble-toil-and-trouble.html This post is not really about "we're in a bubble all over again", it's about the difficulty in discounting future developments in the technology world. In the article, there is a table listing the top ten tech market caps in 2000 and the subsequent market returns. Fascinating. I just finished Stealing Time and IMO the author does a job chronological job. https://www.amazon.com/Stealing-Time-Steve-Collapse-Warner/dp/0743247868/ref=sr_1_2?keywords=stealing+time&qid=1566737103&s=gateway&sr=8-2 Another fascinating aspect is how insiders of the company and investors at large pushed the AOL company to such heights and how very bright and savvy people made "the biggest mistake in corporate history" when the convergence merger was completed. It appears that, in 1999, not many people saw the potential loss of market share related to the eventual growth of high speed broadband providers. Who talks about AOL now? Do you remember those promotional CDs? In 1999, I was slowly getting serious about investing and did not get caught up by the internet frenzy. It would be nice to say it was because of unusual knowledge and insights but it's only because a defining feature of the investing style is to invest in businesses that can be reasonably understood and where one can form a reasonable opinion about long-term prospects of the relevant industry and specific embedded moat. Conclusion at a humble level: Mr. Benjamin Graham belongs in the 'fallen' category in the present era but I decided to add a new quote on my wall, an Horace quote that Mr. Graham often referred to: “Many shall be restored that now are fallen and many shall fall that now are in honor.”

Nonsense. What a bunch of bollocks. Not only the US does not need it to "finance its deficit" it should tax capital inflows. If treasuries are sold, either there's no impact on the US or there's a positive impact. Either that or all the surplus countries, including Germany and Japan increase local demand via adjusting local regulation (this is the reason for the imbalances, suppression of local demand via local regulation). This is not going to happen, of course, any time soon. Once again, in plain English. Since this remains an open-ended question, in relation to the chicken and egg confusion, here goes. Does the trade imbalance come from the rest of the relevant world saving too much and not consuming enough (saving glut, Bernanke 2005 ®) and therefore dependent on the ultimate currency or does it come from the US consuming too much and not saving enough and therefore dependent on the rest of the relevant world to finance the private and public deficits? This is a bilateral dependency but my take is that it is not symmetric (in terms of causes and outcomes) and I side with SD on this one because I think meiroy falls into the now widely defined trap of focusing on the financial aspect of a transaction over the substance of a transaction. In plain English, here's a biased example that hopefully may help. Let's say one has developed a consumer dependency of some kind, let's say an opioid dependence. Let's assume that one has entered the stage where one consumes more than one earns, and one represents the biggest client of the dealer who, somehow, has to accept one's currency and where the dealer has lent one back the currency in order to allow one to continue to consume and the situation has reached a stage where it is felt that the consumption trend is unsustainable. How to deal with this? -The tariff solution Someone figures that the best way to curb the inflow of the currency is to point a finger and to make the drug more expensive. -The meiroy international tax on capital inflows Someone figures that you could point a finger and unilaterally devalue the currency once it has been spent. -Me thinks that diving interest rates will help to extend and pretend but one should do a root cause analysis and deal with the internal saving-consumption imbalance. In all fairness and to balance the biased example above, some 'analysts' whom I respect a lot tend to agree with meiroy. https://carnegieendowment.org/chinafinancialmarkets/79641