Cigarbutt

As always, you seem to be able to efficiently spot the key ingredients. 1-I like what the author of the following describes in terms of the dynamics that are currently playing out on your side of the border. The budget haggling is obviously nothing new but the current trajectory seems to be related to the political spectrum polarization and relative absence of moderates in the common grounds section. I like the conclusion that helps to remind the tribe that, basically, this is an individual decision. "Elections make a difference in the budget process. One thing is sure, and that is whatever congressional budget decisions are made or not made and how they are made (centralized or decentralized), those decisions will have a transformative impact on the future of the America. As with other congressional budget reforms over the last forty years, in the end the American voters will have the most lasting and significant impact over Congress making those hard budget choices. As always, the final say about spending, taxing, and deficits lies with the American electorate." https://www.american.edu/spa/ccps/upload/the-dynamics-and-dysfunction-of-the-congressional-budget-process-from-inception-to-deadlock-2.pdf 2-I'm reading these days The Millionaire Next Door and enjoy it more than anticipated. The book effectively demonstrates that wealth is found in places where less than meets the eye and millionaires, proportionally speaking, seem to operate on a budget much more than others: "They create an artificial economic environment of scarcity for themselves and the other members of their household." (page 41)

Some data and interpretation of the data. Who reads these CBO reports anyway? https://www.cbo.gov/publication/55551 http://www.crfb.org/papers/analysis-cbos-updated-budget-and-economic-outlook-august-2019 I voted "other". Answer to the question submitted: "When the music stops". I don't like to borrow but this quote has been borrowed from Mr. Chuck Prince, the guy bright enough to be prescient but not bright enough to do anything about it, at least from a fiduciary point of view. http://business.time.com/2007/07/10/citigroups_chuck_prince_wants/

^Individual student merit should not be underestimated but I think that parental involvement and especially parental attitude towards education plays a pivotal role, irrespective of parental academic or wealth achievement.

^The information is confidential although inferences can be made and the cutoff seems to be 75000 bpd capacity. https://ethanolrfa.org/2019/05/small-refiner-exemptions-its-time-to-name-names/ https://www.pbfenergy.com/refineries

Short answer: I've found it very hard to follow this item over time, in the process of a specific acquisition and for specific company, because, after the acquisition, results of the acquired entity morph into the corporate numbers. Internally developed 'customer relationships' and other intangibles such as human capital, organisation etc have costs associated with their creation and maintenance and these costs are simply expensed so it makes sense to somehow expense acquired 'customer relationships' but the reported expense may under- or over-estimate the 'true' expense. I wonder if the best way to assess this, over the long term, is to maintain the link between the income statement and the balance sheet and see if integration of an acquired entity results in maintained or higher profitability or return on capital overall. My humble conclusion is that the best indicator of 'success' for an acquisition is the previous history of acquisitions for a specific company or a specific top management team. For Cognizant (a company I don't know well and an industry I don't really understand), it is possible that acquiring "customer relationships" may result in an under-reported expense if, for them versus the previous owner, they can offer additional and complimentary services to the same customers. But one has to be skeptical about these potential 'synergies' especially if the acquisition appears expensive. Not related to Cognizant specifically, but it is often disappointing when management teams realize that synergies do not really materialize and have to take massive write-downs on goodwill and intangibles. Then, it's always amusing to read how they underline that the write-down has no operational cashflow impact in the present period, forgetting to mention (sometimes timidly noted when the acquisition was devised by the previous team) that the investing cashflows were very real when they were made. The icing on the take is when it appears that it will be easier to achieve a higher return on equity with a much lower denominator. For Sherwin Williams, the Valspar acquisition was significant and one has to wonder if increasing market share to that extent does not result in a lower requirement for operational cashflows that would have been normally required (marketing etc) to build and/or maintain their moat, a conclusion that may warrant relatively high amortization expense from the acquired custome relationships. If you're interested in this area from an investigative or scuttlebutt standpoint, you may want to look at it from the forensic point of view and try to communicate with the CFO (you need to dig details in financial statements and dissect purchase accounting documention) and ask for instance why there is a discrepancy between the duration of the customer contracts vs the estimated useful life and why the company uses a straight-line method when common sense would suggest that an accelerated method would make more sense. There are good reasons for discrepancies and it could be interesting to hear it from the horse's mouth. Here's a nice summary related to valuation of customer relationships if want to focus on the forensic side and here's an example of an SEC communication with a company questioning underlying assumptions. http://www.willamette.com/insights_journal/16/spring_2016_10.pdf https://www.sec.gov/Archives/edgar/data/1123360/000119312506252464/filename1.htm

But...what would you do if you were the pension fund manager these days? Even the actuaries seem to be confused as they write their periodic valuation report. Don't try that on your financial calculator but the conceptual thinkers are considering using a negative discount rate for the liabilities. :o https://www.ipe.com/pensions/pensions/briefing/discount-rates-discounting-dilemmas/10016338.article Summary: the authors suggest that illogical and unsustainable may lose their intrinsic meaning over time. (It is a 2016 article) If you're really interested, take a look at the summary or the report: https://www.bis.org/publ/cgfs61.htm Summary: The authors suggest that there are potential risks under the surface, when considering the impact of ultra-low or negative interest on asset-liability mismatch. Maybe you wonder if these global think tanks such as the BIS simply produce a bunch of BS but looking at US corporate defined benefit pension plans and publicly 'guaranteed' pension funds, my humble take is that they have done a VERY poor job in the last 10 years as they failed to adapt to the lower for longer era AND have failed to materially increase their funding ratios during one the greatest centrally-driven asset reflation episodes in human history. I also come to the conclusion that pension funds in general, in this part of the cycle, have painted themselves in a corner by increasingly reaching for yield and that propensity to reach for yield appears to be inversely proportional to their funding ratio. ::) Of course, we will come out of this discounting mess and magical thinking is also cyclical.

We'll, at least not for the next several. I doubt most incremental buyers are planning to hold for the full 30 years and are looking to the duration for speculative/hedging purposes. Those who are buy/hold buyers (pensions, etc) probably have other ways of managing/mitigating the duration and inflation risk at some time in the future. Of course. Investors buying the 30-yr us gov. bond 'expect' a 2% return over the life of the bond (as this is written, it is mentioned that the US contemplates 50-yr and 100-yr bonds). This 2% coupon includes 1-a real return component linked to overall growth, 2-an inflation expectations component and 3-a theoretical/conceptual/common sense component implying that the return (apart from 1- and 2-) on a 30-yr contract 'deserves' a higher yield vs a shorter term contract. So, a very strong argument, forgetting the global swath of negative interest rate bonds for a minute, could be made that this is now one of the most crowded trades in the market, perhaps in the same category as BeyondMeat or WeWork. Because, especially if one believes in cycles or reversion to the mean, the trajectory now suggests that, somehow, a lower bound will be met. https://www.macrotrends.net/2521/30-year-treasury-bond-rate-yield-chart Mr. Buffett, for decades, has often described that investing in long term risk-free bonds has been, most of the times, a significant way to lose purchasing power. Since the 70's and after, he has been worried by inflation. Berkshire Hathaway's lilliputian fixed income position is a testament to that now. However, so far, investors in risk-free long term securities have done well and the present conundrum has to do with the question of how surreal this situation can go. It is interesting to note that, despite very vociferous and long-term warnings about the dangers of inflation, in 2008, in the NYTimes landmark article Buy American. I am, Mr. Buffett noted: "So ... I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities." Conclusion: Buying or holding a 30-yr bond now makes little sense from the fundamental and long-term point of view but a bottom may not have reached yet in this part of the debt cycle.

I plan to disappear from the scene here because the investment thesis is way above my limited analytical capacity but the cycle management aspect is sooo interesting. Concerning the above, -It seems to me the message is: 43=30+13. -@WB_fan82 (who are the other 81 fans?)---) The Fed is trying to technically incorporate the roll rate mechanism and evolving standards while, at the same time, improving accuracy and smoothing their supervisory capital role. But cycles are cycles and the best 'improvements' always come after the fact because today's posture relies on forward-looking estimates. https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20181221b1.pdf

It seems that pretty much everything is on the table. I understand that initial conclusions when the ECB considered easing was that they could buy anything except gold. They have instituted limits on the amount of debt they can buy (how surreally negative, % of total sovereign held for a specific country) but easing could restart on a dime and these limits could be easily modified. So the question is which model of central bank equity market intervention will they adhere to? Switzerland is in a class of its own so there seem to be two models. 1-The Singapore Central Bank model used in 1998 during the Asian currency crisis Although unprecedented and ridiculed by other central authorities then, the people in charge of governance inspired their intervention on the Bagehot framework for crisis management ie buy a large amount to cause a paradigm shift, buy stuff that makes sense and prevent zombification. The Central Bank bought about 10-11% of their equity market (!) at a time when valuations were low. This was part of a concerted effort and was considered a success as the Singaporean economy and markets reverted back to their positive trajectory. 2-The Japan model Well, it's a different model. Basically, the endpoint remains undefined and the central bank is becoming increasingly the only game in town. Which one will the ECB choose? Apologies for asking a question that suggests that the emperor has no clothes but if their 'idea' is to lower the cost of equity in order to stimulate investment and demand etc and if firms can (already and for some time) liberally borrow at negative rates and still not invest in productive capacity, then what on earth could cause firms to change their behavior in the current environment?

^Concerning the above: 1-the loan loss reserve account is a contra-asset account (asset being the loan held), so recognized net charge-offs will, by definition, decrease the value of the contra-asset account. 2-From a regulatory perspective, in times of stress, even if more loans transition to being charged-off, financial institutions typically increase the loan loss provision reserve because of changed expectations about future transitions along the spectrum of delinquency. The realization is typically delayed and even counter-cyclical to some degree but, for a while, the true underlying trend is unknown, so the idea of a capital buffer. 3-I just checked their specific methodology and "Change in the allowance for loan and lease losses + net charge-offs = provisions". See page 11 (page 19 pdf) of the document, figure 11. https://www.federalreserve.gov/publications/files/2019-dfast-results-20190621.pdf

With the evolution of prices (specific securities as well as preferreds in general) and the general level of interest rates, the risk and reward profile has evolved for Fairfax preferred shares. Getting interesting. I remain split between the possibility to buy now versus to wait for a negative rate trajectory to manifest combined with noise related to a major catastrophe. https://www.raymondjames.ca/branches/premium/pdfs/preferredsharesreport.pdf

I would submit that the above bolded part is obscene (from a financial point of view) :) This post is a copy and paste of a personal note and can be disregarded with a very low threshold. I find that I spend too much time on general issues vs specific names but continue to hope for a change. Changes, as always, can be triggered by internal and/or external events. I think taking Mr. Rosenberg’s inputs on a first level and attacking his conclusions from a personal character angle may not be full-proof analysis. He’s been bearish for a very long time and, like Fairfax…, was expecting a double-dip recession and even a Depression, with a capital D etc. Here’s a memory of one of his ‘bets’ with a famous doom and gloom and fear mongering commentator. https://www.businessinsider.com/marc-faber-and-david-rosenberg-bet-a-bottle-whiskey-on-the-future-of-bond-yields-2010-7 Funny because they were clearly early but this AM, it’s not the 10-yr US government bond that’s flirting with 2.00%, it’s the 30-yr issue, which may be about to trade with a lower yield than the 3-month issue! You may think that something makes you Very Special (gentle derision about a law that you refer to sometimes), but the real estate situation in Denmark has many parallels with its Canadian counterpart (there is a thread about that specific topic). The typical fixed-rate mortgage here is lower (and much lower duration) but similar dynamics are at play. I expect some of my kids to come to me for advice (and maybe financial backing :-\ ) within the next 5 to 10 years and even if there is expected resistance, I will have them go through a calibration of bearish instincts. It seems that people (whatever their financial literacy level, issue being discussed in the student aid bubble section) come up with a monthly payment they can afford with sentiment playing a large part in this decision. Given ultra-low mortgage rates prevailing, it’s hard to see how this is not contributing to significant overvaluation of the underlying asset. In this home price to disposable ratio this time is different world, it seems that necessary assumptions for more of the same imply continued low interest rates AND maintained sentiment about the value of home ownership as well as a persistently good trend in the growth of disposable income (the denominator). Some would suggest that homes are priced for perfection in many developed markets, markets that have become aligned with the Federal Reserve’s input on the long term trajectory of interest rates (FWIW my opinion). Like Viking, I wonder what the bond market may be signaling and am baffled by the fact that real interest rates are heading south in an inverted environment. The following may not matter to you (or anybody actually) but I do regularly train (cycling). Spending that much time on the road inevitably means that bad weather is encountered. Despite weather forecasts, sometimes, I do go out for rides and have learned the subtle signals that Mother Nature provides when significant rain is coming. It is at that point, before the storm, that I definitely decide that I will not turn back and complete the planned training ride, whatever the weather, and I can tell you with confidence that, at least to me, this is the only way (making a decision when it is rationally easier to do so) to reliably to go through the storm and make it to the sunny ways. FWIW, minutes ago, I just sold half of my positions in US government longer term bonds. I would like to affirm that it was to reload the gun and be ready to go on the offensive but, although there may be some of that, I sold not because historical lows have necessarily been reached and the US will not go down the negative path, but because of the potential unintended consequences that may come from a renewed level of recklessness from central money authorities (my opinion). They may be tempted to make the curve go steep whatever the consequences. I hereby promise to gradually become more quiet on the doom and gloom front and, at the very least and in the spirit of the uptick rule in short sales, will only post general bearish thoughts when the market is going up. Today, it is sunny where I live :).

The numbers mentioned here come from the references listed at the end. Summary: From March 2015 to December 2018, with the ECB easing program in place and a cruising speed of buying €60B to €80B of debt per month, it is reported that they bought 90% of the total euro sovereign debt issued (no wonder it's called an experiment in some quarters) and increased the cumulatively held sovereign debt percentage holdings from 4 to 15% (if Japan is the benchmark, I think the Promised Land of Negative Rates and of the Rising Sun just reached 44%). The ECB easing program has finished but there are hints that it may be reignited as central bank bureaucrats have difficulty timing the exit to escape velocity. As part of the transition, they had decided to reinvest maturing bonds and have devised a cheap loan program to domestic banks in order to increase real lending but it looks like the banks are using the cheap funds to buy domestic sovereign debt ::) All in all, under present circumstances, the ECB will directly and indirectly continue to buy about 25% of sovereign debt, a lot of which is marketed with negative yields. There is a line of thought suggesting that low (and lower) interest rates are simply a manifestation of smart innovations and greater sophistication. Central banks such as the ECB have certainly done their part on the financial innovation front but I would submit that this way of life helps to explain how that kind of innovation has not shown up (at least so far) in real productivity numbers. Then again, some people have suggested that we are more productive; it's just that we haven't realized it yet. I will suggest then a new motto for the ECB: if you can't be productive, be creative at least. It just feels that their potential creativity will be put to the test, in terms, for example, of how legacy issues will be dealt with (how deep a hole can be dug). https://ftalphaville.ft.com/2019/05/07/1557223379000/The-legacy-of-the-ECB-s-bond-buying-program/ https://bruegel.org/2019/02/whose-fiscal-debt-is-it-anyway/ https://www.reuters.com/article/us-eurozone-ecb-qe/the-life-and-times-of-ecb-quantitative-easing-2015-18-idUSKBN1OB1SM

I've also spent time on that aspect in order to better understand capital allocation decisions at BRK and also to try to adapt the model for individual asset allocation. An interesting feature (angle) is looking at scenarios (potential equity or whole companies opportunities) and see if the 80% 'coverage' is a floor. I don't think it is if one goes back in time (earlier days of BRK). However, from a humble perspective, the most striking feature is the relative level of fixed income exposure: AR 1998 (B) Q2 2019 (B) cash and equiv. +ST 13.6 (3.8 in 1999) 122.4 fixed income 21.2 20.0 equity inv. 39.8 200.5 (without KHC) total SE 57.4 386.4 (and we know IV/BV has increased) You can skip the next section about bladder physiology if interdisciplinary thinking is not your thing although your prostate may eventually urge you to think about it at some point. The full bladder analogy is classic Buffett and underlines the temperamental aspect of the investment equation. The bladder, as it fills, contains intrinsic and primitive pathways that automatically react to the pressure rising and, absent a conscious and learnt reflex, would result in immediate voiding. Also, the pressure/volume curve is not linear and is quite dynamic with pressure dropping off with adaptation within a certain range (we've all experienced the disappearing urge feeling, given a certain level of patience). I guess the present pseudo-buyback stance may incorporate here with the concept. However, since temperamental decisons are (almost?) always rationally based for the Master, there is an upper limit when the bladder pressure adaptation mechanism does not work anymore as the pressure curve goes quasi-vertical when a specific volume is reached and that may correspond to the self-imposed 150B limit.

Here is some contrarian advice. What is the scope of your relationship with the client? I assume it is professional but do you have a specific mandate or are you involved as an investment adviser with a wide mandate, including explicit suitability issues? The scope of the relationship defines your duty of care and loyalty. You have asymmetric information and you wonder if you should share this information even if other interested parties (including your client) may conclude that your intent is related to a potential conflict of interest... You know that annuity contracts can be shady and you think that the other member of your profession is probably disloyal but you are not sure of that. I would be careful if your situation implies getting involved in a professional relationship that is beyond your specific mandate. Your client sharing this info is not the same as your client disclosing this information with mandated and specific questions about the product or the professional selling the product. If the definition and the context of your relationsip allow it, you could answer questions and provide objective information related to suitability and asset allocation and point the potential risks related to annuity contracts and to the possibility to verify the credentials of the involved professional (I assume this is public record in your jurisdiction). Just imagine that your client, during a meeting, 'discloses' a new personal relationship and you happen to have very unfavorable reviews from reliable sources about this new person. Would you get involved in that relationship for the good of the client?

I think gfp and/or Dynamic have commented on this, elsewhere on this Board. The effort was spearheaded by Mr. Jain, is (and will be) work in progress and it must have been a pain to get this through regulators. From industry publications, many express worries concerning the simplification process which may have gone too far but some of the comments are made by competitors who may lose business because of this new product which will tend to meet an unsatisfied and sometimes frustrating need. https://www.accenture.com/us-en/insights/insurance/small-commercial-research You can easily register and get the full report (12 pages) which is interesting.

Additional comments (are investors putting cash in negative-yielding debt stupid or prescient?): Historically, especially if you have to match long-term liabilities and have to think long term, the total return from bonds has come from income (coupon) and not capital appreciation. Many people have looked at this and it seems that it is reasonable to assume that, under normal circumstances and even during a period of declining interest rates such as happened since the early 80's, more than 90% of the return has come from income. Here's a typical reference: https://www.brandes.com/docs/default-source/brandes-institute/2015/income-as-the-source-of-long-term-returns.pdf So, there are exceptions and individual decisions about what bond to buy/sell and when matter but, typically, the main driver of future returns for bonds is the starting yield. So, what are these investors thinking when the starting yield is negative? Apart form the expectations about low or lower inflation levels, there are instances when the bond investor expects that the capital appreciation component of total return will continue to occur, as has been the case recently, even in a negative interest world. Another possibility is for bond investors to benefit from "rolling down" maturing bonds in certain sloping environments. Japan provides an interesting example (at least up until recently): https://blog.pimco.com/en/2016/04/a-surprising-experience-with-bond-returns/?_ga=2.87817880.1417941211.1565353948-1114108504.1525365177,2.87817880.1417941211.1565353948-1114108504.1525365177 But financial asset japanization is a contained disease. Right? What terrifies me (from the investing point of view :) ), is not that these negative-rate bond investors are stupid, it is that they may be correct. Concerning cherzeca's comment about the financial sustainability of the union, I always thought that one of the underpillars of the Maastricht Treaty was that completing successfully the project required fiscal consolidation. At least, that's what Mr. Soros has maintained for so long. Is he just an old crying wolf?

Disclosure: not a forecast, just a comment about potential downside risk. We have recently lived in a world of low (although slowly declining) and quite stable inflation and have got used to it. It seems that (extreme) non-linear circumstances can occur at the (extreme) margin. During the Weimar hyper-inflation episode, people, on their way to work in the morning, would bring their bags of money to buy bread and not wait for their return at the end of the day because the price would have increased significantly in the interim. During deflationary episodes, people learn to postpone buying and investing as they expect things to get cheaper (people buying bonds now seem to expect somehow that their real purchasing power may be higher when the bond is eventually redeemed at face value). This may give rise to a paradox of thrift and it then may become unusually difficult to awaken animal spirits. By inverting, if I were a central banker, what would I do to cause a significant deflationary episode? I would institute and repeat easing programs and contribute to the debt overhang. But who said that central banks should be contrarians?

I'll gladly share this info but you'll have to endure the following personal anecdote. One of my daughters was born with a heart anomaly resulting in occasional significant but non-life threatening episodes of arrhythmia, most of which would stop on their own but some of which required an emergency room visit for an intravenous dose of a medication. Eventually, she was scheduled for a procedure involving inserting a specialized catheter in her groin, reaching the relevant heart chamber and selective burning of anomalous electrical channels. From the economic side (my appraisal based on relevant inputs), I estimated the total cost to be about 5000$ CDN but the direct cost to me is difficult to assess because I live in area where medical care is 'free'. When my daughter got scheduled for the procedure, I met a member of the extended family who 'recommended' that I go to the US in order to get this done as he knew somebody who had done so. Why would I do that? He said the treatment must be awesome because it had cost the person 25000$ USD. From a balanced point of view, there are reasons for a premium. But what is reasonable? I don't think Mr. Pearson answered that question appropriately. https://www.aging.senate.gov/hearings/valeant-pharmaceuticals-business-model-the-repercussions-for-patients-and-the-health-care-system The relevant part of the video starts at around 1h15min and you can download the prepared testimonies.

Impressive return during your holding period. It seems that Mr. Market is offering another opportunity unless the latest report has changed your assessment of the fundamentals?

On the positive side, 1- in the last annual report, they note significant regulatory dividend capacity, 2- compared to their historical record, the price of debt is relatively low and 3- they have a favorable maturity profile in the next few years. On the negative side, looking at the cash flow movements to and from the holding company vs insurance subs, it seems that capital is going to the subs in order to support a hardening market, but this cash movement is happening very early in the game. The idea is to be able to grow the float opportunistically and that may be hard to achieve if the asset side of the business (high equity exposures) is compromised concurrently(even if only through temporary market swings) as regulators may limit the underwriting leverage especially if the holding debt level is perceived to be high. Since the late 1990's, when it became clear that frogs don't transform into princes, FFH often had to issue equity at prices they didn't like and IMO, the lesson has not completely sunk in or has been forgotten.

That was an interesting post. Thank you. It would be very interesting to hear Mr. Graham's assessment of today's markets. It is humbling to see how such a deep thinker who embraced complexity and abstraction came to such simplification, later on in life. Question: The mechanical 'strategy' as described and other variants have shown (very) poor results (absolute and relative) for the last 10 years. One of Mr. Graham's rules, for a specific stock, was to sell after two years if the investment had not worked out. Would it not be reasonable to abandon such a strategy (or at least question it) after this kind and duration of under-performance? -----)back to the housing shortage and free market solutions -It seems to me that encouraging or simply allowing the multi-generation model would be a constructive step in the right direction. -Your wish for less regulations may be countered by the fact that the housing market is already heavily regulated and the typical knee-jerk reaction then is to have even more regulation. Shortage as manifested by low home affordability is a significant issue in many places and will have to be dealt with somehow.

It does look like price increases are permeating across many lines. Is it for real? The last part of this cycle has been unusually soft and I wonder if unusual access to cheap capital has distorted the underwriting price signals, maybe like the lack of capital discipline displayed in the shale gas industry. Watching for underwriting cycles to turn is like watching an apple to fall. 2017 and 2018 were relatively poor years for (re)insurers due, in part, to higher catastrophe activity. The ILS segment, thought to be more sophisticated with more advanced models, turned out to be a persistenly disappointing factor recently due to loss creep. For example, Markel was 'surprised' by this development (which was compounded by 'issues' with top management) and had to put an entire segment into runoff. The component of dwindling reserve redundancies also seems to be a relevant contemporary catalyst. If interested, see the following, which offers a satisfactory industry perspective: https://deconstructingrisk.com/2019/07/30/creepy-things/ For Fairfax, reserve redundancies, in combined ratio points: 2016 7.8% 2017 8.5% 2018 6.8% Q1Q2 2018 3.5% Q1Q2 2019 1.5% For Fairfax, net favourable development has been very strong vs the industry and the real action is often concentrated in the latter part of the year. IMO, FFH has established a strong underwriting culture and is likely to continue to show a better reserve development profile than the industry but, if history is any guide, across the industry, in a typical cycle, the extent of reserve deficiency eventually reported is directly proportional to the softness and extent of reserve releases of the previous component of the cycle.

@LC Apologies if I misinterpreted and misrepresented your intentions because I somehow imagined that you enjoyed discussing policy challenges :). The comment also was meant to avoid triggering a political derailment (interesting topic but real risk here). The essential meaning was basically what John said. Your country seems to have reached some kind of a ‘mature’ stage (of which higher share repurchase activity is a symptom) and is (IMO) in need for another stage of creative destruction. Ray Dalio has recently described what he calls the coming paradigm shift and comments on what has been the driver behind debt-fuelled share repurchasing activity. https://economicprinciples.org/downloads/Paradigm-Shifts.pdf -----)Back to the 'real question' :) @bizaro For GBT.TO, in the past and over the long term, they have adapted well to an evolving competitive landscape (for example with The Brick which is now part of Leon) and are likely to eventually benefit from a return to more ‘normal’ conditions, although as you say it may get worse before it gets better. In terms of figuring out if the entry point is adequate, I will have to look into the continuity of leadership issue because the long-serving CEO has been unusually smart with capital allocation. On typical value and contrarian bases, this looks like a potential opportunity. It may even eventually deserve its own thread with numbers and valuation etc. Do you think new entrants like Wayfair may cause an enduring new wrinkle in the industry?

I use specific company buyback decisions when assessing capital allocation skills. In the past, because the firm had been repurchasing at prices felt to be too high, I've sold holdings too early or that should have stayed inside the portfolios. ----- Here are two recent references that I found useful when trying to reach fact-based conclusions: https://www.goldmansachs.com/insights/pages/top-of-mind/buyback-realities/report.pdf https://www.yardeni.com/pub/buybackdiv.pdf Fact-based conclusions: -Increased buyback activity has been very significant in the market -Increased buyback activity has not occurred at the expense of R&D or capital expenditures (maintenance and growth) -Dividend component of the payout has gone down -US firms have simply become so much more profitable in the aggregate because of relevant income statement lines: -decreased workers' input costs (US and global) -decreased interest costs (debt-servicing lower despite much higher corporate debt level versus GDP) -decreased effective tax rates (despite higher public deficits and debt to GDP and growing off-balance sheet and unrecognised public liabilities) Next-level opinion: It is interesting to note that the rising tide has resulted in equity holders harvesting a lot of the 'excess cash' and this happened at a time when the typical worker (who tends to hold little stock) saw his or her share of the pie diminish. Like most developed countries and much like a firm that goes through stages (venture formation, growth, maturity etc), it could be argued that the US has reached, for the foreseeable future, a mature phase (because of demographics and being stuck in low levels of productivity {even Mr. Peter Thiel has recently acknowledged this last aspect}). The opening poster LC likely wanted to underline the policy challenges related to this issue but, in this post, I will stick to the investment side because who knows how people behave when they become mature. ----- There are two specific examples of the share repurchase that are relevant these days. Aimia is a company that is trading below intrinsic value (IMO) for both types of equity and it has recently completed a tender offer and continues to repurchase shares in the market at a time when they may need a 'war chest' in order to sell assets and liquidate or go through an evolution of their business model. It's a thin line. Corvel (company involved in third-party administration or workers comp claims) is a company I know very well and it has been a cannibal. It has bought about 65% of its shares since 1996. Retrospectively, the IRR achieved in this activity, so far, has been very satisfactory and the company has shown the ability to reinvest in their business and grow revenue and the ability to use the 'excess cash' to buyback shares, sometimes opportunistically. However (IMO), the company is reaching a mature stage (possibly just a plateau) and it has become more difficult for the company to not build excess cash (à la Mr. Buffett). In their Q2 report released yesterday, their cash balance reached 104.4M, which is 7.1 x more than in 2009 (vs revenue x 1.9). Despite a security breach announcement yesterday, the firm trades at a PE of 30-35 with an earnings yield which, relatively, is barely higher than long-term government yields. A while back, I had held for a few years a regional and boring furniture retailer (Brault & Martineau, GBT.TO). 40 to 50% of the total return (along revenue growth, margin expansion, multiple expansion and dividend) came from the share repurchasing activity. Conclusion: Firms have excess cash and they use it for buybacks but it's a capital allocation decision and dumb moves can be made although shrewd and opportunistic buybacks can contribute greatly to overall results. For most, share buybacks is pro-cyclical. Not necessarily in a cause-and-effect way but in the sense that firms tend to increase buybacks in good times and and curtail them in bad times which tends to cause cognitive dissonance for value investors.