Cigarbutt

If one looks at the last 20 to 25 years, the comment about the relative balance between cash and bonds held versus reserves is relevant as the ratio has remained quite stable (although Mr. Buffett did modify the balance to some extent in 2001-2 and 2008-11). But this balance did not seem to apply earlier when it looks like Mr. Buffett did use float for equity investment leverage (even if, in some years, like the early 80's, the float could be quite costly). Why? If one looks at relative "excess" or alpha return from the equity portfolio held or BRK itself versus the market over the last 10-year segments going back to the early days, the "excess" has progressively come down and some of this convergence is due to size but Mr. Buffett, in the last 20 to 25 years, has refrained from using float as leverage in a big way to help maintain the excess returns. Why? From a risk-based capital and regulatory point of view, it appears that there was ample room to do so although not in an unlimited way.

Will stay at the pundits level and share off-topic anecdotal experience. Been phoning around to coordinate Holidays gatherings and, during mundane conversations, the curve inversion does not come up but main street people meeting mortgage renewal deadlines seem to be considering variable rates. Dumb? https://www.theglobeandmail.com/investing/personal-finance/household-finances/article-bank-of-canada-move-boosts-appeal-of-variable-mortgages-over-fixed/ Around 2016, there was another seemingly unrelated phenomenon: about 30% of global sovereign debt was trading at a negative yield. Dumb? Not bright enough to explain both phenomena but bright enough to wonder if both do not share the same root cause. I guess people tend to choose the best worst case opportunity? Back to the distant relatives and other Canadian acquaintances, it seems that they could manage things differently but who I am to judge?What's clear is that some are struggling to balance at the end of each month and the Bank of Canada's tone on rates seems to have something to do with it. https://www.nbc.ca/content/dam/bnc/en/rates-and-analysis/economic-analysis/hot-charts-181130.pdf

The intention is not to derail the topic initiated by LongHaul. Opinion: the corporate tax is not being passed on to the consumer. ----- @Jurgis and watchwoord This is not about expectations or The Future, which is unknowable, but more about an obsession in being prepared for all the potential futures. Summary: The theme is related to what Mr. Ray Dalio talks about when he sees a correlation between wealth and business interest concentration AND the rise of populist movements and divided politics. https://www.marketwatch.com/story/the-next-financial-crisis-will-threaten-capitalism-and-democracy-ray-dalio-warns-2018-09-13 Nobody knows the future but the price of inaction can be high. ----- Back to topic.

Mr. Tepper's book has been on the to-buy list but was under the impression that it may have been based on an idea (ideology?) looking for facts. From some data, it appears that the lower corporate taxes have been financed with unsustainable debt in order to mostly fund buybacks of overvalued stock. Apart from exceptions, lower taxes have not been passed on (or trickled down to) the capital-scarce end user. In the article you refer to, there is a quote from Chesterton who lived during the Gilded (and not golden) Age. The context of the quote is richer in meaning: "For that is true of pedigree which is true of property; the wrong is not in its being imposed on men, but rather in its being denied to them. Too much capitalism does not mean too many capitalists, but too few capitalists; and so aristocracy sins not in planting a family tree, but in not planting a family forest." Lower taxes is a winning argument until proven otherwise but it seems to be exacerbating a trend that the Gilded Age eventually showed to require, absent appropriate adjustments, a Great Reset. Don't you think Jurgis? 8)

http://www.qcmfunds.com/aa/ Recent and relevant comments by PCM (Q3 18): http://www.patientcapital.com/news Mr. Maida's point: Value investment is not dead, just stoned.

Good point. Most non-life (re)insurers are quite conservative and try to match their reserve liabilities with a highly graded and staggered set of fixed income instruments. Most achieve a fairly adequate match in terms of cash flows and duration. It is also possible to assess (sometimes need to look at regulatory filings) the loss payout patterns by line of business and the "duration" of the reserves, with a % paid per year for ten years and then assuming a linear amortization over a few years and to compare that with the duration of the portfolio. For reinsurers, one has to add a dimension of variance related to IBNR claims emergence and case reserve development which, for instance, can be very significant for long-tail excess reinsurers. Some (re)insurers (BRK: with extremely short fixed income and cash duration now, FFH: with a varying exposure (type and duration) which contributed significantly to the bottom line over time and a very short duration now) deviate significantly in terms of matching and this can be a source of relative positive (or negative) return, especially if the investment leverage (float per equity) is high. Most (re)insurers seem to be positioned for higher rates going forward but it should not really matter for most of them unless there is a regime change as they can hold on to maturity and written premiums to statutory capital is fairly low across the industry. "And 2 year might be the sweet spot." In the last 10 years, many re(insurers) opted for a lower duration which has hurt results compared to a subgroup reaching for yield but, in insurance and others, the jury is out until cycles are completed.

One has to wonder how much of available time should be spent on this (less than 5%?). Some of the blog postings have more value. Over time, the author has shown the ability to change opinions with changing facts which is good but also has evolved his narrative despite facts which is more concerning but don't we all do that? Here are two samples to reflect upon: http://scottgrannis.blogspot.com/2016/08/qe-and-amazing-demand-for-money.html This post corresponds to the feed the pigs cartoon shown elsewhere when discussing QE. People say it's more difficult to lose weight to offset the gain and there's the yo-yo effect. http://scottgrannis.blogspot.com/2009/07/money-velocity-is-likely-stabilizing-4.html This post deals with money velocity. The author has always believed that the most important factor consisted in finally adopting a risk-seeking attitude (?!) and unleashing animal spirits in order to stimulate fixed investment and increase real productivity so that the yield curve could steepen and we could all live happy forever after. Interestingly, the Fairfax team has somewhat equivocally espoused that thesis too. Recently, the market has refused to cooperate and maybe it's time for a different tone (tune?). Please continue yor banana learning and show old monkeys new tricks.

I like his work too, possibly because his ideas offer a different (and opposite) perspective. Sometimes interesting to look back: http://scottgrannis.blogspot.com/2014/12/gloomy-yield-curve.html The first chart is fascinating because it appears that the gloomy market had it pretty much right in terms of the forward looking yield curve. Mr. Grannis needs to be thanked because, reading his thoughful analyses, one could learn the meaning of the word: transmogrify Over the years, Mr. Grannis has been expecting (and he still does) the economy to transform like a caterpillar becoming a butterfly. But the word really has a much more of a colorful meaning: transform, especially in a surprising or magical manner. As in: "the cucumbers that were ultimately transmogrified into pickles". Who remembers what happened to Cinderella at midnight?

Yes, interesting work with potentially short term applications. For instance, in the world of biosimilar insulins that result from DNA recombinant technology, a very minor change in sequencing may have a huge effect on the efficacity and side effect profile of the drug because of the way the molecule folds on itself in a 3-dimensional kind of way.

^The underwriting culture does take precedence over the changes in inflation especially when changes are progressive or benign. The invested assets can be seen as a hedge against the liability reserves especially for long-tail lines but the hedge is imperfect on many levels: -The reserves are influenced by only certain components of CPI and there is the additional "social" cost inflation (courts etc) -In the 70's when inflation was significant, it was a tough time for PC insurers because of the lag effect of premium adjustments, the difficulty to adjust rates in a competitive environment and because of the negative effect on investments (fixed income and also equities which, unlike conventional wisdom would suggest, did even more poorly than fixed income then, except if you invested like Mr. Buffett) -deflationary periods also impact the hedge for different reasons (declining premium volumes and poor investment results) Recently looked at Travelers and it seems that the rising rate environment has been a contributor to lower market values for the shares despite improving operating parameters (CR, net income, net investment income rising with reinvestment opportunities in fixed income securities) because reported book value took a "hit" from a large unrealized investment gains on their held fixed income securities became a large unrealized loss, lowering reported book value by about 3% even if the duration of their fixed income portfolio is only about 4 years. Here's what Mr. Buffett has said about inflation over the years and some of it deals with the effect on PC insurers: http://csinvesting.org/wp-content/uploads/2015/01/Buffett-inflation-file.pdf On page 78, Mr. Buffett refers to what HJ describes above: "Because of this one-sided experience {asymmetric surprises}, it is folly to suggest, as some are doing, that all property/casualty insurance reserves be discounted, an approach reflecting the fact that they will be paid in the future and that therefore their present value is less than the stated liability for them. Discounting might be acceptable if reserves could be precisely established. They can't, however, because a myriad of forces ¾ judicial broadening of policy language and medical inflation, to name just two chronic problems ¾ are constantly working to make reserves inadequate. Discounting would exacerbate this already-serious situation and, additionally, would provide a new tool for the companies that are inclined to fudge."

Thanks for your response. In all frankness, the graph you provide could be interpreted in so many ways… If you add another layer about expected expectations it would even be possible to take the modern monetary theory seriously. :) I will follow you in this rabbit hole and then try to provide perspective. Maybe it's my scientific background bias and expectation that 2+2 usually gives 4 but if 1-easing was used to prevent real interest rates from falling too low and 2-easing eventually caused a "big pop" (more on that later in the perspective), then why tightening has been accompanied by increasing real rates? Why doing opposite things cause the same result? There are a huge number of potential answers and I suspect which one you will come up with. ;) In terms of perspective (looking outside of the time frame of your graph), real interest rates (which are tied to potential GDP growth) have been convincingly coming down since the early 80's (not only in the US BTW) and this is for another thread to discuss but the blips we have seen in the last few years have not changed that trend unless one believes that the times they are changin'. I try to supplement posts with factual or corroborating evidence and I could have supplied you with solid work that contains however derogatory comments but here's one from the Master himself: https://www.brookings.edu/blog/ben-bernanke/2015/03/30/why-are-interest-rates-so-low/ Look, he says, I did what I could and it's up to the other actors to play their role. One of the things that bothers me is the comment, which I agree with, that punctual government spending could cause a short term increase in real interest rates. Mr. Bernanke made those comments in 2015 and perhaps did not envision that the recent administration would put the pedal to the metal in terms of government spending and fiscal deficits in a late cycle. The major thing that bothers me though is that this easing program was to give time to the powers that be to deal with the secular forces and to allow a "beautiful" deleveraging. Deleveraging, what deleveraging? As I sip my coffee in late 2018, we are, on a net basis, on more shaky grouds for debt especially at the public and corporate (hypertrophied BBBs, leveraged loans, high yield etc) levels than 10 years ago. And now we are "ready" for tightening? Sorry long post. Maybe4less, you seem to have an interest in maturity transformation. For a historical parallel, alchemists involved in metal transformation (they called it transmutation then) used the scientific fact related to the differential density of lead and gold. Gold creation was a myth but alchemy was both practice and philosophy. Have you taken a look at which end of the curve the Treasury is selling its debt issues? There is an obvious connection to monetary easing (or absence thereof) as the fiscal/monetary firewall is being tested. An interesting side effect of the tightening mode is that the Fed has been (and will be more and more?) absent from government auctions and, even if the supply of government debt has considerably increased lately, the Treasury, in its great wiseness, has preferentially and to a large extent gone for the 2 year-auctions versus the 10 year-auctions: YTD: 2yr + 55%, 10yr +26% thereby conducting the equivalent of a fiscal operation twist. In my humble experience, for the typical firm with rising debt, short term refinancing may be an ominous sign but I'm just a guy paying his bills every month. Interesting times.

"Sherlock Holmes and Dr. Watson were out on a hike. They had been going all day, so they decided to make camp and stay for the night. They both woke up at 3 AM. Holmes said, look up Watson what can you see? Judging from the position of the stars, it looks like it’s about 3 AM What else Watson? It looks like it will be a beautiful day tomorrow What else Watson? What am I supposed to see Holmes? Elementary my dear Watson, someone stole our tent"

I think this thread should me moved to the Politics section. :)

^Take the Cs. In a few weeks (4-6) the price went from 24.xx to 21.xx and I just can't explain it. Annualized dividend=1.1415 Humbly stated, one doesn't need to understand everything under certain scenarios and the rationale may still be value-based. I remember similar dynamics with OdysseyRe A and B preferreds. Did you play that game too?

^BTW, I agree essentially with the above. This is only seen as a potential window of opportunity to earn 10 to 15% over a relatively short period of time. The pupils have constricted but have not reached for the glove box yet. Longing for longer term ideas and pupils continue to be dilated looking in that direction.

I was involved with the Cs, Ms and Es around 2016, still had the tickers on a watchlist but had not noticed the recent trend. Thanks. These tend to be illiquid so expectations for lengthy discussions here should be tempered. I disagree slightly with SJ (SJ, it reads as if you're angry at a security which is something that you may want to look into). The prefs risk profile is different and the coverage seems secure under most scenarios (something that cannot be said for the common). Also, the investing "crowd" is different as it almost feels like there are cyclical "rotations" that don't tightly fit with fundamentals and that can affect the risk premium. Presently, a big underlying issue is the direction of Canadian interest rates. Reflecting on this, I was following very closely Fairfax when those preferred securities were issued. If I remember or understood correctly, Mr. Bradstreet was behind the rationale for this capital raise initiative. Retrospectively, this was a very shrewd financing move IMO as 1.46B (CDN)of essentially permanent capital was raised with a cost running at around 4.1% in CDN dollars. They really nailed it with their take on CDN interest rates and the embedded conversion features. Another strong aspect is that they are unlikely to need to redeem them if interest rates rise (unless short term rates rise ++).

Many ways to assess this and the picture remains fuzzy. One of the difficulties is that the central banks try to control the message and the message has evolved during the QE process as rationalization to initiate and repeat the rounds has radically changed and in the end Mr. Bernanke said: "The problem with quantitative easing is that it works in practice, but it doesn’t work in theory”. :o The inflation expectations aspect is interesting in theory but does not fit the data. If you look at different graphs with inflation expectations and chronologically match with the CB balance sheet, you see that the initial QE (announced end 2008) was associated with rising inflation expectations but it is not clear if there was any cause and effect (inflation expectations recovered just like after the 2001 recession when QE was discussed only in ivory towers). With QE2, there was, with some measures, a temporary spike in inflation expectations but the there was a relatively rapid return to longer term trends. With QE3, there was no positive correlation as inflation expectations diverged and continued to trend lower, a trend that has mostly continued to this day... In my free time, I look at firms in distress. A common feature is that, initially, debt can be used to meet an "unexpected" problem. Then debt can be augmented to deal with lingering issues with no net positive effect and there arrives a point when more debt is counter-productive (for firms that cannot print their own currency, there may be an acceleration here). A classic case of diminishing returns (digging yourself in a hole). It seems to me that the central bankers realized that additional rounds of QE were simply not effective because the system was flush with excess reserves and because, effectively, of the the liquidity trap that you describe without naming it. The way to deal with this may have been to come upfront about it but, for obvious reasons, the CB came out with the rational that a deflationary spiral had been avoided. The big question I have is: was it avoided or simply postponed? A potential interpretation of yesterday's wording may be that there is more postponing in store. Mr Bernanke, when explaining the evolving rationale behind QE often mentioned the risk of losing public confidence and I wonder if that risk has not been underestimated. Contrarian opinion: The emperor has no clothes. Potential personal bias: tendency to overestimate lag effects. "Clearly there is something else going on." You bet. I hope this discussion continues but I have reached my diminishing return level of contribution for this topic.

Your phrase sounds alchemy to me and I need more explanation. Do you mean: -We can manage higher levels of debt now because we are more advanced or have better managers? -We can simply print more money in our own currency if need be? -We can simply suppress interest rates at will? I'm asking because even if the backing has become more ill defined, I understand that fiat money remains backed, as the U.S. Treasury states, “by all the goods and services in the economy”. No? I'm asking also because the Bank of England’s first banknotes were described as “certificates of deposit” and eventually, by the mid-eighteenth century, became “promissory notes” which maybe was the first easing step in the wrong direction. :) The idea of income tax when introduced was that it would be temporary and history shows that it has been very hard to get rid of temporary adjustments when underlying fundamentals are left "intact". One definition of a spiral: -a progressive rise or fall of prices, wages, etc., each responding to an upward or downward stimulus provided by a previous one. Interesting. We could "fight" back and forth with graphs forever and run into circular arguments but did you consider that whatever effects are produced by what the Fed does or is expected to do happens with a lag? What about what is going on now as we see the early effects of tightening (opposite of easing): are interest rates going down?

Most of the money "created" ended up back at the Fed as excess reserves. It seems then that new money did not end up circulating at the mainstreet level, which explains the absence of inflationay pressures and the absence of transmission effects on the real economy as expected by the powers that be. QE contributed to lower interest rates and, by remitting the interest on public debt to the Treasury, QE helped the government to "invest" in the "recovery". It can be grossly estimated that this "profit" return to the government has contributed to a 10 to 15% decrease in the fiscal deficit. Also, it looks like the Fed has returned more than 700B this way since 2009. I understand Gary Cohn said (before he moved to other personal endeavors): "If we woke up tomorrow and every central bank in the world raised their interest rates by 300 basis points, the world would be a better place.” Perhaps what he meant by "better place" sounded too much like the liquidating Andrew Mellon since the last Fed Chair alluded to the process of shrinking the balance sheet by saying she hoped the process would be akin to watching paint dry. Pictures can be worth a thousand words. http://dailybail.com/home/professor-bernanke-explains-quantitative-easing-cartoon.html Personally, I think that, in due course, some people will have some explaining to do.

If you are interested in the topic and want to understand the product, you may consider taking a basic sommelier course. Sounds fancy and some courses are elitist but there are community-based courses which cover the basics and should appeal to you if value is your thing. You get to taste different grape varieties and often get to learn the basic accord principles. A humble conclusion is that your appreciation of value may not correlate to the price of the bottle. No commercial connection but I found this through a rapid search which may help to decide if that's the way to go.

Interesting tool. It's always fun to see the power of compounding. I would only say (from the 5 minutes spent on your link) that the output seems to be based on a forward application of a range of historical returns (ie as if history repeats itself) and not on a classic Monte Carlo Simulation which is more like what the future may be given a certain set of assumptions thrown into an equation and run an "x" number of times.

"After the experiment, we discussed Kelly and optimal betting strategies with our subjects. We were left with the feeling that they would play the game more effectively if given another chance. We wonder whether any long lasting impact could be had on investor behavior through similar discussions of sensible approaches to stock market investing." Given that people, in general, hear what they want to hear and that confidence is typically inversely correlated with competence especially when emotions (money) are involved, I wonder if the authors are not stretching their conclusions.

^This is somehow related to the ovarian lottery concept that Mr. Buffett described. You may be interested in the following: https://www.cfainstitute.org/-/media/documents/book/rf-publication/2018/risk_compilation_2018.ashx (pages 22-25) ftp://ftp.iza.org/SSRN/pdf/dp4365.pdf So twin studies (which are quite powerful) show that genes play a role but the environment in the "formative" years are crucial and, for investments, early adulthood may be particularly relevant. And a somewhat relevant presentation: https://www.alexanderforbes.co.za/download/afo/media-centre/2018%20Indaba%20Presentations/Indaba_The%20Real%20Cost%20of%20Investor%20Behaviour_Morgan%20Housel.pdf

^On a personal level, I guess one could potentially go for the ultimate nirvana but, for an investment Board such as this one, basic respect and a minimum awareness that the ego may get in the way are probably sufficient. I am presently reading Gore Vidal's Lincoln and like in the Team of Rivals, his story seems to reveal that his biggest strength was his humble ability to accept he was wrong, even as a leader.

Thanks. That was useful. I kept the checklist (cheat sheet) for reference. https://static1.squarespace.com/static/53419b80e4b0cccdfc3bbcf8/t/5be2484870a6ad62d3a2343d/1541556450200/ih-cheat-sheet.jpg Will have to work on the balance between stubbornness and gullibility.