Cigarbutt

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.

^Thanks for the perspective and you wrap it up nicely. Just in case for international readers, the public debt to GDP in Canada has an unusually high component of provincial debt which, in total, puts us in the OECD pack. Sincerely, I hope you're right. When thinking of the real estate picture in Canada, I don't use a Monte Carlo simulation (garbage-in-garbage-out, backward looking, underestimation of correlation between inputs etc) but use different scenarios. I guess using scenarios is reasonable because our situation is somewhat bizarre especially when I read that Cardboard and yourself seem to be on the same side concerning the inappropriateness to raise rates at this point, which is really a head-scratcher. In the event that the economy refuses to cooperate and/or austerity (oops! dirty word) becomes imposed, I want to make sure that I can contribute my fair share to our redistribution effort. I'm also reading my fair share about Mr. Paul Volcker these days (his name is brought up not to argue about what he would do or suggest here but to underline the huge weight on public people's shoulders and their "political" capital). When he "caused" a recession, he was a hated figure and kept receiving car keys and others through the mail and it must have felt awful at the time. But he rose to the occasion and grew taller.

Who is we? Isn't that the crux of the issue, the crass conformance? -Optional part: http://www.rbcgam.com/investment-insights/research-publications/_assets-custom/pdf/rbcgam-economic-compass-canadas-debt-threat-201107.pdf -This is a report from 2011 which I had kept to see if/when the real estate in Canada would reach two standard deviation levels. -The report contains comments about the role of the powers that be, in terms of the challenges related to prevention and the risks related to cheerleading and the conforming marginal buyers lining up as long as the music plays. -Especially fascinating are exhibit 10 and exhibit 14. See the two following links for more contemporary updates. -The question is not if but when and, at times, there are unusual "market forces" at work. -An argument could be made that the author was wrong on many levels but he had that to say, in 2011: "There is a popular misconception that the Bank of Canada cannot afford to raise interest rates because this would prove too damaging for mortgage holders. The opposite is in fact true. The reality is that the Bank of Canada cannot afford to delay raising interest rates, for precisely the same reason. The longer the Bank delays, the more marginal borrowers will enter the market and be walloped when rates rise, and the further home prices will go above their equilibrium levels, only to tumble later." http://creastats.crea.ca/natl/index.html See MLS composite benchmark price https://tradingeconomics.com/canada/bank-lending-rate See 10 year or max option And as the housing tide has lifted us to unusual heights, we just learned this week that the federal government has no plan to balance the fiscal budget for the foreseeable future. On this last point, I agree formidably that the budget will not balance for a VERY long time even if we wanted to. Famous last words.

Interesting inputs MrB and one is tempted to ask where John Galt is. My mother (like Putnam in Bowling Alone, 2000) used to say the same thing about television. The linked article is relevant when they raise doubt about the use of social media and "screens" causing unhappiness as there may be another independent variable: social capital. My humble experience with kids is that the devices are to be seen as opportunity costs. I've found that, despite the invisible leash to the device/truncated social construct, they easily put it down when they have something better (from the social capital point of view) to do. And sometimes, the activity is bowling. :) This is an investment board and I would say that one/we need to invest in social capital to cover the inevitable depreciation expense but it's a worthwhile investment.

Thanks LC as I was preparing to initiate this thread. Happy Thanksgiving and some correlated thoughts Have you seen the last batch of turkeys? Huuge! Interestingly, this very American symbol’s “growth” phenomenon may have underlying significance. Taking advice from members suggesting to look at the forest rather than trees, it looks like the upward trade trajectory of the live weight at the slaughterhouse for turkeys has closely matched the stunning upward slope of the S&P index. Article from last year: https://www.marketwatch.com/story/history-suggests-the-stock-market-is-poised-for-a-big-turkey-bump-2017-11-21 Why? Doing some research, some suggested it was climate change while others pleaded for manifest destiny. But again, updating data to 2018 as the trend continues, there was no point in searching as the answer was in plain sight: artificial insemination. https://qz.com/1471267/the-average-american-turkey-just-keeps-getting-bigger/ Typical for a country balancing free markets and central government, the artificial insemination breakthrough occurred in 1939 on the academic side (those who want the original research publication can PM me but the pictures in the article are not meant for prude eyes) and the innovation was picked up by the profit-motivated Market, especially since the early 1980’s with mind blowing results. So a typical example of human ingenuity and American exceptionalism taken to the extreme with, however, some uncomfortable side effects as the birds can no longer walk or procreate but who cares? Thinking along multiple dimensions, I found out that the correlation between the weight of turkeys and the S&P also correlates very strongly with another index, referred to as the body mass index which tells me that I should simply stop fighting the Fed and invest in insulin manufacturers. But the true origin of Thanksgiving is related to the early Pilgrims who set foot on American soil, this bountiful land. A celebration of the harvest signaling hope for the year to come. Thanksgiving is a beautiful word that is backward and forward looking. It has to do with being grateful and sharing. Happy Thanksgiving to American fellow members.

A year of working between Abidjan & Takoradi showed me this. I'd seen it before but these areas really hammered it home. It disgusts me to see students whining & making excuses for barely putting out any effort. It reassures me to know that they will be no competition in the work place. Unless, of course, they're great political operators. Fortunately you can't fake music. I keep the disgust to myself & like to believe that 1 or 2 see an old guy shining & are motivated to get their asses in gear. (The competition doesn't really scare me...) Here's to mediocrity & the social programs that stand between it & dog eat dog chaos. BTW, I'm doing a literature essay about Harrison Bergeron & will post it later for anyone who's interested in my take, on Vonneguts take, on forced equality legislation. This a general discussion topic and may be taken from the following angle: Should there be a safety net for the apparently repenting money manager? for the participating investors? An underlying assumption may be that the tightness of the mesh of the safety net will be inversely proportional to the capacity, for the able and talented, to achieve their full potential. But what do you do for the "truly" disadvantaged? ----- "Gee - I could tell that one was a doozy," said Hazel. "You can say that again," said George. "Gee-" said Hazel, "I could tell that one was a doozy." ----- "To me it's a very grey area and an interesting subject on which I don't have a definitive opinion."

I find you're able to concentrate selection bias, simplification bias, clustering illusion and the fallacy of anecdotal evidence to underline what seems to be an investment approach (bottom-up or top-down) issue. Apologies since I may be missing the courtesy bias. :) Please explain how it is easy to avoid a disaster, before it happens, if possible.

I assume that you already have strong answers to the questions you ask and that you look for better ones which makes it a hard undertaking. Few thoughts: -a stupid person is more dangerous than a bandit. -a challenge is how to protect the helpless from the bandit. -a bigger challenge though is how to deal with the super-stupids: "people who by their improbable actions not only cause damages to other people but in addition hurt themselves." If you allow yourself to think only under two dimensions, you may find the following interesting: http://advanced.jhu.edu/wp-content/uploads/2013/07/The-Basic-Laws-of-Human-Stupidity.pdf