Cigarbutt

Titan Pharmaceuticals is in the right spot but does not seem to have the right product. The bill is the result of a reasonable bipartisan effort which, by itself, deserves at least some praise. To help in evaluating entrants which could eventually benefit, interesting to look at the different paths: -primary prevention: avoid occurrence of the problem -secondary prevention: intervene in the early stage(s) of the problem -tertiary prevention: mitigate the impact and complications related to the problem You may want to look into naloxone (and related products) which is used in acute situations (tertiary prevention). The bill has provisions for the use of naloxone by first responders. If you have ideological unease with this aspect, I have too just as I felt unease when the TARP program was approved. Interesting also because, some "experts" suggest to look into a recently defined quaternary prevention which imply using methods to mitigate or avoid results of unnecessary or excessive interventions in the health system which brings you back to primary prevention which is where the money is. Of course, primary prevention has to do with how your "environment" deals with mental disease and general socio-economic distress, two factors that are unlikely to hurt your investment returns, at least in the short term. Have you been to Vermont? I often go there for reasons unrelated to investment. They just tend to be nice people. https://www.vox.com/policy-and-politics/2017/10/30/16339672/opioid-epidemic-vermont-hub-spoke

^The topic does often come up and there have been some equations suggested to discount the liability. I wonder if the discounting exercise applies to all insurers as the underlying principle means a long term capital commitment related to underwriting discipline. Recently reviewed transactions completed in the non-life insurance runoff area (including by Fairfax) over the last few years. Interesting because the acquirer, in these transactions, aims, in a way, to decrease the advantages related to float: 1-cost of float The acquirer aims for a low cost of float instead of a negative cost of float. 2 and 3-discounting and growth The acquirer aims to accelerate the runoff (active management of claims, commutations etc) and to bring the number of claims to zero. Despite the above, it is possible to buy a runoff book of business at book value (assuming "adjustments" to reserves, strong claims management and superior investment ability) and obtain a satisfactory return. So, reserves liabilities at BH deserve a significant discount. However, unless in a last man standing scenario, growth in float should moderate and float to shareholders' equity has been decreasing and stands now at about a third. When looking at other insurers, interesting to compare the investment leverage (float per share) and to multiply that number by a factor related to excess return expected (or absence thereof) related to superior investment ability. The discounting exercise for BH (balancing float assets and reserve liabilities) also helps to evaluate how much cash could be converted to stock investments if stars align. I would say about 30 to 40% of cash float could be used pretty much overnight.

Thanks for the link. The question is limited to one state but may represent a larger current. I live in a place where electricity is essentially a vertically-integrated regulated monopoly (wholesale and retail) with hydro responsible for more than 90% of electricity needs and with policies in place favoring low and uniform prices and in a relatively steady place versus the socio-political sphere. But I really like what has been going on in the US considering the experiments with various deregulation plans. It's noisy and sometimes disruptive and inelegant but it seems like it's the best way to go IMO. What is happening in Nevada (it seems like the ballot item will pass?) may be part of more to come at the national level and underlines the risks of transition costs and partial recovery of the value of stranded assets and I guess BH can manage transitions but investments in regulated utilities does rely on trust versus potential regulatory harm. The context in Nevada is fascinating with the recent residential solar issues and the ballot question does not go along traditional political divisions. I've looked into the issue, from a Nevada perspective, and come to the conclusion that it is very hard to decide what is best on a net basis for "society". In terms of consumer costs, I wonder if the Nevada experience would look more like California or more like Texas. I would tend to vote against the trend and for BH (bias here) because of the traditional reasons that it has used to justify the venture into regulated utilities (efficient operations, low cost of capital, reasonable rates of return, long-term outlook with stable and low retail prices and flexibility for alternative sources of energy and environmental concerns). Found the following to be useful: https://guinncenter.org/wp-content/uploads/2018/07/Guinn-Center-Q3-2018.pdf https://guinncenter.org/wp-content/uploads/2018/07/Guinn-Center-Q3-Voter-Guide-2018.pdf But this is not simply a story about two billionaires.

You make good points. Just want to add that technology can go both ways. Have heard of this from the local media but it seems to be gaining traction. It's called Hopper and will likely be included in my planning process. https://www.hopper.com/research/bunny-saves-money/ https://www.forbes.com/sites/kathleenchaykowski/2018/04/10/the-vacation-predictor-how-the-fastest-growing-flight-booking-app-is-using-ai-to-transform-travel-hopper/#65069ec323bd

Whether one agrees or not as an individual, is it not reasonable to expect increasing pressures to deal with perceived or true externalities? Historically, efficiency gains have not been sufficient to reduce variables like CO2 emissions because of volume increases (trade and number of passengers). Air transportation is so much less efficient (CO2 emission per tonne-kg) compared to maritime transport (10x less versus heavy truck and 30x less versus cargo) that IMO it makes it an obvious target for increased regulation and taxation. Right now, maritime transport accounts for 90% of volume of global trade and is associated with an about 3% share of CO2 emissions, which is only slightly more than for global air transportation. Our world is changing and the rules of the game will be redefined. Here are two "visual" references that show how global movement has changed and where it is today. https://www.shipmap.org/ https://www.theguardian.com/world/ng-interactive/2014/aviation-100-years

Possibly, there is a coming paradigm shift that only a few can see and there may be pockets of opportunity but the paradigm shift, if it is to manifest itself, must include a scenario of low growth and low volatility of fuel costs and a departure from the historical competitive rivalry that has existed for, at least, the last 50 years. Revenue growth and productivity gains have essentially been captured by different participants along the value chain (including the customer who complains about poor relative value...). For fun, just checked the price for a Montreal-Toronto ticket and what I could get today is, in nominal terms, comparable to what could be obtained decades ago. An argument can be made that service received is less and hidden fees have become the new normal but there is no question that the price/value proposition has tremendously improved, very much at the expense of the airline industry equity holders. https://www.mckinsey.com/industries/travel-transport-and-logistics/our-insights/a-better-approach-to-airline-costs When looking at the value chain and competitive landscape, the overriding conclusion that seems to remain is that the industry has been characterized by high cyclicality (both demand side and volatile input costs), high capital intensity and very high degree of competition based on a product which remains, essentially, a commodity. The labor issue that KJP mentions is discussed in the following document (page 24). I understand that it is a factor but would say that it is not the major one. Last time I looked, the proportion of crew costs over total costs per block-hour of operations was typically slightly less than 20%. https://www.iata.org/whatwedo/Documents/economics/profitability-and-the-air-transport-value%20chain.pdf In the above article, the conclusion seems to say that the value chain needs to be fixed and investors are expecting higher returns compared to historical trends but one doesn't spontaneously always get what he/she wants or needs. Looking forward to opposing views and would look at specific opportunities but otherwise the airline industry will remain in no man's land.

The hazelnut topic has to do with what Peter Lynch has suggested: Buy what you like (and understand). :) If you don't allow me to discuss hazelnuts, what is there left? Writing a poem about blockchain and cryptos? ;) Anyways, thanks for the geo-political analysis of Turkey. I'll be able to skip Le Monde Diplomatique and spend the day outside. To the point, your posts are always dense and powerful. I'd wish to have this talent.

Roasted hazelnuts are awesome. I know somebody who works at Ferrero's HQ in Alba and I understand that Nutella's flavour and aroma are related to a molecule called filbertone (among 37 others!) which is also used in perfumes and cosmetics. Global sourcing of hazelnuts is an issue as reports mention that Ferrero needs anywhere between 25 to 50% of global production. Remembering that Mr. Buffett once invested in cocoa beans, if you have time, could you elaborate about the bolded part? https://www.npr.org/sections/thesalt/2014/09/16/347749070/thanks-to-nutella-the-world-needs-more-hazelnuts https://www.reuters.com/article/us-agriculture-hazelnuts-ferrero/nutella-maker-ferrero-seeks-to-crack-turkish-grip-on-hazelnuts-idUSKBN1D22L4

Paul, You make it sound so obvious. I was following market developments then with quasi-autistic obsession, but was confused at least half the times and never even considered the possibility that there would be a run on the money market. Relative sleep deprivation and lack of perspective could explain some of that as I was only partially retired then. Reliable reports (including from the SEC) have been made, describing that these funds threatened to break the buck at least on 300 different occasions since the 70’s and the 1994 episode barely broke the buck and the fund was “tiny”. In 2008, what was different was the run. Fascinating when you think about it because it shows how close we came to the brink as these funds are short-term in nature and the run literally occurred on the part of the money market that was responsible for overnight (less than 24h!) funding of large structural and foundational aspects of the US (and world) economy. Consoling to compare, in terms of poor capacity to anticipate events, because important people also seemingly were still dancing: -from the CEO of the “Reserve” fund that “caused” the run (letter from early 2008): “[T]he tenets that define a money market fund: sanctity of principal, immediate liquidity, a reasonable rate of return– all while living under the overarching rubric of boring investors into a sound sleep.” -from a review (pieces of a puzzle) --September 14th, 2008, GE sends a reassuring a letter to investors (I wish I still had that letter and it has “disappeared” from their website). From memory, things were hunky-dory and access to credit markets was robust. --September 15th, 2008, GE CEO phones Mr. Paulson and explains that funding has become difficult as lenders’ maximum maturity extend to the next 24 hours. So, over 24 hours, the 24-hour outlook darkened considerably. Of course, dominos had started to fall and things were more fuzzy than the above description and, somehow, GE most likely had been preparing plan B, C, D etc and legend has it that Mr. Buffett authorized his 3B “bail-out” early the day of October 1st, 2008 dressed in his bathrobe when more unexpected events were to occur. @muscleman Probably the best response would have been to let go but FWIW here’s a brief answer submitted mostly because you asked. I think there may be a last puff in there. Reading today how people feel superhuman driving a car, I’ve become particularly humble and sensitive to fallibility. Also writing this makes me realize how much luck has been the predominant factor in trades previously made in government bonds. Since 2010, I have opportunistically and recurrently realized very significant gains from buying and selling long term US and CDN bonds and, since 2016, there is a residual allocation of about 10%. From a certain conventional perspective, with the mind-blowing flattening, a long-short position could be considered (short long-term bonds and long short-term bonds) but conventional is not always right. If you are into multi-dimensional analysis, conventional thinking in risk-free bonds now reminds me of what is expected in multi-stage rocket technology ie the rising short term rates (first stage) in substance means that the energy (assuming no fuel leakage) will be transmitted, through higher long-term rates, to the second stage eventually allowing the economy to reach escape velocity. Humble evaluation of this reveals that the quantitative operation will be delicate and alternative scenarios should be considered. There is a very significant possibility of being wrong here and I’m no rocket scientist but, in terms of a potential asymmetric bet, I find that, among other downside risks, the value of the open-ended equity put embedded in long term “risk-free” government bonds could be mispriced. Some say that “riding the dragon” can only be experienced once but, from limited personal and very natural experiences in investing, the last puff is often the best one. I do not plan on expanding here as unconventional discussions can reveal how one is stupid, really.

I understand that the SEC requires maximum maturities of 13 months or less and average maturities of less than 90 days for money market funds. For your curiosity, the times, they have been changing. https://fred.stlouisfed.org/series/TB3MS https://www.bloomberg.com/markets/rates-bonds/government-bonds/us Wow this is mind blowing. How can the short term rate be so close to 30 yr rate? Hmm... Indeed. But is it fundamental or is it sentimental? Luckily, after all the fundamental work, was able last night to finally figure out the interest rate conundrum and will be able to follow Spekulatius' advice to stop worrying about "economics". The path of interest rates is related to the central bank leader's stature: https://forbesfinancialonline.com/will-hawks-take-control-2018-bond-market-perspectives-october-24-2017/ Still a nagging thought though because mind-blowing has two meanings: -overwhelmingly impressive. or -inducing hallucinations. The money market is dead, long live the money market.

I understand that the SEC requires maximum maturities of 13 months or less and average maturities of less than 90 days for money market funds. For your curiosity, the times, they have been changing. https://fred.stlouisfed.org/series/TB3MS https://www.bloomberg.com/markets/rates-bonds/government-bonds/us

^For various reasons, home ownership has followed the same curve as the US, but on a slightly delayed basis. An argument can be made that a segment of the population (lower middle class and upper lower class) were "encouraged" (low interest rates, various policies etc) to buy homes in an unusually favorable environment. Regular folks who don't read the FOMC statements gradually realize that homeownership is no longer affordable and see rising interest rates at a time where wages are not following the cost of living. A similar scenario is playing out for people making (financing) car purchases. https://www.huffingtonpost.ca/2018/09/08/canadas-tradition-of-homeownership-is-at-risk_a_23520973/

No inside or privileged information. I have followed Mr. Volcker (with respect) and have compared, for pushback, to others such as Mr. Greenspan, on how one can/should evolve with thinking (keeping what is essential and getting rid of nuisance) and infer rather indirectly that he has his share of ailments for his age and have found that he has tended to speak in terms of legacy which usually corresponds to one feeling his own end coming. An interesting part that has filtered around the publication of the memoirs and which is relevant to the noise heard about others who have recently published material potentially tied to vested interests, is that it appears clear that noboby (the publisher, the editor, or any other) could have told Mr. Volcker what and when to write. https://dealbreaker.com/2017/10/paul-volckers-memoir-will-be-less-arousing-than-warren-buffetts/ When asked about the motivation behind the ultimate piece: ""I had no intention of writing a book, but there was something that kind of was irritating me," he said. "I'm really worried about this governance thing." These people have huge responsibility, have to deal with diverging interests and deserve a lot of respect. I thought Mr. Buffett expressed an aspect of this fiduciary responsibility in this video (2012). https://www.youtube.com/watch?v=bPk0UFKHEHs Mr. Buffett has a way to wrap tough messages into softer choices of words but he seems to say that a man's got to do what a man's got to do.

I just need a cash sweep vehicle to park my cash temporarily as I am looking for stocks to buy. I am not looking to hold cash over the long term. Same here. :) But basically what you're asking is if it matters if you wear sunglasses when crossing a narrow and quiet street (vs being hit by a car). The risk remains extremely low but, from my point of view (risk and reward), I don't see why you should hold commercial paper in your cash-equivalent vehicle. Black swans are rare by definition but occasionally weird things happen. https://www.bbc.com/news/blogs-news-from-elsewhere-45938724

Not sure I can build a constructive discussion here (and I take responsibility for it) but I have a question. This is about sharing the gains and the pain but, in a previous post you mention: "Oh yeah, and all Presidents push the Fed. Maybe less publicly but, when the big guy tells you to do something, you tend to obey. I actually think that words behind closed doors are stronger than what Trump is doing: Trump will get backlash if the Fed bends." Can you elaborate on the bolded part. Asking because of an article I read recently. I won't refer to it directly because it is coming from a "source" which is quite typically biased and the article itself focused primarily on form (irrelevant personal details) over substance but the title was: "Trump Vows to Continue Trashing Jerome Powell Until Fed Chair Bends to His Will". BTW, I plan on reading Mr. Volcker's to-be-published memoirs. Because of his personality traits and seemingly impervious nature to biases, the value of the thoughts may be particularly significant because he is 91 and dying.

Hi muscleman, Not familiar with the specific instruments you mention but will offer the following comments: -it seems "money market funds" are very variable and one needs to look under the hood to see the composition of assets and some funds have an unusually high level of commercial paper which occasionally can surprise (on the downside). -these funds "break the buck" relatively frequently with unexpected bumps but sponsors typically "bail out" the temporary liquidity issue and it's no big deal. -what happened in 2008 with Lehman failing and with nobody knowing exactly what short term commercial paper was really worth (remember GE?) was highly unusual and could not last. Government intervention was quasi-automatic (even if nobody as far as I know had considered this possibility) as a failing money market meant basically going back to barter trading. With government backing, confidence came back and the buck was no longer broken. -with "risk-free" rates having gone up quite a bit in the last few months (3mo: 2,30% and 6mo: 2,46%) and if your opportunity cost for this category of your funds is 1,6%, why don't you go with plain vanilla stuff like SHV (minimal duration risk) or SHY (low duration risk)?

The value of rest appears to be underestimated. On a related note, in sports science, you may appreciate the concept of supercompensation that can only happen after an adequate amount of rest, regeneration and recovery. https://en.wikipedia.org/wiki/Supercompensation http://skitrax.com/supercompensation-what-is-it-good-for/ The best time for a competition or an investment decision is after a good night's sleep. In the building on previous work domain, I think Newton called this phenomenon standing on the shoulders of Giants.

Fascinating question and would add that future opportunities will come from what is available at a cheap price wherever that may be. Your question is difficult to answer because one has to rely on what is written between the lines and is subject to personal interpretations. I guess we all have, to varying degrees of formalness, a list of owned stocks and a watchlist tabulating the ratio of price to intrinsic value, that we update on a regular basis. For Mr. Buffett, this may be recorded in a book slipped into his drawer but may simply be in his brain. The 1979 annual report has useful comments (annual performance based on investments at cost and longer term performance OK with investments at market value) and more recently, Mr. Buffett has described his 2-column valuation "model". If interested, Mason Hawkins at Southeastern Asset Management periodically discusses this aspect when "monitoring" portfolios. As value investors, typically, our recorded price to intrinsic value ratio should be below one as we allocate entries and exits in our portfolios. At Berkshire, there is a long term mindset and the turnover is relatively low but, in the main and long-term wise, the market has recorded the closing gap between intrinsic value at acquisition and at every year-end reporting. All that to say that I suspect the price to intrinsic value ratio at Berkshire is below 1 but not by much, especially since it has grown so much and because of present circumstances. Wondering if Mr. Buffett makes adjustments or not, would say that the price to intrinsic value for marketable securities held may have gone down to some degree when capital constraints are felt and when maximum pessimism abounds (time for juicy returns, especially in the early days but also more recently, to a lesser extent) and may have come closer to one in different 180-degrees scenarios. However, I don't think Mr. Buffett needs to make adjustments, especially for the more recent period, for the following conceptual reason. My understanding is that the cash position at Berkshire tends to "naturally" increase when the price to intrinsic value gap decreases in BH portfolios. This happens because, despite cash being associated with an opportunity cost, I assume that Mr. Buffett considers that the temporal optionality value provided more than compensates for the opportunity cost and "naturally" allows to benefit from the widening gap opportunity occasionally seen. In summary, I think Mr. Buffett does not adjust for the fluctuations of the intrinsic value gap for the marketable securities in his portfolios because of his long term and opportunistic valuation approach using financial flexibilty as an input. As an aside, the recent "evolution" on the buyback stance may be related to evolving thoughts on the present opportunity cost of cash and the opportunity set (or absence thereof) on the horizon.

Hoping for a diversity of opinions and will keep the reply short. Your simplified answer is at the heart of the issue as I find that the rule for every lender, there must be a borrower has been blurred IMO by what, in the end, could be called black box economics, which is a layer of complexity above voodoo. Looking for perspective and I'm a slow learner as am still trying to fully understand the circumstances that led to the TARP program and maybe simply need to move on. All I know is that Mr. Powell and his team will try to move cautiously and without disruption and it is impossible to "predict" what will happen but it will certainly be interesting to watch. When everything is said and done, this may all come down to instinct. I suspect that George W. Bush, who often used instinct for decisions, did not go into the details of the the controversial bail out but, after the audience with the father, the son and the holy ghost, came out with the right solution: "If money doesn't loosen up, this sucker will go down". Under present circumstances, hard to figure out what he would say but it may have sounded like: "Like it or not, it's time to bite the bullet."

Don't want to derail this thread but what you mention is interesting (and debatable because your conclusions need a certain set of assumptions). So this post is about the net interest margin and will try to keep it in line with the spirit of the thread. The net interest margin at US banks has been relatively compressed since the sudden economic deterioration in 2007 but the trend seems to be changing. https://www.federalreserve.gov/econresdata/notes/feds-notes/2015/why-are-net-interest-margins-of-large-banks-so-compressed-20151005.html Overall, I understand that your comment means that rising rates will be a positive for lenders and if you look at the long term trend in rates, an interesting picture emerges. The curve does look like a smoothed version of the Treasury rate curves. https://fred.stlouisfed.org/series/USNIM Many factors involved and every cycle is different but, when you focus on certain aspects, the net interest margin, in general, seems to decrease when there is a tightening environment and typically increases after the curve has inverted and after the environment becomes accommodative again. This rise in margins typically happens during a period of a significant decrease in the volume of loans. https://www.richmondfed.org/publications/research/economic_brief/2016/eb_16-05 But the initial message of the thread is the possibility that Fed over-tightens and affects demand for the typical citizen. So far, in this cycle, uncharacteristically, Fed tightening has resulted in rising net interest margins but I wonder if more tightening, especially if sufficient to cause an inverted curve, will be beneficial to the net interest margin or the volume of loans. History seems to provide some potential answers. Here's a final link coming also from the Federal Reserve Bank of Richmond (this time from early 2007). The article talks about net interest margins, term spreads, chasing for yield and credit risk during inversion as well as the solidity of banks due to their robust levels of equity capital etc. The authors suggest vigilance which may always be a good idea afterall. https://www.richmondfed.org/-/media/richmondfedorg/publications/research/econ_focus/2007/spring/pdf/feature5.pdf

Fair enough. Individual securities need individual evaluations of merits. But this thread is about the FED and Mr. Buffett, in his usual apparent low level of interest, has said that the low level of interest has been fun to watch, adding: "QE is like watching a good movie, because I don’t know how it will end". Hmmm… Also, when evaluating an investment, a 1% increment from 2% to 3% does not have the same impact as from 8 to 9% (in terms of valuation, interest expense etc especially if higher leverage is in the picture). And when you're buying a security in the market or privately, you have been competing, for a few years during which there was a huge and incomplete experiment, with buyers using very low discount rates, having access to a large amount of cheap leverage and being driven by the hot potato effect that JimBowerman describes above. I wonder if the cash balance that has been rising at Berkshire has anything to do with the fact that is easier to buy than it is to sell (or wind down). I tend to think that Mr. Buffett is often on the right side of transactions. Don't you think? @JimBowerman The definition of the hot potato effect that you describe does not correspond to my understanding. You seem to imply that the 1,7 trillion injected by the FED through the QEs was transmitted to the economy because banks were induced to lend more. That does not seem to be the case and I understand that even the FED acknowledges that the real economy was not really affected, apart from the unverifiable comment that a worse depression was prevented, which is really something, if true. The hot potato effect that you describe seems to be related to the fact that, through an induced new equilibrium, the new money that found its way into the system eventually stayed at the banks but somehow encouraged chasing for yield behavior. Money did change hands but made it back to the banks as reserves but the result of the flow of new money was higher asset prices (wealth effect), especially in stocks, junk bonds, leveraged loans etc When the "excess" reserves are retired from the system, how do you call the hot potato effect? And what is the opposite of chasing for yield or wealth effect? I read some of your stuff and look forward to becoming more educated.

On curve inversion and a job well done. I’ve been critical and will continue to be, concerning various distortions and unintended consequences introduced in the market by the Federal Reserve and think that the interest rate “conundrum” has not been resolved. However, if animal spirits do lift growth and interest rates going forward in sustainable manner, such as suggested by the Fairfax team for instance, I take the pledge to openly recognize that I’m wrong. If that’s the case, I will also dissociate from the morbid fascination about what happened in Japan. First, some would say that flattening or inverted curves don’t matter and there was some interesting work that came out in 2006 suggesting that curve inversion no longer really mattered and, using Fisherian and Wicksellian concepts, that the curve was not inverted even if it was!? At this point, if long term rates don’t increase, the inverting curve will become inverted with the next short term hikes. Maybe, in a way, not that relevant for most investments, but useful concept when looking at something like the Bank of the Ozarks. Even if the underwriting culture at that bank was very strong, IMO the distorted interest rate market may have very well insidiously introduced a bias to underestimate the risk premiums and decisions to enter certain markets to an extent that credit mistakes have been made. When purely looking at reported numbers, this bank would constitute a good opportunity but, given the historical perspective and the tightening of the term spread which, if it continues, will invariably manifest the stress between borrowing short and lending long, the recent negative developments represent a leading indicator of things to come. Possibly cherry picking to some degree here but, when you look back at actual comments made by Mr. Greenspan (before the 1990, 2001 and 2007 recessions) and Mr. Bernanke, concerns about an inverting or inverted yield curve were put aside. Example (forecast vs foresight?): https://www.marketwatch.com/story/greenspan-discounts-flatter-yield-curve-as-warning-sign FWIW, here’s a recent, interesting and balanced study by the none other than the San Francisco Fed: https://www.frbsf.org/economic-research/files/el2018-20.pdf So what? When I was a young kid, my parents, sometimes tired of never ending questions, would send me to my grandfather who had been born before the 1913 Federal Reserve Act and who had no formal education. But he was one of the wisest man I’ve come to know and never answered questions in a conventional way. One day, looking at the sky, watching the V-shaped flocks of birds convincingly moving in a southern direction, after a typical run of questions, my grandfather explained some “principles”. First he said, “One swallow does not a summer make, nor one fine day; similarly one day or brief time of happiness does not make a person entirely happy" from which I understood that he meant that complex systems are complex, exact timing is difficult and false signals could lead one astray. Then he explained that Canadian geese, some time during the fall, migrate south. But why? My grandfather said I was lucky because, in the new era of Great Moderation (he may have said era of great abundance), I could get educated and hear from the masters as to why birds migrate but he also said that for him, winter coming meant that he had to prepare for survival (food supply reserved and preparation for the next year’s sowing) and that he did not need to understand why the birds were migrating. He just needed to know that no seasons were exactly the same, that occasionally birds, especially the younger ones, did not fly exactly in the right direction and that there were natural and deep-ingrained forces “telling” the birds when and where to go. The future is indeed unknowable and to each our own as we have to decide how to balance profits and protection but I wonder what my grandfather would say today. He always seemed to focus on the real and the enduring. It’s hard to be a contrarian when one “sees” a certain amount of collective foolishness but today, I look at the sky and I see tightening in a late cycle. I assume John has finished his book on cycles and wonder if I’m off-base here. Speaking of tightening and of a job well done and linking to what Cardboard opened with, and basically asking the question: Why suffer if we don’t have to? I read some interesting stuff today and will finish with a question. It’s from Horizon Kinetics Q3 2018. “The U.S. has $71.3 trillion of total debt, including everything from a car loan and credit cards to a U.S. Treasury Bond. If rates were to increase, across all instruments, by 1%, the additional debt service would be $713 billion. The U.S. consumes about 20 million barrels of oil a day. At roughly $70 a barrel, it costs $1.4 billion a day to pay for the oil, or $511 billion a year. So imagine, using the 1% increase in debt service as a reference point, if the country had to pay another $713 billion for its oil. That would be a 140% increase over what it is right now. That works out to an oil price of $168 a barrel.” Yields have been increasing across the board and there’s more in store. If gas prices at the pump would have gone to 5 bucks a gallon and were moving to about 8 bucks a gallon and more in such a short time, the 70’s oil shock induced consumer suffering would pale in comparison. Yet, in the context of a job well done, deleveraging, in the main, has not occurred and fiscal deficits are heading up without any sign of suffering. Why is that? There is a rare disease where some people don’t ever feel pain (those familiar with the Millenium movies will understand). Despite what first level thinking would suggest, people who never feel pain don’t do well. Unnecessary suffering is unnecessary but pain has to be felt. It’s unfortunate but it’s evolutionary.

You seem to want to add another mandate to the FED: to avoid an inverted yield curve? Isn't an inverting or inverted yield, if at all useful, only a symptom of an underlying problem and not a problem in itself? I understand that the FED has laid out a plan to gradually decrease its balance sheet over a few years by letting bonds mature and by not reinvesting the proceeds. Are you suggesting, as they are entering the second and most delicate part of the greatest (unorthodox and aggressive) monetary experiment of all times, that they suddenly unwind the humongous position that they have built since the financial Pearl Harbour? Interesting to consider the unwinding options and timeline, as tightening is being mentioned (and felt, see opening post), but the "normalization" process has only begun and lags are expected. Looking at what the Bank of the Ozarks reported today and compared to previous trend, its net interest margin has steadily decreased but not by much (even report an improving core spread) mostly because the asset side is mostly tied to variable rates but the the "tightening" is being felt as it is passed on to the borrower and aggregate loan growth has started to moderate already. Perhaps just a blip for the bank but we may already see the early manifestation of the tide going out (risk premium set too low, credit mistake) even if the "normalization" is just starting. Just to add, versus another part of the thread above, monetary and fiscal policy are two different animals but, for a while, the FED was, in a way, buying debt issued by the government (indirectly in the secondary market) and this paradigm will change as the FED will no longer be a net buyer of government debt at a time when the Treasury Department will need to offer an increasing amount of debt to the market. I wonder if they will go to the short or long end of the curve.

I agree that this is a short term long term question. The FED has started to reverse course but, in the overall scheme of things, would say that they are still accommodative. Wouldn't want to be in their shoes at this point. Guess also that they would easily revert to lowering interest rates at the first sign of distress which will provide other opportunities for interesting debates. Thinking back of previous chairmans, what Mr. Volcker did in the early 80's was certainly not popular and an argument could be made that a recession was "triggered" but, lo and behold, in a way, it set the stage for one of the most amazing bull market. There is another chairman that I admire: William McChesney Martin. Interesting to remember that when calls to have him go finally hit home, Mr. Buffett was planning on disbanding his partnership. https://fraser.stlouisfed.org/files/docs/historical/martin/20_09_19650610.pdf When somebody goes to the emergency room with a diabetic coma secondary to a sugar overdose, no questions asked, insulin is given and the life is saved. It's what happens after which is interesting as a largely preventable disease can be endured and in fact worsened by simply continuing on applying the same medicine. It's a question of perspective, different opinions are respected and maybe the point of view I describe can't stand prosperity but I think the punch bowl occasinally needs to be taken away. And IMO, this is such a time.

Thank you for the link handycap5. It was an interesting conversation and I hope that the BRK-led venture amounts to something. Mr. Gawande is a humble leader with conviction and I guess he is not the type to underestimate the challenge. Benjamin Friedman must himself turn in his grave if he sees the growing portion of GDP spent on healthcare and he did make a distinction between the oath and the man behind the oath. Going forward, we will need to continuously rebalance the tensions between the freedom for alternatives and the reliance on third party payments. The foreseeable future is fuzzy, as always, but I think health outcomes, for at least a while for the tapeworm to grow, will come down to a race between growing "system" productivity and diminishing returns on "scientific" inputs. All the hype around the big data and predictive analytics is really about gradual and evolutionary application of method where science meets humanity. Interesting to note that Mr. Gawande does not talk about increasing intricacies and opacity, he explains that we will try to "unknot the complexity". In my own humble on-the-ground experience, the most effective improvement projects were simple, automatic and "natural", irrespective of the degree of underlying complexity, insight or sophistication. The underlying design will continue to require human intelligence but the application of the design will increasingly require the assistance of artificial intelligence. Concerning incentives and changing people, I remember an episode where I was part of a group responsible, in a self-regulating type of environment, for adjustments in payment amounts (code) for listed procedures. There was a typing mistake and a rarely performed procedure became more rewarding financially. Guess what happened after the new list was disseminated. People, medical or otherwise, respond to incentives, good and bad. Concerning changing people and systems, nobody likes it to be told about the huge gap that exists between the assumed "performance" and actual results but Mr. Gawande sees himself as a bridge builder and Fortune favored the prepared mind. A relevant example is the integration of the thermometer into the "system". Historical example but highly enlightening. Just like the BRK-led projects to come, the iniatives may first be seen as threats but, before you know it, it's not the the people that will change the system but the system that will change the people. https://blogs.scientificamerican.com/observations/why-doctors-reject-tools-that-make-their-jobs-easier/ I'm long human intelligence since ignorance has reached the level of ineptitude.