Cigarbutt

From the Big Short (Micheal Lewis): "And so in January 2007, [ ... ], Michael Burry sat down to explain to his investors how, in a year when the S&P had risen by more than 10 percent, he had lost 18.4 percent. A person who had had money with him from the beginning would have enjoyed gains of 186 percent over those six years, compared to 10.13 percent for the S&P 500 Index, but Burry's long-term success was no longer relevant. He was now being judged monthly. "The year just completed was one in which I underperformed nearly all my peers and friends by, variably, thirty or forty percentage points," he wrote. "A money manager does not go from being a near nobody to being nearly universally applauded to being nearly universally vilified without some effect." The effect, he went on to demonstrate, was to make him ever more certain that the entire financial world was wrong and he was right. "I have always believed that a single talented analyst, working very hard, can cover an amazing amount of investment landscape, and this belief remains unchallenged in my mind.""

Opinion: This is not exactly what Mr. Pettis suggests.. What a slowing GDP growth may mean: -yes maybe a 'successful' centrally-driven transformation to a more 'productive' phase but also -the possible realization of slower (perhaps much slower) growth ahead and the amortization of bezzle. ----- In China (much more now than in other developing and developed countries), GDP numbers are an input and not an output outcome. This has given rise to an amazing catch-up phase but diminishing returns have started to trickle down. For the last few years (especially since GFC), debt levels have grown faster (and accelerating despite central efforts to curb debt growth and to boost 'productive' growth) than GDP and productivity measures are going down. China is still in the catch-up phase but is already surpassing all developed countries (except Japan): Demography is destiny (not quite) and China interestingly has caught up and more in that respect and this will be interesting to watch. Baby bust: China’s looming demographic disaster | The Spectator Diminishing productivity linked to higher debt levels and an aging population is the story of our times though. And China will be leading the way in a command-and-control fashion.

AFAIK, the real price for a Big Mac has remained stable (or the nominal price may have outpaced inflation slightly; have Big Macs become smaller or is it me growing up?) since the 60s (45 cents in the mid 60s). Of course, the value in MCD has been growth in sales (and scale), not necessarily growth in margins through pricing power. The value in See's was potentially untapped pricing power. What was the origin of this pricing power? The usual ingredients and likely the perceived 'quality' and consistency of the product. Relative scarcity may have played a role in the wholesale decision. When looking at available numbers (more specific data was likely available around the 1972 purchase) the price of See's one pound of chocolate went from 0.50 cents around 1935 to 1.85$ in 1972, for a CAGR of 3.6% vs 3.1% for CPI. In 1972, one did not necessarily need to understand specifically the underlying moat and pricing power as it had been historically established. A difference of 0.5% doesn't sound like much but this excess pricing power leads to compounding benefits that flow directly to the bottom line (and return on capital numbers). From 1935 to 1972, this small difference in excess pricing resulted in an excess of 20% of extra nominal sales and extra nominal net profits. From 1972 to 1984, room for more pricing power was explored (trial and error may be the only way to find out). The price per pound of chocolate grew (CAGR) at 9.5% versus 7.9% for CPI. Without this excess pricing being exercised, the price per pound would have ended up at 4.61 instead of 5.49 as reported. 5.49 being 20% higher than 4.61, from 1972-84, See's exploited its pricing power over 12 years instead of over 37 years after the great depression.* For those interested (educated guesses from various reported sources): CAGR See's price per pound of chocolate from 1984 to 2022: 4.3% CPI from 1984 to 2022: 2.8% Of course, this can't go on forever as eventually See's may occupy the full 5% share of disposable income for food away from home. *Purists will signal that cocoa price behaved like a typical commodity in the 70s but cocoa input price had come down in 1984 to some degree and the cocoa's share of the price for the pound of chocolate is likely around 10% of total price so..

Interesting. For perspective about what's going on for real concerning wages: The consumer flush with cash is proving to be mostly a mirage when looking at developing patterns (data below up to May, credit card spending by groups and housing price change according to sub-groups): The question about "bottom" will depend on how the bipartisan-debt-driven secular trickle down will be met by growing percolating up of bottom discomfort (and sentiment). The Friedman helicopter money experiment has now been tried in a way and numbers show that people have more money but, on a net basis, real people are finding out that they have less purchasing power.

Interesting. That's also what this potential geographical arbitrage graph/data seems to show: Three children of mine will likely buy a house within 3 to 7 years and there's this new savings account that's being allowed with amazing tax-protected potential for first time buyers. if this time is not different, this opportunity looks almost too good to be true. Collectively people vote with their feet but perhaps, individually, should put their money where their mouth is. When asked, i suggested to focus on their individual incomes and the rest should follow.

A bit of perspective here? 'Our' bank had looked into this recently: Home Equity Extraction and Household Spending in Canada - Bank of Canada and described the "collateral effect". However, 1-Using a longer term perspective, this is not so impressive especially compared to pre-GFC trends (from Calculated Risk): 2-Refinancings and Helocs account for a relative drop in the bucket in relation to the steep increase in deposits (deposits went up by 4.6T since March 2020) which is mostly explained (about 80-85% since March 2020) by large scale QE (asset swap in accounts, 'new' dollars for bonds) and by large scale acquisition of US government debt by commercial banks ('new dollar' in one private account vs the government debt issued and held as asset by bank). 3-A large part of this debt (and related new cash) has been used for residential renovation (as the Bank of Canada report suggests) and as this data shows in a significant way since March 2020: ----- i'm not saying this trend will not impact consumption as a separate and independent issue, just saying that the impact will be material if it's a symptom of a larger disease.

Your view is appreciated as you tend to be mostly right on most topics most of the time, a perspective which complements my tendency to be mostly wrong on most topics most of the time. But i would bring some nuance to the above (rising inflation and negative P+C insurers' profitability). Disclosure: this is not an endorsement about sustainable inflation at this point; back on topic---) Rising inflation will tend to mean rising yields and, typically insurers invest in safe fixed income, so, with a lag perhaps, investment returns from float will tend to at least partially mitigate poorer underwriting results from inflation, especially since most insurers tend to practice duration matching (payout curves with fixed income maturities) and tend to hold fixed income to maturity. But insurers will hurt with lasting inflation as the underwriting side may take time to catch up. A lot has been said about the inflation in the 70s, how insurers fared badly and how Mr. Buffett allocated poor results to 'inflation'. This shows investment returns for insurers which tended to rise with fixed income yields (return on common stocks was more variable but is blunted in the total portfolio return curve; Berkshire was again an outlier with higher common stock allocation and wildly positive excess returns on that part of the float portfolio). This shows the underwriting returns for insurers which don't reflect adequate poor investment return but more poor underwriting not mitigated by higher investment returns. Again, the threat of an adverse event like inflation has negative implications but could correspond to an opportunity ie buying Geico in the late 70s when inflated reserve payments seemed to overcome Geico's intrinsic capacity to pay for them with a declining premium base..

Funny. The topic is social inflation (already mentioned by Mr. Buffett in 1977) and is worth pursuing here? RedLion is right vs a BRK investment and social inflation: unless unexpected, insurance subs simply have to adapt. ----- Still. To make a link from video above to social inflation, there's been developing case law for wrongful pregnancies ie getting pregnant as a result of another party's negligence. Social inflation has two components (opinion): a normal evolution according to social norms and an unproductive aspect. For 'normal' children, it's been established that compensation should not be considered although recently there have been signs (raising children can be expensive propositions well above government 'benefits') that a certain degree of court openness is on the way. For children with disabilities or special needs however, there's been legal developments in favor of larger payouts, which kinda makes sense (opinion). The problem however is when Geico may be on the hook for back seat love action. ----- Here's an Geico example which does not even cover the potential underlying material absence of objective correlation between the real physical impairment and 'damages'. GEICO Must Pay $2.7M to Settle Claim After Rejecting $30,000 Payout (carriermanagement.com) Geico has produced poor underwriting results for some time and there are many factors apart from social inflation but they will eventually 'benefit' from inflated loss ratios as they remain well positioned to pass through cost increases, eventually. Underlying Q4'21 underwriting results rank among GEICO's worst this century | S&P Global Market Intelligence (spglobal.com) ----- Still. To make money, companies need a fairly predictable landscape and a solid rule-of-law framework. Also, the driving forces behind the social inflation (gaining speed in the last 10 years) include widening inequality, spreading resentment and well entrenched anti-establishment (including big business) sentiment. Courts' decisions, even if often grotesque in appearance, are more a symptom than a disease. ----- Back to BRK financial news.

The meaning (message?) is not clear. Can you elaborate?

Funny you mention that. Just a few minutes ago, i read this (from a specialized legal publication medium, MSN), saw a potential link with social inflation and decided not to put it here to avoid thread derailment. Geico may have to pay $5.2 million to woman who claims she contracted STD in a car insured by the company (msn.com) ----- There is something broken in the US legal system but am confident it's more a relative low in your typical but unusual cycles. ----- Personal note For about 20 years, as a peripheral and marginal sideline activity, i provided expert testimony and participated in administrative decisions. The typical case meant to appear in court and find out, on the spot, who would be responsible for the hearing and decision. That designation was often the determinant factor in the outcome, sometimes almost irrespective of underlying merit and forced parties to settle immediately, before appearing. This meant for me full payment and release, allowing time to prepare for the next case and this single day honorarium equivalent was almost enough to bring the family (to Spain a few times) on vacation for a few weeks. In this Montana specific case, i'd say NICO had to to play a similar strategy: If you can't beat them, join them (and share the bill). ----- Back to relevant news.

Interesting. Thank you for sharing here. The largest reinsurer on the hook is TIG, an FFH's subsidiary.. ----- Anything can happen but it's likely that National Indemnity will get paid by reinsurers. NICO has already paid 16.1M in 2009 (with the intention to recuperate the sum). The final amount due went from 43.6M in 2011 to 97.8M in 2019 to 157.2M last April. That's what they mean by 'social' inflation.. Montana obtained policies from NICO during 1973-5 and started to receive asbestos-related lawsuits in the early 2000s and first notified NICO in 2002. NICO (opinion) appropriately denied coverage because Montana knew about toxic levels of asbestos since 1942 and, in 21 different occasions after inspections over the years, failed to take action. The strategy NICO used was to argue that Montana had failed to share this info when the policies were contracted, that it should only be responsible for the years during the policies were written on a pro-rata basis coverage (and not on a cumulative basis) and chose a specific definition of "occurrence" that was reasonable and limited $ coverage. The courts, as the issues moved up, decided that NICO had failed to assist Montana in its defense against litigants (potential link with the reinsurers' refusal to pay) and was therefore responsible for damages. The late 2021 Montana Supreme Court decision was particularly acute against NICO vs its arguments as the decisions from lower courts were maintained and even expanded and the "occurrence" definition was remanded to lower courts for factual and technical evaluation but with guidance. Ouch. A major guide for the contractual relationship between the insurer and the reinsurer is the follow-the-fortunes doctrine which is related to the follow-the-settlements doctrine. Basically, unless fraud, bad faith or obvious behavior only to maximize reinsurance recovery is present, the right to 'discovery' is limited and reinsurers are expected to defer to the reinsured parties for both claims handling and allocation of damages and settlements. In this case, NICO chose a reasonable strategy that did not work out and the allocation/settlement scheme has been pretty much imposed on them by the courts. TIG and the rest will likely have to pay, with interest. Clearwater, another FFH's sub involved in toxic runoff helped to build case law: Lexington Ins. Co. v. Clearwater Ins. Co. (Mass. Sup. Ct. July 26, 2011). Follow-the-fortunes and follow-the-settlements binds a reinsurer to post-settlement allocations absent gross negligence or bad faith on the part of the cedent.

^The Gateway South project is interesting on many levels. The construction is scheduled to start soon and the transmission infrastructure should be operational in 2024. From the linked regulatory document (showing the work done by PacifiCorp to establish the project's value in terms of need to meet new demand and increased reliability), the cost of the project is 2.07B (2.4B with Gateway West segment, page 49). The document also contains technical aspects and financial numbers. Gateway_South_Transmission_Project_CPCN_Application.pdf (rockymountainpower.net) The total revenue requirement will be based, as usual with the usual local jurisdictional twists, on the rate base (assets - accumulated depreciation) (pages 50-1).

"There should be asterisks next to everything humans say. No?*

Interesting. And potentially relevant bcoz if inequality is a 'thing', the typical course of human events usually implies some kind of forced redistribution of a smaller pie. Can this be discussed here without reverting to locker room talk? What you refer to is the time frame bias and it's significant (climate, investment performance etc). What is the bias whereby all causation is linked to a single variable when the variable is, in fact, only part of a confluence of other significant variables?* ----- Inequality has become a 'thing' in the sense that most data show it convincingly well and in the framework of a potential to a return to the mean and of the fact that too much of a good thing is not good. The following shows the top 1%'s share of income (just an example that matches the top 5%, top 20%, top 40% long term trends, pre or post 'transfers'; using wealth or income etc etc; trend has continued and even accelerated after 2019): For some reasons, the 1945-75 time 'frame' was associated with high (inclusive, 'shared' or whatever you want to call it) growth and high productivity. There are many factors driving inequality, including main drivers and possibly unknown or undefined circumstances but low rates, as a single variable, do not explain inequality trends. There is some evidence that the inequality derived form quite fragmented data during the roaring 20s may have been, in fact, slightly exaggerated. From an excellent 2000 paper, there was the following quote, showing how essentially all inequality that occurred during the Coolidge 'prosperity' years happened as a result of capital gains: More recently, capital gains and other equity-related income have played a role but straight compensation has also become a key ingredient. i would offer the opinion that, apart from low interest rates, polarization, automation, globalization and a generally lower level of dynamism (temporary) have been the main drivers. Now what to do? Whatever the case, nature will take its course (eventually).

If so inclined, could you elaborate on two questions: 1-Do you think Ben Graham's experience (versus negative market action) is relevant now? 2-What makes you say that one of the main issues was having no dry powder? i was under the impression that his message was that one should avoid a situation of forced selling in the context of leverage?

Interesting comment within an interesting debate (sleep vs else) and there are investment implications? Just like with any decisions (ie investments (also macro topics where this is playing out now with the 'inflation' debate)), one has to extract the key ingredients (for or against an expected outcome) and come up with an informed guess: Interestingly, many 'experts' may arbitrarily choose and put emphasis on some inputs and the 'authority' opinions, as formulated, may hide the real underlying uncertainty, potentially giving rise to unpopular contrarian opportunities. ----- A lot of what Mr. Guzey describes is reasonable but it seems he is pulling on some arguments to a disproportionate degree. Mr. Walker's approach is very reasonable but there is a tendency to stretch conclusions to a very unusual degree, especially when dealing with the correlation/causation aspect. One of the issues when dealing with Mr. Walker's themes is that he happens to be riding a 'popular' trend and people who criticize his conclusions may look like losers and suffer from the Javert paradox. One of the themes developed by Mr. Walker is the idea that poor sleep patterns early in life may lead to earlier cognitive decline (and Alzheimer's etc) later on, a theme plagued by the correlation-causality issue and even the possibility of reverse causality (likely people who develop early and abnormal cognitive decline may be programmed already to have poorer sleep patterns along the way). If interested, there's this recent publication: Subcortical Neuronal Correlates of Sleep in Neurodegenerative Diseases | Ophthalmology | JAMA Neurology | JAMA Network It's often thought that people suffering from cognitive decline have their evolution negatively impacted by poor sleep (common sense) and an environment for good sleep should be privileged but the work suggests that the people who have cognitive decline may have an associated and pre-existing issue with neurons that are networked in a way to promote wakefulness. This study was especially interesting for me (i've been quite involved with my mother-in-law who is reaching later stages of Alzheimer's) as there is clearly a sleepiness problem in the morning (which seems to be more an inability to wake up, sort of, than as a result of a poor night's sleep). ----- Anyways, this was mostly to underline the interesting level of humility that you shared in your post, a phenomenon which is more and more on the brink of extinction (including and especially in 'social' media discussions).

^Thanks for sharing. The reported results are indeed very strong. Higher AM Best ratings may come but they are mono-line and their float portfolio is positioned in a way to cause rating agencies to move (too?) cautiously. i've followed (and been involved with) workers comp for more than 20 years and current conditions are quite unusual. If interested: COVID-19 rebound lifts workers' comp funds to highest premium growth in years | S&P Global Market Intelligence (spglobal.com) "Private market carriers appear poised to post a workers' comp combined ratio of less than 100% for an eighth straight calendar year. Their calendar-year combined ratios exceeded 100% 17 times in an 18-year stretch from 1996 through 2013." In pseudoscientific circles, there's a biorhythm concept of three concurrent cycles: physical, emotional and intellectual. There are certain periods where all cycles coincide (peak or nadir). Wintaai is doing great but if one believes in the possibility of concurrent cycles, it's hard to (retrospectively) imagine a more favorable confluence of circumstances for present conditions.

Recently spglobal came out with this picture, regarding absolute top performers for reserve redundancy: Fairfax, which is not US-listed on an exchange, did not make it to the list but they reported 355.6(USD,M) favorable development in operating subs in 2021. For FFH however, one has to reasonably deduct the run-off component and, in 2021, overall net favorable reserve development was 124.1 (USD,M). At any rate, FFH is now in good company with a durable conservative reserve redundancy profile. Overall for P&C (re)insurers in the US, 2021 will likely be the 16th year with net prior-year reserve releases, a situation not seen in modern times and likely to persist as the hard market is likely to kick in and to compensate for whatever possible relative adverse development from older years. This time is different? Since 2017, FFH's trend in overall net favorable reserve development has matched the industry's trends: 2017: 454.6 2018: 580.4 2019: 329.1 2020: 322.3 2021: 124.1

^ What you describe as « incorrect » may simply be a matter of perspective or even accrual. If i send you money electronically tonight, new money is created in your account until the money amount is actually accrued in my account tomorrow. When government spends money, there may be an accrual component but that money was/is/will be “absorbed” from a private market participant’s purchasing power. At least up to now, somebody needs to buy those bonds. During some of the previous hyperinflation episodes (extreme example used for illustration), such as the Weimar episode (compared to milder contemporary inflation forms in France, England and the US who relied respectively more on taxes , debt financing and less on money printing), government deficits were met very little by taxes and debt financing and almost exclusively by discounting bonds at the central bank in exchange for new cash to be spent with the obvious market recognition that the central bank bonds would never be retired. Since the GFC and especially since March 2020, a lot of the government bonds (which absorbed private purchasing power when issued) ended up on commercial banks’ balance sheets. This is effectively the same as if commercial banks directly financed the government ie by creating this bond, the cash that had been absorbed from private hands is injected back into consumer circulation (as a new deposit). When commercial banks effectively and directly finance the government, deposits are created the same way as if the central bank had discounted those bonds... Again using an extreme example, let’s say private commercial banks finance 100% of the government deficit which becomes large, then broad money growth becomes decoupled from underlying economic activity and becomes aligned with government deficits, à la Weimar. It’s been tried before, it’s a slippery slope and my bet is that, somehow, this will be averted but who knows? Concrete example now. Let’s say I lose my job and need to receive employment benefits. Let’s say 100CDN. The government goes into deficit and sends me a check. With accrual, we know that someone, let’s say wabuffo needs to buy a government bond in order to finance my employment benefit. No new private asset created as the government simply acted as an intermediate between wabuffo and me. wabuffo could have sent the money directly (do you want my bank account info for a transfer? ). Now let’s say Metabank buys the government bond from wabuffo by crediting his account with cash. I now have 100CDN in my account and wabuffo has 100CDN in his account. If it’s not private money creation (or net financial asset creation), then what is it? MMT is a lot more than overt government debt financing but the way commercial banks are expanding their balance sheets for government debt securities is an effective equivalent to overt debt financing. Looking to improve my understanding here.

Thank you for this thread. The topic has been lingering and the thought for a post was formed during my 17 km run today. Entering MMT may not be a binary phenomenon. 'We' may have entered the vicinity of MMT for a while especially since the GFC and more recently. With QE, money is sort of created from the asset swap but it's matched with inside money deposited at the Fed (liability) as reserves and the operation is still understood to be temporary (ie to be reversed). Also, QE has not been associated with consumer inflation (it may have prevented some consumer deflation?) but has clearly fed into asset inflation (opinion, as money 'trapped' in the financial system). QE is not MMT but it may conceptually be an intermediate step especially if the short term definition of the program becomes more permanent (there's nothing more permanent than a temporary gov****ent program). In parallel however, there's been a development (not much talked about or discussed it seems) since the GFC and accelerating recently whereby US commercial banks have expanded their balance sheets by buying US government debt at a much higher pace (and accelerating) than GDP growth, which effectively is the equivalent of direct government financing or of overt monetary policy that becomes fiscal policy. The bank creates an asset (government debt) and simultaneously creates a matching liability deposit, ie new M2 money that ends up in private bank accounts, ready to be spent. The following link discusses that aspect from a concrete balance sheet perspective. Money Creation: Misconceptions: Government Spending Creates Money by Alexander Pierre Faure :: SSRN A fascinating aspect (if one accepts this concept) is that the Fed-Treasury have found a way to perform the effective equivalent of MMT without stating the objective and obviously circumventing the Federal Reserve Act. Also, if one accepts this 'model', it's interesting to note that this version of MMT is sort of failing because consumer inflation took off significantly (level and duration) way before full potential employment and full use of resources to their potential. An argument could be made that the inflation is not well tolerated by the US masses (real income less disappearing transfers) and the inflation is being exported (given size of US 'stimulus', record negative trade balance and international reserve status) to nations where the CPI-essentials (food, fuel and rent) has the potential to hurt even more. The following is a graphic construction (illustration) adjusted at zero around 2000 to show trends. The Treasury-Agency held is used as a proxy for the phenomenon described above. Of course, if the above makes any sense, the interesting question is what's coming next..

Apologies for the lack of clarity. The 10.0% coupon for Brit was for the initial OMERS' transaction. Disclosure upon transaction announcement is limited and the coupon (and reimbursement of principal) can only be reconstructed retrospectively looking at the separate disclosures eventually released by the relevant subsidiary (annual reports etc). For the recent Brit transaction, it will likely be possible to reconstruct the missing variables over the course of 2022 and beyond. Given the general movements in rates, FFH's credit spread and growing level of confidence (OMERS' point of view), i'd assume the most recent coupon to be around 8% for the 2021 Brit 'deal'?

The 'preferred' share 'coupon' is 10.00% for Brit minority ownership. The 'preferred' share 'coupon' is 8.00% for Allied World (126.4M per year on initial par value of third parties of 1580.0M).

Not as much a 'lesson' as a teaching moment for me. It felt as though a more material way to protect from reserve risk with covers and transfers was indicated during the 2017-9 period when it was felt that there were significant reserve deficiencies building in many lines, including casualty catastrophe (those developing trends can be a bummer; asbestos etc). But across the industry and, similarly (and relatively better) for FFH, these reserve deficiencies have not occurred, at least so far, and even if were to occur at this point, the solidly priced recent hard market period would likely buffer such trends. One needs to have an open mind and i was wrong about that (we had exchanged about this topic some time back). The following (offering of reserve risk mitigating products) explained that perspective: affiliates_maf_0319_3_lpts_and_adcs_for_risk_mgmt_dustin_loeffler.pdf (casact.org) Having said that, FFH was careful with rising premiums during that specific period by keeping a relatively low level of retention, which, in retrospect, appears to have been the right strategy in that part of the underwriting cycle. ----- Along the same conceptual line, FFH has decided to deal with interest risk in its own specific way and they may be right once again?

Yes, that's the fast and easy way to do it and likely works fine in most circumstances. With share-based compensation, there are potentially many valuation issues including timing issues. When shares move from the company to the employee, to calculate the compensation cost, one has to wonder if shares had been bought back before, are being bought back concurrently or will be bought back later. At least, when cash settled, you know that shares are being bought back concurrently and the tax-withholding-part of the share-based compensation is basically a cash bonus paid upon vesting.

Opinion: these look like operating decisions which are not material in the grand scheme of things. It's an exchange of reserves for premiums with a time value component and the buyers of reserves think that they can make a larger profit than the sellers, in this case Fairfax. It's likely tied to older business lines in run-off or semi run-off; FFH likely sells a small profit opportunity but gets a cap on adverse development on already incurred claims. These transactions can have small effects on statutory capital but that doesn't look like a primary reason in these specific cases. These are similar (in substance) to adverse development covers that FFH was fond of (example: the Swiss Re cover (remember those days?)) before finite reinsurance issues surfaced in the early 2000s.