SHDL

The number of shares repurchased doesn’t have to (and almost never does) equal the number of shares issued to employees as compensation. If fact you probably want to avoid investing in companies that do the sort of thing you listed while claiming to be returning capital to shareholders via buybacks... A company can just hold on to the repurchased shares as treasury stock or cancel them. Either way the number of shares outstanding goes down on a permanent basis and that makes each share represent greater ownership of the company.

Also, like the author of the LT3000 blog kind of alluded to, this could mean that we are in a great environment for value oriented investors who don’t mind a little stock price volatility.

I thought this was a very insightful explanation for some of the things that were discussed above: https://lt3000.blogspot.com/2019/09/a-duration-bubble-or-low-volatility.html

An interesting take on the US bond rally: https://www.wsj.com/articles/the-market-forces-that-propelled-a-massive-rally-in-long-bonds-11567426486?mod=hp_lead_pos4 It seems there was more to this than I thought.

Yeah, top-down approaches tend not to work very well from what I’ve observed. I get the strong impression that a lot of big pension funds operate with that kind of mindset too, with dismal results. It is also interesting that Druckenmiller, who is probably the most successful macro trader of all time, doesn’t go around broadcasting his trades all the time and sounds like he actually changes his mind about things quite frequently.

Yes I mostly agree. There are a few people like Buffett and Shiller who I think have been rather successful at reading macro trends, but it is interesting how their behavior contrasts with a lot of the big macro trader types you see on TV and elsewhere. Buffett has been quite emphatic about how the really big money is made by nailing the business prospects of individual companies rather than predicting macro events, and Shiller is on record saying that the problem with macro forecasting is that it is hard to make a career out of it because there are normally only a handful of opportunities to do it well in your entire life. I think both are on point.

This is actually something I wonder a bit about. My current thinking is that this is more likely to be a temporary situation than not, the reason being that normally when you have a shortage of something but a lot of demand for it, yes its price can go up like crazy at first but then over time the high price attracts new supply and that brings the price back down to earth. I don’t see why something similar cannot happen to things like, say, quality businesses via increased/improved entrepreneurship over time. That being said, it may take quite a long time for this type of “cycle” to fully play out. Today’s Bloomberg Odd Lots podcast was pretty interesting: https://www.bloomberg.com/news/articles/2019-09-02/why-one-of-the-oldest-investing-strategies-has-been-doing-terribly?srnd=premium The guest (Chris Meredith, Co-CIO of O'Shaughnessy Asset Management) talks about some similarities he sees in the business/investment environment today and the 1920s. In each era, he notes, seemingly expensive growth stocks hugely outperformed other stocks, and not because there was a stupid bubble but because the growth companies (GM, Sears, etc in the 1920s; FANGs and co. today) actually lived up to the market’s lofty expectations. He then notes that value investing started to make a comeback sometime around 1940-50 as other businesses gradually caught up with those industry leaders in terms of technology, and that we may be heading in that direction today. I think this somewhat relates to what was discussed above re: how the lofty valuations of great companies — even if they are fully justified — can gradually deflate over time as the supply of such companies increases through things like imitation, technology diffusion, and the invention of better alternatives by new entrants.

This is actually something I wonder a bit about. My current thinking is that this is more likely to be a temporary situation than not, the reason being that normally when you have a shortage of something but a lot of demand for it, yes its price can go up like crazy at first but then over time the high price attracts new supply and that brings the price back down to earth. I don’t see why something similar cannot happen to things like, say, quality businesses via increased/improved entrepreneurship over time. That being said, it may take quite a long time for this type of “cycle” to fully play out.

I think you’re right that a lot of cyclical things are trading at depressed multiples now, which is an indication that at least some recession risk is already priced in. But at the same time the major indexes are trading at high-ish multiples on earnings that appear quite elevated relative to things like GDP. So it’s a curious situation. If I were to guess, the active investors are making certain things cheaper than others while at the same time passive investors are preventing the index itself from meaningfully selling off. My personal strategy at the moment is to deal with the recession risk by reducing my total equity exposure and buying some long dated puts, and then not worry too much about cycles when picking my longs. That may or may not be optimal but I think it’s reasonably close. BRK makes sense to me as a long now because it’s cheap, the assets are solid (even though some are certainly cyclical), the capital structure is great, and I have basic confidence in the management.

RV’s are supposedly a good measure because strong RV sales indicate a lot of consumer confidence (since it is large outlay for those who tend to buy them and it’s totally discretionary ) as well as easy to obtain credit (most are bought on credit). I think boats are similar and their sales also have weakened recently. It's ok. He ignores all of the indicators to pick on the one that seems.most dubious on the surface...and yet, still agrees with the overall narrative To be clear I wasn’t picking on you. I apologize if I came across that way. I’m fully aware of the supporting data. I just find it funny for whatever reason. :)

Ah yes, RVs. Not sure how I forgot about those. They are supposedly one of the best recession predictors out there. Consumer spending is a key variable to monitor, as that is what seems to be holding the US economy up at the moment. I have the suspicion that it got a temporary boost over the last few quarters because those who were paying close attention to what Trump was up to (including me) front loaded their spending. If I'm right about this we are going to see a sharp drop in consumer spending over the next few quarters, with negative consequences.

Could you list some ? Yes, for starters we have the various PMI indexes. The recent numbers suggest that we are starting to see general economic weakness around the world. For North America specifically there are things like AAR rail traffic data, which have been meaningfully declining YoY for a while now. There are also some isolated reports that come in every now and then that focus on specific industries. Today there was a story in the WSJ about how new truck purchases are sharply declining. And then there is the inverted yield curve. I actually have mixed feelings about this one because it could well be caused by irrational speculation in the bond market and/or excessive easing by the ECB/BOJ. But still, it has a stellar track record as a recession forecaster, and, more importantly, its message is consistent with the other signals listed above.

Companies lose money, workers lose jobs, asset prices drop, everyone panics, governments try to save the day and end up making things worse, and Buffett goes shopping. But I have the feeling you already knew that... I think we’re seeing plenty of signs that this is already happening. The only question to me at this point is how bad is it going to get.

Also if you think 1-2% of GDP is trivial you may want to know that that is roughly how much nominal GDP declined YoY between 2008/9. Not enough to end the world of course but it will be noticeable.

My only hope is that this bizarre presidency one day inspires someone to write the best political thriller ever. cc: @netflix Done. https://www.amazon.com/dp/B01N1R9W4X/ref=dp-kindle-redirect?_encoding=UTF8&btkr=1 I have probably become a bit too desensitized by everything to be blown away by anything short of an insanely over the top fiction piece, but thanks. :)

I think you guys are right about how extremely low (or negative) interest rates can create problems by weakening the banking system. Another issue I think is that they can depress consumer spending by forcing people to save a lager portion of their paychecks so that they have enough savings when they retire. My take on this at the moment is that the ECB and BOJ are doing it wrong and that they should really start trying some version of helicopter money. (I suspect the ECB may be prohibited from doing so, but anyway.) Hopefully the Fed will avoid following their footsteps.

My only hope is that this bizarre presidency one day inspires someone to write the best political thriller ever. cc: @netflix

I tend to agree. Bonds are literally screaming recession and stocks are still bumping along like it's not a big deal. I wasn't old enough, or educated enough, to recall much of the events from 2000 and 2008 (other than I was the naive idiot buying banks, autos, and dry shippers in 2007/2008 ), but this seems crazy and I'm assuming is atypical. It's not so much a divergence in performance that bothers me, but the divergence in the narrative. Bonds are saying there's no need to be concerned with inflation and/or GDP growth is going to be muted for the next 30-years. Stocks plucking along at high P/Es with near record margins suggests equity markets see no danger to nominal GDP growth/inflation. I know I've sounded like a broken record since 2016, but my concern is contracting multiples on top of contracting earnings. Not hard to get a 60% decline in such a scenario. Congrats to Cigarbutt and others for the successful trade. I agree that it is probably a good idea to avoid overplaying this one. Regarding the divergence between the bond and stock markets, I think the general consensus among macro traders has long been that the bond market tends to be the better forecaster. This tendency may have strengthened in recent years by the rise of algorithmic trading and passive investing in equity markets. I personally think the big long term risk for equities in general now is political, i.e., changes in regulations/taxes/etc that make businesses much less profitable. We’re already seeing all sorts of signs pointing in that direction. This is also the worst type of risk for investors IMO because it is the kind of thing that can potentially cause businesses to gradually lose their value over the course of many years and not recover.

I think that losing a big customer is bad for business even if you have other customers. Also, the tariffs they impose as “retaliation” increases their cost of living.

The bond market is screaming so loudly all day that I cannot hear whatever it is that the stonk market is whispering. :P

One key point re: this trade war is that China has something like a dictatorship while we do not. That gives their political leaders an upper hand in this game of chicken because they can in principle keep fighting (and let their people suffer) without worrying about being voted out of office. This is just ill conceived at so many levels.

Well, thank goodness the Fed isn’t on board. https://www.wsj.com/articles/former-fed-official-says-central-bank-should-act-to-thwart-trumps-re-election-11566926950?mod=hp_listb_pos3

This is probably a good thread for this opinion piece by the former head of the NY Fed: https://www.bloomberg.com/opinion/articles/2019-08-27/the-fed-shouldn-t-enable-donald-trump?srnd=premium Crazy stuff. I think he's trying to help but my sense is that this will only make matters worse.

I’m not interested in getting into a political debate, but one observation is that these arguments for protectionism have a lot in common with how various regulations — particularly around labor issues that make it very difficult to let go of employees — are usually justified in places like Western Europe and Japan. I personally think those regulations have been serious drags on economic growth and business profitability in those regions and that if the current political climate persists in the US we may well be heading in that direction.

I agree with the above. There is way more than just a little market volatility at stake here. And for what? The risk/reward here is terrible IMO.