SharperDingaan

This is 2023, not 1993; the banking thing is just getting started. This is the age of social media, crypto, 'bots and viral growth/decay. Volatility is materially higher as impacts that used to take days to spread, now take hours. Crypto is full of black swans, the ecosystem is really a global network 'too big to fail', and any one of these swans is severely disruptive. Regulation is reactive, messy, and not getting any better. There's no need to rush. Example: There are some who believe that simply because they asked SVB (on Friday) to wire their money elsewhere, the wire will be honoured. There are others who recognize that if the money hadn't left SVB during the day on Friday, you're now just an unsecured creditor (above the 250K deposit insurance limit). A crypto stable coin had USD 3.3 billion on deposit, it has had to significantly 'break the buck', and founders are desperately putting up their own capital - praying they can avoid a run. At least 2 other lessor but better known stable coin are in similar straits .... As the coins run off the collateral USD paper has to be sold. However with supply flooding the market across most terms, price has to immediately fall and yields immediately rise. If the yield curve is not to rise abruptly the fed has to step in as buyer of last resort - following which there will not be any future rate hikes for a while. The media screams panic, the financial sector cries 'uncle', but 2-3 months out? ... the broader economy actually does pretty well. A good 'blow-up', and there ain't going to be anywhere near as many obstacles to getting inflation down. SD

Stable coins are 'de-pegging' - ie: 'breaking the buck', in the Asset Backed Securities world. https://cryptonews.com/news/how-usdc-stablecoin-depegging-could-break-many-crypto-firms-but-bitcoin-will-stronger.htm Crypto is a very inter-connected industry; lots of loose cannon rolling around in the hold isn't good for anyone. Notable is that Tether (significant Chinese support) is trading above its peg at 1.01 following their unusual news release on friday https://tether.to/en/more-outdated-allegations-from-the-wsj It would appear that some decisions have been made ... SD

SVB blew up because a ALM mismatch, ran out of liquidity. Thousands of companies all across NA routinely do the same thing, and we gladly pay their treasurers and bond managers to do it - FFH amongst them. It can be extremely profitable and in a variety of ways, but ONLY if you NEVER run out of liquidity, IN AN ORDINARY market. A great many companies are highly dependent on an ordinary market remaining in place; one of the most dependent, being any company taking consumer paper. Consumer paper vs treasuries backs the liabilities, the market is a lot shallower than the treasury market, and the liquidation discount a lot higher. All else equal, the widespread securitization of consumer paper takes a dive as ABS sell for less. Tether mechanics have long been suspect, but so long as those treasuries were there at the custodian, and the custodian could verify it ...... everything was good. One has to think that folks are now looking very closely at how much liquidity Tether actually has, before they are forced to sell down those treasuries en mass. One also has to think that the US Fed would prefer Tether to fail, versus the consumer paper/ABS market. The good news? Nothing will reduce inflation faster than both a simultaneous chill on consumer paper, and a treasurers ability to mismatch ALM. Most would expect that we finally start to see a normal yield curve again. All good. SD

They do better as the product is sold in USD, and production costs are in CAD. It also stokes M&A as CAD companies become cheaper in USD terms. All good SD

Nothing changes for you until you get to the end of the mortgage 4 years from now, at which point you will be refinance the balance with a new mortgage at whatever the rate is at that time. If at that time, both the mortgage balance and remaining amortization term remained unchanged, your mortgage payment will be lower if interest rates fall. Now assume there are 1.2T of 5 yr (60 mo) mortgages outstanding, all at higher rates that in the market today. At an even distribution roughly 200M (1.2B/60) of these mortgages will reset every month, at a lower interest rate. If the o/s mortgage balance and remaining amortization period remained the same, there would be a lower payment every month for the next 60 months. The reality of course is that mortgage balances and amortization terms will be shorter, and some of the mortgages will reset at rates higher than they were previously. That has to be modelled. SD

'So you assertion about "instantly lower mortgage payment" is only valid if central bank lower rates and it applies to variable-rate mortgage.' Canadian mortgages are primarily priced off the 5-yr Canada bond rate, and 'reset' every 5 years or less; dependent upon the agreed term. The 5 yr fixed-rate mortgage just prices at a higher premium to the Canada bond than the 5 yr variable mortgage does. Alternatively, a HELOC will typically price at the T-Bill rate plus a spread, and reset every time there is a significant change in rate. Agreed all variable and HELOC payments instantly drop as the BoC lowers rates. However the payment on ALL MATURING, fixed rate mortgage amortizations ALSO instantly drops as the BoC lowers rates. 1/60 of all 5 year fixed rate mortgages, 1/48 of all 4 year, 1/36 of all 3 year, 1/24 of all 2 year, 1/12 of all 1 year. And that is just the amount THIS month ...... it ALSO repeats every month until the end of the mortgage term. A fixed rate mortgage may reset at a higher rate than it currently has, but it is still going to reset at a rate lower than it would have been at before the BoC reduced rates. The modeling needs to be more sophisticated, than simply using a duration x bp change x o/s principal. SD

The reality is that tech drives to full automation and uses price to get there, whereas people are social. Where I see automation, I deliberately use the cashier and deliberately pay using a credit card - to inflict as much cost as possible. Whereas in a small mom/pop with the kids behind the till, I will deliberately do the impulse buy and pay in cash wherever I can - to reduce cost as much as possible. Just one person doing this, is no big deal. But scale it up in the thousands, and it bites. The social over robotics. SD

Lot of grocers do local delivery for a $5-10 fee. Similar to instacart, but groceries at the store price, and delivered to your door at a pre-set time - even when it is in the middle of a snow/ice storm. Still seen as a 'convenience' by many, but the real market is the elderly/infirm aging in place at home. Lot different to the Uber Eats, or DoorDash model. Cashiers cost, and their real value is security. Live in a rich neighborhood and there are few cashiers, simply because customers don't steal enough! Customers simply check out their own stuff, and the cost of their theft/hour is less than the cost of a cashier per hour. Paying someone to just scan goods has zero value add. All that is really needed is a warehouse on cheap land, a good on-line portal, robotic loaders/sorters to unload/stack/load, a reliable fleet of electric delivery vans, a roof full of solar panels, and the odd windmills. Charge an average 20% less for everything, keep a small quantity of manual labor on hand for resilience, and ideally don't permit any customer pickups or in-store shopping as well. Combine bigger players together, save 35% and give back 20% in discounts. SD

Look around you, people are buying smaller quantities and less of the meats as inflation raises the price of groceries. There isn't the budget to just pay more for everything, so you pay the same as you were and just take home more 'no name' brands, in smaller packages. Minimal change in revenue. SNAP payments aren't going to fall much from Covid lockdown levels, if only because there are now both more recipients and inflated costs. As long as you can qualify, SNAP stamps can replace grocery spend, freeing cash up to pay for higher rent and utilities, etc. Grocery stores rely on size, and the net addition of new stores. The bigger the store the cheaper the rent, and the greater the grocers collective buying power. But when everyone is now big, the solution is consolidation into bigger still and further out of town. Costco's 4-5x current size, and customers picking directly from the warehouse pallet. A Whole Foods continues to do well. Their custom is largely price inelastic, and just buys $150/month more of high-end groceries while saving $250 on going out less. If more reasonable people do not shop there, we really don't matter. Luxury goods equivalent. SD

Like it or not, the SNAP program does a great deal of good. These folks are buying food - whatever they cannot get from the foodbank, supplemented from a supermarket in a dignified way. If it's a good month maybe they can avoid the foodbank entirely, leaving more for others. Nobody wants to have to use a foodbank or SNAP stamps. A great many support elders in varying degrees of poor health, and are mothers supporting small kids going to school. Rough neighborhoods, and eldercare/child care demands are not conductive to full time jobs. The minimum wage job is also often NOT in the neighborhood, only a few hours/week at best, and net of bus fare and deductions - often a wash. Net of the safety considerations, SNAP is often the better choice for hard working folks just doing the best they can. It is well understood that SNAP contributes to community dependency, but it also enables fairly large numbers to escape the drug dealers and the poverty trap. A good portion of the US military is sourced from these communities; and for those who can avoid getting killed or maimed in state service, the resultant ticket will get you a way out and a better life. The American dream. Of course, not everybody makes it, that's life. But until there is a better, and functioning, solution at the bottom of the food chain, SNAP is not a bad thing. SD

At 100,000 feet, most approaches are broadly similar; sit in 'good' companies, take the time to know/understand the darlings of choice, and swing trade. It is good advice, it rewards the patient, and most would do very well. But the approach ASSUMES that the darlings are industry monopolies/oligarchs, earnings aren't materially volatile, and they are largely a function of the broader economy and competent management. Dividends will almost always continue to get paid; simply forecast the macro, and bet on Mr Market periodically mispricing. A great deal of the conversation on the COBF board! Commodities simply amplify earnings volatility, and mitigate reliance on competent management. Share buybacks versus dividends, forecast the commodity cycle, and no reliance on Mr Market periodically mispricing. Diversify by forecasting 2-3 commodity cycles, risk manage by pushing anything > $X into treasuries. The higher CAGR and periodic adverse 35% drawdown, offset against a stack of treasuries. Not viable, UNLESS you have a longer investment horizon. SD

250bp rate rise over 4-months sucked the spending power into mortgage service. Can't get as much inflation if you no longer have the money to chase goods. SD

It is pretty clear that from now through the end of May, Canadian CPI is going to drop to around 4.7% from the current 6.8%. Simply because the cumulative Feb-May 22 change of 2.1% drops off, and is replaced with Feb-May 23 change, where the average monthly change has trended at near zero for the last six months. Similar story in the US. https://www.bankofcanada.ca/rates/price-indexes/cpi/ The yield curve drops 200bp+, millions of people instantly have lower mortgage payments, and all just in time for the nice weather of summer. Getting below 4.7% doesn't happen unless we have successive monthly deflation ... so keep firing those tech bro's in the hundreds of thousands, and speed it up! It would be pretty surprising if we didn't have a nice summer rally, but that's not the 'story' being sold. Opportunity is knocking SD

China news is being 'actively' suppressed; China has been aggressively buying what Russia isn't selling to Europe, and then some (the six-week out 500K boe/d production cut has been quietly 'dropped'). https://oilprice.com/Energy/Energy-General/Europe-Hikes-Diesel-Imports-From-Middle-East-Asia-After-Russian-Ban.html It is also a mystery as to how well the shipping restrictions have been working; most would think, not as well as expected. To some extent, there are also the possibilities around Ukraine rearming and air-cover. A two-seater state-of-the-art plane flown by a Ukrainian pilot, launching state-of-the-art long range missiles at a key Russian oil facility could be very useful. Hence, GS USD 100 oil is not unrealistic SD

There will eventually be a settlement, but not for a while yet. Most would expect both Prigozhin and Putin in a box, along with more suicides, and a sudden rash of skydiving amongst senior Wagner members. Wagner is already being strangled, and losing. Putin fails to win the war, and he cannot be allowed to live; the nation needs a martyr. This is another Russian Afghanistan, but this time against western weapons, and right on their border. They cannot sustain it, but sadly - until all the old generals are dead (Belarus), a lot more people are going to die. SD

For the most part the market trades the 'story', and not the 'thesis' (longer term view); hence as the story changes, so does the trade. Only the 'storyteller' gets rich in this game, and it is almost entirely via 'front running' the story. So if another 'storyteller' suddenly shows up, or a more catchy 'pitch' ....... change is inevitable The people who are very good at sales, are good for a reason. Rather than fight the crowd, learn from them. SD

We would expect that the BRK interest in the permian is primarily for ALM purposes. Long term permian asset matching long term liabilities from the insurance side. A strong presence in the permian enabling the insurance side to expand long-tail liabilities, and BRK to move into global warming related weather/crop insurance. Smart. Smarter still, were the permian also diversified against oilsands and replacement NA electric grid. Hence, most would also expect a significant BRK acquisition in the oilsands once TMP begins line fill, simply because oilsands can currently be bought at 50c in the dollar. Were BRK to simply wait until linefill began, and paid 20% above the current market, they would still be buying at just 60c in the dollar. Highly doubtful that has escaped WEBs attention. Many talk about potential natural gas buyer/seller cartels, but it is very unlikely. Natural Gas Hydrates (Methyl Hydrate) are widely distributed around the world's coasts, and it is relatively straightforward to produce them; there is also a great deal of it in the high arctic, and off the coasts of both India and China. Most would expect widespread use of ice-breaking LNG carriers transiting the clearing North-West and North-East passages, and much more continental vs global markets for LNG. https://pubs.usgs.gov/fs/fs021-01/fs021-01.pdf Lots of opportunity, but it's on the business side - NOT the trading side, SD

Amazing how Russian officials have a penchant for 'accidents' Obviously it isn't going well, and the noose is tightening. Russian defence official dies after falling from St. Petersburg tower window. https://globalnews.ca/news/9494380/russian-defence-official-dies-fall-st-petersburg-marina-yankina/ SD

Oilsands production is almost all oil and no gas, has a higher crack spread, and a ESG footprint that is a work in progress. It's the 3rd largest oilfield in the world, now primarily just maintenance capex and consolidation, and over time both the differential and 'dirty-oil' discounts will fall materially as egress and C02 sequester improve. We aren't getting rid of the virgin chemicals produced any time soon, and it's hard to find a better 20-30 year asset. The Permian are primarily GAS fields that produce light oil in their early stages of production. The light oil depletes quickly and pays back the infrastructure costs, thereafter the paid-off pipe is repurposed to gas collection and distribution for the next 20-30 years. One of the biggest (and cheapest to produce) gas fields in the world, the transition fuel of the next 20-30 years, but a fuel with material quantities of substitute (methyl hydrate) around the globe. Different business models for different fuels. SD

Both WEB and Munger grew up in privilege and privileged times (in the US during WWII avoiding destruction, the 'go-go' years following WWII, and with little competition at their level). Nothing wrong in that, but his benchmark experience with humanity, hasn't moved on with the times; the 'average Joe' of today, is quite different than he was during WWII times. Scum don't change much! and his benchmark has served him well, but today's 'common sense' is a lot different that it was back in the day, and those differences have been magnified by tech. Today the same scams just look different, and as the experience is largely the same for a great many 75+, we have the annual 'geezerfest' to celebrate another year of breathing! Had crypto been around last century, when they were young and poor, they would be singing a different song. SD

We have always made directional bets over a 6 yr time (12% ROE, double in 6 yrs). We focus on commodities because we're smart enough to know that we can't predict direction with any reliable accuracy; but over a 6 yr period we will experience at least one full commodity cycle. As long as we are willing to average, or round-trip; even if we bought at the absolute top, we're probably going to do very well. The obvious instruments are LEAPS, convertibles, and long-term warrants. In the corporate world, DOL x DFL = ROE. In the investment world DOL is via the instrument, DFL is via the margin used. Risk manage accordingly. Because you need to wait, tax planning is an issue. Make 5x, vs 2x, and a poor choice will burn you. And 'cause we know we're dumb, we pay off debt with all capital > $X. Thereafter, it comes down to temperament, taste, risk tolerance, and expertise. Not for everyone. SD

You might want to keep in mind that energy is quite a bit different .... Anywhere in the world, any kind of economic activity requires energy to make it happen. The only question is the total quantity required, the energy 'mix' supplying it, and where those 'mix' components come from. 'Asia' is the 2nd largest economy in the world, and the energy mix has been rapidly changing to more renewables and nukes, versus coal and oil. Gas/LNG being the transition fuel to cover interim energy shortfalls. No different to anywhere else Asia would prefer to use oil over coal, but so long as coal is cheaper and there is no charge for pollution, use of coal will persist. However for the foreseeable future, discount Russian oil would be expected to lower Asian energy costs, and what Asia will in turn pay for coal net of transport costs. Asia is coming out of Covid, activity is rising, and so is energy demand - but net of renewables, the flood of Russian crude, continuation of coal, and Asia's own o/g supplies; incremental Asian demand for western o/g may well be more subdued that many hope for. OPEC+ is cutting supply for a reason. The mystery is the Ukraine. Shut down Russian loading/transportation facilities in any significant way, and China is aggressively forced into the paper market. Volatility. SD

Portfolio theory uses the variance-covariance between stocks in a portfolio, the expected return of each stock, and the risk-free rate to determine the optimum portfolio and the individual stock weightings within that portfolio. Traditionally, the variance-covariance matrix has been determined from a rolling history of the most recent 60 months of data. In the 16 years since the Great Recession of 2006, there has been so much ANNUAL fundamental and material change in the rolling history, that the approach has become useless. If you hadn't realized/adjusted for this, your 'optimized' portfolio has been anything but 'optimal' - and for quite some time. Crypto portfolios being a prime offender. Today, the variance-covariance matrix is determined from option volatility, and looks entirely forward; history is a very minor component. However the same portfolio, looks very different to what it used to look like, and the more change in the rolling 60 month history - the greater that difference. Post Beijing Olympics and the domestic rollout of e-CNY, a portfolio using the 60 month average, and a high weighting of BABA has underperformed - largely because it hadn't recognized the change that e-CNY created. The reality of course is that when the sh1te hits the fan, all correlations tend to 1.000. However, what is unstated; if that if you win big, you also end up having to take equity in the counter party which would otherwise fail. Minority ownership can be a bastard if you don't have scale. You still have to think. SD

Metcalfe speaks to JUST the network value, and it is very limited. Unstated, is that Metcalfe means the square of the number of users who can afford to pay .... and not the absolute number of users. Intrinsic value(s) are conveniently ignored, as well as the very different number of total users. The reality is that the far better valuation methods are not going to become public until BTC trades at well above the calculated values. There is a reason why trade secrets make you rich! SD

As we routinely ‘round-trip’ a portion of our holding across reporting dates, the fall has been beneficial. As we also stay JUST within the WCSB, our view may also be a little biased. PD has a dominant position but is not particularly well run; many others are better. Revenues are also about as high as they are going to go, as the industry wide 30% rise in average day rates is causing cutbacks. Lower WTI, and high differentials, are forcing many to cut back budgets and MAINTAIN production – NOT grow it. PD revenue vs EBITDA growth also leaves a lot to be desired. WCSB o/g servicing is bought in November and sold in May; the 6-month period typically capturing 70%+ of a year’s total activity. Buying now to flip in 3 months, is to really show up too late. The story changes late 2023 as/when the TMP expansion completes and begins line-fill. Permanently reduce differentials by USD 10+/bbl and capital budgets will materially increase; what doesn’t go into M&A goes into drilling instead. Drilling upticks, but many WCSB producers should uptick more. The servicing companies may be good for a fun spin around the dancefloor, but don’t fall in love with them. Disappointment is inevitable. SD