SharperDingaan

Per OPEC+ production reports, Russian production is falling; highly unlikely to be voluntary given the Russian need to pay for the war effort. Various reports suggest that China will be consuming a lot more than it was pre-pandemic. Ordinarily this would not be an issue except that India is also sucking from Russian production, and Iran doesn't have the capacity to compensate for BOTH the Indian and Chinese surplus demand. Add to it that most OPEC+ members are also missing their production quotas ...... and we have a bastard of a grey swan developing. The trading view is short-term, the SPR re-fill long-term. The smart thing is to keep that demand in reserve, and use it to refill from primarily friendly sources as/when the need arises. Not a bad thing. SD

You were actually told something quite different ... There isn't going to be a bid because over the balance of 2023, WTI prices are not expected to fall below what they sold the SPR at; if they made any kind of bid they would just push prices higher. Most would surmise that Chinas post-covid incremental energy demand is expected to exceed what the sanctioned market can supply, and that the surplus demand is expected to push western prices higher. All good. SD

We learnt long ago that to get wealthy you need to concentrate - to stay wealthy you need diversification. Diversification by itself, is a good thing; but once you go over 10-12 assets - it becomes more about limiting loss than making money (ie: staying wealthy). We benchmark against a double every 6 years (12% CAGR in technical terms), but to do it we must both concentrate and use active management; within a limited term engagement. Not for most people. Anyone who has owned/run a business, implicity understands that time is one of the diversifying assets, as is liquidity; boredom is the enemy. You cannot grow wealth if you cannot scrape together the wealth to buy good businesses in distress, as/when they become available. Storms eventually pass over, the sun shines again, and you get richer still. However, when you start doing stupid things simply because you're bored/tired - you need to walk away. There are people what 'do' and people what 'don't'; you need to know which of these people you are. Most people would be better served if they 'never' invested. House paid off and a series of government bonds to pay the upkeep as the structure deteriorates over time. For kicks, invest in lottery tickets every week, spend time with the kids, and spend on toys/exotic vacations. No need to ever touch a stock or index fund. COBF is a great forum, but keep in mind that there is a great deal of survival bias. For every few posters who routinely do well, there are seas of people who routinely do badly; we just don't see them 'cause they don't post on the COBF board. Also keep in mind that if you have to play against Gretzky every week, you're also going to become a much better player, and have higher average returns. All good. SD

Keep in mind there will be no realized MTM losses if they stay alive, and unrealized MTM losses will be a lot lower six-months past the current market disruption. There is a need to demonstrate the resilience of US regional/money-centre banking structure, and a public non-CB solution (albeit with a little help). The reality is that 2-weeks ago the US Federal Reserve system thought the US banking structure optimal, and has maintained it for years. Collapse FRC and you also collapse the viability of US regional banking .. not in the Federal Reserve System interest. A similar version of the dynamic is in force with the Swiss National Bank and CS. When everyone needs a face saving way out .... SD

WEB just does a version of the GS thing. A very large convertible (>20% interest on a FD basis), that includes a (fed guaranteed) buyback/interest over X years. As/when the bank progressively buys back at the convertible value, the BRK FD interest declines; otherwise in year X the fed takes out at least enough to keep them below the limit. If the other players also have the deal .... and a portion of their deposits rolls into the convertible ... it's a 'rescue' that comes from 'outside' the system .... Biden can keep his promises .... and FRC instantly becomes one of the strongest banks in the land. We also get a nice bump in the price of CS next week Fingers crossed. SD

We all might want to draw a few lessons learned from BTC over the last two weeks. BTC is currently USD 27,560; UP, and by quite a bit .... BTC is now a proven alternative to both traditional finance, and much of crypto in its current form. Yes, naked BTC is volatile, but the volatility is also entirely curable if you choose to use CME options/futures &/or a ETF. The added plus is BTC anonymity/privacy countering the zero-privacy of CBDC; the cost of privacy is the satoshi used to pay the miner to hash two blocks. However, the real lesson is that BTC is a direct competitor to ALL sovereign treasuries, AND that it pays better. BTC yield to maturity as option premium divided by the strike price, it can be bought/sold in all the major currencies, and is entirely immune to national capital controls (ie: portable). Largely orthogonal to the macro events driving treasury prices, and term to maturity decided by the expiry month of the option. That orthogonal relationship diversifies a treasury holding, and BTC is continually proving its value in weekly live stress tests. It is now becoming hard to make the case for NOT including BTC as part of the treasuries weighting in an institutional portfolio. And as that weight shifts ... so will the price of BTC. All good! SD

Gear Energy was selling at < 0.95 today, in quantity, has very little debt, and pays a .12 dividend (12.7% yield). If you believe that WTI averages around USD 85 this year, and that the risk adjusted yield should be around 7.5%, you will be reselling at around 1.60 (or better) - or a 68% return, before dividends. It was a lovely day for shopping SD

Sadly, no crypto implosion ..... https://www.wsj.com/articles/federal-reserve-rolls-out-emergency-measures-to-prevent-banking-crisis-ba4d7f98 “After receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the president, Secretary Yellen approved actions enabling the FDIC to complete its resolution of Silicon Valley Bank, Santa Clara, Calif., in a manner that fully protects all depositors,” they said. “Depositors will have access to all of their money starting Monday, March 13. No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.” SD

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