ERICOPOLY

If I'm not mistaken, Citi has 50% of it's business in emerging markets. This leaves room for solid organic growth versus the US centric banks. So Citi is trading below tangible book and perhaps has the best growth prospects. Now, just to throw an example out there, if you pay 2x book and make 20% ROE, your return is actually only 10% (despite the high ROE) if there are no reinvestment prospects for retained earnings (no means of growing the business). That 20% ROE is just going to wind up as a 10% dividend and you'll earn 10% economic return given that you've paid 2x book. So Citi is going to be able to shelter it's earnings for a long time here going forward due to their tax losses that they can carry forward, and they're priced under tangible book with room to grow their overseas business (I believe only 25% of their business is based in the US). These restrictions on the acquisitive dealings of US banks going forward if they approach 10% deposit share -- isn't that a concern, especially if you view organic growth as challenging? So do Citi's other advantages here (growth and taxation) help to favor it more than just looking at these other metrics such as the cost of the deposits? Personally, I own a lot of Citi (since late January) and own it for these reasons that I'm alluding to here. Just interested in how others see it. I like WFC's balanced earnings stream (50% from fees) -- helps cushion it from problems in the loan book. However I wonder how they will grow and such. I own some WFC too -- but I don't own BAC. Clearly because C's stock performance has been so much better than WFC and BAC right now (past 1 month, 3 month, 6 month, and 10 month) I'm starting to get interested in shifting some money -- but I still don't see why Citi doesn't look the best at this point. You've got the international growth, the tax free status for quite some time, and the best valuation based on price to tangible book. So some of the internal metrics aren't quite as good... but once again you've got the after-tax metrics which will be the driver of tangible book, and the organic growth opportunities -- plus I believe they can make acquisitions in foreign markets without it raising the hackles of US regulators who want to limit deposit share to 10% (was that the number?). I suppose nothing stops WFC or BAC from going more international, I just rather thought that the Citi name is already embedded overseas in many markets so growth seems more realistically attainable. Thoughts on Citi's 75% international, 25% domestic footprint? The pessimism I see on the US growth prospects that I've seen in other threads isn't in this one -- these banks have been discussed as if Citi's global footprint (and thereby growth) is of no consequence to the discussion. WFC I suppose does have room to grow by more cross-selling to it's Wachovia customers. Another reason I own it, but I'd rather there also be a big tailwind from fast deposit growth as well.

The IPAD sucks when you are trying to read in the full sun. That's where the Kindle really shines (sorry for the pun).

I've had a kindle for more than two years now and it's great. However I tend to leave it behind these days -- I ditched the Blackberry this summer and bought an IPhone 4. The phone goes with me everywhere so I installed the Kindle app on the phone and that's where I do most of my reading now.

Broxburn, It is not accurate to say that I believe gold is in a bubble. My view is that the price of gold fluctuates around a central real value, and where we are today relative to that value I cannot say -- so I am cautious. The past thirty years has seen the price of gold fluctuate meaningfully both up and down over decade long periods. It was perhaps expensive in 1980, then perhaps cheap in 2000 -- but this depends on some central real value -- I cannot quantify it, so I find it risky to treat as a replacement for dollars with these short term gyrations. For long terms I don't like it because I could go with Ko.

The tax rate could be 99% and it still would't hurt Warren. So I don't really see why his opinion as a wealthy person is surprising. He demonstrates how income taxes create merely a barrier to becoming wealthy through saving after tax income, but someone who already has billions need not care.

Is PHYS (Sprott Physical Gold Trust) an asset or a liability? http://www.sprottphysicalgoldtrust.com/Theme/Sprott/files/US_prospectus_Feb_25_2010.pdf By your definition it is a liability because it just makes you poorer over time (management fee of 0.35% guarantees this, and total fees and expenses can run as high as 0.65%. Notice though that the fund prospectus speaks of "net assets". This despite the fact that the fund is a net liability by your accounting methods. How do you reconcile this? Will you engage Mr. Sprott and ask him to correct this mistake?

Most of the liabilities that I've faced with my house are things that I faced as a renter. Either I pay for the property taxes and repairs myself or I pass them through the landlord's income statement as "rent". The house being owned by me hasn't created anything new in this regard. True some people have their net worth depleted by paying for taxes and repairs, but unless the alternative is sleeping in their parents' basement they'll need to pay rent instead -- and rent will also deplete their net investable net worth. So much of liability is just a new form of rent. The property, let's say it is owned outright, often and perhaps most likely in the long run becomes largely dead money in real terms. I don't buy the idea that it decays in value to nothing because you are maintaining it (paint, siding, roof) using money that would otherwise be going to rent. Any conversation about it being a liability needs to look at these expenses in light of whether they go away without the real estate ownership -- thus, take into account the rent that you'll be paying to the new home owner. Some home owners manage to make their homes far more expensive in terms of cash flow than renting, but often that's because they keep it in a nicer condition than their rental -- it's not strictly necessary though, that's personal choice. The house being wholly owned might be dead money... but that doesn't mean it has no value for your net worth. Short term treasuries are largely dead money (look a the yields), but we still value them in full when calculating net worth. You don't assign higher values to assets that yield more -- you merely use the market inputs. You might own some art -- it doesn't earn a yield yet it still counts towards net worth.

There is a reason that equity in personal real estate is not considered part of net worth.... because if the price is carried on your balance sheet at "market" value..the value is notional.... not realized. The day the home is sold (after deducting all carrying costs and ALL PIT payments) at a profit, the cash so generated can be added to your net worth. You may be surprised to notice that very few homes in very few markets actually end up with a profit. This is because personal homes are a liability... they generate monthly expenses and impair your monthly cash flow (which is the real measure of wealth, not notional net worth). One million dollars notionally stuck in a personal home generates huge monthly expenses. One million dollars invested at 12% generates ~ 10,000/ month. Let's assume that scenario B pays 2000.00/month for rental expenses. Who will be wealthier in a year? in a decade? Who will be a "victim" of the sudden mass realization that notional home equity is illusory. Broxburnboy, what the crap are you talking about? Assets - liabilities = net worth What is an asset? - something that produces cash flow - sits on the balance sheet and produces income on the income statement What is a liability? - something that produces negative cash flow - sits on the balance sheet and produces monthly expenses How do you grow net worth? - buy yet more assets with your positive cash flow How do you reduce net worth? - buy yet more liabilities with your cash flow This means that physical gold is not an asset, but a liability. It does not produce income -- instead it produces monthly expenses because you have to pay somebody to securely store it.

Retired at 34 (37 now) but not in bonds (nothing in bonds). I have enough invested in stocks to live on dividends -- so all in equities. There's risk to that, but I don't like the compounding prospects of bonds after tax and inflation. If I'm in bonds is there room for me to spend 3% of net worth every year and still have my investments keep pace with inflation? Here is the thing... to live on 3% pre-tax income with projected inflation of 5% per annum over the next 10 years and 38% tax rate I'll need 11% pre-tax from bonds! Okay, that's not blue chip yield territory! On the other hand, I can own blue-chip stocks that pay 3% and generally speaking they'll hold the line with earnings and ultimately dividend increases matching inflation (plus some real growth perhaps). So at age 37 I've just got too many years left to risk it in bonds -- inflation will slowly destroy me. So I've chosen equities. Now, if I were 80 yrs old my attitude would be different because I wouldn't have enough years left for a 2% loss in real net worth per annum to matter. But from age 37 a 2% annualized purchasing power loss adds up and is unsustainably risky.

You're right. I remember being down quite a bit on those calls within the first few weeks of ownership. It might have been 50%. That restatement however is what shook my confidence -- I blame it in part for my selling too early. I still trusted management, but I no longer trusted that the market would drive the stock up so high so fast.

There won't be a repeat, I'm not playing that game anymore. It is fun to have that record, but I'm not ever going to run with that leverage again so it won't be repeated. I will be extremely pleased if I get about 16.7%, then 14.5%, then 12.5%, then 11.1%, then 10%, etc... There's a number there that I want to clear every year and those numbers will get me there. So my hurdle rate is getting much more attainable... I don't need big leverage to get there. Here is the thing. Around mid-2006 when I bought the first batch of those calls the maximum I could put into investments of my own choosing (outside of my limited menu 401k plan) was a sum that amounted to about 2x my annual salary (that was the total combined size of my taxable account and RothIRA). Given my age at the time, I didn't worry about losing the whole thing -- the other 1/3 of my liquid funds were in my 401k and for my age that was plenty of saving -- I would be ahead of most people my age even if I lose the 2 yrs income. So it was a risk I could afford to take, even though it was 100% of those accounts. I look at personal portfolio allocation in terms of what you can afford to lose, not what % you have allocated to any one thing. Look, if you are 25 yrs old with no kids, have $30,000 in your trading account and can save $15k a year to put towards buying new investments, don't be afraid of putting the whole damn thing in FFH calls with 140 strike for $2 a pop for potential (and seemingly likely) 40x return. You get a million if you are right.. You don't lose 100% if it goes wrong... you only lose 2 yrs of savings. There's a really big difference between losing 2 yrs of savings and losing $5 million close to age 40 (the whole pot) when you can only replenish at a rate of $15k per year. At age 25 you can afford to lose 100% if it's 2 yrs of savings. But you can't afford to lose $5m at age 40 if it's all you have and you save at the same rate as that 25 yr old. That $25k was worth a million 8 or 9 months later! So, I have always had this mentality towards my investments. Percentage allocations only matter when your portfolio size is significant relative to your means of replenishment. I blew it though with those options -- I should have just put it all in the higher strike calls instead of getting those 70 and 90 strike calls. The reason being is that if it went wrong those calls didn't offer any safety much to speak of... so if you are going to risk it you might as well go for the big payout. That was costly -- they made money of course, but not what it could have been. Not that I'm unhappy, but I could have achieved the same results with less money on the table by just raising the strikes on those options. I should have bought more of the $140s and $130s which is what I was buying too.

I first dengyu at Microsoft -- they have an "Investment Club" distribution list there. I would post there, and he would post sometimes as well. We started chatting back and forth in email as our investment style seemed to be similar. That was April 2006, and I mentioned Fairfax and the old MSN Berkshire board to him. That's when he showed up on that board, and it's right around the time when FFH options got really cheap. He suggested to me that I should look into the options -- before that I'd never even worked out how puts/calls work. I would still be wearing an employee badge if it wasn't for him walking me through it. We would buy some nearly every day and swap stories of what prices we got. I remember getting an email from him one day stating that at closing he got 50 contracts of the $160 strike 2008 for 80 cents. Just imagine... the stock broke $300 before that expired. I had written a jscript file that would compute how much money I would make from my FFH calls at various prices (I had 240 contracts). We were both supremely confident that we could retire on that trade (he quit at age 25 before the end of 2006, having worked less than 2 yrs). So the week he quit, we decided to meet in person and went out to lunch. Pretty funny sitting across the table from someone I'd never seen in person, and here we were both able to quit... and all for a trade that seemed to us highly predictable. Just laughing and grinning. Good times. I stayed on until January 2008, it was harder to let go for me because I'd been "institutionalized" (quoting The Shawshank Redemption after 10 years of being there. Today he's developing games on his own time -- good for him.

JP Morgan played a large role in restoring confidence to the markets in 1907. This is the example I thought of when Warren wrote his "Buy American, I Am" piece in the NY Times.

That's my RothIRA account with that return (according to Fidelity's calculations). And to date (as of 8/31/2010) it's 99.19% annualized for a total of 18,465% cumulative since 2/1/2003. The FFH options had a lot to do with it. Earlier this year the cumulative return was something like 24,000% but since end of April it has pulled back. Blended (including my taxable account) it's 61.64% annualized since 2/1/2003 for a total of 3,709% cumulative. The reason the RothIRA outperformed is that I manage it with a different mentality, due to taxes. It was also a smaller sum so taking a huge risk on it didn't matter to me. Another board member who doesn't post anymore (dengyuthenugget) has done 170% annualized since 2005 or so (perhaps it was 2004) -- overall, all accounts combined. Again, credit the FFH options for quite a bit of that.

True but both the real estate and the stock markets bubbles in Japan were much larger than in the US. That's important as well.

Take a look at Japan's CPI from 1990 to 2007: http://www.thedti.gov.za/econdb/IMFConJAPANCPICHA.html Aside from a very minor and brief spell at the end of 1995, deflation didn't take hold until 1999. Even then, there has really only been a few years where at some point deflation went as high as 1% -- I could only find one quarter beginning at the end of 2002 where the rate exceeded 1%, and perhaps that coincided with the recession from the stock bust that we felt here in the US. The CPI is a broad measure -- surely there were areas where prices rose. What were they? And surely there were areas where prices fell by quite a bit. A breakdown of the CPI components would be nice -- does anyone have that info?

If you have an issue with the rude flippant statements, take it up with the appropriate poster. It has nothing to do with me. Please point out where my comments have been rude or flippant. I wasn't taking it up with you. However you referred to a point that "Broxburnboy and I were trying to make" in your post (the one I replied to) and I figure by directly putting his quote in there would be absolutely no confusion as to who I'm talking about. He did it to three posters I believe (not just me). At one point I believe you said I didn't properly address a question of his -- look, if somebody is going to act like an ass I don't feel it deserves a reply, but I replied to him anyhow. Yes it's perfectly acceptable. You can have that conversation with Broxburnboy or whomever if you wish about non-finite money. But don't make assumptions that you need to teach it to me if I am silent on the topic (you told me I "missed the point"). I didn't engage you on that topic because I'm not thirsty for new knowledge about it. I have no disagreements with anything you said about it, except your assumption that I missed your point. I don't believe I passed any opinion whatsoever about non-finite currency backing, nor do I feel required to do so when I am probing about limitations of finite currency. I never generalized about all non-fiat money, I very specifically spoke only of gold and it's finite nature.

Also one thing I noticed: I think Fairfax has bet $200m on these CPI deflation hedges which is only about 3% of shareholder's equity -- and I think they have a 10 yr term. The CDS hedge comprised 10% of shareholders' equity (or was it a bit more than 10%?) -- and they had a 5 yr term. 3% vs 10%. And the former is of twice the duration of the latter. It says to me that they are not looking to hit it out of the park as they did with the CDS -- less conviction I think.

You may have missed the point that Broxburnboy and I were trying to make because of your focus on the scalability of gold. Both of us have made it clear that it is not important that gold is the standard. It's just important that it be something whose supply cannot be easily manipulated or manufactured. I didn't miss the point BTW. It's simply not what I was talking about. I know all about these positive aspects of gold -- they've been rehashed here a million times, and elsewhere billions of times. I could just as easily have lectured somebody else on that topic in a pedantic tone -- however it wasn't the topic I was discussing! I was discussing scalability. It's annoying to try to discuss scalability and get a reply that shifts the subject to something totally unrelated -- like wheat and whatnot. I'm quite aware of the possibility of a currency backed by a basket of commodities -- but I wasn't discussing that! I was discussing the viability of gold as the only commodity backing the dollar -- I want to understand whether or not it is even possible anymore (without a drag from scalability). Yes, it was possible throughout history but generally speaking the world back then was still discovering new and important reserves of gold in the ground. We're going to reach a point where the amount mined will be insignificant (are we there yet?) relative to the needs of the growing economy. In summary, I was exploring gold's viability as the only commodity backing it. You guys were insistent on changing the topic to one where it's not the only commodity backing it. And I got a lot of rude "you either get it or you don't" flippant statements which really adds a high degree of value to the discussion IMO.

I believe the Nikkei also had a trailing P/E of 60x in 1989, and today it's trading at 13.5x forward earnings. That's a 77.5% decline in P/E ratio vs a 76% decline in the index (I think they actually peaked at 37,000). The US stocks I believe are trading at about 12.8x forward earnings today -- that's a much lower terminal point than what Japan began with. (yes, I understand the limits of "forward" earnings, I'm using forward estimates for both US and Japan today). The point is that the big drop in the market for the Nikkei put it at a lower P/E ratio -- and that's the P/E ratio that the US market is ALREADY at today. So while it looks scary to say that the market is down 76% 20 years later in Japan -- it really is different here in that we're not currently looking at a terminal start point of 60x P/E. Now, I have a question. Is the value of the Nikkei index inclusive or exclusive of dividends? What I mean is this: if it starts at 10,000 one morning and pays a 1% dividend that night, will it be valued ex-dividend at 10,000 or at 9,900? I'm trying to determine if an investor would have made a positive return from the Nikkei if it's starting P/E had been 13.5x rather than 60x.

That's agrees with what I wrote above. The first paragraph you wrote though didn't agree -- I was asking probing questions and you mistook them for a position -- easy enough misunderstanding as questions can sometimes be rhetorical -- I figure that's where you got on the wrong track. The other reason I took it as your position was because you did not address Broxburnboy's question as to what was the point you were trying to make. I think I've adressed the scarcity issue extensively - it is not an insurmountable problem. So, leaving this aside, which of the two evils do you come out on? To me, it is obvious that some standard is better than no standard. I don't come out on either side because I'm still exploring the limitations. Now, if I had my mind wrapped around the finite supply of money I wouldn't have been asking questions. I think the biggest problem facing this country is the debt load, not the money printing. I read in Hoisington's letter that the quantitative easing program is not inflationary -- I haven't yet ruled that he is wrong. I'm asking (and trying to stimulate) discussion of these things. I wonder (as an engineer would) about the mechanics of how a currency of finite supply can scale to a future world where there might be 10 times as many people and fifty times as much world GDP. Using a metal that (despite increasing scarcity per capita) will "always" purchase roughly a fine man's suit. It leaves me scratching my head as to how there can be enough to spread around under such a scenario without triggering an upward revision of intrinsic worth per ounce. I tend to believe that population growth alone should raise it's intrinsic value per ounce for the simple reason that women demand jewelry and prefer gold (there are other uses too). However if it's intrinsic worth rises due to population growth and demand, then it's not really a stable store of value -- then I wonder whether that will lead people to just sit on their money and wait for it to appreciate in real terms, and what would that do for the economy? Money itself is not meant to appreciate in real terms to function properly -- it should be absolutely stable in an ideal world Here is the quote of my addressing his question as to what my point of view is (in case you missed it): Regarding my point of view... In a word: scalability. I'm exploring the limitations of a finite supply of money. It is desirable to have the supply of money grow with the needs of the economy, however it is not desirable for it to be abused. So there is some benefit that fiat money brings to the table that gold could not provide, yet it's difficult to keep the leaders from abusing the ability to create new money. Now one opinion I've stated about gold already in this discussion is that it's volatile in real terms (not just dollar terms). It doesn't always purchase a man's fine suit -- at least it didn't earlier this past decade at $300. I believe it oscillates -- perhaps due to manipulation or whatever. Thus, that's a negative -- would TIPS do a better job I wonder. El Erian of PIMCO expressed interest in purchasing TIPS in the next deflation scare.

Yes I am 100% certain that the average Joe likes his 3% raise even though inflation is 3.01%. I am also 100% certain he really doesnt understand, but prefers to say he is making $39,000 vs $33,000 a number of years ago. Do you disagree? I have a decent understanding and even I prefer option 1. Psychologically no one wants to make less. It's also the rational way to think for somebody with fixed rate debt. That 3% raise and 3% inflation actually makes that debtor richer. There is no way that debtors will come out of this ahead-the bankers who run the show are the creditors and all these manipulations of currency volumes and interest rates are designed to profit these creditors. The bankers will end up with the real wealth - all the gold, foreclosed houses.. debt obligations etc. The taxpayer will take the real hit, and the defaulters end up with nothing. I was thinking actually of the people struggling with these big mortgages -- people who will never own their houses outright without a tailwind of inflation. Personally, it sounds like I'll be able to pay off my mortgage with the gold in my wedding band and my wife's jewelry box. Now if the wedding band, jewelry and my mortgage were all I had, I'd be doing well. Or perhaps I'll just go out and pull some apples from the tree, get a few hundred thousand for them, and then use that money to pay off the house. Alternatively, the average Joe who has a big mortgage but perhaps less gold should buy up as many houses as possible with as much debt as possible. After the Zimbabwe inflation plays out overnight, he can then go and exchange his copper plumbing for scrap and pay off the mortgage with the proceeds and likely still have enough money to purchase some plastic pipe as replacement. My father in California this past year had to replace the copper pipe from his swimming pool pump setup after 30 years of pool chemicals had corroded it to the point where it was leaking. He got over $100 in scrap value for it, and replaced it with plastic pipe. Soon that same amount of copper will fetch a million right? A million would be enough to pay off the mortgages of several of his relatives -- and for what, giving up the pool pump? California is full of swimming pools -- none of those people are losing their homes to Zimbabwe inflation. Many of them would never have owned them outright by any other means. And take a company like Seaspan -- why they will be able to sell one ship for hyperinflated scrap value and use the proceeds to repay the rest of the mortgages on their ships. Unless you believe the cost of steel didn't go up in Zimbabwe? I don't see how the debtors are the losers in hyperinflation. Yes people will lose their jobs as the economy is destroyed, but that will happen as well to people without any debt. Those people will still be paying rent -- the debtor will be relatively better off.

That's agrees with what I wrote above. The first paragraph you wrote though didn't agree -- I was asking probing questions and you mistook them for a position -- easy enough misunderstanding as questions can sometimes be rhetorical -- I figure that's where you got on the wrong track.

Something I didnt consider, but you are right. I dont give Joe enough credit sometimes. My father bought the most house he could afford (maximum allowable debt) in 1970 at fixed 9% I believe. He was relieved that inflation payed his house off quite rapidly. So I grew up with a different perception of inflation. I am biased towards not holding dollars for any significant period of time, and view bonds as a way to make nominal gains but at risk of losing a lot to inflation. There is the gold crowd though -- if you question gold they'll shoot back with a form of "you're either with us or you're against us" argument, so "go hold your dollars and good luck!". There are actually so many other dollar alternatives, so it's rather odd to hear it. TIPS for example -- I don't really know the answer to this, but since their inception have they tracked closely the cost increases of a man's fine suit?

Yes I am 100% certain that the average Joe likes his 3% raise even though inflation is 3.01%. I am also 100% certain he really doesnt understand, but prefers to say he is making $39,000 vs $33,000 a number of years ago. Do you disagree? I have a decent understanding and even I prefer option 1. Psychologically no one wants to make less. It's also the rational way to think for somebody with fixed rate debt. That 3% raise and 3% inflation actually makes that debtor richer.