Thrifty3000

I think it depends on the level of interest expense vs the ability to pay.

Definitely rambling. Especially during the annual meeting portion. Repeated some stories a couple times too - like the origin/importance of Ajit Jain. Made me worry a touch about dementia. I’d like to think the rambling was just his excitement about answering questions in front of a live audience after a few years of pandemic-induced isolation. But, I know better. The old boy’s gettin on up there in years. He’s still smart as a whip. It’s amazing that nonagenarian brain is still able to hang in there for six solid hours.

Net premium growth and operating earnings are outstanding

I had the exact same thought this morning. Haha

This is very helpful. And, believe it or not, the way you've laid it out in the T tables is in line with the way I've understood that series of transactions to work. Though, admittedly, my mental model of the flow is a much dumbed down version. Now, to continue with your example, after step 3 there is a brand spankin new $10 million treasury bond at the Federal Reserve and a brand spankin new $10 million private sector financial asset that didn't exist prior to step 1. So, it seems to me the next big question is what happens to inflation if the treasury bond is paid off at maturity: a) using taxpayer dollars (specifically, using reserves offset by taxpayer dollars) b) using debt purchased by the private sector (specifically, using reserves offset by treasury bonds purchased and held by the private sector) c) using debt purchased by the Federal Reserve (specifically, using reserves offset by treasury bonds purchased from the private sector at artificially high prices to reduce interest rates, but ultimately held by the Federal Reserve)? Further, let's assume the market expects the Treasury to perpetually roll maturing Treasuries over into new Treasuries that will be purchased/held by the Federal Reserve. It seems to me scenarios a and b pose low risks of longer term inflation. However, it seems scenario c is equally as inflationary as raining cash from helicopters IF the Treasuries are rolled over to an over-paying Federal Reserve in perpetuity. It sounds to me like our WSJ article author was suggesting that the extent to which the market realizes/believes we're facing scenario c will drive Mr. Market's inflationary expectations and consequent behavior. Maybe the Treasury ultimately rolls half the Treasuries held by the Fed. Maybe it rolls all of them and much more. I think Buffett is betting we're in a world where the government won't have the willpower to reduce spending or raise taxes enough to pay off its existing debt with taxpayer dollars, and that we should expect the debt to be rolled to the central bank in perpetuity. Even worse, it's probably not a stretch to expect continued deficit spending in excess of 2%, or at the very least, the continued reliance on bazooka-sized stimulus during future economic downturns - at least until inflation becomes overly destructive and intolerable. It's the only playbook developed economies seem to have. I guess we'll know more after the Fed starts winding down its balance sheet. If the market chokes and the Fed reverses course like it did in 2018 then we're probably in for more of the same.

Also, when you say it (the treasury) first creates reserves I'm assuming this is the act of manifesting money, right? Is converting reserves to currency or treasury securities part of ensuring the Treasury's account doesn't have a negative balance?

@wabuffo when this transaction happens is it the Treasury's reserve account that gets credited, or is it the Federal Reserve's reserve account? Basically, what entity is "signing the check" that purchases the Treasuries?

@wabuffo as always, you're a saint. I feel like my Neanderthal brain is slowly grasping some of your concepts. Let me see if I'm getting any closer to reconciling the Buffett/WSJ article thesis with the Hoisington thesis with some oversimplified examples: Scenario 1: - a government is funded solely with newly created money. (Inflation becomes the de facto tax.) Scenario 2: - a government is funded solely by long term bonds - the bonds MUST be purchased/held by the private sector. Scenario 3: - a government is funded solely by long term bonds - the bonds are purchased/held to maturity by a government-owned bank that can create money. Scenario 4: - a government is funded solely by long term bonds - during expansionary times the bonds are purchased/held by the private sector. - during recessions the bonds are purchased by a government-owned bank that will sell them to the private sector during the next expansionary cycle. Besides this being a gross oversimplification, all else equal, doesn't Scenario 3 have the same inflationary effect as Scenario 1? And, doesn't Scenario 4 have largely the same inflationary effect as Scenario 2 (not much inflation over time, and can be deflationary if government excess stifles private sector growth)? It seems to me Hoisington is banking on Scenario 4 long term, with government excess ultimately stifling private sector growth. While, Buffett and the WSJ author are assuming that although the government may reduce SOME of the treasuries held by the Fed they'll never have the discipline to offload ALL the treasuries AND reduce deficit spending, which will in fact resemble more of the inflationary Scenarios 1 and 3 than the less inflationary Scenario 4. And, please, just ignore me if I'm wasting your time. I'm perfectly content sitting in my cave and banging rocks together for fun.

Sounds like he’s scared of cash

@Viking @wabuffo Here's a link to a WSJ article I bookmarked several weeks ago. I thought it presented an interesting framework for thinking about inflation. I felt the most important statement was: Healthy economies don’t have inflation “no matter what the central banks do,” while dysfunctional ones have inflation even with “heroic central bank presidents.” I think it presents the inflation case that Buffett and Munger subscribe to. I think it also indirectly makes the case that the Hoisington thesis may have to wait many years to play out the way they expect (basically, until the government chooses fiscal discipline and austerity over inflation). According to the author inflation and interest rates will reflect people's expectation of future government deficit spending as well as the degree in which debts will be repaid with devalued currency. If investors expect $20 trillion of government debt to eventually be paid back with dollars that only have half the present purchasing power, then you will see reduced demand for treasuries (higher interest rates) and increased demand for other assets (inflation). Who is going to invest a dollar to get back fifty cents (other than a central bank)? The author suggests the price of other assets would have to double in relation to the price of treasuries to restore balance. (This was the big eye opener for me, as I've been pretty well in the Hoisington camp that the US economy will be trudging through a debt deflationary trap until the government gets a grip on deficit spending.) Also, if the government continues running 5% annual deficits AND the Fed buys up a large percentage of the treasuries required to fund the deficits then the market will expect inflationary pressure. (This seems to be Buffett's strongest argument predicting inflationary pressure over time. I assume it's why he advocates for a 2% government deficit, and expresses inflationary concerns over higher amounts.) (The article doesn't touch on impacts from demographic and productivity trends, etc. which also need to be factored into inflationary expectations.) Here's a link if you want to give it a read... https://www.wsj.com/articles/government-spending-fuels-inflation-covid-relief-pandemic-debt-federal-reserve-stimulus-powell-biden-stagflation-11645202057?st=4b0oqafdjth05v9&reflink=desktopwebshare_permalink

This would be a good question for Prem. What is the criteria for lengthening duration? My guess is they want to lock in returns of at least a couple percentage points above long term expected inflation. However, Prem is such a believer in markets regressing to long term averages that I could see him saying they’ll hold off on a major move until rates return to at least their long term historical norm. So I could see them start lengthening duration as yields approach 4% and getting more aggressive as yields rise beyond 5%.

People act almost like Fairfax lost money over the last decade. That’s not the case at all. Because FFH’s results are “lumpy” I like to look at their earnings in 5 year averages. In September of 2020 I pulled the average per share earnings for the 3 prior 5-year periods: 2005 - 2009 = $33 average EPS 2010 - 2014 = $17 2015 - 2019 = $28 Fairfax was trading for around $285 in September 2020 so I backed up that truck big time. The average earnings for the 2020-2024 period is shaping up to be at least double that of the 2015-2019 period. #bargain

Holy crow. I’m going to have to invest even more in this thing aren’t I? Thanks for the additional detail! Just came up with a new investment mantra: Be greedy when others are clueless.

@Viking to bring this down to a per share level, you’re suggesting over $80 per share of income from the insurers alone is possible next year. Wow, sounds like I’m going to have to update my look through earnings model. Sounds like look through earnings could comfortably exceed $100 per share in 2023.

BABA Baby!! $80 per share. Unbelievable

People, people, please let us not forget how much we friggin love (and benefit from) wholesale panic-induced market selloffs that are no fault of Prem’s. Many of those insurance premiums we’ll enjoy this year were paid up front, and now we just get to sit back and watch FFH buy up more of its own and others’ assets than we would have been able to had ol’ Vladdy P not been such a cotton headed ninny muggins. These are the times when the oracles make us wealthier, while almost certainly giving us more intrinsic capacity to donate to causes like Ukrainian relief.

Put a fork in Russia. It's done. Ukraine will fall in a few weeks/months. But, that's in no way a Russian victory. In fact, it will only expedite the Russian collapse. It may only take 100,000 to 200,000 Russian troops to conquer Ukraine, but conquering is never the hard part of a hostile takeover - sustaining power is. It will take Russia's entire defense budget just to hold on to a land with 40 million pissed off enemies (keep in mind Ukraine's population is about a third of Russia's). Just look at how much the US has had to spend to maintain order in Iraq and Afghanistan. Further, the world-sanctioned Russian economy won't be able to feed and equip a 1-million person army to govern and police an obliterated Ukraine while Russia's own 140 million citizens are starving and pissed off as hell. Russia (well, Putin's Russia) is done. The big eye-opener for me in all this has been learning just how idiotic of a strategic miscalculation China's Xi made. Xi took what may be the dumbest wrong turn in history trying to drive a wedge between itself and the US, while buddying up with a broke-assed country ruled by a monster. (I'm only now realizing just how much more frail China has become as a result of all of this.)

Yeah, I agree it’s quasi-debt. I was actually just digging to see if the AR had more color on the Odyssey deal. I haven’t found anymore clarification on the amount FFH will ultimately have to pay to buy back the equity. So, I’m going to assume the buyback will cost somewhere in the neighborhood of $1.2 billion. If FFH’s shares are worth $1,000 apiece in a few years then it will have been a good trade. Here’s the language from the AR: “Sale of non-controlling interest in Odyssey Group On December 15, 2021 Odyssey Group issued shares representing an aggregate 9.99% equity interest to a subsidiary of Canada Pension Plan Investment Board (“CPPIB”) and OMERS, the pension plan for Ontario’s municipal employees, for cash consideration of $900.0 which was subsequently paid by Odyssey Group as a dividend to Fairfax. The company recorded an aggregate equity gain of $429.1, principally comprised of a dilution gain and the fair value of a call option received, which was presented as other net changes in capitalization in the consolidated statement of changes in equity. The company has the option to purchase the interests of CPPIB and OMERS in Odyssey Group at certain dates commencing in January 2025.”

It’s all a figment? $hit! Call me crazy (again), but I like to think of an oversimplified explanation of observable trends as more of an insight than a figment. Now, I will gladly concede a couple things: 1) The current excitement around recent and near term earnings prospects are greatly influenced by several strong market cycles and tailwinds. Ie. the insurance hard market won’t be here forever. 2) I previously said Prem appears to be dialing back unilateral “bet the farm” investment decisions. I may have given the impression that I think Prem is now simply passively watching others make investments, which I don’t actually believe to be the case. He almost certainly has a heavy hand in big capital allocation decisions, like the recent TRS and share buyback decisions, and I’m sure he played a strong role in the recent decision to allocate more to Kennedy Wilson. So, I should further clarify, that the capital allocation trend I believe we’re seeing is that Prem is pulling away from making sizable investments in one trick ponies (like Sandridge Energy. Barf.), and is consolidating capital under managers/allocators that have proven long term track records managing multiple assets/investments. I think the Prem of today would rather shop a deal around to Wade, D Sokol, Trott, etc to see which one of them, if any, would want to add it to their own portfolio/scorecard/track record. If he’s not doing that then he should, because it’s a brilliant approach. ^ I think that’s a critically important insight (or figment). It’s also an easy thesis to monitor going forward. (Just like it’s easy to monitor whether he shorts again.) To know if I’m wrong in the future, all we have to do is see if Prem makes a very large direct bet in another one trick pony. If he does, then I’ll update my thesis and adjust my financial projections downward, just like I would do if he shorted something. It ain’t rocket surgery. Now, if you still think my insight is a figment please tell me, because my therapist is going to want me to call up Prem, D Sokol, Wade B, Byron Trott, Brian Dalton, and all the leaders at FF India, FF Africa, Kennedy Wilson, the restaurant group, etc etc and tell all of them that they and their track records don’t really exist.

@petec I think there's more to it than that. Prem is a formally trained engineer and systems thinker. He engineered a strong insurance operation by getting talented leadership in the right positions and allocating capital to those who proved best able to deploy the capital profitably. I believe he realized there are a number of people more (even far more) talented than he is at allocating non-insurance capital. He spent the last decade engineering an non-insurance capital allocation engine, consisting of David Sokol, Byron Trott, Kennedy Wilson, and so on... I have a thesis that he doesn't want to make anymore material investment decisions unilaterally (though he would tell you he never did make unilateral decisions - which is horse hockey). I believe he gets just as many deal opportunities as he always has, if not more, but I think he is now funneling every opportunity to his network of non-insurance capital allocators. I think the Prem of today wants his non-insurance allocators taking ownership of all significant capital allocation, since they are all proven investors, and since the result will go on their own scorecard, and impact their ability to earn even more capital from Prem. Today, Prem gets to live the good life of having $100+ million a month flowing in the door, and he has a group of proven insurance managers AND a group of proven non-insurance investors vying for that cash (all more skilled than Prem at allocating capital in their respective domains). They pitch ideas to Prem, their performance scorecards are easy to monitor, and their incentives are well aligned. Prem supplies them capital as long as their scores continue to measure up. The strategy HAS changed. My latest epiphany is: - Prem ain't a great investment analyst - and realizes it. He may be a decent analyst, but he knows others are better. - Prem is a great business leader and - continuously improving - systems-thinking engineer. - Prem has brilliantly ENGINEERED a diversified capital allocation engine staffed by talented capital allocators.

Holy eff. A work of art.

At these prices I wish they'd cut the dividend to $0 and buy back more shares. I wonder if shareholders would vote in favor of reallocating the dividend to buybacks while the stock traded below a certain threshold?

I think the board, Todd and Ted all know to buy back aggressively in that scenario.

Yeah, that makes sense to use asset backed debt rather than margin - to guard against a great depression scenario. Like I said, I don't have a game plan yet, and I'm only talking about pulling the trigger in an extreme market dislocation (probably at least a 30% decline from a recent peak). I may only go that route when I see a really crazy spread between an investment's dividend yield and the loan's interest rate. For example, I believe Fairfax had some preferreds yielding over 12% at the height of the 2020 panic. Situations like that seem like a decent candidate to borrow at a sub 5% rate to net at least 7% (and hopefully enjoy appreciation as fear subsides and yields normalize). I'd love to have a handful of situations like that to take advantage of. And, I'd probably be tempted to ride high yielders like that to maturity, and then use the principle payback to pay down that debt. However, if I invested in heavily discounted low yielders, like BRK, then I'd probably cash out of that once it made a return trip to fair value.

Are you still tapping margin? I don’t use margin, but I’ve been thinking about doing what you did during future panics. But, I don’t have my margin game plan nailed down yet.