wabuffo

The application of the lessons from 2020 does not work well in 2022 so far. Its very specific to sudden bursts of deflation as in 2002, 2008 GFC and the 2020 shutdown of the economy. Bill

Unfortunately the lesson from March 2020 was to buy the trashiest companies you can because they would rally the most. The shitco's, if you will. Posted in real time (see below)...... Bill

The company undoubtedly has access to liquidity to cover any eventuality. No it doesn't. Both operating businesses are losing money and too small to be able to get outside financing. DJCO also has no positive cash flow coming in from either the newspaper business nor the software business. The Utah property is already mortgaged. I guess he could throw a mortgage onto the LA properties or do a dilutive secondary. If catastrophe strikes in both the equity markets and the economy, Charlie has painted himself in a corner, in my opinion, unnecessarily. Look - I'm not saying that this won't work out. I'm also not saying that its going to zero. But why court even a small chance at catastrophe. Buffett doesn't. With that said, I guess I've made my point - no sense belaboring it. Thank y'all for letting me make it. Bill

Margin is roughly 20% of invested assets- 395M of securities You have to deduct taxes on unrealized gains. What counts is margin as a % of net worth (which must subtract deferred taxes from asset values). If he has to liquidate now, he pays taxes so that part isn't available to cover margin. If the stocks fall such that there are no taxable gains.....well margin is higher than 20% and that's a whole 'nother problem. Bill

The margin question gets asked at the DJCO AGM and.....Munger ducks it! Sad! Bill

Also, the entire culture that BRK is built upon is considering shareholders as partners with a responsibility as caretakers of that capital. Thats not something that just Warren practices, Munger believes that as well, to their core, for BRK shareholders as well as those at the Daily Journal. It's true that Buffett also used borrowed money in the portfolio during his Buffett Partnership days. But, in my opinion, there are two key differences between Buffett's stewardship of BPL & Munger's current stewardship of DJCO. 1) Buffett had his whole family's net worth invested alongside his partners at BPL. Munger owns very little of DJCO (~3%). Charlie is not "eating his own cooking" here. 2) While Buffett used borrowed money at BPL, he clearly laid out the "rules" for when & how much he used. Thus - Buffett used borrowed money only against market-neutral special situations & limited the borrowing to a maximum of 25% of total net worth (though he was usually in the 10-20% range depending on how many workouts were in the portfolio). Munger, on the other hand is already at 26% margin on the Daily Journal's portfolio net worth. $40m of that borrowing was ostensibly used to invest in a Cayman Island VIE that has a dubious claim on the operating business in China. The contracts that spell out the legal & financial relationship between said VIE & the operating business may or may not be recognized by Chinese courts. And as we've seen in the case of NTP (but also BABA itself when it "stole" AliPay from Yahoo & Softbank), if the local management decides to steal the operating assets, the foreign shareholders (even when they control the shares) have a difficult time enforcing their ownership rights. Compared to Buffett's protection of the downside in his use of borrowed money, Munger appears to favor the "heads, I might win some, tails I can lose a shit-ton" approach to margin. Look, I wouldn't be comfortable even if Munger had used this margin to open a big position in Berkshire Hathaway (a company that is beyond safe in terms of low risk from permanent capital impairment and that he knows the best) much less to buy a stake in a company whose very name is derived from a fable about forty thieves. It will be interesting to see if Munger gets any questions today on this. I'm sure he will get generic questions on BABA, and he will answer them generically. But it would be truly interesting if he was asked to explain his view about (1) DJCO's "legal ownership rights" in the BABA investment, and (2) why he is using borrowed money to buy it on behalf of his shareholders. Bill

Would that require a disclosure? I think it does Bill

I wonder if BHE has been selling BYD - given DJCO has been selling it They have held it so far (thru Sep 30, 2021 Q. Haven’t sold a single share. Also, BRK not buying any BABA, either. Bill

To summarize, Charlie Munger, acting as a fiduciary for DJCO shareholders, has over the last twelve months invested $152m in BABA & other foreign securities while using $40m in borrowed money (an astounding 26.6% margin percentage) and has incurred almost $30m in unrealized losses so far. Meanwhile, both DJCO operating businesses (newspapers, tech) lose money on a cash flow basis. Bill

Trading cash for Meta (the financial group). Actually you are trading cash for CASH! The bank artist formerly known as Meta! LOL Bill

Not long gold. Once BBB looked dead, I pitched it overboard. Gold's thesis depended on profligate spending still coming out of Congress & the prospect of higher taxes. Stayed with the 2023, 2024 TLT puts. Bill

And which team are you on, Bill? Team Transitory. I hope. But I'm not dogmatic about it. Still have my TLT LEAP puts on as insurance if long rates really spike. Last year I thought that BBB would pass by a hair, spending would ramp up & Fed taxes would be raised. I also though the end of the debt ceiling meant everything was setting up for a big jump in rates & inflation. But BBB didn't pass & the US has kept the 2017 tax cuts in place. Many of the pandemic spending programs were one-timers & with the freak-out over inflation, Congress won't pass anything, perhaps until the end of Biden's 1-term presidency. So guess what, the economy is booming already, Fed tax receipts are booming (+46% Dec 2021 vs Dec 2019, +28% in Jan 2022 vs Jan 20). Once all the pandemic restrictions are completely lifted, I think the US economy roars. ...and that huge deficit? Its already turning into a short-term surplus before the likely big tax receipt months of March, June and April (the really big one). The macro is setting up as a bit of a whipsaw, but its coming... and it will surprise everyone who thinks rates will rise, deficits will increase & monetary inflation will continue. By the end of the summer this year, we could have an inverted yield curve & slight deflation (bad for gold & long rates, good for ending inflation). Bill

Mr. Equity Market & Mr. Bond Market (as well as Mr. Gold Market) are all on Team Transitory, FWIW. The Fed will just invert the yield curve with their hikes. Watching the Fed is like watching a 1-year old in diapers carrying an expensive Ming vase high over their head while wobbling around a room with lots of obstacles in their path. It only ends one way. Bill

CB - thanks for that chart. I am always happy that you are one of the posters here who loves macro stuff almost as much as I do. A few observations (I could be repeating myself here, so sorry in advance for that). - US Treasury debt is really just US Treasury securities held by the public sector (I don't really consider this debt - any more than currency in circulation or bank reserves are debt. They are just one of three forms of private sector assets created by US Treasury deficit spending). If not for the debt ceiling + the TGA balance not allowed to go negative, the US Treasury doesn't have to issue US Treasury securities at all. As we've seen in a weird monetary plumbing experiment in 2021 (where the TGA balance started at $1.8t and ended the year near $100b), when the US Treasury does not issue securities to remove the reserves that its spending creates, reserves flood the system and rates start to fall. The only thing that prevented them from going negative in the second half of 2021 was the Fed stepping in and lending from its inventory of US Treasury securities (via reverse repo) to provide the US Treasury securities that the private sector needed. - starting in 1998 and lasting until mid-2002, the US Treasury went into a multi-year surplus (ie more Federal taxes going in than Federal spending going out). As you've heard me say often - "for the public sector (ie Fed govt) to run a surplus, the private sector needs to run a deficit (ie borrow to maintain its consumption). So it's not a coincidence, that the drop in US Treasury securities during this period triggered a large increase in private sector (mainly household borrowing via the mortgage market). In fact, the domestic private sector (US households) competes with the foreign sector's desire to net save US dollar and US dollar assets via the trade deficit. So in addition to the US Federal govt not providing enough of a deficit (and running a surplus instead), the admission of China into the WTO in 2001 really expanded the US trade deficit and combined with the US Federal surplus squeezed the US household sector really, really hard. Obviously, this trend has completely reversed now with large Federal deficits, smaller trade deficits equaling....surprise, surprise... astronomical levels of household savings and rock-solid balance sheets (in terms of debt) vs the early aughts. - I view business debt as a proxy for business investment and this brings in another axiom I'm fond of -- private sector (business) investment equals private sector (household) savings. Of course this is with a closed economy and no federal govt. If the household sector wants to save more than the business sector wants to invest, then household income falls until balance is achieved. This is where the Federal govt comes in. The new equation becomes: business investment + govt deficit = household savings. My contrarian view (despite the recent doom-mongering in the business press) is that the failure of Biden's BBB spending & taxing agenda plus a potential Republican sweep in next year's midterms would push the US Congress to the sidelines. The large deficit spending is rapidly declining to more reasonable levels (Federal tax receipts are booming! while some spending programs are falling off as one-timers end) and we get to retain all the benefits of the very stimulative-to-investment Trump tax cuts (low tax Federal corporate tax rates, accelerated depreciation, etc). Growth could really boom here for the next few years once the pandemic stuff recedes. Just my 2-cents and I could be wrong. Bill

Let's check in on US household debt to US GDP.... near decade's lows.... good, good. Even when GDP contracted at Depression-levels temporarily during the start of the pandemic.... Of course, US household debt is growing (cue scary music....) Bill

I was looking at a company that had total borrowings of $2.5B at the end of 1999 -- but those borrowings had ballooned astronomically to $116.9b by the end of 2020! That's 47x !!! What's even worse, it that this company has other contractual commitments that are even larger than its long-term debt! And those have been growing exponentially as well. When will the music stop for this highly leveraged company? Gotta be soon, right? Should be an easy short! The name of this company? Berkshire Hathaway! An example of the unintended irony of this thread's title. Bill

could be closing of his very successful shorts on the name as he rode it down from $317 to where it is today. The reason they appear as long position, is because the shorts were initiated against HK 9988, so you don't see it as they are not need to be disclosed by SEC, but in grand scheme of things they are offsetting each other, with the net between them left as profit. Hmm - I see disclosures of losses from the BABA long, and gains from holding three banks + BYD but no mention of these "gains" in MTM from shorts (even though they would be material to DJCO -- greater than $20m as at 9/30/21 10-K). It's also curious that the FMV of the total portfolio matches the exact closing MTMs of all six stocks (incl BABA) -- leaving no room for a short position MTM. Here's my working theory. Munger bought BABA and has suffered large M-T-M losses to-date on all three buys. The investment may work out, or it may not. Such is life. Bill

doubled DJCO's position size in BABA w/ another 300k share purchase during Q4, 2021. per new 13F-HR filed. Bill

Parsad - you got a lot of reading to do. Forget the Fed - its the "little man behind the curtain". Tries to sound important but actions do very little to the macro economy. The real 800-lb gorilla is the US Treasury. But of course, they are quiet and maintain a low profile while the Fed does all the talking. The real thing to focus on is earnings growth, long-term risk-free yields (ie 30-year Treasury yields) and Federal corporate tax rates. If you can predict the trend of those three things, that's all you need. Of course, no one can predict them. Bill

I won't try to explain this chart - except to say that the "Total Assets of Fed" has little to do with equity values. So right off the bat, inserting that line makes me question the meaningfulness of these charts. I would add that if the value of equities is the DCF of future cash flows, then $1 of pre-tax earnings is much more valuable to shareholders than back in the 1990s. That's because Federal tax rate on corporate income has fallen from 35% to 21% and the discount rate as measured by the yield on 30 year Treasuries has fallen from 6% down to 2%. So that same $1 of pre-tax earnings is worth 3.6x more (even with no growth in pre-tax earnings). Bill

Hmm, exactly one year later another strong rotation towards value. Must be the time of the year... Last year, long rates rose fast during Jan-Feb but then the TGA started draining and yields fell back again. This time it might be more of a longer-term effect. As posted boringly by me in a number of Fed-related threads littering CoB&F, the December passage of the US Congress of a new, much higher debt limit is reversing (slowly) the huge "shortage" of US Treasury securities available to the private sector. (blue line = actual, orange line = required to match deposits creating by deficit spending. graph starts before pandemic on Jan 1, 2020) Add to that a possible "pause" by the Fed in its buying activities, and the shortage will be slowly relieved. The DCFs of high-growth, no-present-cash-flow companies which rely on a very low discount rate (= 10-year or even 30-year Treasury yield) to discount those, ahem, cash flows to the present are going to get re-rated lower pretty hard. Its just math. Bill

I'm just gonna update this chart since a more "permanent" raise to the debt limit was just approved in Congress (and signed by the President into law). Unlike the first relief package in October which was limited and quickly reached by US Treasury security issuance, this latest relief is much larger ($31.4T gross vs $29.8T current limit). As I've speculated before, US Treasury yields have been severely suppressed by the lack of US Treasury issuance vs what it should've been if the Treasury kept a constant TGA balance. While Fed buying has also been a factor - I reckon that the impact of the US Treasury running down its TGA balance has had 3-4 times the effect that Fed buying has had in 2021. Of course, many macroeconomic factors affect Treasury yields - not just supply. But this was a very large one-time "monetary plumbing" factor. Combine this coming (a) reversal in supply (Yellen has said she wants to take the TGA back up to a $1 trillion dollar balance -- it's currently at $197b) with (b) the Fed stepping back from its purchases and we could see a very rapid surge in the amount of US Treasury securities held in private hands in the first half of 2022. (We've already started to see a reduction in daily reverse repo amounts since the debt ceiling unlock -- which makes sense as more Treasury securities are issued). I also think the Fed is starting to worry about inflation and will be hiking rates late in 2022 as well. There seems to be a convergence of factors here that will push yields higher (perhaps much higher) over the 2022-2023 time frame. Will that be a headwind for equities? Possibly. I was more certain that equities were going to face a tougher go because US corporate tax rates were also going to go higher in 2022. But the BBB plan is now DOA so the status quo remains in place. Equity values are governed by pre-tax income & growth in income, tax rates and discount rates (as measured by Treasury yields). If the economy continues its recovery perhaps equities can overcome the drag of higher rates. We shall see, I guess. Happy holidays y'all! Bill

Rick Hermmann - HireQuest - TBD, but it is fun to try to spot them before it becomes a 10 bagger Totally agree. Bill

These are flawed metrics b/c the US Treasury was also running down its TGA balance from a starting level of $1.7t to just $79b today. Not Herodotus

I believe if real interest rates ( net of inflation) turn positive and become significant- let's say 3% - then hard assets like real estate will fall. Right now, we have interest rates of 1.5% (10 year treasury) and inflation of ~7%, so the real interest rate is -5.5%. that's pretty much an ideal environment for real estate. Spek - it looks like US Govt is set to approve a $2.5t increase to the debt ceiling (currently locked at $28.9t gross). I think Yellen wants to take the TGA back up to $1t pretty quickly (currently at $133b). The Fed will begin to at least taper and set the stage for stopping its buying sometime in 2022. That means some very heavy Treasury security issuance (with little to no Fed buying) is coming. Add in the Fed starting to act on inflation worries and this sets the stage for some Treasury interest rate whiplash in 2022. I think one should become cautious with growth-y equities (especially with little to no profits) because of the DCF effect of rising benchmark rates. Bill