wabuffo

Burry has been sounding the alarm on Twitter big time. Wasn't Burry also forecasting big time inflation....in 2009? wabuffo

A thumbs up for "The Head" -- a series on HBOMax. Its short - just six episodes. I'm through four episodes and its very good if you like suspense/mysteries. Without giving away too much plot (and spoilers) - a small scientific team (10 people) is left behind on an Antarctic research base as the long winter night is about to begin (the six months of the year without any sun over the South Pole). When the spring comes and the summer commander and a small crew return to the base, they find the entire team that stayed behind either dead or missing. The summer commander then goes about trying to piece together what happened and find the missing crew. wabuffo

Skip his monetary policy/Fed section ("The Point of No Return") - he clearly doesn't understand how any of this works. wabuffo

at these level? curious about your thesis. I've been watching the Company for 5-6 years but never invested in it. But the new capital allocation strategy is a very big game-changer if you run the numbers on it. I think the decision to fully reinvest all of their free cash flow completely changes the valuation math if one believes they can do it. And these guys have the track record to do it successfully. We'll see - it might not work as well in practice as on paper. Bill

CSU.TO 8) wabuffo

If the excess reserves were already excessive before, the Fed still aims to keep the bond buying spree going (so contributing to more excess reserves in banks that may have already too much 'liquidity') This is actually worse for the banks because it is an asset swap therefore as reserves increase, total assets stay more or less at the same level (unlike Treasury spending which adds both reserves and deposits and increases bank assets (not so fast Wells Fargo! no asset increase for you!) which means that (for the theory to apply) the TSA account needs to rise (staying the same is not enough) in proportion to bond buying. The Treasury Balance has been coming down since last summer. The Treasury used to run (at least since the GFC) an account balance of about $400b - give or take. So in a worst case scenario one could foresee an additional $1.2t increase in that reserve chart projection. What the Fed is doing makes no sense whatsoever. wabuffo

The US Treasury's Quarterly Refunding Statement is where people are getting this idea from: https://home.treasury.gov/news/press-releases/jy0011 The Treasury General Account balance sits at ~$1.6t - so ending March at $800b is a big move with big repurcussions......except I don't believe Yellen! Why? ------------------------------------------------------------------------------------- Let's go to the previous Quarterly Refunding Statement from November. End of December TGA balance = $1.728 Trillion. How about the one before that from August? End of September TGA balance = $1.781 Trillion. wabuffo

2016 letter --- 52 pgs 2017 letter --- 85 pgs 2018 letter --- 112 pgs 2019 letter --- 128 pgs 2020 letter ---- ? pgs What's the over/under line? 150 pgs this year? :o wabuffo

I read this book written by two NY Times reporters years back called "Blind Man's Bluff" about the Cold War that involved true stories about submarine espionage. One of the stories involves the USS submarine Scorpion that disappears in 1968 to the bottom of the Atlantic with all hands lost. This sets off a frantic search by the US Navy to find its lost sub. All they knew was its last reported position, the path it was on (it was heading back to base at Newport News, VA after a tour of duty in the North Atlantic) and only vague other bits of information. The area to be searched was a large part of the North Atlantic near the US coast. It was kind of hopeless that the sub would ever be located. https://en.wikipedia.org/wiki/USS_Scorpion_(SSN-589) So the Naval Officer in charge of the search operation (a kind of Hunt for Red October Jack Ryan type of guy, I guess) comes up with a novel plan. He doesn't just reach out to experts like other submarine commanders. He assembles a wide range of folks - some with submarine knowledge, mathematicians, salvage ops men - basically a diverse set of knowledgeable people but not all experts in subs. He briefs them with all the information and data that the Navy has related to the USS Scorpion's last voyage. He then asks them to go off on their own, sift through the data and independently offer their best opinion on why the submarine ran into trouble, its speed and its steepness of descent so as to locate where it might have touched bottom. He makes it interesting by offering a reward and prizes to the winner who comes closest to the actual location if/when the sub is located. The individuals' guesses were assembled on a map and using some fancy math (Bayes Theorem) -- a composite guess of the "crowd" was isolated based on the collective estimate of the group as to where the sub might be located. The location was not a spot any individual member came up with or picked. But a search was started focusing on the spot identified by this collective method and five months later the sub was located within 220 yards from where the group's estimate said it would be. Ok - why tell this story. Because collective wisdom is what the stock market operates on. It is why it is generally an efficient market. The various participants individually all have guesses about the fair value of a stock. These guesses are made up of lots of random guesses + a tiny bit of signal information in each guess. As these guesses are aggregated, the random parts cancel each other out and what remains is mostly pure signal. I long ago gave up on using the Kelly Criterion. That is because according to the Kelly Criterion the size of the bet is determined by the formula: Edge/Odds = size of bet. But here's the thing - according to the formula if your Edge = zero, then the size of bet is "Don't Bet!". If most of us are truly honest with ourselves, do we really have an edge in picking an individual stock vs the market. Do we think our guess as to where the "missing sub" is located is going to be more accurate and correct than the collective wisdom of a diverse group of actors with money on the line? Are we really just punters when we think we are experts? The good news is that unlike most gambling games (which are negative sum), the stock market is a positive sum game. All we need is to go with the market via diversification in a group of 10-15 high quality businesses and we will do fine. So my recommendation is to put away the Kelly position sizing stuff because if you think you have an edge then you are making big bets that you alone can locate a "missing sub" better than the market can. wabuffo p.s. the USS Scorpion story is also featured in James Surowiecki's "Wisdom of Crowds" book.

I believe that one has to think in terms of the consolidated US Federal government debt mix as the sum of: (1) currency in circulation + (2) bank reserves + (3) US Treasury bonds owned by the public - (4) US Treasury bonds owned by the Fed. Some things that are going to happen this year: 1) US Treasury spending will subside as we get stimulus behind us. 2) In addition, US Treasury debt issuance over and above that spending level will decline even more than that as the US Treasury runs down its TGA account at the Fed in time from the current $1.6t down to $800b or below as per the plan released by Yellen's Treasury dept. So spending will exceed borrowing by $800b. 3) the Fed's continued QE is therefore a Federal govt debt management policy that will continue to push the US Federal consolidated govt debt mix more towards the short end, in interest bearing reserves that can't escape the banking system. I don't see how that allows the long end of the Treasury yield curve to continue to rise over the coming year and beyond. In fact, I think we may see zero long-term yields before we see 3-4%. wabuffo

Just one clarification in my original post. RH's account at the clearinghouse is a collateral account -- there as insurance to backstop/cover customer payment failures. Co-mingling customer and broker assets is a no-no. It is not a payment account like my Fed example. wabuffo

BTW - this is similar to the Federal Reserve system. Banks have reserve account balances at the Fed to ensure that all US payments transactions between banks settle without failure. Of course, the Fed ensures no payment will fail because it backstops the whole thing with unlimited funds. But the DTCC/NSCC is a private clearinghouse set up by the financial institutions who run the markets in order to clear stock transactions and does not have an unlimited source of funds like the Fed. In the end its all plumbing... in one form or another. wabuffo

Think of it as RH must maintain a checking account at the clearinghouse. Because trades take two days to settle, RH has to have its own money (not its customers' money) in a clearing account (as do other brokers who clear for themselves as well as clearing agents) to cover a calculated percentage of the expected cash its customers must deliver two days out to settle and pay for the net buys that were placed at RH with non-RH brokers. This system of settlement balances ensures no settlement fails due to a lack of payment by one of RH's customers (or anyone else's customers). If there is a failure, the cash gets taken first from RH's account (if its one of their customers), second from the clearinghouse itself and 3) from passing the hat to other brokers. That's why other brokers like IB also pumped the brakes on buys - all to reduce settlement balances overall and reduce risk. Peterffy (Chairman of IB) said as much on Thursday night in various business TV interviews. The balance that must be in there varies with numerous factors but clearly one of those factors is exponential growth in order flow at RH. The issue for RH is that they must find their own source of cash to deposit into that account. That's oversimplifying it - but another big factor is a surge in orders limited to a few names whose price, in turn, is very volatile. This is what happened to RH last week. By Thursday RH was being asked by the clearinghouse (NSCC) to add more money in RH's clearing account. Since they didn't have the cash immediately to put in, RH had to stop the buys and only allow sells (since sells reduce the amount RH has to have in its net settlement balance). As RH's settlement balance shifted due to the stop-buy and the capital raise Thursday night, they now had the cash and added it to their clearing account. wabuffo

how many random stocks would you have to buy to approximate the results? 500? 2500? It doesn't seem like a reasonable strategy. I think there are academic studies about diversification that demonstrate that you can achieve 90% of the results of a population of stocks with just 12-18 stocks - especially since here we are talking about a median return equaling the average return. You get to 95% of the population result with 25-30 stocks, etc. Its not that unrealistic to me that a strategy of picking 20 stocks at random from the stock pages on March 31st would've gotten you close to a 100% rate of return - similar to the 4500 equal-weight index. On another board, we run an annual stock picking contest. The spouse of one of our members, picks a "control" portfolio pretty much at random. She wins a few years and always smokes most of the field other years, FWIW. Moving on to cigarbutt's excellent question about how does one pinpoint the timing for deploying this "buy crapstocks" strategy, I have a working theory on that. The macro environment has to be one of large deflationary monetary conditions (not recessionary - though that sometimes becomes the result of the deflationary conditions). The clues are a surge in the demand for US dollars and a drumbeat of not enough good collateral (i.e., US Treasuries). The gold price should also be falling (gold goes up and down all the time - but a falling gold price in the middle of the crisis signals deflation). I can count three times these conditions have happened in my 20 years of investing - a) 2000-2002, b) 2008, and c) 2020. In each case, the dollar surged, gold fell vs the USD and there was talk of not "not enough US Treasuries to go around". The difference between the three is the response of the Fed and US Treasury in each case. We went from a laissez-faire, small footprint in 2000-2002 (because of the surplus, there was actually a fear that there would be no more Treasury debt for collateral lending) to a slightly faster, slightly bigger response in 2008 to a "fire the bazookas at the first sign of trouble" in 2020. When these conditions turn around, the crap stocks go up the most because they feel the heaviest burden from monetary deflation as their large liabilities relative to their profit/equity rise the most in real terms under a deflationary compression. That's why when this topic sprung up in March, it felt like this strategy would get a good test run. wabuffo

Or am I mistaken? Equal weight. Each stock is 1/4500th of the market value of the index at the start of every month (actually more like 1/6000 - I think there are more than 4500 stocks in that index) and then rebalanced the next month. Its a theoretical construct that would be plagued with crazy liquidity and frictional costs. The point is trying to track the results of the average stock where even the tiniest microcap is weighted the same as any other stock. Its a theoretical concept but it is the equivalent of throwing darts at the stock pages at the end of March 2020. wabuffo

The significant differential performance has occurred since around October Mar 30 - Oct 31, 2020: S&P 500 total return +27.8% Wilshire Equal-Wgt 4500 +46.5% I guess it depends what you mean by significant differential... wabuffo

The point of my tongue-in-cheek post wasn't to recommend buying an equal-weight fund. My central point was that once there is a deflationary bust, you: - look for signs that the deflation is over (usually gold price stops falling and starts going up again), and then - you buy a basket of the trashiest microcaps/small caps. - hold for about 10-12 months. It worked in 2003 (after the 2000-2002 bust), it worked in 2009 (after the GFC) and it seems to have worked again in 2020. You don't even have to really do any due diligence because you want diversification via a basket. In fact, trying to pick them using fundamentals is actually a bad idea. If you look at the results of that study that I posted in this thread that did a post-mortem of 2003: - companies with no earnings/loss making companies (+117%) did better than companies with positive earnings (+44%). - companies rated F (poor) for financial health did better (+110%) than companies rated (A) (+55%). It's counterintuitive and hard to actually do in the middle of stocks falling 20-40%, but that's what the data says... so back in late March when the question was asked "how to make the MOST money from the depths of this crisis in March", this was my recommendation. Did I follow it myself? Uhhh - I'll plead the fifth. wabuffo

https://www.cornerofberkshireandfairfax.ca/forum/general-discussion/how-to-make-money-from-this-crash-lessons-from-2008/msg401716/#msg401716 Circling back to this question posed during the eye of the storm in late March 2020. How did my advice of throwing darts at the stock pages of the smallest small caps work out? end of March 2020 - end of January 2021: S&P 500 Tot. Return: + 45.8% 4500 Equal-Weight: +118.4% You're welcome. 8) History not only rhymes, it repeats! wabuffo

Where can I see this information, that he is using margin? I think folks are referring to the borrowings used by Munger to buy the two software companies in 2012 and 2013. https://www.sec.gov/Archives/edgar/data/783412/000143774914011800/djco20130930_10k.htm This is the description here in the 10-K: [click on the image for full-size viewing] And you see the amount on the balance sheet here: wabuffo

Tax rates probably won't go up until next year. And I think most wealthy individuals and corporations will be able to avoid most of the impact. The point is that tax rates matter and the market won't wait until the legislation goes in effect to react to them. The market will handicap their passage and begin to react before they are enacted (say this summer or fall). So then, what is $1 of pre-tax constant annuity-like earnings worth at a 21% federal corporate tax rate and a 3% long-term risk-free discount rate? Answer = ($1 x (1 - .21))/.03 = 26x What is $1 of pre-tax constant annuity-like earnings worth at a 29% tax rate and same discount rate? Answer = ($1 x (1 - .29))/.03 = 23x so 12% lower. Add in a slight backing up of long-term rates (discount rate goes to 4%) and it could be 30% lower (17x). For large domestic payers of US federal taxes like BRK or banks or railroads, this could be bad news (all other things being equal). wabuffo

The thing that worries me is the S&P 500 does not actually look that expensive at around 25x pre-COVID earnings. ... And with interest rates a lot lower ....So you could imagine the S&P 500 going 50% higher perhaps over the next year or two unless the Fed starts tapering or the economic weakness starts to affect the results ... or marginal tax rates on capital gains go up + the corporate Federal tax rate increases..... but I haven't heard any plans for something like that happening,... 8) wabuffo

The dude is using margin. I mean, he can't be too concerned then, right? mmm - he sold enough stock in the Sept Q to basically raise cash to cover 90%+ of the margin loan. Prior to this Q, Munger didn't hold a lot of cash on the b/s. So is he really still on margin? Technically yes, but... wabuffo

strong dollar relative to what? ...other currencies, commodities, gold,...? What is the benchmark for your question? wabuffo

The biggest difference between the late 90s and today is the monetary environment in terms of what ends the 'bubble'. And by monetary environment, I mean the supply of federal government liabilities to the private sector that provide "moneyness" (i.e., currency in circulation + bank reserves + US Treasury debt held by the public - US Treasury debt held by the Fed). from late 1997 til 2001, the US ran a surplus that peaked in early-mid 2001. The effect of this was to put deflationary pressures on the US private sector. You can see this in a FRED chart I built for that period. [click on image for full-screen viewing] You can see that the effect was to reduce the private sector's total Federal govt money liabilities by 15.5%. This effect is mirrored by pulling up charts of the USD vs commodities and currencies during this same time period. Dollars were getting scarce. Here's gold vs the USD: Here's the Euro vs the USD Here's the Canadian Dollar vs the USD (this graph goes the other way, as USD gets stronger, CAD weaker means rising trend line): This was like a blanket descending on equities slowly smothering them. Add in US Treasury yields over 6% (which is an inverse P/E comparison for a DCF calculation) and equities collapsed in Q1, 2000 and didn't hit bottom until Q4, 2002. Today the monetary environment couldn't be more favorable. Here is the chart of Federal government liabilities since 2018 (currency + reserves + Tsy debt held by the public ex amounts held by the Fed). One can see the taking-it-to-11 growth (+22%) in 2021 since the pandemic. And the incoming administration wants more based on their recent pronouncements. And of course, unlike 1999, the yield on the 30-year US Treasury bond is 1.8% today vs 6%-ish back then in terms of the anchor for DCFs. I wonder if most people are going to get caught underestimating the length and strength of this bubble/rally/pick-your-descriptor. At the very least, there aren't the obvious headwinds of 1999 forming against equities today. The only things that I think could emerge as headwinds would be if long-term 30-year yields break out above 4% AND if tax rates on investments/business enterprise go up (both personal capital gains tax rates as well as Federal corporate tax rates). In 1997, personal cap gains tax rates were cut (and later cut again in the early aughts). Just some things to think about in terms of structural issues that affect stock prices. wabuffo

There has also been a structural change on how we should perceive BRK cash pile as well: I would like to point out that Buffett's avoidance of long-term US Treasury bonds starting in 2010 or so in favor of extremely short-term T-Bills has cost BRK a lot of money. As an example, her is the bond table from the 2019 BRK annual report: Look at the fair value gains on the tiny amount of bonds in the five-to-ten year duration bucket (+84%). Imagine what the fair value gains in the ten-to-thirty year bucket would've been. It's been taken as gospel that Buffett has been shrewd in avoiding the long-end of the yield curve and staying in cash and cash equivalents for the better part of a decade. But in fact, its been a huge error that has cost BRK shareholders plenty. Is ten years long enough to call out Buffett's mistake or is that still heresy here at COB&F? wabuffo