LearningMachine

If 5bps valve turn could have such a big impact, could Fed turn these valves in the future also, making it hard to predict TLT/GLD/GLDM prices AND their timing?

@wabuffo, curious what makes you more comfortable about gold etfs over other ideas for inflation protection? Speaking of gold ETFs, have you considered GLDM?

Interesting how Paul Tudor Jones mentions at around 4:55 that now is not the time to be invested in financ[ial assets], but better to be in commodities. This brings another distinction that someone mentioned earlier #1. Inflation in financial assets vs. #2. Inflation in day-to-day products/services. I wonder if another way to think about this is that with the monetary supply going up and interest rates being low for so long, we have been having inflation for a long time. So far, the monetary supply was going in the hands of the rich who don't spend that much and end up saving or buying financial assets, which has been increasing the price of financial assets. Now, when we see stimulus and minimum wages go up, putting monetary supply in the hands of lower-income spenders, and we have bottlenecks happen, all of a sudden we see them compete with each other on limited products/services and we see inflation start to happen in day-to-day products/services. The danger here though is that as inflation starts to shift from financial assets to day-to-day products/services, it will result in higher interest rates/discount rates, bringing the value of financial assets lower. Another way to say it is that the value of financial assets is basically a multiple on price of day-to-day products/services. With inflation in day-to-day products/services, that multiple goes down.

Because 10% inflation in prices will take more than 7 years for prices to double. However, 10% inflation/interest rate will have an immediate impact on discount rate and also an immediate impact on cost-of-capital for some. When inflation was running red hot in 1970s, if you had invested in S&P 500 in Dec 1972, you'd have lost 46% of your investment as of Sep 1974. However, if you had prepared in advance and stayed in cash until Sep 1974, and had invested at that time, you'd have done ok. This was a time when P/Es were not high to begin with, and interest rates were not that low to begin with. This time, it will be devastating if inflation/interest rates shot up that high by any chance. That said, it is possible that Mr. Market might be irrational and not look at that impact on discount rate for some amazing companies, and not give us an opportunity like 1974. So, we have to be prepared both ways. However, I think it is likely that it will give us an opportunity for at least not-so-amazing companies. The video at https://www.youtube.com/watch?v=AcQ0UlSzohA does a better job of explaining how market's discount rate is impacted by higher inflation and higher interest rate, e.g. risk premium goes up and risk-free rate goes up. On top of that, margins go down for companies without a lot of pricing power. Also, as Buffett explained in his infamous inflation article, asset-heavy companies have to replace the assets at high-inflation cost, not leaving much for shareholders.

At the May 1, 2021 meeting, Buffett acknowledged "very substantial inflation" using the clearest language he has ever used on inflation: At the same time, BRK March 31, 2021 Balance Sheet shows Total Cash: $145.439 Billion Investment in Equity Securities: $282.097 Billion Liquid Portfolio (Cash + Equity Securities + Fixed Income Securities): $447.563 Billion Cash as percent of Liquid Portfolio: 32.5% I understand Cash position is only 16% as a percentage of total assets, including hard assets. I also understand he has said he also needs some cash for any circumstances that might be faced by BRK. I also understand Buffett has been preparing for inflation all his life by being in the right businesses with pricing power. That said, even with all the early data on the onslaught of immediate inflation that he is getting, he is choosing to have almost a third of his liquid portfolio in cash, not in gold, not much in oil, but in cash! Based on his experience in 1970s that he has recalled so many times, he is probably one of the most prepared individuals for inflation! I wonder if he is hoping for another 1974-style opportunity, and the best way he could think about preparing for that was to be in cash! What do folks think about Buffett's strategy?

BAC also had "$450 billion in terms of our ability to fund loan growth or invest" as of April 15, 2021. See https://app.tikr.com/stock/transcript?cid=19049&tid=2592914&ts=2251951&e=670919338&refCode=u8yosp#. In the past, they have said they were ok with getting 10 bps while they wait for higher interest rate environment. Also, from BAC's clients perspective, "there's a lot of cash on the sidelines. And when you think about our business and the size of our business relative to the marketplace, I think it not only tells you where investors are, which is still maintaining some caution, which is as a contrarian, that's a bullish signal, makes me feel like we're not very late stage. And I think if you kind of gross up our kind of excess deposits or uninvested funds right now, that speaks to $1 trillion of buying power that could come into the market over the months ahead when client perspectives of risk do shift more meaningfully." See https://app.tikr.com/stock/transcript?cid=19049&tid=2592914&ts=2319413&e=717689992&refCode=u8yosp. Wonder where clients will invest/spend that cash.

@wabuffo, I really like your analogies. When we look back at the 2020s decade in the future, I wonder if we might say some events caused folks to realize the currency debasement going on so quickly this time as well, e.g. Home builders realized quickly they had to pay double (?) the price for lumber because of bottlenecks caused by covid Small business owners realized quickly they had to pay almost double the wages they used to pay pre-covid Soon, restaurant customers realized quickly they were paying almost double the prices they used to pay pre-covid Soon, consumers started realizing they were were paying almost double for their favorite foods at supermarkets Soon, consumers started realizing they were paying almost double to their wireless company for their bundle of streaming packages + wireless service for their phone, watch, AR glasses, 5G laptop for work-from-anywhere lifestyle, etc. Soon, the health insurance companies started realizing they were paying almost double to drug companies and had to double the cost to their customers And then, near the end of the decade, the Chinese economy became bigger than the U.S. economy, and RMB started overtaking USD for trading, just like the American economy and USD had overtaken British economy and GBP a century ago. ... It will be interesting to see what history will say about 2020s. Lets hope U.S. stays united throughout all this.

And, why did that happen itself? Could it have been because it might have been harder to provide in increased quantities something that was "bottlenecked" or "limited in supply" to people with increased money supply, which had been happening already with increased wages?

Because money supply didn't get as much to people who will be competing to get the same bottlenecked goods & services, unlike now with the stimulus, unemployment funds and now wage increases. Similar to how before the 1973-1974 oil "bottlenecks", money supply had already started going up in terms of wage increases in the hands of people who were going to compete for that bottlenecked oil. This time we might end up calling some other oligopolies/cartels/monopolies or something that is truly limited in supply that starts the fire as the "bottlenecks".

Thanks @nafregnum for sharing. I really liked that he talked about some nuggets that folks forget at times: How to identify how big is the barrier-to-entry: Figure out what is the minimum market share you need in order to be viable now Electric car market: Now, if a market is small like the electric car market is today, you probably need to get to 20% market share to be viable In the mature global auto-market, you can be viable at 2% market share. At 20% requirement, Tesla maybe able to keep rivals out, but at 2%, nobody is going to keep anybody down, and guess where the electric car market is going. Not a chance Tesla will dominate 20 years from now because barrier-to-entry will be lower with bigger market. Cloud computing: The market is going to get really big and it is going to be harder to dominate [because percentage market share needed to enter market will go down] Checklist to keep in mind that DCF doesn't address #1. DCF doesn't make distinction between estimates of near-term cashflows and estimates of distant cashflows Near-term cashflows might be closer to being correct, but distant cash flows are more likely to be incorrect. DCF adds bad information from distant cashflows with good information from near-term cashflows Growth stocks have even more extra-ordinary emphasis on future cashflows [that are likely to be incorrect] #2. DCF has no easy way to integrate strategic insights #3. DCF is all forward looking as it is based on estimates of the future and completely ignores balance sheet Why inflation is a likely possibility: Because our economy is 70% oligopolies and local [meaning niche] monopolies

Thanks @aws, that's exactly what I ended up doing once. I ended up selling the options in the same tax year to balance the short-term gain. Waiting to sell the options next year was gonna make me pay the tax on short-term gain the year I bought the options. However, you're right that buying options with expiration in next year gives me the option to decide. If there is a big gain in options, I could then take the gain next year, while paying the taxes on the original short-term gains this year. You could potentially extend the strategy to move the big gain in options to being a long-term gain, but with speculative gains, might not be able to predict well. Another reason I was thinking the trade might still make sense is that I'd be effectively trading (1) one short-term gain in 2021 from selling a stock for (2) another potential short-term gain in 2021 from a speculative option-based position. Because #2 is speculative & volatile, #2 will likely result in either zero or multiple times of short-term gains from #1. If it is zero, I save on taxes (which is a benefit that other investors in that speculative option might not get). If it is multiple of #1, I end up paying an even bigger tax bill, but still end up making a multiple of #1. Overall, looks like we agree that if one uses short-term capital gains to fund speculative options that they either sell within the same year or let expire within the same year, their effective cost is less than those who are not using short-term capital gains to fund them.

Thanks @Castanza. What do folks think about partnering with IRS to make such speculative bets, e.g. use short-term capital gains to fund put options expiring within the tax-year, reducing the effective cost of Put options compared to other folks? If it pans out, great. If it doesn't, you save on taxes - of course you still lose the money but you would have paid a big percentage of that money to IRS anyway. Anything I'm missing?

If you are going to hold a broad-index for the very-long-term, maybe you're right over the very-long-term as S&P 500 ended up reaching its non-inflation-adjusted 1972 high in 1980 and again in 1982. However, when adjusting for inflation, 1968 high took 25 years to recover in 1993. Please see https://www.macrotrends.net/2324/sp-500-historical-chart-data. The reason I said long-term is because 10% price increase every year will take more than 7 years for prices to double. However, 10% interest rate will have an immediate impact on discount rate and also an immediate impact on cost-of-capital for some. Someone neck-deep in debt at 5X EBITDA at 3% interest rates having to now renew debt at 10+% interest rates will have a hard time even if they were able to increase prices by 10%. This video does a better job at explaining how market's discount rate is impacted by higher inflation and higher interest rate, e.g. risk premium goes up and risk-free rate goes up. On top of that, margins go down for companies without a lot of pricing power. Please see https://www.youtube.com/watch?v=AcQ0UlSzohA. Also, as Buffett explained in his infamous inflation article, asset-heavy companies have to replace the assets at high-inflation cost, not leaving much for shareholders. That said, it is possible that Mr. Market might be irrational and not look at that impact on discount rate for some amazing companies, and not give us an opportunity like 1974. So, we have to be prepared both ways. However, I think it is likely that it will give us an opportunity for at least not-so-amazing companies.

Thanks@DeepSouth for sharing. I do believe the probability of that event is higher than what market is believing it to be, but don't think the probability is 100% within the next few years. Any particular multi-year-long cheap OTM interest rate options you'd look at? The issue with options and futures positions is that it is very hard to predict the timing with high certainty. Mr. Market can be irrational longer than anyone expects. I'm looking for stocks that do reasonably ok with both (1) low inflation & low interest rates, and especially (2) high inflation and high interest rates. If I stick to only #1 as market is doing mostly, finding stocks can be easy. If I stick to only #2, that gets a little harder. Now, if I want to satisfy both #1 and #2, that gets even harder :-).

@Gregmal, what are you thinking is still cheap for putting in new money (not from perspective of holding)?

Thanks @wabuffo for starting this discussion. Now, if capital gains are ~50%, and you wanted to avoid paying taxes, and just wanted to sit on what you bought, are you ok with holding 4500 Equal-Weight forever, or would you rather hold S&P 500 Tot. Return forever?

Any non-commodity food product that you will not substitute for another similar product even if price went up faster than general inflation, either for yourself or your kids? Could be a store-owned brand or an established packaged brand?

Thank you @John Hjorth for sharing a measured article with some rational thought. No surprises. He alluded to it but I wish he had emphasized a little more how immediately an 8% inflation rate can result in 10% interest rates, and how immediately and drastically a stock price can fall for a company with a lot of debt when its cost of capital goes from 5% to 10% vs. price increases taking 9 years to double at 8% inflation rate. As Mr. Buffett said on May 1, "conditions change very, very, very rapidly sometimes in markets." It may not happen but better to invest with the mindset of requiring reasonable returns in both situations.

This made me smile :-). I had to go look up that scene. Gotta add re-watching Big Short to my list :-).

It didn't pass my principles around debt, valuation, and historical price. I got flak for it here last year, but because @Spekulatius is asking, I'll share again: debt situation must be such that the company can survive disruptions without impacting shareholders, including possibility of interest rates shooting up to 10% anytime. The current situation is such that very few companies end up passing that bar. At debt of ~5X EBITDA and terms to-be-known on debt, Discovery wouldn't pass that bar. I understand many here believe that interest rates will not go up much and they might be right. I'd like to make reasonable returns weather it happens or doesn't happen.

Thanks @Baklava. This is the exact chat I was remembering, not Li Lu's chat. My memory had incorrectly associated it with Li Lu :-).

DISCK. I was able to get out 100%. In all the excitement, I had made a mistake in forgetting my long-term principles.

I have a faint memory that in one of Li Lu's chats, he mentions the "paternalistic" behavior of Chinese regulators, and how it had caused an odd case that a company had understated earnings so that they wouldn't have to have a negative surprise in the next earnings release. I have gone through several of his chats again, and couldn't find it in any of these: https://www.youtube.com/watch?v=FiHrWy2jGbA and Transcript of Li Lu and Bruce Greenwald - Value Investing in China - Roiss Investment Insights (substack.com) https://brianlangis.files.wordpress.com/2018/03/li-lu_s-lecture-at-columbia-2010.pdf https://www.youtube.com/watch?v=y3c2PKupiu8 I tried searching for "Li Lu" at thecobf.com, but it doesn't find anything, even though searching for Greenwald does find somethings. Anyone else remembers that chat, and has a link to the video and/or transcript?

Found someone who thinks like me about AI :-). Really like the quote at 14:10: "AIs can travel the way they are already traveling in my lab ... wirelessly" This is huge. Evolution hadn't developed an organism whose nerves could be wireless. So far :-).

Thanks @Jurgis. Am I reading it correctly that XBI's forward P/E is reasonable? Have you found it to be reliable? Other than QQQ, IWO, IWF, XBI & FSPHX, what other ETFs are you thinking might be a good way to catch growth?