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TwoCitiesCapital last won the day on May 29

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About TwoCitiesCapital

  • Birthday 04/04/1989

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  1. I still lean in the recession/bottom isn't in camp. The longer it takes for us to get there, the higher the level of the overall bottom can be due to retained earnings/repurchases/etc. Perhaps if it happens in late 2024 then we can end at similar lows to to what we saw in October and just let out the pressure in real returns and time instead of nominal ones. It's possible (though I'm skeptical). That being said, even with the drawn out nature of this slowdown (longest stretch of leading indicator contraction in history), I'm more comfortable owning bonds. 6-7% YTMs in short and intermediate duration core bonds funds that are predominantly treasuries/mortgages? And a potential double-digit kicker if rates are cut substantially? Versus a 20+ multiple on contracting earnings from stocks that have spent two years absolutely failing to be inflation hedges? All while most economic indicators outside of employment (which lags) are screaming slowdown or already well within recessionary ranges? I think I'll take the 6-7% with little risk than trying to sell to the next greater fool and bag a 15% return. Still have substantial equity exposing I'm trading around, but every month that goes by that we remain in "bull" mode, I'm trimming net exposure and adding bond funds. Maybe I'm wrong about the recession - but at least there are reasonable alternatives this time around to hide out in
  2. Would also add M2 is cratering faster than velocity is accelerating. If M2 is going down faster than velocity is rising, typically that foretells of GDP contractions. I expect additional draws of liquidity as the Treasury has been spending down its account and will need to rebuild the balance sucking additional liquidity out of the market. We had plenty of deficit spending in 2008 and were running trillion dollar deficits going into the economic weakness in 2019 that preceded covid (were already in a manufacturing recession long before the pandemic hit). I doubt trillion dollar deficits change much in the near to intermediate term outlook and still expect a recession - potentially a deep one.
  3. The exorbitant privilege of being the world's reserve currency....until we're not. With the way the current monetary system is set up, the US HAS to run trade deficits to provide a constant supply of dollars to the rest of the world so they can have enough dollars to settle trade in. We import their goods and export dollars they need to settle their imports of raw materials. What do they do with those dollars? Hold them as reserves in the form of US treasuries until needed. How do they get treasuries? Well the Treasury has to issue them. WE basically have to run twin deficits to provide enough treasuries to supply the world with dollars and a constant flow of attractive, liquid reserve assets (~6.5 trillion in global reserve assets currently denominated in USD). Now the size of the deficit is probably larger than what is required by this process, but then you have the dollar claims of the euro-$ banking system providing a steady bid too, but that is too complex and beyond me to know the impact. As long as we're the reserve assets, we probably get a pass until a better alternative reserve comes along. Everyone else? Not so much.
  4. Agreed. S&P equal weight telling a very different story from the S&P cap weight. I've been buying a few commodity companies now that they've sold off significantly and I can reinvest profits from prior trims, but still waiting for the last shoe to drop - corporate profits. In a recession, I expect most things will get cheaper and most stuff outside of oil and small regional banks andaybe 1-2 other sectors don't seem to be pricing in any recession. Still prefer to own quality spread and duration. I expect it'll be city dependent. I doubt the Midwest gets hit as hard as population centers on the coasts. But yes - we've clearly overbuilt CRE. If even 10% of workers are remote on average, you have a very large abundance of office real estate at the margin. And my guess is the figures are quite a bit higher than 10%. Sure it can be converted - but that takes time. And it takes capital, and capital requires a return, and that return is largely going to come from lower valuations and not increases in cash flows. Maybe its not true of every building or even every city - but I expect CRE to be plagued with issues for the next 5-10 years as leases come due and aren't renewed and redevelopments are slow to happen because people can't afford to write down the value of the property against the debt carried on it. It could also be true that elevated inflation bails them out and cash flows CAN make up a decent portion of it - but in a real basis, and compared to other asset classes, I expect it'll still be a poor comparable.
  5. I'm in the Midwest/rust belt. We never really had a huge boom of corporate real estate here given that the city has been shrinking for 60 years. That being said, still seeing large office towers sold prior to imminent bankruptcy from desperate landlords. My company gave employees the choice of hybrid or fully remote. Less than 1/3 chose hybrid (requires an average of 2 days in office per week). The rest are fully remote. We own at least 6-7 large office buildings outright with some smaller buildings across the street from our canpus. We sold 1-2 of the small buildings and are demolishing one of the 6-7 large ones. Despite being "well insulated" from overpriced CRE, we're still here....
  6. During the GFC, they had multiple counterparties. It wouldn't surprise me if it were 2 or 3 here as well. Especially since these wouldn't be centrally cleared. Prem said each year with the ability to extend. Hard to say exactly how this was structured, but my guess is there are quarterly "resets" where cash is exchanged between the parties to settle the contract. The notional would adjust higher/lower to reflect the new value of those shares at the reset date and the financing rates would also change. Functionally speaking, there isn't much difference between a reset and a maturity except that the maturity date gives one or both parties the ability to renegotiate the terms of the contract - this would typically be the counterparties renegotiating the spread they demand over the financing rates, but Fairfax could also renegotiate the notional larger or smaller.
  7. Sounds like the shares you own aren't highly shorted or in demand. I also make negligible interest on my securities at IBKR. But something is better than nothing which is basically what I get elsewhere. If you want to earn "real" interest, then you need to own something highly in demand by shorts willing to pay high rates to short it....which may not end well for you.
  8. Front end bonds are all priced off of Fed policy, so it makes sense they'd be more volatile as that policy is uncertain. Longer term bonds though? The 10-year has been between 3.5-4% that whole time. In fact, with a few short lived exceptions, it's been in that range for the last 7 months. I'd say that's fairly reasonable volatility and that the 10-year is staying fairly consistent in what it expects for the US economy: a slowdowns of economic growth and inflation coming down significantly.
  9. You can call it absurd, but it's to reflect the average renter's inflation, which occurs with a lag from the increase in prices. From that perspective, it's more accurate than immediately marking everything up to reflect the rise in price. Homeowners don't immediately feel the rise in price either because it only matters when they sell and rebuy so much t makes sense to prioritize rents.
  10. I'm glad they extended duration last quarter. I hope they keep incrementally pushing it out. The primary thing keeping inflation positive at this time is the lagged effect of housing still coming through as positive even though home prices have been falling for a few months now (and seem likely to continue). Inflation is going back to zero, at least temporarily, regardless if there is a recession or not. Locking in 1.5-2% real yields before inflation falls off that cliff would do A LOT to hedge some potential equity and economic downside and provide consistency to the income.
  11. Because for the last few years, QQQ has been highly correlated with TLT. Paying a 30x multiple to earnings provides a similar duration to long term treasuries. Basically QQQ should trade like a long duration Treasury with a corporate spread premium. In addition, for years people have been saying higher multiples on the market are justified due to low interest rates and that there was no alternative to equities. Now that interest rates have risen substantially, it seems few are suggesting that multiples need to come down OR that flows might go to alternatives that are significantly more attractive. Just seems like they expect to win both ways even though it's not really logically consistent if TINA ever was true to begin with.
  12. I grew up on the Gulf coast and have plenty of connections down there. Premiums for storm and flood insurance have absolutely exploded in the last 5 years. Some are paying higher premiums for insurance than their current mortgage. The insurance companies absolutely seem to be responding to this threat - my real concern is how anyone other than the ultra wealthy will be able to live anywhere along the coast line given how expensive the combination of housing and premiums have become.
  13. Thoughts and prayers doesn't seem to be working Guess we'll send more
  14. Between May and August 2000, QQQ rallied 45% before turning back down and continuing it's bear market and losing an additional 70% over the next 8 months. I'm not suggesting we see a repeat of 2000. Just pointing out 20-30% rallies aren't UNCOMMON as bear market rallies and are hardly evidence of a sustained recovery. Liquidity is still tightening. High yield spreads are approaching levels from last year where stocks were making lows while stocks are near local highs. Leading indicators continue to be significantly negative. Coincident indicators are rolling over. Consumers are continuing to demonstrate signs of becoming tapped out. This is hardly an environment that is supportive of assets with uncertain/cyclical cash flows. Particularly assets whose earnings are already falling despite "beating" newly lowered estimates.
  15. Isn't IDBI for Fairfax India? It's not competing for the same capital as Fairfax Financial's uses.
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