TwoCitiesCapital

I saw somewhere recently that Grayscale had received its first inflows since conversion to an ETF. Which begs the question - who is buying the ETF with significantly higher fees than ALL other available options? I understand capital gains trapping some current investors - I don't understand new inflows. Anyone have the angle here?

Probably depends on the merger. If paid in cash, you'll receive cash. If acquired by a US listed company, my guess is you'll receive US listed stock. If acquired by a foreign listed company, my guess the ADR sponsor receives the shares, sells them, and distributes the cash to you. But I cant say for sure it will likely vary pending the scenario.

The primary reason would be just the simplicity and access. Most domestic brokers don't trade in foreign markets OR they charge exorbitant fees to do so. The only downside of buying local markets on IB was that you had to convert enough currency to make the trade and it was hard to get the right amount without uneconomic residuals sitting in the foreign currency. That being said, I believe they just announced auto-conversion of currency balances which SHOULD mean that this is taken care of and you can buy foreign stocks with USD balances and IB auto-converts the appropriate amount for settlement/commission on your behalf. I only own local holdings @ IB. I use ADRs in my accounts at Schwab. The other piece is liquidity - there may be a handful of notable instances where foreign companies listed on major exchanges via ADR might actually have more liquidity in the US than their home country, but I don't know how often this might actually matter for us smaller individual investors.

This is interesting. What do you make of India, and the rest of the BRICS, seeking an alternative trade currency for use amongst themselves in trading commodities? It seems like they'd prefer some form of basket (or perhaps crypto currency) to settle trade without use of the USD. If even India is in discussions to sue something other than the rupee, does this change your view? Exactly. I think this theory is probably true if you're not discussing the world reserve currency pairs. We will break all economic theories with the USD because we have uneconomic participants in its use - global banks, insurance, pensions, world trade participants that are all required to hold some significant amount of debt/currency despite uneconomic pricing. Any fiat currency crisis, even centered on the USD, will impact other currencies relatively harder even with better demographics, better finances, and better inflation profiles. This will happen until the pain of the USD continuously trending higher is deemed unacceptable and a replacement found.

I think he's paying too much attention to the no-moat piece and maybe that's what is holding him back? Let's ignore the moat. Let's assume insurance, and every insurance company out there, is offering a commodity product. Fairfax is still exceptionally well positioned with low duration, little-to-no capital impact from rising rates, and investments/associates that are banging on all cylinders. The earnings power is almost as perfectly predictable as you could hope barring a catastrophe and it's extraordinarily high for the next 2-3 years. Even if we assume no differentiation or skill of management, we know Fairfax will earn ~600 CAD/share over the next 3-4 years. Assuming no reinvestment and just adding to BV as retained earnings, you'd expect the stock price to go up $ for $ and that alone represents an 11-15% annualized return over the next 3-4 years without assuming compound returns OR a rerating of the stock. So why does he assume an equity risk premium of 6-10% for Fairfax with such visibility into its earnings?

This is my long term thinking as well. And my guess is that it's not so much those markets ceding to BTC (other than maybe gold), but much of it may come at the expense of real estates market share. BTC isn't really a substitute for bonds. Equities growth in profits and and assets over time may keep them from ceding much. BTC largely accomplishes the same inflation protection as R.E. with fewer intermediaries/costs/frictions so that is where I envision most of the market share will be lost - but it doesn't produce income not can you live in it so R.E will likely continue to be the largest sector by far.

I know the analyst who used to work for Semper Augustus. The view of FFH was too much blow-up risk at FFH. I dunno if that was from the insurance side or beunf uncomfortable with shorting/derivatives/investments etc, but that was the reason they were uninterested in FFH and Fairfax India when I was discussing them with him.

If the broader market was gambling on a recession, it's doubtful that the long bond would've been down ~30% in 2022. Or that oil would've been up. I think you need to revisit the big picture across ALL asset classes. Stocks down. Bonds down. Oil up. Gold up. Yea, that's inflation driving the market.

Equities also didn't do well in the 70s? Or is that also cherry picking? Can you show me a period of significant inflation where stocks outperformed both short-term bonds and commodities? We all agree that stocks are long duration instruments, but suddenly it becomes controversial to say that they have the same problems with inflation and rates ALL other long duration instruments do? It wasn't ignored. I acknowledged that so far stocks have done better over the full cycle (entirely from margin expansion). I also acknowledged that after ~3 years of this 'multi year runway' that earnings are nominally flat and still significantly negative in real terms. How is that ignoring it? Do we just need to wait another 3-4 more years to catch back up? Stocks are a great inflation hedge IF you have ~7 years to wait for them to be? The absolute peak for the indices was like November 2021. The absolute peak for most names in the index was summer 2021 (you've even pointed this out before). Using the beginning of 2022 was convenient from a calendar year perspective because 2022 is when inflation really showed up and rate hikes really started. It was a few months/percentage points off the top for both stocks and bonds, but it doesn't look much better if you rewind further back into 2021. It improves the nominal peak-to-trough drops (for both stock and bonds), but also extends the time in which stock returns underperformed inflation That hasn't mattered in prior inflations when stocks did very poorly. Why does it suddenly matter now?

Isn't the rule of thumb that they can invest roughly the accounting equity of the business in equities? The remainder is reserves/float for the insurance? So they could probably add another $10B in equity if push comes to shove. Maybe more as long as we avoid major catastrophes over the next year or two. I think the big win will NOT necessarily be from adding $10B of equities - but being able to roll a large portion of the $35B+ in fixed income into corporates/mortgages opportunistically to add another ~1-2% to the portfolio yield as well as the realized capital gains when the opportunity presents itself.

I think this is what people are missing. Long bonds were a terrible investment in 2021. They're significantly better today and the risk/reward is skewed to the upside IMO. Even if inflation accelerates, it'd have to go up quite a bit for 30-year mortgages to be a bad bet. You'd likely lose some on the 20 year treasuries, but reinvesting coupons at rates of 5+% on discount bonds isn't a bad way to go IMO even if you show unrealized losses for the first 1-3 years. I disagree. 2022 returns were abysmal for big tech as inflation was accelerating. Meta was down ~65%. Apple was down ~27%. Google was down ~40%. Microsoft was down ~30%. Nvidia was down ~50%. They only turned around once it was clear inflation was abating. Intermediate bonds stomped big tech in 2022. Short term bonds even more so. This is why I keep repeating ad nauseum - stocks are NOT an inflation hedge. They do miserably when inflation is elevated and/or erratic. They do well when its consistent and low. I don't disagree that real returns for bonds will likely be close to zero over a 10-20 year type time frame. But I expect that they will be significantly positive in the intermediate term. This hasn't really played out though. Margins fell pretty quickly in 2022. Companies cannot raise prices as quickly their input costs are rising so margins get compressed at the front end of inflation acceleration. Then, you also have consumers that cut back, or substitute cheaper options, meaning that higher prices often lead to lower volumes and you're still behind. This is precisely why corporate earnings fell in 2022. After 2-years of moderating inflation, rising prices, and etc - corporations have only barely made it back to 2021 in nominal terms but are still significantly negative in real terms. Equities did better than bonds over the whole cycle, but underperformed dramatically on the front of it - even with bonds starting from a historic bubble. What happens if we accelerate again? And bonds aren't in a historic bubble? They probably outperform again - and even more dramatically this time.

I just don't think you need higher rates with GDP where it's at. Under a lowish/stable inflation regime, I'd argue the nominal rate on the 10-year should roughly approximate GDP growth. At this point, were ~2-3x that level. The gold/copper ratio is also suggesting significantly lower 10-year rates. But the 10-year rate probably won't/can't go meaningfully lower until rate cuts occur and 5+% short term rates are absolutely restrictive in a 1.6% annualized growth environment.

Should we add CLF to this list? $5 Billion of net debt reduction since 2020. Announced a $1 billion share repurchase program in 2022. Just announced another $1.5 billion for 2024. For comparison, current equity market cap is ~8.5 billion and rough EV is ~11.5 billion. Not an insignificant share count reduction/deleveraging that has occurred and will occur going forward.

I haven't verified myself, but saw somewhere recently that S&P earnings are actually negative YoY ex the mag-7. If true, it's not exactly a ringing endorsement for equities in general. Nominal EPS for the S&P 500 index barely surpassed its 2021 nominal high (and is still significantly negative on a real basis) and we're already rolling over again?

Same. I don't think I've seen a more favorable set-up for fixed income in my adult life. Yields significantly in excess of both GDP and inflation?!?!?! High single digit returns available without taking much, if any, credit risk?!?!? With a little leverage, spread, and/or illiquidity premium, you can easily get 8-12%. 401K is entirely in core bond and intermediate treasuries funds. All of my short-term fixed income products have been sold and rolled into intermediate/long treasuries, agency MBS exposure, OR fixed income CEFs utilizing spread/leverage and discounts to NAV. Betting on a move in rates sooner rather than later.

1.6% growth with interest rates @ 5+%. That's how the Fed cuts rates with inflation over 3%.

I mean, the US sends Israel ~$3 billion a year to buy our military products so....

They were wrong for 2015/2016, neutral in 2017, right 2018/2019, and wrong in 2020. All that benefit of missing unrealized losses from 2016-2019 was reversed to missing out on billions of unrealized gains in 2020 making the outcome moot. The cost of that round trip to nowhere? 2-3% a year minimum in interest income in billions so 10-12% minimum. And what happened to any 10-year bond bought in 2015/2016? They were 4-5 year bonds in 2022 when rates really started rising. You'd have lost roughly 8-10% at most in 2022. So you'd still be a positive net on those bonds even after the rise. What saved them and made the trade work was float exploding as rates rose. The cost of 2-3% a year was borne on a much smaller portfolio than the benefit of being short duration as rates rose 5% on a much larger portfolio. But they couldn't have known/planned for that. It was luck that insurance pricing exploded post-covid. And we're still only considering a buy/hold scenarios. Fairfax has a history of being savvy with rates - I really think the most likely scenario, had they actually had duration on, would've been them selling it for huge gains to redeploy elsewhere. Point is - if you're giving them credit for being short duration in 2022, we also have to net that against under-earning from 2016-2021.

I agree with this. I was one of the few pounding the table on FFH back in 2020/2021 after having sold out in 2018. Fairfax didn't recover with the rest of the market, DIGIT has done superbly well over the prior 2-years, and it became clear FFH was incredibly cheap even with very modest assumptions. I was guestimating $500-600 USD/share was a reasonable valuation, but it was reading for like $250-450 USD for much of that time. But it WAS interest rates that changed things. Interest going from 0 to 5.5% allowed Fairfax to capture billions in interest income in 2022/2023/2024 and lock that in with visibility for the next 3-4 years. That, paired with float exploding in a hard market, are what we're thinking game changers to justify the move to $1000 and still make it look like a reasonable value here. It's what made a 2-3x and 4-7x. Prem deserves credit, but it's not without luck. There was no guarantee, or foresight, that we'd have a hard market this strong for this long. Also, the fastest rate hikes in history was basically on nobodies bingo card in 2021. The team executed very well on it, but that doesn't mean that the environment/beta wasn't the huge portion of the tailwind. It was - but if you're going to give them credit for that then you also have to ding them for the opportunity cost of sitting at 0 for 5-years waiting for it and missing the turn in 2019/2020 when rates reverted back to 0. How many billions were left on the table from 2016 - 2021 as we waited in short-bonds earnings practically nothing? What would those billions have compounded into if redeployed at covid lows? Or used to increase share repurchases? Or invested into treasuries that could've been sold at massive premiums near the covid lows? We'll never know - but there was a huge cost to shareholders for waiting. Perhaps it paid off - but it paid off because we got lucky with the steepest hiking cycle in history paired with an incredibly strong insurance markets allowing a greater weight of portfolio to be reinvested at high rates versus what was invested/missing interest at low rates. Those didn't have to happen in tandem and isn't what Fairfax was prepared for when they went to 0 (you'll recall they did it under Trump expecting higher rates due to economic growth - not inflationary animal spirits under Biden). I'm happy with the outcome. But I'm not judging the process by the outcome. Ultimately they got one interest rate call wrong and then they got one right. And it just so happened the portfolio was significantly larger for the right call then the wrong one which is the only reason that panned our so well. And that portfolio size was luck

No - it's your scenario that doesn't really happen. You're basically the only person who advocates holding BTC as a "cash instrument". Everyone else recognizes its very volatile and incredibly risky for anything shy of a 3-5 year time horizon...i.e. "not cash". But even with that example - I buy more BTC every 2 weeks. I also buy more stocks/bonds every 2 weeks. All with the expectation they appreciate in value. And yet? I still spend. We could actually make a pretty good argument that I'd spend quite a bit more of that money being socked away if I didn't have to prepare for the eventual inflation that is required for the federal debt/deficit to make any sense. We are currently living through a real time example of people getting paid 5% on CDs that are sub-1 year. 4-7% on short term bond YTMs with very limited volatility. 5+% on money markets. And yet - people still seem to be spending if you look at GDP. So if people still spend when the alternative is to take very, very moderate risks and earn 5%, why wouldn't you think they'd spend when they can riskless having a stable currency?

This just isn't true - I'm not independently wealthy. I can't simply stop working tomorrow. I still spend plenty on 'wants' in addition to 'needs' and its because I have enough to feel comfortable spending on 'wants' knowing what I have put away, and likely what I will put away. If I knew that the cash in the bank was going to be worth more next year, just like I envision my stocks will be, it doesn't mean I don't spend it. I simply means its a higher bar to get me to spend then it burning a hole in my pocket because holding it is penalized via inflation. I still spend plenty despite knowing I could sock it away in a short-term bond fund and earn 5-7% YTMs. Why would it be any different knowing that my $100 of cash is still going to be $100 of cash next year? Or even if it was going to be $101?

I'm not making the argument that people should get wealthy off minimum wage jobs and limited savings/investments. I'm saying the $ you traded your labor for today should still be worth same tomorrow because the labor has already been delivered. Having the $ drop every day/week/month/year simply steals from you after you've already delivered on your end of the bargain by devaluing what you traded for AFTER the fact.

I mean I literally said I agree with y'all about Biden... But if one of them is operating within the political apparatus and the decisions can be undone at a later date by others in the same political apparatus And the other is unleashing angry mobs of violent populism and calling into question the very meaning of truth so he alone can be the purveyor of absolute truth to said angry populist mob regardless of reality/evidence/critical thought would suggest... Then yes, I'll take the former any day. Ideally these wouldn't be our choices, but America is so focused on not "wasting your vote" by supporting an alternative option, but end up wasting their vote on one of two bad ones...

This system is designed such that people trade time/expertise for money and then the government purposely devalues that money so that they're forced to take risk of loss just to run in place for the time/expertise already delivered. It is theft, it is immoral, and it is absurd to suggest that this is a foundational teaching that should be put forth in schools. If you want to start calling the USD a "transaction" vehicle, then be my guest. But everyone else currently calls it money, and that word implies something is a means of exchange, a store of value, AND a unit of account. Otherwise, we're all just bartering collectibles and back to the days pre-gold.

This simply isn't true. Just like I don't put every dollar into bonds/CDs/etc because 'they'll be worth more tomorrow" and still actually spend money each and every day. At some point you feel sufficiently comfortable with your level of savings, and have desires to be met that you'll spend for. I think you can argue people will be more discerning with their spending - but it's not like people stop wanting things. Inflation distorts this picture and encourages people to spend more and more money, take more and more risk to earn returns, and hoard assets all because we can't simply hold cash and have it retain the value we put into earning it... And then when wages/etc aren't benchmarked to that inflation - it means a % of the population is falling behind daily. If you create a system that does that, it's not surprising poverty and homeless have become rampant issues in major cities that have experienced high inflation over the last ~3-4 years.