TwoCitiesCapital

Two years ago, with a net worth of more than $5m, I couldn't get a loan for $100k. I was trying to purchase a $200k property in Sacramento, a 4-plex with $32,000 gross rental income. The property was fully occupied, the rents were below market. Wells Fargo and Bank of America, plus other local banks. None would bite. They wouldn't loan me under 2% of my net worth! On a property where I was putting 50% cash down in a market that was already crushed in valuation! The loan amount was roughly 3x the gross rent! And then John Stumpf (Wells Fargo CEO) would get on TV and claim they wanted to make loans but there were no creditworthy opportunities. What an unbelievable statement. Their chief excuse was that I didn't have experience as a landlord. I lived a thousand miles away in Seattle and, as I told them, was going to hire a property manager (with experience). I had this issue too. In 2011 a friend and I were looking at buying a triple-net lease in small town Mississippi (about an hour from where we both went to college). The building was occupied by a Dollar General with 5 years left on the lease and option to extend for a few more years. There was one other dollar store within 30 miles and no Walmart within 30 miles and the Dollar General had grown sales from 700k a year back in 2000 to over 2M a year in 2011. There was also a % of sales over 1M option that kicked in at the end of each year that was a great supplement to the annual rent :) . The DG was already negotiating signing a new 10 year lease if the current owner would drop the option. In other words, they're weren't going anywhere anytime in the near future. The yield on the property, including the option, was 12-15% after expected expenses/taxes and before any leverage from a loan. It was a motivated seller who needed cash to cover mortgages on unoccupied condo developments in Denver. We were going to put 30% down. Both my roommate and I have ample savings, no debt, great credit scores, and individually had incomes that could easily cover the mortgage bill without any monthly income from the DG....and yet, no banks would bite. They all lead us on for weeks through loan application processes before telling us ''no'' for some bullsh*t reason ("you have no experience", "we don't lend for out of state properties", "we don't lend to out of state principals", "we'll give you a SBA loan with an amortization of 7 years but then it's uneconomical", etc. etc. etc). I've hated the big banks ever since. Between that and the "goodwill" they created with me during the crisis, I hope that I can build a business that will fund itself and will never have to give them 1 cent of my hard earned money again - they clearly don't do anything to deserve it.

Hey guys, Was looking at bull spreads and bear spreads over the weekend. I built myself a small calculator to the heavy lifting for me. Figured some of you may be interested in using it. Some required disclosures: 1) I haven't really tested this yet. I've casually looked over the numbers, but haven't really run much of a scenario analysis. It's quite possible there might be a small error in it. If that's the case, I'm sorry. Let me know and I'll fix it and repost for everyone. 2) You need macros enabled to run. 3) I refuse to accept responsibility for any losses incurred while using the tool ;) Please give me your feedback. I enjoy making things like this and am considering starting a small freelance thing on the side doing so for small businesses for data analysis. Just need to know about the ease of the design, etc. Instructions are pretty simple - 1) Enter the ticker of the equity you want to analzye 2) Enter the expiry month 3) Click refresh data 4) Enter the strike prices you want to initiate the position at and how many contracts you want. It will do the calcs for you. Options_Workbook.xlsm

P/Es may have stayed high relative to U.S. averages, but it's quite clear from that chart that there was a pretty big compression nonetheless. First half of the chart shows a multiple range between 40 and 100+. After that the range is between 20 and 40. Still high, but evidence of major multiple compression. I do think stability is and low rates of inflation or deflation is key. Its my understanding that Japan has undergone persistent, yet low, deflation. This still falls right into stable and low rates and shouldn't really be much different from low and stable inflation

Forgive my long post. I'm going to try to coordinate meeting with some of you now that I've gone through all the posts :) My story is St. Louis, MO > Belleville, IL > Wichita Falls, TX > Biloxi, MS > Shreveport, LA > Hattiesburg, MS > NYC Hey, you're in Brooklyn? Want to meet for a drink and stock talk? Meeting up sounds like a great idea. If all of you are still in the NYC area, why don't we coordinate something? It'd be great to finally meet people from the forum. I don't have very many peers my age who enjoy this kind of stuff and it would be nice to find like minded people who actually enjoyed talking about this stuff on a semi-regular basis. PM and I'll coordinate something. I visit NO about once a year. Went to college about 2 hours from there and have a lot of friends in the area I visit. Find me on facebook or something (same name as my username, the one in NYC) and we can meet up when I'm back in town (won't be for months though, was just there). Most of my family lives in the St. Louis area and I visit a handful of times a year. Same goes for you two if you'd ever be interested in meeting up for a beer or something while I'm in town.

This debunks nothing. If you were told that the 10 year would be 1.5% forever, wouldn't you be willing to pay a higher multiple for stocks? Markets are based upon expectations. Investors are worried that rates will increase causing a contraction in multiples. If they knew that rates would decrease, multiples would expand. I did agree with this: "But should it work in theory? The common rationale for the Fed model relates to the “discounted cashflow” approach to valuing equities. Lowering the discount rate you apply to future cashflows increases present value (the share price), other things being equal. The trouble is, other things aren’t equal." There are too many variables when trying to think about equity market valuations. That is way I don't (try not to?) think about market valuations. As the article says, bond yields tend to reflect inflation expectations which also reflect growth expectations. When investors adjust their discount rates lower to reflect lower risk-free rates, they should, at the same time, adjust their growth expectations lower, hence the multiple shouldn't be significantly higher. Exactly. In a deflationary environment, bonds can trend towards 0%. That doesn't mean P/E multiples shoot through the roof. Quite the contrary... As long as you have stable, but low inflation P/E multiples will be trending high. As you move from away from that stable level in either direction (high inflation or deflation) P/E multiples will likely come down. Stability is really the key. Given that we've had relatively stable and low inflation for the past few years, it seems like we can only get more "unstable" from here in either the upward or downward direction. P/E multiples will likely compress when that happens, on top of normalizing margins, and we'll find ourselves still within the secular bear market that started in 2000.

Unfortunately I'll be taking Level 3 again.... Just didn't really have a disciplined study regiment for this and didn't need one for the first two. Have to adapt to pass this one; my results were abysmal.

True, but I believe these remaining long duration bonds are, more so, held to a maturity type of position unlike the much larger position of a few years back that were sold at a very large profit. It would appear, to me anyway, that the portfolio is in a somewhat win-win situation now. For example, if spreads widen like they are doing now then the economy is doing better and WFC, JNJ, BIR all do better and probably have alpha against the hedges. If the economy sours, then spreads flatten back out and the losses on the hedges and bond portfolio are mitigated somewhat. Call me naive, but what is the downside with FFH today? Cheers JEast Just because they have the ability to hold to maturity doesn't mean that they will. It's their investment portfolio; if stocks, crater they would sell alot of their treasuries at a loss in hopes of picking up stocks for a large gain. Marking down the portfolio and discounting for such seems appropriate to me. Secondly, low rates have really been the only thing supporting the higher P/E multiples we've been seeing. Volatility within interest rates will result in volatility within stocks as the multiple adjust to expectations on inflation/disinflation/deflation as well as supply/demand differentials due to competitive investments now offering higher yield. Frankly, I think what we're seeing is overblown; rates will likely come back down due to the fact that they can't go back too high without shutting down the economy and/or cutting profit margins down from historic highs. Deflation is still the main threat and higher rates and deflation don't really go together unless if you're a credit concern.

Just went through a relatively large rebalancing effort. I try to develop most of my investment ideas myself, but will occasionally steal one of I like it enough. DBLTX - 11% FRFHF - 12.7% BBRY - 11.3% MBI - 5.1% - board idea. Thanks guys SAN - 5.1 % MURGY - 4.7% ATUSF - 4.5% - board idea. thanks guys AAPL - 4.8% SB - 4.3% OGZPY - 2.0% MRVL - 2.0 % - following David Einhorn on this one. GOOG - 2.0 % TOT - 2.0% SLV - 1.75% AMZN - (3.2%) Cash - 16.2% Other market exposure through various funds Stocks - 6.3% Bonds - 2.7% Real estate - 2.3% I'm also short calls covering half of my MBI position and long calls for BBRY. Net long exposure through calls is only 1.3%. Totals don't equal a hundred because these were my best estimates off the top of my head.

In an environment with low interest rates, companies that aren't capital intensive will be undervalued and companies that are capital intensive will be overvalued. This is simply because a company that can generate tons of cash on a small asset base has less of advantage if companies who can't can cheaply lever up to achieve the same results. If your paying 0%, you could borrow all the money you needed to operate and the ability to generate it internally isn't very valuable.... until interest rates rise. If you think rates will be low for a long time,then the company with a higher return on equity may not receive the premium valuation it deserves until rates move higher giving it a clear competitive advantage.

There was a similar large move upward during tax season in 2012. Rates came back down afterwards. Rates will likely remain low if history is any guide. I only see them rising in the near term if Bernanke admits he was a total failure and his policies flawed from the start which I think is unlikely. Even then rates could remain low. Some points to make: ) Market rates are set at the margin. The Fed may be buying 90% of government issued bonds but the price will be set by the remaining 10% and what they are willing to pay. ) 90% of new issuance is still a small part of total government debt/mbs markets. ) interest rates have to remain low for the government to finance itself. Its curious that Fed buying has roughly matched deficit spending. Does Bernanke want to be remembered as the man who bankrupted the U.S.? Probably not. The deficit is doen due to forced capital gains last year in fear of higher taxes. It'll likely be back up next year along with increases in Fed buying. Just my two cents

I'm about halfway through the Shipping Man and have been a little disappointed. Maybe it's because I've owner shares is Safe Bulkers for the past two years and have been reading a lot about shipping as it is, but I feel that there are much better way to learn about the industry. I guess my complaints about the book so far are 1) The story itself seems made up, characters are exaggerated, no real character development, etc. Overall just bad writing 2) Knowledge gained is really basic and could be likely picked up elsewhere without wasting time on a bad story I haven't gained anything that I haven't been able to pick up elsewhere and I largely feel like I'm wasting my time reading it. Maybe it's a little too early to judge, but after reading half I don't know if I'll take the time to bother to finish.

Level 3 candidate here. Good luck to you guys. Tou

1) take anything the CBO says with a very large grain of salt. Their prediction record has been abysmal. 2) housing prices are increasing? Maybe the third time since 2009 will be the charm. Tell me who will buy them when the coming generation is graduating with the largest amounts of student debt and the lowest paying jobs we've seen in a decade? 3) trade balance is improving precisely because individuals can no longer afford many of the imported luxuries they used to buy IMO. Hardly bullish. 4) stock mutual fund flows have consistently been negative up until this year. Not sure if this will last through the next correction or not. 5) deflation takes years to culminate. Even Greece is just now experiencing it. Increased Federal debt has made up nearly every penny of consumer deleveraging. All that's hit the economy has been corporate deleveraging if I recall my numbers correctly. Realize that all interests have to do is go back to the 4-5% they were at before the crash and we're spending more than 30% of current government receipts servicing interest. You don't think that will be a drag on th future economy? Spending will have to be cut somewhere or revenues will have to rise or we can keep interest rates artificially low until we've inflated enough of the debt away where that's not a threat (not bullish for the economy either), 1) industrial production increasing isn't a substantial part of the economy anymore. I'd say this is more of a lagging indicator and is a small part of a much much larger economy. 2) debt service is only at multi-decade lows due to extremely low rates. What happens when rates rise with a recovey? 3) bank capital ratios mean nothing in light of the trillions of derivatives that they hold on their books with global counterparties who aren't as strong (European banks leveraged 30-to-1 who have gone double or nothing in buying European sovereign debt). 4) the level that housing construction is rising from is meaningless without the context of the overbuilding that occurred. There are still empty neighborhoods with vacant houses in places where the most overbuilding occurred. 5) housing may be the most affordable it's been, but only for those who can obtain credit. Not the easiest task nowadays. 6) non-farm jobs are being added but they're typically low wage, part time jobs that are replacing the full time jobs. Not bullish for real wages (which have been declining for a decade) which means its not all that bullish for the long-term economy. Granted, some jobs are better than no jobs. All of this isn't to say that I think Watsa will be right. It's simply saying arguments could very easily be made for the other side. He's been cautious in his approach to protect capital, not necessarily to maximize short term gains. Also, we're seeing unprecedented amounts of global stimulus that aren't sustainable. What happens when trillions in liquidity stops? The velocity of the dollar has continued to slow and has fallen very far from where it began in 2007. This is not the sign of a healthy economy, but is partly why we aren't seeing inflation from printing. I think Watsa made a very smart choice. He looked at the unprecedented rise in global debt over the last 30 years, asked himself what are the consequences if this goes South, and hedged accordingly. This was a way to protect his business. Could we have profited from it? Sure. Was that the intention? Unlikely. Secondly, you focused on all U.S. statistics but the majority of the deflationary derivatives were written on Europe. Europe does appear to be heading towards a deflationary end game and these may still pay off in the next 5 years. I have nothing to add but do I count as an upcoming generation? I graduated in 2011 and I bought a house in 2012 and now I am trying to buy another. ;D This is in the SF Bay area too so no 200k house for me. Plenty of people still have money. As for inflation or deflation, I have no clue! The recovery is bifurcated. I've been fortunate to see both sides. I graduated in 2011 in Mississippi. Many friends are still unemployed, or employed at part time jobs, can't afford to move away from home and certainly can't afford to save any significant amount. Me? I had no student debt, moved to Manhattan, got a job and have done well for myself. Most people up here seem to be doing well. Many people I know from MS, AL, LA, GA , etc. aren't. It seems like the upper 10% are doing pretty well. Everyone else is struggling and jogging in place. Congratulations on the houses though. I was trying to buy a piece of rental property 2 years back that was occupied by a Dollar General. Place yielded $50K a year, was on sale for $250K from a motivated seller. I had 20% down between myself and my business partner, had been to the property in person, we had pristine credit, banks approved us on cash flow coverage, collateral, credit scores, business model, insurance, and still refused to give us a loan. Said they don't give loans to new businesses, or they don't give loans to out of state principals, or th don't give loans for out of state properties. Every where we turned we got turned down for reasons that didn't seem to really matter (non-economic reasons). This was banks in NYC and MS. Didnt sound as if banks were too interested in making loans if they're turning away business like that. Can't even imagine what's its like for someone with poor credit and/or no savings. The photos of Ordos are dramatic, by our standards, but keep in mind that the estimates are that urbanization increase over the next 15 years will be 300 million people. That's about 12 Manhattans a year, 1 Manhattan every month for the next 15 years. Approximately 1 America. Now that's dramatic! I think when you say Manhattan, people who don't live there typically think of the entirety of NYC (could be wrong). Just to make things clear in those terms, it's about 2.5 NYCs every year. That being said, this has been the trend for awhile and Ordos has been empty for years, just because that many people are urbanizing doesn't mean they're going to move to the empty cities. They're going to move to the cities where there are jobs. Jobs will be provided by businesses who need customers (also not found in empty cities). I have a hard time seeing these places filled up without the government forcing them to be. Then the question becomes what kind of long term structural disadvantage do they have in that location. Large cities grew to be what they are largely because they were at the center of some big trade activity (close to ports, rivers, or the source of raw materials). They dont just pop up out of nowhere for no reason. Was there a reason that not many people lived these areas of a China in the first place? Probably because they weren't well situated for large cities. Governments without a profit motive often misallocate capital in this way.

Hmmmm. Any idea what the room for growth is in the U.S. or globally? Seems hard to imagine this ever contributing in a meaningful way. I mean, if they're one of the oldest and operate in all states and still only maintain a market cap of $15 M it seems like growth is very very limited.

Something that I meant to include in my original post: your shouldn't be contrarian for contrarianism's sake. There needs to be a fundamental reason. You could argue that the number going back up to where it was should be bullish, but then the converse should hold true of them coming down being bearish. The stock market has risen quite a bit over the past 4 years. Either QE has been enough to overcome deleveraging, a sluggish economy, and this trend or this trend has very little impact. Its not just about the supply and demand of people buying stocks; the price is set by the marginal buyer. This number could fall to as low as 10%, but if the market P/E were 1000 and the next marginal buyer was unwilling to pay that amount, prices are coming down regardless of how underowned stocks were.

I don't think it is necessarily for a near term catalyst. Think of major demographic trends occurring right now: 1) Boomers are retiring. Many can't live off the interest income from their portfolio and will need to sell stocks and bonds if they can't find another way to supplement their income. 2) The current generation of graduates are graduating with the highest debt loads and the lowest real wages in the past decade or two. I know many recent graduates who can't afford to move out of their parents' house, let alone begin investing in a meaningful way. 3) Even if this trend were to reverse, I'm not sure it would be enough to counteract boomers selling increasingly large positions as time goes on. The stock market may go up, but I don't think this will be the reason nor do I think there will be a reversal of this trend anytime soon

Problem with shorting is that you need an active catalyst. Otherwise shares could stay elevated for years. Tesla may be a good option now that it's up over 300% and the recent rally has likely been shorts covering the 45% of float they borrowed. Once theyre done covering, who is going tombuy at these prices???? Now may be a good time to initiate a small position. Have your stop loss set according to the loss you can afford to take though.

1) take anything the CBO says with a very large grain of salt. Their prediction record has been abysmal. 2) housing prices are increasing? Maybe the third time since 2009 will be the charm. Tell me who will buy them when the coming generation is graduating with the largest amounts of student debt and the lowest paying jobs we've seen in a decade? 3) trade balance is improving precisely because individuals can no longer afford many of the imported luxuries they used to buy IMO. Hardly bullish. 4) stock mutual fund flows have consistently been negative up until this year. Not sure if this will last through the next correction or not. 5) deflation takes years to culminate. Even Greece is just now experiencing it. Increased Federal debt has made up nearly every penny of consumer deleveraging. All that's hit the economy has been corporate deleveraging if I recall my numbers correctly. Realize that all interests have to do is go back to the 4-5% they were at before the crash and we're spending more than 30% of current government receipts servicing interest. You don't think that will be a drag on th future economy? Spending will have to be cut somewhere or revenues will have to rise or we can keep interest rates artificially low until we've inflated enough of the debt away where that's not a threat (not bullish for the economy either), 1) industrial production increasing isn't a substantial part of the economy anymore. I'd say this is more of a lagging indicator and is a small part of a much much larger economy. 2) debt service is only at multi-decade lows due to extremely low rates. What happens when rates rise with a recovey? 3) bank capital ratios mean nothing in light of the trillions of derivatives that they hold on their books with global counterparties who aren't as strong (European banks leveraged 30-to-1 who have gone double or nothing in buying European sovereign debt). 4) the level that housing construction is rising from is meaningless without the context of the overbuilding that occurred. There are still empty neighborhoods with vacant houses in places where the most overbuilding occurred. 5) housing may be the most affordable it's been, but only for those who can obtain credit. Not the easiest task nowadays. 6) non-farm jobs are being added but they're typically low wage, part time jobs that are replacing the full time jobs. Not bullish for real wages (which have been declining for a decade) which means its not all that bullish for the long-term economy. Granted, some jobs are better than no jobs. All of this isn't to say that I think Watsa will be right. It's simply saying arguments could very easily be made for the other side. He's been cautious in his approach to protect capital, not necessarily to maximize short term gains. Also, we're seeing unprecedented amounts of global stimulus that aren't sustainable. What happens when trillions in liquidity stops? The velocity of the dollar has continued to slow and has fallen very far from where it began in 2007. This is not the sign of a healthy economy, but is partly why we aren't seeing inflation from printing. I think Watsa made a very smart choice. He looked at the unprecedented rise in global debt over the last 30 years, asked himself what are the consequences if this goes South, and hedged accordingly. This was a way to protect his business. Could we have profited from it? Sure. Was that the intention? Unlikely. Secondly, you focused on all U.S. statistics but the majority of the deflationary derivatives were written on Europe. Europe does appear to be heading towards a deflationary end game and these may still pay off in the next 5 years.

What do you guys think about Russian stocks. You have entire ETFs trading at single digit PEs and below book value. You also have megacap companies like Gazprom trading at .3x it's book value. Obviously there is political risk and corruption, but valuation makes it tempting. I guess my main concern is that I've been burned badly on cheap companies with shady management (Chinese reverse mergers) and etc before and want to make sure I'm thinking through this correctly before taking capital. What are your thoughts?

Sanjeev, I was wondering if you could elucidate your approach to these options. I'm fascinated with options and have tentatively been trying out different strategies as I learn about them over the past 3 years. My two favorites are to go long deep, LEAP call options to get get a delta of 1 to the common stock with less money down or to buy way out of the money calls/puts in a binary outcome type situation. That being said, I have yet to ever make any significant returns using options and have typically ended flat or at a loss. I'm curious to know why you picked the options over common and what your thought process was on the risk/reward of the situation. Thanks for any insight

I'm a little late to this discussion now that the Russian bailout appears to be the way they're going; however, I figured I'd toss in my 2 cents since I didn't have the ability to respond at work and this is a good discussion. Wrong. As mentioned previously, it's not just Russian oligarchs that will be paying. Secondly, it puts in place a precedent that could be abused in the future. Who is to say they won't do this again in the future. Also, maybe they're Russian criminals, maybe they're not. Why is it their responsibility to foot the losses that should be borne by bondholders and equity holders? This totally upsets the precedence of bankruptcy law and etc. Bondholders and equity holders are the ones who accepted this risk. Not the depositors who thought they were insured. Lastly, and the biggest issue IMO, is that this is a tax so they could receive a bailout loan the size of 50% of their GDP. So the depositors are paying 6.7%-10% so that the citizens (many of them depositors) have the privilege of paying back 50% of GDP at interest. This. I too am long certain European securities and am looking to increase my exposure, but I'm mainly picking up European assets that have exposure to the emerging markets or real assets. I disagree. The Cypriotic banking system functions as a massive money laundering system for (mostly) rich Russians. My guess is that the EU made the clawback a requisite for a bailout because they don't want to pay so the 'mobsters' can keep all their money. Cyprus is tiny, can be saved easily, it's just a bit of politics. Basically Europe is saying: "if you stash all your money here, you better help us.". The EU doesn't want to target the local population, they affirmed this today: http://www.forbes.com/sites/afontevecchia/2013/03/18/eu-takes-shot-at-moscow-with-cyprian-haircut-as-russians-own-22-of-deposits/ http://www.eurozone.europa.eu/newsroom/news/2013/03/peg-statement-cyprus-18-03-13/ Small depositors treated differently then large depositors? Maybe the pay a lesser amount upfront but they'll be the ones repaying the loan at interest, and struggling under the debt burden even more. Just look at Greece. The problem is that EU still can't admit that it has a debt problem. They're still viewing this as a liquidity driven epidemic and treating a problem of insolvency with emergency credit and printing money. Neither one of these is directly addressing reducing the debt and it simply increases the debt load, by a massive amount, at the expense of the tax payers. Default. Bite the bullet and get better.

I think you're looking at a very limited time frame. Japan has been printing money with the encouragement of people like Bernanke and Krugman since the 90s. They just recently announced QE8 (or was it QE9). Has the currency "collapsed" over the past 20 years? No. It's down maybe 20% in the last few months, but it's up a significant amount over the past 20 years if I'm not mistaken. The stock market has also rallied by a similar amount, but still remains at less then 1/3 of its peak value even after the recent rally. If a similar situation does happen in the U.S., we could definitely expect another drop in equities of 50-80%. Secondly, the recent occurrences have been in large part predicted by Kyle Bass. He believes Japan is going through a currency collapse given that they are the most indebted nation in the world. The U.S. is a long way from there, but definitely going down that path, IMO. It might be 10-15 years before we experience similar happenings as Japan right now. I tend to agree with Watsa on being concerned about deflation. We haven't seen deflation because there has been no deleveraging. Private households have mainly delivered by defaulting (not paying down credit) and the government picked up the slack by spending with massive deficits. On a net-net basis, no deleveraging has occurred. What has occurred is that wages are down and prices for necessities are higher meaning less disposable/taxable income to service the same amount of debt. the next crisis will be worse because we're in a much worse spot to handle it. Secondly, I don't know if this is a macro "bet" as much as it is a hedge and our attitudes towards the 2 should be different. Watsa spent what was roughly 1 year of earnings (~6.5% of market cap) on deflation hedges to protect the entire company against a very serious outcome that is definitely a possibility. Not only that, he gave himself the ability to profit from it if it does and place him in a fine spot to swoop in with cash at the bottom. I don't care if deflation happens or not. This is a smart way to protect your business. it is prudent to protect assets and capital when they are in danger even if the danger never materializes. Hindsight is always 20/20.

Damage from sandy seems pretty bad in the tri-state area. Fair fax doesn't have much exposure Coming in at 74 on estimated impact. Berkshire may not be so lucky. http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2012/10-2/20121030_sandy2.png

I have a hard time believing that any financial assets (paper assets) do well in a hyper-inflationary environment. I guess it all depends on the rate of the hyper-inflation. The simplified scenario looks like this: 1) You buy an ownership in the business through purchase of stock. 2) The earnings of the business should grow with inflation, but will likely lag a little bit given lower earnings/prices at the beginning of each period. 3) The price of the stock might rise to reflect these gains in earnings However, if we're talking real hyper-inflation like Weimar Republic, then I don't think it works like this. Think about it; it takes a few days for trades to settle and cash to be withdrawn from your account. If there is a danger of that cash losing a significant portion of value of that 3 day period, then that will have to be discounted into the prices. Secondly, in a hyper inflationary environment, investors will be drawn to real assets as a hedge. Third, there are huge risks to companies for holding cash for liquidity/safety/flexibility because it's losing value so fast. This means they have to either continue holding a depreciating asset or accept the risks involved investing it in other less liquid assets. This increases the risk to businesses and exposes you to the risks involved with whatever investments they are making. Stocks may appreciate some, but I do not see how it will keep up with inflation. I think that there could be massive real losses resulting from P/E contraction due to the loss of attractiveness in stocks for the aforementioned reasons. Just my two cents...

I was under the impression that PIMCO was the one who sold them the contracts. Can anybody clear this up? Secondly, it's a very real threat given that derivatives are a legal contract that follow very, very specific rules and guidelines (just like any other legal contract). If something occurs that is outside the bounds of these limits, it's likely in legal limbo. For small deviations, counterparties will generally work out agreements/compromises to maintain their rapport with clients; however, if you're talking about a multibillion dollar payout from institutions who will already be struggling from such harsh economic conditions, then it's a matter of survival and you can be sure they'll fight it.