TwoCitiesCapital

http://www.valuewalk.com/2015/03/roboadvisors-schwab-wealthfront/ I want to look into Shannon's results a little more, but intuitively it makes some sense in defense of cash.

I largely agree with you on the limited impact of commodities and energy. The other thing to mention is that after a 50% decline, commodities' impact on the CPI index is significantly more muted going forward. I disagree with you on wages though - the positive wage print in January was largely due the CPI deflator that they use as the denominator and not because there was a large rise in the nominal pay. Walmart wages may be a bellweather for future wage increases, but I think walmart wages are a very small piece of the wage picture and don't mean much in isolation. We need a tighter labor market for there to be a sustained increase and I tend to believe that there is still quite a bit of slack. I agree though - we won't see sustained deflation unless if it makes it's way into housing. I think the biggest impediment to the inflation story in the near term will likely be the strength of the dollar. Just like oil, this will translate into pricing decreases through almost everything that is purchased outside of services. I think dollar strength and the price of oil will contribute to deflation through calendar year 2015 and possibly into 2016 depending on the status of our record oil supplies in storage and the continuing strength of the dollar. It will need to enter the housing market to extend beyond that. I tend to agree with Gio on this one though - I think something as simple as a stock market decline could be the trigger. After 6 years of being told to ignore risks, investors have levered up their exposure to equities through margin debt while US equities are priced for perfection. A strong dollar and potentially increasing wages will weigh on corporate margins that are currently significantly above their historical trend. Paired with extremely high stock valuations and the potential for rising rates and you have a stock market disaster - declining margins and declining multiples could easily spell a 50% decline. Magniffy this by the margin debt and we could see some spectacular blow ups that have larger economic implications that affect wages and employment. This is simply speculation - I just get the feeling investors aren't the only ones who've been ignoring risks and that the implications of a risk-off environment will be felt far beyond the stock market. Full disclosure: I recently purchased 1 year put options on the S&P at 1900. Would you kindly share how much you paid and how much S&P was then? I paid 8.30 per contract for the 190 strikes for next January. I don't know exactly what the S&P was at when I bought them, but they've been in the green since day 1. It's only a small piece of protection at the moment - will expand it depending on how the market does

The biggest indicator of deflation for me is simply the velocity of money. It's been dropping every quarter since 2008 and doesn't seem to have stopped. This essentially represents the multiple applied to the entire monetary base in it's effectiveness at stimulating growth, liquidity, and inflation. An expansion of the velocity of money is similar to expansion of credit in this regard. If the velocity of money is still decreasing, it suggests an unhealthy economy and a drag on inflation. I don't know the fancy economic formulas to fool you into believing it, but it's hard for me to get to the inflationary side of things in an American recovery if each dollar is circulated less and less each year.

I've thought this about Fairfax since I first invested back in 2011. It's what attracted me to the stock as I turned more bearish on the world economy. I'm not in any position to be able to ascertain their robustness in a severe disaster, but I certainly would welcome the large insurance driven profits that come afterward that I've been patiently waiting for.

IIRC, the EURO at PPP is around $1.20. Obviously, currencies can stray from PPP for years at a time, and I think we'll likely see further depreciation in the near term, but the long-term story suggests that the Euro will rise from these levels. You've done pretty well for yourself being in US equities as a EURO denominated individual, but it might be time to start moving your exposure back to European equities for both currency and valuation reasons. A strong dollar makes cheap non-US stocks even cheaper and the long term direction of the Euro is likely upwards if you believe PPP has any relevance, so I'm not hedging my currency exposure with my investments in Europe at this point.

I certainly think there is some level of milking that goes on. If you look at the Greek shipping companies, many are set up where the holding company owns the ships and it pays an outside company, usually owned by the CEO of the holding company, a fee to manage them. The CEO then gets a fixed fee from each charter, purchase, and sale of ships regardless of what shipping rates are. This also incentivizes the CEO to get as many ships as possible to increase chartering, purchasing, and sales activity that pays him more on a regular basis even if rates are low due to oversupply. I can't say this applies to the generalized economy or to suggest that Greeks are lazy, but I can say that you can expect a greater amount of swindling here. The question is - do the valuations justify it? I know that Gazprom wastes billions in corrupt practices, but at today's valuation I think investors are compensated for that. I feel the same about Greek equities in general.

http://www.nyxdata.com/nysedata/asp/factbook/viewer_edition.asp?mode=tables&key=50&category=8 Agreed. I think Prem was banking a lot on deflation and not sustained disinflation. If inflation stays at 1-2%, then the multiple on equities could reasonably be inflated all else being equal. This would NOT. be the case in a deflationary scenario with falling earnings, falling asset values, and increasing leverage ratios. I wish he was able to call the tops and bottoms, but I know that he's not. I disagreed with hedging my entire equity exposure so, as a result, I was far more aggressive in my own portfolio and allocated less to Fairfax in the past few years - that has changed recently though. I've doubled my holdings of Fairfax, have been reducing my margin positions, purchased puts on the S&P, and have been moving into European and EM equities over the past two years with little direct exposure in the US. I think that the next 2-3 years pose significantly higher risks for US equities than the past and tend to think this will be the period that Prem looks like the genius who was just early again.

I largely agree with you on the limited impact of commodities and energy. The other thing to mention is that after a 50% decline, commodities' impact on the CPI index is significantly more muted going forward. I disagree with you on wages though - the positive wage print in January was largely due the CPI deflator that they use as the denominator and not because there was a large rise in the nominal pay. Walmart wages may be a bellweather for future wage increases, but I think walmart wages are a very small piece of the wage picture and don't mean much in isolation. We need a tighter labor market for there to be a sustained increase and I tend to believe that there is still quite a bit of slack. I agree though - we won't see sustained deflation unless if it makes it's way into housing. I think the biggest impediment to the inflation story in the near term will likely be the strength of the dollar. Just like oil, this will translate into pricing decreases through almost everything that is purchased outside of services. I think dollar strength and the price of oil will contribute to deflation through calendar year 2015 and possibly into 2016 depending on the status of our record oil supplies in storage and the continuing strength of the dollar. It will need to enter the housing market to extend beyond that. I tend to agree with Gio on this one though - I think something as simple as a stock market decline could be the trigger. After 6 years of being told to ignore risks, investors have levered up their exposure to equities through margin debt while US equities are priced for perfection. A strong dollar and potentially increasing wages will weigh on corporate margins that are currently significantly above their historical trend. Paired with extremely high stock valuations and the potential for rising rates and you have a stock market disaster - declining margins and declining multiples could easily spell a 50% decline. Magniffy this by the margin debt and we could see some spectacular blow ups that have larger economic implications that affect wages and employment. This is simply speculation - I just get the feeling investors aren't the only ones who've been ignoring risks and that the implications of a risk-off environment will be felt far beyond the stock market. Full disclosure: I recently purchased 1 year put options on the S&P at 1900.

Incredible! Thanks for sharing

This is nice to see. I carry two AmEx cards but neither is my primary because neither offers the awards that the citi doublecash card does. My experience with AmEx customer service is unparalleled and I still use the Gold card for all groceries, electronics, and travel expenses (will add restaurants in June). I'm happy to see that they're focusing on better rewards - I might switch back to making this my primary card if a few more changes like this occur to bring up my average total reward to around 2%.

Not all today - but recent purchases. Buys: EGFEY - began accumulating SAN - finished accumulating FRFHF - doubled position in January at $500 OGZPY/LUKOY/SBRCY - have been accumulating over the last 3 months. IBM - following Buffett/Watsa on this one, small position Puts on the SPY @ 190 for March 2016 Sells: 1/3 of my position in WFM Rolling calls against 60-100% of my FCAU position These "sells" are simply profit taking to reduce my leverage. I was at about 115% exposure previously and want to get down below 100%. I have about another 10% to go. Watching with potential to add: SB/SBLK/GLBS ATUSF PKX FRFHF if it stays around $500-$525

Deflation hedges pulled in 116.4M gain in the 4th quarter for a total of +17.7M for the year. This means that the swaps were literally up some 95% in fair market value just in the fourth quarter alone on the decline in oil. Many are expecting headline deflation in 2015 due to the slowing of economies and cheaper oil working it's way through the supply system - we don't need much to get us to breakeven on these swaps. 1-2 years of negative headline inflation in the CPI could result in a nice payday of a few hundred million. As a reminder, every 1% beyond the 2.45% needed to breakeven in the US would result in a net gain of 527M. I wouldn't be surprised to see them continue building these positions though - they've expanded them aggressively over the past few years at prices more attractive than the original position was purchased at. 2010 - 34.2B in notional (cost 302M) 2011 - 46.5B in notional (cost 421M) 2012 - 48.4B in notional (cost 454M) 2013 - 82.9B in notional (cost 546M) 2014 - 111.8B in notional (cost 655.4M) From the original position in 2010, Watsa has committed 116% more capital to increase the exposure by 226% AND adjust the strike price upwards. Averaging down seems to have worked out well. I'm thinking these might actually pay in the next year or two. French consumer prices fall 1.1% MoM and 0.4% YoY. France is the country closest to inflation breakeven for Fairfax though it's only 2.75B in notional so it won't be a game changer. U.S. prices fall 0.7% MoM and 0.1% YoY http://www.cnbc.com/id/102454987

Deflation hedges pulled in 116.4M gain in the 4th quarter for a total of +17.7M for the year. This means that the swaps were literally up some 95% in fair market value just in the fourth quarter alone on the decline in oil. Many are expecting headline deflation in 2015 due to the slowing of economies and cheaper oil working it's way through the supply system - we don't need much to get us to breakeven on these swaps. 1-2 years of negative headline inflation in the CPI could result in a nice payday of a few hundred million. As a reminder, every 1% beyond the 2.45% needed to breakeven in the US would result in a net gain of 527M. I wouldn't be surprised to see them continue building these positions though - they've expanded them aggressively over the past few years at prices more attractive than the original position was purchased at. 2010 - 34.2B in notional (cost 302M) 2011 - 46.5B in notional (cost 421M) 2012 - 48.4B in notional (cost 454M) 2013 - 82.9B in notional (cost 546M) 2014 - 111.8B in notional (cost 655.4M) From the original position in 2010, Watsa has committed 116% more capital to increase the exposure by 226% AND adjust the strike price upwards. Averaging down seems to have worked out well. I'm thinking these might actually pay in the next year or two. French consumer prices fall 1.1% MoM and 0.4% YoY. France is the country closest to inflation breakeven for Fairfax though it's only 2.75B in notional so it won't be a game changer. Realize that Prem explained that these CPI type derivatives don 't have to actually be in the money to break even. They 're like options. When the underlying goes down, the implied volatility goes up, sometimes a lot! I totally agree, but I doubt Prem is going to sell them for a moderate gain simply due to time value and a vol premium. He has more than doubled the exposure since the bet was originally made and it's because he thinks there will be deflation. I imagine he will hold these for a few years more and the time value and volatility premium will vary over the course of that time (declining to zero for both if held to maturity). For this reason, I choose to ignore them and their variations and simply focus on how much money we'll make related to the direct pricing of the underlying because that what will drive 90% of the returns for us.

Ha ha! Nice!

How did you get to 1.1x? Reported BV was $395 and then I added $20 from roughly $450m of unrealised gains on equity accounted stakes. Prem gave that figure and it got me to 1.3x BV when I did the maths at CAD $670 per share. But I don't think they gave a figure for unrealised gains on consolidated stakes. Did I miss something? You've got to find another $91 in book value per share to get to 1.1x! Which would make me very happy ;) I still don't really get why people would rather a rights issue than just buying more, if it is so attractive! Fairfax reported unaudited equity figures at their Q4 announcement of $9.74B. Add in an addition 450M for the unaccounted gains in associates and you get equity of $10.19B. With 21.2M shares outstanding, you get a P/B of $480. 1.1x this figures is about $528 which is right around where it's been trading this past month. Sorry - I think you are using total equity not common shareholders' equity. In other words you should be using $8.36bn in equity not 9.74. Then you can add the $450 for unrealised gains on associates but I don't think they disclose the unrealised gains on consolidated stakes anywhere. You're right. Wasn't thinking about the preferred shares they've issued. Thanks for the correction.

How did you get to 1.1x? Reported BV was $395 and then I added $20 from roughly $450m of unrealised gains on equity accounted stakes. Prem gave that figure and it got me to 1.3x BV when I did the maths at CAD $670 per share. But I don't think they gave a figure for unrealised gains on consolidated stakes. Did I miss something? You've got to find another $91 in book value per share to get to 1.1x! Which would make me very happy ;) I still don't really get why people would rather a rights issue than just buying more, if it is so attractive! Fairfax reported unaudited equity figures at their Q4 announcement of $9.74B. Add in an addition 450M for the unaccounted gains in associates and you get equity of $10.19B. With 21.2M shares outstanding, you get a P/B of $480. 1.1x this figures is about $528 which is right around where it's been trading this past month.

I am kind if disappointed that there wasn't a rights offering as well. The stock isn't that expensive when you adjust reported book value by unrealized gains in their equity/control accounted affiliates. It was something like 1.1x. I don't have an issue with them issuing equity to get a large deal done, but just wish it had been offered to shareholders instead of to an underwriter at a discount... They have more than enough money on hand to have been able to do this with some flexibility in another issuance of debt/preferred shares if rights offering turned out to be undersubscribed (unlikely after killer 2014 results...).

All of the CPI data and related strikes come from Fairfax regular releases. I haven't ever tried to look up, or correlate the index myself, but I would assume they're using a different index or measure of consumer prices than what you're using if the figures don't align.

All corporations get favorable tax treatment on dividends. IIRC, corporations can deduct 70% of the dividend from the taxable amount and if they own 20% or more they can deduct 80% from the taxable amount. If you want to compare apples to oranges (a corporation receiving a dividend vs an individual receiving a dividend) the corporation receives massively better terms on the tax bill due to this. If you want to compare apples to apples (end investors vs end investors) the owners of the corporation that receive the dividend are still paying triple taxes on the income as it flows through from corp. to corp as opposed to double taxation, but this deduction severely limits the impact of the "triple" taxation they get hit with. I think the other tax benefit is inherent in his strategy - Buffet receives a no-cost loan to leverage investments that he never has to sell to repay the loan so taxes are never incurred. Not only does he receive the benefit of leverage without having to pay for it - he also gets the benefit of 4 decades worth of unrealized gains accruing further gains/income without being taxed. The whole thing comes apart when an investment is sold, but if you "buy and hold forever" you never have to pay taxes and Berkshire is in the position of never having to sell.

Deflation hedges pulled in 116.4M gain in the 4th quarter for a total of +17.7M for the year. This means that the swaps were literally up some 95% in fair market value just in the fourth quarter alone on the decline in oil. Many are expecting headline deflation in 2015 due to the slowing of economies and cheaper oil working it's way through the supply system - we don't need much to get us to breakeven on these swaps. 1-2 years of negative headline inflation in the CPI could result in a nice payday of a few hundred million. As a reminder, every 1% beyond the 2.45% needed to breakeven in the US would result in a net gain of 527M. I wouldn't be surprised to see them continue building these positions though - they've expanded them aggressively over the past few years at prices more attractive than the original position was purchased at. 2010 - 34.2B in notional (cost 302M) 2011 - 46.5B in notional (cost 421M) 2012 - 48.4B in notional (cost 454M) 2013 - 82.9B in notional (cost 546M) 2014 - 111.8B in notional (cost 655.4M) From the original position in 2010, Watsa has committed 116% more capital to increase the exposure by 226% AND adjust the strike price upwards. Averaging down seems to have worked out well. I'm thinking these might actually pay in the next year or two. French consumer prices fall 1.1% MoM and 0.4% YoY. France is the country closest to inflation breakeven for Fairfax though it's only 2.75B in notional so it won't be a game changer.

Yea...he bought an entire company over a 1% difference in payout from what he'd been told to expect on a tender offer so he could fire the CEO. He certainly had a chip on his shoulder at the time. That story always amazes me and doesn't necessarily leave one with warm fuzzies. I think Buffett is a genius. He extended the concepts of value investing beyond the original template that Graham had provided. He pioneered the use of leveraged, captive funds in using the insurance business to fund his investment portfolio. His contributions to the field may be less appreciate by the "little guys" who can't necessarily mimic his strategy, but it's a brilliant view on investments, captive capital, and leverage that should definitely be recognized. Warren is probably cleaner than most, but he's not the nice guy you see on television. He's obsessed with making money and being liked - and when the two conflict he seems to choose the money.

This makes more sense. Once you had adjusted for the fair value of their associates, the stock only traded at 1.1x book from what I could calculate back of the envelope. Hardly an expensive price for a company that seems like it will do moderately well no matter what environment.

I don't agree (but I am not a lawyer :)). One way is to partially nationalize which would dilute the common to the hilt. It's impossible to dilute preferreds. To make prefs worth less than par, you have to go through formal recap in which case they come before common, but might be worth little and common might be worth nothing. In general though, I think most arguments in this case are emotional or mind-screwing variety from people with ownership agenda (i.e. people holding securities that are possibly worthless will argue anything to prove they are right and other side is wrong). Personally, I am on the government (and Munger/Buffett) side on this: if government would not have backstopped Fannie/Freddie, they'd be BK and worthless now. So IMHO from common sense, government should have nearly 100% ownership in remaining entity. Legal case might have completely different result though - common sense is not what the law is about. ;) There's an argument against this - most of the losses experienced by Fannie and Freddie were accounting losses - not real cash losses. MTM accounting was discontinued for banks during this period. If Fannie and Freddie had received similar treatment, they wouldn't have been insolvent on paper or in practice. The reversal of these "losses" is why they've been so profitable in recent years.

This is the usual macro bear argument that people have been repeating from 1980s and possibly before (I have not been around before that). There are couple issues with that: - By being in cash/etc. you are horrendously underperforming for couple years now. So it might not matter that your portfolio will drop only 30% in a crash compared to 50% of someone who is 100% in equities. Your long term result will be worse. - You are assuming that Dalio will perform better in a crash. So far a lot of algorithmic shops collapsed during the crashes because their models were not crash proof. Pretty much no value investor every collapsed during a crash. Or they recovered. - You have a mental model of what will happen. This is very dangerous. I can almost guarantee that you don't know what will happen and pretty much nobody else does. Hey, Buffett has been wrong about inflation for 20+ years. That being said, I am fine with people holding Graham-like portfolio of having 20-50% money in bonds as long as this is not a market call, not a macro call, but forever philosophy independent of the market/macro etc. Just don't expect the 100% equity returns. In all fairness - Dalio was up 14% in 2008 relative to the massive drop most indices, assets, and funds experienced...the man knows what he's doing.

It's nice to see these things moving. Looks like the markets might agree with Merkhet that this gets resolved before the Obama administration leaves. I wouldn't mind a 10x pay day in amount of time :) Fingers crossed.