TwoCitiesCapital

https://www.wsj.com/finance/investing/charlie-munger-will-take-your-questions-now-3e842ab7 The price of bitcoin has been rocketing higher again. Is that something that concerns you? A: Of course it concerns me. I have a lot of very simple fundamental ideas that I think every educated person ought to have. Those ideas include what Adam Smith taught everybody…. You’ve got a huge increase in what I would call civilization per capita. And it happened automatically just because people take better care of their own property than they take care of somebody else’s property…. In order to get the Smithian results, you need a currency to facilitate exchanges. And to make the currency respected widely, the trick we’ve used is the sovereign issues it. The only way to get from hunter-gathering to civilization that we know of that’s ever worked is to have a strong currency. It can be seashells, it can be corn kernels, it can be a lot of things. It can be gold coins, it can be promises in banking systems like we have in the United States and England and so on. When you start creating an artificial currency…you’re throwing your stink ball into a recipe that’s been around for a long time, that’s worked very well for a lot of people. --------------- He gets SOOOOO close, and then takes the exit right before the crypto conclusion. A stable currency doesn't lose 80% of its value in 50 years. A stable currency isn't linked to gold redemption one day and then simply the "full faith and credit of the US government" the next. A stable currency isn't one that gets weaponized when you do something daddy-government doesn't like. I guess he's at an age where it doesn't matter if he veers from the system that's been so good to him or not. He, and his few generations, are gonna be well off no matter what.

Last I checked the system was still losing fairly significant deposits - just at a slower clip. Until rates drop, or deposits equalize, id expect you're still going to have trouble here. The recent rally is probably just the inversion of the yield curve, but it's still not steep enough for banks to really make profits or offset the negative carry of their book of business from 2020-2022.

I expect bonds and gold w/ still outperform the average equity indices, but the correction in equities does seem to be playing out sideways as opposed to a large drawdown and recovery. Being flat-to-down for ~2.5 years while inflation ranged from 4-8% annually during that period even without another substantial drawdown - especially considering the additional repurchases/retained earnings that accrued over that period. If we manage to avoid the recession, I still expect it to be awhile before we make new highs ATH, but perhaps we avoid another 20+% drawdown.

I also wish the repurchases were bigger, but understand this was intended to be a permanent vehicle and quickly taking it under my be counter productive. But even 2.5% annual rate @ a 35% discount to NAV results in near 4% annual BV growth solely from the repurchases w/o considering the investments so in generally good with a +4% spread of alpha to the underlying investments.

Excellent execution. I'm gonna sleep much easier knowing the interest is flowing for AT LEAST 3 more years with opportunities for gains and swaps into credit if rates come down in a recession. That was definitely the case in the past, but I don't think has been how it's traded in the recent past. I used to be able to see the fantastic results and load up on shares that'd pop 1-3 days later. More recently though it's responded pretty quickly to the earnings releases (like today).

10-year below 4.7% after the October hysteria if it surpassing 5% to the upside.

someone had an axe to grind... We can debate whether or not we agree with their investment approach or his management style, but this journalist is coming out hard against someone who has achieved professional success most people can only dream of...

For all the fanfare surrounding the blowout Q3 GDP, Q4 is expected at 1.2% at the moment Largely due to a much reduced contribution from personal consumption and negative drag of inventories. Perhaps Q3 was just front-loaded demand for a dismal Q4.

Other countries aren't in a better condition so the USD will remain the reserve currency for now. However, gold has been taking the marginal demand from USD as a reserve asset for the last few years. Any cross-border deals to trade oil for yuan, gold, rubles, rupees, etc only leads to further degradation of USD denominated reserves and Treasury demand even if USD remains the reserve currency. There may not be an alternative for the USD as a reserve asset, but there are certainly alternatives to marginal demand for USD which is occurring. This will only serve to make the USD less attractive which will lower the bar for any future alternative to surpass.

Not the guy you asked, but.... At least to the expected duration of their liabilities. That would be neutral positioning. I think it was said else where that was around ~4 years. My preference would be that they overweight it at this point, so call it 5-6 years on average. Whether via ladder or barbell I'd leave up to them and their discretion.

TIPS come to the market via dealers. You're buying secondary after the dealers take it down from the gov't. So the government isn't really impacted by your demand or not - it's the demand of dealers that matters and the government has control over the amount issued. As far as limiting iBonds, I'm not sure why the limit was set @ 10k, but I can understand why they don't allow an unlimited amount seeing as they're the ones committing to pay the floating interest and should have some control over how much they borrow.

Yup. iBonds were attractive in a world of zero-to-low yields given their price insensitivity and their floating-rates. Now that TIPS/bonds have largely repriced and iBonds outperformed significantly over the last 2 years, I expect the reverse will be true going forward: You're going to want the price sensitivity and the additional compensation for that risk.

Agreed. I'd rather own an 6-7% mortgage, but I'm guessing hedging costs back to EUR kill a lot of the excess return

I think what's more incredible is how long that has been able to persist in the past. It's happened before and wasn't just a simple aberration on a day or two. As your chart shows, that was the case for most of 2021 even before the Fed embarked on rate hikes.

-19% in real terms and yet - supposedly an inflation hedge. SMDH This is dragging out much longer than I had anticipated. It's possible that we get to -30 or -40% real returns simply staying flattish for the next year or two while inflation stays near 3-4%. My expectation is still for another dump and recovery, but we'll see. Either way, I'm more comfortable owning bonds.

On the flip side, the benefits to owning funds are daily liquidity (not a guarantee for individual bonds - especially when getting outside of things like treasuries). Other benefit is fills at, or near, NAV. I'm sure treasuries are more liquid, but moving outside of those to munis, TIPS, mortgages, IG etc then you really have to start sizing up buys to 50-100k type lots OR you tend to get really wide bid/asks that eat 1-2% of your return before considering commissions.

All I see is performance chasing and hindsight justification. He's chasing prices down and chasing them up instead of leading them down and leading them up. Following his piece targets is no different then looking at a chart of what has already happened it seems.

My general view is they will either fall or stagnate. Either way, if they underperform reported inflation over the next few years, then any gains after inflation weren't ultimately real and it just took a few years for that to be evident - just like it took a few years for people buying houses in 2004/2005 to realize that the gains weren't ultimately real. It doesn't shock me that people's net worths went up when the government literally mailed everyone and their mother checks for thousands upon thousands of dollars. It's what's been happening afterwards that I don't think is as rosy as everyone makes it.

Transferred ~$800 of $1+ billion to Coinbase (or similar exchange with identity attached) Can't make this ish up. Also, approaching investigators and cops for a marginal theft of a tiny increment of that $1 billion?!?! The f*ck was he thinking?!?!

+1 I've got a small amount of fixed income left in money market. Most of it has been moved to short-term core plus type funds. I want spread, but not spread duration. My intermediate stuff is all treasuries/mortgages and a little IG via funds and is now where the bulk of my fixed income assets are. I have a handful of speculative positions in discount CEFs and ZROZ/TLT. Very small part of the portfolio, but growing .

I have two scenarios and I don't know which ones is more likely: 1) We get a recession and rates go dramatically lower which buys us time before we have to face the next option or 2) we avoid recession, rates remain high, but there just isn't enough demand for the massively increased issuance of treasuries to fund an ever growing deficit/interest bill. The Fed implements yield curve control with a yield cap of 3 or 4% on the 10-year treasury. Either the Fed buys bonds directly or banking/insurance/pension regulations are adjusted to force them to buy more to implement the buying needed. Real assets and gold soar. Stocks will go up too, but probably by less. Bonds get an initial pop, but are then dead money for a decade -plus. The US is definitely heading towards and end-game of #2. Just a question of if we're there yet or if it'll be the next time or the time after. I'm still leaning on the recessionary scenario of #1 with an expected pop in bonds and drop in stocks.

I think real household net worth hasn't gone anywhere nominally from Q1 2022 from the same data. Which means for the last 2+ years the average household has LOST net worth in real terms. And that's before any real damage has been done to housing which is MOST households' largest asset and won't remain at these "most unaffordable" levels for much longer IMO. Lastly, most of us can't spend our networth. Say my house price goes up 50% and my 401k doubles. What does that matter if groceries, insurance, healthcare, children's education/day care, car repairs/replacement, utilities, gasoline, travel, etc is up 20-30% while my wages are up only 5-6%? Cuts have to be made. Quality of living is going down regardless of what my 401k says. Sell assets to fund the gap? Sure, but then I'm gonna take a penalty on early 401k withdrawals OR a hit against my equity paying selling/closing costs AND be able to afford something significant less nice. And spending those gains reduces the net worth a long with any penalties or fees paid. I don't care what aggregate net worth is on paper because it doesn't reflect anything real. Many people can't maintain their current quality of living without spending those net worth gains - and then spending them results in the reversal of those gains. If you have to spend the gains to run in place, were the gains ever really there? I'm sure many people saw their networths rose by investing in real estate in 2005. But was any of it real?

This is right. We can debate the efficacy of the lag, but it's intentional because people's rent don't go up overnight simply because home prices rose. It takes time to filter through to rents and then time to filter through to tenants who tend to be on fixed leases for 1+ years. The lag is intended to reflect increasing prices for a small percentage of the population each month whose leases are renewing a d etc instead of pricing in the inflation that almost no one sees the month it occurs. It makes it a more useful "average", but a less useful indicator of what is actually happening as it will lag actual inflation and is why inflation typically peaks inside of the recession instead of before it.

It's all narrative driven. The high valuations of yester-years was all TINA, negative real rates are bullish for stocks, and "look at all that growth in a 0% rate world". Now there ARE alternatives, real rates are decidedly positive, and many of these names aren't really growing (like Apple) while many are shrinking (falling index earnings), but you can't own bonds because of inflation? And equities don't have to correct because they are always a better bet than bonds? Seems like real fuzzy math and rationalizing hindsight as opposed to any honest thoughts given to what the risks are and what stocks SHOULD actually trade for relative to lower risk bonds.