TwoCitiesCapital

I just repurchased some of the PBR I sold @ 15.25 and some of the WCP.to that I had sold at ~$11.50. Rode them up, missed a 10+% drop on the shares sold, and proceeds used to repurchase even more shares than were sold growing the allocation and the dividend income. I think some weakness now makes sense given the recent dollar strength and the coincident rally in the USD over the same period. Ultimately I expect Russia might attempt to weaponize energy exports again . They've already done it with diesel and China has already bulked up their reserves if they need to take a backseat from buying for a a bit. The Saudis don't owe us any favors either and may continue to support price via reduced production targets along the way. $90+ may not be sustainable outside of some geopolitical shock, but I think $70-80 is basically a given barring an immediate recession. $70-80 is still very profitable for most producers and this is still the sector I want to own for the next decade as $70 5-years from now strikes me as a joke.

Not exactly how it works. Bonds have exhibited equity like risk over the last 2-years given the low yields. So the risk was highest when priced the lowest. Now that they've repriced, it's be very hard to get another year of 10-15% losses and thus very hard to get equity like risk going forward. To get a 5+% unrealized loss on core bond funds going forward, you'd need some combination of IG spreads blowing out, mortgage spreads blowing out further than they have (already @ 2008 levels), or rates to go 1.5 - 2% higher. That's what it's going to take to overcome the interest accrual and amortization accrual over the next 12 months. It's a high bar to lose money in high quality credit today. I.e. not equity-like risk.

To be fair, it wasn't really style drift. They shorted Japanese equities back in the 90s, pretty sure they did so again during the tech bubble, and were short credit/long CDS in 2008. Macro bets have LONG been part of their management style. If anything, the recent style drift has been the promise to not short again, but the near zero duration call was still a HUGE macro bet that shareholders paid for during 2016 - 2021 where shareholders received basically no income return from the fixed income portfolio.

Pain trade for everyone was higher long term rates. Does 2023 end similarly to 2018? Give everything back in the 4th?

That's why you buy munis that pay 3.5-4.5% instead and then don't have to deal with the federal tax problem. Definitely easier to compound wealth in the 37% bracket versus the 0% bracket IMO.

All dependent on "real" levels of debt and whether or not you're a reserve currency. For most countries - debt is deflationary until you are printing money to pay it. I.e. it's deflationary as long as debt growth, in real terms, exceeds monetary growth, growth in incomes, growth of the economy, etc. Once you pass that Rubicon and it becomes clear the only way to repay the debt IS to print - then you get a hyperinflationary currency crisis. Even per your example, Germany's economy was in the shitter before the inflation because it was becoming increasingly obvious they couldn't service the reparation payments. It was the continuous printing of paper currency to do so that then led to hyperinflation. But the US is different: 1) we're the reserve currency with no reasonable alternative at this time. People will still need $ for global trade regardless of what our fiscal situation is preventing any real currency crisis from occurring and 2) we are not yet at the point where we HAVE to print to pay the debt - but we're rapidly approaching it quickly with budget deficits of 7% in a "strong" economy with rapidly rising cost of carry. Even if #2 happens, because #1 remains true and most of the globe remains short USD, I wouldn't expect it to play out in the currency as much and would still expect deflation to be the primary thesis until a reasonable reserve alternative comes along

In hyperinflation you'd expect that to be the case. For moderate inflation, both stocks and bonds tend to go down.

I tend to agree. This traded at a large premium for awhile post-IPO. The fee structure was the same. Nobody was arguing why it should trade at a discount back then - they were justifying the premium. It's all sentiment driven. They make the narrative fit the share price.

They should go back to what they were established for - a lender of last resort that prevents cascading bank failures. Giving them dual mandates of money supply and unemployment was a foolish endeavor. As if a handful of people can properly manage an economy of 350 million....

Inflation only works if it grows faster than the debt. The debt grew by 18% in 2020. By 5.5% in 2021. And by 8.7% in 2022. And by another 7.1% YTD. Way. Faster. Than. Inflation. Cost of servicing that debt has risen way faster than inflation. It's grown way faster than incomes. So far - debt remains deflationary. That may not remain the case, but we have no evidence to the contrary so far.

In the long-run, I still agree with Lacey Hunt. Debt is deflationary. It's still growing in real terms regardless of what inflation is/has been. As long as debt is still growing in real term, I expect the economic trajectory is "lower for longer". The Fed is making a policy error IMO and the real opportunity isn't in stocks pricing in continued perfection but in bonds pricing in real yields of 2-3% with basically no credit risk ( in treasuries, mortgages, and TIPS). The treasury bond market has lost more trillions in the last 2-years, amongst risk averse investors, than the real estate market did in 2008 and people are convinced the only fall out from that is a run of the mill 15-20% pull from manic highs? Without considering the impact of higher defaults, insolvent banks, negative PMIs and leading indicators, declining earnings, alternatives yielding significantly more than equities, and geopolitical tensions at multi decade highs? Give me a f*cking break. The music stopped in 2021. Y'all don't have to dance anymore.

It should work that way - and probably does given a long enough perspective and timeline. But you can get significant deviations. We have ~30 story sky scraper downtown that was built in 1986 for $150 million back during the 80s. It's been empty for the better part of a decade. It can't even be sold today for $4 million (the last auction price that was walked away from) because the cost to redevelop to anything usable remains uneconomic. So you have a value that is down 97% from its original build price, probably is less than a fraction of 1% of what it'd cost today, but I guarantee insurance on it wouldn't be cheap because the costs to repair and etc would still be exorbitant relative to the property's market price.

The bodies are in plain sight, but have accounting rules that obfuscate them. Damn near every bank in this country is nearing insolvency if they had to mark their bonds to market. They don't - so you don't see the losses until declining deposits threaten liquidity and force the crystalization of losses a la Signature, Silicon Valley, etc. Who else? Insurance companies. Part of the reason insurance rates are going up is due to inflation, increasing catastrophies (both scale and frequency), AND because they took a hit of 10-15% to their capital over the last 2-years as rates rise which constrains the amount of insurance they can write. And again, they're not forced sellers barring a massive catastrophe year so you probably won't immediately see the damage outside abnormal policy renewal rates. Who else? Pensions. But again, most of these are "liability driven" investors and their liabilities have similarly "cratered" along with their assets. Funding status might've actually improved seeing as most pension plans are underfunded and their assets would go down less than the assumed value of the liabilities. Who is the next shoe to fall who may NOT have the benefit of accounting rules to hide the loss? Hard to say. Commercial real estate feels obvious with the double whammy of fewer lease renewals and refinancing mortgage debt into higher rates. But it does concerns me because it is so obvious - feels like that won't be where the bodies are hidden? Maybe the banks that lent to them?

This is where you and I disagree. The 10-year rate was sub-1% just 15-months preceding CPI inflation @ 9%. The market is going to be just as bad as forecasting and just as emotional trading as it always has been. Even if inflation averages 3% over the next decade which I think is probably right-ish, there will be significant variation between the highs and lows of interest rates and yields.

Would also just add you could obviously buy the bonds directly. I'm not buying with enough size to make that worthwhile since I'm doing all of this incrementally over time. Lots need to be like above 100k per purchase before bid/asks make more sense than the slow accrual of fund fees. Might pay more on fees this way if takes more than 12-18 months for rates to come down. Might pay less if rate cuts start in the next 6 months and I start removing the exposures.

Agency mortgages are probably the best deal in the bond market right now. Can get ~6-6.5% in government guaranteed mortgages with some duration. Moving from money market/short-term funds to core increases duration some and roughly ~40-50% of your exposure is likely to be to mortgages pending the fund. I have been doing this. You can also buy funds geared primarily towards agency and non-agency mortgages like Doubleline Total Return fund (or the new ETF Harley Bassman & Simplify are about to launch which buys new issues of ~5-year mortgage bonds). You can also buy mortgage REITS. Slightly different risks here with the leverage, but with mortgage spreads so high relative to the treasuries/repos, the negative carry from the inverted yield curve isn't killing them and you've got multiple turns of leverage to drops in rates. And lastly I've been buying OTM calls on TLT for a duration kick as I do expect rates to come down.

And to be clear, I'm not advocating for bonds only, or even long bonds now, just pointing that you had very long periods of time between 1-3 decades long where subsectors of the highest quality bonds outperformed equities (I'm sure plenty more instances if you include a risk premium for credit exposure in high yield, EM debt, etc). This concept that ONLY equities can deliver attractive long term returns seems incredibly ignorant given what we can see in hindsight over multiple periods with varying circumstances. Maybe it's not long bonds going forward - but 8-10% in high yield strikes me as reasonable and a way better bet than a 4% earnings yield in equities. There is absolutely a benefit to switching out of equities when you're not being paid well for the relative risk. I think it's pretty clear that 2021-2023 is another one of those times. Which is why I started the move to iBonds and short duration instruments in late 2021 and have increased the duration of those exposures going into, and throughout, 2023 and missed out on a ton of the volatility in stocks in 2022/2023 as a result OR had the liquidity to take advantage of the dips while also selling the rips.

The benchmark for Zero coupon bonds only goes back to ~1985 - before that they were STRIPS issued by the Fed. From 1985 period through 2020 they crushed equities. So not 50-years, but 35 falling only behind after last two years where stocks went up and long bonds went down ~50%. Before zero coupons you had 20+ year treasuries and STRIPS. Im not sure there is benchmark data for STRIPS since you could only get them via reconstitution through the Fed, but you can find 20+ year treasury data. While zero coupon bonds outperform 20+ year treasuries from 1985 forward, I'm pretty sure 20+ year treasuries outperformed strips from the 1970s through then. Starting yields in 73 would've been 8-9% for 20+ year treasuries. You'd have been reinvesting that 8-9% every year at higher and higher yields all the way up to 17% several years later - and then you rode it all the way back down. With zeros/strips that's just a ton of price volatility for the same 8-9% return you locked in at inception . With 20+ year treasuries, the semi-annual coupon raised your YTM with every reinvestment for the first several years at rates as high as 17% (locked in for 20+ years). Yields didn't collapse until post-2008. Having started off at 8-9%, and increased that all the way up to yields of 16%-17% over several years, and then rode that back down to 6-7% over 40 years, you absolutely crushed equities. Its possible post 2021 equities have caught up given their 2021 rally while long bonds lost half of their historical returns in 2021/2022 but then we could still say they outperform over 48 years if not the full 50. Still not a bad showing for securities of significantly higher credit quality with no counterparty or bankruptcy risk. Without access to the Bloomberg terminal at work any longer, I can only run returns in Morningstar back through 93 or look at benchmark data back to it's inception of 85. But I ran the figures during covid after reading a Lacey Hunt article and zero coupon bonds and long treasuries had wrecked equities for a long time.

In?

Yes, still alive and shrinking. We all know of the bank failures back in March. Regional bank earnings have fallen QoQ 10-15% since simply on the negative carry of the liquidity provided which has only gotten worse with subsequent hikes and is BEFORE any credit weakness which we are beginning to see. We also saw the Fed basically undo the entirety of the QT it has accomplished with the liquidity to banks which also helped support markets. We're now starting to see some of that liquidity/support come back out and rates have been hiked since which has further exacerbated the profitability picture. We may not see more liquidity driven failures, but the earnings profile going forward is trash - especially for regionals. Total loans outstanding has been largely flattish for the year - not yet a contraction but definitely a negative from a credit perspective when considering general prices have risen over that time and the economy needs a constant flow of increasing credit to grow. As far as the economy? most leading economic indicators point to a significant slow down and have been for a bit. Now that we have the exhaustion of covid savings, restarting student loans payments, raises that have fallen below inflation again, and an unemployment rate that has continued to creep up, we'll see if that resilience lasts. GDI which attempts to measure the same thing as GDP, but from different sources, has been in contraction for the last 3 quarters. That contraction is supported by lower tax receipts. My guess is that it'll be GDP that follows it down as opposed to GDI being revised up.

Definitely taking some basis risk by buying the miners over the commodity. They don't always move as expected. But I wanted the operating leverage to enhance the shortage dynamics. I don't need it to perform at a specific time like I would gold so can have patience if they behave weirdly. And while I don't know much about the SMR industry, and expected roll-out profitability, I liked that Cameco bought Westinghouse out of bankruptcy and now has exposure to the manufacturing of new plants if policy makers ever take their heads out of their asses.

+1 Also made modest profits on PFIX. Definitely didn't hold it long enough! I figured 3-3.5% would be the max for the Fed as I didn't anticipate their willingness to kill the economy and the banking sector. I was obviously wrong there, but still think 3.5% is probably too restrictive over time. 4.5% certainly will be IMO.

I definitely take queues from price. I've been trimming WCP every time it was above $10 and buying back every time it fell to $8-9 for the last 2-years. I've been trading in and out of PBR with it's wild swings in prices and dividends. Have had multiple round trips and tons of trading profits from my energy names. But $12/share on WCP 2 years ago is different than $12 today. Companies have consolidated the industry some, have delevered some, have retained earnings some, and have repurchased shares/dividends along the way. And now the exhaustion of inventories supports "$90+ is the new $70+" for the foreseeable future barring a recession (and perhaps even then).

I guess so I'm in the secondary markets to make money and will continue to bet on the idiocy of policy makers by buying oil companies, but would prefer to be buying uranium ones. Just sold Cameco after it's recent run-up. Will look to re-add, but until policy makers get serious about nuclear, I just can't see a path for a long-term exposure to it other than trading spikes/dips in sentiment as the uranium shortage thesis plays out.

Really wish this trend was heading the other way. I understand the concerns around nuclear - I have a few myself. But I cannot envisaged supporting the burning of coal while shutting down existing plants with useful life left If you're concerned about the safety of it, put the plants in the middle of nowhere and pipe the energy in. You'll lose 50+% of it in transmission, but it's SOOOO efficient and uranium so cheap that you can still probably cut energy prices and emissions go down dramatically even with the most inefficient approach. And then the low hanging fruit becomes improvements to infrastructure for more efficient delivery instead of worrying about the intermittency or pollution from generation. I'd imagine that's a very manageable problem to tackle.