TwoCitiesCapital

Would also add M2 is cratering faster than velocity is accelerating. If M2 is going down faster than velocity is rising, typically that foretells of GDP contractions. I expect additional draws of liquidity as the Treasury has been spending down its account and will need to rebuild the balance sucking additional liquidity out of the market. We had plenty of deficit spending in 2008 and were running trillion dollar deficits going into the economic weakness in 2019 that preceded covid (were already in a manufacturing recession long before the pandemic hit). I doubt trillion dollar deficits change much in the near to intermediate term outlook and still expect a recession - potentially a deep one.

The exorbitant privilege of being the world's reserve currency....until we're not. With the way the current monetary system is set up, the US HAS to run trade deficits to provide a constant supply of dollars to the rest of the world so they can have enough dollars to settle trade in. We import their goods and export dollars they need to settle their imports of raw materials. What do they do with those dollars? Hold them as reserves in the form of US treasuries until needed. How do they get treasuries? Well the Treasury has to issue them. WE basically have to run twin deficits to provide enough treasuries to supply the world with dollars and a constant flow of attractive, liquid reserve assets (~6.5 trillion in global reserve assets currently denominated in USD). Now the size of the deficit is probably larger than what is required by this process, but then you have the dollar claims of the euro-$ banking system providing a steady bid too, but that is too complex and beyond me to know the impact. As long as we're the reserve assets, we probably get a pass until a better alternative reserve comes along. Everyone else? Not so much.

Agreed. S&P equal weight telling a very different story from the S&P cap weight. I've been buying a few commodity companies now that they've sold off significantly and I can reinvest profits from prior trims, but still waiting for the last shoe to drop - corporate profits. In a recession, I expect most things will get cheaper and most stuff outside of oil and small regional banks andaybe 1-2 other sectors don't seem to be pricing in any recession. Still prefer to own quality spread and duration. I expect it'll be city dependent. I doubt the Midwest gets hit as hard as population centers on the coasts. But yes - we've clearly overbuilt CRE. If even 10% of workers are remote on average, you have a very large abundance of office real estate at the margin. And my guess is the figures are quite a bit higher than 10%. Sure it can be converted - but that takes time. And it takes capital, and capital requires a return, and that return is largely going to come from lower valuations and not increases in cash flows. Maybe its not true of every building or even every city - but I expect CRE to be plagued with issues for the next 5-10 years as leases come due and aren't renewed and redevelopments are slow to happen because people can't afford to write down the value of the property against the debt carried on it. It could also be true that elevated inflation bails them out and cash flows CAN make up a decent portion of it - but in a real basis, and compared to other asset classes, I expect it'll still be a poor comparable.

I'm in the Midwest/rust belt. We never really had a huge boom of corporate real estate here given that the city has been shrinking for 60 years. That being said, still seeing large office towers sold prior to imminent bankruptcy from desperate landlords. My company gave employees the choice of hybrid or fully remote. Less than 1/3 chose hybrid (requires an average of 2 days in office per week). The rest are fully remote. We own at least 6-7 large office buildings outright with some smaller buildings across the street from our canpus. We sold 1-2 of the small buildings and are demolishing one of the 6-7 large ones. Despite being "well insulated" from overpriced CRE, we're still here....

During the GFC, they had multiple counterparties. It wouldn't surprise me if it were 2 or 3 here as well. Especially since these wouldn't be centrally cleared. Prem said each year with the ability to extend. Hard to say exactly how this was structured, but my guess is there are quarterly "resets" where cash is exchanged between the parties to settle the contract. The notional would adjust higher/lower to reflect the new value of those shares at the reset date and the financing rates would also change. Functionally speaking, there isn't much difference between a reset and a maturity except that the maturity date gives one or both parties the ability to renegotiate the terms of the contract - this would typically be the counterparties renegotiating the spread they demand over the financing rates, but Fairfax could also renegotiate the notional larger or smaller.

Sounds like the shares you own aren't highly shorted or in demand. I also make negligible interest on my securities at IBKR. But something is better than nothing which is basically what I get elsewhere. If you want to earn "real" interest, then you need to own something highly in demand by shorts willing to pay high rates to short it....which may not end well for you.

Front end bonds are all priced off of Fed policy, so it makes sense they'd be more volatile as that policy is uncertain. Longer term bonds though? The 10-year has been between 3.5-4% that whole time. In fact, with a few short lived exceptions, it's been in that range for the last 7 months. I'd say that's fairly reasonable volatility and that the 10-year is staying fairly consistent in what it expects for the US economy: a slowdowns of economic growth and inflation coming down significantly.

You can call it absurd, but it's to reflect the average renter's inflation, which occurs with a lag from the increase in prices. From that perspective, it's more accurate than immediately marking everything up to reflect the rise in price. Homeowners don't immediately feel the rise in price either because it only matters when they sell and rebuy so much t makes sense to prioritize rents.

I'm glad they extended duration last quarter. I hope they keep incrementally pushing it out. The primary thing keeping inflation positive at this time is the lagged effect of housing still coming through as positive even though home prices have been falling for a few months now (and seem likely to continue). Inflation is going back to zero, at least temporarily, regardless if there is a recession or not. Locking in 1.5-2% real yields before inflation falls off that cliff would do A LOT to hedge some potential equity and economic downside and provide consistency to the income.

Because for the last few years, QQQ has been highly correlated with TLT. Paying a 30x multiple to earnings provides a similar duration to long term treasuries. Basically QQQ should trade like a long duration Treasury with a corporate spread premium. In addition, for years people have been saying higher multiples on the market are justified due to low interest rates and that there was no alternative to equities. Now that interest rates have risen substantially, it seems few are suggesting that multiples need to come down OR that flows might go to alternatives that are significantly more attractive. Just seems like they expect to win both ways even though it's not really logically consistent if TINA ever was true to begin with.

I grew up on the Gulf coast and have plenty of connections down there. Premiums for storm and flood insurance have absolutely exploded in the last 5 years. Some are paying higher premiums for insurance than their current mortgage. The insurance companies absolutely seem to be responding to this threat - my real concern is how anyone other than the ultra wealthy will be able to live anywhere along the coast line given how expensive the combination of housing and premiums have become.

Thoughts and prayers doesn't seem to be working Guess we'll send more

Between May and August 2000, QQQ rallied 45% before turning back down and continuing it's bear market and losing an additional 70% over the next 8 months. I'm not suggesting we see a repeat of 2000. Just pointing out 20-30% rallies aren't UNCOMMON as bear market rallies and are hardly evidence of a sustained recovery. Liquidity is still tightening. High yield spreads are approaching levels from last year where stocks were making lows while stocks are near local highs. Leading indicators continue to be significantly negative. Coincident indicators are rolling over. Consumers are continuing to demonstrate signs of becoming tapped out. This is hardly an environment that is supportive of assets with uncertain/cyclical cash flows. Particularly assets whose earnings are already falling despite "beating" newly lowered estimates.

Isn't IDBI for Fairfax India? It's not competing for the same capital as Fairfax Financial's uses.

Losing 3 months interest, liquidity locked up for an extra 1-year, and future resets looking less favorable are the major considerations. If you plan to hold long-term, it's worthwhile to get the extra 0.9% every year. For me, this was always an intermediate holding for the income and lack of price risk that intended to sell when resets were less attractive - as they're becoming.

It was done a little later than I hoped and 2.5 is a little less duration than I wanted, but it's FAR better than the 1.6 they were at. Glad to see we have visibility of interest income for the next 3-ish years and some potential to benefit from dislocations with reasonable duration exposure. MoM CPI is showing obvious decelerations. If you strip of out shelter (which is still rising in the monthly figures due to the lag in reflecting price adjustments that are already falling), then you get CPI at something like 1% annualized already. With bank failures/tightening credit conditions having started a month ago, and real estate prices falling, my expectation is that this obviously gets worse before it gets better and that we're probably looking at deflationary prints ~6 months out. Glad they managed to eek it out and lock some in even if not at the top.

Nobody is limiting you to long term bonds. Or fixed rate notes. Why are those the only consideration you're giving here? Plenty of people did fine in short term paper, iBonds, etc and have done well with intermediate bonds once rates had risen sufficiently high. Why just long duration instruments that are similar to equities on their duration of cash flows? Why assume that this is the bottom of the biggest equity bubble we've seen since the tech bubble imploded? I tend to agree that investors biggest hurdle is themselves. And the constant feeling of needing to DO or change something. I don't typically believe in day trading or weekly/monthly type trading with the bulk of your portfolio. That being said, I do believe that the bulk of equity performance occurs in certain environments and that they do not perform well, on average, for very long periods of time outside of those environments. Secondly, I recognize how difficult it is to pick individual stocks for the long term period and have a reasonably diversified portfolio doing it to hedge if you're wrong. Let alone trying to pick these stocks in an environment that isn't really suited for most equities. See quote from WSJ article today: "Another eye-opening research paper, this one by Hendrik Bessembinder, shows that most stocks tracked over decades don’t produce any return at all in excess of risk-free Treasury bills. About half of all positive returns were generated by 83 companies between 1926 and 2019, or less than one-third of 1% of all stocks tracked." https://www.wsj.com/articles/this-strategy-beat-the-worlds-top-hedge-fundsdont-try-it-c673a039 Recognizing that this is likely NOT an environment conducive to equities as well as how hard it is to find companies that outperform over the long term, I prefer to be diversified into some fixed income investments to our perform the T-Bills rate that I expect will outperform most equities. That held true for 2022. I expect it might hold true for 2023-2024 period too, pending when the recession narrative actually becomes priced in.

I think professional money management has it's price, not necessarily "trading". Doesn't matter how enviable these guy's track records are, 20-30% of AUM will leave if they have more than 12 months of underperformance...even if ultimately proven right. Look at Michael Burry during 2008. Look at Bruce Berkowitz in 2011. Money management is s fickle. Doesn't matter how long your time horizon is as a manager.

I'm not saying buy short term bonds with a 10-year horizon, but I AM saying (and have been saying) that there are many better alternatives to equities at this time. I was also saying that in 2021. If inflation proved sticky, and there would be things that outperform stocks. It did. And they did. I don't think double digit real-return outperformance over 2-3 years is anything to sneeze at. You didn't have to catch the top or the bottom to make that work. Just generally avoid equities for the last 2-years and generally buy gold and short term bonds. I trimmed equities on rallies and directed new flows to those asset classes. I didn't sell 100% of my stocks overnight - but I have been trimming every rally. I'm not advocating trading daily, but I am advocating buying what makes sense and shifting portfolios to meet that environment with a 12-36 month horizon. Equities @ 29x in accelerating inflation? Never made sense. Equities at 19x with slightly lower inflation and deteriorating fundamentals and macro? Still doesn't make sense. 1-3 year govt guaranteed mortgages yielding 6%? Short term treasuries yielding 4-5%. Short duration IG corporates yielding 6-8%? That makes sense and is exceptionally less risky than the average equity. As far as successful traders? Soros. Druckenmiller. Dalio. Tepper. Plus others. And I'm not even advocating doing what they do. Just asking people to recognize that there are 10-20 year periods where equities go nowhere. There are extended periods of time where stocks generally don't make sense. If you want to fight that tide and try to find the minority of securities, be my guest. But the vast bulk of people would be better served by avoiding/reducing exposure to the asset class during those periods. We are likely in one of those periods given the starting valuations of 2021 and instability of inflation witnessed since.

You say it wasn't the "average" company and yet blame it on companies that aren't in the averages. Peloton and Teledoc were never in the S&P 500. Neither were most of the micro/small cap stocks that exploded. None of those stocks contributed to the average of 29x on the S&P 500. It was very much the Amazons, Facebooks, Teslas, Microsofts, Apples, Googles and other blue chip companies driving much of that trend. And those are very much the average person's portfolio/stocks and they were very much buying those on continued expectations of growth/profits/revenues - either directly for those companies or for averages as a whole via index purchases. And 2-years of negative returns during an inflationary periods of 7-9% in an asset class nearly everyone believes is an inflation hedge IS a big deal. Most stocks are probably -20 to -40% real returns over the last 24 months. Coming back from that ISNT easy. And we're not even sure that it's over yet. All we've seen is a reversion in the multiple - people still aren't pricing on corporate profits contraction despite it occuring for 3 quarters now. The Fed still tightening, leading indicators are still weakening, coincidental indicators are beginning to roll over, and we're now contending with tightening credit availability as banks struggle for liquidity. None of that is priced in @ 19x trailing earnings that are currently falling.... You'd have done much better buying bonds and gold over the last 2-years than most stocks. That is largely what I've been advocating for the entire time. Gold is up over that time frame. Short term bonds are neutral-ish. And intermediate/longer term bonds are up since I started advocating for them when the Fed Funds pass 3-3.5%. All have done markedly better in real returns versus most equities and will likely continue to do so if a recession is in-store later this year.

So the market was paying 29x trailing earnings for the "average company", i.e. the index, because it was obvious to everyone that earnings were going to fall? I think if there is a disingenuous narrative going on, it's that one. People paid 29x earnings because they were excited about future growth, not because it was obvious earnings were going to contract. Anybody can go back to late 2021 and early 2022 posts to see that the viewpoint here re: earnings falling was NOT consensus. The consensus was "equities are an inflation hedge and will pass on the cost to their customers to maintain profitability"

On the flip side, there is no longer incentive to step in and buy banks and their troubled assets BEFORE they fail due to the arrangement that was made for First Republic and the FDIC eating $13B of losses on that before flipping to JPM 24 hours later. They've got to do something? But maybe that something should have been nothing. Should've let the first several fail and then come up with exceptional relief.

They're determined by the NBER and not by any rule of thumb like two quarters of anything. There's been a debate above re: historical recessions that didn't fit that definition either. I'm sticking with my "within 6 months" call. ADP data is telling a slightly different story than NFP. No idea which one is more accurate, but they're not both right and one is signalling weakness while the other comes in strong and then gets revised downward. New job openings are still elevated relative to history, but coming down fast. Leading indicators have been significantly negative for 11+ months now. Coincident indicators are showing weakness. Fed is STILL hiking despite acknowledging that the bank failures are likely to tighten financial conditions which isn't showing up in data yet. MoM inflation is trending at 1-2% annualized and housing prices and used car prices are still falling which will take it down further in coming months. Corporate earnings are accelerating to the downside. Revolving credit is going through the roof signaling consumers maybe tapped out on excess savings. And, we still have several months left to feel the full effect of prior hikes let alone the tightening of credit from banks. This is going to accelerate downward quickly IMO - and like always - jobs will be the last thing to go.

I'm not sure that's the case. Sure, anyone owning T-bills is doing alright. But short term bonds were down 5-7% last year. Owners of that are probably doing alright too. Probably neutral to positive. Owners of intermediate bonds? Down 10-15% last year and monthly income up only modestly as only a percentage of the bonds have rolled at higher rates. That's a negative on spending from the negative wealth effect. Owners of long bonds? Absolutely slaughtered with basically zero pickup in income. That's a negative on spending from negative wealth effect. Anyone living on a fixed income doesn't get to reinvest at higher rates, but does pay higher prices. That's a negative from higher rates as their bond equity/bond portfolios look miserable while their incomes haven't improved. Sure - over a multiyear period there is the potential for higher rates to bleed through and increase incomes - but it takes years at these levels (which I doubt we have) and it primarily increases the income/spending of the wealthy/retirement plans/pension plans who would tend to save/compound most of the additional gains - not the average person who would spend them and circulate it.

Glad I own COIN. A little upset I can't buy the futures myself Really wish the SEC would do it's job here and pass regulation instead of regulation via the court system.