TwoCitiesCapital

I own the Jan 2024s - but have been selling calls against the position since it ran up from $11 to $20+. Think I'm down like ~7-10% on the total position at this point after crystalizing gains in calls sold. I purchased some of the preferred shares today instead of adding to equity/calls. @ $4.50 on a $25 par, seems like a risk worth taking while moving up slightly in the capital stack if it does in fact enter chapter 7.

I've done well with selling vol this entire downtrend TBH. Now I'm buying it.

Always interested in coverage on tether given it's wide-use in the crypto ecosystem But it also begs the question why people are still discussing the misdeeds from 2018 in 2023 when everyone and their mother knows this company is/was involved in shady sh*t....

I noticed this as well. I've been paying $3.50/4.00 per dozen for large, organic, cage free eggs from my local grocer for years now. And they're the same $3.50-4.00/dozen today. The typical dozen of small white eggs that used to be quite a bit cheaper is now $5+/dozen sitting right next to them.

In high inflation periods, short term bonds and cash tend to outperform equities, but the long bind would be killed - as we've seen over the last 18 months or so

It basically is from a federal income tax perspective. Most people under 70k pay 0 federal income tax after considering deductions, credits, and refunds. Romney wasn't making it up when he said half the country didn't pay income tax.

Energy is still a problem. It's flat year over year despite a massive flood of supply from the SPR and the world's largest consumer going through rolling lockdowns. Neither is those will be true or 2023 and I think a replay of a 2008 scenario where energy despite economic weakness is a possibility in 2023. Beyond that, I think the case most bears here I've seen is that margins are contracting and earnings will fall which playing out right now. Some might've blamed inflation, or economic weakness, or whatever catalyst, but the hypothesized end state is occurring. Pick your poison for the cause if you don't believe they're related

I've met Chris and know an employee or two at his firm. Have casually talked about Fairfax, and Fairfax India, with those employees and it's my understanding Fairfax would never be considered seriously for a portfolio holding because of the risk of a "blow up" is too high AND they don't view their core competency is foreign investments (specifically for Fairfax India).

I am limited to mutual funds/ETFs in my HSAs and 401ks which makes up a reasonably sizable portion of my savings. Only my IRAs and taxable accounts are self directed. While a reasonably large portion of my portfolio, I'm still stuck with index beta OR other people's tracking error on a large portion of my funds.

This. I made the mathematical case that is was nearly impossible for Fairfax to make attractive forward returns in 2018 given interest rates and equity markets. I sold ALL of my Fairfax that I had been accumulating for the prior 7-years at $500-600 because the market seemed to be very optimistic. Turns out, mathematics was right and Covid changed the narrative to "Fairfax has been dead money for a decade" despite insurance, rates, equities, and repurchases ALL syncing up to make forward looking returns fantastic....and the price of the stock was 1/2 to 3/4 what it had been 2-3 years prior.

Yes, and for the last 9 months economic indicators have continued to deteriorate. I'm sorry the economy doesn't just fall off a cliff in 30 days so you can be content with the timing of people's calls. The fact is, we've been saying these things would be happening and they've been unfolding for the last 9 months with nearly every economic release strengthening the bear case. Bear markets take time. It's not uncommon for contractions to be 2+ years long. Yes, unprofitable tech might be 90% off it's bottoms, but much of it is still 50-90% off it's tops even after those rallies. Most people buying those names were likely in it long before the bottom, likely didn't nail the bottom on additional buys, and may still be in the red on the whole position and may not yet have sold the recent rally. To have made money on those names required impeccable timing of very short term tops and bottoms. Or you could have just taken a 12-month view and bought gold, short duration bonds, or stayed in cash and done better than ALL of them without taking much risk and without having to call tops and bottoms every 2-3 months. Just sitting on your ass and winning. I'm simply suggesting the trend in outperformance over a longer time horizon is likely to continue. I still think gold, cash, and short term bonds outperform equities for the next 1-2 years. I've added intermediate bonds to that mix once we surpassed 3% rates. I'll add some equity on dips, sell it on the rips, and continue to be cautious overall since the economic environment is signaling even more cautioun than a year ago. That is - until we get valuation that reflect that weakness.

How can you say they were totally wrong? Leading indicators have been negative for 10 months running and many are ACCELERATING to the downside. Corporate margins are contracting and earnings are falling. Housing prices are falling while most of the market for buys/sells has stalled. New construction and permits have basicsally dried up. Consumer savings have cratered while revolving credit balances are exploding. If anything, the people suggesting economic weakness and malaise have been absolutely right with most of the data (and risk asset returns) supporting that deterioration. You just think they're wrong because a handful of unprofitable tech companies are having a multi-month bounce. I tend to think that is just symptomatic of the last 15-year psychology of the Fed saving markets which isn't going to be true this time around - people just haven't changed their minds about it yet.

The answer to your first question is yes, their bonds would gain in value. Potentially moving to unrealized gains even if they are far enough from maturity to trade at premiums. All the unrealized losses will be made back by Fairfax either by holding then bonds to their maturity OR rates dropping. Your second question the answer is 'it depends'. It's possible for 1-2 years treasuries to do better than 10-years in a rate cutting scenario, but highly unlikely. The duration of a 1 year bond is slightly less then 1. You'd expect that bond to gains slightly less than 1% for each 1% the Fed cuts. At this point in time your max gain on those 1-years bonds is 4-5% of we go to 0% on front-end rates. A 2-year bond sports a duration slight less than 2. So the same 1% decrease in rates results in ~2% return. A 10-year bond will have a duration closer to 8. If 10-year yields fall by 1%, you'd gain ~8.1% on the bond. So for the 1-year bond to outperform the 10-year, you'd have to believe that a 1.00% cut on the front-end only results in a ~0.125% reduction in rates on the long end. It's possible, but not likely. More likely is 10-years go down by 0.5-0.75%. You make 1% in the one year bond, 2% in the two year bond, and 4-6% on the 10-year.

Our of curiosity, how are you measuring meaningful deterioration?

Nobody is expecting perfection. I'm expecting them to take risk off the table after knocking the ball out of the park instead of doubling down and expecting another home run. I'm not upset they didn't go all in on 10-year treasuries in October. I'm upset that they didn't even extend duration even 0.25 years in an environment that saw rates heading higher even while the economic environment was/is clearly deteriorating. 3-years duration is still a massive large macro call on rates and inflation relative to their insurance liabilities. It's still wholly consistent with their inflationary outlook. It just reduces the risk of giving back all of the benefits of having been short duration like we did in 2018-2020.

I agree on the current undervaluation. Fairfax is my largest holding. But its ONLY significantly undervalued if you believe current earnings are recurring. A portion of them could be if we locked in rates. Insurance is always at the whim of catastrophes. And equities? Well, if the Fed cuts to zero, it's for a reason and that reason us unlikely to be supportive of positive returns at that time.

0% is essentially the lower bound for all intents and purposes. I understand the Euro took their's slightly negative, but the Fed never has, has suggested they won't, and is the reserve currency of the world which are all things to be considered. If we agree on that, then the difference in # of cuts isn't important. The Fed literally COULDN'T cut 4.5% in 2020 so it's pointless to debate how much longer that would've taken them. What is significant is rates went from their peak to 0% in less than 6 months. Said another way, the maximum amount of cuts possible in 6 months time. That's how quickly the outlook changed. I'm giving the Fed 10ish months to do something similar with economic indicators pointing to significantly more weakness. Also of those indicators your suggesting we can ignore - interest rates and the yield curve is literally one of them. I think it's prudent to pay attention to what interest rates are saying about the future of interest rates. Also, maybe I'm wrong on timing. Maybe it's Q1 instead of Q4. Or Q2. Point is, that unless if Fairfax extends duration, the interest income will decrease massively over the course of a 12 month period when that happens.

They CAN do this, but why would you expect them too? 1) they didn't jump into long bonds in 2018 when the Fed halted nor in 2019 when the Fed started cutting. They also never really have acknowledged that they view this as an error to think the approach would be different this time 2) if they didn't see value at 4.25% on the 10-year in October, why would you expect them to see value now that it's 3.75? Or 3.25? Or 2.75? Or whatever rate it's at when the Fed finally capitulates and starts cutting? Long end rates typically drop a ways ahead of the Fed cutting which is why the yield curve is so heavily inverted at the moment. It's possible that much of the move down will have already occurred by the time the Fed cuts. I seriously doubt Fairfax will add long bonds in this environment (unfortunately). But I can't for the life of me understand why they wouldn't be running a 3-5 year duration at this point.

Perhaps. That did happen in 2020, but Fairfax was sitting at 0 for a long time before that happened as the Fed paused in 2018 and then began cutting long before any blow out occurred in 2020. I liked the moves they did in 2020 - just imagine how much bigger they'd have been had they owned a few years of duration going into it and had actually booked gains on the bonds sold AND on the ones purchased instead of just sitting in cash. Imagine what it would have looked like to have had an additional $1-2 billion in cash from the increased interest received from 2018-2020. It would have been hugely impactful. Secondly, 3-years of duration is hardly taking undue risks. Nor am I looking for it for purposes of appeasing the market. It helps with business planning knowing you have that $1B coming in consistently. It helps give you the confidence to take those risky/lumpy bets when the world is falling apart because you can use the $1B to do it while knowing there's another $1B coming right behind it if it continues to deteriorate. And lastly you get the optionality of a duration kicker which may allow you to front load $2-3B by selling some of duration to buy credit that has blown out.

While I understand the theory of WHY interest rates matter, and how they play through the discounting mechanism, historically the correlation between interest rates and movements in equities or multiples in equities has been spurious. Even directionally there have been extended periods of time where bonds were positively correlated (consistent with the academic theory) and extended periods of time where they were negatively correlated (inconsistent with the academic theory). What has WAY more explanatory power is the inflation rate. When inflation is stable at ~0-4%, you get high equity multiples. As inflation gets above, or below, that threshold you get dramatic contractions on those multiples. This is consistent with what we've witnessed in 2022. The contraction started because inflation was 6% and heading to 9%. It's paused/reversed some as inflation came back done from 9 to 6% and markets are hopeful the Fed can thread the needle and get it back to 0-4%. It's more probable, IMO, that the multiple contraction continues as I expect inflation to be unstable and bounce around quite a bit as opposed to the nice, consistent 1-2% we saw most years from 2009-2019.

1) it went from 2.50% to 0% in a matter of 6 months going into covid and Fed was cutting rates BEFORE the shut down and covid had even ever been heard of. They don't have to do it in 0.25 or 0.5% increments pending how deep and bad the deceleration is. The fact that they've been hiking 10 months into a deceleration suggests to me it'll get bad 2) the only thing that makes me think they may not cut back to 0% is the persistence of inflation. But even going back to 1-1.5% would kill the interest income over a period of 12 months because they're running an average duration of ~18 months. In 12 months time, 2/3 of your bonds will roll to significantly lower yields regardless of what the bottom end of the Fed cutting cycle. This is precisely why I want them to lock it in. Would be much more comfortable with a ~3ish year type duration (which is still WAY short relative to counterparts and the Barclays Aggregate index). 3) while acknowledging labor is resilient and may lessen the impact of the coming recession, MANY economic indicators are at 2008-type levels and there is a general acknowledgement that booms and busts tend to have similar magnitudes. 2020/2021 was obviously an enormous multi-trillion dollar stimulus fueled boom. What does the hangover look like? 4) Why does 0% seem so extreme when we spent the vast majority of the last 15-years sitting there?

Seems like the market is over the "wait 2-3 days to respond to earnings" trend. Multiple expansion might be the next change the market gives us

If the Fed cuts rate back to zero in Q4 of this year, you'll have run off and reduction in rates every quarter of 2024 until the end. 2025 will be the year of near 0 income, but 2024 would be declining every quarter. I don't care so much about Fairfax maximizing yield in any one corner. I know the yield curve is inverted. I'm also not asking them to go all in on 20-year zero coupon bonds for the duration. I want them to lock in reasonably high yields so you can count on that billion every year and have a reasonable amount of duration to hedge downturns. And the reason I'm so paranoid about it is because they DID miss it once already. They went all short duration in 2016. Were right into 2018 hiking cycle but missed the pivot, never extended duration, and the we sat at 0 income until 2022. 6-years of a bond portfolio basically doing NOTHING from an income or gain/loss scenario. That could have been an extra $3-6 billion pending how you expected them to trade the bonds in covid. We talk about how much the equity hedges have cost... look at the missed income and duration opportunities over that period! This time around I doubt it'd be 6-years, but even 3 years would be terrible This is the ONLY part of their business that lends itself to being predictable and they've already knocked the ball out of the park on the interest rate call. Lock it in!

Definitely disappointed in the lack of duration extension. Rates might be headed back up, but in more and more convinced the 4.25% we saw on the 10-year will be this cycles top. Wish they'd start locking some of this in for 3+ years so we're not back to limited interest income in 2024.

From the little I've listened to him, it seems to me he doesn't like BTC precisely because of it's censorship resistance and inability to be controlled by the government. He's called it unpatriotic and anti-social in many interviews. Who knew he'd skews to the "we need militant leaders as regulators to limit freedoms" side of Republicanism as opposed to the "let free markets work side".