TwoCitiesCapital

Yea. I remember seeing a case study or something talking about "cliffs" that provide disincentive for you to try to better your economic position also 7-10 years ago. It focused on single mothers in Pennsylvania. IIRC, they would have to be paid $75k+ to have an economic incentive that exceeded their current welfare benefits (post-tax) and I don't think it considered the cost of childcare if the mothers went to work. How many single mothers are going to be qualified enough to land a job that is the median INCOME for two-earner families? The whole point of the case study was to point out various "cliffs" that provide disincentive to get off welfare because the moment you earn $1k more you lose like $5-10k worth of benefits.

I don't know if you'll ever get that type of leverage in a retail/consumer product. You'd probably have to buy options on the ETF that owns the swaptions to approximate something similar to Ackman's trade. I'd say getting a 50+% return is about right for the targeted duration on the interest rate swaps. Also, IIRC, the bulk of the collateral for the swaps is held in TIPS which have been falling with rising rates so you have a small headwind there.

Retail sales fell 0.3% in May despite CPI rising 1% MoM. Corporations will NOT be able to pass along increased costs and it eat some of the bottom line.

The other big assumption is that Fairfax will buy 10-year treasuries. They didn't in 2018 at these levels. I doubt they do so today. They might move out to 2-3 year bonds which will provide similar 'umph' to their interest income, but it will be temporary if rates come back down like they did in 2018-2020 so hardly anything to get excited about or to count as real earnings power. The real hope is dislocation in credit markets. Mortgages are yielding 5-6% at this point. Might be a better area to take the duration risk in versus treasuries. Waiting for a spike in credit spreads could mean getting high single digits in high yield and mid single digits in IG - both of which help interest income with limited duration risk.

I agree, but I still think it's a few years away. Debt and demographics and productivity are the three other deflationary factors and they're still with us. Deglobalization doesn't happen over night and I expect commodities to charge forward in fits/sputters as recessions kill demand but shortages will persist. So while inflation will exceed the average of the last decade, I don't believe it'll be out of control this decade because recessions/demand destruction will contain it

2) small relative to revenues, sure. But waht matters is how small they are relative to net profits because that's where it'll come from of they can't be passed along and the data is suggesting that they may not be able to in aggregate. 4) those items were all basically true in 2018 too. Didn't stop the economy becoming incredibly fragile and a recession from occuring. The US might be in a good 'relative' position, but that doesn't mean it's in a good 'absolute' position and equities were priced for perfection in 2021. The 1970s/1930s (inflationary/deflationary) environments saw single digit P/Es in aggregate by their end. Even if we only get half-way there, it'll be incredibly painful. To justify today's market levels, you have to believe we'll thread the needle and keep inflation averaging 2-4% per annum over the next decade - anything higher or lower than that threatens significantly lower equity markets. I still believe deflation is the risk, but if I'm wrong and this inflation remains persistent, that is still NOT good for stocks. As we're seeing now, it can result in suboptimal inventories where companies get whipsawed and/or the inability to pass increases in production costs onwards. We're seeing both at the moment.

1) agreed in the short term higher rates matter little for public debt. Intermediate to long term they do and plays out explicitly via default risk or implicitly via inflation/currency risk. 2) I'm not so sure corporations can just "pass it on". The data suggests that corporations have been struggling to pass along inflation with PMIs outpacing CPIs for the last year. If they can't even keep up with inflation, what makes you think they can tack onto that increased interest costs? Also, please look at the WSJ article from today that suggests inventories for many products are elevated and we'll likely see price cuts across various retail products DESPITE rising inflation and interest costs. 3) uS consumers carry relatively low debts because they were essentially bailed out twice over the last 20-years and have used the opportunity of deferrals, stimulus, and etc to deleverage, so we agree there. That being said, what matters is the picture going forward and costs are rising faster than incomes for most and the savings glut that appeared from stimulus during covid is largely undone. 4) the economy appears significantly LESS robust today than in 2018. 3.25% rates in 2018 were enough to break the repo market, start a manufacturing recession (in 2019), PMIs fell to negative growth globally, and invert the yield curve long before anyone has heard of covid. Maybe it IS different this time, but I'd like to know what gives anyone the confidence to think so?

Stocks may have their prices rise, but there has NEVER been a high inflationary episode that was "very good" for stocks. Even in your example of Venezuela, the real purchasing power of the money invested in stocks was falling rapidly even as share prices climbed vertically. You'd have been better off holding foreign currencies outside of a bank and gold. Inflation drives people to hoard. In moderate inflations, people don't tend to hoard equities but focus on things like floating rate bonds, TIPS, commodities, oil, etc. Stocks tend to face margin compression which can result in falling earnings even as revenues rise. This is typically a negative environment for equities. Also, inflation doesn't have to be persistent. Even in the 1970s US, inflation started around 6%-7%, fell to 4%, rose to 12-13%, fell to 5%, and then rose to 15% before cratering back below 4% in the early 80s. These are dramatic swings in prices/expectations and leads to dramatic swings in supply/demand based on inflationary expectations. Equities do NOT do well in periods of uncertainty - not knowing if inflation will be 15%, or 5%, the following year fits that bill. Now in severe inflations, people will hoard ANYTHING. Physical goods. Real estate. Food. Etc. Anything is better than cash. Stocks get hoarded because because they have a longer shelf life than food and have a small amount of inflation protection from rising revenues. But you still tend to underperform other real assets and still tend to have a negative real return. It's not 'very good', but it is better than some alternatives. I'd still rather own gold, foreign currencies, foreign real estate, crypto, etc over equities in that environment. If you're going to play stocks, you're best bet is to be leveraged with non-recourse debt and pray you catch a pop and not a dump.

Interest rates have historically trailed inflation. There just is no mechanism that forces interest rates to trade above it - it doesn't HAVE to happen. I'd actually expect average 10-year yields to trail average inflation over the next decade by 1-2% per annum. We're going to have a decade of repression, real interest rates will be negative, and stocks and bonds are going to go through crazy volatility IMO.

Good call out. Comparing the individual withholding and corporates line items doesn't look to bad. Has forgotten the extension for 2021 which contributes to the difference. Still think we're in for weakness by 2023, but agree its too early to be concerned now and that risk assets may rally from here.

This is a good indicator, but the YoY figures for the month are worrying, no? How many months do you have to be down 30% YoY for the YTD figured to flip? 5 more months of that and you start to get negative YTD figures as well. My general thought is this plays out like an accelerated 2018-2020. The Fed is going to hike, economic conditions tighten dramatically, inflation begins to come down, the yield curve will invert again, Fed halts, and risk assets rally straight into economic weakness. My guess is the recession is early next year, not this year, but you'll start to see the economic weakness starting now as we had several months of sub-50 PMIs and a manufacturing recession in 2019 while equities popped 20% even while fixed income markets screamed about economic fragility. The unknown to the above is the willingness of the Fed to capitulate given the current inflation in the mix, but I'm still thinking they will.

I'm pleasantly surprised. One of the first times, in a long time, it's outperformed so dramatically. Recently sold some shares to buy other names I had trimmed on the way up now that Fairfax's relative performance is like +40%.

I'm guessing that we may have seen the top in yields for the intermediate term. I expect CPI and PMIs to start slowing down over the next few months and for yields to reflect a readjustment in rate hike expectations.

While I understand the argument for it as an inflation hedge due to it's fixed supply, it always was fairly obvious that this would be dominated by other price action inputs. Do we really expect the inflation hedge properties to dominate a 50-100% growth rate in adoption? Do we expect the inflation hedge narrative to trump 2 countries adopting it as legal tender over the last 12 months? Do we expect inflation hedge narrative to trump the fact that retail investors fled the scene in the Summer of 2021 and haven't yet returned? The inflation hedge piece seems so SMALL in comparison when we're talking about hedging a slight decline in the dollar (or other currency). BTC can only serve as an inflation hedge once it largely has reached full adoption and as a global asset class, which currencies' inflation is it hedging? Secondly, I'm not even certain that happens then. My prior views have been that volatility in crypto would decline as the asset class became sufficiently big and liquid. And maybe that does happen. But crypto is nearly perfectly inelastic in it's supply and becomes more so with each halving event. Inelasticity breeds volatility as the price is the only input that can change to reflect changes in marginal supply/demand.

So were you buying in 2018 the last time it considered by ~90% or nah? Because it's easy to say that, but typically people find excuses to NOT buy once something is down 90%.

I dont mind the macro bets - but would prefer they do them smaller OR lock in profits on them more quickly. They successfully called interest rates in 2016-2018, but missed them in 2018 - 2020 and there was basically no net benefit to shareholders (maybe even a net cost after considering 4 years of substantially reduced income). Now they've nailed them again in 2021, but if they don't start locking it in, we risk losing it all again. If they're gonna bet the entire bond portfolio on the call, I want them to start systematically taking steps to lock it in. Like move 10-15% into 5-10 year bonds when rates hit 2.5%. Move another 10-15% when they hit 3.00%. So on so forth. Still very well positioned for rising rates, but you're steadily locking in higher rates and duration for when the cycle turns.

Since GDP is simply a measure of aggregate incomes - isn't it bad in general? Whether those be corporate incomes, individual incomes, or a mix - they're pie is getting smaller. And sure, within that there will be some winners and some losers, but that doesn't even mean the winners' stock goes up. A receding tide lowers most boats. Google had record revenues earnings basically throughout the entire 2007-2009 period and still lost 2/3 of it's market cap. The sky isn't falling. Don't sell everything. But might be prudent to be trimming gains, selling rallies, and adding some duration here.

People seem awfully sanguine about the contraction in GDP for Q1. Consensus estimates mostly hovered around +1-1.5% from what I'd seen. Coming in at -1.4% seems kind of major - particularly since the Fed only just started hiking rates and is expected to accelerate that next month, no?

Not sure if those are the reasons for the discount since those were true back when it traded at a premium too. The discount is solely based on sentiment. Can't tell you why it's negative after performance like they've put up, but it just is. I do agree the Dutch auction wouldn't be a catalyst for a higher price now, but probably one of the best uses of funds since the improvement to book value is attractive and guaranteed.

Meh. It's a calculation of a fixed basket of assets - it doesn't do a great job at calculating actual changes to cost of living. Like, we'd all agree that a large portion of the inflation index right now is elevated due to energy costs. And oil going from $20/barrel to $100/barrel was a large part of that. But oil was also $150/barrel 14 years ago...so what inflation? Inflation calculations don't factor in the ability to select a cheaper alternative, or that mortgages remain a fixed cost for the duration of ownership, or consumer behavior changes to drive to a local vacation destination instead of fly, etc. Does fiat currency lose value every year? Most likely. Does it lose value by more, or less, than official calculations? Depends on who you are and how flexible you are in swapping to alternatives. My cost of living isn't up 8% this year. I'm sure others are. But you hold the ability to manage that better than any central banker tinkering with interest rates IMO.

I think I mentioned it earlier in the thread, but the fact that PPI keeps outpacing CPI by a significant margin should concern anyone buying equities as that signals margin contraction. High inflation tends to lead to low P/Es and here we're seeing that those earnings may not even safe if margins do contract. A receding tide is going to lower most boats.

Best type of fixed income exposure there is at the moment. Too bad you can't do more than 10k per year.

Seeing as prices are set at the margin - any incremental increase/decrease in flows is important. Particularly in times of euphoria or panic when liquidity is nil.

That's the primary problem in the US though. For 20+ years, trades were villified and everyone was told they NEEDED to go to college and get a degree to be successful. So they tried. But they found when everyone has a degree, the degree itself doesn't do anything for you in being competitive in the workforce and the work they were best suited doing like auto mechanic, or HVAC repair, or customer service, etc. don't require degrees nor the 20k in debt and the 3-4 years it took you to realize it. It's not a total disaster, but a waste of time measured in years and debt used to finance it. I'm someone who has been very successful with a degree. I had several very intelligent friends in college who would've been far better served by trade schools and not wasting the time/money on university

A negative real rates implies negative real growth. Will there be SOME opportunities that provide positive returns? Sure - but collectively asset returns will be negative. Particularly for financial assets. In reality, negative real rates stifles lending (who lends for long term capital projects at a guaranteed loss?) and stunts the borrowing capacity of a country (who buys incremental new issuance of bonds for a guaranteed loss?) while encouraging the hoarding of real asset inventories which is unproductive money. I'm sure there are other perverse side effects, but I dont think guaranteeing a negative return on trillions of financial assets is a positive for any country.