TwoCitiesCapital

Losses in fixed income markets exceeds that of the 2008 global financial crisis. Real incomes, on average, are less than what they were 3-5 years ago? Real returns on nearly everyone's investment assets (savings accounts, retirement accounts, pensions, taxable stocks/bonds) are exceptionally negative. How is that 'no damage'? Rates are attractive on a forward looking basis, yes! I've been screaming that as nauseum in other threads. But it's going to take a long time for new monies invested at those rates to offset the damage to everything that was invested before those rates came to be. And it was the inflation/raising of rates that did most of that damage. As far as your twitter poll? There is NO way the average person's net worth is up 2.5x - even nominally - over the last 4 years. Your chart off household net worth doesn't support it either reflecting a ~40% rise from 2019 levels - much of which is attributed to housing which can't be tapped to improve quality of life. Maybe Twitter isn't lying - but if they're not then that just paints a bleaker picture for everyone who didn't answer you poll as we know what the average was.

That's all true nominally, but not true in "real" terms. Real incomes have been eroding, on average, since 2021 (and only grew in 2020 due to transfer payments). I'm making the most nominally I ever have. In real terms it's less than what I made in 2018. I'm in the top 5% of incomes in this country, with no kids, and even I can feel that pinch over time. Wealth might be at nominal highs, but was higher in real terms in 2019/2020. Also, that's on paper too. A 10% dip in 2024 would erase much of the current bounce just like the 2022 dip did. Homeowners? They are doing well on a relative basis - but even many of them are suffering with rising costs of carry. Despite refinancing my condo in 2021 for 2.75% and saving ~$500/month, my total carry on my condo hasn't reduced much from those levels. Taxes have gone up, the insurance has gone up, HOAs have gone up, and my monthly utilities are up. I got that $500/benefit for 12-18 months and now I'm basically back to here I started at in 2021. On a real basis I'm "winning" because I'm basically up 0% while inflation has been higher than that, but I no longer have a nominal benefit from the refinance and that will continue to get worse as costs continue to rise. Sure - on paper my net worth is up due to rising condo values. But I can't tap that to pay any of these higher living expenses. With a HELOC, high rates become a cash drain. Selling? Lose a chunk to closing costs and can only afford something way smaller/less nice due to higher rates on mortgages. So what is that "gain" in net worth reflective of ? Nothing. It essentially basically exists solely on paper and cannot be translated to an improved quality of life. It's reflective of 'not losing more' like renters have - not an actual improvement of my absolute position. Point is, inflation is what caused rates to go to these levels this quickly. Considering the impact of that inflation, very few people are better off today than versus 2-3 years. If we stay at a place where rates significantly exceed inflation for 3-5 years, we might get to the point where rates will be beneficial. Over time compounding at higher rates that exceed inflation will offset the losses from prior assets invested @ negative real rates, but it takes time and we've only just gotten there in the last few months. I don't think we're going to to stay there for the # of years required to make people whole on the upfront damage.

Another way to think about this - Interest rates go to 100% tomorrow. You can double your money every year. But that means all current assets are gonna lose ~99% of their value in comparison. How long does it take you to come out ahead and "benefit" from 100% interest rates. Probably year sometime in year 6-7 pending inflation. Also depends on what happens to your job in that environment, if you need to tap those savings that are now down 99%, and how much additional you can contribute. But in a vacuum - 7 years to come out ahead doubling your money every year.

What losses am I talking about? Exactly the ones you listed. Made worse by the fact that cumulative inflation has been like 10-15% over that time making nominal losses even worse. People bought stocks/bonds/commodities/whatever in 2021 and 2022 and are currently in loss status on most of it. They weren't sitting in cash. They're not benefitting from higher rates until the reinvested income from current investments offsets those prior losses on the reset higher. Even at 5-6% rates, we're a long climb out of that hole nominally (and even longer on inflation adjusted basis). Money markets/and treasuries? Cool. Basically every Treasury bond thats ever been issued is in an unrealized loss status at the moment. Doesn't count as benefitting quite yet. Money market assets? Sure. Those are doing well. But a good portion of those are in retirement accounts that aren't going to circulate for the multiplier effect on the economy and the remainder is so small in proportion to what is owed on cars, houses, revolving credit, durable goods orders, etc as to make little to no difference. So yes, consumers might be benefitting from higher rates on like 2% of their total net worth, but everything else is hurting against that at the moment Is this really debatable?

Yes - YTD that's the case. And GLD kicked the S&Ps ass in 2022 with or without dividends. The S&P total return is ahead by 2-3% per annum at this point, but was behind as recently as June. Compared to the S&P 500 equal weight, MSCI ACWI, EFA, EM, small cap, mid cap, etc....gold has killed them all over the preceding 5-years and basically matched the equal weight S&P 500. Not obvious that gold was/is a bad call if the only asset class to outperform it was basically the Nasdaq...

Most stocks and bonds are down over that period. Isn't limited the ones I named. It wouldn't have been the mania that it was if MOST people weren't participating by buying something and most of those somethings today are significantly off their 2021 highs. Point is very few people were sitting on loads of cash, and still hold it, to benefit from the higher rates.

That's assuming the cash wasn't used for share repurchases 15-20% ago, refinancing prior loans, or used to actually invest/grow the business. I'm going to assume very few companies issued tons of debt and then just sat on it for 2-3 years paying a small amount of interest waiting for rates to rise and have it to collect the spread today. Some companies carry higher cash balances naturally. It's those companies that benefit from the rates the most. Some companies make gobs of cash. They benefit too, but less so. Investors aren't giving those companies 25-30x multiples to sit on 5% t-bills. These companies probably use the gobs of cash for buybacks or acquisitions instead of continuing to compound the benefit of higher rates, but they get paid a little while they wait. Everyone else? Probably not a large beneficiary of higher rates at this time. Over time, higher rates COULD benefit savers and potentially flow through to spending - but it'll be 1-3 years of pain before that occurs because most savers weren't sitting in cash but we're invested in the mania that was 0% rates and Pelotons/Rivian's/GameStop/crypto/etc that was all been severely punished.

Perhaps. I tend to think Bitcoin MAY displace gold, but given it's perfect inelasticity, its possible it remains TOO volatile to be the asset counted upon in risk-off type moves. Gold may retain an important place in people's portfolios despite my expectations for Bitcoin. I own way more Bitcoin than I do gold. But have been recently been buying gold miners that are now significantly off 2021 highs. I expect a high probability gold will do significantly better than equities in the 2020s - perhaps miners with exposure to it won't be half bad either.

I mean...the 5-year return for GLD isn't that far off from the 5-year return on SPY. Relative to value stocks, small- and mid-cal, and int'l, GLD is kicking ass. Can we really say that a positive view towards gold is wrong if it's outperforming MOST global equities over a 5-year period?

Debt, for any entity, is inflationary upon issuance and deflationary upon servicing/maturity.

I don't think the S-curve is quite as valid here given the constraints on supplies and the need for infrastructure investment. In a vacuum, demand for EV might follow the S-curve. In reality? Probably going to run into supply chain issues with shortages of key components OR problems at the utility level as they run into issues producing the power necessary to charge vehicles day/night. As far as Tesla prices coming down? Sure - some of that is probably economies of scale and reductions in commodity costs. The other piece to that is competition. Pre-2020, basically nobody in the Western world was competing with them. Now you have Rivian and Lucid with EV-only platforms (Rivian's truck looks 1000x better than the cybertruck btw). Porsche has a high end Taycan that's getting rave reviews. All the major manufacturers of Ford, GM, Chrysler, VW, etc are developing EV product lines. Tesla is becoming a commodity product - the price changes reflect that loss of market share.

Yes. Job listings on CFA website, on job aggregation sites, and their own company websites. Non responses have been largely across the board. Have only heard back from one company. Received an immediate canned rejection email from HR like 4 hours after applying, but then was called by HR a few weeks later for some "clarifying questions" and was told they're still absolutely interested, and then never heard back again. That was over a month ago. The jobs numbers today reflect declining full time jobs and exploding part time jobs. Underneath the surface, it doesn't seem like all is well.

Yup. No immediate catalyst to close NAV gap. Both VW and P911 have turned down recently which seems to be driving the sell off here too. It doesn't rally when it's assets rally, but sells off in sympathy when they drop Not a huge position for me - but I love Porsche cars and feel good owning the company at a sizable discount.

Have been applying to other places for the last 18 months. Mostly non-responses. Not rejections. Not scheduling interviews/phone screens. Just silence. Seems like much of the financial industry is on hold for hiring. Not sure how it is back in NYC (where I left for this job), but my options here are quite a bit more limited unless if I want to move to Chicago (~3-4 hours away). Just biding my time and slacking off since I don't get paid for the effort in the meantime. But it does give me an appreciation for the plight of the middle-class worker as j can't imagine they're doing any better as a collective.

Closed S&P puts for a gain Still holding long puts on Apple and RIVN as partial market hedges Sold OTM puts against my ITM puts on GLD to lock in recent profits. Used proceeds to add to my SBSW position which I want to accumulate long-term as I do expect gold/precious metals to outperform equities this decade - just hedging expected weakness from positive real rates/USD which GLD had been resilient to up until a week or two ago with the puts. Added to ZROZ and POAHY with proceeds of S&P puts.

Agreed. I have been patient for years thru conversations my higher ups that my salary was out of sync with the revenue/cost savings I drive. Also doesn't make sense when looking at the rest of the industry as I'm "below median" on comp while receiving "above expectations" on most performance reviews. The most recent conversation was how I'm actually making less now vs 6-years ago when I was hired because my salary/bonuses haven't kept up with inflation despite promotions and stellar reviews. Now they think my attitude is "combative" and "toxic" because I've refused to operate up to the level they've grown accustomed to since my pay doesn't reflect it and all I've heard for 6-years is "we're working on it" instead of seeing any results . If I'm being exploited like this in a high paying, professional industry, that requires specific credentials for the job - how much more so people less competitive in the labor market? Makes you angry to think about Perhaps Marx was right about capitalism just devolving into exploitation and regulatory capture I also refi'd in 2021 and locked in 2.75. Dropped my mortgage payment by nearly $600/month. Have definitely been thinking about a portion of my fixed income allocation like this. I've basically been short a 30-year treasury for the last 3-years. Lock in some of that profit by buying mortgages/fixed income against that liability stream now that rates are 2-3x higher.

Most miles driven by consumers are city miles though. Hybrid is the low hanging fruit to make deep cuts in emissions without huge upfront costs and could literally be done in the next few years if we had government policy supporting the trade-in of ICE for hybrid. A 20% reduction in emissions from driving in 10-years is HUGE and can be done cheaply. I am willing to cede electric MAY take over long haul trucking first - but I'm still skeptical here given the massively increased requirements for performance. And without changing how our electricity is produced? EVs don't make a huge improvement to ICE. We need nuclear power plants to replace coal/gas if we want the full benefits of EVs. Otherwise you're burning 2-3x as much coal/gas is necessary just to lose a ton of energy in transit while you charge the EV with dirty energy - the end result isn't significantly better than ICE engines. Certainly not better than hybrids.

I am also concerned about the banks in this scenario, but probably not BofA. As proven time and time again, too-big-to-fail is a competitive advantage. Each bank that fails has deposits that flee to other banks buying the survivors more liquidity/time without threatening their own solvency. I imagine the large banks will capture a disproportionate amount of those deposits. I own a small bit of USB speculating that it'll make it through alive. If things get really bad, I'll add JPM and/or BofA at the right prices to benefit from the further consolidation of the industry. Everyone seems to be believing higher for longer, but this is the same Fed that totally missed the inflation of 2021 to begin with. Any of their expectations beyond 6-months should basically be ignored. Lower rates will be an immediate salve to the financial sector, even if accompanied by increases on defaults, and I imagine there will be some decent opportunities in financials before then.

My entire life people have only focused on the "recycle" portion of "reduce, reuse, recycle". My current vehicle is a 2003. I'm looking to upgrade to a 2016 sometime soon as the maintenance on the 2003 is becoming a regular headache. I like the idea of re-using someone else's vehicle before "recycling" it which "reduces" my demand for new materials. All of the emissions from production and shipment are a sunk cost - only incremental pollution is from oil changes and gasoline burn. I'm not so sure. I think hybrids are likely to be the clear winner in the next decade given the continued lack of investment in grid technology, base load generation, and the metals needed to make large battery packs. Hybrids bring a massive immediate reduction to emissions, do not require the massive scale of investment to make them work, and are required fewer of the scarce resources that we're limited on to achieve those results. Electric vehicles likely WILL be the future. I just think it's far more distant than 10-years.

I mean, I don't disagree with him, but this is EXACTLY what was done from 2008-2021 where we ran massive deficita and interest rates were below 3.5% at the longer-end for much of that time. I'd need to hear why he believes this is different? That's an interesting way of characterizing negative real income growth for the 3rd year running. 2020 was a boon to the common man given all of the transfer payments. It's kind of been shitty since with real wage growth trailing inflation basically every year since. It's strange to me he acknowledges "lots of sectors are going to be terrible " but characterizes that as a "one percenter depression". Because typically it's not the 1%ers being laid off when the sector does terribly.....it's them doing the laying off.

Yes. Interest rates have definitely risen higher than I expected. Still glad Fairfax extended duration and would want them to continue to do so even if rates keep going higher. I'm not trying to get them to call the bottom. I kind of want them to get away from that type of behavior/portfolio management. I want them to systematically lock in these 17 year highs in interest rates so we can have some visibility in benefitting from them for the foreseeable future. And while duration hasn't been a great equity hedge for the last 3 years, I expect it will be revert to being a decent one now it's an reasonably attractive alternative to equities.

Yes. As this entire forum implies, it's a pickers market. Otherwise we'd all just buy the 60/40 portfolio and not talk about anything. Bonds are priced attractively. Equities not so much. The history thing has really only come up when the equity bulls say "stocks ALWAYS outperform bonds" or "stocks are inflation hedges" or "stocks are the only suitable long term investment" because all of those statements have been proven false by one segment of the bond market or another for extended periods of time.

They're average in IG and HY. Not small. Not large. Average relative to history. And traditionally, spreads move inverse of rates so it's unlikely to get an environment of spreads blowing out 1-3% without rates coming down to offset some of that. And if you don't like that risk, or are concerned about higher rates AND higher spreads (basically what it'll take to lose from here) then you can take risks in mortgages that are priced like it's 2008 or in treasuries where you don't have the spread. Point is, it takes A LOT to lose in bonds right now. And if we get those series of unfortunate events, it's going to take A LOT more to lose on them a second year OR for equities to beat them. Because an environment where rates go up 2% and spreads blow out by 2% is NOT an environment where equities are up.

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.