TwoCitiesCapital

It's not September 2020 anymore - exactly. It's been 3-years of under-supply and we've burned through commercial and government reserves. Barring a recession - the shortage will grow even more acute. Perhaps even inside of one, but I'm much less optimistic there. Plenty of companies that are consolidating the industry, paying fat dividends, and/or repurchasing shares. The easy money has been made, but I think energy will be a leading sector for returns for several years to come given how cheap it started and how unproductive policy has been to ease shortages.

I'm putting in orders for more intermediate funds myself. The TIPS is an interesting call - they got killed last year. A reversal in rates AND inflation would do well! Copper-tp-gold ratio that Gundlach uses to estimate fair value of the 10-year based on inflation/growth is suggesting fair value @ ~2.5%. Would be near a 20% return in treasuries if that were to happen in the next 12-months.

They're investing for 20+ years if they're 20-40. But a 50-year old? Can't really afford to be wrong 15 years straight unless if they're ok delaying retirement. A 60-year old? Can't be wrong for 15+ years while living off of those funds in retirement. So what you're saying - blindly but equities because they've always been better with 20+ years - only works until you hit about 45-50 and then it starts to matter a helluvalot. IIRC correctly - Buffett's comments were regarding distressed/discounted corporate bonds/preferreds. I.e. when you see deals on these offerings significantly less than par and significantly less than their peers in the market, it's typically made better sense to buy the stock. It wasn't so much a "never buy bonds argument" as much as it was "distressed investing delivers superior returns to equity when the issuer doesn't fail" which I agree with.

It would have less risk - yes. In that it probably would've never have traded for as high as it did not as low as it did as a private company and thus you're likelihood of paying too much and selling for too little are greatly reduced. If you're talking about anything other than forever-money, than forced liquidity events present risk and greater volatility of the share price exacerbates those risks.

And nobody here has advocated for buying only bonds for your entire life. But any time we've narrowed the range to the years where stocks failed as inflation hedges, or bonds outperformed stocks, even if those periods were 5-15 years long, I get accused of 'pinching' the timeline to work for me. These things are actively managed. There are times when stocks are attractive. There are times when bonds are. I contend this is one of those times. So far, the primary argument against that has simply been all of you guys chirping about historical returns of stocks versus bonds, which leads me to respond with historical comparisons of long-periods of time where bonds do better (inflationary or otherwise), and then I get accused of 'pinching' again - or that I'm only focusing on the large segments of the bond market that were attractive (like short and intermediate) while ignoring the parts that did poorly (like long). And then the argument starts over again. So how is this for simplifying - a 30 yr mortgage @ par today will have a period of 20-30% pts of outperformance relative to the S&P 500 at some point in the next 36 months. Is that specific enough for you?

+1 Peak to trough of -21% over 2+ years without accounting for the income distributions received over that time, so in reality -15% peak to trough is probably right... in the worst period ever for fixed income. Pretty certain US equities, on average, went down more than that just in the last 3-months of 2018 without needing a recession to kick it off.... But yea, equities are low risk like bonds

No, you a showed 'a bond' that had a monster drawdown. Or rather, a small handful of bonds, that had a monster drawdown. No broad based index of bondS, emphasis on the plural, looks anything like that and it's disingenuous use a small sub-index known for it's wild swings to represent a whole asset class that behaved nothing like those bonds do. Just like I'm not using an index of loss-making tech companies as my benchmark for equity returns... And, no, i don't really care to provide proof. The data is out there. But just like all of my other claims about bonds outperforming equities over long time periods, it'd likely be summarily dismissed so why should I go through the effort of doing the leg work for you?

I gave you 20-30 years. That's why I said you need a 20-30 year horizon to believe stocks are of little risk. But most people don't have 20-years to wait for their funds to recover to retire OR to lower their spending for 20-years in retirement waiting for an eventual recovery. I personally don't want to 20-years to do "alright" when I could've just avoided buying what was stupidly expensive to begin with. 10-years has proven it's not enough in multiple instances. Great Depression? Significantly negative annualized returns over 10-15 years. Even more negative after consider inflation over that time. Late 60s through most of the 70s? Nominal equity returns were single-digit positive but were still massively negative after inflation. Also, as I've mentioned ad nauseum, short and intermediate term bonds outperformed equities for much of this this period. Late 90s through mid 2000s? 10-year returns also sucked and look significantly worse after inflation. 10-years isn't enough. 20-30 is what you need to say equity risk is reduced and to confidently outperform a static allocation to fixed income. Or you could just buy bonds when they're attractive and buy equities when they're attractive, but that's a highly controversial take here for whatever reason. You're kidding me, right?!?!? You're going to pick the worst performer and hold it up as the poster child for the entire asset class? Well shit, bonds still take it because the worst performing equities went down 100% over that time. Also, since you want to focus only on long duration instruments in what is an intellectually dishonest comparison, just acknowledge that 2022 was a terrible year for those bonds but they still absolutely crushed equities for the preceding 50-years before that. Still lower risk over the long term

I just don't buy that equities aren't riskier. Meta was down 80+% in 2022 exceeding even Bitcoin's peak-to-trough. Disney is trading for prices now that it first traded for 9-years ago. Peloton and Rivian are both down 90+% from their peaks and may never recover. Regional banks that were considered sound one week were insolvent and the equity worthless the next. These are just a handful of observations at a time when equities are generally rich - not a "market panic" type valuations. Bonds don't have this sort of thing happen. 2022 was a bad year for bonds - the worst on record. And yet its still better than most general equity drawdowns. And unlike equities, there places you can be guaranteed to "hide-out" in bonds regardless of what other bonds are doing. You're not gonna lose much in 1-year treasuries even if rates go from 0-12% over that 1-year. 2008 demonstrated equity correlations go to 1 in a crisis and nearly EVERY equity was sold down dramatically regardless of their business conditions. Look at Google going from $700+/sh down to $250/sh (unadjusted for splits since) despite growing revenues and profits every quarter of that time period. Equities are way riskier than bonds for anyone that doesn't have a 20-30 year time horizon and way riskier in any given year once considering the likely impact of human emotion and response to even paper losses.

Joe sixpack cares about censorships resistance if the 18th amendment comes back. Or if the government says he has to spend his CBDC on X instead of Y. Or if the government won't allow him to spend his paycheck because he works as a bartender at a strip club and the govt/bank frowns on sex work. And lightning in El Salvador definitely had some issues/bugs when first implemented. But onboarding more people to electronic payments in a month than the banking industry had in decades is hardly a "flop". Everyone in El Salvador now has the choice to make payments electronically - the vast majority of them did not have that choice before. That is a huge success even if they aren't exercising the option daily. I myself don't exercise the option daily - not because L1 and L2 payment systems don't work but because of the Gresham's law. Doesn't mean the option isn't valuable - particularly for those who've already amassed a large amount of wealth in BTC and want to spend it.

Supposedly they are linked, but weren't CRs high while interest rates were low in the late 2010s? And now CRs have been low for a bit while interest rates have been rising quite a bit? And the higher interest rates go destroys more capital keeping CRs low due to higher underwriting prices? The rationale of why they are linked makes a lot of sense to me, but I'm not seeing it in the results. At what point does the "rationale" assert itself? And why has it not been asserting itself in the last 5-7 years?

+1 definitely real world use cases for wanting to transact and or carry your wealth with you from problematic regimes. Everyone should be down for this level of sovereignty over ones wealth/assets +1 The other use case I see with BTC is the censorship resistance. CBDCs may work for most, but they'll probably have the same issues that sex workers have, or that marijuana distributors have, and etc. Despite operating in a legal manner, with appropriate registrations and licenses and etc, many of the people/businesses in these fields can't be banked or regularly have their banking privileges revoked because of companies not wanting to be involved in those activities despite their legality. BTC provides a means of payment that isn't controlled by anyone else's moral compass but your own. Which matters a lot when the government begins deciding the moral compass ... It's just funny to me you'd mention this because gold WAS a currency for eons, has served as the reserve currency currency of multiple empires and was used to bootstrap most modern currencies including the US dollar. It's only been in the last 60-years that fiat has become the default and was only because the US government was going to default on its gold liabilities like all major reserve currencies before it. To look at those 60 years and predict it will always be that way going forward while ignoring the thousands of years preceding that is crazy to me. Paper money replaced gold for spending because it was more easily carried and subdivided. That's it. Its value came from its backing in gold until people had enough confidence in the credit of a government to accept paper money backed by nothing. But confidence and credit are fragile things. The moment they're gone is the moment you need backing for a currency again like we've seen with most foat currencies. Bitcoin is more easily carried than paper money, more divisible, and can be sent electronically (paper money cannot be). If you compare it to payment networks like Visa/MasterCard/CBDCs, than the lightning network does what they do for cheaper with censorship resistance and finality of settlement - both of which carry pros and cons that come with individual sovereignty and responsibility over ones wealth. Using El Salvador as an example of failure is like asking why Visa's network wasn't built and accepted everywhere in 3-years. It takes time. Over that time we've seen an explosion in the number of wallets and continued adoption and implementation of scaling solutions as well as counterparties willing to participate in the Bitcoin eco-system. Having more people owning BTC and more people accepting BTC over the last 3-years hardly strikes me as evidence of failure - more so as evidence of the continued secular trend.

+1 Prices have generally risen. CPI shows that. But gas gas prices? Have they gone nowhere over 15-years as in my example? Or are they up 6% per annum as per Dinar's? Home prices? Up significantly in NYC. Not so much in St Louis city. Food prices? Corn is up significantly from 3 years ago, but down significantly from 1- and 10- years ago. This is exactly my point - looking at the price at the pump or food costs doesn't tell much of anything about inflation. It tells you a little bit about that specific time/location/commodity, but not any general trend in prices. Relying on how consumers "feel" about these prices, which is primarily what they focus on, would be a terrible policy approach. Consumers' feelings and expectations matter in the short-term. But for the long term, CPI a much better measure of average changes in prices despite its flaws.

I agree with you, but with nuance. If you ask someone about inflation, often they'll point to the cost at the pump. But average price for fuel in the summer of 2008 was $4.11/gallon. Today it's ~$4/gallon. So I ask, what inflation? It's been 15 years! Same things can be said for food. Some things are more expensive currently - some things are cheaper. I'm regularly seeing beef/chicken at my grocer stickered for 30-50% to get it sold before the sell-by date. So yes, prices are more expensive - but if you wait a day or two it's 50% off? What inflation? CPI is a better way to view average prices overtime than someone's opinion on inflation. But for short-term movements in prices, I agree with you that all that matters are consumers' attitudes and their views on what is likely to happen next with rising prices.

Same. I assume it's the general trend towards a slightly healthier diet and the demonization of sugar that has occurred in the last decade. Doesn't look like it stopped them from 10x-ing their money though so good for them.

Sold my entire position in Rolls Royce now that it's nearly tripled this year. Buying Exor with the proceeds. Is now my second largest position only behind Fairfax. Will probably try to flip most of these shares into the upcoming tender. Remains to be seen if I buy Exor back with those profits or not.

The latest macro voices has Harley Bassman on talking about how rich convexity is currently priced and how to take advantage of it. Simplify, the ETF firm he's associated with, will be launching a MBS ETF structured specifically to take advantage of the convexity premium so you can keep your eyes open for that. Not a bad way to get some spread and convexity premium without having to take much duration risk. I'll likely be adding it to the fixed income portfolio when launched as I've been a big buyer of core bond funds specifically for the MBS exposure and this will be a cleaner/better way to achieve the same thing.

We can hope, but I just don't have the confidence interest rates will be at their current levels in 12-18 months. I know what the Fed is saying. I know what they're currently doing. But this is also the same Fed that has forecasted interest rates to stay low through 2022 and then ran into 9% inflation with a ton of egg on their face. I don't have any confidence in their projections of rates beyond a 3-month time horizon.

I had short-term bond funds/money market that was from proceeds from equity sales in late 2021/early 2022. I was predominantly in commodity producers/energy outside of my Fairfax and Exor positions in 2021/2022. Most of those did exceptionally well, but I realize things don't move in a straight lines. Those valuations exploded and took a lot of profits. Given the mania in stocks that was occurring in 2021, I was concerned about downdrafts in equity valuations and earnings. We got some of that in 2022, but not as much as I expected. Those short term bonds funds were down ~4-6% during 2022, so I was negative on that portion. But compared to the 25-50% drawdowns on the commodity names I had sold and the 15-20% drawdown for the indices on general, it was an exceptional move to protect profits/values versus the alternative. Especially now that it's given me dry powder to redeploy into those same names again. My conviction in fixed income has only grown since then: 1) Continued hikes have only improved the forward looking returns for fixed income investments which now can get you equity like returns in spread products 2)) the yield curve inversion WILL choke off credit creation. Regardless of your views on the economy, this will slow it. It is inevitable in a credit based economy and banks don't really have the choice - they don't have the capital/liquidity to support additional credit creation at this time. 3) equities have rallied significantly off of their lows and weren't exceptionally cheap to begin with. 4) a bunch of economic indicators have slowed, reversed, and collapsed over that period of time warranting extreme caution. Basically only employment that continues to do well, but is a lagging indicators and has ALWAYS peaked inside of the recession - not before. I'm still buying stocks. Ive been repurchasing most of the commodity names that were sold in 2021/2022 at significantly lower prices. Have been selling bonds/money markets at gains to do so. And continue to have a ton of dry powder earnings low-equity like returns waiting for the tide to potentially go out. A receding tide will lower most boats. Equity markets trading at 26x earnings that are declining while credit/liquidity are contracting. Every major leading indicator has spent the last year or more in contraction, PMIs are largely below 50, and GDI has been negative for 3 quarters now. All of this tells me the economy is slowing, but outside of a few cheap pockets, the equity markets are still pricing in sunny with a high of 75⁰.

I gave you the 70s as well. An entire decade that you ignore while accusing me of pinching data to 28 months while using only the last 9 months of a 15-20% rally to prove your point. CPI does lag. What inflation measure should we use to determine the efficacy of "inflation hedges" then? And what levels does it need to get to that we consider "inflationary"? Or if we move back the starting point of S&P returns because it anticipated inflation, do we also get to move back the end point and exclude the current rally because of the anticipation of inflation falling? Give me a better benchmark, measure, methodology and we'll take a look. And yes - bonds can still be better than stocks even with trailing returns aren't attractive because the investment game is played looking forward. Would also say if you get -3% in bonds and -3% in stocks, bonds are still the winner because you took way less risk to accomplish the same return. I wasn't advocating for bonds in 2021. I started buying price insensitive iBonds in November of 2011 when they were yielding 7+%. Those have crushed the S&P over that time. I started advocating for short-term debt when rates were 3.5-4% and for extending that duration when long term rates got above ~4%. Both of those occurred early in late 2022/early 2023. This approach would have bypassed ALL of the pain in equities in 2022, most of the pain on fixed income in 2022, and would have had you significantly ahead of the S&P 500 over that period of time even with the current equity rally. Additionally , you would now have a short-to-intermediate portfolio with forward looking returns of 6-8% versus the S&Ps current forward looking return of ~4-5%. This is based on current earnings yields and expected "growth" (which is generous as growth is currently negative ATM) and no economic prognosis on GDP, recessions, current earnings contractions, inflation, etc. This isn't cherry picked in hindsight. It's what I did with my portfolio. The equities I held largely crushed the indices or were traded in a way that did so. The i-bonds? Crushed the S&P over that time. Nowoving from iBonds to short-term and intermediate term debt in 2023? Lagging over the last 9 months, but still outperformance overall with very strong look-forward prospects. My performance in 2022 was only hampered by a very large weighting to crypto which I don't actively manage and simply DCA. The crypto position is wholly unrelated to any views on the economy/inflation and largely just DCA'd/staked with the I don't know why it's so hard to believe there are periods of time bonds are better than equities. History is literally littered with examples. But I guess we can ignore all of those like we're ignoring all of the times equities sucked (either relative to bonds or commodities or both) during inflationary periods?

Not true? I gave you the numbers?!?! Pinch the data?!?! I went all the way back to April of 2021 to present. 2.5 years when inflation was occurring! How long do I need to give stocks to determine that they sucked as an inflation hedge over an inflationary period of time? A decade? I did that too with the 70s. You just prefer to tell me I'm wrong with nothing supporting your stance.

Yes, in a year where equities are up nearly 20%, it's no surprise they've outperformed bonds. Short term bonds, money market, and i-bonds killed equities in 2022. And despite the performance this year, a lot of those are still ahead, or matching, equities performance over the 2 years with way smaller drawdowns and better forward looking prospects What I see from your chart is HY, EM, and short-term bonds put up high single digit rates of returns despite 100 bps of rate hikes (and likely another 25 bps priced in). The higher yields go, the less sensitive bonds become to them. If rates go up another 1.00% I think bonds will be similarly unbothered given the YTMs priced in. Can we say that for stocks? It's almost mathematically impossible to get another 15% down year in fixed income. Rates would have to go up another ~200-250 bps for that to be the case intermediate IG. Equities could fall 15% next month and still be expensive relative to bonds....

Why the insistence on ignoring that equities have had a significant negative real return while inflation was present? They sucked in the 70s and they appear to be sucking today the current rally notwithstanding. 2020 had whopping inflation of 1% YoY by year end. Inflation didn't start until early-to-mid 2021. The first time it exceeded 3% YoY was April of 2021. S&P return from the end of April 2021, until now, has been 6.7% nominal. Inflation over those 28 months has been 15%. 28 months and your real return on the S&P 500 has been -8.3% plus some dividends so call it ~(2%) annualized . Given the current debate of how expensive it is, contracting earnings, and attractive alternatives, it's quite possible we've just witnessed the BEST outcome for equities and it was still a negative real return. Some inflation hedge... Meanwhile, WTI crude is up 44%. The world food index is flat from April 2021, but had spiked nearly 15% in the 4 months leading up to April so take that however you want in determining if it's flat or down in real terms. At the very least, I'd call it a draw with equities Short term bonds are probably underperforming at this point, but we're dramatically outperforming the bulk of that period as well. So probably too soon call winners/losers there - it's path dependent from jow until whenever we want to pretend inflation stops.

I've said it before, I'll say it again. Bonds had a better return in the 70s than equities did. Short term absolutely. Intermediate did so too with some basic assumptions (didn't buy at the extreme highs, owned corporates instead of just treasuries, etc). Equities are NOT a good inflation hedge - their duration is significantly longer than most fixed income investments and thus they're way more sensitive to accelerating interest rates and inflation. They work best when it's low and stable. When it's moderate, they suffer more than bonds do (like in 2022 and in the 1970s). When it's high, stocks do "well" in that nominal returns do exceed bonds, but they don't come close to maintaining real purchasing power like necessary commodities do. You want a bet on deflation? It's bonds. You want to bet on stable/low inflation? It's stocks. You want to bet on inflation? It's commodities - particularly food and energy. If you're that terrified of hyper inflation, you're buying the wrong thing. If you're terrified of moderate inflation, you're still buying the wrong thing. My ownership of Bitcoin isn't inflation related - the inflation impulse of Bitcoin is absolutely trounced by its secular growth curve and the changes in speculation within it. This is also why BTC went down significantly in 2022 despite inflation. There are multiple things driving BTC's return - inflation will not be significant amongst them until you have global adoption/acceptance. We're a long way from there. Not sure what you mean here? As in did I outperform the benchmarks for fixed income? I imagine it depends on which one you want to select? The Agg? A short term fixed income benchmark? A high yield one? An emerging markets one? A weighted benchmark of all of them that changes each time I change my allocation? I own bonds in all of these categories and generally believe more in absolute returns than relative. I also own equities and crypto that may, or may not, need to be considered. I also work in Finance meaning my compensation is heavily tied to markets so I may be more cautious than most. I dunno which of these considerations is relevant to your question, but I generally believe in absolute returns - not relative. Nobody is happy when they're down 30% and the index is down -35%. Relative returns seem to only be a bull market consideration, but I invest across the cycle.

Not too bad. I'm positive across all of my accounts - even th fixed income ones. Owning fixed income in 2021/2022 was crazy. Owning it in 2023 hasn't been too bad - even with subsequent rate hikes. Rates haven't moved much except at the front end and because there basically isn't any duration at the front end the coupon yields made up for higher rates.