TwoCitiesCapital

I think this is reflective of the actual spending situation in the country though, right? The only people who aren't having their spending manipulated by the govt are the wealthy - they're not receiving $1,200 checks and they're not receiving $600/week in extra unemployment benefits. And the wealthy, for the most part, probably are still employed and still making money AND STILL CUTTING BACK. So what is the rest of the country going to do when the exceptional unemployment benefits end and $1,200 stop coming?

He seems to do this a lot. I find the the people who call crashes every 6 months have a perfect record in terms of having "called" all the previous ones. https://www.wsj.com/articles/SB10001424052748704905604575027602834843606 While Grantham has definitely been on the side of US stocks being said expensive, I believe it's only been since early-to-mid 2018 or so that he's been calling it a bubble and defined what he meant by bubble (could be wrong on the exact timing). And to his credit, stocks have gone very little distance over that 2-year period (despite the vicissitudes in between!) despite the Fed lowering rates back to zero, restarting QE, and massive stimulus by the Treasury. I think his observation has been fair to this point.

Lol +1, though I didn't buy $150 million to prove it Basically just replaced 1/2 of the position that I had closed back in 2018/2019 because I couldn't get the math to work at $500-600 USD. Much lower bar at sub-$300

This is just anecdotal, but may add a little more color to anyone wanting to understand the industry. I've been to VicenzaOro many times & if you want quality, Italy is a great place to go (bring a very large wallet with you though). Hong Kong manufacturers (and Thai jewelers to a lesser extent) will copy just about anything & do a very good job of it, but will frequently use inferior quality gemstones (in particular, diamond melee). TBF they offer significantly lower prices, and something has to give, but even if you offer to pay a bit more for better melee, you'll be hard pressed to get the reliability of an Italian manufacturer. That plus the established haute couture names, make for an interesting segment of the market. Basically, there are 2 types of jewelers, those who sell branded (haute couture) merchandise with higher margins & slightly lower turns, and those who sell lesser brands & commoditized products at slightly lower margins & higher turns. Branded jewelers tend to have higher spend on required coop adds in order to promote brands. Commoditized jewelers will have more optionality with regards to participating in coop ads which become more requisite if they are members of buying groups and depending on the stroke of the brands they carry. --- Disclaimer: My hiatus from the offshore industry, into wholsale jewelery, was an abysmal failure. I'd have difficulty selling air conditioners on the equator. I think in this case, brand name, status attached to country of origin matter just as much a the quality of the merchandise. Northern Italy is well known for fine jewelers and Fope is a niche business with a global reach (85% of their revenues are foreign) that can exploit this, I think. Based on the price I paid 7 Euro and change), it trades at 7x EBIT. It’s too small for LVMH, but the new 59% owners have an investment banking background and saw value here. I hope they do t screw it up. I see a good chance they they follow up with a buyout when this COVID thing is over. I know this is a very different business than Fope & it's not intended as a comparison but Swatch bought Harry Winston around 2013. They don't break out the results in reports but they do say "Harry Winston will continue its dynamic growth trend in 2019". In recent reports they attribute slightly higher inventories to gold & gemstone purchases related to Harry Winston. They own the swinging luxury watch brands Breguet, Blancpain, Glashutte, Jaquet Droz & the more pedestrian Omega. Their lesser brands include Tissot, Longines, Hamilton, Rado & of course, Swatch. If you believe that the watch industry won't be decimated over time ;) (I've never been able to get comfortable with this possibility) these guys product the vast majority of the worlds mechanical movements & escarpments. If you claim to be a luxury timepiece manufacturer & you don't produce everything down to the tiniest little spring & screw, you're not as cherished by aficionados. Very clean balance sheet, possibly offset by high insider ownership which may or may not be aligned with the little people. The father built this company & the children could fritter it away. Annual reports are front loaded with society page fluff & the actual numbers are buried in the back. Some background on the FOPE deal: https://gioiellis.com/en/why-fope-was-sold-to-costamagna-and-morante/ I am familiar with Swatch. It a well run company, but I am a bit concerned that watches will have much less mindshare with future generations that grow up without using them or go straight to a smart watch (similar to what happened with stamps) I could imagine that there will be a market to build jewelers cases for smart watches, but Swatch wouldn’t have much of an edge here. It's possible - and definitely some market share loss here, but seems to me the type of people buying Apple Watches are not typically the same people whole collect analog watches and that analog watches are more a symbol of status and style while Apple Watches are more functional. For instance, my GF uses an Apple Watch it's primary function is for fitness. I own 3 analog watches and it's primarily for the appreciation of the asthetics, design, and durability. Her Apple watch is on its last leg and will soon be unsupported by additional software updates. My watches will still be ticking in 5 years time with appropriate maintenance. While both are watches, definitely different applications and target markets.

Some generalized thoughts below Companies that are massively underfunded on pensions would be huge beneficiaries of a rise in inflation (assuming that it is accompanied by a rise in yields). Real estate does well enough - particularly if you mortgaged the property at lower rates (i.e. the real asset maintains purchasing power while the 30-year bond/liability you're short loses value) so maybe leveraged REITS? Emerging markets with heavy dollar debt would also be beneficiaries of rising inflation in the U.S. - so own local bonds or EM equities

Have the inflows of capital changed? Not that I'm aware of. I don't have industry data that measures that on a regular basis, but I can't think of anything that would have caused that to change. We haven't had any major catastrophes to scare money out, insurance linked products are becoming a bigger part of the industry, and the hardening of the market started long before all of this COVID stuff could have made capital scarce (and doesn't seem to be making it scarce for other risk products). My next door neighbour is a Managing Director at one of the major reinsurance brokerage companies. I just spoke to him about the current state of renewal rates, the existence of the hard market and why now for the hard market if one exists. To summarize what he said: -rates are hardening everywhere -the outbreak of the pandemic has not slowed down renewal rates at all. -the hard market which started last fall is continuing with no end in sight -best rate increases being experienced since 2005 -capital has not left however it is finally demanding an adequate return on investment. Too many lines of business were no longer profitable -as for why now---the industry simply couldnt hold out any longer. The low interest rates look like they are here for awhile and longer than anyone expected so increased renewal rates is the only chance the industry has to stay viable Hopefully this helps! Thanks - I guess it makes sense that the industry is FINALLY accepting that they need to be economic on the policies and not just rely on float return. I guess I just don't feel very comfortable assuming that's what happened when it didn't happen in any year where low interest rates were also a thing before. Who knows how long this will last ,but have even more confidence in Fairfax at these prices if that's the case.

Who knows and there are multiple inputs but the alternative capital market is an area to look at. 2019 calendar year was characterized by very significant loss creep (adverse development) from catastrophe activity occurring in prior years (starting with Irma, 2017 event, which 'developed' well into 2019). The alternative capital is at the margin but it forms about 15 to 20% of reinsurance capital and is very significant in the retrocession category. The volume of securities outstanding in 2019 grew because of multi-year contracts but the new issuance level was actually down, something that hasn't occurred in ages. A blip or more? Because of previous negative surprises and the associated "trapped" capital in collateralized transactions, 'investors' have been asking much higher spreads. On a business level and as a coincident indicator, underwriters, at some point, 'realize' that the last policies written were unprofitable. At the industry level, this means that some leave business lines altogether and disciplined underwriters have their prices met and more. Helpful. Thanks!

Have the inflows of capital changed? Not that I'm aware of. I don't have industry data that measures that on a regular basis, but I can't think of anything that would have caused that to change. We haven't had any major catastrophes to scare money out, insurance linked products are becoming a bigger part of the industry, and the hardening of the market started long before all of this COVID stuff could have made capital scarce (and doesn't seem to be making it scarce for other risk products).

Can someone explain what is driving the hard market? I've been skeptical of it so far just because we were told the reason for the soft market was the massive inflows of capital through new insurance-linked products and etc paired with limited catstrophes to remove said capital. So what's changed? Why is it that suddenly low yields mean insurers hold the line and raise pricing. Low ROEs were acceptable for most of the last decade, why is 2020 suddenly different? Guess I'm just trying to understand where I'm wrong in being skeptical. We've had a few months of sustained pricing increases across the industry and now places like Lancashire are raising capital to out to work in underwriting. The experts seem to believe this is for real so I'm just trying to understand what changed the dynamic?

Isn't to make it agnostic of the capital structure and not used an an actual proxy for shareholder return? Same company can be financed by debt with a high ROE or by equity with a low ROE. But EBIT is the same for each and reflects that financing can change and that ROE is fluid and impacted by that. You wouldn't want to discriminate against a company with low ROE because it's equity financed right before it goes in a debt-funded repurchase.

Was refuted by Fairfax this AM. Who knows what is going on here....

Behind a paywall, so I can't see all of the details. That being said, I got burned betting on Blackberry the LAST time Fairfax announced the intended acquisition of the remainder of the company, so hesitant to believe it'll actually happen this time around - though shares are much cheaper.

But it is the same thing. If the terms of a mortgage are changed ("Lowers your mortgage payment by as much as 20% (with an adjustment of your interest rate, loan duration or forbearance of a portion of your unpaid principal balance")) and there is no credit hit (per CARES, not allowed with FnF backed mortgages), how is that different than a refi? I mean, technically you're right, but in actuality what is the difference? There's no credit hit from a temporary mortgage deferral. There's absolutely a credit hit from a permanent restructuring/mortgage modification.

With the way current mortgages standards are, I'm not so sure that you can simply repay the forbearance and then be eligible for a refi. I read an article (I believe WSJ) talking about individuals who were unknowingly signed up for the forbearance program simply by calling their banks and asking about the details about the program. The article highlighted an individual who has made all of his monthly payments, but is ineligible to refinance because he was listed as "seeking forbearance" despite having made all of his mortgage payments on time. It seems even just asking about it might be enough to scare banks away from making the loan at this point in time. http://www.freddiemac.com/about/pdf/covid_19_forbearance_servicer_script.pdf Did I miss something relevant in this script to my post or the post before it? I don't think so. I just addressed that those actually in forbearance enjoy option to refi. I feel blind and dumb for asking, but am I missing something? I breezed over this once before posting and just browsed it again and then read it thoroughly and still don't see any mention of refinancing. Also, when I Ctrl+F there isn't a mention of refi or refinancing. I'm guess I'm overlooking something? "As we work with you on the next steps after the forbearance, the best solution will depend on your financial situation when your forbearance plan has concluded. o If you are able to afford it, you can reinstate which means paying the total amount due, or we can set up a repayment plan, allowing you to catch up gradually while you are paying your regular monthly payment. o If you can’t afford the additional amount, but you can resume making your normal monthly payment, we can leverage alternative ways of paying back the suspended payments in a manner that is affordable. o If you have a sustained reduction in income resulting from the crisis, then we can look at a modification (changes to the terms of your loan) that might suit your new circumstances; those changes will aim to reduce your original monthly payment amount." "We’ll reach out to you about 30 days before your forbearance plan is scheduled to end to determine which assistance program is best for you at that time — a repayment plan, loan modification, or even an extension of the forbearance period if needed." Ah, I think i see now. A loan modification is not akin to a refinance. A refinance is a brand new loan to repay off the old loan - no black mark on your credit report. A mortgage modification is NOT the same thing. A modification is an admission that you cannot pay the existing loan and is a restructuring of sorts. Not quite a default, but a restructuring outside of bankruptcy to avoid full default. As mentioned at the below link, a mortgage modification is available if your're INELIGIBLE to refinance and is damaging to your credit score (though not as much so as foreclosure). https://www.knowyouroptions.com/options-to-stay-in-your-home/overview/modify-overview/modification

With the way current mortgages standards are, I'm not so sure that you can simply repay the forbearance and then be eligible for a refi. I read an article (I believe WSJ) talking about individuals who were unknowingly signed up for the forbearance program simply by calling their banks and asking about the details about the program. The article highlighted an individual who has made all of his monthly payments, but is ineligible to refinance because he was listed as "seeking forbearance" despite having made all of his mortgage payments on time. It seems even just asking about it might be enough to scare banks away from making the loan at this point in time. http://www.freddiemac.com/about/pdf/covid_19_forbearance_servicer_script.pdf Did I miss something relevant in this script to my post or the post before it? I don't think so. I just addressed that those actually in forbearance enjoy option to refi. I feel blind and dumb for asking, but am I missing something? I breezed over this once before posting and just browsed it again and then read it thoroughly and still don't see any mention of refinancing. Also, when I Ctrl+F there isn't a mention of refi or refinancing. I'm guess I'm overlooking something?

With the way current mortgages standards are, I'm not so sure that you can simply repay the forbearance and then be eligible for a refi. I read an article (I believe WSJ) talking about individuals who were unknowingly signed up for the forbearance program simply by calling their banks and asking about the details about the program. The article highlighted an individual who has made all of his monthly payments, but is ineligible to refinance because he was listed as "seeking forbearance" despite having made all of his mortgage payments on time. It seems even just asking about it might be enough to scare banks away from making the loan at this point in time. http://www.freddiemac.com/about/pdf/covid_19_forbearance_servicer_script.pdf Did I miss something relevant in this script to my post or the post before it?

Maybe there is a differentiation between gov't and Fed since the Fed is technically independent? Government debt in inflationary upon issue and deflationary upon service and repayment. The trillions the Treasury has issued is inflationary, but it primarily offset by an economy with near 0 activity and 40 million unemployed (massively deflationary forces). So you're not going to see the inflation, but you will see the disinflationary/deflationary forces every quarter the gov't has to make interest payments on that unproductive debt. I think this is what Druckenmiller may be referencing. There's also arguments like the more the government spends on interest is less money the government can spend on other things and the corollary for tax payers is higher taxes mean less money for other things. Both ought to be somewhat disinflationary as you have less money chasing the same goods - particularly if those taxes/interest payments are going outside of the U.S. consumers/business to foreign owners and the Fed. 1) Seems like QE massively fails at what it intends to accomplish then. Every one of the QEs following the financial crisis resulted in yields that were flat to up from when the program started. Sure, maybe the Fed's involvement raised inflation expectations which in turn impacted the yields more than their buying, but the outcome of QE was always the same - rates didn't go lower. 2) Isn't IOER at 0% right now? I don't think banks aren't lending because of 0% rates on excess rates. This may have been an argument back in 2017/2018 when IOER was positive, but it wasn't as positive as Treasuries or Corporates or Mortgage loans which meant banks earned a premium for the risk they were willing to take. Maybe when IOER gets too high we could make this argument (like when the curve inverted in mid-2019), but even then I don't think many were complaining about lack of available credit suggesting banks were still lending to meet the demand?

With the way current mortgages standards are, I'm not so sure that you can simply repay the forbearance and then be eligible for a refi. I read an article (I believe WSJ) talking about individuals who were unknowingly signed up for the forbearance program simply by calling their banks and asking about the details about the program. The article highlighted an individual who has made all of his monthly payments, but is ineligible to refinance because he was listed as "seeking forbearance" despite having made all of his mortgage payments on time. It seems even just asking about it might be enough to scare banks away from making the loan at this point in time.

...so Fannie/Freddie need $200+ billion in capital to support an insurance book of $6 trillion and are only penalized in the event of an actual default event but the Federal Reserve only needs $39 billion in capital go buy a $6 trillion book of securities with exposure to the same default risk but also market risk... I'm sure it makes sense to someone, but not me.

Yooooo......that's about the size of the subsequent purchase they were going to make to bailout the ex-CEO Lol!

It would've if they were longer dated and/or high yield. But they were primarily IG and short dated so spread duration wasn't huge and the move in spreads less pronounced.

This all makes my head hurt but I find it very hard to find a positive. A few thoughts: 1) If I understand correctly, Fairfax are exposed in both directions. I am struggling to see how this is much different from the short swaps that so hurt us in the bull market. Fairfax took a levered bet on stock movements without capping their downside or the potential cash collateral calls if they are wrong. In return for a possible $178m profit which doesn't really move the needle, they risked moving the liquidity/capital situation from "mildly concerning" to "oh fuck". If this interpretation is correct, I would argue that they have kept to the letter of their promise not to short equities again, but perhaps not the spirit of it. [/Quote] Yes. Exposed in both directions just like owning the stock would, just with a lesser cash outlay upfront. This position provides liquidity at zero gain and positive gains and costs liquidity at negative gains but still likely better than owning the actual security (from a liquidity perspective). Say they buy $1000 stock. That's $1000 out the door. They buy a TRS for $1000 notional on the same stock and they put up $100-$150. Even if the stock moves against them 50% and they now owe $500, they've still only had a total outlay of $600-650 versus the $1000 from owning the stock directly. Roughly same P&L (less financing costs), but way less cash used. Typically there is zero cost upfront because the only cash required from you is posting initial margin which is still owned by you. As far as a premium, you pay LIBOR+spread that accrues while the contract is ongoing - financing costs are netted from P&L monthly or quarterly when the contract settles. For calls your paying a premium for the right to own a contract. For TRS you only pay ongoing LIBOR+spread that is typically quite a bit less than call premiums AND you're only paying while the contract is active/accruing where calls you pay for the entire time premium upfront.

I don't think you have to disclose foreign positions on a 13F.

Cash. With the TRS you only need initial margin and maintenance margin to maintain. Fairfax's $950 million position probably only costed something like $90-100 million in cash to put on

Typically, index TRS are quarterly cash settled. So if you have $1B of notional that goes up 10% over the quarter, you'd be owed $100 million, less financing costs, at the end of the quarter and the contract would continue forward for the next quarter until maturity. So in this case, if the $950 million in notional that Fairfax owns goes down more than the $180 million that we estimated they were in the money by, they'd owe cash at the June settlement