TwoCitiesCapital

Rolled some of my fixed income exposure in the form of ZROZ into Annaly stock. Kind of figured it's basically the same thing - leveraged returns on rates. That being said, Annaly should prove more sensitive to changes at the front-end if cuts come to fruition given their use of short-term funding/leverage.

I'm not so certain. Sure most people don't use debt to buy equities, but the equities themselves have every opportunity to to lever up, refinance at lower rates, acquire competitors, fund capital projects, etc to grow revenues and earnings. I agree the effects might become more apparent more quickly in mortgages, but to have the evidence in one area of the market and not another that should be similarly impacted calls into question the assumptions that it's interest rates driving that. Particularly where the only place globally upholding the "low interest rates = high equity multiples" mantra seems to be the U.S.

Sold more Fairfax as my opinion is rates go lower in the mid-term. Purchased more Eurobank and Exor with the proceeds.

Hi John, Good meeting you as well and great discussion. There's a lot of moving parts imo regarding monetary policy as it relates to asset prices, so i'll try to list out at least my thoughts in bullet point order: #1 I'd argue that monetary policy in the EU has been TOO TIGHT, not too loose. Yes, the supply of money has gone up quite a bit in the EU, but the demand for money has gone up even further. I think it's helpful to judge tightness or looseness of monetary policy based on nominal G.D.P. (which has been very low in the EU since 2008). Current short term interest rates are not a good metric for judging monetary policy and instead, low short term interest rates are usually a sign that monetary policy has (counterintuitively) been too tight. Theres a lot to this, and I explain it in much more detail across 50-100 pages in my 2017 and 2018 letters (link below in my signature) #2 Because monetary policy has been too tight, this has led to lower Long term bond yields in the EU. As Buffett says, LT bond yields act like gravity on asset prices. Again, it's counterintuitive, but the implication is that because tight monetary policy led to lower bond yields, this results in higher house prices as mortgage rates tend to track the low bond yields in the EU. I'm no expert on the specifics of the denmark housing market, and surely i'm missing some factors here (local building codes, zoning, etc), but at a high level i'm not surprised to see house prices rising. But its not because the ECB has been printing too much money...its the opposite...they haven't printed enough money. I'd like to see the ECB drop its current targets and instead promise to do unlimited open market operations until NGDP is growing at 5% a year. Assuming they do this i'd argue that 1) wages would go up across the EU 2) real asset prices would drop (real house prices drop and (which also reduces income inequality) 3) populism and political tensions are reduced. edit: as a final example showing how ECB largely controls asset prices at a high level. Lets imagine 2 scenarios. The first scenario (akin to what we currently have) is that ECB keeps money growth low and inflation low over the next 100 years. In this case, I'd expect nominal house prices to grow at a slow rate in line with money growth, but for there to be a one time boost in real house prices as the housing market adjusts to lower interest rates. At the other extreme lets imagine the ECB prints a lot more money than they currently are to the point where inflation averges 10%/yr over the next 100 years. in this case, nominal house prices would rise much more quickly than in scenario 1 (again, nominal house prices tend to track with inflation), however i'd expect real house prices to be a bit lower than in scenario 1, as the high interest rates act as a drag to real asset prices (scenario 2 would also likely result in stocks having lower P/E ratios (proxy for "real asset prices") but HIGHER nominal earnings growth/stock prices over those 100 years). I'm probably not explaining this very well so welcome any feedback! Why is it the low rates have allowed for massive real estate inflation, but not equity markets? Europe is dirt cheap on a relative basis to the U.S. If low rates act as a guaranteed inflator of asset prices, I would think European equities would've trounced U.S. equities over the past 5-years - but instead they've underperformed massively while the U.S. was raising rates?

Yes, but a central bank controls the growth path of the unit of account, which is the main measuring stick for those "buyers and sellers". The central bank can almost completely dictate the size of the nominal economy going forward. The below table kinda shows that housing (as % of nominal GDP) has been relatively constant. So at a high level, can't Draghi and Volcker largely determine the nominal price of housing over a decently long time frame? https://www.nahb.org/-/media/Sites/NAHB/research/housing-economics/housings-economic-impact/housing-contribution-gdp-q1-2019-0426.ashx?la=en&hash=DB4820E7942613C16F65F3BF6739E0462AC168EE (Would add that there's no iron law that housing must be a fixed % of GDP - Its just that with various zoning laws, it's (imo) likely to stay relatively constant. Without those laws, there's a (good?) chance that housing would represent an ever decreasing % of GDP, much like food has done over the last century) https://cdn.theatlantic.com/static/mt/assets/business/1900%201950%202003.png Agreed. The more financial-ized housing becomes (i.e. the more house finance and package into a product to sell to retail investors), the more it's value depends on interest rates and money creation and the less on its fundamental value. Back in the days of banks keeping mortgages on their books and buyers having to put 30% down, you wouldn't have near the housing prices we see today. The prices are this high because with rates this low, you can finance 97% of the house and still end up with a reasonable mortgage payment - and banks don't care because they just package and sell it to retail investors who are just glad they can beat 2% on the 10-year treasury. Upside is more mortgages and more affordable mortgages. Downside is housing inflation and increasing housing's dependence on low interest rates.

Speaking of the conversion rate, are the juniors going to care what price the IPO is set at as long as they get par? I didn't understand the latest Moelis plan, which called for juniors to get 2 or even fewer than 2 commons for every $25 in par value, even though the market ratio far exceeded that. The comments by orthopa about the preferred holders wanting to win versus the commons, not just getting par, has me thinking. I also don't see why the IPO would be conducted at prices 4-5 times what we see now. Won't the price be set by the market, and if so why assume such a high price? Why would the preferred shareholders behind the Moelis plan come out with something that advantages the commons so much more? my guess is that the major junior holders have argued like this: first, if you want to give us par in cash, that's fine. second, seeing that you dont want to do that and you would prefer to level the capital structure, we will convert into common at the re-IPO price. third, since you need 2/3rds of each class to force conversion and you need to settle lawsuits, we have these various other items to discuss (high on my list would be getting the $20B or so back into the companies beyond the 10% moment). now if the re-IPO price sinks, the junior who is about to convert is protected by getting more common shares. this is a very straightforward scenario in my view I agree with this line of thinking as a preferred holder.

Also, something I believe should be pointed out, typically these commodity indices are geared very heavily towards oil. It's not to say that all commodities aren't cheap (most are), but if the thesis is based on the relative value of financial investments versus the components of a commodities index, you probably need oil exposure. It doesn't need to be the only thing you own, but if you don't own it, it's very possible the commodities index DOES revert and you still miss the rally.

I dunno - I witnessed a ton of euphoria on the FANG stocks two years ago. Same with NYC real estate Same with Tesla. Same with Bitcoin. One could argue that there's euphoria in the bond market if you believe that we aren't in a period of secular stagnation. Even if you do, there's a pretty decent argument to be made that there's euphoria in corporate credit. I agree euphoria doesn't appear to be widespread - but it's been there in very specific, very large, and very visible risk assets even if it hasn't been in the S&P as a whole. With the exception of bonds, each of these euphoric instances has also dramatically disappointed investors over the past 12-18 months which does tend to portend broader weakness. And while S&P 500 might not be euphoric, it's definitely priced for perfection. Just my two cents

Can't tell if you're being sarcastic given the "it's short and should only take half a year to Wade through" comment To OP: But generally, I like their business model and these guys seem to have integrity. They haven't hit their stride in the stock yet - some would say because the business model can't overcome terrible industry dynamics and that royalties are essentially fixed income like return investments. Others would say it's because we haven't seen a prolonged bull market in base commodities since the last one popped in 2011. It's up to you to determine which you believe. As a long suffering shareholder, my modest profits on the name have been 100% due to active management (adding/trimming at the right times) and not because the stock was easy money or because the company has delivered exceptional results.

Lol

The Wizard Powell. We have a "symmetric" target of 2% inflation. We raise preemptively 8 times before reaching this target as the data suggests we may reach this target at some point. We never really reach the target and inflation expectations turn down. Question: so why aren't you cutting this meeting? Because we are waiting for more persistent data. Someone needs to explain the words symmetry and target to this guy! Reflect for a minute on the last 12 months. The arrogance of this man is staggering. Everything he says is contrary to what the rates markets are telling him at the time he says it. Think of this from a gambling point of view. The bookmakers with all their trillions of $ at risk along all durations of the bond market expect a lower neutral rate, undershooting inflation and lower growth and believe that hitting 2% is unlikely and price trillions and trillions and trillions of bonds accordingly. This wizard then repeatedly backs the long shot contrarian position: that the neutral rate is higher, and that inflation and growth will increase. Like most long shot gamblers he has been losing all his bets. Ok, so this isn't ideal, it would be better if the guy wasn't always wrong. But really more remarkable than all these lost long shot bets is that Powell has been walking into the bookies when HE DOESNT EVEN NEED TO. He has a target of 2% he doesn't need to gamble on any outcomes until we hit 2% and spend some time symmetrically around it. So not only do we have long-shot-larry running the Fed but he's compulsive and runs out to make these bets when he should be sitting quietly at home. I think this unfairly targets Powell. In reality, any member of the FOMC is hugely arrogant to believe that they know better than the millions of market participants what rates should be. If they weren't arrogant, they'd let markets handle rates and call it a day.

+1 Honestly, I agree with this. The cost of servicing the stock of debt is more deflationary than the inflationary impulse of the continues flow of new debt issuance. In other words, the marginal utility of new debt is exceeded by the additional cost of servicing that debt. I think we need a Volker 2.0 - someone who will raise rates despite negative consequences. Not to break the back of inflation, but to break the back of debt dependence to purchase every major item in a lifetime (i.e. and education, a home, a car, a standar of living, etc).

Also, he manages Soros’ open society foundation, which is a charity right? He is so famous that I thought this is a wildly known fact. He was named Soros' 8th successor after Soros fired his first 7 successors. Then he magically hang on and worked well for Soros for many many years. I haven't heard any news that they parted their way yet, so I assume he is still Soros's successor. It is. He worked for Soros for awhile. Then he started his own fund and did well. Now he manages his one family office I think. Still a brilliant dude with an exceptional track record even if he got whipsawed by the internet craze in 2000

wfc will buy back 10% of common stock over the fed's dead bodies 1) Agreed. WFC isn't going to buyback anywhere near that amount with the regulation and scrutiny they currently have. 2) The idea that the rest of the world has never had an impact on the U.S. and never will is terribly short-sighted. The globe used to be dependent on U.S. economic strength. Now the globe is dependent on credit creation in China. Further, the U.S. is hardly "very strong". As has been pointed out by a few, nominal economic growth has been less than nominal national debt growth in the U.S. for the last several years - i.e. without gov't spending/borrowing trillions more than it had, GDP would have been negative. This is obviously unsustainable and in no way indicative of a "strong" or "self sustaining" economy. And despite trillions in stimulus spending, tax cuts, and QE, we still haven't been able to spur growth above what would've been considered paltry pre-crisis nor have we had any appreciable amount of inflation despite generational low unemployment. Methinks all of these factors are still trying to offset the deflationary impulse of an incredible debt balance and an aging population. Imo this is a common misconception. Perpetual lower bond yields/growth lead to HIGHER stock multiples. As Buffett said: "if you had zero interest rates and you knew you were going to have them forever, stocks should trade at 100 or 200 times earnings". Lower interest rates = Higher P/E ratios Honestly, I'm so tired of this line being quoted. It has only been true in the U.S. and nowhere else. And the reasons it has been "true" for the U.S. aren't due to the low rates, but rather due to the following: 1) Higher relative growth 2) Low and stable inflation 3) Expectations that 1) and 2) will continue into perpetuity Not anything to do with low rates. We haven't seen extremely elevated multiples in Japan who has had incredibly low interest rates for my entire life. We haven't seen extremely elevated multiples in Europe who has interest rates far lower than the U.S. and has for years. Low rates =/= higher equity multiples. Buffett's statement only makes sense if you have assurance rates will remain low forever. When has that ever happened?!?!?! Rates are actually quite a bit more volatile than we give them credit for. (as demonstrated by the 100 bp decline in the 10 year treasury in the last 8 months). And you know who has had low interest rates for majority of most of our lives? Japan. And yet they still haven't even recovered to the highs they hit in the early 90s which set off their low interest rates path.... If interest rates fall because growth falters equity multiples will NEVER do well. Never. Deflationary environments NEVER lead to expanding equity multiples. Never. Growth going down leads to lower interest rates. Inflation turning negative leads to lower interest rates. Neither is supportive of stocks. The ONLY environment where low rates supports stocks is an environment where inflation is low, but positive, and stable. We've been there for nearly 10 years - it seems we might be leaving that arena for one where inflation turns negative. Once again, this is NEVER supportive of equity valuations.

I'm about 80/20 preferred to common. I'm expecting the recap to take some time and the dilution issue to put downward pressure on the common. If we know for sure commons are ok then I'll go all in common if the price is weak enough for a multi bagger return on a sure thing. Anyone adding to their position with the recent news? Or waiting for something more "sure" - a court decision, an endorsed plan, etc.? (Count me in the second group - still a speculative position for me.) I'm torn between adding because outcome appears to be getting more positive than what it was a year ago and Reducing exposure because the price reflects those developments, we've been burned by rallies before, and it's what prudent risk/portfolio management would advise. I think I'm gonna settle in the middle and just hold what I already have recognizing that the 2-3x appreciation we've seen increased the position for me. I bought a few more preferred shares this year. Not too much though. For position sizing I’m currently using a model where, within a year or so, the investment “works out” with probability p, in which case I get back a fraction f of par, or it doesn’t (with probability 1-p), in which case I get x. My (subjective) belief at the moment is that p >= 80% and that the distribution of f should be no worse than a uniform distribution between 50% and 100%. I have no idea what x is but I know it’s >= 0. So I ran some simulations using my most conservative/pessimistic assumptions (p=.8, f~U[.5, 1.], x=0), and from that I got an optimal portfolio allocation (in the Kelly sense, assuming there are no competing investment opportunities) of about 25%. That number is of course very sensitive to the inputs, but having played around with them, I decided that I feel fine with, say, a 10-20% position, so that is where I’m at. My general view of this bet is that the expected return may no longer be spectacular but it is still pretty high among those opportunities where one can reasonably expect a very low (in fact close to zero) beta. I happen to be somewhat macro bearish at the moment so for me that is a big plus. Understood. My approach is far less sophisticated, but still ended up with a position at my maximum allowed 10% concentration. The struggle is knowing if I should implement my risk controls and potentially make less and let the sucker run and make more (but also risk losing more). In the words of Howard Marks, "Investing is hard!"

I'm about 80/20 preferred to common. I'm expecting the recap to take some time and the dilution issue to put downward pressure on the common. If we know for sure commons are ok then I'll go all in common if the price is weak enough for a multi bagger return on a sure thing. Anyone adding to their position with the recent news? Or waiting for something more "sure" - a court decision, an endorsed plan, etc.? (Count me in the second group - still a speculative position for me.) I'm torn between adding because outcome appears to be getting more positive than what it was a year ago and Reducing exposure because the price reflects those developments, we've been burned by rallies before, and it's what prudent risk/portfolio management would advise. I think I'm gonna settle in the middle and just hold what I already have recognizing that the 2-3x appreciation we've seen increased the position for me. In your opinion do the prices reflect ending of the NWS and recapitalization? At this point meaning prfd gets roughly par and if converted gets 4 common for each preferred share? For the priced to reflect that, they'd be at or near par. But that doesn't include the discount mechanism for timing or a discount for uncertainty of things like the ratio of what they're converted into and whether or not it's better to own the common today and etc. Ultimately, if we were still sitting at 20-30% of par I'd be a buyer today. But we're not - we're at 40-50% of par. That appreciation has priced in a good bit of the positive developments while still noting the uncertainty of the situation and how many head fakes there have been in the past.

I'm about 80/20 preferred to common. I'm expecting the recap to take some time and the dilution issue to put downward pressure on the common. If we know for sure commons are ok then I'll go all in common if the price is weak enough for a multi bagger return on a sure thing. Anyone adding to their position with the recent news? Or waiting for something more "sure" - a court decision, an endorsed plan, etc.? (Count me in the second group - still a speculative position for me.) I'm torn between adding because outcome appears to be getting more positive than what it was a year ago and Reducing exposure because the price reflects those developments, we've been burned by rallies before, and it's what prudent risk/portfolio management would advise. I think I'm gonna settle in the middle and just hold what I already have recognizing that the 2-3x appreciation we've seen increased the position for me.

That always happens though in the maturing of the cycle. As rates move higher, lenders can accept more defaults and still end with the same, or higher, income due to the higher rates. Riskier loans means defaults get higher even if the economy is strong. It's not to say that there's nothing to worry about, but you can't just look at the data in a vacuum like that.

Looks like the US is doing nicely and China as re-accelerating. Europe is still slow and I don’t know about Canada. Mr. Market simply seems to have overreacted back in December. Not to say that it hasn't been wrong in the past, but Atlanta Fed GDP numbers are tracking at 1.6%. hardly a "re-acceleration". If that's what it prints at, it would prove a deceleration given slowing GDP while things like oil/inflation should be rising to support it.

At my new job, I was given the advice of building consensus and getting an idea approved BEFORE the formal meeting in which you seek it's approval and build the case for it. Seems to me that's what's happening here. Informing the audience, building a consensus, and seeking approval BEFORE taking the official actions. Certainly could be wrong, but I'm not concerned by the recent rise in optics on the situation.

I thought this for the longest time. It's why I was in Fairfax for the longest time. The equity hedges, the deflation derivatives, the hedged equities, etc. Starting in late 2017, I started to realize that maybe I was wrong. Money velocity was rising the first time in years which seemed to confirm that inflation was on the upward trend. Rates had climbed 75-100bps and stock market was on fire after the tax rebates. That being said - the weakness we've been seeing in equity markets, the ongoing trade war, the recent decline in money velocity again, and interest rates that have given up all of their gains might suggest I was premature to change my views. I'm squarely back in the lower for longer camp after a brief 12 month hiatus.

Great news!

It's an unfortunate view, but it's somewhat supported by data in America. While most of the world pulls teachers/professors from the upper quintiles of students, teachers in America tend to be more representative of the lower quintiles. That doesn't mean there aren't good teachers, or smart teachers, but that they are vastly outnumbered.

On the surface, I like the idea or sentiment. Which of the three choices above would you recommend shorting? Sorry I'm a bit confused. Was Berkshire his secret stock? I'm a bit confused. Do you think there are other viable candidates for a stock Whitney would recommend? LOL

There was another article on Bloomberg a few weeks back about the practice in general. Vangaurd patented attaching an ETF to their mutual fund to effectuate this in a mutual fund, but that's all. Most ETFs do this from my understanding and is by-and-large why they're more tax efficient than their fund counterparts.