TwoCitiesCapital

It's quite charitable to assume that this type of behavior only occurred "right at the end." +1

I haven't checked these numbers to know if they're accurate, but I think claiming they "doubled down" is probably a mischaracterization of what happened. Treasury rates hit record lows post-"Brexit". The 10-year fell 80 basis points from 2.27% to 1.47%. That's a massive move! What that means is that Fairfax's bond portfolio increased in % relative to the rest of the portfolio which means they became more exposed to interest rate risk. Further, as interest rates fall, duration risk increases which boosted their exposure further. Since these are passive market moves, I think it's a mischaracterization to say they've doubled down on long-bonds and I wouldn't be surprised to see that they recognized some gains from sales in the next quarter's release. This wouldn't be the first time they've taken gains on bonds in the last few years. I tend to estimate Fairfax's equity book value around $9.5-10B as a rough estimate. That leaves me at a ~1.35-1.4x multiple and I'm relatively alright with that given the improvements in underwriting and the upside earnings potential if/when they ever remove those equity hedges. This is the real catalyst - there would be massive improvements in earnings power when Fairfax does this. The best case scenario would be for markets to collapse, the bond portfolio/deflation hedges to explode in value, and then the reinvest that money near the bottom while removing equity hedges. Fairfax would be an easy double to triple in 2-3 years in that kind of scenario as earnings power would explode. The next best case scenario is that Fairfax removes hedges without a major correction (I don't see this happening). If we got closer to 1.6-1.75x without a major correction in equity markets, I might lighten up and sell a portion of the portfolio. If it fell to 1.25x or so without a deterioration in insurance, I would probably buy more. I think we're in that happy medium now where I simply intend to hold and wait.

Like anything, I will trade around it based on it's value. That being said, I will probably always maintain some non-token position in the name given my trust in the people running it and their ability to generate returns. As we all know, business performance <> stock performance and at some point I have to arbitrage the difference if it gets large enough as my primary motive is to make money which trumps my secondary motive of owning sizable stakes in companies I admire.

Any proof for this? Let's see: People are happy and yet somehow everyone is worse off for it? And BTW before you go on your gold bug bandwagon, maybe you should explain why the last 50 years of fiat money was one of the best times of the history of our civilization. For businesses and entrepreneurism too. Or will you claim that it made everyone worse off and it would have been so much better on gold standard? Edit: it's also rather funny seeing people railing for gold standard at the time when there is no inflation, no inflation on horizon and there might be deflation because of a number of reasons. So you want to go back to gold standard why? BTW both gold standard and bitcoin are bad because they encourage spending resources on unproductive endeavors: gold mining and fruitless computations. There's already way more gold in the world than there's need for it. If you're so smart, at least tie your bitcoin computations to finding cure for cancer. I'd vote for "cancer-cure-coin" maybe. ::) Ignorance is bliss. People are happy because no one is quantifying the losses. Just because they're ignorant to the losses doesn't mean that we should stick with the system. The prosperity that has been achieved over the past few decades has been independent of the monetary system. It's a result of better education, better technology, and better productivity. This would have happened regardless of the monetary system in place. While I agree with you that borrowed money can contribute to society if invested in productive assets, it IS borrowing from the future and a detraction from future growth when that money is squandered or invested in unproductive assets. Many consumers are still underwater on houses purchased prior to '08 because housing prices were inflated due to misallocations of capital and speculation. That is not productive. Many consumers are in debt up to their eyeballs in consumer debt on credit cars. That is not productive. Many students are in debt up to their eyeballs getting a degree that has inflated in value even as the wages that degree is likely to earn have stagnated for the past 10 years. This is likely not productive OR not anywhere near as productive as it once was. Many corporations have borrowed a ton of money to repurchase their stock. This is not productive. Trillions have been spent fighting foreign wars, paying current gov't bills, and paying interest on current debt. None of this is productive. So when these tens of trillions of dollars in unproductive debt unwinds and negates from future GDP growth, the question will be have the last 30-40 years been anywhere nearly as good as you thought? As mentioned, we are seeing deflationary forces now. These are a combination of 1) Relative competitiveness because Europe and Japan are in a far worse position than the United States (both dealing with debt/demographic driven deflation) and 2) The bad kind of debt driven inflation as consumers have been saving more, spending less, and generally deleveraging As mentioned: the only time deflation is bad is when you have a ton of debt. U.S. tax payers currently own 100,000+ for their share of gov't debt. Add to that a car loan, a mortgage, some credit card debt, and student loans and you're talking about people who can't afford for wages to drop. This won't be a healthy deflationary cycle that ends well. I don't own gold. I don't run around advising everyone else to own gold. But I do think Western monetary policies are irresponsible and don't make any reasonable sense. The general public doesn't pay attention to this stuff. Inflation is hard to measure and monitor in real time because people think in nominal terms - not real. Consumers will have a high tolerance for it until it becomes increasingly clear their quality of life has become obviously worse off than they once were. So far, what we've seen is real wages declining/stagnant for 16 years. If that trends continues, I imagine that we'll see people starting to wake up to that fact. When that happens, the trust in the currency could disappear which is the only value the currency has. This doesn't happen when currencies are backed by something fundamental because: 1) A fundamental backing enforces some measure of discipline on market participants AND 2) Even if the system does blow up, the fundamental backing retains some value Anyhow, not really a gold bug. I think fiat currencies could work if people were responsible. We are not a responsible people. This is why gov't budgets are chronically underfunded and pensions too! This is why even when left up to the individual, people woefully undersave for retirement, expected health care costs, education, unexpected events, etc. etc. etc. No - we are a totally irresponsible people without the ability to look forward and plan for the future. Since that is clear, a fiat currency is totally unworkable because it requires a discipline and responsibility that we do not have (and it seems clear from history that most civilizations haven't). In a perfect world, fiat would work. We're not in a perfect world so I'd prefer to opt for the currency that forces that discipline on it's users.

+1 Politicians win by promising their constituents more stuff (regardless if it can be delivered or not). Gold results in a failure to deliver. Fiat currency and perpetual debt allow for them to deliver on some things. Politicians are happy. People are happy. And yet everyone is worse off for it.

Deflation would slow the level of current consumption, but the level it settled at would be entirely sustainable and still support this economy and it would be a healthier growth with far less debt (i.e. less prone to shocks and far more sustainable). I love when people say deflation prevents people from purchasing. It does to an extent, but it doesn't prevent purchases indefinitely. If you know that you can wait 3 months and it will be significantly cheaper, you may wait 3 months to purchase. But that doesn't necessarily mean you'll wait 9, 12, or 15 months (or indefinitely!). We all know that TVs will get cheaper if we wait. We all still own TVs. We all know that used cars will get cheaper if we wait. The used car business is still a functioning business model. We all know that if you wait until the end of the season to buy clothes, you get the best deal....but plenty of people buy clothes in season. People will buy something when they want it bad enough. Most people will wait a little bit if they can get a better price, but nobody puts off the purchase indefinitely. Some people won't even wait 2 weeks. People still would buy TVs, clothes, cars, and houses when they wanted them. This would be no different in an economy that consistent, modest deflation. Think of how ridiculous you would sound if you told someone you bought a car you didn't need because you just new it would be more expensive next year as prices inflated and you may need it next year (i.e. inflation is supposed to spur consumption). That's how stupid you sound when you say people would put off purchases indefinitely to wait for a lower price for things they do need/want now (i.e. deflation delays consumption). The U.S. has operated through many periods of persistent deflation and did just fine through them. It was literally ONLY the Great Depression that it was an issue before the fears today. The Great Depression was brought on by financial speculation through the use of too much margin debt which further confirms the one rule of deflation: it's only bad if you owe a lot of money.

Sure, and we haven't hit them yet at $4 trillion so they could keep going if they wanted. And when they hit those limits, the could open it up to corporate bonds and equities immediately adding tens of trillions in potential buying capacity. I don't know where the limit is at for the public to lose faith - maybe never if because they seem wholly uneducated on these items, but it's odd to me the Federal Reserve can engage in the same activity that counterfeiters engage in and it's encouraged. Money has value because it acts as a medium of stored labor value. If you can just assign that stored labor value to any piece of paper, whether it is created by the Fed or a petty street thief, it detracts from the overall confidence one should have in the continuing value of their money. It's as simple as that. I don't know what limit the average person has - mine was hit long before we did $4 trillion in funny money. TBC - I'm not a prepper, I don't own bars of gold, I'm not suggesting we hoard gas/food/guns/ammo. I just have no confidence that the U.S. dollar (or any other massively manipulated currency like the euro or the JPY) will be worth much of anything by the time I retire. I prefer sensible policies that pass a simple smell test - the Federal Reserve counterfeiting $4 trillion dollars in a bid to stimulate the economy doesn't do that UNLESS it actually does ruin the faith in our currency and erodes the value of the debt overhang we have...but then, that's no better than simple a default in my eyes.

Your comment hints at some of the criticisms of fiat currency that have been around for many decades (centuries?). Ultimately the success of a given fiat currency is dependent on people's confidence in it. This psychological underpinning makes some people very nervous. I don't disagree. And I imagine that it's becomes easier to lose confidence when you can hit the "print" button and magically have $4 trillion worth of stored labor value acquiring real assets that would typically require real work and real productivity to acquire...but maybe that's just me. Anyhow, my criticisms of fiat currencies aside, that was the point of the post. The point was that they can't run out of money because they just print however much they desire to "achieve" their goals. The last 8 years have proved that.

Global QE is at all time highs (Europe and Japan) and money is leaking to the US, is my guess. Plus China stimulating like crazy and I suspect money is flowing out. Up til recently, the only positive flows into equities were corporate repurchases. Retail and hedge funds were selling. I haven't seen updated figures to know if that's still the case or not, but was true 1-2 months ago. Central banks don't run out of money. They magically create more when they need it. The Federal Reserve never had $4 trillion in equity to purchase all of those bonds with. They're levered like 80x to their equity base and they just created the money to purchase those bonds electronically. Crazy that you can just use fake, electronic money to acquire real assets representing claims on the value of labor measuring in the trillions, right?

I think the catalyst for a correction could literally be as simple as the current environment: Earnings growth has been negative for 6 straight quarters. Q3 is very likely to be the 7th as many companies have been guiding down expectations. Revenue growth has been negative for even longer. Traditionally prolonged trends, falling earnings, margins, and revenues Interest rates are rising. Traditionally, tightening of financial conditions and liquidity has not been the best thing for the markets. Lastly, inflation has been between 0-1% for most of the last 2-3 years. Traditionally, stable inflation has been the best environment for markets meaning that it can only remain the same or get worse from here on out. A trip to higher inflation or mild deflation would result in a less than ideal market impacting multiples. Traditionally, inflation trending out of the 0-2% zone has not been the best thing for markets. We currently have 2 of these things occurring in tandem with the 3rd being speculated by many (either higher or lower inflation). How likely is it that the market can keep puttering along at record high levels on elevated multiples are revenues/margins/profits collapse and as liquidity is moved from the system while increasing your discount rate on financial assets?

I don't think anyone is arguing that Tesla won't disrupt the auto industry. It already has! The real question is does that disruption lead to profits for investors. Tons of internet companies were disruptors in 1999. Only a handful made any money for anyone other than their founders.

:( on Kentucky Also saw this on Bloomberg of Perry's assets plunging on recent losses http://www.bloomberg.com/news/articles/2016-09-09/perry-capital-assets-plunge-60-to-4-billion-as-wagers-backfire

Why do we let political threads devolve into name calling and slandering another person? Seriously, everyone engaging in this childish behavior just needs to grow up and understand that you're going to encounter people with different values/opinions/priorities than you and it doesn't make them any less intelligent or any less of a person. Some of my best friends are people who have wildly different political and religious views than me. I welcome it as long as they're well thought and supported. Those are the friends I know that I can engage in intelligent, and civil, discussions about things that matter and get a better understanding of their side, even if I still disagree, than I would ever have had otherwise. I'd say it's pretty valuable to be able to get along with people who are wildly different in their views and you guys should all give it a try.

Yes. Quite right. Link below provides more detail. http://www.marketwatch.com/story/blackberry-restructures-convertible-debt-to-cut-interest-expenses-shares-halted-2016-08-26

http://www.bnn.ca/blackberry-to-sell-605m-in-new-debentures-to-fairfax-other-investors-1.555845 For those not following the Blackberry thread, $605M more being issued in converts at 3% to help fund the $1.25B purchase of the 6% coupon converts. Don't know how this impacts Fairfax in that there's no details on how much of the $605M they're taking and if they're selling any of their higher coupon converts.

+1 Not to derail the thread, but we spend so much of out time focused on equities. Interest rates drive the world. The worlds bond markets are so much deeper than the stock market. If bonds are shouting a warning, we have to be very, very careful before we determine that hundreds of trillions of dollars is wrong just because it takes SO much to move those markets.

Just like Lamberth's. And I can tell you that as someone who has limited knowledge of the law, I felt Lamberth's was embarrassingly awful and cringeworthy. And now this one. Makes me seriously wonder if these judges are getting paid off by the Govt. I think the not making any waves is the most important. My personal experiences with the law have been iffy at best and I have a very cynical view about participating in courts myself; however, I had more faith in this for some reason. Maybe I was thinking Federal judges/system would be better than the local one. We'll find out. #LongAndStrong

It's much more basic, & primarily demographic. We know from supply/demand that as long as there is 'excess demand' price will go up. We can get that excess by raising the number of buyers, getting them to spend more, or cutting back the supply. The average person spends far more in their 30's through 50's (kids, house, etc.) than they do in their 20's & their retirement. Folks in their mid 50's to mid 60's are generally anomalies as spending is more influenced by saving for retirement, retirement packages, and 'crossing things off the bucket list' - before they retire. On top of this is annual inflation and growth, which may or may not be positive. NA markets are primarily influenced by the baby boom - their peak is entering their mid 50's, but the early boomers are retiring - in growing numbers. Hence the current flow of new saving $ (excess demand) into the market is about as good as it's going to get. As aging continues we really need inflation & growth to offset lower net contributions - & retirees starting to sell down to fund their retirements. Japan has very few young people, & their economy reflects it, same thing for big parts of Europe. It's also hard to 'make' inflation when there are annual declines in the underlying buying need (growing numbers of retirees), and growth when there are few folks to man the factory. You can import labour (Germany), but at some point it's easier to just move the factory to the labour. In any given quarter a particular NA sector may outperform, but it may not be sustainable. SD +1 Demographics is a HUGE driver of investment returns. Further, index construction creates a secular upwards bias as indices are regularly reconstituted with the survivors/winners and the dropping of losers while not actually having to come up with the capital to make these adjustments (i.e. selling losers typically means you can buy very little of the winners, but indices can make these adjustments however large they wants as they're only constrained by making denominator adjustments to keep the price the same). If you're regularly dropping the losers and acquiring the winners, and unconstrained by capital limitations that most of us have, you will generally rise in nominal value.

I don't know your circumstances, nor the companies your looking at, but as someone who works in finance, my guess is that most people on this board wouldn't find it fulfilling from an investment standpoint. It only works for me as a means to an end to fund my 2nd Act.

This is incredibly interesting to think about. Incredibly terrifying when you think about how national finances have deteriorated alongside. Eventually, you'll have records amount of debt owed and far fewer people left to pay it.

I don't know if you are considering leveraging securities, but there have been a few topics on cheaper forms of leverage already. Good resources below. http://www.cornerofberkshireandfairfax.ca/forum/strategies/getting-leverage/ http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/leaps-portfolio-cash-and-leverage/msg150912/#msg150912

Not to mention that VIX is basically at all-time lows so they're not even being compensated in terms of the volatility premium that is often associated with selling options. Somewhere, there is someone savvy making a lot of money from convincing people to do this while allowing the counterparties to go long vol in size with the VIX at 12...Seems like these sheep are about to get fleeced.

Genius really :o Not genius. Counterfeiters have been doing this for ages. What's new is that somehow central banks have been able to sell the idea that counterfeiting is what will save economies...

I would elect an actual turd over Hilary so yes, that includes Trump. Hilary fits my definition of true evil. Hilary is true evil? Suppose Hilary does win the election and it is a 90% certainty based on polls. What will happen? Who will suffer, who will die? Probably no one as everybody who stood in her way will already be dead. #HillaryIsTheRealZodiacKiller

Well, Santander didn't buy any of them, but it wasn't a bad time to be buying them. Below are the returns, not including dividends, since that post. Banco Santander Chile: +23.87% Banco Santander Brasil: +131% Banco Santander Mexico: +30.92% Despite this incredible performance from it's subsidiaries, SAN itself is down -17.53% over the same period currently sporting a market cap of $60B. This has significantly shifted the market implied values of operations in Europe (only accessible by buying a stake in the parent). If we look at it's ownership in its public subsidiaries and the Americas and their market caps, (BSBR - 88.3% OF $26B, BSMX - 75% of 12.59B, and BSAC - 67% of 10.3B, SC - 58.9% of 4B), we see that it's ownership in public subsidiaries is around $42.5B against it's current market cap of $60B. So what that is telling us is that the market implied value of the remainder of U.S. and European operations is only $17.5B - or roughly 4x it's earnings contribution (~4.5B - 1st half of 2016 annualized) while America's trades closer to 15x (~2.8B - 1st half annualized). I still think America's offers decent value with a long runway for growth, but methinks it's time to roll out of the subsidiaries and back into the parent to increase that European exposure. Prior to today, about 1/3 of my exposure to Santander was through BSBR and the other 2/3 via SAN as I anticipated higher returns from BSBR either through an EM recovery or through Santander repurchasing the entire entity. Now that it's rallied quite a bit, and the parent has languished, the repurchasing is less likely and the gains I've received are pretty favorable to roll back into an even larger position in SAN. Totally out of BSBR and back to 100% SAN.