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"they are all in"


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I think we are in the limbo area.  You've got managers who are all in, but if you look at CNBC, they are telling you how to prepare for the coming correction.  You don't get the correction until the consensus is decidedly on the same page.  It may go on longer before people come back to reality...that this isn't going to be a quick recovery. 

 

While the worst is over, there is miles (years) to go before we clean out the books and restore the balance sheets.  The psychology of spending has changed.  People just can't do it right now, because there continue to be corporate restructurings and increases in efficiencies.  Business will get better, but it won't be robust.  Cheers! 

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I think we are in the limbo area.  You've got managers who are all in, but if you look at CNBC, they are telling you how to prepare for the coming correction.  You don't get the correction until the consensus is decidedly on the same page.  It may go on longer before people come back to reality...that this isn't going to be a quick recovery.  

 

While the worst is over, there is miles (years) to go before we clean out the books and restore the balance sheets.  The psychology of spending has changed.  People just can't do it right now, because there continue to be corporate restructurings and increases in efficiencies.  Business will get better, but it won't be robust.  Cheers!  

 

I think that coming out of any recession, people always feel like things will never be as good or spending won't be back.  The truth is that we won't know how good of a recovery we'll have without hindsight.  I'll use Fairfax as an example, they used the huge plunge in the markets to set themselves up for healthy growth for the next 10 years, if you have enough business's putting money to work at a high ROI, you'll see very robust growth.  I think Lehman, Bears and AIG sent the market down way below where it normally would have bottomed out. Right now, the market capitalization is about 11.5 trillion dollars, roughly 90% of GDP..historically it has fluctuated between 50% and 180%.  We have had a strong rally but only because the lows were so extreme.  

 

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I think that coming out of any recession, people always feel like things will never be as good or spending won't be back.  The truth is that we won't know how good of a recovery we'll have without hindsight.

 

That's true, but we haven't had a correction in real estate prices like we've seen since the Depression.  When you have non real-estate asset bubbles (equities, commodities, bonds, etc), the deleveraging has a wealth effect but not nearly as dramatic as a shift in real estate valuations. 

 

For some reason, a depreciated value of a home has a different psychological effect than a diminished IRA account.  We saw this to a lesser degree in the early 80's, but the correction this time in prices is nearly double.  People changed after that period.  Many weren't the same as they lost what they had spent the last couple of decades building.  And this time the extent of the damage is significantly worse outside of the United States, excluding parts of Asia and South America.

 

Things will get better, but there is no easy way to get there...not using stimuli, unique financing arrangements, interest rate movements or regulatory augmentation.  Those things will shorten the time needed to deleverage, but they won't eliminate it.  Cheers! 

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Yeah, RE has an extremely emotional component to it. If we assume 20% of the population controls 80% of the wealth, the other 80%, if they are homeowners, probably have most, if not all, of their net worth in their home. This 80% isn't going to care as much about the $5000 they have in an investment account, as they would when housing corrects around 15-30%. The mortgage debt makes the pain worse.

 

Canada's pain is coming. If CMHC data is correct, the avg. homeowner has 10% equity in their home. It won't end well for many. I just wished that I had the ability to figure out when it will start to correct. I'm starting to look stupid to the housing bulls.

 

 

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I wouldn't be surprised if we reach the 2007 peak sooner than people think, maybe 1-2 years.

 

For some reason, I would definitely be surprised if we did.  I'm guessing more like in 4-5 years.

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I agree with Sanjeev.  Apparently in credit busts it takes about 5-6 years for housing to find it's bottom. The huge issue with real estate is leverage.  IRAs aren't leveraged. Most people would put down 5-20% on their home. So if it goes up you get a 5x-20x multiplier.  But same on the way down.  The other big consideration is the baby boomers.  Many are close to retirement.  After this dump they aren't likely willing to jump in.  Either that or they will be desperate, sit out the rally,then buy at the top..  Hopefully not, but that's usually what happens..

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Question: Why does everyone use the past or statistics to try to predict the future? Is there any reason to believe that data has any information about current macroeconomic events?

 

History doesn't necessarily repeat, but it often does rhyme.  There was no reason the tech bubble could not continue well past 5,000 on the Nasdaq in March of 2000, but history tells us that such valuations were historically a tipping point for such a correction.  Statistics tell us nothing about what will happen today, but it gives us a pause for concern regarding the current deleveraging based on the few corollaries we have to compare.

 

Another example could be:  How often does one actually spill their coffee on themselves while driving?  Not often.  But history tells us that it does happen from time to time, and the consequences are not enjoyable.  The question is, if the odds of such an event are small, how do you protect yourself from that rare possibility of such devastating effect?  As Buffett says, a long string of successes can be wiped out by one simple error in judgement.  Cheers!   

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  How often does one actually spill their coffee on themselves while driving?  As Buffett says, a long string of successes can be wiped out by one simple error in judgement.  Cheers!   

 

Especially if you're a female, got hot legs and you're wearing a business skirt to work.

 

Seriously though, the way I see it, some economies around the world are doing extraordinarily better than others. We all know the China story, and economies connected to it like Australia haven't even entered a "technical" recession - it's probably been one of the mildest recessions, definitely not nearly as bad as the early 1990s. Canada too.

 

Back during Q109, when I was poo-pooing WFC what I did not expect was the extent to which the US govt would virtually guarantee bank loans, and underwrite bank debt - how much money they would print to get there!! The US Treasury and the Fed have shown their hand, and it's pretty clear that they will not let the markets fail. Never before in history have we seen a coordinated effort by central banks around the world to print money to backstop the markets.

And for that reason, correction or not, I don't believe that we'll go back to the March lows we saw earlier this year. It might be long road to recovery for the US, but around the world, countries/economies that aren't overly leveraged at a Federal level and consumer level (mostly Asian countries) don't have a problem at all, and we'll see a rebound a lot faster there.

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Here is a thought exercise: why can't US (and the world for that matter) use inflation to neutralize effect of deleverage (or at least some of that),  effectively reduce actual debt load and inflate its way out?

 

This seems to be the path US is taking (China is doing the same, for additional reason of keeping RMB currency low without changing the exchange ratio to USD).

 

Obviously the inflation needs to be controlled so it doesn't run wild, say price of everything goes up 20% in the next 3 years, including your wage, now that mortgage load doesn't look too bad because it's fixed amount, and housing doesn't look overpriced either (I actually think housing price is reasonable now). 

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Here is a thought exercise: why can't US (and the world for that matter) use inflation to neutralize effect of deleverage (or at least some of that),  effectively reduce actual debt load and inflate its way out?

 

did you happen to see WEB's recent NYT op-ed piece? for politicians facing hard choices the path of least resistance & personal accountability is almost always the prefered path to dealing with problems. inflation is the supreme stealth confiscator of purchasing power including fixed rate debt values. you will probably get your wish, tho we should be careful what we wish for!

 

http://www.nytimes.com/2009/08/19/opinion/19buffett.html?_r=1

 

 

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I think we are in the limbo area.  You've got managers who are all in, but if you look at CNBC, they are telling you how to prepare for the coming correction.  You don't get the correction until the consensus is decidedly on the same page.

 

i dont know if any kind of setiment indicator is actionable or not, but in general i think its important to watch what they do, not what they say. but as you note, people on CNBC are TALKING about a correction, & maybe their "all in" posture is heavily hedged with index puts, especially given the steep decline in option premium in the face of a 40% bounce from the march lows.

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Back during Q109, when I was poo-pooing WFC what I did not expect was the extent to which the US govt would virtually guarantee bank loans, and underwrite bank debt - how much money they would print to get there!! The US Treasury and the Fed have shown their hand, and it's pretty clear that they will not let the markets fail. Never before in history have we seen a coordinated effort by central banks around the world to print money to backstop the markets.

And for that reason, correction or not, I don't believe that we'll go back to the March lows we saw earlier this year. It might be long road to recovery for the US, but around the world, countries/economies that aren't overly leveraged at a Federal level and consumer level (mostly Asian countries) don't have a problem at all, and we'll see a rebound a lot faster there.

 

Printing money to backstop the markets, is not a cure for insolvency, all that has been done is to transfer previous losses from the private sector to the public sector and dilute the real purchasing power of the respective currencies. This makes inflation inevitable. To counter inflation and preserve the value of credit to the creditors, interest rates will rise, perhaps dramatically. This will lead to further pressure on the consumer, and a deepening recession is assured, but the oligarchs we have empowered will retain their grip on the economy, which is the thrust of current economic policy.

 

 

"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."

 

Ludwig von Mises

 

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did you happen to see WEB's recent NYT op-ed piece? for politicians facing hard choices the path of least resistance & personal accountability is almost always the prefered path to dealing with problems. inflation is the supreme stealth confiscator of purchasing power including fixed rate debt values. you will probably get your wish, tho we should be careful what we wish for!

 

Yes I saw the article and had some comments on that thread of the board, not that I prefer inflation or deflation or anything, I just think "inflating our way out" is the most likely outcome, and trying to figure out how to position as an investor.

 

When everyone is worrying about deleverage and debt implosion, the picture is actually much more complex, with multiple different forces at play. If you buy into this inflation thesis, it's actually good to have debt before high inflation hits, the individuals/companies which are leveraged and can survive this round, like RE investor/companies, they will come out of this and look good. 

 

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"The question is, if the odds of such an event are small, how do you protect yourself from that rare possibility of such devastating effect?"

 

Don't use too much leverage and invest in the right businesses/managements - other than that, I'd ignore the odds of small events with big consequences, there isn't much else you can do about it. Some people hedge/insurance but I don't think that's very useful because over time, the bias is towards recovery so the insurance is wasted, you can get "pseudo-insurance" by just not buying more than you can chew.

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. If you buy into this inflation thesis, it's actually good to have debt before high inflation hits, the individuals/companies which are leveraged and can survive this round, like RE investor/companies, they will come out of this and look good. 

 

 

This is true only if their income is secure and inflation protected. The price of your assets should appreciate during times of price inflation, but your cash flow will be negatively impacted by higher interest rates. The more your leverage, the more the impact.

After all the point of higher interests is to "mop up" excess liquidity and defeat price inflation. The job of the investor today is to assure that the liquidity that is thus mopped up is not his own.

Last time around in the late 70's when rates skyrocketed, real estate price eventually collapsed in the face of soaring financing costs, defeating the advantage of inflation reducing the mortgage.

You can profit from inflation by borrowing today at a fixed low rate, buying an income generating asset that will retain its real value, cashing it in during inflationary times and use the proceeds to pay off the loan. Levered real estate was not one of these assets during the last cycle.

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You can profit from inflation by borrowing today at a fixed low rate, buying an income generating asset that will retain its real value, cashing it in during inflationary times and use the proceeds to pay off the loan

That's exactly what I did last fall, refinanced and took out a bigger mortgage, and started loading up quality and dividend stocks. 

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Don't use too much leverage and invest in the right businesses/managements - other than that, I'd ignore the odds of small events with big consequences, there isn't much else you can do about it. Some people hedge/insurance but I don't think that's very useful because over time, the bias is towards recovery so the insurance is wasted, you can get "pseudo-insurance" by just not buying more than you can chew.

 

Well that works most of the time, but anyone who stuck to just that last year got burned.  We did well because we weren't afraid to hold cash, but the rest of the industry is trained to always stay fully invested.  Even if you chose the right companies and didn't use leverage during the 30's, you still got a severe taste of volatility.

 

My opinion is that investors should stick to what they know.  Wait for fat pitches, buy good businesses at a margin of safety, and don't be afraid to hold cash until you find something.  That theory doesn't change in good markets, bad markets, deflationary markets, inflationary markets, etc.  You don't buy gold, you don't use exotic hedges and you do only what you understand...but macro still has an intangible effect.  Sometimes more and sometimes less, but it has an impact on your future discounted cash flows.  Cheers! 

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"Well that works most of the time, but anyone who stuck to just that last year got burned"

 

I don't think its a good idea to use a single year as meaningful of anything. I couldn't care less that my portfolio was down in a single year, especially when everyone else's portfolio did the same thing. A good long-term track record can suffer a couple of years of business depression-like results as long as you beat par and know how to do it. For example, I read somewhere that something like 8 out of 10 years the S&P has had a positive return and 2/10 it has had a negative (sometimes very negative) return. The best thing to do is to go through it and forget about timing yourself in and out of cash. Volatility is no big deal, it is highly welcome, otherwise how to get the great deals?

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That's exactly what I did last fall, refinanced and took out a bigger mortgage, and started loading up quality and dividend stocks. 

 

Be very careful here.. this is the very behaviour that created the housing (and others) bubbles. The strategy depends on the asset being purchased constantly appreciating at a higher rate than real price inflation. Should there be another delevering event like last year (essentially the world's largest margin call) you may discover that you have underestimated the risk.

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I don't think its a good idea to use a single year as meaningful of anything. I couldn't care less that my portfolio was down in a single year, especially when everyone else's portfolio did the same thing. A good long-term track record can suffer a couple of years of business depression-like results as long as you beat par and know how to do it. For example, I read somewhere that something like 8 out of 10 years the S&P has had a positive return and 2/10 it has had a negative (sometimes very negative) return. The best thing to do is to go through it and forget about timing yourself in and out of cash. Volatility is no big deal, it is highly welcome, otherwise how to get the great deals?

 

Again, that is true the 49 years out of 50, but unfortunately that 50th year does eventually come around.  Multiple successes multiplied by zero is still zero.  How many hedge funds perished last year...25-30%?  And that hedge fund number would have more than doubled if they couldn't lock up the capital.  How many value fund managers got killed last year...85-90%?  How many pension funds got mangled last year...65-75%?  

 

The industry is primed to always stay fully invested.  It's the greatest statistical Trojan Horse in the financial world!  Always stay fully-invested...buy, hold & prosper...missing the 30 best days reduces your results by 50%...etc. This is what statistics tell us, so the investment managers fully buy into it, and in turn they feed their clients the same information.  

 

Don't get me wrong, it is completely true but it depends on the context.  If you are a 50 year old person who planned on retiring at 65, and you're portfolio which was heavily invested in the Nasdaq (which drops from 5000 to 1400) collapses, and ten years later it isn't half way back up to its peak, then "staying fully invested" or "buy & hold" was probably the dumbest idea anyone could have given you.  Statistics have value...but you can't view them in a vacuum, otherwise the data becomes meaningless.  Cheers!

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