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Deflation hedges

steph

By steph
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TwoCitiesCapital Veteran

TwoCitiesCapital

Posted
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FFH up again today in a down market! So is it becoming the "all-weather" stock we've all been waiting for?

 

Fingers crossed - I imagine it'd still get caught up in a massive sell-off in which everything is liquidated indiscriminately, but the behavior we've seen YTD is suggesting this won't be a 2008 scenario where they're minting billions that you can buy for 50% off.

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petec Experienced

petec

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FFH up again today in a down market! So is it becoming the "all-weather" stock we've all been waiting for?

 

Fingers crossed - I imagine it'd still get caught up in a massive sell-off in which everything is liquidated indiscriminately, but the behavior we've seen YTD is suggesting this won't be a 2008 scenario where they're minting billions that you can buy for 50% off.

 

Agreed.  So far I've broken even (in sterling, not dollars) in this selloff because of Fairfax.  I'm mildly nervous that won't continue. 

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giofranchi Newbie

giofranchi

Posted
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Agreed.  So far I've broken even (in sterling, not dollars) in this selloff because of Fairfax.  I'm mildly nervous that won't continue.

 

I think what people want, and almost never get, in investing is clarity: will I make money, or will I lose money. And if I’ll make money, how? I think in a difficult environment the way Fairfax makes money is clear to most people. Therefore, if some forced selling happens to Fairfax as well, I think it will probably be short lived.

 

Many other company that I know of and follow will probably go on being profitable even in a very difficult environment. For instance, for Berkshire to stop being profitable a really catastrophic event should occur. But people don’t know how much Berkshire will earn in a difficult environment, and they are probably guessing Berkshire will earn much less in a difficult environment than what it has earned until now. Furthermore, while everyone knows a difficult environment doesn’t last forever, no one really is sure how long it could last: some months, one year… two? Of course it makes a lot of difference!

 

With Fairfax, instead, it is different because people think that it will make more money in a difficult environment than it did until now. Therefore, the psychology is reversed imo.

 

At least for me it surely works that way.

 

Cheers,

 

Gio

 

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dartmonkey Collaborator

dartmonkey

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http://business.financialpost.com/investing/investing-pro/will-prem-watsas-650-million-bet-pay-off-if-it-does-fairfax-makes-109-billion

 

"Will Prem Watsa’s $650-million bet pay off? If it does, Fairfax makes $109 BILLION"

 

I hate these articles. I saw this exact same thing in Motley fool Canada that suggested Fairfax could make 109B too - the only way that happens is if the world ends and money means nothing....

 

Realistically, even in a very, very favorable scenario for Fairfax, they'd only make 15-20B over the course of several years. That's assuming we get the same amount of deflation that was seen over the decade following the Great Depression. No way he makes anywhere near $109B... I think what we'll see is that he makes WAY more money from the TRS hedges than he does from the deflation swaps, but the deflation swaps could still turn out to be great investments even if they only return 1-2B given the cost basis being $650M and a current carrying value half of that.

 

It just blows my mind how clear and open he's been with the details of these swaps and yet the media still misunderstands them years and years later.

 

 

Obviously the suggested $109B gain for Fairfax, in the event of deflation, is ridiculous, but I asked myself the same question: for a given level of inflation, how much will the notional $109B return? For instance, if we get a drop to the CPI level where the positions were opened (about 2-3% below today's levels), and then another 10% drop, can we assume that we will get 10% (pre-tax) of the $109B notional exposure? In other words, is the return linear? I would assume so, but I could not find anything in Fairfax's reports that actually estimate how these things work. Brooklyinvestor (https://www.google.ca/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&cad=rja&uact=8&ved=0ahUKEwi84em8xf3KAhVovIMKHVO7CpwQFggkMAE&url=http%3A%2F%2Fbrooklyninvestor.blogspot.com%2F2015%2F01%2Fwatsas-massive-bet.html&usg=AFQjCNH7gf6kiJGUKy3Mt8ScoQ64ST4PIg&sig2=eoSYaTP3cOjT5v2el_7I3w&bvm=bv.114195076,d.amc) seems to be assuming it is linear, but doesn't say how he knows; does anyone have anything more definitive?

 

 

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TwoCitiesCapital Veteran

TwoCitiesCapital

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http://business.financialpost.com/investing/investing-pro/will-prem-watsas-650-million-bet-pay-off-if-it-does-fairfax-makes-109-billion

 

"Will Prem Watsa’s $650-million bet pay off? If it does, Fairfax makes $109 BILLION"

 

I hate these articles. I saw this exact same thing in Motley fool Canada that suggested Fairfax could make 109B too - the only way that happens is if the world ends and money means nothing....

 

Realistically, even in a very, very favorable scenario for Fairfax, they'd only make 15-20B over the course of several years. That's assuming we get the same amount of deflation that was seen over the decade following the Great Depression. No way he makes anywhere near $109B... I think what we'll see is that he makes WAY more money from the TRS hedges than he does from the deflation swaps, but the deflation swaps could still turn out to be great investments even if they only return 1-2B given the cost basis being $650M and a current carrying value half of that.

 

It just blows my mind how clear and open he's been with the details of these swaps and yet the media still misunderstands them years and years later.

 

 

Obviously the suggested $109B gain for Fairfax, in the event of deflation, is ridiculous, but I asked myself the same question: for a given level of inflation, how much will the notional $109B return? For instance, if we get a drop to the CPI level where the positions were opened (about 2-3% below today's levels), and then another 10% drop, can we assume that we will get 10% (pre-tax) of the $109B notional exposure? In other words, is the return linear? I would assume so, but I could not find anything in Fairfax's reports that actually estimate how these things work. Brooklyinvestor (https://www.google.ca/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&cad=rja&uact=8&ved=0ahUKEwi84em8xf3KAhVovIMKHVO7CpwQFggkMAE&url=http%3A%2F%2Fbrooklyninvestor.blogspot.com%2F2015%2F01%2Fwatsas-massive-bet.html&usg=AFQjCNH7gf6kiJGUKy3Mt8ScoQ64ST4PIg&sig2=eoSYaTP3cOjT5v2el_7I3w&bvm=bv.114195076,d.amc) seems to be assuming it is linear, but doesn't say how he knows; does anyone have anything more definitive?

 

They return 1% of notional for every 1% below the CPI strike price headline inflation is. I believe the lump sum would be paid at maturity. Both these and the TRS hedges are linear in return profile.

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Sharad Newbie

Sharad

Posted
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While UK headline inflation was 0.3%, I believe that the retail price index is the one being weighted for Fairfax's CPI puts (please correct me if I am wrong), and this index shows a monthly decline in January 2016, and a .5% increase from December 2014. Historically, it appears that there is a monthly decline from December to January every year, so the next few months will be more telling.

 

https://ycharts.com/indicators/uk_retail_price_index

 

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TwoCitiesCapital Veteran

TwoCitiesCapital

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http://www.bloomberg.com/news/articles/2016-03-15/wholesale-prices-in-u-s-decreased-in-february-on-fuel-food

 

Wholesale prices in the U.S. fell in February. CPI also expected to be negative when released later this week.

 

CPI in the U.S. fell to 1.0% from 1.4% in January.

 

 

http://www.ft.com/fastft/2016/03/18/german-producer-prices-drop-3-in-february/

 

German producer prices drop 3% in February on top of a 2.4% annualized drop in January.

 

German factory gate prices dropped for a 31st consecutive month in February on an annualised basis, as deflationary pressures from falling energy prices continues to bite.

 

 

Year-on-year producer prices fell 3 per cent, worse than expectations of a 2.6 per cent drop. Prices had slipped 2.4 per cent in January. Price rises in non-durable consumer goods, capital goods and durable consumer goods couldn’t offset the 9.4 per cent fall in energy prices and 2.2 per cent fall in prices of intermediate goods.

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Zorrofan Newbie

Zorrofan

Posted
Posted

that's the $64,000 question isn't it - will oil continue to strengthen or will it roll over as Iran ramps up production, US shale drops off further etc....on the other hand Japan has had deflation for over 20 years regardless of oil.  European demographics , China overcapacity etc etc......this is why WEB ignores macro

 

cheers

Zorro

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TwoCitiesCapital Veteran

TwoCitiesCapital

Posted
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Core inflation which excludes energy and food was up 0.8%. What do you think is going to happen to overall inflation with oil now going up?

 

Cardboard

 

The rally in all commodities since mid-February has been driven by a weaker dollar given the dovish Fed. The markets are literally pricing in 0 rate hikes for the remainder of 2016. Now, how many rate hikes we get is up for debate - I couldn't care less.

 

The fact of the matter is that the U.S. economy remains in a much better position than either Europe or Japan from a growth perspective (even though growth here is pitiful). Our rates are also significantly higher than both countries making us even more appealing for foreign capital. My guess is that the U.S. dollar begins to rally again some time this year and we'll see additional weakness in commodities and emerging market currencies.

 

That being said, I'm still heavily invested in them simply due to the value available and so I can still profit from being wrong to offset my U.S. equity market hedges.

 

And, ultimately, it doesn't matter if see deflation in the U.S if it happens in Europe instead - which is the base case if the dollar remains where it's at or gets weaker. We have protection in both areas. The real question simply seems to be a matter of who bears the load of the deflation - does the U.S. import deflation via a stronger dollar and bear some of that load or does it remain in Europe/Japan.

 

 

 

 

 

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omagh Explorer

omagh

Posted
Posted

bump - how are these doing in this market?

Inflation has been ticking along, so it would take a big deflation thump to move the indices. 

 

source: https://inflationdata.com/Inflation/Consumer_Price_Index/HistoricalCPI.aspx?reloaded=true

YEAR JAN         FEB MAR APR         MAY JUN         JUL         AUG SEP         OCT NOV DEC AVE.

2020 257.971

2019 251.712 252.776 254.202 255.548 256.092 256.143 256.571 256.558 256.759 257.346 257.208 256.974 255.657

2018 247.867 248.991 249.554 250.546 251.588 251.989 252.006 252.146 252.439 252.885 252.038 251.233 251.107

2017 242.839 243.603 243.801 244.524 244.733 244.955 244.786 245.519 246.819 246.663 246.669 246.524 245.120

2016 236.916 237.111 238.132 239.261 240.229 241.018 240.628 240.849 241.428 241.729 241.353 241.432 240.008

2015 233.707 234.722 236.119 236.599 237.805 238.638 238.654 238.316 237.945 237.838 237.336 236.525 237.017

2014 233.916 234.781 236.293 237.072 237.900 238.343 238.250 237.852 238.031 237.433 236.151 234.812 236.736

2013 230.280 232.166 232.773 232.531 232.945 233.504 233.596 233.877 234.149 233.546 233.069 233.049 232.957

2012 226.665 227.663 229.392 230.085 229.815 229.478 229.104 230.379 231.407 231.317 230.221 229.601 229.594

2011 220.223 221.309 223.467 224.906 225.964 225.722 225.922 226.545 226.889 226.421 226.230 225.672 224.939

2010 216.687 216.741 217.631 218.009 218.178 217.965 218.011 218.312 218.439 218.711 218.803 219.179 218.056

2009 211.143 212.193 212.709 213.240 213.856 215.693 215.351 215.834 215.969 216.177 216.330 215.949 214.537

2008 211.080 211.693 213.528 214.823 216.632 218.815 219.964 219.086 218.783 216.573 212.425 210.228 215.303

2007 202.416 203.499 205.352 206.686 207.949 208.352 208.299 207.917 208.490 208.936 210.177 210.036 207.342

2006 198.300 198.700 199.800 201.500 202.500 202.900 203.500 203.900 202.900 201.800 201.500 201.800 201.600

2005 190.700 191.800 193.300 194.600 194.400 194.500 195.400 196.400 198.800 199.200 197.600 196.800 195.300

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