ERICOPOLY

The gold standard was no guarantee -- going back to the period after 1915, there was like 50% inflation because the First World War experienced a flight of gold from Europe to America. That encouraged inflation. I don't know, I feel like having a gold standard makes a lot of investors feel better about their chances of getting a real return over a very long 30 year period -- or at least it sounds romantic enough that investors should pay a bit more for the flirtation. But I was talking about Shilling -- he mentioned a 2% rate on the 30 year bond. That totally blows away the rates of the periods you mentioned -- I don't think the 30 year bond was even introduced yet. They had 10 year, and I think 20 year.

100% is the most concentrated. Several times since 2006 I've had 50% declines from earlier peaks. What was the stock or option that you had 100% into? That sounds amazingly stressful if it goes 50% down. Okay, here is an example: I had a 50% decline (in net worth) peak-to-trough in March 2009 at the bottom of the market, versus the peak that was hit after the short selling ban in late 2008. The decline was stemmed by the strikes I had on the leverage. So it goes from leveraged, down to a point of no leverage. From there, the stress declines as I can wait out that position forever at that point. Go back and remember what early 2009 was like. There was a company called Redwood Trust (RWT) that I had written some puts on in January 2009. The company traded for about $12, the puts were $10 strike, and the premiums were $5. So you could double your money-at-risk just by having the stock not decline below $10 from $12. I even wrote some $2.50 strike RWT puts for about 40% yield. Or another example... WFC was at about $10 in early 2009 (before it went to $8) and when it was at $10 the puts were like $4. So you could make a ton of money by the stock just not moving. Then LUK was down at around $16 and you could write the $15 strike put for $5. So while my total net worth was down by a ton, there were all these ways to make insane income from it. The annualized returns were so high that the total yield you could make was far higher than what you could make on your money if you had a lot more of it and the year was 2007 still. I had the Fairfax calls at-the-money at that point, so the bleeding had stopped, yet the calls could easily be paid for by the puts. You could have 100% upside in Fairfax but only 40% downside in these other names. Instead, I went to 100% downside in these other names and more than 200% upside in Fairfax calls. And a lot of that downside was out-of-the-money. The volatility premium on Fairfax was about 20% of notional value -- compared to what I mentioned as 50% on something like RWT. So when Fairfax eventually recovered, I wound up being way up on the year. But I wasn't leveraged on the downside. I just did some swapping around. Somewhere in this archive for this board there is a post from me in March 2009 describing what I was doing -- I had the Fairfax calls but I had written puts on GE, AXP, WFC, RWT, etc... I was pretty grumpy at the time -- I had a bad cold, I was on a ski trip to Big Sky Montana for the week and not really getting enough time to focus on the market. Had I been clear headed (not sick) and at home, I might have realized sooner that... the strategy turned out to be a mistake. It would have been far more profitable to buy WFC and AXP directly than try to write puts and use the premiums to buy FFH calls. The reason is... FFH didn't have their book value invested more than 50% into stocks. And they had slugs like JNJ which were just not going to move the needle. But I wasn't completely positive and I was scared -- so the FFH exposure was the best my courage could muster at the time. This is why I have developed the opinion that you should dump FFH at the market bottom as a means of increasing exposure to the rebound -- of course, don't do this until the market is actually at the bottom (a little humor).

One thing to note -- the US went off the gold standard after those dates. I believe the gold bugs do have some point about that event and inflation risk. So when comparing historical interest rates, I like to think about risk premiums. Do you feel comfortable endorsing the following statement: There should be absolutely no risk premium to compensate investors for fiat currency backed bonds versus gold backed bonds. None whatsoever. It is perfectly reasonable to compare bonds paying gold-backed coupons to fiat-backed coupons. No added risk of debasement to the coupon thus no premium. Surely, there is a reason why the TIPS trade at a lower yield to non-TIPS. Wouldn't the same be true if the Fed introduced 30 year bonds tomorrow that paid a coupon fixed in ounces of gold, not fiat dollars?

Ray Dalio also saying stocks are pumped up by the Fed -- predicts 4% returns for the next 10 years, which he claims will still be better than the return from bonds: http://finance.fortune.cnn.com/2013/11/12/dalio-stocks-disappoint/?iid=obnetwork That article also says that former Fed official Andrew Huszar claims the market is pumped up -- and he's the guy who was hired in 2009 to help execute the Fed's bond buying program.

No, the Chinese have a lot of expertise investing in ghost cities. So they are the world's experts. If anyone can succeed purchasing vacant property in Detroit, it's them.

Another way of looking at it is Jeremy Grantham himself declared the fair value of the S&P500 to be about 1080 -- he said that in October 2008. Okay, so here we are 5 years later. That would be 1,514 fair value today if you assumed 7% profit growth over the 5 year period. That's not that far off your 1,647 number.

Is that a Benz I see in Detroit? http://money.cnn.com/2013/12/04/real_estate/chinese-homebuyers/index.html?iid=HP_LN

The Hoisington letter talks about the trouble with the US consumer, and the recently poor GDP growth rates. All of that of course is a symptom of the current deleveraging process. Then the letter goes on to say at the end that the US is tracking towards 2% long term interest rate 13 to 14 years after the collapse (following what happened in Japan). That's fine if that's their viewpoint -- it supports why Lacy Hunt and Van Hoisington want to be in bonds. They see poor GDP growth and their comment about 13 or 14 years suggests they don't see this as a short term thing. No, the confusion I have over Gary Shilling, why I think he is going through a disconnect of his own, is that he isn't seeing this as continuing for more than another 5 years. Yet despite this 5 year view, he still thinks long rates will bottom. The Hoisington letter points out that the single most important ingredient to long term rates is the inflation expectations. But if you believe that GDP growth will be back at 3.2% real in just 5 years, then you cannot simultaneously have this inflation expectation that would drive yields down to the 2% level on a 30 year bond. That level of rate at that duration isn't consistent with a business as usual GDP growth rate environment for a full 25 out of 30 years. So that's what I'm saying is the disconnect. It's that Gary Shilling's expectation for the interest rates is disconnected with his expectation that the GDP growth will recover again in just 5 years. That kind of recovery timeline would presumably bring inflation expectations with it that wouldn't allow for a 2% yield on 30 year bonds. But I agree with you that Van Hoisington and Lacy Hunt are not in a similar disconnect -- they aren't openly stating that GDP growth will be back to normal in 5 years. So their views on bond price direction isn't disconnected with what they believe. I'm not saying that Shilling is going to be wrong about interest rates -- I have no idea. I'm just commenting that his viewpoints on economic recover seem to be disconnected with his interest rate expectations. He could be wrong about the recovery and right about interest rates. He could be right about both and for a while interest rates could bottom at 2% if people get very pessimistic temporarily. I just find it odd that he has this viewpoint that recovery will happen in 5 years but an investment stance that depends on the market not realizing it -- like he's smart enough to figure it out but estimates that the market won't be.

http://ibkb.interactivebrokers.com/article/1718#What_if_I_have_a_long_option_which_I_do_not_want_exercised_ ^^I'm almost positive that they cancel the contracts as soon as you enter the instruction (during market hours), but I canceled mine within 3 days of expiration so it could be different if you're a month away. Thank you very much for relaying that anecdote. I had just ended a chat a few minutes ago where I asked the IB representative if I could pay them a fee to buy my position from me. He said "I believe what you are referring to is Cabinet Trades. We do not offer that service at IB". So I was bummed out. You have given me a different question to ask of them now. However I'm afraid it's a different situation. I need it cancelled about 17 days before expiry -- the link you showed me merely talks about forcing them not to exercise under any circumstance. Well, I have 2 more days to go to wait out the wash sale period. The bid is still 2 cents. Probably will be there still.

Where does that take us in terms of translating mean reversion to a "fair" price for the long 30 yr bond? How much should the 30 year bond be discounted for the uncertainty of the next 5 years? The interesting thing is that Shilling's 2% target on that 30 year bond implies giving up 190 bps per year (from today's rate) for the last 25 years life of the bond. The reason that makes no sense to me is that you don't need the safety of long treasuries to protect yourself from a 5 year period of time. 5 years is way too short. Expecting it to trade at 2% yield in order to ride out a tough 5 year period is an extremely irrational expectation of Mr. Market, in my opinion anyhow. What risk of deflation is coming over the next 5 years that you can't safely hide from in short-duration treasuries? I don't know if he was seduced by looking at the potential gains and then trying to justify it or what. But if you use straight logic, nobody should accept 2% yields for the following 25 years if they expect the deleveraging to be over in just 5 more years. Thus I think there is some disconnect here between what he wanted Mr. Market to throw at him, and his prognosis for how much longer he expects this economy to complete the deleveraging and return to normal growth.

So originally I bought these puts at cost of 92 cents average price. I can take a 92 cent tax loss if I can write them off for 0 cents. But if I sell them for 1 cent to my retirement account, I then get a cost basis of 92 cents in my retirement account (due to wash sale rule). Then when the 92 cents loss is realized at expiry, I can't use it for any purpose because you can't write off losses in an IRA account. I would lose 100% of the value of the tax loss -- which is a very valuable tax loss because I took short-term capital gains when I sold my BAC class "A" warrants back in March (with the plan of writing that gain off against these put contracts that are about to expire in January).

Then I get audited (my luck) and they discover the wash sale. You can't do what you are proposing -- wash sale rules also apply to purchases you make in retirement accounts. It can be caught in an audit. I then owe a massive whopping tax bill.

See, the trouble is that obviously I don't want to sell the stock for $12, which is what is implied if I exercise the $12 strike put option. Boy, that would sure be a gift to someone. So, perhaps "exercise" is not the proper word. I want to somehow tear the sucker up if the bid goes to 0 cents so that I ensure a tax loss in 2013 tax year.

I'm not yet finding anything specifically on that suggestion. However, I thought of another question: Can an out-of-the-money put be exercised as a means of tearing it up?

I have some Jan 17th, 2014 BAC puts with $12 strike. They have a "bid" that is dangerously close to absolute zero. It is only a 2 cent bid today. I need to take the tax write-off this year, but how do I recognize the loss in 2013 if the bid goes to absolute zero? Is there a means by which a broker will help in buying it very cheap for a fee, or for zero for a fee? I need to prevent the situation where the only means of exiting the position is through expiration, given that it is 2014 expiration (I need the tax loss this year). It is being held within an Interactive Brokers account.

A person with shorts might be trying to roll the position for continued short protection, while at the same time realizing some tax losses on the existing short position. So a month before the end of the year, he may purchase new puts to replace the ones expiring in early 2014. Then, 30 days later, he closes out the short positions to harvest the tax loss. But he keeps the same notional short exposure. So you get this weird effect where he had twice the amount of short exposure for the first 30 days, then a wave of short covering. So, I don't know -- this might create weird volume that could be construed as negative at first, and then bullish 30 days later. It also mirrors what I've been doing -- so there you go. I presently have a double load of BAC puts that will be halved before the year is up. Now if a lot of people did that, it would look like a lot of people were exiting short positions at year's end and turning bullish.

Many times, A. Gary Shilling has spoken of a "Grand Disconnect" in the stock market price. But he has also made some comments on bonds -- last year for example he put this in the Globe & Mail: http://www.theglobeandmail.com/globe-investor/inside-the-market/qa-gary-shilling-on-why-the-latest-rush-into-stocks-will-end-miserably/article7596047/ I'm adding some highlights in bold: Prices have just skyrocketed, since the yield has now dropped to 3 per cent. I’ve never, never, never bought Treasury bonds for yield. I couldn’t care less what the yield is, as long as they are going down. In other words, I want the appreciation and that’s the same reason most people buy stocks of course. I’m of the opinion that if we’re right, and there’s a global recession shaping up, that will reduce demand for credit, and it will enhance the appeal of treasuries as a safe haven, and it will probably get more people worried about deflation then inflation. Those three factors I think could drive yields on treasuries down further, and if they go down further, we will go from 3 per cent to two per cent. You’ll have appreciation of about 16 per cent on a 30-year coupon bond assuming it takes place over a one year and you get a year’s worth of interest. And on a zero coupon bond it’ll be a total return of about 25 per cent. Alright, now balance that against his view that the deleveraging will only go on for 5 more years, after which we'll be back to 3.2% real long term trend GDP growth (he says that here: http://www.bloomberg.com/news/2013-08-26/the-strong-case-for-optimism-about-u-s-growth.html) Additionally, he is perfectly aware that QE3 has been pushing down the long yields and openly talks about how they'll need to stop doing that before the 5 years is up (well, of course he says that, after all who wouldn't). So what I'm working around to asking, is that is perhaps the bigger "Grand Disconnect" in fact that Shilling thought there was value in the 30 year bond last year at 3% rates, on the speculation that they would drop to 2%? Why would they be worth a 2% yield when GDP growth will resume at 3.2% after just 5 years of the 30 year life of the bond? Plus, the starting yield was being held down by Fed intervention, so where would it have been without QE3? Was there a Grand Disconnect to ignore the threat of tapering? He talked about a 100bps movement in the zero coupon bond to return 25%. How much did he put into that bet? He must be getting quite an ass kicking this year to date on that. Wouldn't it be the reverse of 25% if rates go up by 100bps? The 30 year is now at 3.9% today. Why is he so ready to advise getting out of stocks (on a forecast of recession) and tempting people with 25% gains on bonds, when he feels growth is going back to 3.2% real rather early in the life of those bonds? This seems incomprehensible. I agree that it was a perfectly logical call to get out of stocks last year if there was threat of recession, but betting on the market to serve up 25% gains in zero coupon bonds (he was implying it to be an opportunity) with the risk of tapering and the market figuring out (like he has done) that "Age of Deleveraging" would conclude in 2019... how much can you expect the market to price in deflation that would serve to be so short-lived? And wasn't it priced in already at 3% yields? I don't hate the guy -- I just find his thoughts on bond investing to be equally a "Grand Disconnect" as he attributes to the stock market investing. Yet he chooses a favorite. In both cases, arguments can be made that the fundamentals he is expecting (recession and recovery from delivering) don't fit the market prices of either stocks or bonds. Based on that, I would figure he would be espousing short-duration bond strategy for preservation of capital. Which is a fine strategy if you are uncertain. But he just wants to chase capital appreciation on truly a greater fools game of betting the market won't figure out that deleveraging is coming to an end, as well as tapering eventually coming. Is it generally perceived that chasing treasury bonds for capital gains is somewhat safer than chasing stock market for capital gains, even when just chasing them for short-term fundamental reasons? By short term fundamental reasons, I mean to say that one can argue that stock market earnings are only going to be high for the short term, and equally one can argue that bond yields are going to be this low only for the short term. In both cases, if you believe in that being truly short term, then you are just making a risky game. One could argue that five years is pretty long term, but not in the context of 30 year instruments -- it's only 1/6 the time of the full duration, which is relative small (short term).

quoting: Despite the billions of dollars thrown at lithium-ion technology—the battery of choice for plug-in electrics—progress seems to have stalled, while costs have remained stubbornly high at around $2,000 per kilowatt of power. I hope everyone reading that immediately recognizes how monumentally inaccurate that statement is. My Tesla has a 85 kWh lithium-ion battery pack. At $2,000 per kilowatt of power, that amounts to $170,000.

Difficult to say what the normalized revenue is for servicing, but it is dropping fast. It is $699 million in Q3 and $2400 million YTD. This is provided in the earnings supplement (page 27). They plan to get rid of servicing loans they have not originated. So once all the loans that they bought are gone, they would be just keeping the loans they originate. Originations are about $25 billion per quarter over the last few quarters but since this varies with mortgage rates. Moynihan has mentioned that he wants to grow the share of originations from 5% so I would expect loans to increase but cannot really translate this into a normalized number. Vinod Given the size of the decline in servicing revenue, I find it strange that the analysts on the conference calls only ask about the expenses. They just don't seem to be curious. I agree with you about getting rid of the negative earnings businesses. There is no time like right now. I also agree with getting rid of the servicing rights to loans that they didn't underwrite in-house. I further agree with them for ditching correspondent lending. Even though the shift led to lower revenue (for now anyway). I like all these changes because it raises their level of control over what they manage, and therefore hopefully risk as well. Despite all those things I like, what I don't like is being in the dark over how big they expect the servicing revenue to settle down at once they reach their target market share for mortgage originations (it is low right now at 5% and it is climbing). They "touch" so many households that there is potential for it to be much larger. So the managers of these businesses must have a general idea of what they can attain (their aspirational goals on their performance reviews) -- and perhaps they have performance goals around milestones. Like for example, they intend to grow to X% of the market by 2016. Now, you could model those projections against a range of assumptions and come up with some realistic brackets for how high the servicing revenue would settle down at. But nobody asks them on the conference calls to share that with us :-\

I understood that. The funny thing is if you asked him whether or not to own gold a year ago, would he have said yes? Probably, yet such advice has led to a 25% loss. I'm sure it is just a temporary loss given that gold will be higher in 10 years, 20 years, or 100 years. The S&P500 could fall 25%. It could fall farther than 25%, as could gold. But both losses will be temporary when held for long periods of time (and partly for the same reason, given that nominal earnings growth will over time raise stock prices). One could use his excess Fed liquidity comment to explain that gold is at risk of decline as well. Excess liquidity can't raise gold prices? I remember when liquidity dried up in late 2008 gold went into a tailspin, just like the S&P500.

Gary Shilling recently expressed an opinion that real GDP growth will return to 3.2 percent a year... beginning five years from now. Once private sector deleveraging is completed, in about five years, real GDP growth will probably return to its long-run trend of 3.2 percent a year, an improvement on the 2.1 percent growth in the recovery so far. http://www.bloomberg.com/news/2013-08-26/the-strong-case-for-optimism-about-u-s-growth.html It's just a "musing".

Eric, Not to say that the market is crazy expensive, but I think it's probably more appropriate to talk about GAAP earnings when we talk about aggregate PE ratios, and compare them to history. There is a nasty trend that has developed in the past 30 years or so where the operating earnings quoted from S&P have been 15-20% higher than GAAP earnings on a pretty much continual basis. So when someone says a 15-16x PE is fair or average or whatever for the market, this historically was a GAAP PE (TTM, not forward). If you want to quote forward earnings that's fine, if you want to quote non-GAAP / non-one-time charge earnings, that's also totally fine, but if you want to quote both together I personally think that 16x sounds pretty high to me. That's probably the equivalent of 20x TTM GAAP PE for most years. Seems that ROE for corporate America is high-ish given the low rate / cost of capital environment. I could see a lot of factors that could keep stocks doing well near term, but bargains do seem challenging to find. I do agree with Oddball though, it doesn't seem that people are crazed about stocks or anything. Most amateur investors I know are mostly fully invested in stocks, but nervous as they just don't have other good options from their perception. I think stock returns will be low from current prices, but so will the returns of most other assets. The killer for stocks will only come if the normal ROE of corporate America starts to come under pressure due to interest rate gravity / competition... but not sure I see that today. Plenty of people with great records are cautious though... JME and Klarman are two to listen to if you don't like losing money... Ben I didn't realize that about the market P/E. Okay, so you think it is more in the 20x range versus 16x. I am glad you took the time. I have to admit that I was less critical of what he had to say until I got towards the end of it with the talk of Neo-Keynesian and gold being the new/old currency again. I just can't listen to people who talk like that. The dollar has lost value through my entire life. Gold skyrocketed when I was a young child, but I remember those years fondly -- people always smile at a cute baby no matter what gold is doing, so perhaps that creates a bias that high gold prices doesn't equate to misery. Gold has increased by a large amount over the past decade once again, but it hasn't made me miserable. I don't mind if he doubles his money in gold once again over the next 7 years -- I think he could do better owning Wells Fargo (less macro study needed), but to each his own. Some of these guys are academics of macro, or enjoy it immensely enough as an economic pursuit, and seem to do well following it. But I don't think I need to do that to make money, so I tend to roll my eyes when I see how long their commentary about it is. It was very interesting for a while, but it's been a decade of it now it seems.

quoting: Now, the stock market is up sharply because some of the excess liquidity being created by the Fed is going into stocks. Some of it has also gone into things such as the real estate and fine art markets. But the money goes particularly into the stock market. Hmm... Well... the forward P/E ratio of the S&P500 is only 16x. He could instead argue that the forward prediction of earnings is wrong for X,Y,Z reasons, but I would argue that you don't need excess liquidity to pump a market up to 16x earnings expectations. In fact, the market has traded at 16x expected earnings many times in history without the presence of excess liquidity being created by the Fed. So his argument that the market is being artificially jacked up to 16x earnings expectations is not well supported by the claim he makes.

They could have expressed that degree of risk aversion with 10% or 20% out-of-the-money puts. In other words, we can tolerate a little bit of pain, but not too much. There has never been a solid argument that the kind of hedging they did was necessary to protect their business. A 20% market decline only hurts their book value by 7% after taxes if they are 50% in equities. Can't they take a 7% hit? Plus, during that time they have bond gains and bond income to offset if there is really that much deflation. Okay, they might not lose anything at all in that situation. Instead, they implicitly hedged with a "we can't suffer any losses at all" stance (a straight at-the-money short on the market). Or rather, they were expressing their confidence that the market was going down nearly for sure. Prior to this round of hedging, they always hedged against the market continuing to climb (they used out-of-the-money index calls to do that). Something seemed to change their mind that such hedging for a possibly rising market was no longer needed.

Some of these (and I am no doctor) sound like symptoms of asperger's, which Burry has been diagnosed with. That's what I was thinking. Asperger's Syndrome is an obsolete diagnosis now rejected as too vague. I once sat in a TQM training session in 1999 and watched an audio video feed of Buffet, Gates, Ted Turner, Richard Branson and Steve Case. After a few minutes, my wife poked me in the ribs and said, "Case is the only one who is normal". She was right. The other four were hyper excitable, bubbling over with synergistic insights they were eager to share as they lighted up with voltaic energy in the aura of their combined mental insights. Each one of the four who weren't normal stuttered slightly in restrained eagerness to share golden nuggets of wisdom. It definitely wasn't normal, but it wasn't pathological either. That must have been what it was like when Leslie Groves confined the greatest minds in theoretical physics on the mountain plateau of Los Alamos, NM until they hatched the bomb. :) :( It has been rejected and now the official diagnosis is just "Autism" -- of course, that's a spectrum so it is vague. The idea of Asperger's was just "high functioning Autism". We always understood that distinction before the term "Asperger's" was thrown out -- it's too bad, because at least before it was rejected it was implicitly understood to be "high functioning" -- now it takes extra words to explain that to people My daughter was diagnosed with Asperger's 6 years ago. While I'm not the world's expert on it, I've given it a good deal of thought. You can't put her in the room with other Autistic children and say "yeah, they all have the same thing". She's not the only one in the family to have similar traits, but we wanted the diagnosis so that we could get her an "IEP" in the public schooling system. Now she gets a lot of help from the public school that she can't get without the diagnosis.