original mungerville

Yes, I agree with you - real rates are a big driver (the gold price also seems to correlate well with the expansion of central bank balance sheets which some academics argue create negative nominal rate equivalents in practice). If because of the large debts globally the Fed now remains behind the curve on interest rates (ie if Fed keeps real interest rates negative as they are currently), then gold will do well. If real interest rates are significantly positive, gold will not do as well going forward. I just don't see how we get the latter without major major asset market declines in the US and globally.

"Yes gold went up nicely in the 70s and inflation was higher in the 70. But as you say gold went up nicely in the 70s. In fact it went a hell of a lot higher than inflation. Then inflation continues (yes at a more regular pace) and gold crashes then fluctuates. In the 90s we still have inflation (subdued kind) and gold trends toward a bottom. Then in the 2000s we still have subdued inflation but gold spikes up. Yes gold went up nicely in the 70s and inflation was high in the 70s but so what? Does anything that went up nicely in the 70s is related to inflation? Yea that's a bit of snark but it has its place sometime. It's just if something is related to inflation I expect that it would have a correlation to inflation. Otherwise what are we talking about." I explained why gold crashed through the 1980s and 1990s in a bit of detail (there is too much for this thread) and those factors have nothing to do with regular pace inflation. The point is a whole bunch of other factors drive the gold price to a greater degree when we have regular pace inflation - see my previous post. Gold went a whole hell of a lot higher than inflation in the 70s which is why you want to own it if you think rampant inflation is coming back - and the gold miners - which brings us back to the beginning of this thread.

Wow man. There is no point continuing this discussion. I did not say it correlates well to controlled inflation. You assumed that is what I meant. I then explained in my last post that that is not what I meant. Yet you still insist it was what I meant. Gold went up nicely during the high inflation in the 70s as per my last post.

"gold is related to inflation if data doesn't support it? See chart I've attached." From your chart, gold does well in periods when inflation is really high (1970s) which is what I was referencing when I said "an inflation" (I wasn't talking about controlled 2% inflation periods, and certainly the CPI is probably not the best measure, I was talking about significant inflations) and it does well in periods when material money printing is required (last 16 years) to sustain a debt-fuelled global economic/financial system - ie it does well when the monetary system is under pressure. "It actually turns out that surprise! the price of gold is more related to its real world applications and mining costs rather than inflation." What are you talking about? The chart you provided shows a bull market in the 70s due to inflation, then a bear market in the 80s through 2000s because Volcker jacked interest rates so much in the early 80s that real interest rates were significantly positive breaking the back of the gold price. Then several central banks sold significant amounts of their gold by the early 2000s (eg, Bank of England) marking the bottom in the gold price just when financial assets were peaking (ie stocks). Gold then started to rise as Greenspan's put on the bursting Nasdaq sent real interest rates to lows, inflated the housing and finance bubble 2002-2005 which then burst by 2006 through 2010 requiring lower interest rates and asset purchases (ie money printing) by Bernanke. China inflated their financial system as the financial crisis took hold and just kept levering up. They have had a huge creation of debt in their financial system in the last 15 years, and especially the latter part of that. Bernanke's strategy went global - Europe adopted it as well. That is why gold has been increasing significantly since 2000 in $US terms. And very significantly in almost every other currency. "Real world applications"? Jewelry demand has some impact. Gold price is driven by investment demand including central bank buying, selling, leasing, and the gold derivatives market. Mining costs provide a long-term floor as is the case for any substance which is mined. Real interest rates have an impact. Monetary stability has an impact. Sentiment and prospective views on monetary stability have an impact (which is why gold can also do well in deflations). If you think "real world applications" and "mining costs" drive the big moves in the gold price, you are mistaken.

"I just don't understand two ideas - 1. If inflation decimates P/E ratios due to higher rates, but 2. Rates go up so financials and good assets - hard or soft - such as an operating business with pricing power become more valuable" #1. is why I think precious metals also make sense to own as part of a portfolio rather than only stocks. At a minimum, gold becomes your old cash position in an inflation. In a "risk off" phase of an inflation there should be tons of demand for gold rather than cash. Gold is an investment in monetary disorder which we seem to have at this point. The p/e of precious metals miners should not contract in an accelerating inflation as the earnings growth would be levered to accelerating revenues. Earnings should grow faster than the inflation and so the p/e should not contract, it should expand for the period when earnings growth is greater that the inflation/discount rate. I don't know, given the debt levels and the money printing, I feel more comfortable with 15% of a portfolio in gold, gold miners and silver rather than just traditional stocks and cash.

So how does it end...when every developed world government and/or its financial sector is so leveraged up - including China - the #2 global economy? That is what I have been asking myself now for a number of years. Do the debts just keep growing and growing to feed our debt-fueled economic system? Obviously not, something will give and the question is what and when. I don't see how these debts get repaid, they will elect to inflate them away or move to a new global monetary system (the alternative is default). And so I end up thinking you need some precious metals for protection - and the miners are quite cheap given the brutal depression-like (ie down 80-90%) bear market they went through from 2011 to early 2016. So I think a neutral portfolio (say for my mother-in-law) is 85-90% cash/ short-term bonds and 10-15% silver, gold, and miners. Or for a value investor, a neutral portfolio is long individual value picks, some hedging to get to neutral or cash-like, and then incorporate the 10-15% precious metals. Does that make any sense to you? Or do you somehow think these debts can be repaid?

Ok Kenny!: It usually takes me quite a few drinks before playing that one!...but you have to sing-along, otherwise it just doesn't work.

Yes, I agree. More often than not, you want to stay away from those plays. Its probably the rare exception that works out in the end - FFH I guess was such an exception. I don't know what the odds are 2:1, or 4:1, or 8 failures for every one that works. That is probably the other lesson in this for me.

There are probably more cockroaches out there, they just can't get them out yet because the stock would go to zero due to breaches in convenants: http://finance.yahoo.com/news/valeant-walks-knife-edge-debt-194237721.html Its still potentially a shit-show from here. Who knows? Not me.

That is such bullshit. This wasn't hard. It had tons of signs of a bad ending: A torrent of M&A, lots of debt, lots of rumors of unethical behavior, very aggressive management, incentives for management to pump the stock price, lots of adjusted non gaap numbers, and every time you try to read a 10-k you get a splitting headache. If you see these things, it's easy to figure out the right thing to do as an investor - you stay away. The people that got burnt on this didn't do investing. They joined a cult in which common sense is suspended driven by a combination of greed and hero worship. All you have to do is go back a couple of hundred pages on this thread to see it in all its glory. If anyone would say anything negative about VRX then you would have a chorus of people basically: 1. Keep repeating: Well Value Act and Sequoia are is so it must be great! 2. Parroting numbers from the management presentation without any reasonable analysis 3. Declaring: You don't get it man, Pearson is an outsider. There are some things that are hard. This one wasn't! My issue with Valeant is that you could have said pretty much the above about Fairfax in 2002: it is a value-investing cult based on worshipping Watsa, good long-term investors bought in, management presentations/projections should not be trusted, etc, etc. And none other than Hempton was saying it at the time. Pearson pushed the enveloppe as much as you could in multiple areas and was not forthcoming about it. You could say he was a liar, or you could say he told half-truths about the business due to the perverse incentive system and his lack of ethics. Basically, if you premised your investment on trusting Pearson as I did, you got screwed. Even though I wrongly trusted Pearson, I was nevertheless always concerned with the large debt-load and so bought the call options rather than the common. This greatly reduced my losses. As did selling once the stock dropped 50% or so rather than waiting until it dropped 85-90%. Can't believe Ackman did not cut ties earlier and instead doubled-down. And of course Bill Miller is now long so he has company. Its going to be a long workout from here as it looks like earnings were juiced from several angles and areas of the business.

What are the downside risks? ie that they get to the distribution date and can not distribute say 7 cents per share?

I put 10% of my good friend's retirement portfolio in Valeant pretty close to the top - but I understood there was risk (not quite 85%+, but I had figured it could drop 50%). In any case, we sold when I couldn't figure out anymore whether or not it was still a buy - so we sold at a 50% loss and he did not ride this all the way down. He lost 5% of the portfolio. But 5% is easily salvageable over time. And in this case, actually, it took us about 3 months to make that up. Maybe a bit of luck, but maybe not because I knew there was risk in the market generally stemming from macro pressures building and so Valeant was our only exposed equity position. In November, I put half his portfolio in cash, the other 35% or so in undervalued equities fully hedged against the market, and the last 15% in precious metals and precious metal miners. Lou Simpson will have a similar outcome. Ackman (with his somewhat more correlated positions) and Sequoia with the huge sizing problem are in a different spot on this one however. What they don't need now is a full-on bear market.

Its the position size at Sequoia that was the main problem with Valeant, especially combined with Valeant's debt leverage. If you think about Valeant's fall in Enterprise Value, its probably down about 60-70%. That enterprise value would have probably fallen less without leverage because baked into the fall in enterprise is a probability of liquidation at this point. So one might argue that without leverage, ie all equity, enterprise value would be down 50-60% because there would be zero probability of liquidation. Compare that 50-60% drop to the current 85% drop in the stock price. I mean the average stock on the NYSE fluctuates what, 30-40% a year? So 50-60% is really nothing much. But with a 30% position and debt leverage at Valeant making the drop 85%+, I think that was the real killer. Every great investor has been, can be, and will be wrong on any number of investments. IF you weighed them at 10% of your portfolio, but ensured they had little debt, low operating leverage and had consistent earnings through economic cycles, along with competitive advantages, then the price of any of them might move no greater than 50% - so a 5% loss to the portfolio on a MTM basis is the worse you are probably going to get with very low risk of permanent capital loss. A 20-30% weighting in Valeant with its high debt load in a public mutual fund is another story. I think Lou Simpson might have had 10% of his portfolio in it or something along those lines - so lets say he lost 8%. Hurts, but it is not a huge deal: he can likely make that up in 12 months. It won't really significantly interrupt his compounding process. Ackman on the other hand decided to go big on Valeant, double down, and then even sell puts to fund calls, and on top of that, invested in other arguably correlated investments: other "platform" companies (which also do poorly if the junk bond market tanks) and/or other pharma companies. Imagine if we now have a real bear market in stocks with junk bonds going south significantly from here? Where would Ackman end up?

Let me take a stab: If Valeant indeed needs to liquidate to pay back debt, the "real life terminal values" of the businesses will, on average, be greater than the "zero" Hempton, feeling the need to masquerade as AZ Value, put on them - in the analysis he felt the need to twist in order to support his short case against a company he claimed was twisting their reported financials no less.

This was inevitable. I have some commercial land there (which was purchased quite a few years back), which we plan to eventually put a small condo building on over the long-term...more of a location play rather than a general real-estate play. I felt this general bust was going to happen with near certainty as the prices were so out of balance relative to even high incomes in India.