The last time the Dow was here

[stahleyp]

ahhh, gotcha. just wanted to make sure I wasn't a complete idiot there. thanks!

[hyten1]

moore you state

 

"The reason the risk-free rate was always 3-5% was because that was historically the rate at which savers were willing to pile in their savings. That has historically been the magic number that provided almost every level of net worth with sufficient return to cover expenses (avoiding the need to dig into principal). It also ensured that the riskier capital was plowed into higher risk but on he margin productive/necessary ventures which led to growth."

 

but that doesn't mean it has to be 3-5% right? due to past environment/condition the number turn out to be 3-5%

 

now not trying to get sci fiction, but in an alternate universe, could that number be 1-3% or 6-8% and under what condition would be be these #? i am sure other nations on earth didn't all have 3-5%?

 

 

 

hy

[moore_capital54]

moore you state

 

"The reason the risk-free rate was always 3-5% was because that was historically the rate at which savers were willing to pile in their savings. That has historically been the magic number that provided almost every level of net worth with sufficient return to cover expenses (avoiding the need to dig into principal). It also ensured that the riskier capital was plowed into higher risk but on he margin productive/necessary ventures which led to growth."

 

but that doesn't mean it has to be 3-5% right? due to past environment/condition the number turn out to be 3-5%

 

now not trying to get sci fiction, but in an alternate universe, could that number be 1-3% or 6-8% and under what condition would be be these #? i am sure other nations on earth didn't all have 3-5%?

 

 

 

hy

 

Buddy, this is the alternate universe. Risk-Free rates (after tax) are about 0.2% lol So to answer your question yes of course. But does a 1% rate really pass the logic test? What's the point of lending money out if the return is so minimal.

[hyten1]

moore, i hear ya, not trying to be difficult and my question sounds dumb i am sure

 

to answer you question, if there are deflation, if money will be worth more in the future than now, then 1% would sound good. i am not trying to argue that our current condition won't change or rates won't go up.

 

just interesting at least for me a chart of rates vs inflation, hmm i would of thought the rate would fluctuate more due to inflation but it didn't seem like it http://www.crestmontresearch.com/docs/i-rate-relationship.pdf

 

honestly i have no idea what is going to happen, most likely the rates will increase in the future, but the question is when

 

the 2 reference i have are japan and our own great depression, both period the rates stay low for decades

 

now at the end of the day i just want to make money, looking for undervalue stocks :)

[moore_capital54]

I respectfully disagree. 1% only makes sense if we are dealing with funny money (IE: money that has no value meaning there is a lot of it floating around making 1% of a lot of funny money an ample return) The problem is that when you turn what was real money into funny money in 5 short years, a lot of savers that for 20-50 years have been piling up real money don't really get the memo. They are stuck with what they parted with their labor and services for (and prudently saved) thinking would produce them a few years of salvation prior to parting from the earth.

 

1% used to be the rate Central Bankers reduced interests to for very brief moments in time. Now we all are debating whether risk free rates will ever appraoch 1 again .. its madness. And BTW when we say risk-free rates we mean a rate that is earned in ONE year. There is a lot of manipulation going on now (well look at the 5 or the 10 year) those long-dated risk-free instruments are not risk free as you all know. The purchaser is betting on i-rates with his principal.

 

**apologize for all the typos. Been a while since I typed my mind off on this board and I have also gotten older lol

[goldfinger]

Regarding interest rates...  I've asked this before but nobody really knows/knew the answer, so maybe some newer board members know:

 

How can we compare interest rates of today versus 120 years ago when back then the dollar was backed by gold?

 

Shouldn't a 3% government rate be considered a higher yield back then, when backed by gold, versus today when the underlying dollars devalue at a faster pace?

 

I totally don't get these arguments about rates today versus history that goes way back.  What seems unprecedented to me about low rates today, versus say 1890s, is that back then your low yield actually beat inflation.  And your yield wasn't even taxable back in 1890 -- they brought the income tax in somewhere around 1913 or so.

 

How do you make any money at all with a 2% 10 yr yield and you only keep maybe 1.3% yield after taxes?  Surely there is higher risk involved here with making a real return, whereas if it were backed by gold it might be more of a fighting chance.

 

So I can't figure out how comparing rates today versus far back in history is any kind of fair comparison whatsoever.  A 2% rate today is vastly inferior to a 2% rate in 1890 -- that's my theory and I'm sticking to it.

 

Precisely Eric. If anything the risk-free rates should be significant higher due to the fact that every nation runs a fiat based currency. And the date is not 100 years ago but rather 1971. That is the most important date to look at. Post 1971 and Pre 1971 when trying to understand these things.

 

The crux of the matter is that since 1971, as influenced by the majority of the electorate, the politicians have been increasingly relying on the fiat money system to subsidize their lack of fiscal discipline (blaming both dems and R's here) each time PUNISHING the saver for the debtor. It has done nothing but created a long cycle in hard asset appreciation and significantly increased the real value of commodities - the essential ingredients that allow an industrial society to flourish. Did technology help soften these effects along the way? Of course it did, the most important of which was the ubiquity of the internet imho. But we have now reached the end of this experiment with all nations employing a fiat standard, all nations employing ZIRP, and all nations employing a significant transfer payment program as a percentage of global GDP.

 

It doesn't feel like socialism yet because there was in fact a major deflationary event that is still in its final innings (since 2008 lehman).

 

One of you posted a wealth video the other day. The primary reason for the asymmetric distribution is that savers have been marginalized leaving only those with large bases of capital (as a percentage of nominal GDP) to flourish and creating a situation where even respectable savers, prudent savers, find their way back to the lower quartiles when taking into account taxes, inflation, and distribution to heirs over time (splitting of the nest-egg).

 

A risk-free rate of return has been one of the cornerstones of trust in the economy since the late 1600's. It has allowed for terms such as retirement and leisure to be introduced into what our view of capitalism should be.Unfortunately for savers today unless you have 8 figures you will be hard pressed to generate a risk-free rate of return which could cover your outlays.

 

We talked about this before. I know many investors with $2-5mm that are reaching into their principal for the first time in their lives. This is a de-facto wealth redistribution. I am not sure how it will end but I have always chosen the contrarian route when making long-term investments. Right now the most contrarian route of all is to pile up unencumbered cash. Keyword: "Unencumbered". A lot of people have liquidity (cash) today but it is not absolute liqudity. They have taken on more debt in their business or have bought a more expensive house with a mortgage reflecting artificially depressed i-rates.  Same goes for corporations, even Buffett's cash situation isn't what it used to be when viewing it through the prism of future encumbrances.

 

I will use 2013 as the year to pile up unencumbered cash which I will use to purchase short duration fixed income assets (less than 90 days).

 

A lot of what you say makes a lot of sense. But Moore, how long do you think you have to wait? It seems that the FED could keep that going for a while more... especially if things stay relatively muted like they have for years in the future, don't you think?

[stahleyp]

 

**apologize for all the typos. Been a while since I typed my mind off on this board and I have also gotten older lol

 

Shades of Phil Fisher in the older years I see. ;) kidding, of course!

[Packer16]

What the FED is doing is financial repression (holding interest rates below inflation).  It did it after WWII to monitize the debt and its doing the same now.  This is a way to deal with high debt levels (both personal and gov't) and let them be manageable.  It will continue until the total debt is down to more comfortable levels.  It took 30 to 40 years after WWII to whittle down that level of debt so I expect it to last into the decades time frame.  Given this look at the asset classes that did the best under that scenario (1940s/50s/60s and 70s) (commodities and stocks).  Bonds got killed and holding shot-term paper made you no or a loss after taxes.  If you can find inexpensive stocks that is the way to go.  Also purchasing firms who have locked in low rates over long periods of time is also something to look for.

 

A guess I feel bad for savers but I think today's savers save in asset classes beyond fixed income and CDs.  Most of the folks I know who have saved and are in or close to retirement have other asset classes to obtain higher returns.  Just like stocks over time making a safe return has gotten more difficult as there has been more competition for these safe returns.

 

The main reason I look at the 1800s and early 1900s data is that was the first period of globalization (before half the world decided to turn communist).  As to the risk free rate and comparisons that time are not as applicable as the currency was backed by gold however the trends are instructive.  There is a book called The Great Wave that documents price and interest rate history going back to the 1600s.  The gold standard may be different but the other behavioral aspect of market remain the same.  It is a good read if you want to know what has happened in the past.

 

Packer   

[goldfinger]

So Packer, you think they could be doing so form of QEn for a long and continuous time or could we get into abrupt periods of change of direction in the way the FED does that?

[Packer16]

I think they have stated they will do it until unemployment is very low (a very long time or never).  The only other factor would be inflation.  I do not see inflation until wages are increasing more.  Every company is running lean and mean (producing the same or more output with fewer workers) so unemployment does not come down.  I think Bernanke's comment on holding the securities until maturity gives you a clue on how long the QE will last.

 

Packer

[goldfinger]

I think they have stated they will do it until unemployment is very low (a very long time or never).  The only other factor would be inflation.  I do not see inflation until wages are increasing more.  Every company is running lean and mean (producing the same or more output with fewer workers) so unemployment does not come down.  I think Bernanke's comment on holding the securities until maturity gives you a clue on how long the QE will last.

 

Packer

 

That's why I am asking Moore if he is ready to wait for a long time?

However there could be a lot of turmoil in the markets if one day the FED stops buying even for a relatively short period of time and Buffett actually asked the question himself during the last CNBC interview.

[benchmark]

I think they have stated they will do it until unemployment is very low (a very long time or never).  The only other factor would be inflation.  I do not see inflation until wages are increasing more.  Every company is running lean and mean (producing the same or more output with fewer workers) so unemployment does not come down.  I think Bernanke's comment on holding the securities until maturity gives you a clue on how long the QE will last.

 

Packer

 

In my part of the world (silicon valley), wages have gone up, and prices (food, gas, housing) have gone up, maybe it's not inflation, but sure looks like it.

[Packer16]

You may have inflation in silicon valley but it is no that widespread.  The type of inflation that would start action is the widespread type seen in the 1970's around the country.

 

Packer

[moore_capital54]

How long am I prepared to wait? I have only started as of mid February. I was very long into this cycle from 2011-end of 2012. I think the inflection point was when stocks FINALLY began to react. At that point they over-reacted and I knew it was time to take chips off the table.

 

Finally a point about inflation. All it takes is hoarding. Once society begins to hoard you will see inflation. We have been bred as a society to visit our super market weekly or daily for our commodities assuming that the following week the product will be there at the same price and with the same quality. That type of consumer behavior has been achieved due to a surplus of commodity production which can only occur in an environment where demand is organic (no pun intended). I assure you that in today's environment where 46 million Americans are handed free food, if only 10% of the population began to hoard (and by hoarding I mean buying two tomatoes instead of one or two whole chickens freezing the other) you would immediately see how inelastic some of these commodities are. Not even getting into the actual finite stuff like Zinc/Palladium/Copper just talking about Agricultural commodities.

 

The bottom line is inflation has not manifested just yet due in part to the consumer behavior of our modern industrialized society relying on daily/weekly deliveries as opposed to seasonal acquisitions of raw materials.

 

 

 

 

[Palantir]

So Packer, you think they could be doing so form of QEn for a long and continuous time or could we get into abrupt periods of change of direction in the way the FED does that?

 

You addressed this to Packer, but I'll take the liberty to answer. The idea behind QE is to increase the quantity of money by suppressing interest rates below the growth rate of GDP. GDP growth rises, then rates will slowly be raised. If rates are greater than GDP growth rates, we'll see deflationary pressure.

 

Problem with the bear thesis is that a rise in rates is going to be coincidental with a rise in GDP growth rates. Not bearish for stocks. I am expecting an extended bull market over many years.

 

In my opinion, the "herd" thing to do is to say that "rates will rise soon, repression unsustainable", everybody I talk to shares this bearish view along with "fiscal clif/overspending/sequestration bad" etc, and has been making this very point for 3+ years.

[finetrader]

Fairfax's guy has said in the past that big inflation will come when unemployment rate is low. I tend to agree with that view. So were still away from this.

[txitxo]

How long am I prepared to wait? I have only started as of mid February. I was very long into this cycle from 2011-end of 2012. I think the inflection point was when stocks FINALLY began to react. At that point they over-reacted and I knew it was time to take chips off the table.

 

Finally a point about inflation. All it takes is hoarding. Once society begins to hoard you will see inflation. We have been bred as a society to visit our super market weekly or daily for our commodities assuming that the following week the product will be there at the same price and with the same quality. That type of consumer behavior has been achieved due to a surplus of commodity production which can only occur in an environment where demand is organic (no pun intended). I assure you that in today's environment where 46 million Americans are handed free food, if only 10% of the population began to hoard (and by hoarding I mean buying two tomatoes instead of one or two whole chickens freezing the other) you would immediately see how inelastic some of these commodities are. Not even getting into the actual finite stuff like Zinc/Palladium/Copper just talking about Agricultural commodities.

 

The bottom line is inflation has not manifested just yet due in part to the consumer behavior of our modern industrialized society relying on daily/weekly deliveries as opposed to seasonal acquisitions of raw materials.

 

Inflation is coming, independently of the actual path which takes us there. Rogoff and Reinhardt showed it convincingly in "This time is different". The best endorsement of the book I've read is what the WSJ said of it: "...they offer frustratingly little economic theory to accompany their findings...". I am skeptical about models, but good data can always be relied upon, in Economics or in Cosmology.

 

With the current levels of debt in the developed world, the only realistic way out is a "soft" default by inflation. Developed countries will not default outright, and prolonged austerity is impossible to maintain in a democracy. Here in Spain public opinion has shifted more in the last two years than in the previous 30. A few more years like this, and we will have a Spanish Beppe Grillo on the government, taking the country by action or omission out of the Eurozone. The powers that be in the Eurozone are very well aware of this. They also know that in a world with rising countries like India, China, Brazil or Russia a divided Eurozone will be irrelevant. 10 years from now no EU country will probably be within the top 6 economies of the World. So they will not allow the Eurozone to break up, under any circumstances, not because of economic considerations, but of geostrategic ones, and the way to avoid this has already been implemented in the Anglo-Irish debt deal. Debt will be restructured so that it has to be paid 30-40 years from now, that will avoid legal challenges (no formal monetization) and make it bearable for the indebted countries. What they are doing right now is just trying to squeeze as much public spending cuts as they can from the European South before that happens.

 

So there will be inflation across the developed world. But as Hugh Hendry says, before there is inflation, there will very likely be a big deflation scare, to make inflation palatable. Japan is showing the way.

 

  My personal bet is that we will have a big crisis first, due to some exogenous shock, perhaps provoked (and there is no lack of candidates) and then central banks and governments will save the day by shifting into inflation mode. The related crash or crashes should bring the US Shiller multiples to a secular bottom and kickstart the next bull market a few years from now. My timing indicator shows that a US stock market crash may come any time now, so I don't think we will have to wait a long time for the final adjustment process to start.

 

 

 

[bobp]

I've stopped reading zero hedge. Most of the content I will admit is way over my head. That's ok, that's true here also, but I think the constant barrage of negativity and sarcasm isn't good for psyche or performance.

 

I hear a lot of negativity, and I listen and appreciate it, but I think the market is headed much higher. And in the long run, stocks go up. When I fight that trend I'm usually wrong.

 

 

 

 

[StubbleJumper]

moore, can you tell me a bit more about why you are selling AIG and BAC? According to Berkowitz, I believe he said that BAC should be around $40 in about 5 years and AIG around $140.

 

So, with the AIG warrants, if you buy them at $15 (assuming Berkowitz is right), those should be worth about $95 ($140-$45 strike) in a few years, right? I mean, even if we hit a correction, if Berkowitz's number are anywhere close to being right, you're looking at a 3-5x return in a few years. Plus, you still have a few years worth of time value left.

 

With BAC, if it's at $40 within 5 years, they'll be worth (not including extra shares or reduced strike), $26.70 ($40-$13.30 strike). Now these warrants don't have quite 5 years left, but it's pretty close.  I mean, the risk and reward trade off is pretty crazy.  Thanks in advance!

 

We are selling because we like to make money, and we are up a lot of money. On the AIG's almost 100% on the average purchase price. On BAC we will end up making more than 100% (probably 130% when its all said and done). For a hedge fund these are fabulous annualized numbers why mess with them. A bird in the hand..

 

 

Moore,

 

Maybe you covered this already, but I'll ask anyway...  Have you considered simply hedging your exposure by purchasing a bunch of SPY put expiring in Dec 2015?  The options would cost you about 15% of your portfolio value, but then you could happily invest for the next 32 or 33 months unworried about a drastic decline in the broad market. 

 

Personally, I wonder whether you have not exited from BAC and AIG prematurely.  Presumably those two positions will easily provide a sufficient return to pay for a SPY put if markets do turn out to be favourable.  In the other hand, if markets turn out to be unfavourable, presumably BAC will be fine, but I don't know about Chartis....and in any case you would have some degree of protection by virtue of your index puts.

 

It's a real son of a gun to correctly time macro events...as long as there's undervalued big caps out there, personally, I'm really hesitant to convert any more of my portfolio to cash.

 

 

SJ

[Packer16]

The hoarding thesis is interesting but how is it going to create more than a temporary spike in prices?  Once prices rise won't supply follow in the next season or reproducion cycle?

 

Packer

[onyx1]

Is Inflation in Our Future?

http://centman.com/files/PDF/Newsletters/2009/IsInflationInOurFuture.pdf

 

Four year old paper from Century Management old but still very relevent to the current situation.

[Guest deepValue]

I thought I'd make an off-topic comment about the apparent enthusiasm for BAC on this board. You'd think everyone should have 100% of their portfolio in the stock based on some of the comments. Rarely will you find a sure thing, and I can assure you that BAC is not that rare case. I think many of you are outsourcing your homework -- either to other members of this board or to Bruce Berkowitz. BAC at $12 is not a slam dunk no matter how you look at it.

[ERICOPOLY]

I thought I'd make an off-topic comment about the apparent enthusiasm for BAC on this board. You'd think everyone should have 100% of their portfolio in the stock based on some of the comments. Rarely will you find a sure thing, and I can assure you that BAC is not that rare case. I think many of you are outsourcing your homework -- either to other members of this board or to Bruce Berkowitz. BAC at $12 is not a slam dunk no matter how you look at it.

 

Layups are nice too.

[stahleyp]

I thought I'd make an off-topic comment about the apparent enthusiasm for BAC on this board. You'd think everyone should have 100% of their portfolio in the stock based on some of the comments. Rarely will you find a sure thing, and I can assure you that BAC is not that rare case. I think many of you are outsourcing your homework -- either to other members of this board or to Bruce Berkowitz. BAC at $12 is not a slam dunk no matter how you look at it.

 

Layups are nice too.

 

haha nice.  ;D

[jay21]

I thought I'd make an off-topic comment about the apparent enthusiasm for BAC on this board. You'd think everyone should have 100% of their portfolio in the stock based on some of the comments. Rarely will you find a sure thing, and I can assure you that BAC is not that rare case. I think many of you are outsourcing your homework -- either to other members of this board or to Bruce Berkowitz. BAC at $12 is not a slam dunk no matter how you look at it.

 

Can you discuss why you think so?  Obviously you think we aren't taking into certain risks.  Which in particular do you have in mind?