Author Topic: Deflation hedges  (Read 4697 times)

kilroy04

  • Newbie
  • *
  • Posts: 49
Deflation hedges
« on: April 05, 2020, 12:07:22 PM »
From the annual shareholders letter:
 
$100 billion notional amount in deflation hedges which still have 2.8 years to go and are now on our balance sheet at only $7 million.


Do you suppose this might yet come into play?  Anyone have access to data on this?


mcliu

  • Hero Member
  • *****
  • Posts: 789
Re: Deflation hedges
« Reply #1 on: April 05, 2020, 12:30:11 PM »
US CPI Feb: 259
Deflation hedge strike: 231
Duration: 2.7 years

EU CPI: 105
Strike: 96
Duration: 2.2 years

Needs about 10% deflation to break-even. Have to see the #s for March, with O&G down so much, they might get a decent mark, but is there really a market to sell these securities? Maybe there's an early settlement clause?

kilroy04

  • Newbie
  • *
  • Posts: 49
Re: Deflation hedges
« Reply #2 on: April 05, 2020, 02:05:02 PM »
Thanks for posting that mcliu.  With severe recession (or more) and all the needed stimulus, it will be interesting to see what happens.  Even volatility could turn out to be significant with that notional amount.  There could be cds rhymes.  Based on the last 20 years, it would be somewhat unusual for FFH not to have some level of hedging.

StubbleJumper

  • Lifetime Member
  • Hero Member
  • *****
  • Posts: 1425
Re: Deflation hedges
« Reply #3 on: April 05, 2020, 02:45:21 PM »
US CPI Feb: 259
Deflation hedge strike: 231
Duration: 2.7 years

EU CPI: 105
Strike: 96
Duration: 2.2 years

Needs about 10% deflation to break-even. Have to see the #s for March, with O&G down so much, they might get a decent mark, but is there really a market to sell these securities? Maybe there's an early settlement clause?


The interesting wild card is the shelter element of CPI.  It's a heavyweight in the index, and is it possible (likely?) that Covid and its associated recession could push US housing prices down considerably?  Otherwise, it's a bit tough to imagine a 10% haircut in the CPI.


SJ

mcliu

  • Hero Member
  • *****
  • Posts: 789
Re: Deflation hedges
« Reply #4 on: April 05, 2020, 07:52:41 PM »
Even in 2009 CPI dropped by only 5%. It's possible, but unlikely in a fiat world. Maybe they'll get a bump in value though. We'll see March #s soon. Maybe it's structured so they can settle early, get a bit more $ out of it..

petec

  • Hero Member
  • *****
  • Posts: 2461
Re: Deflation hedges
« Reply #5 on: April 06, 2020, 01:13:48 AM »
Even in 2009 CPI dropped by only 5%. It's possible, but unlikely in a fiat world. Maybe they'll get a bump in value though. We'll see March #s soon. Maybe it's structured so they can settle early, get a bit more $ out of it..

I almost think we are more likely to have deflation now than 2008 - the disruption to cash flow and normal demand behaviour is greater. But it will be temporary. I will be stunned if the Fairfax deflation swaps are worth anything material.
FFH MSFT BRK BAM ATCO LNG IHG TFG CGT DC/A

StubbleJumper

  • Lifetime Member
  • Hero Member
  • *****
  • Posts: 1425
Re: Deflation hedges
« Reply #6 on: April 06, 2020, 05:14:12 AM »
Even in 2009 CPI dropped by only 5%. It's possible, but unlikely in a fiat world. Maybe they'll get a bump in value though. We'll see March #s soon. Maybe it's structured so they can settle early, get a bit more $ out of it..


I have never worked on CPI, so I cannot say how the nuts and bolts of the calculation work.  But, I am very curious how governments will treat rent abatement for tenants who tell their landlord that they cannot or will not pay their full rent any time soon.  If they skip out on paying rent altogether, that's probably not considered to be a transaction for CPI purposes.  But, if my landlord agrees to drop my monthly rent from $1,000 to $750 until the end of 2020, is that captured as a price decrease?  Or is there some logic through which the government would still view the price as $1,000 for CPI purposes, and the $250 is just some sort of rebate that doesn't get captured?

The drastic decline in the price of petroleum would certainly be helpful for a lower CPI, but I'm not sure the weight is really that important.  But shelter is like one-third of the index...

I am not holding out much hope that the deflation derivatives will finish in the money.  Maybe the best hope is that the counter-party will want them off its books for some reason and would agree to a favourable cash settlement?


SJ


kilroy04

  • Newbie
  • *
  • Posts: 49
Re: Deflation hedges
« Reply #8 on: April 21, 2020, 04:18:13 AM »
Any updates on deflation/inflation marks for the EU and the US?  Any suggestions as to where this quote can be viewed?

petec

  • Hero Member
  • *****
  • Posts: 2461
Re: Deflation hedges
« Reply #9 on: April 21, 2020, 05:49:20 AM »
IIRC these contracts are not quoted.
FFH MSFT BRK BAM ATCO LNG IHG TFG CGT DC/A