Author Topic: Fairfax 2021  (Read 148311 times)

petec

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Re: Fairfax 2021
« Reply #520 on: February 21, 2021, 10:53:35 PM »
Xerxes, you’re right that they might lock in too soon. But there are a lot of “ifs” in your thesis and personally I’ll wait until it’s happening before I worry about it!

The one thing I think you might have wrong is the speed of an inflationary bond bear market. Yes, the bull has lasted 30 years - but the inflationary bear that preceded it was much quicker. Once people think inflation is coming, they start getting rid of cash, the money velocity rises, and inflation can come thick and fast.

But as others have said, we may be a long way from the turn yet.
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petec

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Re: Fairfax 2021
« Reply #521 on: February 22, 2021, 03:25:20 AM »
Announcement re efforts to renegotiate holding company debt at Atlas Mara:

https://otp.tools.investis.com/clients/uk/atlas_mara1/rns/regulatory-story.aspx?cid=744&newsid=1453476
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TwoCitiesCapital

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Re: Fairfax 2021
« Reply #522 on: February 22, 2021, 01:17:39 PM »
I understand if they were to stay on the short end, they will float like a boat and ride that wave, while never having material exposure to capital loss. But at some point, let's say 20 years from now for illustration's sake, they will gradually lock in because they perceive that the rate has peaked. That "lock-in" itself could be 20 years too early, if the actual peak rate arrives in 2060. That is what I meant.

I would think they could begin locking in significantly before year 20. It obviously depends on starting yields/durations and how quickly rates are rising, but in prior bond bear markets you could recoup the principal losses from rising rates with higher income/higher reinvestment income by year ~4.

So even if you expect rates to rise, you can buy a 10-year bond today and still be ahead of short-term bonds by years 5-6 even if you're right about rates moving higher.

I don't mind Fairfax's move to short term bonds. It's certainly saved them from some pain. But I would hope that they'd start moving incrementally back to 10 year and longer bonds if rates exceeds 1.5 -2.0%.  Just in recognition that these things don't move in a straight line, roll down yield becomes more attractive as the curve gets steeper (short term still anchored @ 0%), and any unrealized losses from rising rates will likely be mitigated by year 4-5 of holding the bond anyways.

And given my ultimate views that we are NOT in a sustainable inflation environment, I would think this exposes them to potential gains from a disinflationary/deflationary environment that they missed in 2018, and again in 2020, when 10-year yields dropped from 3 25% all the way down to 0.5% over that 2.5-3 year period.


And it is not a given that the current bull market in bonds is even over :-) Yes, we likely will see inflationary pressures in 2021 as the economy recovers. But in 2022 as the economy normalizes we may see disinflationary forces that were in place pre-covid re-established. No idea which way we go the next 10 years (mild inflation or disinflation / mild deflation).

Lacy Hunt would likely say the core issue continues to be total debt. And more debt = more disinflation or even mild deflation over time.

This is my view. I'm very heavy into commodity companies - but mostly because they're cheap and not because I'm expecting massive inflation.

I think we'll get a pop in 2021 due to the trillions pushed into circulation during 2020, but I do think at some point in 2022 we get back to disinflation as rates can never rise significantly with debt loads/equity markets where they're at.


petec

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Re: Fairfax 2021
« Reply #523 on: February 22, 2021, 02:05:46 PM »
Bear in mind rates and inflation don’t have to move the same way. I can easily imagine a period of financial repression, with policy designed to drive slightly higher inflation while keeping rates low. Dangerous game to play, but ultimately the only realistic solution to high debt levels.
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Viking

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Re: Fairfax 2021
« Reply #524 on: February 22, 2021, 02:42:05 PM »
Bear in mind rates and inflation don’t have to move the same way. I can easily imagine a period of financial repression, with policy designed to drive slightly higher inflation while keeping rates low. Dangerous game to play, but ultimately the only realistic solution to high debt levels.

Defining just exactly what ‘inflation’ is is part of the challenge. One example is real estate in Vancouver. Single family home prices are expected to increase this year 20-30% (maybe as soon as this spring). Crazy. And prices were already at bubble levels. This looks like asset inflation to me. Ever rising prices :-)

So i agree rates and ‘inflation’ often don’t move in the same way.

gary17

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Re: Fairfax 2021
« Reply #525 on: February 22, 2021, 05:29:04 PM »
Bear in mind rates and inflation don’t have to move the same way. I can easily imagine a period of financial repression, with policy designed to drive slightly higher inflation while keeping rates low. Dangerous game to play, but ultimately the only realistic solution to high debt levels.

Defining just exactly what ‘inflation’ is is part of the challenge. One example is real estate in Vancouver. Single family home prices are expected to increase this year 20-30% (maybe as soon as this spring). Crazy. And prices were already at bubble levels. This looks like asset inflation to me. Ever rising prices :-)

So i agree rates and ‘inflation’ often don’t move in the same way.

Relative to foreigners Vancouver RE  has gone down in prices because Canadian currency has devalued significantly.

Spekulatius

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Re: Fairfax 2021
« Reply #526 on: February 24, 2021, 04:39:39 AM »
Bear in mind rates and inflation don’t have to move the same way. I can easily imagine a period of financial repression, with policy designed to drive slightly higher inflation while keeping rates low. Dangerous game to play, but ultimately the only realistic solution to high debt levels.

Defining just exactly what ‘inflation’ is is part of the challenge. One example is real estate in Vancouver. Single family home prices are expected to increase this year 20-30% (maybe as soon as this spring). Crazy. And prices were already at bubble levels. This looks like asset inflation to me. Ever rising prices :-)

So i agree rates and ‘inflation’ often don’t move in the same way.

Relative to foreigners Vancouver RE  has gone down in prices because Canadian currency has devalued significantly.

That’s not correct, the CAD has been strong relative to the USD and is close to a 5 year high.
https://finance.yahoo.com/quote/CADUSD=X?p=CADUSD=X&.tsrc=fin-srch
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gary17

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Re: Fairfax 2021
« Reply #527 on: February 24, 2021, 04:47:23 AM »
Bear in mind rates and inflation don’t have to move the same way. I can easily imagine a period of financial repression, with policy designed to drive slightly higher inflation while keeping rates low. Dangerous game to play, but ultimately the only realistic solution to high debt levels.

Defining just exactly what ‘inflation’ is is part of the challenge. One example is real estate in Vancouver. Single family home prices are expected to increase this year 20-30% (maybe as soon as this spring). Crazy. And prices were already at bubble levels. This looks like asset inflation to me. Ever rising prices :-)

So i agree rates and ‘inflation’ often don’t move in the same way.

Relative to foreigners Vancouver RE  has gone down in prices because Canadian currency has devalued significantly.

That’s not correct, the CAD has been strong relative to the USD and is close to a 5 year high.
https://finance.yahoo.com/quote/CADUSD=X?p=CADUSD=X&.tsrc=fin-srch

I was looking at Asian currencies rmb, jpy, skw, hkd, ntd, etc and Euro



gary17

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Re: Fairfax 2021
« Reply #528 on: February 24, 2021, 06:52:29 AM »
rising rates is not good for Fairfax though right?

Viking

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Re: Fairfax 2021
« Reply #529 on: February 24, 2021, 08:55:15 AM »
rising rates is not good for Fairfax though right?

Rising rates is a tailwind for Fairfax (all things considered). They hold a disproportionate amount of their very large bond portfolio in short duration bonds or cash. As rates rise they will take a mark to market loss on existing holdings which will lower BV. However, if they are able to redeploy some of the cash/short term securities into higher yielding bonds then this will increase interest income.