Data on median monthly rent a year ago -- you only have a bu...
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It sounds similar to TIPs, except in that case it's pegged to CPI.
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By what measure then will you measure real GDP? You've...show/hide message
My thinking is that gold as a world default currency doesn't...show/hide message
Gold miners did well in the Depression because demand for go...show/hide message
but in times of monetary uncertainty such as no...show/hide message
I did start reading Galbraith's "Money" book last night.&nbs...show/hide message
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Thank you (understatement), and the new board is much better.
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I saw this in the Q4 earnings transcript for Wells Fargo: $294 million of net charge offs related to the Madoff fraud |
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On June 22nd, 2006 the $140 strike 2008 calls were selling at $2.05 on a per share basis! Approximately 70x leverage at Canadian book value, with 18 months till expiration! Ridiculous, which is pretty much what we said then. |
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Yes, no I wasn't serious about buying anything in Flint. The place is very messed up: I don't have any real estate right now except for my house. I am on the "it's gonna get cheaper yet" bandwagon now.
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Yes, fly fishing. That's why I'm going in April -- the wild steelhead are ginormous.
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I live on Bainbridge Island (6 miles by ferry from Seattle)....show/hide message
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This is a funny example of a house selling below the cost of production. It looks well maintained despite being in Flint, MI: |
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The "ask" on the 2010 $200 is only $129.9, implying a break even price of $329.9. Given a current stock price of $324.12, that's essentially only $5.78 in volatility. $5.78 / $200 = 2.89%. So really, it costs only 2.89% to borrow $200 per share until expiration (exercise or sell in January before the dividend).
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I wonder how much of daily volume is due to this currency arbitrage. |
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I was referring to the days when gold was stable in real terms. Evidently I was misunderstood and you still think I'm speaking in terms of dollars. |
I find it interesting that when I talk about real estate, pe...show/hide message
Beach glass has no valuable uses that I am aware of curre...show/hide message
indicating the real exchange ratio between the buck and g...show/hide message
Warren bought silver around this time &...show/hide message
or under valued in the late 1990s when it was almost down...show/hide message
The median house in 1800 doesn't even begin to comp...show/hide message
Four, at one time one ounce of gold bought the Dow Jones ...show/hide message
The median house in 1800 doesn't even begin to compare to...show/hide message
the discussion about gold and Ca. real estate in particul...show/hide message
Faber also thinks that an ounce of gold will buy the Dow ...show/hide message
Further more does the fact that that say it took about 20...show/hide message
Four, at one time one ounce of gold bought the Dow Jones ...show/hide message
Can you recommend a good math text for me? Something t...show/hide message
3.5x expansion of this bubble over 25 consecutive 39 year periods.For the price of only 1 median house in 1970, you'll be able to buy this many houses in 936 years!39,966,959,347,247
40 Trillion houses! You have figured out the key!We're onto something major here. Gold Rush! Gold Rush!No no, it won't be pricing in future inflation... no... black helicopters, tin foil hats... no no, it's real man, it's the only money.
can't you see! it's worth so much more than dollars.
Attention! Now here this! I am putting my house in a charity so that, in 936 years every man, woman and child in the universe will have a house of their own. Not just on Earth (don't think we have enough room here for 40 trillion houses), but pretty much on any planet we could possibly colonize. I'm pretty sure we'll have enough houses for your pets too!
For goodness sakes man, give it up. Your position that 3.5x real purchasing power expansion doesn't price in future inflation -- completely untenable. Check the math -- it's nearly 40 trillion houses.I will read your book suggestion because I generally agree with (nearly) all the points you made -- except for your denial that it's okay for gold to increase real buying power by 3.5x (houses) - 5.5x (CPI) every 39 years.
If you hold on the other hand that gold is real money as ...show/hide message
these real estate prices are reflective of the real wealth...show/hide message
This claim is at face value absurd. You expect such a hou...show/hide message
Let's see what transpires.Let's clear something up. I'm not responsible for the rate at which the price grew from 1970, yet I laid that fact out there. It's merely a fact.Then, I wrote the following right after:His house has appreciated 40x, but that of course is not going to happen to anyone buying his home today after Silicon Valley has been all built out.You wrote:Let's see what transpires.So I will be CORRECT if his house stops appreciating at rates of the past. The area went through a period of orchards to office parks -- won't happen twice. It won't surprise me in the least if we have a debt deflation and real incomes fall. As I've said many times, these real estate prices are reflective of the real wealth sloshing around -- there's no law saying that real incomes will expand forever.
29 years -- sorry, 39 years.show/hide message
If you hold on the other hand that gold is real money as ...show/hide message
Blithely? Not blithely. I give you perhaps one of the most insane examples of appreciation, one that certainly completely blows away anybody's sensibility of actual inflation over that period... and do you know what your reply was? You mentioned that gold did almost as well! Talk about walking into a trap.
Don't let the CPI confuse my point. The CPI isn'...show/hide message
the price of gold seems to react to inflation of the buck ...show/hide message
I have already pointed out that the price of gold seems t...show/hide message
Data on median monthly rent a year ago -- you only have a bu...show/hide message
Las Vegas: $1,056
Los Angeles: $1,699
Miami: $1,368
New York: $1,751
Phoenix: $939
San Francisco: $1,810
Seattle: $1,211
Washington D.C.: $1,687
I guess then, if you convert the 1800 rent to 1970, and then...show/hide message
Homes in Zimbabwe have not appreciated in value in any re...show/hide message
I have tried to point out with limited success that the c...show/hide message
and it's why I can't afford a nanny, a cook, and a persona...show/hide message
I am not a goldbug, but do you think you picked 1970 vs s...show/hide message
CPI Jan 1970 38 Dec 1980 86 Jan 2001 175 ...show/hide message
Jan 1970 38
Dec 1980 86
Jan 2001 1752.26x rise in CPI by 1980
4.60x rise in CPI by 2001
GOLD
1970 35
1980 850
2001 25524x rise in gold by 1980
7.28x rise in gold by 2001
They say that market are mean reverting, and that bubbles always collapse. At the height of the bubble in 1980, gold fetched 10.6x CPI-based purchasing power. Post collapse, it traded at a low (21 years later) of 1.58x purchasing power.So there it stands. Throughout this entire period the US dollar has not been backed by a hard currency. In the 1980 bubble, people were willing to part with over 90% of their purchasing power in order to hedge from inflation. And that was during a period of high inflation! Compare that to today, when we are actually experiencing deflation, and we're parting with 78% of our purchasing power to buy gold based on fear of inflation (rather than actually experiencing it at the same time).
Beware the mean reversion. All the arguments you are making now were made in 1980. The people who paid the 10.6x premium in 1980 didn't get good value for their insurance, now that we look back in history. Markets always revert (everybody smart tells me that).
Now that dollars aren't backed by anything, I would argue ...show/hide message
Gold is a bubble! I'll use the same rational that...show/hide message
Rise? 5.55xGold in 1970: $35
Gold today: $900Rise? 25.71xSo, to bring gold back to purchasing power of 1970 (the same one used to value real estate), it needs to trade at $194.Now, I don't necessarily put much weight in the CPI numbers, but Schiller does. He claims real estate is a bubble because it rose faster than inflation.Well, gold rose even faster! So where does that leave your "value" store if you buy today and then it begins to do what it is supposed to do... measure purchasing power. Be careful what you wish for is all I can say.
personal real estate is superior given the history of you...show/hide message
The question is which measure more accurately reflects the "real" appreciation of the house.You told me the appreciation of the house was only 1.75x gold. So the "real" value of the land is about $1m, according to the "gold is value" theory.at the height of the real estate bubble and traded his US dollars for a more reliable store of value such as gold.I pointed out already that houses were cheaper in 2005 than in 1995, priced in ounces of gold. I believe it holds true since 1970 as well. Which real estate bubble are you talking about? After all, gold is the only true measure of value, not the US dollar. The bubble is only measurable in the US dollar, a fiat currency that isn't to be relied upon as you put it.Does it bother you that gold has risen faster than inflation since 1970? Which bubble should we be talking about, gold or real estate? I find them both to be real assets, both to have trounced inflation, yet we only have a bubble in real estate?Join me in a thought experiment... if you had bought $1,000 of real estate in 1800 and leased it or rented it, and had plowed all revenue into gold, how much gold would you have today even if the land were worthless?
How expensive was your dad's house in 1800? You dads hou...show/hide message
You dads house didn't exist in 1800, leaving your point a bit fuzzy.Let's knock the house down. It's still worth $2m just for the land -- the house was purchased for $50k in 1970. So it's up 40x -- the house itself isn't valuable, the people who buy these things knock them down and build their palaces. Now, you passed a comment about what houses would sell for if they weren't financed.... well, that's an interesting point. Last year Sergey Brin paid $10m for the lot 3 doors down (a 6 acre lot). So, financing probably had nothing to do with it.How expensive was your dad's house in 1800?I can still answer that question though! Amazing I am. Gold in 1800 was $19 and it was $35 in 1970. It was 54% of the 1970 price in other words. Now, lets take that $50k house and we'll use your long term store of value to figure out what that house was worth in 1800.My heavens! It was worth $27,000 in 1800!!!!!!!!So, you argue that gold outperforms houses over long stretches of time, and presumably 170 years is a long time!Don't tell me that house cost $27,000 in 1800. The Louisiana Purchase was struck just a few years later, a deal between Thomas Jefferson and Napoleon.... drum roll... just $15m!!!Here is a map that shows you how much territory could be bought for $15m in 1803:
There is a view that gold is real money, not US dollars. ...show/hide message
It can also generate a loss... strictly speaking personal...show/hide message
It may appear as an asset on the day it is sold if it generates a capital gain. Otherwise the holding of it is a guaranteed loser.The case of "personal" real estate is not a guaranteed loser. You are counting only capital gain! Everyone has to live somewhere.Unless you were thinking of living in your Mom's house instead, you would be paying rent to live in somebody else's house if you hadn't bought one of your own.An owner of a house can consider the rent he doesn't pays to be income offsetting his expenses (taxes, maintenance, interest). Now, this conversation is about inflation hedges... if you rent, and if we go through a period of 10% inflation, then after 7 years of such inflation your rent will be doubled. The person who owns the home on a fixed 30 year mortgage will see the biggest part of his expense (the interest) unchanged, but the other expenses will still rise.I don't own my house as an investment, it would probably be cheaper to rent. I do have a mortgage though, and I don't pay it off because the interest rate is very low.The reason why I own my house is because I desire to live in a detached single-family home, not an apartment or in a duplex. Yes, there are single family rentals available, but you might sign that 12 yr lease and find that the owner soon changes his mind and decide to sell the house. Now, the furniture your wife bought isn't going to fit in the next house you want to move into, and you'll have that expense as she buys new stuff. Your kids won't have a stable environment, etc... etc...In California in 1970 home ownership made especially good sense because they have the law that prevents taxes from appreciating by more than 2% per annum. My father's property tax (Los Altos Hills, CA) has actually fallen in real dollar terms over the past 39 years (he bought in 1970). His house has appreciated 40x, but that of course is not going to happen to anyone buying his home today after Silicon Valley has been all built out.
An apartment building in downtown Cincinnati probably has...show/hide message
ditto a condo in Ft. Lauderdale ...show/hide message
In reality the rise in real estate over time remains marg...show/hide message
When inflation is falling (ie: house values are falli...show/hide message
In my view the continued appreciation of gold against the...show/hide message
Should you invest your savings in an economy whose main e...show/hide message
I suppose if I could simplify my fear about gold, it's that ...show/hide message
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my assumption all along has been that the clearly large (and likely sophisticated) buyer is not using this for protection, they are bundling this into some kind of structured product and selling it to idiots. They're up to something. It's a big mystery to me, unfortunately probably always will be :-)
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You also might have bought the S&P index at the peak in 2000, and be underwater today. Yes, don't disagree. However you have fairly historically reliable guidelines to help you understand that in 2000 it was rediculous the price you were paying -- like market cap as a percentage of GDP for example. What similar benchmark do you have to measure gold by. These comments however: Gold is more of a direct inflation hedge and alternative store of value If gold is a store of value, consider this... the price of housing in the United States (priced in gold) was cheaper in 2005 than in 1995. Is this evidence that housing saw deflation? Or is evidence that if you rely on gold as a store of value, then you must plan on being extremely patient as to when you get your value back. It might hedge your long term money, like if you plan on locking up the money for 80 years or something, but over 10 or 20 year time frames (which is too long for me to deal with), you can wind up losing a massive chunk of change. I would figure something like a toll bridge, a parking lot, or a hydroelectric dam would be a good inflation hedge. Don't just buy a hard asset, get something with yield -- even if you find that the speculative value of the asset declines, you at least have a yield to start filling in the hole you find yourself in. |
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the $4.5 billion premium invested at even a modest return over the next 10 years will cover that and more. The next expected return is positive, possibly very positive. Yes, I felt that way from day one. To me, it's rather boring though. Very boring, which is why I'm not talking at all about it. It's obvious that $4.5b compounding even at a modest return will grow to be a significant size, and so the index doesn't need to return to strike-minus-premium just to break even. I understood that in the first 10 seconds -- what takes longer is to figure out what the other guy is up to, because people often with $4.5b don't tend to be your average day trader who is investing his income from his primary job as a fitness trainer. I'm more interested in how good the deal is for the other guy -- so I'm trying to learn the various ways in which he can win big, even though Warren is winning big too. However, there is no market quote for a 15 year European option, so you will be forced to mark your option to model. This exercise is fraught with difficulty, but if you attempt to use something like Black-Scholes, you will likely find that the underlying assumptions (ie, stocks follow geometric Brownian motion) do not justify the price originally paid for the option! Under Black-Scholes, assuming that you select an appropriate risk free rate for the 15 years, how many "sigmas" would it be for this beast to actually expire in the money? You might find yourself marking losses to model from day 1..... Don't all the models incorporate in-the-money (intrinsic) value? |
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and lost half of your purchasing power if you sold it 20 years later. Actually, I think it would be about 78% of purchasing power lost (was looking only at price, forgot to also account for inflation!) Anyways, 78% loss is pretty lousy for an inflation hedge. |
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It is not inconceivable (which is why the option has any value at all), but it is a highly improbable outcome. You assert that the only reason these puts have value is because there is some far off chance that the index will be below strike at expiration. I don't agree with that -- I think it is much more valuable than that. There are a couple of things this buyer can do that I can think of off hand: A) write short-term European index puts to collect decaying volatility. The index won't be significantly higher than 2007 levels for quite some time, so there's likely several years here where they can just be banking decaying options premiums. They can just write puts up to $37b notional (if that volume is even possible), and if the market turns down they don't have to worry because of the hedge. Anytime it looks like they are about to get assigned at expiry they just close out the position and roll to a later date for more volatility premium. Normally, you can't play this game unless you have the cash to actually cover the puts you are writing -- otherwise a very large downturn may destroy you in a margin call. But you don't need $37 billion of capital to cover the puts if you have $37 notional 12 year put by Berkshire backing you up -- it won't use any of your margin at all, because your position is covered. B) use it's cash to buy up $37billion worth of the underlying index at current prices. The market may fall by a further 50% from here, and the puts will rise in value (mark to market) to offset the decline (mark to market) of the index. There you go, normally their book value would have have taken a $18.5billion hit mark-to-market, but not this time. The extra return they can make by purchasing the index at this level, fully hedged, will be worth more (over time) than the $5b premium they paid. To a leveraged financial firm this might be a difference between life and death (regulators might shut them down were it not for the hedge). So, these things have value outside of just what it's worth at expiry, from what I can tell. |
With respect, I would propose that a very long term Europ...show/hide message
If that's so, then still it's not a reason to say BRK's p...show/hide message
There would be little point in buying a long term 12+ year...show/hide message
+can BRK's counterparty trade its put? I would be ...show/hide message
I would be extremely surprised if they couldn't. There would be little point in buying a long term 12+ year European put with no collateral obligations if it couldn't be traded.
+does it matter that's its an european option?Yes, that indicates that it can't be exercised early. Only at expiry. Berkshire also negotiated it so that they have no collateral obligations. Put differently, it doesn't create any liquidity issues for them no matter how fat the index falls over the short term.
If I u/stand u, u're basically saying we could've gotten a better deal.
Well, I don't know if Berkshire could have gotten a better premium from anyone else. I was just saying the other guy is really happy with his bet!
Def have no idea what decay is. Quick explanation...show/hide message
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Would a stock like KO be a better inflation hedge? I mean don't they raise the price of a can of Coke over time as dictated by inflation? They ought to be able to raise the price in line with the input costs, thus maintain a inflation protected income for you. I know you guys think of gold as a great inflation hedge, but the chart is a bit frightening in this regard. You might have bought it in 1980 and lost half of your purchasing power if you sold it 20 years later. Was there deflation over those 20 years? |
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Was reading the wrong put dates. Believe the premium for Dec 2009 at-the-money SPY puts is about 14% premium, not 18%. Still illustrates the point.
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To illustrate my point with real data: Today, an ...show/hide message
You surely jest? BRK pay money to someone so t...show/hide message
Why have the puts not worked in BRK's favor? ...show/hide message
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I need fifty (cent) dollars to make you hollerl - Ton Loc Potential conference mug?
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For $4k I figure Chanos' and Spitzer's friend would sit in y...show/hide message
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The put options we're a valuation call and I think they're awesome! If one could safely leverage up in this environment, would you not? The trouble is that he isn't necessarily leveraging up in this environment. For one thing I don't think these puts can be exercised early. The potential cost basis at which he gets assigned at expiry will be the strike price of the put less the premium earned -- any idea what that is? Is it $833, today's environment as you put it? Hindsight is 20/20, but thus far the puts have not worked to Berkshire's advantage. There are probably some names today that Berkshire would rather leverage up on than the index itself -- unless Warren has changed his mind and is now buying indices rather than the single best companies he can find at today's prices. |
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Roughly a year ago I stated that one could just look for low-risk investments that would return 14% in year one, and just skip the whole "50 cent dollar" concept -- that the two are one and the same (using Buffett's supposed 7% discount rate). A guy named LeeWalter jumped all over me for it and argued tooth and nail how stupid the concept was to do that. Well, guess what? According to Alice Schroeder, Buffett does not do a DCF but instead just looks for low-risk investments that return 15% in year one. Implication being a 50 cent dollar at 7.5% discount rate. So I feel vindicated.
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but I still think that they can create value and are undervalued compared to a conservative book value. I wrote the 2010 $10 put for $5 in November (100% for 14 months holding), then a couple of weeks ago I wrote the 2010 $2.50 strike put for 75 cents (42% for 12 months holding). I'm amazed first by the premiums, and then by how quickly I move the market. I put in an order to write 200 contracts of that $2.50 for 75 cents (which was the bid), but only 50 contracts filled and the bid has been scared away ever since. It's like fishing for trout in a small pond -- first one hooked spooks the rest of them and you just have to come back later. But it's not coming back and RWT shares are cheaper now than they were then. Fifty contracts of $2.50 strike at 75 cents is only $8,750 worth of capital put to work (cash covered puts). Talk about a small market! |
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The price I'm looking at is $328. Time to move to Canada.
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(adjusted to include dividends) Why use data including dividends? The puts are priced based on a particular index level that isn't adjusted to include dividends. Including dividends to say the index returned such and such amount is just noise and fairly useless in an analysis of how fast the index itself climbed, the only point of interest to the options market. The average annual return on the DJIA since 1928, even when including the 1929 crash and the dismal 1930s, has been 7%, in line with the rate of appreciation required for Berkshire to break even on the worst-case S&P 500 position we assumed. What does it matter to anyone the performance of 1929 over the next 80 years? These aren't 80 year contracts. It wasn't 7% between 1929 and 1941, a 12 year period. What happened over the next 68 years is meaningless if you've already asserted that these are 12 year options contracts, a point which was already asserted right here: these are options with 12-year time horizons For all the paragraphs, I'm completely amazed that perhaps the most relevant 12 yr period wasn't discussed, the one that most people are worried about, the period of perhaps 1928 to 1940. That was the only one incorporating a massive collapse of credit, the only deflationary period. Personally, I'm not at all worried about the puts that Berkshire wrote. They would be better off without them, but they're not a threat to their solvency. |
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Strange they were still junk rated until today. |
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It's not entirely well reasoned. "Finally, if we were going to have a so-called Depression, why is copper above $1.50?" Right... now go back to the years before the Great Depression -- funny he doesn't cite copper prices before the Great Depression as proof that no Depression was coming, now does he. So let me do his homework for him -- Copper was high before the Depression: "Copper was hit hardest during the Depression" You see, it wasn't hit hardest before the Depression, it was hit hardest during the Depression. But this author is suggesting that if a Depression were coming, then copper prices wouldn't be where they are today. Okay, so his reasoning is that the market knows the future? Why didn't I think of that. |
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I am actually quite pleased that even the relative pessimists are saying 15-20% compounding. Most of the investing public would sell their children for those kinds of returns, and I think that will chase up the multple to book over time. I am not capable of pulling off five baggers the way Cardboard can. So I'll be collecting my 15-20% tax deferred compounding and will be plenty rich enough.
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a very elite group, that is maybe the last 5% on the...show/hide message
If it occurred equity prices would need to drop seve...show/hide message
We made a similiar argument at around the time of the...show/hide message
I think we should pay for the repeatable earnings stream (...show/hide message
Also, I really don't think that we should count on "5-bagg...show/hide message
I was also wondering what price FFH would be willing to bu...show/hide message
comments by reinsurance brokers suggest that rates are not...show/hide message
There is extensive investment literature that both pr...show/hide message
There is extensive investment literature that both pr...show/hide message
In a poor economy the discount increases ...show/hide message
Which one would be a better takeover? O...show/hide message
Personally I think FFH should just buy up as much MKL as it ...show/hide message
There are a number of other available investments&nbs...show/hide message
has FFH's earning power doubled because its surplus has d...show/hide message
More to the point, are you saying that you are indifferent...show/hide message
If FFH paid out $5 Billion (or book value) in cash right n...show/hide message
I agree with you that #3 brings up some interesting questi...show/hide message
Are you implying that IV can't be different than the publi...show/hide message
