December 3, 2017
December 3, 2017


There’s a lot of questions this week. Buckle up!! BTW–I’m back in Ulaanbaatar. Weather is beautiful. One of the most enjoyable cities in the summer that I know of….

Kuppy, your article reminded me of an article about Sam Zell. This is what he said: “Between ‘73 and ‘77, I ac-quired $3 billion worth of real estate. The banks had a problem carrying a large amount of distressed real estate with so many proper-ties in foreclosure. They weren‘t looking to make money. They were just trying to mitigate the losses their real estate loan portfo-lios were expected to gen-erate. In those days, institu-tions didn‘t have to mark-to-market, so I tried to figure out ways to preserve the principal of the asset for the seller and still make the deal work. It basically amounted to lowering interest rates on the debt to the point where you could almost carry it or you had a defined carry. We realized that if we could accumulate assets – particularly in an inflation-ary time – with cheap fixed rate debt, it was hard not to make a fortune.

When people looked at our performance during the ‘70s, they always asked, ―How did you pick all those ripe projects?‖But the truth of the matter was that I created $3 billion worth of 5% fixed rate debt in an inflationary environment of 10, 12 or 13%. In this situa-tion, it was hard for it not to work. And yet, like many others in my career, most people thought I was crazy. I‘ve spent my whole life lis-tening to people explain to me that I just don‘t under-stand, but it didn‘t change my view. Many times, how-ever, having a totally inde-pendent view of conven-tional wisdom is a very lonely game.”

I recieved a sizable number of posts on my most recent piece “Does Real Estate Equal A Bond Short?” I think this quote from Sam Zell (one of the smartest investors alive) answeres the majority of those questions. I will answer a few of those that are more nuanced, but in summary, in an inflationary environment, if you can lock in very low rates of financing for long periods of time, you usually make a lot of money.

Would the buying Apartment and other multi-family REITS be a way to play the Real Estate Idea

It could work. It sure beats many other investment types. Just remember that many REITS take on shorter duration debt in order to get every last basis point of savings on their funding cost. You want to own REITS with long term debt that will be crunched by inflation.

Not sure if I’m missing something, but if interest rates rise substantially, wouldn’t the value of the property go down materially as there are less capable buyers? Or is your math based on the assumption that the either the property is never sold (in which case the gain would be unrealized) or that the locked in rate can be transferred to a prospective buyer to materialize the gain?

The property doesn’t always go down in a rising interest rate environment (though it usually does). However, this is a short term impact of inflation and rising interest rates. If you can lock in a decade or more of financing, you probably will do just fine as inflation bails you out and your asset appreciates.

basically, your logic is what Buffett was describing during his interview on CNBC a few months ago. ‘If i can buy a couple thousand single family houses, WITH 30 year fixed rate mortgage, I would happily do it.’

However, what do you think are the chances that when rates rise, house price will fall instead of rising?
Since so much of real estate purchases depend on financing, once rate rise, isn’t there a high possibility that the property you brought in low interest environment will lose significant value?

If the dollar continues to drop by two-thirds or more over a 30 year period, it’s very unlikely that your home will be worth less than the value of the mortgage.

Hi there, I’m a fan of your blog.
I’m a little confused w/ this piece, and I’m not sure the value proposition is what you believe it to be.
If rates do indeed rise, it’s not like the borrower can take a profit by paying off his mortgage at a lower market price (similar to how banks use a Debt Valuation Adjustment to book income/losses as the price of their debt falls/rises) – the borrower still has to pay the outstanding principal.
Even if one were to short long bonds against one’s real estate holdings (using the current income to cover the carry cost of shorting bonds), one would still be exposed to falling RE prices that normally accompany rising rates.


You can book your trade at any time because in an inflationary environment, the property has likely gone up against the value of the bond (LTV drops) and the excess is your profit. However, if you can secure long term debt, you probably won’t ever want to pay it off. In highly inflationary environments, banks stop issuing long dated mortgages.

mistake at “positions mentioned”
BDSec’s price should be in MNT. no?

Correct. However, my software developer wanted to charge a lot more than a free website can afford in order to fix that…. lol

Kuppy – thanks for the post on real estate. I’ve been rolling some of the same things around in my head.

I think you’re essentially saying that real estate is an inflation trade. However, the reason it’s more attractive than alternatives is that it can be put on with a great deal of low-risk leverage that’s unavailable in other inflation-hedges (say, gold). Do you agree with that?

This is how I’m starting to see things. The problem with gold is that while you can margin it, you need to deal with the issues caused by mark-to-market. I have no idea if gold is $1400 or $2400 first. That’s hard to leverage up. Besides, gold doesn’t pay you anything. It actually costs you something to pay the interest on borrowing to own it. Real estate should pay you a slight positive carry so that over time, you can add more of it. Gold and real estate each have different features that make them interesting in an inflationary environment. However, the fact that you can borrow for 30 years to own a home and do it at a low single digit rate without ever having to post collateral if the price drops, is simply an unusually attractive feature in an inflationary environment.

May I ask what do you consider too much of one position?
With this plunge I can envision EGD recovering only when gold does.
This is the otherside of Paulson, et al, like you wrote: they got large positions and they are being taken down. Did you see GROW report? Another example.

If you have to ask yourself if you own too much of something, you probably own too much of it. EGD isn’t reliant on the price of gold. At $1600, plenty of guys are making money and expanding their drilling budgets…. I should point out that at some points, if juniors cannot raise capital, it will start to show up in earnings.

Yes, liquidations create a nightmare for shareprices.

what happens to companies like MERC & others that use the Euro if the currency collapses or the EU begins to break apart. Seems like it is good for those with debt if the currency is debased, but it also impacts their revenue…Does buying companies with debts denominated in Euros, but cash flows (perhaps via subsidiaries) in other currencies make for an interesting idea?

It could work that way and you might get some margin expansion at MERC (especially with a declining EUR). However, you can probably get that sort of trade exposure on in a way that is much purer and less exposed to operational risk by using plain vanilla sorts of products.

I should point out that Q1 MERC earnings were as expected. Roughly breakeven EPS and a hair less than $0.50c of cash flow after maitenance cap-ex and changes in working capital. Since then, NBSK prices have increased modestly while input costs at MERC are starting to drop. So you are basically buying buying MERC at trough cash flow levels of 3-4 times cash flow, for a company with increasing electricity revenues, rapidly reducing debt and the potential to get a free look at a substantial increase in NBSK prices in the future. Sounds good to me…. VBG


I agree with your belief that Energold is currently under-earning due to growth expenses. I’ve done an analysis on my site that is slightly different from the one you’ve done, but which comes to a similar conclusion. You can read it here if you’d like:


I post this for readers who want to get another opinion about Energold.

Hi Kuppy,

I’ve often thought that throughout history China was never interested in taking over Mongolia because there wasn’t anything to take over (tough place to live, no precious metals, not rich in farm land) and why fight for the land of Genghis Khan (way too difficult and for no meaningful benefit).

But what about today? What is the fear, if any, about China? What is the strategy to not become a subsidiary of China?

I have to correct your first paragraph as China captured and controlled Mongolia for a number of centuries before the Mongolians finally fought them off early in the 20th century.

Most mongolians are very concerned about China trying to re-extend their control over the country, both financially and geopolitically. The best option that the Mongolians have, in order not to become part of China, is to ensure that other nations have a sizable economic interest in seeing Mongolia remain an independent nation.

I am frankly puzzled. Your most recent Q&A included reference to silver being priced at over 2x production costs and that gold was a better value. This cannot be right. Barrick, the largest gold producer had $339 average cash cost in 2011 and it is expected to be $540 in 2012. Goldcorp had cash costs of $223 in 2011 against $1650 market price today. I believe the top 10 gold producers have production costs well below 50% of spot prices today. Gold would appear to be much more out of line than silver relative to production costs. Also, it makes no sense to ignore above grounds stocks, demand, and WW production.


A few decades ago, gold miners somehow convinced investors that cash production costs were the measure to use in evauating margins, because otherwise, most miners would look like even worse investments than they currently are. You need to add in depreciation, discovery cost, SGA, royalties, starting cap-ex, community relations and a hundred other costs. Basically, the cost per ounce of a new mine that you would discover and then build today, is substantiall above those costs that the miners quote you. Remember, many of these guys are still getting the advantage of cap-ex spending ten or twenty years ago that would cost many times more to replicate today.

You last reader asked about the silver overvaluation and ur interest in owning things like gold due to its relative undervalued nature vs marginal production. So that begs the question, if u like to own things that are trading for closer to cost of production, if not silver what are some of the more attractive commodities along with gold? thanks

Sites like this are usually a good starting point….Look at what’s not up much (for a very long time) http://www.indexmundi.com/commodities/


Thanks for sharing your views! Just one quick question. Considering your predictions for silver do you still feel comfortable with Impact Silver? I am somewhat under water with it so I tend to get a little nervous. 🙁

I think IPT will be just fine as long as silver stays over $20 (which I think it will). It is a very small position for me however.

Kuppy–I feel like there is going to be one more massive QE leading up to the elections that will lift all commodity stocks. Do you have any sense about by when that must occur to be fully percolating through the economy by the time the elections arrive?

Dunno, but I could use some QE soon…. VBG

Reading the SRK consulting report on Invicta released today drove home prior points you made about th complexity of the mining business. Assuming you have had a chance to read it, can you summarize it in a couple of paragraphs ?

I honestly haven’t read the report. I sort of feel like AAG is a lost cause. I’m giving them a few months to get it sold. Otherwise, it is a tax loss for me at year end. Repeat after me, “no more mining…. no more mining….”

How do you go about finding stocks you like? Is from articles where you think that is an interesting idea that I want to examine or do you just notice things like the rag for toilet papaer and wonder how long this will go on or do you get ideas from others? Then, what is your next step, is it just reading about the companies or some other method?

All of the above. I read a tremendous quantity of stuff and talk to dozens of really smart friends who do the same. In the end, I’m always looking for a strong macro trend where I can buy businesses experiencing increasing revenues, profits and ROIC and get involved at a reasonable valuation (I’m not usually buying truely cheap or distressed companies).

Hi Kuppy

Thanks for posting ideas about Mongolia. Greenbackd (a value investing blog I follow) mentioned investing in Bank Khan and Bank Panin, via holdings that have stakes in then and are traded in Japan and Indonesia. What do you think of the bank themselves (business prospects, and valuation)?


Khan Bank is well respected in Mongolia and Isaac is a very close friend of mine. Will it work? I hope so, for his sake….