Packer16

One other solution is what countries have done when thier debt is too high (selective default - esp. to foreigners). I think you also are underestimating the amount of high value-added jobs that will move to low-wage countries. We (UK/Europe/USA/Canada/Australia) have 3 current advantages: 1) a system that rewards success without being related to someone in control, 2) having a system that efficiently provides competition to improve products and services and 3) a system the provides protection for IP. I don't see developing countries providing these advantages over the next 10 to 15 years as they are cultural in nature (absent a coup or change in gov't control of China). As an example, I have seen some firms try outsource software work to China. However, most of the work is low level coding and QA-type of work. When they tried outsource other work it was eventually moved back to the US. Packer

Yes but the decline in spending will put us closer to a sustainable demand level. Japan has tried to defer reaching that level with gov't spending to the point where it has squandered its citizens accumulated savings and it still does not know whether it has hit a sustainable demand level. The other point is Bernanke can incease the money supply to the extent of the cuts. It looks like Europe is doing the opposite reducing spending and constraining money growth via higher interest rates - this is where I think the most danger is. Packer

Like you said the US model is neither market or gov't based. It would be nice to see a state experiment with a market-based subsidy capped model to see if prices would come down and educational resources prioritised to meet market (employer) demand. Packer

You are correct about the two ways to approach it. Historcially, the US has used the markets and Europe the gov't to control costs and the current middle way is allowing the lobbyists to take control. As to too much demand, I think in some areas you are correct (math, science, engineering, etc.) but in others we have too much supply (communications, english, sports medicine, etc.) and the gov't subsidy is the same for both. So what you get is a surplus of majors who cannot afford the debt payments and a shortage of the folks that are really needed. What you need to do is to cut the subsidy to the surplus fields and either increase or keep the subsisidy to the shortage areas then students will adapt to the economics. You also are correct college is not necessary for everyone and pretending it is leads all kinds of bad side effects like high cost trade schools (for profit education). Packer

Maybe the gov't should develop a metric to determine if these subsidies are providing more of or an improvemnt in a product or service or just driving up the price and try to set the subsidy level to increase the former as much as possible without increasing the later. In other words, cap the subsidy and let the market participants compete to bring the price down. Packer

I think part of the reason is that when people panic they go to treasuries but these are the securities that have the largest potential downside (sort of counter intuitive). Packer

I disagree. I think one positive about B&F is that we can discuss and use the same logic for choosing stocks (dealing with emotional bias, considering both sides of an issue, etc.) in making decisions in other spheres. My only problem is when folks start to call each other names and discussion devolves. Myth brings up a great point about average folks and how do they fit into a society that more and more rewards the talented. Something the conservatives need to consider. And does the other side have a plan beyond the status quo. Another consideration for liberals is how to deal with a "new normal" and its implications about spending. One observation, the 2 areas that have the higherst levels of inflation are two areas that have the largets gov't subsidies/involvement - education and health care. Packer

In essence today we are collecting 20% and spending 25% and borrowing the difference. I think the key is do you want 20% or 25% of GNP to be gov't spending? The story of the Republicans being held hostage by the tea party is just that, a story made up by the folks that want to spend 25% against the most vocal folks that want to spend 20%. I think the more appropriate question for the 25% spenders is how will they pay for 25% spending? They have perpetuated the myth that this spending can be paid for by the "rich". You may not agreee with the 20% spenders but at least they are honest. Packer

I don't think anyone is saying take away entitlements, they are saying reduce them or at least reduce thier rate of growth. As to Obama providing no specifics, I think it is a mistake if he is trying to negotiate a solution. If he is facilitating the two sides that is one thing but my impression is that he was acting as a Democratic negotiator with the Speaker. As far a I know the other side (Democrats) have no specifics to negotiate with beyond the status quo. Let me know if I am missing something? Thx. Packer

If you believe the press. It looks like the opposition was willing to give $800 million of tax loophole closure but Obama wanted more taxes. These views are held by few if any in the opposition and the press and others are using as a smoke screen. I find it incredible how some can be objective in stock selection but not in challenging some of the "facts" in other realms (like politics). Packer

I think if you look closely at why little has been accomplished all you have to do is look at how he has treated the opposition. Most presidents that have accomplished big things in the past 20/30 years have realized that the country is divided and develop good relations with the opposition to get things done. Reagan's first thing he did when he got into office was to personally call every Demcorat in Congress and develop a relationship with them. Carter and Obama by contrast thought they knew what was best and pushed their priorities versus developing respectful relationships with the opposition. I agree that he has done a good job if you agree with him but the mark of a good leader is one who can put a compromise together and have both sides respect him. Packer

I just got done reading A Deacade of Delusions by Frank Martin and his 2010 annual report. He appears to have purchased out of the money put positions similar to Fairfax. My question is how many of you have such hedges and for how long and at what strike price. I was thinking of setting up a hedge but wanted to know what other folks have done and rationale. TIA. Packer

Good points. All I am pointing out is there is logic in what is being done by both sides and in the end we need to decide how much of GDP we want the gov't to spend (on wars, social programs or whatever else). We all have to do this a personal level and the gov't in long-term has to do the same. Packer

Your right the question is do we want gov't to spend 25%+ of GDP (like Europe) or do you want to spend 18 to 20% like we have historically spent. The reason for the tax increases is to support the 25%+ spending. This is the reason Repubs don't want to increase taxes is to support the 18-20 model not the 25+ model. Once you determine the model you want, then you can ask who pays for it. The President is combining the issues to push his 25% plan by at first taxing the rich. As to Boles Simpson, this is not the President's plan. If it was, how do you explain his budget proposal? If I have learned one thing about Obama, it is watch his actions not his words. He is very good smooth talker. Packer

I think a large part of the problem is lack of trust. The "rich" and other job creators don't mind paying taxes but don't trust the current crew in Washington will do anything but provide a short-term solution and go back and ask for more. Part of the issue is that the folks running the show in Washington are career politicians who are rewarded for being not trustworthy. You see it in the debt showdown. How can the President hope to get a compromise by slamming his opposition? What has worked in the past has been charming and compromising with it (i.e. Reagan, Clinton). This is how deals are done in business. The President is using his skills and charm to destroy rather than unite, acting more like Hugo Chavez than Bill Clinton or Ronald Regan. I guess this what you get when you elect a career politician with no business experience (i.e. compromise). He could get a great lift by being the adult but instead by acting as a partisan he has given away his advantage. He could easily get a deal and but he has poisoned the well and has taken the opposition to his policies as a personal attack. Even if sometime it is, the President needs to rise above it or he will lose the trust factor. Friedman's contention that somehow China (in its current form) is going to replace the US is fear mongering. Who in there right mind would accept advice from a China over the US for a few dollars. More likely they will accept the money (as financial transaction) and ignore the rest. I believe he also has "China envy" - where he thinks China is as stable as the West. This may be in theory in the future but just look where is most of the money going once the Chinese make some - real estate and savings to pay for health care and other staples we in the West pay on a relative basis very little. He also seems to bemoan the fact that so much debt was racked up but his approach does nothing to stop it. As matter of fact, his investment statement (for unneeded items such as uneconomic high speed passenger rail (the Concorde of the 2000s) and green energy subsidies) shows he does not get it. His other investment is education. Why has no one offered an economic incentive to get what we would like to get, i.e. more engineers and scientists? Maybe providing more federal loans and financial aid for engineers/scientists versus less needed majors would be a step in the right direction. Packer

James, How do you access the videos? I tried to get on the site and only got a picture and bio of each speaket. Thx. Packer

Even if you pull out the 3 million strategic defaults you still have 6 years of supply overhang. I think the market will recover but not in the next year or two. Packer

I agree they need a place to live but if they live in an apartment or with their parents that does not increase the demand for SFRs. The SFR supply is what will drive the recovery Buffett is talking about. As to jobs I think a "new normal" slow growth scenario is what we are looking at today. I think this also happened after the last recession in 2002 but most folks did not heed and piled debt on as if we were coming out of a normal recession. In terms of destroyed homes, most of the destruction comes in areas of lower than average income many of which are probably not insured (New Orleans), therefore, in cases the homes do not get replaced. Another aspect is the regional nature of the overbuild and the mortgage paperwork delays that only prolong the market clearing process. I would bet on commercial rebound long before a resi one in the overbuild areas. Packer

The 8 to 9 million is from Mort Zuckerman with 3 million (in some form of foreclosure/deliquency), 3 million (homes folks will eventally default - stragetic default) and 3 million (empty homes). Even with a 900k per year excess demand it still takes 10 years. Packer

Another data point is the 8 to 9 million home overhang which will take 16 to 18 years to work through at the 500k/year supply/demand imbalance. Packer

If you look at some of the larger tech cos like IBM, TXN, HPQ, AMAT, INTC, CSCO, MSFT, DELL and LXK They all, in my opinion, have done value enhancing share repurchases and this is how they will increase FCF per share going forward in concert with small organic revenue grwoth. Packer

I just got done reading the monthly CFA magazine and it has 2 good articles. One is an interview with Prem and another supports stocks in the "new normal" environment of slower growth as excess debt is being worked out at the individual and gov't levels. One item noted that was positive for stocks is the slower growth will require less investment and thus more cash for firms to do buybacks or increases in dividends. This appears to be happening now with the resultant firm cash build-ups, slow loan demand growth and slow employment growth. Another finding was that alot FCF growth per share was going to come from repurchases versus actual growth. This is exactly how Henry Singelton grew Teledyne in the slow real growth 60s and 70s. Out of lets say an 7% growth rate per share, 5% is going to come from income/return of capital (2% from yield and 3% from buybacks) and 2% from real growth. I think this article points out a source of equity returns (buybacks) that have been common in some sectors (large cap tech) in the past 5 years but may become more common across all sectors as growth moderates. One offshoot is to test the normal growth rates in stocks in your portfolio. I think the most danger comes in production growth for a 5 -6% growth world when 2% is more appropriate leading to overcapacity. The stocks in my portfolio that has the highest risk is SSW and some O&G firms. SSW has protected itself via LT contracts to creditworthy customers but I think O&G stocks are exposed. What has driven O&G stocks has been increasing demand with steady or declining output but if that demand levels off or declines I think we may have reached "peak prices". I had been an O&G bull but now I am more cautious. Any other thoughts on how to test stocks for the "new normal" would be appreciated. Packer

Has anyon elooked at these types of funds? The PIMCO ones have purchased munis and levered them woith short-term LIBOR based funding. The current tax-free yields range from 6.7% to 7.9%. Pretty good in this environment. I haven't purchased any but was just wondering about folks experience with them. TIA Packer

Kodak is a sad story in opportunity lost and squandered by management who chose to be at the whims of technology change versus choosing to be close to the customer. Kodak had a model in IBM but chose to go the way of the Japanese consumer products firms where it had no advantage with that model. A sad side effect is all of the lost jobs here in Rochester. Packer

For capital purposes, why don't they treat sovereign debt like corporate debt and require higher capital levels to hold it? If it is gov't junk treat it like corporate junk. I don't understand why for derivatives, the regulators just don't require higher capital levels (maybe a % of notional value) to trade in these things. Simple solutions like these would solve the problem but hit large bank/brokerage earnings hard. My question is why should we care about bank earnings are when they have proved time and time again that they do not have the self-control or adequate risk control in this area? Packer