Packer16

The name of the professor is David Rutledge out of Caltech. He has some interesting insights like the predicted amount of fossil fuel reserves is always over estimated and the inputs to the IPCC model for global warming use these inflated estimates to predict temperature change. He makes an adjustment for both the lower amount of reserves actually used and the increased use of alternative energy sources and comes up with a much smaller effect. The coal use curves also provide some interesting analogs for other fossil fuels. Packer

I think the difference was the intent was not to manipulate the outcome (i.e. tell the banks what to do) but to provide capital to prevent a systematic failure that is the reason for the lack of conditions for the money. The new approach uses the same methods but has different end (i.e. control the outcome - more lending) thus the conditions for the money. The implicit assumption is the lending that went away was bankable lending. Much if it was probably not and that is why manipulating the market (via TALF and PPI) to reach this end will probably not work and result in taxpayer money going to those who can game the system to their favor (which is what happens when the gov't tries to manipulate the market rather than just tax the result). Packer

This outcome is the result of a change in economic philosophy from an assistance role in letting the market determine the outcome (Bush philosophy) to a manipulate the market to your ends approach (Obama philosophy). The later approach may work if the outcome the gov't wants is the same as the market would provide but I do not think this is the case and there is the problem of political influence/favortism and the unintended results of trying to make the market do what you want it to do versus using its signals to guide the most efficient use of resources. This can be seen in cap-and-trade, the Private-Public Partnership, the auto bailout and green technology subsidies (ethanol and renewable power mandates). Although these may be good goals, without an unmanipulated market to put a relative price/value on these goals and allocate resources by these prices economic efficiency will suffer. The primary way we have been able to compete with countries that have a lower paid workforce is by providing products and services more efficiently. By using the gov't to impose these goals with no or very little consideration to the lost efficiencies is way to reduce the US' competitive advantage. Packer

I think that comparing the US now to 1930s and Japan in the 1980s misses the following large points: 1) Both the US and Japan had large trade surpluses, little debt and currencies that were at their apexes in terms of strength. I think the analogy to the UK in the 1930s and 40s is probably more on the mark. The UK had to pay for the war and we have to pay for the excess consumption. Packer

In Whitman's book Distress Investing, there is an example of a liquidation value calculation for a firm in bankruptcy on p.201. It basically adjusts the balance sheet assets and liabilities to FMV from BV. Packer

I thought Sam said the thermal coal will cover the costs and the real money will be made with the met coal and will depend upon steel demand. Packer

Another risk as Prem pointed out is guaranteed floors for policy holders. This can be a long-term liability with insurance companies assuming they can roll their holdings forward to capture the difference in investment returns and guarantee floor. In an inflationary environment this does not present a problem but in a low-interest rate deflationary environment this can crush an insurer under its own guarantees. Per Prem, this is what happened in Japan and most life insurance companies failed as a result. Packer

I thought the reason Prem said he did not like life insurance was not because it did not generate float but because of the possibility of a run upon a downgrade and due to guaranteed returns provided in some policies which can be a dangerous liability in deflationary world. He also pointed out that in Japan all but the largest life insurer has gone into insolvency. Packer

Sanjeev, Wanted to thank you for setting up the dinner the night before the meeting. I wasn't able to catch you before I had to leave to return to Rochester. The annual meeting was so busy with so many folks that the dinner the night before provided some great insights that were not available with such a large crowd. Thx again and hope to sit down and speak at some future event or next year at the FFH meeting. Packer

Sanjay, Wanted to thank you for setting up the dinner the night before the meeting. I wasn't able to catch you before I had to leave to return to Rochester. The annual meeting was so busy with so many folks that the dinner the night before provided some great insights that were not available with such a large crowd. Thx again and hope to sit down and speak at some future event or next year at the FFH meeting. Packer

Thx

Do we need any types of credentials/proxy to get into the annual meeting like the Berkshire meeting? Packer

Does anyone where I can get subprime whole loan pricing data or pricing data on defaulted subprime loans? Or even REITs that hold such assets. Thx. Packer

The decline in military spending is based upon an untested theory that if we can talk our way out of conflicts with little or no real military ability to back up our threats/diplomacy. This was tried with Carter and was found lacking. In addition, the budget put forth assumes this rosy scenario. If does not come to pass, then the deficit will become worse and tyrants will become more emboldened as they know the threat to their power is declining. I think as long as major portions of the world have leaders who don't respect compromise but look it as a weakness (everywhere except the US, Canada, Europe and Japan) you need to spend to provide a credible threat (and can provide technology spin-offs). If you do not, others will walk all over you (like what happened under Carter and may happen again) and the cost to re-establish the threat can be higher than if we had kept the spending up to begin with. Packer

I think you may be underestimating the potential inflation because: 1. Spending always seems to be underestimated (and it is difficult to slow down) and tax receipts overestimated (the money may be there now but by the time tax increases go into effect the revenue from the top 5% may have gone somewhere it will be taxed at a lower rate or will be deferred), this will lead to higher deficits. I am disappointed buy the lack of stimulus (primarily funding state deficits that are a result of states overspending) in this package and some of the stimulus projects are just silly. For example, in upstate NY one proposal is to spending billions of dollars to build a high-speed rail system. This is a total make work project that will have very little long-term benefits to the region other that creating the job to construct the railway; 2. The interest on the debt will be higher than expected if the debt is not monetized and monetization may lead to a flight from the dollar. China has stated their issues and their desire for an alternative to the dollar. If one is not provided, they may just sell dollars and buy a basket of commodities they will eventually consume. The flight from the dollar might accelerate if an alternative reserve currency is developed. This flight may reduce the expected purchase of dollars by foreigners. 3. Monetization of the debt is least painful way of delevering both consumers and the US gov't after all this spending. 4. Other trends in including the card check legislation, cap-and-trade subsidies to alternative energies which are all inflationary as the costs will be passed unto the consumers. The US may end up with a stagflation similar to emerging markets has in 1990s after their currency has collapsed. Other more disciplined countries' currencies (such as Canada, Australia and the Eurozone) may be in better shape than the US dollar. Packer

Has anyone noticed that a less publicized but much larger payment to AIG's CDS counterparties of hundreds of billions of dollars which then flow to Hedge Funds (speculative CDS buyers)? This was in yesterday's WSJ. So you have taxpayer paying off AIG's bad bets to hedge funds (speculative CDS buyers) with no negotiation with CDS purchasers with the CDS being paid off at par. Once this settles in the bonus issue is going to be a sideshow. Packer

Jack, You are right. Trying to invest and make money is science projects (like alternative energy projects that are not economically viable or only are so via gov't subsidy or regulation) is like investing in biotech with questionable rewards. At least for now, biotech's rewards are valuable protected drugs. Tom Friedman is an interesting observer but his recommendations or spending billions of dollars on alternative energy engineering when the science is not economically viable is a hairbrain idea. The Chinese must be laughing there heads off. The US will spend billions of dollars to develop a technology so when oil prices rise that we can use and develop and sell to the rest of the world. Meanwhile, the US will regulate (via cap and trade) manufacturing jobs to us as we can continue to purchase low cost oil and gas. These folks that think science experiments will produce jobs and lead us to a green economy are out to lunch. When was the last time the gov't/experts predicted what the right technology was going to be in 10/15 years? Its not that they don't try, it is just an impossible job that many will not admit. I am also disappointed with administrations small business initiatives. These guys don't understand small business and it is scary that they think they do. I am small business owner with a group of other guys and so far every initiative announced has either had a neutral or in some cases a negative effect. The largest negatives are higher taxes, no incentives to invest and higher costs via any cap and trade scheme. One item these guys either don't get or are ignoring is that many small firms are S-Corps or LLCs. So many of there tax savings (such as recaptured losses from the past just do not apply to these entities) and increasing taxes on the "wealthy" owners has the same effect as increasing taxes on the business.

Currently is believing equity (economic power of holding equity) will have a reasonably high rate of return over the next few years. Over the past 25 yrs the changes have been very friendly to shareholder (privatization (including less gov't competition in markets), the marginal buyer of equity (the "new" rich with incomes between $200k and $1M per year) had declining tax burdens thus more $ to invest, less centrally planned economic intervention (allowing capital to move from certain overvalued sectors to undervalued ones without interference, stopping subsidies of uneconomic activities and removing of dependicia policies), steady labor costs (the majority of gains of productivity going to equity versus labor) and a declining interest rate/inflation environment). Almost all of these actions are now in reverse compounded with higher gov't spending. There will be pocket of value as there always has been. However, once gov'ts start mucking with the real market (versus the highly regulated finance markets - banks, brokers, etc.) to make things fair, capital runs for the hills. This happened in the 1930's and did not return until the 1950's. I think we are a critical milestone at which we need to decide whether capital friendly measures will prevail or will gov't determined fairness will carry the day. If the former holds true the market will recover if the later we may be in for 10 - 20 yrs of flat to no growth for the market as whole as the capital strike intensifies. Packer

Watsa, I am not saying they are evil just not extensively tested in real markets (especially illiquid markets). I am a very free markets guy but I think regulation is need to prevent things from blowing up. How can having multiples of the underlying face value of the debt be good? This in my mind is set-up for negative feedback loops. Why has the concept of buying insurance on your neighbors house not allowed in the past? I think the issue that has not been addressed is the liquidity issue of the underlying. All of the other markets you spoke of have deep liquidity where hedging can take place in single-name CDSs it cannot. This how portfolio insurance blew-up. Once the volume became so great the hedging no longer worked. In addition, CDSs change the incentives of the holder of the underlying bond from a willing participant in a restructuring and a well informed investor to a neutral observer. In addition, arbitrage between the instruments can enhance the feedback loop. Maybe there is a way to make CDSs non-toxic (limiting open interest) but moving them to an exchange is not going to address the issues described above and the issue of feedback loops. As a matter of fact it may increase the potential for such loops. Packer

Watsa, I agree that some derivative markets are huge but those are associated with very liquid and deep markets for the underlying securities. For single-name CDSs this is not the case. The CDS outstanding par value is multiples of the underlying security and the underlying market is illiquid. This is the first clue that something is amiss. Second, the market is dominated by a few large players (this is my understanding from Damodaran who does not consider the data from this market to be a true indication of the cost to hedge a debt instrument). CDSs I think is more akin to portfolio insurance, where an unstable hedging mechanism is at play which will work if the derivative instrument is a small part of the market bit will collapse once a certain critical mass is reached. Packer

I would agree if the derivative market is smaller than the primary market. For CDSs you have the tail wagging the dog because for a small fee you can buy insurance on some elses default. The system breaks down because you have seperated the interest of the bondholder to support the firm to one that is neutral at best. The holder of the CDS has a huge invested interest to cuase the firm to fail. This is why you can't buy insurance on your neighbors house. How is that differebnt here?

I was talking about other policies too. I think three big differences are: 1) Clinton reduced taxes on capital (capital gains), 2) he did not seem to be so focused on fairness of economic outcomes but rather enhancing free-markets (NAFTA and welfare reform) and taxing the outcome and 3) he had a peace dividend (lower defense spending and talent whose minds could be put elsewhere). I think the argument that we are going back to times of Clinton may be good rhetoric but I think the mindset is different. Then the mindset was let free markets work and tax the outcome to finance the gov't. The mindset today is the free market is broken and the gov't must impose fairness to fix the free market. I think the difference is also illustrated in the markets reaction to each President's policies. I know it is to soon to say that about the current admins policies, but the longer the market stays down or continues to go down the more the market in the aggregate is saying it is different this time. Packer

Has anyone else noticed the economic actions of the new administration is driven by the idea that the gov't is the agent for economic fairness versus the individual over the past 25 years? Given this new paradigm for the US and given that many members of this board are in countries where there is more gov't imposed economic fairness than the US, what has been your observations on the effects of this policy on capital accumulation and investment management for those trying to accumulate capital like ourselves. Other observations on how the movement away from gov't imposed fairness and investment opportunities created by such a policy would also be interesting to know. Thx. Packer

I think this is more a reflection of current expectations than anything else. I think part of the issue may also be reflected in the GMO letter. There was hope that with a new president that Volcker was more than window dressing (the market rallied into year end) but I think given the financial teams actions, lack of realizing/dealing with the issue of overconsumption and the black hole of bail outs it may sink the ship. Clearly, the unveiling of unrelated spending priorities is taking the attention off the treasury policies that are a continuation of the bail-out and hope policies of the past. An interesting exercise in using some of the data from GMO is that we had $50 trillion in asset before the crash which declined to $30 trillion. He estimates the debt to be about $25 trillion. If you add the $5 trillion Gross estimates as a loss hole and the $2 trillion already on the Feds balance sheet you are at $32 trillion, or 110% debt to equity. This before any of the additional spending proposals. It is hard for me to believe given this situation that interest rates will not go up. I think the game of the gov't trying to finance its spending from fear based investors may cause interest rates to skyrocket once losses are known and/or if the gov't continues to bailout. I think that the spending now has no margin of safety built in (as we had via a net creditor position in the US in 1930's and Japan had amongst its consumers in the 1990s) and if it fails and causes interest rates to spike the game will be over. These are aggregate numbers and this is where is Gross' logic falls apart. If the US gov't held this much debt I would be concerned, but since the debt is spread around, there will be pockets that will be blown away but pockets that will do fine. Packer

I think Jim Rogers is much better long-term understanding of markets than Soros who has a short-term focus and will change is strategy on a dime. Of what I have read he is great trader with a short-term focus. It sounds like at their hedge fund Rogers set the long-term strategy and Soros was the trader. It appears that the strategy that the US administration is following is just the opposite of what Rogers is stating. They are ignoring the market signals that their strategy of bailout and spend does not work. The real danger with the addition of spending to the Bush bailouts is that of a currency/debt crisis. I think the admin is taking lower interest rates as a signal that they can spend $ for a cheap price without considering the reason that interest rates are low for t-bills is fear. China and other creditor nations appear at this point willing to continue to lend us money, again due to fear. However, you have to ask yourself why would these countries finance US debt with such a low interest rate? I think there are two reasons. First, these foreign countries will gain political influence far more than any OPEC countries selling us crude. So we are spending money to become energy independent (I don't know why other than some folks say so or the green energy groups have alot of lobbyists) with borrowed money from people we know want political influence. Second, a short-term reason is fear. I think where the current policy is driving us towards the post-WWII UK model. The gov't is not letting some politically connected institutions fail and spending like a drunken soldier. I fear that the people getting hurt the most now and those who continue to have the most to lose with the bailout and spend philosophy are the investor class. And to add injury to insult the spending is going to be financed by the same group of savers/investors. I think you really need to ask yourself is the bailout and spend philosophy of the current administration really investor friendly or is it hostile to those who follow the rules and save? Do you want the gov't to be decision making of what is fair with no debate, distorting the words/intentions of those who disagree with you and with an approach of my way or the highway all the while talking about compromise. The danger here is the approach is that of a dictator or at least of a group of people who dislike/disagree with workings of the democratic system and have been able to circumvent the checks and balances in the system. When has so much money been spent and the seeds for so much more to be spent without debate? Packer