Nomad

I just finished watching the Berkshire AGM livestream. My overall takeaway is that Buffett is very cautious, if not outright bearish, on the near-term prospects of the stock market. Some highlights below (mistakes and omissions are my own): WEB sees the US currently at "DEFCON 5" on the health impact of the coronavirus but only at "DEFCON 1" on the economic and market impact - seemed surprised by the disconnect Range of possible outcomes on the economic side is still "extraordinarily wide" Pointed out that the Dow fell from 381.17 on 1929-09-03 to 198.69 on 1929-11-13, but rose to 240.42 by 1930-08-29 - it was "not apparent" by the summer of 1930 that the US would enter the Great Depression Mentioned the lasting psychological impact of the Great Depression - two lost decades in stocks before the market went back to even in nominal terms WEB: "You can bet on America, but you have to be careful in how you bet." You will do fine if you buy an index and hold for "20 to 30 years" $6b in Berkshire net equity sales in April, all airline positions liquidated On overcapacity in airline industry - there are "too many planes" Unlike 2008, Berkshire has not acted as a lender of last resort because WEB "hasn't seen anything attractive" WEB: Companies were able to get money from the Fed in 2020 "on terms we wouldn't have given them" Sees possible permanent impairment in commercial real estate due to work from home programs Believes there could be "extreme consequences" from abnormally low or negative interest rates Did not buy back Berkshire stock because he did not see BRK at a discount to intrinsic value Overall, some very interesting comments by Buffett and Greg Abel about the challenges currently facing the country and Berkshire's operating businesses as the pandemic persists.

Quotes don't get much better than this: https://www.bloomberg.com/news/articles/2020-04-29/firemen-and-romance-writers-faces-of-a-fierce-rebound-in-stocks

As things normalize, one thing I won't be doing - if I can avoid it - is commuting. I plan to push my managers hard to work from home for as long as possible. The improvement to my quality of life by not having to dress up in a suit and shuffle into the office has been immense.

Ha! Slightly different than my original meaning ;D I will edit to "Let Rent-Seekers Fail" to remove the ambiguity created by the French etymology of the word "rentier."

Where did we get the insane notion that the taxpayers must rescue people who made dumb decisions while they tried to collect economic rent? Take a look at the latest sob story in the Wall Street Journal: https://www.wsj.com/amp/articles/a-bargain-with-the-devilbill-comes-due-for-overextended-airbnb-hosts-11588083336 The poor, poor AirBNB owners who thought they were hoteliers are now shocked - shocked - that they made a Faustian bargain and that rents and house prices don’t always go straight up. Predictably, political influence was brought to bear to ‘help’ them through these tough times: In the past months alone we have bailed out - or have heard cries for bailouts - from: Management teams that bought back billions worth of stock at market highs, issuing themselves more options and telling shareholders that the dilution was a “non-cash expense” Private equity firms that scooped up marginal franchises to lever them up based on “adjusted” EBITDA Energy zombie companies whose breakeven cost of production make them unprofitable even with WTI at 3x the current price The piggish funds who bought the debt of those energy zombies in a reach for yield Universities that pay "diversity" and "student life" administrators $250k salaries while adjuncts starve States and local governments that offer $150k / yr defined benefit pensions to retired civil servants AirBNB owners who purchased property at 90%+ LTV in urban areas with artificially constrained supply NIMBYs in those urban areas who carry enormous HELOCs and who voted against housing development to ride the wave of house price appreciation Idiot VCs trying to dump their scooter companies on the public at 15x sales It’s quite a show. All of the rentiers are steadily proceeding to the trough to claim that they are “systemically important” and that if you the taxpayer don’t help them RIGHT NOW, everything will collapse. This isn’t negotiation; it’s thuggery and extortion, plain and simple. If this continues, we in the West will have our own class of Russian-style oligarchs who attained their fortunes not through prudent risk taking or innovation, but political connections and bilking the citizenry. It seems we don’t have capitalism anymore - we just have looting.

Where's the Fed to buy them out at par when you need it? ;D

Excellent article, thanks for posting. Software spending is not invincible - it can and will decrease in a recession. Corporate IT departments cut back, consumers re-evaluate their subscriptions, and demand for e-commerce and cloud solutions falls as small and mid-sized businesses fail. Since 2008, the tech sector has enjoyed one of the most favorable interest rate environments ever. Easy money has flooded into the system, propping up dubious "tech-adjacent" ventures with terrible unit economics like Uber, WeWork, and the scooter companies. It's hard to see how any of those companies get off the ground in a higher interest rate environment, if one returns someday. Investors have been all-too willing to slap nosebleed multiples on anything SaaS-related. It will be interesting to see if multiples on the public companies re-rate or if Greater Fool Theory and Buy the Dip prevail as the coronavirus lockdown persists. Big Tech has also largely escaped antitrust regulation in the US - we haven't seen another US v. Microsoft type of case since 1998. A change in administrations or in public sentiment could lead to pressure to break up the titans. Anecdotally, I've already heard people say that Amazon should be split up and AWS separated from the retail segment of the company. If wealth inequality increases, it's possible that the public starts to view the FANGs as this century's Standard Oil. All of this is speculative, of course, but it gives me lots to think about.

For mainstream sources, the obvious one would be the FT. In my opinion, it has higher quality coverage than WSJ, and the Lex column is required reading. Paywalled, though, and also more Eurocentric than WSJ (as one would expect). I also generally find Reuters to be a good source for news - they have avoided a lot of the editorializing that has proliferated in the US media during the past 5 years and I appreciate their objective tone. I don't really read investment publications, although I often skim Institutional Investor. For credit and bankruptcy news, you'll want to read Credit Slips. American Banker is the trade publication for all things banking, as you can probably guess. And if you're a gambler, you need to keep up with Fantini Research as they cover the gaming industry.

Yes, this will be worse than the Great Recession. The number to remember is 70% - that's the approximate portion of US GDP comprised of consumer spending. Consumption similarly drives many other developed economy GDPs. Let's start with the optimistic case. Let's assume that the economies of the developed world are allowed to legally re-open in the next 3-4 weeks. Let's further assume that there is substantial "pent up" demand in those economies and that the citizenry decides to return to normal activities without apprehension. People go back to restaurants, they go back to retail, they order clothing and makeup and home furnishings again, they get their hair cut, etc. Finally, let's assume that the household balance sheets of these returners are largely intact - that these people have savings in reserve or access to unsecured credit on reasonable terms to drive their consumption. Overall, let's assume about 80% of 2019 capacity and 20% unemployment for FY2020 and 90% of capacity and 10% unemployment for FY2021. Sounds good? No - even with an optimistic scenario of a quick return to 80% capacity, this will be an economic calamity. About a fifth of the job seekers in the US are presently unemployed and in survival mode. That means they're not consuming; they're trying to literally and figuratively stay in their houses and avoid the bread lines. Their balance sheets were already precarious before the crisis, and - surprise, surprise - their creditors are not legally prohibited from collecting on debts incurred, and the creditors' staff are allowed to work remotely. So how do the laid-off and furloughed workers repair their household balance sheets? The lucky ones get their jobs back and successfully renegotiate terms with their creditors. The unlucky ones declare bankruptcy and get partially or wholly wiped out. By the way, if the debtors are younger and have student loans, those aren't dischargeable in bankruptcy, so many people will come out of BK with ruined credit and still have the burden of debt repayment. Do their jobs return? Maybe - unemployment is a lagging time series, so many jobs will be slow to come back - if they come back at all. Restaurants can't pack people in if there's no vaccine or therapeutics; they won't have a need for as much staff. Same story for employees at movie theaters, bars, stadiums, wedding venues, etc. Factories will try to automate to the extent that they can, because machines don't get sick and have family emergencies like human beings do. The oil patch is getting wiped out at $20/barrel WTI and many of those jobs are probably gone. Even the white collar work from home set is not immune, and white collar workers are liable to face layoffs if austerity hits corporations. Homes, cars, and durable goods purchases? Forget about it - household formation will be down as the Millennials once again run headlong into the twin buzzsaws of economic disaster and high house prices (thanks, Fed). The young will choose to further delay marriage and children and consume less in the process. The elderly are in the high risk infection group and will be sheltering in place for longer than their younger counterparts, reducing their consumption too. Older people with less solid balance sheets will be forced to liquidate assets, creating a negative feedback loop. Additional negative wealth effects could come from an equity market collapse, which could happen as soon as the "unsinkable" tech titans start to take on water. Facebook and Google rely heavily on advertising, which is a cyclical business that always declines in crises. Apple produces luxury products that cash-strapped consumers will hesitate to upgrade. Even mighty Amazon will be hit hard by a decline in discretionary purchases, cancellation of digital subscriptions, and reduction in revenues from their cloud services. After all, with the reduced corporate IT budgets and shuttered small businesses, who will need more cloud capacity? Once the FANG and QQQ bubble finally pops, the wealth destruction will be immense as upper middle class equity holders see their holdings evaporate. In sum, the virus has caused global demand destruction on a scale not seen in generations. To steal blatantly from Churchill, we are not at the beginning of the end, and we may not even be at the end of the beginning.

This seems to be a point lost on many investors - especially younger investors - who have been riding a decade-long bull market. Downward price action does not make something "cheaper." Downward price action only makes something cheaper if the fundamentals persist or improve. And as you note, the fundamentals are getting worse with each passing day. What happens when more and more companies start including "going concern" warnings in their public filings?

Graham was very candid about his poor performance during the Depression. I recently re-read an article (https://www.capitalideasonline.com/wordpress/benjamin-graham-and-the-great-crash/) where Graham recounts his experiences following the Crash of 1929. The whole thing is worth reading, but in particular, I found one story related by Graham from the Winter of 1930 to be especially compelling:

“[W]e’re like the captain of the ship when the worst typhoon that’s ever happened comes . . . We just want to get through the typhoon, and we’d rather come out of it with a whole lot of liquidity.” To me, that's the key quotation from Munger. WEB and CM have said multiple times that it's the height of foolishness to risk what you have and need for what you don't have and don't need - especially if you're already rich. Although Munger can certainly be acerbic, I don't think he's exaggerating here with the typhoon analogy. It's almost impossible to do any fundamental analysis of most businesses right now because no one has any idea what the revenues will be, much less the earnings. So why would WEB and CM risk what they have and need (their massive cash & equivalents pile) to chase after what they don't have and don't need (companies that you can't currently value with any reasonable degree of accuracy)?

Surely there is a difference between demonizing a group and pointing out that the members of said group (despite the myriad opinions of the group's individual members) have benefited immensely from enormous wealth transfers, the burden of which fall overwhelmingly on later generations? Nah, it's just stupid. There are better ways to criticize the situation. This is the ineffective way. Re-read it but replace "boomers" by some other group like "women" or "latinos" or "jews" or "gays" or "handicapped people" and see how treating groups of millions of people as monoliths sounds now. So you're not disputing that later generations will be paying for the current bailout largesse, spending that disproportionately benefits the Boomer demographic? Got it.

Surely there is a difference between demonizing a group and pointing out that the members of said group (despite the myriad opinions of the group's individual members) have benefited immensely from enormous wealth transfers, the burden of which fall overwhelmingly on later generations?

After today's unprecedented announcement by the Fed that it will start buying junk bonds, how can the Boomers continue to cast aspersions on ANY other generation for being "soft"? The Boomer Fed chief (b. 1953) just announced that he cares so little about market price discovery that he is happy to bail out the Boomer management of failing companies and their Boomer private equity lenders, a measure no doubt encouraged by the Boomer Treasury Secretary (b. 1962) to prop up the economy of the Boomer President (b. 1946) and save the Boomer pension funds that acted like pigs and reached for yield. This is nothing short of outright theft from later born generations, who will bear the burden in the form of higher taxes, decreased public services, and heightened inflation. Meanwhile, the Boomers will be able to unload their assets at inflated prices (again, no real price discovery) and they will remain convinced the whole time that they deserved their "success." Shameful.

I think that's a very reasonable interpretation. If unemployment and business activity numbers are truly terrible, there's no saying that stocks won't get even cheaper as earnings erode. In the Great Depression, the market crashed in 1929 but didn't bottom until 1932. Buffett is a patient man and willing to wait for asymmetric opportunities - he's been waiting for a decade now, after all. ;D

https://www.wsj.com/articles/softbank-seeking-to-take-control-of-wework-through-financing-package-11571002488 Already putting the bankruptcy lawyers on retainer? That was fast.

https://www.reuters.com/article/us-usa-trade-china-limits/trump-considers-delisting-chinese-firms-from-u-s-markets-source-idUSKBN1WC1VP I can't imagine this is a positive for the US real estate market. Foreign FDI has been driving price appreciation at the top end of the market for years and limiting the ability of Chinese nationals to invest in US properties seems like an easy way for the Chinese government to retaliate.

https://www.wsj.com/articles/this-is-not-the-way-everybody-behaves-how-adam-neumanns-over-the-top-style-built-wework-11568823827 Maybe he can join these guys? http://img.timeinc.net/time/magazine/archive/covers/1999/1101990215_400.jpg

Does this explanation sound like nonsense to anyone else? I find it hard to believe that publicly-traded megacorps were so bad at estimating their tax liabilities that they collectively misjudged their liquidity needs at the same time. Even if that were the case, would it spike repo rates by 500%? It just seems laughable to say, "Things were too good - therefore repo rates surged!" Could an alternative explanation be that a major counterparty - possibly Deutsche Bank - is on the verge of collapse and banks are hesitant to lend in the overnight market?

Not to be overly cynical, but how many of these HF moves are "I truly believe Berkshire is undervalued" vs. "I am completely out of ideas after a long bull market but I don't want cash drag to reflect in my returns"? WEB is the person best placed to understand the intrinsic value of BRK and while he has been buying back shares, he's not exactly backing up the truck either.

Thank you! I'm going to delve deeper into their statement of cash flows to see if they were misclassifying certain investing / financing cash flows as cash from operating activities. This is where my accounting ability gets admittedly pretty weak, so it might take me awhile to understand everything (if I understand it at all).

Doesn't look like there's any massive FCF deficit, although I haven't delved extensively into the components listed in the statement of cash flows yet. Their 2000 Annual Report has been archived here: http://picker.uchicago.edu/Enron/EnronAnnualReport2000.pdf Page 36 shows their cash flows and it appears at first glance like there's a huge jump in operating cash flow from 1999 to 2000.

One of the exercises I find useful to address the problem of hindsight bias is to conduct a "de novo" review of past company filings prior to those companies' later writedowns, miscalculations, and strategic failures. Although I have been investing for several years now, I have to say that my knowledge of accounting has developed much more slowly than my knowledge of competitive dynamics and that accounting remains one of my weaker areas as an investor. In an effort to expand my circle of competence, I want to take a look at Enron, Tyco, and WorldCom - the Holy Trinity of accounting scandals - from the vantage point of an investor during that time period. We all now "know" that Enron was a fraud, but what exactly was amiss with their financial statements? I have pulled up their 1998 - 2001 SEC filings in an effort to better understand what transpired, but I'm not sure I know exactly what I should be looking for. Has anyone else undertaken this exercise? What are the red flags that I'm not seeing here? All I can say from my (admittedly cursory) review of their financials so far is that the company would belong in my "too hard" pile. What led smarter, wiser investors than me to the conclusion that their financial statements were likely manipulated?

very much so +2. Happened last year too. Your kid is not "special" or "precocious" because she can read from a script that you prepared, and nobody thinks it's "cute" rather than just simply annoying. It does seem like there has been a general deterioration in the quality of the questions over the past few years.