oec2000

The delevering is happening at a very slow rate relative to the overall level of debt. Don't have time to look it up but it was either a FFH or Hoisington presentation that showed the total debt/GDP ratio was around 380% which is the highest since WW2 I believe. Delevering is happening at the rate of less than 10% of GDP per year. It will take a long time at this rate to get back to normal. I think FFH and Hoisington are both saying that it is this excessive debt that will provide the deflationary impetus to the economy. Is Shilling is arguing for a similar result but giving the opposite reason? What's interesting is that Buffett disagrees with both Shilling (bonds) and gold (Schiff). I am curious to know what the investing track record of the two asses, sorry I meant S's, are. ;D That's why FFH's deflation bet is so brilliant because the downside is limited if they are wrong. The traditional way of betting on deflation by buying long treasuries runs the risk of being painfully and spectacularly wrong.

It is true that the vast majority of people retire with less than $1-2m (not counting the house) and somehow manage. You are right that most people will live within their means. On the other hand, it is nice if you can retire comfortably - by which I mean being able to enjoy the things you like without having to worry whether you can afford it. What is comfortable obviously varies from person to person but I would imagine that $250K pretax (no mortgage) would be enough for most "reasonable" folk (many will be comfortable with much less). Members of this board should be able to manage an annual withdrawal rate of 4% (8% total return less 3-4% allowance for inflation) implying a MAGIC NUMBER of $6,251,123.24. :) So, the $5-10m number is actually not too far off. Some may feel that these numbers are not worth killing yourself for (I agree) but I think they are within reach of the younger members of this board who have a long slope to start rolling their snowball from. It's a good aspirational goal imo. (E.g. start with $100k, double every 4 years for 16 years and then every 5 years for 15 years. This gets you to $12.8m after 31 years - after tax and inflation, this should be enough to reach the magic number.)

A quote from my grandmother: Money doesn't make you happy, but you can be miserable in comfort. Alternatively, "I would much rather be rich and unhappy than be poor and unhappy." I think the maxim about how "becoming rich doesn't really change people; it just allows them to reveal their true character" is very true. People who are predisposed to being unhappy will be unhappy whether they are rich or poor. So, all things being equal, it's obviously better to have more money rather than less. I latched on to the concept of "drop dead money" after reading James Clavell's Noble House in which a character talks about her desire to have enough money so that she could ask anyone to drop dead if she so fancied. As a young man working in an office with many superiors to report to, this was a thoroughly inspiring objective.

Buffett and bridge?

Volcker did it by taking a single-minded approach to taming inflation. The question is whether Bernanke will continue to try and balance the Fed`s dual mandates when the time comes to tighten. Bear in mind also that Volcker did it only after many years of stagflation. Should we have confidence that Bernanke, who neither saw the bubble forming or the crisis developing, will have the prescience and courage to head off inflation before it becomes a problem? It is not realistic to think that there will be political will to tighten until things get ugly, by which time it might be too late. Bernanke will also face a major problem that Volcker did not - the record indebtedness of the economy. You mention deleveraging - but this is happening very slowly at the aggregate level because of the replacement of private sector debt with public sector debt. If you think the economy was bad when Volcker raised interest rates to double digits, imagine how bad it will be if Bernanke has to do the same when total debt to GDP is 300%. This is what Eric Sprott worries about. Meanwhile, there is no indication that Washington is doing anything to address the fundamental problem of excessive consumption and a shortage of savings. The options are getting more limited over time. When the crisis broke in 2008, the government finances were in much better shape. If another shock happens, the government will be in a considerably weakened fiscal position to act. It seems like we are heading towards the point beyond which every option left will be a bad one.

Well, to be fair, the reason natural gas hasn't mean reverted is because, in the United States, we have a large increase of supply via shale gas. Correct me if I'm wrong, but isn't natural gas much higher in other areas of the world where there's not an abundance of shale gas? In silver, it doesn't seem like a similar story is likely to play out... The oil/gas ratio is based on energy equivalency and would work well if demand and supply were completely elastic. Structural barriers, however, prevent switching from one commodity to another when the price differential goes out of whack. These barriers may fall in the long run of the differential remains pronounced for an extended period of time. With gold and silver, I am not sure there is any fundamental equivalency that can be relied on to make the price ratio revert to that equivalency level. Seems like the gold/silver ratio is more emotional than it is fundamental. Perhaps, we could look to the ratio of costs of production as a guide.

Isn't this why we got into the crisis in the first place? The loan reviewers in North America are "robots." Everything is systematized to make loan approvals quick and easy. The drawback is that the systems are not designed to deal with rare and unusual cases like yours. When I first moved here, I faced the similar problem of not being able to get a credit card - because I did not have a credit history. (Same story with mortgage). Doesn't matter what your net worth is or how much money you have in the bank - they only understand "credit score." If I had kept on using cash to pay for stuff, I probably would still not have a credit history today and still be unable to get credit.

Ericopoly, This is the best description of why they are doing what they are doing that I have seen. Concise and likely quite accurate. Nicely done. As you say, whether it works is another discussion. But, so far, I'm in the camp that thinks on whole, the gov't has handled this better than I would have predicted. Is there really any evidence that the govt deficits have been crowding out the creditworthy private sector's access to credit? It does not seem to be the case judging by the terms that recent corporate bonds have been able to attract (for very long maturities, too). Isn't the real reason why private sector credit is shrinking because the people who can borrow don't need to, and the ones who want to, can't (because they are not creditworthy)? The former don't need help from QE and the latter won't benefit from QE. Hasn't Bernanke himself said that the idea is to create a wealth effect by boosting asset prices? The question is how is this different from what Greenspan effectively did earlier this decade? Isn't the definition of insanity, "Doing the same thing over and over again and expecting a different result each time?" I agree with Ericopoly that government stimulus is necessary to offset the the sharply contracting private sector economy. But, QE is not strictly necessary to make this happen - unless you fear that the market will not lend the money to the US govt. In which case, we come back to the argument that Sprott is making that there will be a run on the US treasury. I don't think we are at that point yet, which is why I don't see how QE2 makes sense. What is the risk reward trade-off here? Is the negative psychological impact of QE2 a worthwhile risk for the marginal benefit of 50 bps of easing? I believe this is what people like Klarman are worried about. And, Hoisington is basically saying that further easing will not matter. It is not clear Bernanke has considered the risk that QE2 might spark off another asset bubble while not helping the real economy at all. The idea that Bernanke will reverse QE on a dime is subject to question. No doubt he has the tools to do so. The question is whether he has the will to do so expediently. Neither he nor Greenspan tightened quickly enough to prevent the huge housing bubble. Leaving aside what the possible causes of inflation were in the 1970s, I believe Sprott is taking the simple but seemingly valid view that at some point curing the deficit problem will become so painful, the politicians will take the easy path and inflate their way out. We only have to understand Munger's views on the power of incentives to realise that self-interested politicians will find it hard to ask the electorate to take tough medicine. Letting inflation solve the problem is convenient - you can then blame the markets (and bankers and hedge funds) for it.

Interesting idea except for the cost of security or insurance. (Thus making it still a liability for Broxburnboy.) I remember a contractor telling me about a job he was working on the last time copper prices were going through the roof in 2008. Apparently, thieves had broken into the house (which the homeowner had left vacant, in between tenancies) and stripped it of all the copper pipes and wiring. Cost the homeowner a lot more than the value of the copper to repair the damage! But, I guess it might work if you bought guns and tinned food to go with the gold and build the house out in the boondocks. :)

1) I believe the article is wrong in saying that 90% of Eric Sprott's net worth is in precious metals. The bulk of his net worth is tied up in SII stock - $700m at current prices. Yes, you can say that SII is quite exposed to the precious metals play but it is not 90%. Besides, much of their exposure is via performance fees, which has option like characteristics (upside, no downside) - I think I discussed this before in another thread a few months ago when SII was just 50% of the current price. 2) Is QE2 = printing money? To the extent that it increases the monetary base, I would imagine that an economist would equate that to money creation (i.e. printing). This is not necessarily inconsistent with Hoisington's view that in the short term this may not result in inflation - because of a drop in the velocity of money. (Saying that money is printed only if the loan goes bad is virtually like saying that you don't have a mortgage when you first take it out because it is backed by the property and that you can only call it a mortgage when the property becomes worth less (or worthless)). 3) Is it possible that Hoisington is right in the short term and Sprott right in the longer term? Seems conceivable to me; especially if, as seems likely, Bernanke continues to respond to deflation by throwing money out of helicopters and the politicians continue to fumble with the deficits. 4) Can we look at just the one example of the 1970s inflation to conclude that inflation cannot occur without wage inflation? I don't know enough about economics or the original causes of the 1970s wage spiral to give a coherent answer. However, I suspect that inflationary expectations can, in the absence of wage inflation, spark off goods inflation which in turn drives wage inflation. If inflationary expectations are bad enough, won't people just rush to convert their cash into "things" (salt, sugar, gold, whatever). Even if their wages have not risen yet, they may feel it is better to borrow first and pay back in tomorrow's cheaper dollars. 5) Buffett has said that the bailouts and stimuli were necessary but there would be a price to pay later on for the past excesses. The problem is that there is no sign that the policy makers have accepted this truism. Right now, the current policies seem to me to be remarkably similar to those that Greenspan favoured - i.e. keep the economy growing at all costs and deal with the consequences when they arise. There seems to be little consideration of "what if we are wrong" and "what unintended consequences could there be?" Until they accept the reality that we have to take some tough medicine, it seems unlikely we will get good long term solutions. Till then, it is prudent to be aware of the risks. 6) Gold & silver - people like Sprott and Rogers have got this argument right for a long time. This does not mean they will get the sell timing right although their track record is pretty good. They may continue to be right but anyone deciding to join the party today has to realise that their risk reward ratio is not the same as those who got into gold at $400. At these levels, it feels too much of a 50:50 bet; not sufficiently good odds, imo, unless you can find ways to manage your risk.

http://www.sott.net/articles/show/218151-U-S-in-Vast-Insider-Trading-Probe Will be interesting to see how SAC comes out of this.

Why is he praising them then?

While agreeing with what he said, I thought he could have made a more useful contribution by providing prescriptions for the future for policymakers. His typically well thought out comments would be a great counterbalance to the incessant rhetorical garbage spewed out by partisan commentators daily. While policymakers deserve praise for their handling of the crisis, he should not have left unsaid the role that some of them played in causing the crisis in the first place. Watching interviews of Greenspan and Bernanke recently reminded me that they both seem to view their role of promoting financial stability as dealing with crises after they happen, not in preventing them to begin with. The Fed should defuse bombs before they explode, and not just be satisfied with doing a good job dealing with the aftermath. http://abcnews.go.com/ThisWeek/video/greenspan-hedge-fund-mgr-michael-burry-10282143 Greenspan's continued denial that anyone could have seen the crisis coming is symptomatic of this attitude. Even if you accept his argument that no one could have foreseen the crisis, he could have taken actions that erred on the side of caution; taking the margin of safety approach, if you like. Central bankers are meant to be boring and conservative; they are not meant to push the envelope to see how close we can get to the limits of a bubble. With QE2 (and who knows how many more sequels there will be if QE2 fails), Bernanke seems to be following Greenspan's example - I guess he wants to see how close we can get the to the precipice without falling. Like many fund managers, they seem to have no understanding of the concept risk; of "what if we are wrong." I don't get Buffett's rationale for the op-ed. The policymakers don't need more praise; they need more advice from a wise man.

The same reason why people buy lottery tickets or play the slot machines.

This one shouldn't be terribly difficult for the counterparty to hedge... (if they were prudent). the bigger risk would be what Hamilton points out... having a counterparty that doesn't hedge properly. Your maximum loss is the notional value of the contract plus interest... and that's hedged with the short equity swaps. And the cash from the shares sold are probably invested in something relatively safe that could be used for this purpose, and if not, the rest of the portfolio is fairly large compared to any potential loss. I really would tend to think that the other equity swaps serve the purpose sufficiently. 1) Counterparty risk exists whether the counterparty hedges their position or not. They could fail for unrelated reasons. But, given FFH's past caution with counterparty risk in their CDS positions, it should be reasonable to assume that they have covered this angle. 2) The question is why do the TRS, if not to obtain leverage? If leverage is the reason, then what's the rational? The only other reason I can think of for doing the long TRS is that maybe it reduces the burden of the periodic cash settlements for their short TRS positions - because the positions are offsetting. Without the long TRS, with the market moving against their short TRS positions, they may have had to pay up significant amounts of cash at each reset. While their (previous) long equity positions would have economically offset the losses on the short TRS, they would not have generated the cash to settle the short TRS.

Just got back from a trip to China last week myself. I think the drive, determination and entrepreneurial spirit of the people are clear to see. The other thing that strikes you, if you compare China today to 5, 10, 20 years ago, is that the pace of progress is breathtaking. Although much more needs to still be done, the infrastructure is in some respects world class. And, the movement towards "greenness" also surprised me given all the talk about how environmentally irresponsible China is - just observe the number of electric motorbikes/scooters and the presence of trash cans for recyclables. The politics remains communist but it is clear that the economy is increasingly capitalistic. Students of western history may see problems with the Chinese model but students of late 20th century history of the Far Eastern tiger economies will see many parallels between what is happening in China with what happened in Korea, Singapore, Taiwan, and HK. These tiger economies combined autocratic govt with free enterprise economies to achieve amazing rates of growth, the same as we are seeing in China. Of course, many problems remain - corruption, political discontent, wealth disparity - but it is equally important to understand that the Chinese mindset has been conditioned by a very long history of subjugation under non-democratic rule. You only have to observe how Chinese migrants act in societies where they are minorities to understand their relative indifference to political freedoms. As long as they see opportunities to improve their lot in life (through education or enterprise), they are quite happy to leave politics alone. You rarely hear them grumble about what the govt should do for them; they just suck it up and get on with life, no matter how tough a hand they have been dealt. I have no doubt that the Chinese economy will suffer setbacks from time to time as its outdated institutions and systems try to catch up with the breakneck pace of economic development - the tiger economies suffered the same - but the drive of the common people to build better lives for themselves will provide the impetus for the economy to continue on a long term trend of growth. All the govt has to do is to ensure that the right incentives remain. For me, the challenge is to identify companies and managements that we trust enough to be long term investors in. Corporate governance remains problematic but it seems better now than before. Again, I believe that this will improve over time - the Chinese are no different from others; initially, they may value money over reputation; once they have accumulated enough wealth, they will start to worry about legacy and reputation.

Is he saying that those states that went from NO income taxes to SOME income taxes experienced a decline in income taxes? How can that be? If he is referring to all forms of taxes (incl sales tax for e.g.), the discussion is unclear unless we also know what changes there were in the rates of other taxes.

Sure, as long as I can also take 50% off for the paucity (maybe poverty would be a more appropriate word given the obssession of this board with wealth ;D) of hair. Alternatively, since age is a liability rather than an asset, I will declare my age as zero!

To Prem and everyone at Fairfax Financial, Congratulations, thank you, and all the best for the next 25 years. oec

The HK company you're thinking of is probably Li Ka-Shing's Cheung Kong or Hutchison Whampoa. Cdn company - Power Corp (POW)?

Einstein WAS the next Newton; and, of course, Obama is the next Franklin, right? ;D

Schroeder should be entitled to make fair-minded criticisms of Buffett's & Munger's views on business and the economy. i doubt that they would mind. On the whole, I thought the Munger article was fair although she should have offset his "suck it up" remark with his comment on not meddling with social security to reduce the deficit. I believe his point was that Americans should be able to find a way to help the less fortunate by making sacrifices elsewhere. It seemed obvious that he cares about those who truly need help. On the other hand, he clearly does not think that all "underwater" homeowners need help which is the justification for the "suck it up" comment. As for Schroeder's "attacks" on Buffett, some of which are clearly less balanced, I wonder whether they are driven by her reaction to seeing a private side of Buffett that we don't know or understand. Could it be she is frustrated by the fact that the public is blind to the flaws of the man it idolises? I am skating on the very thin ice of speculation here but I thought I would play the role of devil's advocate. It's fun to play amateur psychologist - after all, understanding psychology is key to understanding Mr Market - on a quiet afternoon.

FFH price 1990: $11. FFH price 2010: $400. Guess what? Someone who had invested "single millions" in FFH 20 years ago would, with dividends reinvested, today have >$100m - just being a couch potato. coc, thanks for calling a spade a spade. You should post more!

I'm not saying it is the case but the numbers could also be the result of investing with rearview mirrors (i.e. money chasing performance). Given the nature of this board, it is less likely but we have to be careful with statistics. If we could find an old thread like this and then check for the performance since, the results would be more convincing.

I prefer to go with Buffett's characterisation of value being something that is so obviously cheap that he doesn't need a calculator to figure it out. While it is good to have a framework (like Klarman's for e.g.) to work within, it can be counterproductive to dogmatically stick to a fixed viewpoint. Most of the time the framework makes sense but there can be times when you may want to go beyond the framework. Consider this hypothetical. Assume that oil prices fall below the cost of production for a significant time, speculators start to bail out and you are offered a million barrels of oil at a 10% discount to the market and say 40% discount to cost of production. Might it not be a good value investment? Can cashflow make a gold company a good investment when its product is a commodity that does not produce cashflow? Does the same argument apply to an oil company (oil, like gold, does not produce any cashflow either)? There's no advantage to boxing oneself in to a rigid definition - what matters is developing the skill to identify value when it presents itself to you, whatever form it may take. Like the judge said about porn: I can't define it but I know it when I see it.