wabuffo

Buffett never predicted whether inflation would go up or down in "how inflation swindles the equity investor." He explained how it affects return on capital and business investment decisions, didn't predict the future. Sure - he never made an outright prediction - but he was pretty gloomy about inflation being a perpetual issue in the US. Here's the "money" quote that ends the article: ...this is how the long-term stagflation environment looked like after the publication of his article. I'm not knocking Buffett here - you are correct that his purpose was mostly educational. But if we give him credit for "Buy Stocks, I am" in 2008, then he gets dinged for the pessimism in this article, IMHO. wabuffo

in 1999, (one of the very rare occasions when he talked more specifically about the 'market' in general) that expectations that net profit margins could go higher than 6% for any sustainable time..were not reasonable Buffett is not a great macro-forecaster (and he admits as such). Remember his "how inflation swindles the equity-investor"? Well the publication of that article pretty much marked the top for inflation in the US. As I continue to point out - there are two major valuation inputs that have changed since Buffett's iconic 1999 Fortune article. 1) At the time of the article, the 30-year Treasury was yielding over 6.5%. Today it is 2.3%. Buffett admitted in that article, that this was a factor that could change his forecast (though he didn't predict it). This input is a two-fer for valuation purposes. Corporate America is paying less for its debt - plus discount factors for equity valuations have to be pegged lower. This was also a reason Buffett was bearish at the time - in 1999, 30-year Treasuries were yielding a higher rate than the earnings "yield" on Corporate America. That is not the case today. 2) The Federal tax rate on corporate pre-tax income was 35%, today it is 21%. Uncle Sam has decided to transfer 14% of his ownership stake in Corporate America to us, the private sector owners, at no cost. I think that's a big deal. It seems to me, one would have to adjust a time series of market cap ratios for these two important input factors. Whether these input factors continue to stay at their current values, I have no idea (though I am not betting against it). wabuffo

Corporate debt to after-tax corporate profits currently at 5.42X (average for the last 65 years = 5.43X) Max was in 1990 = 9.08X, Min was in 1966 = 3.32X In a recession, profit dips, so the ratio will increase, but it doesn't look like businesses would be starting from an overleveraged position (relative to history). FWIW, wabuffo

Not a big deal, but minor correction: S&P 500 TR for 2019 was 31.49%. Yes - you are correct. Sorry about that, I had an error in my spreadsheet. Thanks for pointing it out! wabuffo

Interesting to see that ... the mean/average of this years returns seems to be significantly below the index with the most people having a 20-25% outcome, not one, but two steps below the option that includes the index return. Hielko - not terribly surprising. I think there are two reasons: 1) The average stock underperformed the big market-cap weighted indices (the FAANG influence). I would guess the COB&F stock pickers are value pickers and generally are underinvested in FAANG. One way I measure the annual return of the average stock is to take a squint at the Wilshire Equal-Weight Indices. The Wilshire Equal-Weight 5000 Index had a 28.9% return in 2019 (vs 31.05% for the S&P 500 Total Return). So basically a bunch of monkeys throwing darts at the WSJ stock pages underperformed the S&P but still edged out the average COB&F value investors in 2019 by the looks of the self-reported survey. 2) The other factor that I think comes into play is BRK's underperformance. Just like the COB&F value investors are underinvested in FAANG, they are probably overinvested in BRK and BRK underperformed the indices by a lot this year (e.g., BRK-B had a 10.9% annual return vs 31.05% for the S&P 500 TR). wabuffo

canadianinsider.com sedi.ca wabuffo

Negative rates didn't change anything, why? Maybe because negative/low rates hurt savers (in terms of lost interest income) than they "help" debtors. It's a tax basically and destroys the banking sector (which probably also hurts debtors - so no gain). I remember an analysis that Einhorn did a while back during Bernanke's drive for zero short term rates that used US Household data from the Fed to quantify the negative net impact (savers vs borrowers). The US was heading in the same direction, but then cut federal taxes which helped to offset the impact to savers by increasing after-tax incomes. wabuffo

Another important factor is the size of your grubstake. If its small and you are relatively young, there's an argument to be made that you should be fully invested at all times. wabuffo

Buffett piled up $128 billion because the market is not in a bubble or maybe the cash and short-term bills is nothing unusual when placed in proper context. One needs to equate the cash as a percent of shareholders' equity in order to judge its size. In fact, there are times when BRK has had a greater percentage of its net worth in cash and s-t-bills. The cash is nominally bigger because the balance sheet is bigger. The actual amount tells you nothing about any positioning or market stance because it is not unusual at all. wabuffo

the market will observe these prospects and vomit. on the day after the election of warren. The market is fairly good at handicapping political outcomes. It will mark-to-market the odds of either party winning on a daily basis throughout the political campaign season - and thus, won't wait until election. Unless its a complete surprise ("Dewey Wins!") Also - what if these ultra-low long-term Treasury rates are here to stay for the next 10-20 years? Stocks might actually be undervalued at a 3% risk-free long-term rate. I think the comparisons to historical valuations are really comparisons at much higher discount rates (and higher domestic corporate tax rates). What is $1 pre-tax earnings worth at a 35% tax rate and 7% 30-year Treasury ($0.65/.07 = 9.3x pre-tax earnings) vs a 21% tax rate and a 3% 30-year Treasury ($0.79/.03 = 26.3x pre-tax earnings). Of course, if that 3% 30-year Treasury rate is here to stay................ wabuffo

Buffett doesn't like buying assets out of a bankruptcy proceeding. In the past, courts/judges have imposed deal termination fees are that are sometimes too low for him. wabuffo

But he doesn't know that WEB doesn't do auctions. WEB is also not crazy about buying assets inside a bankruptcy process. He's had some disagreements with Bankruptcy judges about the miniscule size of the deal break-up fees imposed by Courts. Buffett views it like he is being forced to offer a put option and isn't being adequately compensated for it. wabuffo

BTW - back to the original post for a quick sec. Anyone else noticed that this bolded statement is plainly untrue. Here is Wedgewood's holdings of BRK.B shares over the last few years according to the 13Fs. He actually started selling in late 2015 (when BRK got cheap and very near Buffett's 1.2x book value buyback level). There was more selling there than this year. How does one reconcile his statement and his many media appearances as a BRK bull with his actual record? Perhaps I'm missing something. wabuffo

The old chucks angles board was so active during that time. oh hey - gfp = globalfinancepartners! The penny just dropped. I didn't realize the connection! Yeah the old Chuck's Yahoo BRK board was amazing - Prez, BabyB and too many others to mention. Those were fun times. I learned a great deal from many posters there and on the Motley Fool. Became a better investor because of them. wabuffo

Charlie Munger even "sold" some BRK-A shares via a Form 4 that was misunderstood at the time. https://www.sec.gov/Archives/edgar/data/1067983/000118143108063602/xslF345X03/rrd224408.xml Who says they don't ring a bell at the bottom. Sometimes they do! wabuffo

If you look at peak to trough Berkshire was down more than 50% during this period. Peak: 12/11/07 BRK-A closing price 148,900 (intra-day peak was higher) Trough: 3/5/09 closing price 72,400 (intra-day low was lower) Drawdown: -51.3% Munger_Disciple - this is an interesting example. Before Buffett came out with his 1.1x and 1.2x book value buyback "floor" prices, I liked to use price-to-book value as a short-hand way to buy and sell BRK. Basically if the price approached 2x book value - you sold (or didn't buy) and if you got anywhere near book value - you bought. The drawdown you note neatly encapsulates this "rule". The peak in Q4 2007 represented a price-to-book value of 1.96x book value. The trough in Q1, 2009 represented a price-to-book of 0.95x book value. Many people were buying BRK hand-over-fist in late 2008 and early 2009. Charlie Munger even "sold" some BRK-A shares via a Form 4 that was misunderstood at the time. He was actually selling his shares to his heirs near their lows on margin (95% margin IIRC). It was actually a ringing of the bell to buy BRK because Munger was executing a deft tax-planning move. There was another 50% draw-down with BRK that happened early in my investing career. During Q4 1998 and Q1, 1999 (in the middle of the Gen Re acquisition), BRK sold briefly at 2.1x book value. Then in March 2000, it sold as low as 1.06x book value. I believe the fall in price from peak to trough was 49.8%. My larger point is that 50% drawdowns do happen to BRK. But they start from a point of very high valuation and the trough (when it happens) often represents an outstanding bargain investment. BRK's valuation today makes it unlikely you would see a 50% drawdown from today's prices. And if you did, then you might want to buy it in size. wabuffo

I follow every post from benhacker and writser as well. Very thoughtful investors (and humble too - despite their very evident value investing chops). I also like cigarbutt's careful reflections and ideas. He's very polite and tolerates my snarky posts about Aimia. I don't think I would have his patience and grace if someone was ripping one of my investment theses. :) Overall - as long as one stays away from the "Politics" mosh pit, one of the few websites with so many high class posters! wabuffo

I don't want to pile-on Wedgewood. But I don't agree that Berkshire Hathaway has underperformed the S&P 500 in recent years. He/they arbitrarily chose the start of the current bull market in March 2009 to do their comparison - but I think that misses an important point. Buffett is starting to acknowledge that his capital base and cash position are making it harder to achieve BRK's past results and he has signalled that he will take action to prevent underperformance. That is why starting in Sept. 2011, he formalized a buyback policy which has helped to put a floor under the stock and moderate its price declines. He started at 1.1x Book Value, then raised it to 1.2x Book Value in Dec. 2012 and then finally went to a more unconstrained approach last year. I would argue that this new capital policy means that one should look at BRK's record since 2011 vs the S&P 500. From what I can see, how can one say that BRK has under-performed vs the S&P 500 through this period (until this year)? It hasn't! It's too early to panic because of a few Q's of underperformance in 2019. Especially since Buffett will act if BRK's price/value becomes attractive. We all may wish he was more aggressive with his buybacks so far - but I do believe that the presence of a significant repurchase program is a new factor that helps the stock from languishing the way Wedgewood fears it will. Of course, this performance reflects buy-and-hold since the end of 2011. There's nothing that prevents someone from buying or adding to a BRK position during periods where it gets statistically cheap (like late 2008/early 2009, Aug-Sep 2011, or Q4 2015). In those cases, the investing record in BRK improves vs the simple buy-and-hold record. I don't see how Wedgewood's investment in BRK has anything to do with their underperformance vs the S&P 500. FWIW, wabuffo

Not sure I understand all of this myself, but have been reading everything to learn I don't think the NY Fed does either. obviously. LOL. wabuffo

CB - thanks for the link to Campbell's article. its a bit technical but it helped provide the best explanation I've seen of what's happening to the US monetary system's plumbing right now. I'm not sure I agree with everything he says but his point about the intersection of shrinking the Fed's balance sheet and new bank regulatory capital requirements causing unintended liquidity consequences is very insightful. Thanks again, wabuffo

I would expect a bailout of some sort in the next Presidential term. Cheers! Did you know that $1T of these student loan balances are 100% owned by the US Federal Govt as assets. There already was a bail-out. Around 2010, the Obama administration pushed private student lenders completely out of the market and basically took over the issuance of new student loans. The "business case" made by the Administration at the time was that the Federal govt could borrow at a lower interest rate than private lenders could. Thus, the govt could, in turn, lower student loan interest rates and help students while still making a small spread. The claim was that the US taxpayer was going to 'make money' on this deal. (LOL!) The Federal spending wasn't even counted in the official Federal Budget deficit statistics since the disbursements under the Federal Direct Student Loans Program and Temporary Student Loan Purchase Authority were considered the purchase of an "asset" and not an expenditure. So the over $1T disbursed for new loans and purchased loans was never counted in the deficit numbers from 2009 onwards. Nevertheless - to the student loan recipients the cash deposited to their bank accounts was real enough! You can see the numbers in Schedule E of the US Treasury's monthly budget reports. wabuffo

I prefer the Modified Dietz method (vs using IRR - which has some faulty assumptions if there are large inflows and outflows during the time period). https://en.wikipedia.org/wiki/Modified_Dietz_method wabuffo

greed, and good convo! This stuff is endlessly confusing (at least for me) and I always enjoy these type of discussions and to hear other points of views. ditto - I'm always trying to learn more about macroeconomics but feel like I only scratch the surface. wabuffo

The treasury can't affect aggregrate demand. they don't control the supply of the medium of account. Treasuries are not a medium of account. Only the dollar is, and the Fed is the sole controller of the dollar. The treasury can't print more dollars, only bonds. Sometimes the Fed plays ball and buys those bonds and monetizes part of the debt. But thats entirely the Feds call. They could refuse to buy any more treasuries, in which case no new dollars get out into the economy, and any deficit will either be accompanied by a future surplus or otherwise the bonds will default. Unlikely this will occur, but just list the extremes to illustrate a point. Ok - thanks for your point of view. Needless to say I don't think this is how it works at all. The US Treasury always spends first. If the Dept of Defense wants to buy a new F-35, the US Treasury directs the Fed to credit the appropriate private banks with new deposits to pay for the plane. The new deposits create reserves at the Fed's account with that private bank. Bond issuance by the Treasury is after-the-spend. The issuance of Treasury Bills or Bonds is not really debt for a fiat currency issuer. Its an interest-rate maintenance mechanism and meets the private sector's need for interest-earning financial assets. The bond issuance by the US treasury just moves the deposits at the Fed from a non-interest bearing account to an interest-bearing account. On one part we agree. The US Treasury never has to has to issue a T-bill or T-bond ever again if it wanted to, the deposits would just accumulate in the banking sector earning whatever the Fed wants to pay on reserves. This in a nutshell is what happened from 2009 on - more or less. In practice, it can't actually happen that way, because Congress has put limits on the Fed buying Treasuries directly from the US Treasury and Congress has also limited the amount of overdraft of the US Treasury's bank account at the Fed. It used to be $5B limit (ie, Treasury could spend up to $5B without going over - and would be forced to issue bills or bonds to prevent an overdraft - but that was changed after the GFC. I believe now the US Treasury's account is allowed up to a $400B overdraft limit - which used to be an entire year's annual deficit). These political constraints create the appearance that the US Treasury must borrow to spend - but as we've seen they are political and not financial or economic constraints. Congress waived both requirements or modified them during the GFC. Needless to say - I don't think we agree. But that's ok - thanks for the engaging conversation! wabuffo

Fiscal deficits only matter to the extent that the central bank allows them to matter. I don't understand your points. How exactly did the Fed offset $8.3 trillion of new bank deposits created by excess Federal spending? What mechanisms did the Fed execute to offset an increase of $8.3 trillion in net deficit spending. And that's an AVERAGE deficit to GDP of 5% per year. And one can't argue that the Fed was somehow too tight! When the spot gold price has increased from ~$950 per oz at the beginning of 2010 to $1420 per oz today, that isn't a tight monetary policy. Gold's characteristic is one of extreme stability so it indicates to me that the there's been a 40% depreciation in the US Dollar over this time frame vis-a-vis a very stable commodity (a North Star for monetary direction). The Fed can't be "too tight" when that kind of a move is happening. What is the difference between the Fed printing up $8.3T in new money and helicoptering it and the US Treasury sending $8.3T to individual private banking accounts? None - I think they are the same thing. Except in today's monetary system, the US treasury is the heavy mover of monetary effects. The Fed can't hit two policy targets with one policy arrow. It maintains an interest rate target so it then slaves itself to US Treasury net deficit spending/bank reserve maintenance. The last time the Fed targeted aggregate money supply was an experiment by Volcker in 1979. Volcker himself abandoned it and replaced it with an interest rate targeting mechanism. wabuffo