Munger

Buffett walks the walk -- the Benjamin Moore CEO learns the hard way. Well done Mr. Buffett. Warren Buffett has sent one of his top execs on a cruise to Nowheres-ville. The billionaire owner of Berkshire Hathaway, famous for not micro-managing, stepped in last week and quietly canned the boss of Montvale, NJ-based Benjamin Moore paint after the CEO treated himself and his corporate coterie to a trip to Bermuda on the company tab, sources told The Post. Ironically, the 129-year-old Berkshire-owned paint company, after suffering through five years of shrinking sales in the wake of the housing market collapse, had just recorded its first quarterly sales increase since 2007. CEO Denis Abrams arranged the island getaway to celebrate the achievement, sources said. But the Bermuda trip — and an island dinner cruise while there aboard a yacht that some in the party believed was owned by singer Jimmy Buffett — proved to be one of the last acts Abrams would take on as CEO. The trip riled Benjamin Moore’s rank-and-file, who have weathered layoffs, slashed commissions and frozen salaries over the five years of tough sledding. Whether or not because of worker complaints, a half-dozen Berkshire officials descended on Benjamin Moore’s North Jersey headquarters last Tuesday to give Abrams his walking papers — and escort the CEO from the building, sources said. “[Abrams] kept asking what he’d done wrong,” according to an insider briefed on the ouster. “[berkshire officials] told him to clear his stuff out while they stood and watched every move he made.” Reached yesterday, a Benjamin Moore spokeswoman confirmed Abrams was ousted and had been replaced by Bob Merritt, a veteran restaurant exec. She declined to comment further. Officials at Berkshire, as well as Abrams himself, didn’t respond to requests for comment . Firings of top executives at Buffett-owned companies are rarely made public. While Berkshire is publicly traded, the CEOs of his companies operate mostly outside of public view. Buffett is said to give his CEOs a simple mandate: run your company as if it were the only asset you own without the option to sell or merge. Berkshire bought Benjamin Moore in 2000 as part of a big move by Buffett into the housing sector. US homeowners needed paint and Benjamin Moore, started by Brooklyn’s Moore brothers on Atlantic Avenue in 1883, just as the Brooklyn Bridge was completed, was supposed to spin off cash and profits. Abrams was the vice-president for operations when Buffett bought the company. He was promoted to the top spot in July 2007 — just in time for the mortgage meltdown. “Bermuda-gate” aside, sources said Abrams’ ouster followed years of worker complaints and strategic gaffes that have hurt the firm’s business — and tarred Berkshire’s reputation with employees. “Ding! Dong! The witch is dead!” one former exec told The Post, noting that Abrams routinely referred to himself as a “dictator” as he threatened dissenting workers with their jobs. Nevertheless, some insiders also blame Berkshire for Benjamin Moore’s woes, as Buffett has paid fat salaries and bonuses to top execs in exchange for clearing punishing profit hurdles. Abrams met targets partly by slashing the company’s sales force and ad budget, which in turn has hurt revenue and market share, according to critics. Meanwhile, Buffett stripped $150 million a year in dividends from the company’s coffers after acquiring it for $1 billion. Insiders said the recent sales increase was driven by price hikes and not unit sales — which continued to decline. Excluding recent acquisitions, annual revenue remains about half the peak of $1.1 billion reached in 2005 — an embarrassment for Buffett. In the throes of the housing crisis, critics say the 62-year-old Abrams made matters worse by introducing a dizzying array of high-tech and high-priced tints. Abrams fired veteran sales execs; retailers say he tried to strong-arm them into exclusive distribution deals. “These were family-owned businesses, a lot of them were my friends,” said Rod Mangan, a ex-regional sales manager in Stuart, Fla., who says he was fired five years ago after 31 years at the company. Small retailers charge that Abrams also undercut their business by signing distribution deals with larger chains and began selling paint on Benjamin Moore’s Web site. Meanwhile, inside Benjamin Moore, employees were whispering that the dinner cruise in Bermuda was taken on a yacht owned by none other than Jimmy Buffett. The famous singer shares a surname and a longtime friendship with the legendary investor. (In 2007, a DNA test found the Buffetts weren’t related.) “One of the wives [on the cruise] posted pictures on Facebook, and she said it was Jimmy Buffett’s boat,” a source said. “People were like, ‘Why didn’t I get invited on this cruise?’” In the end, it is doubtful the yacht is owned by Buffett. An employee of the 65-year-old composer of “Margaritaville” said his boats, which include the 124-foot “Continental Drifter III,” aren’t available to the public for charter. In a meeting hastily convened last Wednesday, sources said Merritt, the new CEO, told workers he aimed to beef up compensation for high-producing sales reps and mend ties with retail partners. Still, some Benjamin Moore veterans are skeptical after years of ruthless cost cuts that have hobbled the business. “Did Mr. Buffett just not have his eye on the ball, or is it just the culture of Berkshire Hathaway?” asked an ex-exec. “That’s what Benjamin Moore people get together and shoot the breeze about.”

Capital allocation will be the critical variable -- no doubt. But no one should kid themselves into believing they know what Dell's business (or any tech company) will exactly look like in 5 years, most especially Jim Chanos who readily acknowledges a holding period of 6-9 months. Dell is appealing in the context of a pari-mutuel betting system, an analogy Charlie Munger has discussed in the past. Some opportunities are attractive because the bookie (in our case Mr. Market) is giving fair odds on a great horse while others are attractive because the bookie is offering fantastic odds on a decent or even run down horse. Most often, a pari-mutuel system provides odds that offer little advantage to the investor. In rare cases, the bookie stops thinking clearly and offers great odds on a dominant horse and this is the time to act with large amounts of your capital. Based on what we know today, Dell is probably still a decent "horse" (with the potential to be a great horse) and Mr. Market is offering odds heavily in our favor. Instead of reading those interviews and thinking of all the ways we can make money from Dell, let's invert and think of how we permanently lose money. Given that capital allocation is the critical variable, Michael Dell would have to drive his current business into a massive ditch (never adapting as circumstances change) and blow through $17.2B of cash. Is this dire scenario possible? -- absolutely. Is it likely? -- any rational conclusion would have to be that the scenario is highly unlikely given Michael Dell's proven track record and the company’s current competitive strengths. Even if Dell suffers a permanent 60% cut in FCF from 2011 levels and only grows that new lower number at 2% annually in the future, you still make a lot money on this investment...assuming capital allocation is prudent. Dell will be a fascinating case study as the future unfolds...will either prove one of the rare, great investment opportunities or one of the great business tragedies in history -- the man who built a multibillion $ global enterprise from a company started with $10,000 in his dorm room and then blew it all. There really is no in between at current valuations because if the company just survives (even if 60% smaller), investors make money on Dell.

I personally don't assume Dell is headed for liquidation but rather will remain a viable going concern that will grow again (at least modestly -- 2-4% annually) at some point in the future. Under this scenario, the cash stemming from working capital will accrue to shareholders in some form. Of course there is risk with an investment in Dell but the general point is that odds are heavily in favor of making money for long term investors in large part because the stock very cheap, even if you did net out WC and fully tax excess cash by another 30%. And if Michael Dell delivers on his plan, the stock will deliver huge returns although it is impossible to know with any certainty if this scenerio will play out...as a result, I don't view Dell as an "all in" opportunity despite the valuation and cash flow characteristics of the business.

For those interested in Dell, here is another interview. A man with a dream, a vision, and an uncanny ability to innovate through technology. Michael Dell is the man behind Dell, one of the most profitable computer companies in the world. Michael skipped his college education and started the company in 1984 with $1000 in his pocket and an extreme passion for gadgetry. Mr.Dell took some time with us to reflect on his strategies for success, his thoughts on implementing a sound economy, and the key characteristic that marks you as an Entrepreneur for life. Alister & Paine: You, along with many other notable entrepreneurs, opted to leave college to pursue your business idea. What inspired you to take that risk and why couldn’t it wait? Michael Dell: When I was 19, I saw what I thought was a huge opportunity to change the way personal computers were made and sold. I didn’t have an epiphany…the idea was cultivated over time. In high school I purchased and took apart one of the very first IBM PCs. I made two interesting discoveries: 1) none of the parts were made by IBM 2) the system that retailed for $3,000 actually cost IBM about $600. I immediately saw this as an opportunity. I started upgrading my own systems, using the same components as IBM, and selling them. The idea grew from there. Alister & Paine: What obstacles did you face, and how did you overcome them, while building your business? Michael Dell: We grew about 80 percent a year the first eight years of our business and 60 percent the following six years. Scaling our operations and our team to keep pace with that kind of growth was by far the biggest challenge for us in the early days. Fortunately, there were a lot of really smart people looking to join a high-risk, high-reward venture like ours…and we were always hiring! Alister & Paine: Technology changes at lightning speed by its very nature. How is Dell keeping pace, particularly in the mobility and cloud computing space? Michael Dell: You’re right, new technologies and trends—like cloud computing, mobile, and consumerization of IT—continue to change our industry every day. The good news for us is, with each breakthrough, IT becomes even more embedded in business and in life. It’s increasingly the way people connect, products and services are delivered, valuable data is stored and shared, business is done. For business and organizational customers in particular, the spotlight has shifted from the latest, greatest device to how IT can help them solve problems and achieve their goals. This has fundamentally changed our business strategy, compelling us to evolve well beyond PCs and devices to address the end-to-end IT needs of our customers around the world. We’re a very different Dell today with skills and capabilities in services, data management and security, software and peripherals, cloud and mobile solutions, networking and end user computing. Alister & Paine: The competition to win and retain consumer business is tough. How is Dell doing and where are you focusing your efforts for the future? Michael Dell: Today, roughly 80 percent of our business is with businesses and public-sector organizations. Ninety-five percent of all Fortune 500 companies and 100 percent of G20 governments are Dell customers. While we have a strong consumer presence and will continue to compete in that space, it’s important to focus and commercial is where we expect most of our growth will come from. Ours is a $3 trillion industry and only about $250 billion of it is consumer. We’re laser-focused on the $2.75 trillion opportunity that is commercial. So you’ll see us not only providing devices that generate consumer and enterprise data, but the technology infrastructure that supports, manages, connects and secures it, too. Alister & Paine: You recently described Dell as a serial acquirer. Can you give us some insight into your thoughts on Intellectual Property and how it fits into your business strategy? Michael Dell: IP, acquired or organically developed, is a fundamental part of our long-term growth strategy. We’ve acquired about a dozen companies in the last two years. Each acquisition introduced important innovations and expertise into the Dell family that enabled our end-to-end solutions strategy. But we’re also investing in organic innovation. In 2011 we committed $1 billion to R&D. In less than a year, we’ve opened 12 enterprise solutions and cloud centers around the world, with more to come. These investments mean we now have some of the best storage, security, networking and cloud capabilities around, and we’re addressing the spectrum of IT requirements, from the data center to the desktop and out to the mobile endpoint. Alister & Paine: After nearly 28-years of leading Dell, what inspires you to keep at it? Michael Dell: I’ve always been inspired by technology. I remember as a kid being fascinated by my dad’s adding machine. I could type in an equation and out came the answer. It did the tactical work while I thought up the next complex problem for it to solve. That’s still how I look at technology: as a tool for solving a lot of the big challenges in the world. Just think about all the opportunities in the world around energy, health care, education and solving the unsolved problems in science. More often than not, a computational problem is at the heart of it. Today’s IT, just like my dad’s adding machine, is all about solving those problems. It’s exciting and inspiring to lead a company that is delivering the solutions enabling those discoveries. Alister & Paine: What one character trait do you think a person must possess to be a great entrepreneur? Michael Dell: Curiosity. Without it, human potential is finite; but with it, anything’s possible.

Dell has bought back large amounts of stock over the past few years. The Perot acquisition was actually pretty good. Dell laid out his plan in a recent interview with Forbes -- we'll see if he delivers. Question: Dell has changed a great deal over the last decade; I expect it will change a great deal during the coming decade. If you were to describe Dell in 2022, what would that Dell look like? Answer: In 2022 Dell has become a true end-to-end solution provider, vertically-focused, solutions-focused and creating value for customers.We are not a copy of HP or IBM. We don’t have to protect aging legacy businesses; we can buy firms that are leading in a critical technology area and be faster to market with a more advanced solution to leapfrog those companies. We will have end to end solutions, but rather than being based on thinking that goes back decades, our solutions will be based on contemporary thinking by young companies that have already proven their success. By 2022 we expect to lead this solutions market, not by chasing IBM and HP from behind but by using acquisitions to jump ahead of them. On tablets and smartphones Question: Everyone is excited about smartphones and tablets at the moment and Dell has pulled back from this segment. Why do you feel that is the strategic play to make and what conditions will have to exist before you reenter (or will you ever reenter)? Answer: Currently the tablet market is really an iPad market and the smartphone market in our space is defined by troubled vendors like RIM and Nokia who are struggling for survival. Microsoft Windows 8 is exciting, and you’ll see a lot of activity from us as Windows 8 becomes available, for now we are more interested in the business solutions to Smartphones regardless of who builds them. If the market changes so that a vendor like Dell can compete with smartphones more successfully we’ll likely reenter but, until then, our focus is going to be on managing, securing, and keeping these devices fed. We have many avenues to success and that falls closer to our emerging core competence. The recent Wyse acquisition strengthened significantly, for instance, our ability to uniquely manage, provision, and securely provide services to both tablets and smartphones, expect to see our biggest emphasis, at least for the short term, on that aspect of this business. On acquisitions: Question: You have been unusually successful with acquisitions. What do you do that is unique and how did you come around to the idea of doing acquisitions in this way? Answer: First you have to understand that value doesn’t come from acquiring companies it comes from what you do with them. We look at over 250 companies a year to fill gaps we have identified in our product lines. We then generally partner with many of them to understand their strengths and weaknesses and then purchase the few that make sense for us to own. We lead with a massive amount of analysis and follow with execution based on what we have learned to focus sharply on addressing the acquired firms known shortcomings, which often come down to just scale. We can give these firms scale very easily. Since we have no legacy technology in these areas none of our effort is focused on protecting existing executive turf or legacy products. There are few if any internal conflicts and that makes every part of the acquired company important. Much of our initial work is to determine, later protect, and eventually enhance the value of what we have acquired. This is systematic and repeatable process that we first implemented with EqualLogic and Dave Johnson, who joined the firm later, has been instrumental in making this into a process we have repeated since. Using EqualLogic as an example we were able to grow their 3,000 customers to over 50,000. This established a process where we start with a successful company and rather than the more typical process that other firms use of blowing the acquisition up in order to integrate it in existing legacy lines we attach the company to Dell resources which act like a huge business booster. The end result is our acquisitions increase in value dramatically while other approaches generally have the opposite effect. The acquired companies like this as well because without us they typically have 4 bad choices either they can’t grow fast enough to compete with larger competitors and fail, never grow to critical mass and fail, get acquired by someone else that destroys everything they painstakingly built, or maybe after a long period of time they make the cut to success. We fast track them to this last most favorable alternative and that is why our retention of both employees and top executives from these firms is so high. In the end while others seem to prioritize integration we prioritize preserving and enhancing value which is why we are so much more successful preserving and enhancing value. We simply believe that making something better trumps taking absolute control of it. On the coming Annual Analyst Conference Question: The Dell Annual Analyst Conference is coming up. What should the analyst community expect from Dell since the last conference? Answer: They should expect a massive change from the desktop focused Dell of the past. Our solutions portfolio, particularly in the mid-market, has grown substantially and our ability to provide complete solutions from client, to security, to management, to back end processing, to storage, to networking, has increased dramatically. We are now a company with the most advanced market tested technologies in a number of critical IT segments and expect that we’ll provide proof points that will demonstrate that leadership. We are nothing like we once were and we are very proud of the changes we have made. We’ll show them a Dell that is now a full service provider, one that has unique solutions that lead our industry and segment, and one that is uniquely able to address tomorrow’s problems with tomorrow’s technology both now and in the future. We aren’t planning on being the next anyone else; we are planning on making everyone else want to be the next us. Wrapping up: I’ve known Michael Dell for a number of years but this is the only time I’ve actually interviewed him. This conversation reflects the unique advantage of a founder more interested in building strategically than focusing exclusively on short term quarterly results. His ability to acquire companies and increase their value remains relatively unique this decade and his approach to acquisitions has become an industry best practice that most other firms seem unable to emulate. What generally makes a founder different is the ability to create and execute a long term vision. In our conversation Michael Dell demonstrated this unique ability which likely will remain as one of Dell’s greatest assets.

"Not really cheap" -- I would respectfully disagree. Accurate to assert that the future is cloudy for Dell but this is true for all tech companies...so I wouldn't challenge the notion that the business should be valued at a discount to the market until the company demonstrates more consistent performance. However, the risk/reward is heavily in favor of making money on an investment in Dell for anyone with the capacity to hold the stock for 3-5 years. Market cap: $24.0B Cash: $17.2B Debt: $ 9.0B So the balance sheet shows net cash of $8.2B -- to be conservative, let's assume that all of this cash is held overseas and tax at 30%, which produces a net cash figure of $5.74B. Using this number to calculate EV, we get: EV: $18.25B FCF (trailing 12 months): $ 4.90B EV/FCF: 3.7x So tomorrow you'll likely be able pay 3.7x trailing FCF to secure ownership of a company with a global brand and huge difficult to replicate scale led by an individual who: 1) is one of the most accomplished CEOs in the history of tech, with a reputation that gets him in front of every potential client for which Dell has a product/service offering 2) is also a multibillion $ shareholder, with personal purchases over the past few years totaling upwards of $200 million 3) has a 20+ year track record of generating gobs of free cash flow year in and year out...important to emphasize -- he has generated massive free cash flow (true excess cash) every single year, good economy or bad Who knows what the exact future holds for Dell and there is unquestionably risk in an investment...but hard to believe the company won't continue to play an important role in the tech ecosystem well into the future...and at 3.7x trailing FCF, the risk/reward is pretty good for long term investors.

Do people really think that BAC can fall, but life goes on as it is? From a practical perspective, the equity could easily get wiped out and life go on for the rest of us. I don't think anyone believes BAC as a company stops functioning -- if the equity gets wiped out, deposits will be guaranteed and people will be able to get their money...life will go on and a recapitalized BAC would come public again or be split up and sold to other companies. I'm not predicting the equity is a $0 (although it is unquestionably a legitimate risk) -- just noting that if the equity is a $0, life could easily carry on.

Firmly believe that BAC is complete black hole, which is why I have never shorted the stock. I continue to see BAC as nothing more than a speculation...one that could prove quite profitable if they get lucky. The bulls will argue the fall in BAC common stock just reflects Mr. Market being irrational once again. In my opinion, the fall reflects the fact that no one can confidently determine the downside. Continue to be amazed that not one insider has used a single $ of their own money to buy the stock at what some argue is an insanely cheap valuation, which was supposedly the case at $12 and then $8 and now $5.

BAC will probably survive, but there is an elephant in their kitchen that won't go away. That elephant is piled high with the credible claims of everyone who held their stock during the crisis and lost much more than the current market cap of the stock after management rushed the acquisition of ML while covering up the huge MTM losses in their portfolio. Their conduct in the coverup was blatant. Lewis actually fired one of his high level managers for standing up at that time and saying, "This is wrong!" I am highly skeptical that anyone can have an informed, bullish opinion on BAC common stock -- too opaque. Any long or short position in the stock at this point is essentially speculative, in my opinion. And I do believe BAC as an institution will survive in some form but that doesn't mean the common stock will prove a good investment. However, to be fair, any litigation against BAC re the acquisition of ML is completely bogus and I don't believe will lead to any meaningful, negative consequences for BAC or even Lewis. While Lewis was foolish (understatement) to initially agree to buy ML and did wrongly fire a subordinate who voiced opposition, Lewis did try to back out of the deal when it became apparent to even him that ML was a house of cards -- the MAC clause was a legitimate out. Paulson/Bernanke/Geithner literally forced Lewis/BAC to complete the deal under the threat of severe retribution -- this fact has been reported in The End of Wall Street (Roger Lowenstein), Sellout (Gasparino), and Too Big To Fail (Sorkin). The litigation trail will ultimately lead to Paulson/Bernanke/Geithner -- I think any litigation would be shut down at that point, with BAC/Lewis agreeing to a modest settlement at worst. I would recommend reading each of those books. I would also recommend Reckless Endangerment (Gretchen Morgenson and Josh Rosner) -- another fantastic book. While the bank executives deserve enormous blame for their role in the financial crisis/real estate bubble, Reckless Endangerment shows that James Johnson (Fannie Mae CEO)/Franklin Raines (Fannie CEO following Johnson)/Angelo Mozilo (Countrywide) are the primary culprits, with great help from Barney Frank/Chris Dodd and to a lesser extent, Cuomo/Cisneros of HUD during the Clinton admin -- without their collective actions, the real estate bubble could have never lifted off. As Josh Rosner and New York Times reporter Gretchen Morgenson show in Reckless Endangerment, the system (US housing policy) became totally corrupt. Banks (as well as other mortgage originators) operated under the cover of Fannie/Freddie/Countrywide and no doubt helped push the bubble to levels that could not have otherwise been reached without their actions.

Bond market has yet to join the party....worth reading article in today's WSJ -- Bond Markets Are Still Skeptics. I'd post article but not sure about copyright issues.

Didn't realize you had to sign up for his email newsletter (which is free) in order to view via his website. So here goes for those that don't want to sign up. Mauldin does not mind the email being forwarded. Just as only four short years ago it was All Subprime, All the Time, and then it was the Credit Crisis, now it is Europe. (When) will Greece default and which banks will implode as a result? Is there another banking crisis in our future? I just came back from a whirlwind four-country visit to Europe, and I will try to offer a few insights. This week we start with Ireland, move to the problem of Europe at large and, if we're not out of space (and your patience!), we'll visit some last-minute data points. There is a lot to cover, so let's jump right in. Two Insights from Ireland This was my first visit to Ireland, but it won't be my last. In an odd way, I felt more at home than I do in some US cities. And the views! I was charmed enough to agree to go back next month to speak at one of the most unusual economic "festivals" I have ever been to, when the last thing I want to do is get on another plane. More on that at the end. First off, even though we think of Ireland as a country, it is in reality a nice-sized city. Ireland is a little under 4.5 million in population (with another 1.8 million in Northern Ireland). I was lucky, in that I have a number of readers in Ireland who offered to introduce me to people. Remember the old game of six degrees of separation (from Kevin Bacon, the actor)? In Ireland it is more like two degrees. It turns out they all had cousins or mates who knew someone I should see. No one was less than a few introductions away. I spent a great deal of time going from one meeting to the next, gathering impressions and data. Literally dozens of meetings. I met with officials of government pension funds, the new chairman of the Anglo Irish Bank, former prime ministers, politicians of all types (both front and back benchers), established economists and rogue economists, businessmen at all levels, regular people in pubs, investors, and the fabled Irish ne'er-do-wells. And only got to a fraction of the potential meetings. With such a potpourri of people, you might think it would be hard to draw any conclusions, but I came away with two main impressions (and lots of smaller ones), which I think offer us insight into the world and European situations at large. But before we get to those, let's review a little history. Ireland is noted throughout the world for its troubles and the Diaspora. Famines, rebellions, and tales of woes. The Irish have emigrated almost everywhere. The Irish pub was created as a way for people to gather when it was against the laws to assemble in public. And they exported their pubs around the world. What city can you go to and not find an Irish pub? (Well, some in Asia, perhaps, though my editor tells me there's a great one in Kyoto.) And in all of them they'll sing about some kid that was killed in the war, which was of course in 1618, or whenever. I have always loved Celtic music, so I was delighted when I went to some local pubs and, sure enough, heard the music I was so familiar with, complete with the lilting Irish voices. The Irish are nothing if not a social people, wherever they gather. And the local pub is still the center of local communication (more on that later). The first night I was there, I had the fortune to be invited by David McWilliams to attend the opening night of a classic and much-loved Irish play by Sean O'Casey, at the Abbey Theatre, first staged at the same theatre for its premier in 1924. The play is set in the working-class tenements of Dublin during the Irish Civil War of the early 1920s. It is a comic tragedy on so many levels, and was an interesting introduction to Ireland. It is those centuries of woes that set the stage for the recent economic crisis in Ireland. For a number of reasons, Ireland began a "miracle" growth period in the 1980s and soon became "the Celtic Tiger." The mood of the country changed from downtrodden to optimistic. And that translated into a construction boom. They ended up believing that "this time is different" and went crazy buying and building homes. Which are now down some 65%. Ireland is an interesting contrast to Greece. Greece used its access to low rates that came along with the euro to borrow and increase the wages of government workers, until the Greek train system, for instance, had €100 million in revenue and €400 million in salaries, with another €300 million in expenses. A government-sponsored retirement plan for some 600 different "hazardous" jobs (like hairdressing and radio work) was available at 50 years of age. Greek banks are going to go bankrupt not because they lent money to finance too many homes but because they lent money to the Greek government. That is the opposite of Irish banks, which, while they bought modest amounts of Irish government debt, facilitated a construction boom of epic proportions - a bubble that imploded. I have written about Irish housing woes. They built 300,000 too many homes, which would correspond to about 15 million too many homes in the US (we "merely" overbuilt by 2.5 million). The resulting crash in building has been a monstrous drag on the Irish economy. And the same happened in commercial construction - a taxi driver took some delight, once he knew I was a financial writer, in pointing out buildings that were empty. "But they are probably a good buy now!" And the construction boom helped finance a huge boost in government revenues. In 2004, the Irish Home Builders Association calculated that 40% of the price of a house went straight to the government in taxes. You can find details on their calculations in this newspaper article. The government of that time protested that the figure was only 28%! And the Irish willingly took on the debt of banks that went bankrupt. If Anglo Irish Bank were a US institution, the equivalent debt would have been about $3.5-4 trillion (depending on the exchange rate). Can you imagine trying to get a bailout for ONE bank for that much? And in Ireland there were three of them (!), though the other two were somewhat smaller. The Irish government guaranteed the bank debt for ECB loans, which money then went to European banks that had loaned the Irish banks the money in the first place. Michael Lewis, in his just published book Boomerang! (I saw several people reading it on the plane coming back - soon to be downloaded to my iPad), noted that he thought it was interesting that the Irish people did not seem all that aware of the rather crushing nature of the debt they had assumed. He also commented on that in an interview with Charlie Rose. More on that bank debt below. Before we get to my two impressions from Ireland, a few things we should keep in mind. First, I heard time and time again that Ireland is different from Greece and other Mediterranean countries. The Irish willingly undertook an austerity program, without major public protests, and have actually begun reforms. They cut public salaries (around 15%), pensions, and other "untouchables." (Try that in the US! Wisconsin went berserk over cuts that were a fraction of what the Irish did.) Other government budgets were slashed. And they acknowledge the need for even more cuts. That being said, a clear backlash is beginning to brew over cuts to government social programs. (I should note that even though this is about the Irish, I hear this complaint everywhere in Europe and the US.) This is from the Irish paper The Independent: "A LABOUR senator has questioned the need for massive social welfare payments to many families after revealing yesterday that some are receiving €90,000 a year. Senator Jimmy Harte highlighted the case of one family who are being paid €1,763 per week. The unemployed married couple, who have four children and live in Dublin, claim a range of social welfare benefits. "Mr. Harte, who received the information from Department of Social Protection officials, said €50,000 is more than enough for a family to survive on. The Donegal-based senator told the Irish Independent yesterday that he believed the figure was far too much to be handed to a family in support payments. "The family are doing nothing illegal but the system is wrong when a couple are able to receive €90,000 per year for doing nothing. I don't think this sort of payment is acceptable in the good times, never mind the bad times we find ourselves in now…. There are married couples in this country with two good jobs, working very hard and are not receiving anything like this. As well as receiving €90,000, they will not have to pay property tax or water charges. That is just wrong. You would need to be earning close to €140,000 to take that sort of money home after tax. "This is a Dublin-based family but I know there are families in other counties receiving up to €85,000. They won't take in as much in rent allowance but they are still entitled to all the other payments [said the Senator]. "According to figures obtained by Mr Harte, the following is the weekly breakdown of the social welfare payments received by the family: father on disability allowance, €322; guardian's pension for child taken in, €286; rent supplement, €276; mother - carer's allowance, €380; child benefit, €288; daughter (17) with special needs, €211. Mr. Harte said he has forwarded all this information on to the Minister for Social Protection Joan Burton and wants a cap put on welfare payments." And from my understanding, this is on top of health care. Which is another thing that I was told needs reformed. Which of course you hear in the US and all over the developed world, so the Irish have no corner on politicians who like to hand out a lot of benefits when times are good. But now the bills are coming due. Sidebar: The one thing the Irish have plenty of is politicians. The Dail (pronounced "doil") is their parliament. It has 150 members. And their upper house has 60 members. That's about one member of parliament for every 30,000 voters. Peter Mathews, a new member of parliament, was kind enough to show me through the parliament building, opening up the chambers in the evening. Now that is something you don't see US Congressmen do. So, Ireland is not without its issues that must be dealt with. But I did come away with some positive views. The Irish Chamber of Commerce As I noted, I met with people of all different stripes and political bents, from avowed socialists to libertarians. When they would ask me who else I was going to see (or had seen), they would almost invariably wince and say, "Don't let them put you off Ireland" or "They don't understand the real problems," or some variation. They are not shy about voicing opinions. David McWilliams is seen as something of a rogue in polite political circles. When McWilliams began to suggest that the Irish housing market was a bubble that would wreak havoc when it broke, the prime minister said that people like him should just commit suicide. (Seriously!) I have been involved in political circles for many years, although lately I have more or less "retired" from my political activities. In my experience, nothing is more sharp or divided than local politics. There is far more direct involvement at the local level, and that means more opinions and personalities get involved. Remember when I said Ireland was a nice-sized city? That is what their politics reminded me of. When everyone knows everyone, and when there are enough politicians that everyone can get to them with their views, it is indeed a small world. But after they had shared their opinions with me, a strange thing happened in almost every meeting. I pointed it out to a friend, Phil Harkin, who set up so many of the meetings and helped me get where I was going. He began to pick up on it as well, and it became our running bit of humor. It seemed everyone I met was a member of the Chamber of Commerce. They would tell you why Ireland needed to adopt one policy or other, what their views were, and then at the end they would pull out a figurative brochure and tell me why I needed to "buy Ireland." Bring your business here. Set up shop. Hire the locals, who are flexible and educated and willing to work, etc. They speak English. They are skilled workers. The Irish seemingly get it. While they all (left, right, and center) want the government to adopt the particular set of policies they prefer, they all recognize that the way to growth and jobs is for businesses to prosper. And they wanted more of that! The virtues of Ireland are manifest to all, if you only look. And they were more than happy to show me where to look. The Irish may bicker and moan amongst themselves, but when they face the world they lock arms and join the chorus. "Buy Ireland," they sing. It really is rather amazing to listen to all at once. Ireland has more direct investment from the US than all the BRICs combined. Think about that. More than China, Brazil, Russia, and India. That rather stunned me. There are over 600 US companies in Ireland, employing 100,000 people. Google has 2,700 employees from over 40 countries and is growing, adding office space and people as fast as it can. Technology is everywhere. Biotech, medical devices, all sorts of computer services. The Irish seem to have a knack for research and development. Entrepreneurs are taking over as fast as they can. I heard one amazing story after another of businesses that had blossomed in the Irish soil. It is not just one-way. Irish companies have a lot of US employees. There are some 82,000 people employed in the US by 227 Irish firms, almost as many as are employed by US firms in Ireland. That is a far cry from the US employees of Chinese firms. As a result, Ireland is in the enviable position of having a positive trade balance, which is necessary if you want to balance your budget in a country where the banking system is imploding and people are deleveraging. It is why Greece will become a basket case and Ireland has a way to get through its crisis. When Greece defaults, whether or not they leave the euro and go back to the drachma, they are in for a massive deflationary depression. At the end of the day, you either have to have "hard currency" to buy oil and medicine and other essentials, or find someone willing to loan you the money. Greece and Portugal and Spain do not export enough to make it through without some kind of devaluation. Ireland does. That is a critical difference. And that brings us to my next take-away, which has serious ramifications for Europe. An Irish Haircut Michael Lewis noted from his time in Ireland that the Irish seemingly went along with the Irish government taking on the bank debt. The large majority were not aware of the nature of the impending crisis. In the last few years, that has changed. I have written extensively in the past about how the Irish have figured out they are taking on debt for banks that no government should have touched. It was just too much. It's simple arithmetic: the Irish cannot repay that debt under the current terms (even after the ECB and Europe gave them lower interest rates in July) and ever hope to get out of debt in the next 30 years. They have consigned themselves and their children to decades of toil to pay back English and German and French banks (among others). And that fact dawned upon them. They voted out the government that allowed the debt to be assumed. It was a clear message, but the government has not yet done anything to rid itself of the debt. There are those like McWilliams who simply want to repudiate the debt. "It should never have been done, so we will not pay it." He is not alone; that view is becoming increasingly mainstream now. When you press politicians and establishment types (and I did) who are against unilaterally disavowing the debt, a strange thing happens. I kept asking, "But the voters seem to want to forego the debt. And the math suggests that Ireland can't pay back these foreign bankers without great sacrifices." At first, they would point out that Ireland is doing what needs to be done: cutting spending and payrolls. We are not Greece, they say; there is a need for "respectability." But when pressed, they would come around to admitting that, "Yes, Ireland will get a haircut." Everyone I met expected it to happen. The difference was the path to the haircut. But while the politics matter, the destination is the same. Some favor doing it outright. Others truly believe they will be offered a haircut when Greece and Portugal get theirs. They fully expect it. In a meeting with an establishment-insider economist (off the record), who was at the table when the first deal was done, he said there was an implicit understanding with the IMF (and ECB) that whatever was offered to Greece, et al. would be available to Ireland. So Ireland went along with the bailout to keep from imploding the euro and averting a crisis that would have been biblical in proportions. The future of the euro is now not in their hands, because by taking on the debt they did not blow the euro up. Which could have happened, because European politicians were not ready for such a crisis. So rather than having to kick the door open for a haircut, they expect the door to be opened for them by the IMF and the ECB. A far more respectable path for those who are very pro-Eurozone. But Irish leaders clearly get that voters expect that something will be done. They have time, as it will be another three-plus years before elections. By then, the crisis will have fully evolved and resolved itself, as far as the political public is concerned. And politicians will take the credit, as they always and everywhere do. But here is the issue for Europe. The amount of money needed for Ireland is going to be a lot more than they now think, or at least are willing to admit. When Eurozone politicians worry about "contagion," or one country wanting the debt relief that another country gets, it is a very real worry. And rightfully so, as voters in Portugal or Spain or (gasp) Italy who are burdened by debt that is seemingly intractable will also want relief. It is not just an Irish condition, it is a human trait. And the money that Europe needs will overwhelm the €440 billion ESFS fund. Stratfor and others think it will take at least €2 trillion. The Boston Consulting Group put out a report that suggest the total number, at the end of the day, will need to be (drum roll, wait for it) over €6 trillion. I don't like their proffered solutions, but their analysis of the debt and the need for relief is sobering. Whatever the figure, it is staggering. And one the Eurozone is not willing to pay, at this moment. When the crisis hits, who knows? But now, that much is not on the table. There is talk of leveraging the ESFS up to €2 trillion, but that seems odd, as normally you have to have equity to leverage more debt. The ESFS is debt created by promises to pay by the member governments. Are we now at the point where we need to leverage our leverage? It seems to me that is what got us into the problems to begin with. France is at risk of losing its AAA rating. From my far-removed seat, I think it is almost a certainty they will, as the amount they will have to raise for French banks is enormous. Add another few hundred billion euros for bailout funds for Spain and Italy, and the idea of AAA euro debt goes right out of window. To keep the current AAA, a majority of guarantees needs to be from AAA countries. That is a very touchy issue right now. Read the following quote from Angela Merkel, Chancellor of Germany and someone who is a believer in a strong, united Europe. This is from a supporter of Europe, mind you. "While stepping up her rejection of a Greek default, she [Merkel] said that issuance of shared debt by euro countries isn't the solution to the problem spilling from Greece, even though some may long for the 'big bang' to end the debt crisis. 'Whoever believes that has no clue about the economy,' she said. 'No one can say with certainty' what would happen if Greece defaults, she said. 'Before I make a nifty step into an adventure, I have to ask whether we can really handle this and can we oversee what we are doing?' "Merkel said that her 'entire council' of economic advisers says Greek debt should be restructured, advice that she is not prepared to take. " 'If we tell a country "We cancel half of your debt," that's a great deal,' she said. 'Then the next guy will immediately show up and say he wants the same.' " 'You can open any newspaper and see there's a broad international debate,' she said. 'I'm not an economist or a theorist. I and the German government have to consider the consequences of what we do.' "Merkel, speaking to the last of six regional conferences of her Christian Democrats before the party holds a national convention next month, said that she was 'deeply convinced' that Europe's problems can only be solved jointly. " 'Solidarity is always cheaper than if we were to go it alone and wind up with the problem Switzerland has - that the currency level is so high that you can't export any products anymore. Today, going it alone is no path to a better future.' " ( Bloomberg) It is getting late and this is already long enough, so a few more quick notes and then I'll save the rest for next week. Greece will only get more promises and more funds until Merkel gets a call from her accountants, who tell her they have figured out which banks need government funds. The next day she will call Papandreou and tell him to hold a conference announcing the haircut that Greece will get. It will all be orchestrated to the color of their socks. From what I heard, Europeans banks are worse than even the dire reports you read in the papers. Spreads are widening and liquidity is drying up. Drexia is the tip of the iceberg. I really have to wonder how much France can do in regards to its bank debt. Will the ECB lend them enough money? The answer is yes. But we are talking a great deal of debt for a country with serious fiscal deficits and where government spending is already 55% of GDP, with rising health-care and pension costs. Think French politicians will try and get their unions and public workers to take a 15% pay cut? The French will not be civilized and stoical, like the Irish. They will take to the streets. We are now in the final innings of the Endgame. Greece is likely to default no later than the end of this year, if not by the end of this month. Which for all intents and purposes they have already done. If you can't get the market to finance you, that means you can't pay your bills without the kindness of strangers. If Greece were an individual or a company, it would be in bankruptcy proceedings. It is now just a matter of time. Can the euro survive? The short answer is yes, but not without a lot of pain on the part of a lot of people. The drive for a united Europe is strong and may indeed overcome the drive that would tear the union apart. I actually hope so. But it will not be done without a lot of sacrifice. I think the valuation of the euro is at serious risk. And while European markets look cheap on a relative and historical-valuation basis, one needs to ask, compared to what? Long European stocks, short the euro? Maybe, especially if the Germans turn the ECB loose as a way to keep (and pay the price for) the European Union. I heard no consensus. There are dozens of different plans, enough to make any politician's head swim. Stay tuned.

John Mauldin -- conclusions from his recent trip to Ireland. Fantastic insights from people on the ground and an enjoyable read. http://www.johnmauldin.com/frontlinethoughts/an-irish-haircut/

"Munger, what you are excluding from those comments is the cost of capital." I'm simply providing updated figures for the metrics Buffett employed in his own analysis. "It is true that corporate profits will shrink significantly at some point. But probably not for at least a few years." I agree and if you are a long term investor, this reality is critical to any assessment of value today despite not being able to precisely time the eventual decline in corporate profitability.

No doubt valuation is much more compelling today but risks related to peak margins and depressed interest rates are probably greater. And I think you can make money (in some cases a lot) in the right opps -- just need to be careful...I don't think we've reached an "all in" given peak margins, low interest rates, and deleveraging -- not sure how it all settles out but these three factors create meaningful risk IMO. I can only imagine what the fees are today with 75% of all trading being done by robots. I would love to see what this market would look like without HFT. Liquidity providers my ass. Share your view re the above. I'm done for the night.

To supplement the Buffett essay with recent figures on corporate profits. After-tax corporate profits % of GDP The measure peaked in 1929 at approximately 8.9%. From 1951 on, the measure has primarily ranged between 4.0-6.5%. In 1981, the measure trended toward the bottom of the band. In 1982, the measure tumbled to 3.5% During the late 1990s, the measure moved back toward 6%. In 3Q10, the measure was approximately 8.2%. In 4Q10, the measure was approximately 8.4%. In 2Q11, the measure was approximately 10.1%.