Munger

Munger, may I ask you a question? Do you follow Robert Prechter and/or the Elliot Wave Theory? I have read his book, among many. I am not a huge believer in an "elliot wave" but the Prechter's fundamental analysis seems directionally correct -- just wouldn't then move to the conclusion that there are these long general waves that recur throughout history and are predictable. Many years were required for the US to reach the current state -- whether this is part of some predictable, recurring wave, I'm highly skeptical. But again, I think his fundamental analysis of the current problem is thorough and generally accurate.

Buffett writes: "With government expenditures now running 185 percent of receipts, truly major changes in both taxes and outlays will be required. A revived economy can’t come close to bridging that sort of gap." This country has no clue and is not prepared for the magnitude of the changes coming down the pike. The US will prosper again but it is going to be an ugly road.

Have you considered the impact on your portfolio if you are wrong? Yes -- I will miss some upside, which I'm willing to concede because it won't be significant. And one thing I am absolutely certain about -- there will be fat pitches in the future, which will always be the case. So I'll happily wait for a better risk/reward. what is difficult to accept is the certainty with which you seem to hold your views. Fair enough. But I've done the work and the certainty reflects the belief that 1+1 must always equal 2 -- i.e., basic math always holds true. The imbalances are so extreme that the odds of some unimaginable positive economic development radically changing the equation are extremely low -- I'm willing to take those odds.

Ben will print if he has to... Not true -- Ben can influence the monetary base but has no control of the money supply. He can't just increase dollars in circulation. Always amazed at how widely misunderstood this fact is... And inflation would solve nothing -- ss, medicare, medicaid, all state/local entitlements are all indexed to inflation.

and the issue is not located in the US only which in reality compounds the problem. This is vey true. Japan and Europe will face a world of hurt, both of which could be the catalyst for US problems. You do not need to borrow to generate more dollars you print more dollars to pay for tax cuts and spending. The Fed could double the money supply overnight. This is complete and utter nonsense. Not true.

One more thing before calling a night -- let me stress that there is no hubris. What you may sense is frustration -- we are in a truly perilous situation and most don't fully comprehend -- innocent people are going to get hammered...if fully understood, they would be demanding a huge margin of safety from Mr. Market. I firmly believe Buffett and Munger fully comprehend the dangers of the current situation -- however, if they screamed fire, the whole system would collapse tomorrow. Buffett has also built Berkshire to survive the worst. The US will recover and go on to far greater prosperity but the odds of a period of extreme pain are much higher than accepted. Tread carefully -- what's the downside? Wait for that fat pitch. Only buy from Mr. Market when he is begging to sell to you.

And take one step further -- if you understood the above dynamic you would see clearly why it is point certain that QE is not the solution to our current problem...no way, no how...only compounds (dramatically) the ulimate pain. Bernanke is out of his mind.

Let me add that this is the very foundation of our economic system -- so questions in this regard are stunning and scary. No hubris.

Exactly what specific trait, aptitude, or track record would suggest that you understand the circumstances better than Packer? Because unless we change US capitalism, you can't get more dollars without more debt! -- stunning that most most don't understand this reality...this is indisputable -- basic 101 stuff and by no means rocket science. Best.

Inflation does not require more debt just more dollars How do you get more dollars Packer? Before investing, everyone should fully understand how the system works -- this error in thinking is stunning and scary because I'm sure Packer is not alone. Best.

I think we should agree to disagree, and focus on identifying bargains (how ever we choose to define them). Fair enough and I agree. What I would say and the reason for the post is that most don't fully appreciate how bad, bad will be...and the current Gov't policies are only compounding the ultimate pain, which is insane. Best.

Unless we are going to figure out a way to hook up our brains to the GPS system we will continue to buy more and more Garmins. Yes we will continue to use GPS. But far from clear we will use the Garmin device to get the GPS. Cell phones will have GPS, satellite radio will have GPS, car dashboards, PDAs will have GPS -- GPS will be everywhere. With that said, you might have a good trade on your hands...I have no clue. Good luck with it.

Tell me as a long term investor with permanent capital why building a position in GRMN today would be a bad idea? Because you don't know if their product will exist in the long term.

This money has caused inflation in stock market and other productive and natural resource assets. True -- this should be well understood. The problem is that the fiscal and monetary stimulus are unsustainable...what happens when it ends -- pop goes the bubble. The end game may be to inflate our way out of it over a long period of time to offset the deflation that is in the system. This requires more debt in an already over-levered system -- not sustainable and not a solution. Further SS, medicare, medicaid, and all state/local entitlements are indexed to inflation -- inflation would never solve the problem. The interesting point brought up by the data is that real demand has declined by 25% already and profitibility of most firms is doing very well. Firms are only doing well because of cost cuts, which are finite and the gov't artificially propping up the economy with 11-14% budget deficits and depressed interest rates, both of which are unsustainable. And the data shows real demand declined by app 69% during the Depression. And remember the only way we got out of the Depression was WWII and the subsequent demand created by the destruction of virtually all productive capacity in the developed world outside of the US.

Some want 10x FCF with a large cap that is fairly immune to macro and you want the same or a lesser quality company but with a 5x FCF. What I am saying is that paying 10-15x does not compensate for the very high risk that FCF will be much lower (on average) in the future -- in effect, you are paying higher than 10-15x FCF today. Hell, FCF would be much lower TODAY if the gov't weren't running a 11-14% budget deficit and artificially depressing interest rates, both of which are completely unsustainable. Layering more debt onto an already over-levered system is insane.

MSFT is cheap when adjusting for cash on the balance sheet. Probably not a bad speculative trade. But would Graham and Buffett invest -- almost certainly not...they (as well as almost every investor) have no clue what MSFT's cash flows will look like in 5-10 years. Buffett could always surprise but he is firmly on the record stating he would never buy MSFT for the reason cited.

And so many abuse Buffett's "ignore the macro" comments. When Buffett ran his partnership and even during the early years of Berkshire, Buffett would only invest if the margin of safety was so high that he could ignore the macro. If the margin of safety was not high enough, Buffett would then have to accurately predict the macro -- he never wanted to be dependent upon a prediction of a robust macro economy in order to earn a reasonable profit over a reasonable time frame on an investment. The key is to get a margin of safety that allows to you ignore the macro.

But it's a pipe dream to sit and wait for years until valuations reach the golden margin of safety that is stuck so far up in your head! Buffett and Graham would most certainly disagree. Never waver on demanding a very high margin of safety. Macro Dreams! No this is macro reality. And they can go a hell of a lot higher as well. You may get a trading bounce but a "hell of a lot higher" -- not happening. But if you can tell me when and how certain that is, then you should be running Fairfax Financial and not Prem Watsa. I can't. But I can certainly discern a good margin of safety from a poor one. And if you think you are getting a good margin of safety on any large cap equities today, I can only say good luck Overall -- a lot of rhetoric disagreeing but NO ONE can refute the analysis/facts/basic math. Moreover, most don't want to accept the inevitable consequences of the math. Best.

So, when private debt is repaid, what will the creditors do with the proceeds? When private debt is repaid (of the magnitude that must occur), the economy slows and asset values decline, rendering much debt on the banks balance sheets BAD. So the debt banks are actually fortunate to get repaid provides much needed reserves.

I think the articles premise is correct and there is nothing I disagree with. But you are anchored to your position, thus no one will be able to convince you otherwise, facts be damned. How could I be anchored in my opinion if you agree with the analysis/facts? And if Coca Cola trades (or a company the equivalent) trades down to 5x earnings, I will be buying hand over fist.

A few observations: 1) A moralizing tone ("reckoning," debt aversion, etc.) plays well in today's environment (a la Mr. Beck), but draws upon an emotional appeal that may shortcut detailed analysis. 2) Concentrating on debt outstanding without always and at the same time considering interest rate, duration, and earnings power is a mistake. 3) You seem to imply an unstated and CRUCIAL set of premises something along the lines of: GDP will decline (at some point in the next 3-5 years), corporate earnings will decline, the earnings multiple that equity buyers are willing to pay will decline, ergo the prices of business will be lower, so the optimal strategy is to hold cash today until the better prices arrive, and... then buy? How and why should I respond to someone who clearly didn't read the analysis/facts and yet firmly offers a subjective opinion, with no relation to the analysis/facts? Part of the problem -- everyone wants to believe...no one wants to do the work.

Now let's tie that analysis into some basic facts to add further clarity: In 1929, household debt as a % of GDP reached app 100%. During the period btw the Great Depression and WWII, declined to approximately 20% of GDP. Further, household debt did not again pass 50% of GDP until 1985! Now let's see where we are today: Household debt as a % of GDP reached 100% again in 1Q09. At the end of 1Q10, household debt as a % of GDP totaled app 93%. And we enter this period with far more government debt than we did with the Great Depression. Gov't debt at start of the Depression = 16% of GDP Peak govt debt during the Depression = 44% of GDP Gov't debt at start of "Great Recession" = 65% of GDP Current gov't debt = 90% of GDP This is not fear mongering. These are simple mathematical facts. Ain't no way around it folks -- we have a day reckoning ahead of us, with the only questions being when and how bad. Remember, only WWII and the consequent destruction of the manufacturing capacity in the developed world (with the exception of the US) pulled us out the Great Depression. And Bernanke as well as politicians encourage more borrowing -- this is INSANE. And yet the owners of capital as well as the general American public gleefully allow this continue.

Those in the camp of just put your head down and buy quality stocks at 10-15x FCF should first see if they can refute this analysis. Othwerise, your FCF will certainly disappear in large quantities. This is not rocket science but rather basic math. Anyone asserting the "macro is too complex and too uncertain to factor into investment decisions" is quite frankly proclaiming their ignorance in the current environment. The truly scary part is that Bernanke is such an ideologue (brainwashed by having "theory" pounded into his head during years in the classroom), he doesn't get it and the ultimate reckoning will only be more horrific if he continues down the current path -- quite simply, you don't and can't solve a debt problem by encouraging more borrowing. QE will ultimately fail. http://www.businessspectator.com.au/bs.nsf/Article/Bernankes-blind-spot-pd20100830-8T8HE?OpenDocument&src=sph

Overstock's long-term rival may be Amazon, but right now their primary rival are all the other online retailers with less competitive business models. That's who they are going to take share away from. Overstock's long-term online rival is much more Ebay than Amazon. Overstock has been and will continue to take share from mall based close out retailers that have much higher structural costs and ultimately will not be able to compete with Overstock, at least on price. Overstock gets hammered if consumer spending proves much lower than expected and traditional full price retailers get stuck with excess inventory and consequently have to price at a deep discount in order to liquidate -- a transitory environment (liquidating the excess inventory) but Overstock would struggle mightily during such an environment and the stock would likely get crushed as concern about the company's liquidity remerged.

owner of overstock but relatively small position powerful brand and building an entrenched position as the low cost retailer on the internet; potentially powerful business model economics -- requires only small amounts of invested capital to support enormous revenue base ceo is no doubt quirky but extremely smart, operates from owner perspective, and learned at the knee of buffett and munger would have a very large position if the company had a stronger balance sheet -- overstock business would be affected by a sharp downturn in consumer spending and at this point not clear balance sheet is strong enough to get the company to other side if economy gets ugly...there is a scenario where the company runs extremely low on cash resources barring a complete collapse in consumer spending during 4Q (which i'm not expecting but is possible), the company will deliver positive FCF/owners earnings but much will come from working capital dynamics, which doesn't represent a permanent increase in the cash base...accounts payable and accrued expenses get paid in 1Q, immediately draining much cash from the balance sheet news from the world of retail has been ominous of late...j crew report/commentary was not good...so be careful