bmichaud

Average salary in 1912 was $1,033 and currently the average salary is around $42,000 - that's a 3.8% CAGR over 100 years. So not only has the average person's salary nearly stayed constant with the price of a loaf of bread, their standard of living has compounded at a FAR greater rate than 4% over that time due to this wonderful economic system we have in the USA. You can argue for the gold standard all you want but it's not coming back. Get over it. You inherited a stash of useless gold from your father back probably in the 70's or roughly 40 years ago - so the rise from $35 per ounce before getting off the gold standard to let's say 1,800 per ounce works out to a 40-year CAGR of 10%. McDonalds on a split-adjusted basis sold for around $1 per share back then, and at its current price of $98, that works out to 12% per annum BEFORE DIVIDENDS. You'd have been better off selling your gold and buying a high quality franchise. Who cares about gold or the gold standard? Buy a wonderful business, accept the system for how it is (there's aboslutely nothing you can do about it) and move on with your life.

Prices always and will forever go up in a credit-based economy. A loaf of bread costs about $2.78 now versus $.05 in 1912 - that's 4.1% inflation over a 100-year period. Who cares? Are you not better off now than back then? Can you not trade a stock in about half a second now as oppose to an hour back then? Prices are not skyrocketing out of control by any means across the board. There are pockets of high inflation particularly in the commodity sector as a result of hoarding, institutionalization of commodities as an "asset class", and supply shortages (GMO has a phenomenal paper out on this, see attached). I think you and I agree. Prices are rising and as you point out it's a given in our democracy. Prices aren't out of control. But then again, the economy hasn't even begun to start perking yet. My point is that there is no deflation, and this isn't Japan. Greenspan, in his infinite wisdom, fearing deflation back in 1999-2002, is really when the seeds of the current mess were planted. Agreed. The asinine interest rate policy you refer to is a somewhat related but largely separate debate, along with government bailouts and the ever-present government put.

Prices always and will forever go up in a credit-based economy. A loaf of bread costs about $2.78 now versus $.05 in 1912 - that's 4.1% inflation over a 100-year period. Who cares? Are you not better off now than back then? Can you not trade a stock in about half a second now as oppose to an hour back then? Prices are not skyrocketing out of control by any means across the board. There are pockets of high inflation particularly in the commodity sector as a result of hoarding, institutionalization of commodities as an "asset class", and supply shortages (GMO has a phenomenal paper out on this, see attached). GMO_Resource_Paper.pdf

I think you're right. Unfortunately, due to the flaws in the system and ongoing austerity, risks will continue to build, and a Lehman-like event will manifest itself in another form later on. Who knows what that may be....

http://blogs.ft.com/economistsforum/2011/12/the-euro-lacks-a-government-banker-not-a-lender-of-last-resort/#axzz1gFjs6e6q Good article explaining the failure of the current european construct of a monetary union w/out a fiscal union. The John Mauldin piece attached is an interesting take on the recent Euro summit, and how the ECB's decision to lend to euro banks at 1% for 3 years could potentially be a quasi-QE operation. However, as Barron's pointed out this weekend, euro banks have over $1T of refinancing needs in 2012, as do the sovereigns, for a total refinancing need of $2T for the eurozone. The interviewee in Barron's believes the ECB's lending agreement takes care of the banks' refi needs but does not solve the sovereign solvency crisis. Yes in theory euro banks could fund the sovereigns in unlimited amounts via the ECB, but then total leverage would have to rise significantly from an already gigantic 40 times. Either way, you can only fight debt with debt for so long - eventually equity capital must be created. As Ackman proposed with the GSEs back in 2008, the euro banking system has plent of capital, it's just in the wrong form - i.e. DEBT. Mark the euro banks' balance sheets to market, wipe out equity holders, write-down the appropriate amount of debt, and convert the remaining debt to equity. For the private sector, equity can be created, as it is here in the USA with the government running 10% deficits, via a supra-national entity that has the power to tax and spend in conjunction with the ECB - bottom line for the European private sector, it is deleveraging as the AMerican consumer is right now, but there is nothing to offset the deleveraging as there is here. Germany is stuffing austerity and deflation down the private sector's throat, and there is no good outcome from such a policy. Even SD monetization by the ECB will stop the deflationary spiral because there is nothing to offset the private sector's deleveraging. This is not a complicated crisis to solve if some basic accounting identities are acknowledged (i.e. private sector surplus = public sector deficit) and the appropriate monetary/fiscal system is implemented. ..... Yes, yes there is plenty room for a long-term value investor to read and study this stuff. 90% of my time is spent reading 10Ks - nothing wrong with a little diversion and some big picture knowledge building 10% of the time. Sorting_Out_the_Euro_Mess.pdf

http://www.huppi.com/kangaroo/L-gold.htm Not only does the gold standard lead to depressions as a result of the inability to create vertical money (see here: http://pragcap.com/the-concept-of-vertical-and-horizontal-money-creation), but it also does not prevent inflation because of fractional reserve banking and horizontal money creation. Even if the gold standard fixes the amount of base money in circulation, that does not stop consumers from borrowing above and beyond their means and bidding up the price of assets, goods and services. See here for why quantitative easing is not money printing: http://pragcap.com/quantitative-easing-the-greatest-monetary-non-event See here for why we are not AT ALL at risk of hyperinflation: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1799102

http://zealllc.com/2011/bulltech.htm Hamilton's essays have been a great addition to the reading library, and I believe I have Moore to thank for that (if not, thank you to whomever began posting them). Hamilton's latest missive is quite bullish on the market making a new leg upward based on higher highs, higher lows, and the market reaching its 200dma. He indicates his projection takes into account the European situation, however, the following quote leaves me concerned: The underlying economy in fact is NOT expanding, but rather contracting, and the Europeans just concluded yet another "Euro-saving" summit that is long on promises, short on substance, and does ABSOLUTELY NOTHING to resolve the Eurozone solvency problem caused by a monetary union with no fiscal union and exacerbated by forced austerity measures. No bazooka was announced, and the european bond markets have demonstrated time and again they are not going to wait around. The Europeans continue to lag the market, and I don't see what has changed. All that to say, it will be very interesting to see how Hamilton's projection plays out.

Phenomenal read. XOM has been producing this outlook and investing based upon it for fifty years. Given its impeccable operating record, I find it quite bullish for long term natural gas prices that XOM is investing so heavily in NG at today's depressed prices. Tough to take an upbeat view of gas with so much supply coming online, but obviously these guys are quite bullish on future demand balancing out the glut. As a side note, the outlook for energy demand from the heavy duty trucking industry is an exciting prospect for a company such as Cummins. I had only been vaguely familiar with CMI before reading the Outlook, but have recently been doing some work on them. CMI's 2015 projections are quite impressive if one can get comfortable with them projecting record high EBIT margins. XOM's outlook for trucking demand as well as the demand for increasing energy efficiency lends credence to CMI's projections, IMO. Exciting stuff!!

http://can-turtles-fly.blogspot.com/2011/12/warren-buffetts-evolution-and-his-three.html

Also interesting, from a purely behavorial standpoint, Grantham thinks PE ratios should be about 20% higher due to where profit margins and inflation expectations currently stand. Again, purely from a perspective of how investors treat current profit margins and inflation expectation levels and NOT from a long-run valuation perspective, which is what his 975 to 1000 fair value is based upon.

In case some cannot access the link, I have attached the PDF. Interesting to note the following quotes from Jeremy: 1. "At the end of July, we remained a little underweight equities despite this decent 7% real return forecast because we allowed ourselves a very small adjustment for a fundamentally scary outlook: thus we were two points underweight in equities instead of, perhaps, two points overweight. No regrets here either, for despite the strong rally in October, things are really, really scary. Aren't they? (And, more recently, stock markets are once again in disarray.)" 2. Third recommendation: "Don't be too proud (or short-term greedy) to have substantial cash reserves." ..... Interesting....seems as though those who "swing a big line" in the market are in fact scared of the current environment, and are frowning upon the idea of taking an above-average optimistic view of the world here. .... Jeremy's Exhibit 1 chart on page 3 is rather exciting to me. If we could in fact get down to an 800 level and stay there for an extended period of time, the number of bargains and the amount of time available to accumulate would be unbelievable!!! 8) Let's only hope that the awe-inspiring, ever-present Government Put will one day be lifted! Grantham_Q311_Letter.pdf

Ericopoly hit the nail on the head. It's easy for Buffett to not worry about equity prices for the next three to five years if he owns all of BNSF or Iscar etc...because his return is all from cash returned to BRK. For better or worse, those of us managing money have to live with the market's opinion of the cash our holdings generate. WEB does not for the vast majority of BRK's holdings, as the equity portion is a much smaller part of brk's IV than it used to be. Sure, I would kill to buy a private business right now. There's a regional roofing company near where I live that has a phenomenal brand name, a 95pc annuity business and tremendous pricing power. If the owner was looking to sell, I'd buy at 7x fcf in a second, and would hold for the rest of time generating an immediate 14pc return before any reinvestment or pricing power growth. If I could do that, of course I wouldn't care about Europe, China or a US recession. The most I'd suffer is perhaps a 25pc hit to cash flow at most, but I'd still be looking at a 10pc or greater return on my money, because there would be no change in a publicly-assigned market value of my business. There is mass disagreement regarding the ecri call, and I get that completely. Econ forecasting is fraught with risk. My biggest point is that there are a multitude of risks out there that the market as a whole is not discounting - the ecri call is simply part of that concern. If we were at 900 right now, that stuff is largely baked in. FWIW, WEB closed up shop before one of the biggest bear markets of all time and began investing with permanent capital. Extremely smart to shut it when he did, but he does not have a performance record through a vicious bear market running a fund. He essentially managed through a 90s type bubble then hung it up right at the top. Ironically, when he hung it up, valuations were at today's levels....the tech bubble throws off all historical precedent for normal valuations because they were so high.

Yes, yes, I'm SURE they're looking at current employment numbers to gauge the direction of the economy. That makes perfect sense.... This pains me to write because I know it's going to be labeled as macro forecasting/trading/market timing etc.... etc...., but the following looks at the S&P 500 performance (ex. dividends) in the twelve months following ECRI's initial call that the US is definitively headed into a recession. First price is the initial market value at the time of their call; second is the high-point in the following 12 months; third is the low point in the following 12 months - following the latter two prices is price performance on an unannualized basis excluding dividends. February 6, 1990, Geoffrey Moore forecasts the US is headed into a recession (Schiller PE = 17x, 10y = 8.21%): S&P 500 close on 2/6/1990 = 330 S&P 500 close on 7/16/1990 = 369 12% gain since initial call S&P 500 close on 10/11/1990 = 295 -10% decline since initial call, -20% decline since peak on July 16 March 2001 ECRI says recession no longer avoidable (Schiller PE = 36x, 10y = 5.1%): S&P 500 close on 3/15/2001 = 1,174 S&P 500 close on 5/21/2001 = 1,313 12% gain since initial call S&P 500 close on 9/21/2001 = 966 -17% decline since initial call, -26% decline since peak May 21 January 2008 ECRI says self-reinforcing downturn has already begun (Schiller PE = 26x, 10y = 4.1%): S&P 500 close on 1/15/2008 = 1,381 S&P 500 close on 5/19/2008 = 1,427 3.3% gain since initial call S&P 500 close on 11/20/2008 = 752 -46% decline since initial call, -47% decline since peak on May 19 September 30, 2011 ECRI says recession cannot be averted (Schiller PE = 22x, 10y = 3.3%): S&P 500 close on 9/30/2011 = 1,131 S&P 500 close on 12/2/2011 = 1,244 10% gain since initial call S&P 500 close on 9/30/2012 = ? ..... As I have said ad nauseum, with the market overvalued on a long-term basis, risks such as a US recession, European implosion, and a Chinese slowdown are not baked into general market prices with the Schiller PE in the range of 18x earnings. Like it or not, WEB set an example of not being 100% invested when the general market was at unattractive levels even when he was able to find undervalued securities. Here is WEB in his January 1962 letter to investors (http://pragcap.com/wp-content/uploads/2010/02/BP5.pdf): WEB closed up shop in 1969 after the Schiller PE hit over 22x in 1968. WEB in Forbes November 1974 with Schiller PE at 8x: ..... WEB talking about the market, economy, and individual securities behind a corporate veil is NOT the hedge fund manager WEB.

FFH is NOT cash. There is significantly more risk owning FFH then owning Cash. the stock is uncorrelated to the general market but it does not mean it is cash equivalent. What if the guys had Utilities in it's portfolio, should he account for those a virtually cash? BeerBaron I was going mainly on Uccmal's quote, If macro doesn't matter and fins are at a generational low, why not put that 40% hedge into fins...

I got news for you. We are in the next crisis. This is what its all about. I am not suggesting anyone be fully Invested but to use the macro as your guide is madness. I am fully invested and have been for 15 years straight. There are times like the summer of 2007 when i downside protect with Spy puts. I have a few Well out of the money Spy puts right now that I bought recently on up days like yesterday. To complete the hedge I hold around 40% ffh. If there is a great EU unravel in the days or weeks ahead I will sell the puts and watch FFH go up, while my Us financials tank, and I buy more of them. Madness to buy jpm, wfc, bby, ssw, even ffh at multi-generation lows, indeed. How is holding 40% of your portfolio in FFH, which is inversely correlated with the market per your comment above, any different than holding a 40% short position in the SPY or perhaps a 40% position in the TLT? Not saying it's a bad thing - IMO, that's a very smart portfolio construction, but it's just a bit deceiving saying you're fully invested with a 40% position that is virtually a cash-equivalent.

Some interesting commentary out this morning. Attached are a weekly market commentary from James Investment Research (a mutual fund manager frequently cited on CNBC) and John Mauldin's "Thoughts From the Front Line" from 11.25.11 (both commentaries are free, so shouldn't be a copyright issue). JIR has a set of over 100 "risk indicators" consisting of short, medium and long-term market indicators. Currently their short and medium term indicators are very strong (they are bearish long-term, believing we are in a secular bear) and would recommend adding to equities here in the short term. This lines up nicely with Moore's essay by Adam Hamilton that says things are oversold and due for a major rally. Mauldin continues to cite the potential banking sector contagion from the European banking sector as the largest risk to the global economy. Highly recommended reading, IMO. Great commentary on how crises happen with a bang after gradually escalating - i.e. risk reduction should happen well in advance. http://www.businessweek.com/news/2011-11-28/grantham-calls-profits-freakish-that-doll-says-are-here-to-stay.html Interesting bull v. bear commentary with Bob Dole (perma bull) versus Grantham (some would say perma bear) regarding the sustainabiilty of current profit margins. JIR_Market_Comment_11.28.11.doc John_Mauldin_11.25.11.pdf

http://online.wsj.com/article/SB10001424052970204531404577052493270860130.html?mod=WSJ_Opinion_LEADTop

His so called timing has been amazing because he does not time - he values. Back I'm the fall of 2008 prem, buffet, klarman and hussman sounded the all clear almost at the exact same time. It is not by accident that the market fell to a level where the expected return was 10% per year for the next ten years. The market continued to fall, proving they were not trying to time. They didn't care what the market would do going forward they just knew it had fallen to a level that would yield the average return the market has generated over time.

So the fact that one of my largest holdings, Pepsi, has not gone down as much as the market means I don't know how to find value? I explained to you over PM that I believe it's worth $115 and it's currently selling for $63. IMO, that is no different than you buying BAC at $6 when it's worth $10 (or whatever). What has really stuck with me from studying WEB is buying wonderful businesses, and when I get the chance as I have with Pepsi, I load up - REGARDLESS of the macro environment. FYI - Loeb is less than 30pc net long right now. He is VERY concerned about the macro and is hedging like crazy all the while loading up on YHOO. There is room for both. Best of luck being 100pc long with leverage in this environment.

It's very easy to have a "glass half full" approach when one does not fully understand and appreciate how the monetary system works and how dangerous forced austerity measures are in a deleveraging environment. We're in unprecedented times, and it is merely being prudent to take into account the current environment when constructing a portfolio. The following is a quote from WEB when he hired Todd Combs (see: http://moneymorning.com/2010/10/28/warren-buffet-investment-todd-combs/): This business is all about managing risk. One can manage risk while at the same time being optimistic about individual securities. I am becoming increasingly worried about the macro environment, yet I am buying the crap out of individual securities right now.

Smallest around $7B, largest around $100B. Generally stay in issues above $1B.

It got LVLT'ed that's why

It's only a matter of time before those posting on this thread will be accused of yelling "Fire" in a crowded room by Moore, but for those interested.... http://pragcap.com/now-there-are-truly-no-safe-havens-in-european-bond-markets Obviously it's very easy to say when the market is down (I wouldn't be surprised at all to see us back over 12,000 on the Dow with one simple utterance from Dr. Bernanke), but this is without a doubt a HIDEOUS environment. And the complete lack of attention investors are paying to the issues staring them in the face is truly staggering. The current situation is not dissimilar to the 12 to 18 months leading up to Lehman where the market almost entirely ignored all signs pointing to a credit crisis. The market is currently banking on governments coming to the rescue, which I find horrifically dangerous considering how many times Germany and the ECB have stated they will not print money, and the bond market's obvious rejection of all European debt. Like I said on the "What a Lovely Frickin Day....to be Reducing Risk" thread, a France downgrade is not going to be pretty, and as an article said yesterday, France is not at all trading like a AAA credit (the absurdity of it even being AAA is beyond the scope of this discussion). Yes, yes, this is not speak a "real value investor" would utter, and as soon as the market is back over 12,000 all those taking action to reduce risk will be chided for not having a large enough.....

Those fools with Schwab accounts are doing even better today at LVLT. So what's your point about the fools at Schwab? Oh snap. How dear you bash LVLT - it's a ten-bagger, remember? 8)

Agreed. I'm a huge fan of BBs well under conservatively-calculated intrinsic values.