goldfinger

I do not know about your time horizon but it really is not finished yet. The system is fully loaded with risks. Crowds' denial is not providing me with any sense of comfort.

More dollars were destroyed than created in the last few years (M3). The inflation rate is now around 0.8 %. QE2 was not inflationary but slightly deflationary as it replaced long duration debt with short term instruments. Inflationistas and hyperinflationistas often use wrong arguments to convince people of their beliefs, Schiff being the stereotype example. Anyway gold is not a good inflation edge (the 80s and 90s are a proof of this). Gold is a speculation supported by the uncertainty and fear about the whole system. There is going to be plenty more uncertainty and problems over the next few years so I would not bet against gold. If I had to I actually would bet it is not finished going higher even if it may go through rough corrections. It is definitely a bubble in the long run however. Gold is not the only speculation out there: the QE trade has made many other markets really speculative at this moment.

http://www.ctv.ca/generic/generated/static/business/article1822961.html

What if profit margins are on the way down and corporations profitability has reach a local peak?

How long will treasuries continue to look risk free? For as long as it appears credible that the government is not printing money well in excess of US economic output. Economic output decreases with deleveraging (another way to look at it is that there is over-capacity right now).

The private sector needs to de-leverage. Debt levels are 1.7 times higher than during the great depression. This is deflationary and we slowed down the process with bailouts and stimuli. Since 2008, the private sector de-levered by around 1.2/1.5 T U$. In theory we should be de-leveraging for a long time (a decade or two). With the political stalemate that is developing, we should have more de-leveraging and economic problems in the next two years. However, the government should run into funding problems relatively quickly (a few years) and that probably is the big difference with Japan. There are no savings to draw money from and the global economy is not in the same shape as during the Japanese experience. The government can print as much money as it needs but the currency might get debased brutally in the process...

http://finance.yahoo.com/news/Special-report-A-far-from-rb-1962957476.html?x=0&sec=topStories&pos=8&asset=&ccode=

In their last presentation, page 16, you can see IP rates of 379, 824 and 132 bopd on the last 3 wells. That's kind of good. If they can execute like this a for a few quarters more value will show.

That's the point. The private sector has almost twice more debt than during the great depression and we traded rapid deleveraging for a slower one with our interventions (not that it was a bad thing relatively speaking). Steve Keen who predicted the crisis and went public in 2005 to warn does an excellent job at describing/modeling the problem: http://www.debtdeflation.com/blogs/2010/11/15/why-credit-money-fails/. It will take a long time and the market is discounting full recovery. At some point reality will set in. Moreover the dynamics of deleveraging are treacherous (economic output depends on velocity and acceleration of debt/deleveraging) and difficult to forecast accurately. So I would agree very much with a lot of things Gary says: - deleveraging here to stay for a long time. - expectations should be scaled down. - housing market still very sick. - dollar not as weak as perceived comparatively speaking. QE2 was not money printing and many understand modern monetary systems wrong.

QE2 is not money printing as everybody says it is: it is an asset swap from higher duration assets to lower duration assets. In effect it does have a minor deflationary effect because it takes away interest baring assets and replaces them with assets without payment coupons. There is no new money in the system! Now I believe that your thoughts are going to the right direction: it is very probable that QE2 is an additional bank bailout and a way to keep borrowing costs lower so as to allow people to refinance and borrow long term at lower rates. In essence it is targeted at a slowing housing market and may be a preemptive bank bailout. Bernanke must be freaking out at what he sees developing! It doesn't seem to work however because rates are starting to shoot up as people are focusing on assets they can resell to the FED. Moreover it brought a frenzy of speculator that are betting on inflation expectations which is having enormous consequences around the globe. QE2 may be backfiring bad and one wonders why the FED is not letting congress and government do the job because they are the ones that should be doing it in a modern monetary system like ours. Bernanke probably saw the political stalemate developing early...

I meant preemptive bank bailout and not bond bailout.

I am sorry to bring more macro economic arguments but this is a general discussion topic and Zorro and I kind of fall in the same camp at this time I think... - QE2 has led to parabolic moves in most commodities: companies at home may not be able to pass costs to consumers. - QE2 is bringing more inflation in emerging nations. In addition the last thing Europe and Japan need is their currencies to appreciate against the dollar. It basically increased global imbalances and currency/trade wars risks. - QE2 has also led to increased expectations and may decrease confidence in government institutions when doubts arise. The funny part is that it is not money printing per se, more like an asset swap or a duration modifier. Still, the markets interpret it as an inflationary event leading to all those speculative moves. The real issue is too much debt and the fact that the private sector is in desperate need of de-leveraging. We have around twice the amount of debt than we had during the great depression in the private sector and this factor will be with us for a long time. If one looks behind the numbers in the last few months one will find out that data tend to show the possibility of a looming contraction coming again: - 2/3 of growth in the last quarter was restocking and same for sales. This cannot continue unless consumer spending picks up. - The housing market looks like it is double dipping. Realtytrack publish an astounding 107 months supply figure in the housing market (visible and shadow inventory). We are not even talking about the mortgage/foreclosure/robot signing issues. - Railroad traffic definitively improved since 2009 but is around 10% below 2008 and 2007 levels. The subcategory auto transports is 25% below! - Lending is not happening and banks are continuing to just buy bonds. QE2 might just be a disguised preemptive bond bailout by the way! - Consumer metrics are still in contraction mode. Actually measures like ECRI, WLI, Consumer metrics, Consumer confidence etc... point to levels only seen during recessions or close. - The job market figures obfuscated continuous job losses across the board. More and more are just giving up looking for jobs, unemployment benefits are expiring, states are and will lay off much more, many existing jobs are replaced by temporary ones too. Real unemployment is at around 17% to 22%. - We are probably going towards more austerity with the GOP now. - The market is not cheap under any measure. etc... One that does a great job at describing this debt saturation issue is Steve Kleen who saw the credit crisis early: here is an interview: http://www.chrismartenson.com/blog/straight-talk-steve-keen/47466 What you call a correction could very well be a meltdown as we realize that our expectations about the future (in terms of valuations at least) are completely unrealistic and it may happen pretty soon.

I am no permabear but have become very bearish over the last few months. What I am seeing out there, the rally included, only confirms this sentiment day after day. I think we are overdue for much more than just a correction... It seems to me that the FED's QE2 move is actually a sign of panic and that it may already be realizing (if one listens to some of the FED's execs speak) that markets' reactions may actually bring fast undesired effects. 1. It seems doubtful that companies will be able to pass on increasing costs to consumers. Commodity markets are exploding upward putting pressure on margins. ArcelorMittal and Kmiberly Clark are talking about this already (http://www.bloomberg.com/news/2010-10-26/kimberly-clark-profit-falls-company-lowers-full-year-earnings-forecast.html?cmpid=yhoo) among others. It will take time to show up as we are barely done with adjustments companies made to cope with the crisis. 2. Currency and trade wars risks have been increased dramatically. 3. Markets are betting on the FED to deliver and inflation expectations or fears may be changing. In the meantime, consumers will not borrow more because rates are slightly lower and the housing market is going down again rapidly with record inventory (official + shadow). This only is enough to change consumer psychology and QE2 won't change that (it actually may decrease confidence in the FED and the government). I do not think we get a 4 or 5 years "recovery period" this time like after the dotcom crash. Data are slowly confirming a big slowdown to contraction again. We may get more than a correction pretty soon, why not after the elections and when q3-q4 data provide a clear picture. QE2 may actually be one of the catalysts for a plunge if it brings obvious disappointments to the investment community.

I strongly believe that Buffett considers more what he should be saying than what he thinks when speaking to the press now, if only because of moral considerations. It has to do with his status: what he says can have dramatic consequences on the economy.

Look at this one with Chris Whalen: http://pragcap.com/chris-whalen-describes-why-2011-could-make-2008-look-like-a-cakewalk

I leave in California and while I noticed some of that a while ago, I haven't seen that recently. Most of the things I buy have actually stayed the same in price and quantity. Maybe it will change again... There is a lot of deals for cars (used and new) and there are sales everywhere I go as shops are going down one after the other. As for the (total) money supply, it actually shrunk in the last year by at least a trillion in spite of the more than doubling of the monetary base.

So are you Munger.

Do you remember what happened before the last crash: commodities were flying high and people were chasing yield everywhere. Pension funds are trapped because bond yields are so low and they have to make around 8%. So they go to hedge funds and chase yields everywhere they can find it. M&A deals replace organic growth and are possible because companies can borrow so cheap. But why is that changing the real issue in the first place: the ability and the will to consume and borrow. This whole reflation thing may actually make things worse by: - increasing the price of necessities which is what people truly consume at the moment. - increasing frictions among countries (currency wars, relative buying power, trade wars etc...). - increasing governments' future financing issues: they get addicted to low yields and increase debt dramatically. What is next?

QE2 won't bring high inflation unless people start borrowing and spending again. The Fed is increasing the monetary base at the moment but it cannot force banks and people to lend and borrow which is how money truly gets created in our system. Of course it could print trillions and trillions and trillions but all that would bring is hyperinflation and it would not have any support in the political arena to do that as things are not sufficiently bad yet (maybe in the future). The real issue is: are we facing a secular change or only a cyclical one? - If it is a cyclical one, when some jobs come back and people start borrowing and consuming again, there will very probably be much higher inflation with all those reserves bank now have on their balance sheets to loan to people. The fed will have a hard time reversing the process and interest rates will rise. There could be stagflation as Sanjeev suggested. Some businesses already looked priced cheap enough to be of some interest. Having cash in reserve seems proper also as there will be some volatility along the road and opportunities will be there for very profitable value investing. - If it is a secular one then this is a different game. This is what most of us do not want to consider because it is frightening. The Fed wants to do anything in its power to avert that but I do not think it can do it by itself. The first ingredient of this is the change of psychology and behavior of the consumer. People's balance sheets are weak at best in the average and the housing mess is not correcting fast: it is just too big. Many indicators point to a repeat of the contraction phase and that is outright deflationary. I tend to believe at this point that we are facing a secular change. The country's finances are going to look increasingly dubious in the future and the same for most western nations (excess leverage). And then we will go from one crisis to the next as dominos fall. In this case it makes sense to have a lot of cash reserves and be very cool and patient and require a high margin of safety.

Totally. I know of a few areas (I live in California) where condo prices are dropping very quickly right now (I am talking about from 155000 to 140000 to 127000 in less than a month as 3 condos of exactly the same type in the same building got sold for those prices in the last month in Walnut Creek). Properties for sale have been mushrooming in the last 2 weeks like crazy too (anywhere I go in the Bay Area). Here is another point of view on house prices nationwide: http://www.safehaven.com/article/18195/home-prices-drop-in-36-states (Mish is an ultra bear but he brings good points).

Buffett has been calling this crisis an economic war from the beginning. One of the best examples is the Pearl Harbor terminology during the financial meltdown. He is the CEO of one of the most admired companies in the world and many people listen to what he says; in essence he is like a general in this war. A war cannot be won without morale. I would agree with you here that he is cheerleading too. And yes given the strength and profitability of Berkshire, he can afford to invest and wait without any fear for a long long time. I know I am following it too: it has never happened in the last 70 years that the ECRI is that negative for so long without recessionary issues later down the road. Of course this is a statistical tool and therefore it will be wrong at some point but still, this one has been pretty accurate up to now and many other indicators are sending the same message. I would like to be more optimistic but it was tough to be last week-end: - houses for sale are literally mushrooming in my area (Bay Area). - people I know that own car sales businesses told me they have had absolutely no sales at all in the previous weeks (used cars too). They have never seen that before. It might be a local problem but??? Moreover I would tend to believe that the stimuli have introduced some irregularities in certain lagging indicators that may correct over the next few weeks. Hussman talks about this in different ways in his last comments. The jury is still out, but if Buffett says it...

Me too I used to own PWE and sold when they made the big merger in 2007 if I remember well. It seemed to me that they had diluted original value in the merger. I haven't followed in the last 2 years because there are better values out there like you seem to have concluded also. I am a peak oil believer and have been for a while. But this economic crisis could very well have a very negative influence on prices over the next few years and cause higher cost projects to be put on hold for a while (magnifying the problem down the road). I would look for cheaper to exploit resources at this point.

Exactly Zorrofan, exactly. The press which in my life time was always enjoying (and over reporting) bad news to increase sales is now desperately looking for good news to report: I think it is telling a lot about the real situation and also that the game might be rigged a little. Never in my lifetime have I seen such denial, never...

Because people are afraid of change and afraid of the unknown because the mind is afraid of dying... humans are creatures of habit. A prolonged "great recession" may mean what nobody wants: irreversible change in people's lives and in society; it may mean that something deeper is happening. Also we do not really know how to address the issue. Unconsciously people know that. Denial feels better. Ideology feels better. Our economic theories do not provide the background to analyze and understand all that; they forgot the human factor among other things. Free thinkers and others with reputations to defend and who believe that the problem is that bad cannot always speak the truth: it will attract the wrath of others. Looking at Achuthan sugar coating the conclusions that can be taken from persistent negative ECRI numbers in the last few months is funny to observe... he almost has to apologize for being an implicit messenger and cannot afford one misstep. Let alone those who dare evoking the possibility of a depression: they can only be irrational nutsos. Human nature really hasn't changed in the last few thousand years.

Expectations and reality are two different things: how many economic expectations have been completely shattered in the last few years? Has China become a consumer economy, can it buy its own products? As far as I know we are far from that point and some really weird phenomena can be observed in China at this point (home affordability in main urban areas for example, or oversupply of office space and even commodities in many places there, etc, etc, etc...). The chinese government has clearly stimulated like there is no tomorrow in the last two years. The jury is still out. By the same token, numbers coming out of BRIC countries cannot be fully trusted. The notion that countries that were growing their economies thanks to the consumption of the west can now pick up the slack is funny at best and sounds like the product of the denial of minds facing painful realities... Moreover the EU and Japan need to be taken into consideration (EU itself is bigger that the US) and they are in even worse shape than the US.