goldfinger

I do not think Fairfax and Baupost positions are that simple. This view is not fully accurate. Baupost is not really hedging against inflation. It is hedging against extreme events leading to the "destruction" of the currency or let's say leading to severe issues on areas like the currency and rampant inflation (not to mention hyper inflation). Klarman may actually believe in a depression first (consumer deleveraging, banks not lending because no faith in the value of collateral like a house for example) leading to the Fed assuming many more bad assets over time (bad debt) on its balance sheet to bailout banks and the government in the end. That coupled with potential QE and whatever additional debts we will create to stimulate the economy could in the end invalidate the dollar or at least lead to very high inflation and interest rates as the world loses faith in the credibility of the FED and the US government. Fairfax is hedging against both inflation and deflation. Klarman is justifiably worried about the world also as Europe and Japan are dealing with an ocean of debt that is starting to look a bit too big to service given current conditions (I think that China is catching our diseases at great speed at the moment also). It makes it particularly difficult to estimate multinational companies' earning power I think. The kind of problems that certain countries face may mean severe structural changes (economical, political and social). Munger wants a very high margin of safety and I think he is absolutely right on the dot. We may not recognize the world in ten years from now and it is almost impossible to foresee many changes at this point. I would also stay away from beliefs like: - it always come back. - our technologies are going to save us from any problem we have created. - it is only going to get better. etc... Technologies when applied unwisely may actually create systemic problems so intractable that it may take completely new ways of acting and thinking to "solve" them. I can think of some of these issues at this point but this is not the subject here. History has proven one thing: human societies always go to some form of instability that lead to major changes in their structure.

It may take longer than anyone expect to recover however... and the issue is not located in the US only which in reality compounds the problem. All in all I am very close to Munger's analysis like discussed in previous posts.

While I certainly would agree with that, I am wondering which industry will do very well as compared to the last decade or two if the depression is particularly intense and what kind of margin of safety I have to get. Munger is absolutely right about the debt levels and this is not only in the US: this is almost common to the entire western world! The japanese situation is even more gloomy but for some reason it is almost ignored by everyone today. The pool of savings that the japanese used to borrow and stimulate has shrunk dramatically with the aging population... It makes it particularly difficult to estimate earning power in many many instances. Always ignoring the macro factor is a mistake: it is all a matter of proportions. We may be at a moment in history where big changes will happen.

SharperDingaan you nailed it I think. There is nothing wrong with cash especially at this point. I have a feeling that people are going to be scrambling for cash more and more over the next few years. One of the assets they will have to get rid of is going to be houses but everything else will take a beating at some point. And it probably will be accompanied by shocks (countries going belly up for example, like Japan). I do not follow Bill Gross too much usually but I am finally impressed by some of his current views on what is happening to us (http://www.pimco.com/Pages/PrivatesEyeBillGrossAugust2010.aspx). Our sages (Seth, Prem, Jeremy, Bill and others) are starting to uncover the truth and they are such a pleasure to read because so intelligent.

I think there are two fundamentally different points of view in this thread, and it has nothing to do with statistics, technical analysis and short term thinking: - Many think things will eventually get back to what it was and better in a few years at worst. All of this was just a boom/bust cycle that's going back to boom. Like in the 70's. In this case there are definitely opportunities in this market. - Some may think that this is not guaranteed and our road is more rocky. Then valuations are not this cheap. They want a higher margin of safety. It becomes harder to evaluate future earnings for many companies.

Hussman agrees with that. He uses several indicators which combined with ECRI allow him to express opinions about possible recessions. He warned in 2000, November 2007 and he is warning again now. In the last 40 years, the number we have already reached this month always corresponded to a recession. Less negative numbers that were not accompanied by a recession (twice) occurred however close to the crash of 87 and the Asian crisis. This is a warning sign. I do not think the market was pessimistic in the last 2 months, it was in correction mode and some bad news helped. After the surge since march 2009 it seemed rather likely that a correction would happen at some point and that professionals would expect one and act in consequence. The market is now back to optimism because of earnings news. There has to be job creation and more vigorous high ticket items markets for these good news to last. Revenue overall is down. The stimulus is waning and governments are thinking about the next elections being rather hesitant in stimulating more. Debt levels are still extremely high at the consumer level. I think valuations are still very generous. We will find out soon in my opinion.

Obviously BS is back and may go away again one of these days... They are definitely cheap relative to other opportunities but may not look that cheap in the "new normal" era. I do not have 100B to invest like Grantham so that I can afford to be less in a rush and more demanding. I really like Klarman's position at this point: buying insurance while he is watching. Grantham named Klarman the smartest guy out there.

Exactly! History is not linear in the least: it is full of periods of progression and periods of regression relatively speaking. Most of our egos are just too freaked to recognize that fact and we'd rather go into denial. This time around, it is the entire world (almost) that has a problem of way too much debt. But hey, we will be back very soon! As for metaphors, patients that suffered heart attacks most of time never come back to their former selves.

It could be rocky instead of stagnant because people are in fear and more unpleasant news are to come. Other than that, I agree that valuations are getting much better but still not really cheap in my view. ::)

That's exactly what I think: it might be way too late and the system might be way too saturated to do anything about it.

1. I think we are not denying there has been some growth. We are questioning whether it is durable and whether there are other factors at play that can change that. 2. I have my doubts on numbers like money supply and inflation.

There is no "decoupling" in between US and Europe and other partners. The EU is the biggest economy in the world and it is going through more than a financial crisis. In countries like France, 1/3 of the active population works for the government. This thing could really bring the EU down into a depression and then impact us greatly. Sokol was saying a few weeks ago: we will be very lucky if we get a slow but stable economy during the next 18 months. Basically nothing bad must happen at all. What about Japan: it doesn't look like an easy problem to solve. The Prime minister just resigned. And it is not only Soros, Sprott and Rosenberg that are fretting: what about Klarman (I liked the fact that he thought that some numbers are manipulated, that was my thought for a while too), Grantham and Zulauf for example ?

Sanjeev, I agree with you that big high quality caps are now getting cheap. It struck me for a while and I am looking very seriously at names like MSFT, KFT, JNJ etc... (I have even been trading in and out of some for some time). However, many of them are quite exposed to the entire world and I am very worried about what's going in on the world - Japan, Europe in particular, more optimistic about emerging areas (new customers but lots of volatility). How do you discount these risks in your valuations ?

I fully agree with Viking here. I am raising as much cash a possible. I always refused to base investment decisions on macro appreciations of market and economic risks but everything is relative: this is one of those times where I do not see how things can muddle through calmly. There is no way European countries can avoid to go down one way or the other: they are competitive, they are still thinking the old way and they have accumulated so many crippling socialistic rules. I am actually worried about the "strongest" economies of Europe: France and Germany for knowing them from the inside. What happens if they look much weaker in a few months from now (I think they will)? Japan is even worse. US and UK are facing a tsunami of debt. China looks bubblicious. Governments are manipulating the system left and right. I am in search of good hedges however: cash for deflation, but what about inflation... I am looking. Prem, Seth and others gave me some hints.

The more I discover Sanjeev, the more I respect him. You are a gentleman sir and you attract quality in your path!

Please do not apologize. Thanks again for this board.

You would not have done so bad simply buying and holding BRK in the 70's, 80's and 90's!

Chanos gave an excellent presentation about China a few months ago: http://www.youtube.com/watch?v=99HNFCn5RP8 I found his views pretty good. I have always believed China would go through some very severe crashes during its ascent and now might be one of those times. We'll see. Should we call it a "gray swan"?

Hilarious: http://www.brandfreak.com/ Watch Geico video. In it, Buffett is a rocker (end of the video). That's one way to sell...

Well actually I was fortunate to have cash ready when it was at 70K-80K recently and deployed some of it to buy more BRK. I have a lot in BRK but for some reason it like I can forget about it.

Sure, but Prem is not famous for overpaying either...

I would tend to believe that WEB prepared BRK for these shocks and that his appetite for BNI is not unrelated to these events also...

I would kick my own ass for selling below 100$. The operational side is going to kick ass over the next decade and more. (Secretly I would situate IV closer to 160k-170k an A share at least.) ::)

Great read, thanks a lot! One more intelligent perspective through which to observe the next moves on the government's side in this crisis.

Remember there is a need for around 14B US$ worth of stocks. But other funds may have to buy it depending on their strategy. There is not a lot of float out there and a majority of Berkshire shareholders know their stock. A majority of BNI shareholders wanted BRK stock instead of cash. I think there is much more buying to come as of tomorrow. Hey, I am not betting on it but it is kind of fun to watch...