scary article

[rmitz]

The Kyle Bass video could be summed up: don't spend more than you make. How much will GDP have to grow to meet current and future obligations and why rmitz would you assume that entitlement costs will be lower than estimated?

 

If the GDP is the same or lower 20-30 years from now, there must have been a measure of deflation.  In broad strokes, this affects the entire economy.  I don't actually believe that will happen.

 

Just as others are arguing that the level of corporate profits as a percentage of GDP is unsustainable [i have no opinion on that issue], so likely is that expected level of health care spending as a percentage of GDP.  It's obvious there will have to be changes along the way, and we have a LOT of time before the chickens come home to roost on that issue.  The world, the whole environment is going to change in that time period, making precise predictions pretty fictional.  So the point in general is, saying that that fictional predicted value amounts to a specific percentage of current debt...just doesn't make sense.

 

Do we need some amount of more discipline in government?  Absolutely. Is it the end of the world?  Hardly.

[Munger]

The world, the whole environment is going to change in that time period, making precise predictions pretty fictional.

 

No one is making precise predictions.  Anyone who takes the time to work through the numbers quickly sees the the reality that the debt problem is so large that the only question is when the day of reckoning occurs and how much pain is felt. 

 

Sure, if society learns to travel at the speed of light or some other radical development dramatically improves overall economic productivity, the problems may be avoided.  Absent some currently unimaginable development, the only question is when and how much pain will be felt.  Buying stocks at 10-15x FCF does not offer the apporiate margin of safety given the risks, in my humble opinion.

 

[Guest ValueCarl]

Believing in "herd mentality" in an environment like this, may indeed be a misplaced "belief system," especially for "valuing."

 

In the words of that bubble blowing, Ayn Rand traitor, Alan Greenspan, I must compliment him for one former quote I heard him say, that being, "This is NOT your father's stock market."

 

As for men like Schloss, who are too old and crusty to spend time learning about computers, or other more generationally gifted ones, I recommend coming to terms with this:

 

http://www.zerohedge.com/article/institutions-now-actively-selling-hft-permabid

 

The absolute lunacy of it all from the perspective of a more normal market participant, reminds me of a line from Braveheart, during the wake of William Wallace's plea for his fellow Scotts to stand tall and fight against English tyranny.

 

One Scotsman in response sensibly replied, "Fight against that, No! We will RUN and we will live!"

 

 

When you're dealing with artificial intelligence and quants with limited investment experience, the best advice to participants continues to be, take your MONEY and RUN! imo

[SmallCap]

What I do not get about macro worries if say Inflation/deflation/double dip is that none of these events can be predicted with even say a confidence level of 50%. We can have far greater confidence in the business values of several companies and if they are selling at a discount to their IV, why make a low confidence macro bet instead of a higher confidence micro bet on individual companies?

 

Good statement Vinod, I also really appreciated your quote from Buffet in 94. I would say that my approach to investing has changed after getting my head handed to me because of the macro events in 2008. I still have no confidence in predicting macro events and do not invest based on potential macro events. I will say that at this point whenever I look at companies I am emphasizing a couple things more then I ever used to.

 

1. I look for a larger margin of safety, Duh, don't we all.

2. But I am now willing to sacrifice growth potential for a solid balance sheet situation.

3. I now look at every investment and consider this investment in the light of hyper Inflation and deflationary environments. I know I should have always considered this but my macro prediction is that we will have either deflation of high inflation in the years ahead, I have no idea which it will be but I don't see the next few years running in monetarily smooth waters. So as difficult as it is to account for both types of environments I am trying to make sure that the company could service either eventuality.

 

Any thoughts that others have on this perspective would be welcome.

 

SmallCap

[SmallCap]

I have been trying to figure out which type of businesses or business models work well in a high inflationary environment. for this question I am looking beyond the standard answers of companies that have hard assets, commodities or high amounts of debts. I am looking beyond those things at the business models and types of businesses.

 

For instance I have been thinking that pure franchise plays should be able to survive in a high inflationary environment, they may not do as well as commodity companies but they seem like a company that should survive and do OK in a high inflationary environment.

 

I also think that investment management companies should do OK in a high inflationary environment.

 

Of course I am only looking at one aspect of a company and there are others that would disqualify them.

 

What other types of companies are there that should do OK and do you see any problem with what I have laid out?

 

How do you think that banks would do in a high inflationary environment?

 

SmallCap

[twacowfca]

I have been trying to figure out which type of businesses or business models work well in a high inflationary environment. for this question I am looking beyond the standard answers of companies that have hard assets, commodities or high amounts of debts. I am looking beyond those things at the business models and types of businesses.

 

For instance I have been thinking that pure franchise plays should be able to survive in a high inflationary environment, they may not do as well as commodity companies but they seem like a company that should survive and do OK in a high inflationary environment.

 

I also think that investment management companies should do OK in a high inflationary environment.

 

Of course I am only looking at one aspect of a company and there are others that would disqualify them.

 

What other types of companies are there that should do OK and do you see any problem with what I have laid out?

 

How do you think that banks would do in a high inflationary environment?

 

SmallCap

 

 

Banks get squeezed.  When there is inflation, short term interest rates  rise proportionally the most ,squeezing margins, and their customers have difficulty paying more interest on loans.

 

 

Some insurance  companies, especially life insurance companies with fixed long term liabilities, do well as they earn higher returns on investments when they roll them over to higher yields as they mature, provided that their book is solid ,without accelerated redemptions in an inflationary environment.  Life insurers with a relatively shorter duration on their portfolio than the average time it takes for paying claims on their policies will be relatively well off.  

 

P&C companies like BRK with short duration assets and many long tail liabilities would be in a very sweet spot as they quickly start earning higher yields that more than compensate for inflation of the claims they pay.  Other P&C companies can become distressed if they have longer duration assets that can't be rolled over quickly enough to compensate for inflation of claims.  This can soon lead to a very hard market that will benefit the wiser BRK type insurers even more.  :)  

[RRJ]

I like Amex to hold its own in a high inflation environment, because they get about half their fees as a percentage of the transaction.  Inflation is an incentive to spend today rather than tomorrow as well.  They can raise their annual fees to match the inflation too. 

[SmallCap]

for the last few days I have been wondering what kind of logic someone would use in order to justify buying a 30 year treasury at this time? Without knowing the future I just can't see doing it under almost any circumstances and yet plenty of 30 year treasuries are being sold. Amazing. It would be nice if the treasury could sell as many of these as they are able to at these interest rates.

 

SmallCap

[biaggio]

Is a Crash Coming? Ten Reasons to Be Cautious

http://online.wsj.com/article/SB10001424052748703723504575425723973560744.html?mod=WSJ_PersonalFinance_PF5

 

Good summary.

 

To me there seems to be a lot of bearish sentiment in everything I read. Maybe it is the stuff I choose to read.

 

It feels reassuring to read those types of headlines, as we never get a warning of an impending crash ie nobody rings a bell just before a crash.

[Parsad]

I remember very few, if any, articles making the same sort of arguments Prem was making before the credit crisis.  Today, you have virtually every article talking about deflation, crash, unemployment, foreclosure, etc.  The media reports what is happening, not where the world is going.  Cheers!

[Partner24]

The media reports what is happening, not where the world is going. 

 

I would add that the media report first what the people want to hear, because the more that's what they want, the more people read them, the more advertising revenues they get.

 

[Munger]

I remember very few, if any, articles making the same sort of arguments Prem was making before the credit crisis.  

 

You have got to be kidding me.  There were articles every day about the housing bubble and a US consumer spending beyond their means.  Everyone was aware of the risks but still didn't believe housing prices could decline while also believing the US consumer could go on forever.

 

Reminds me of the environment we are in today -- while the risks are as clear as day, virtually NO ONE can bring themselves to believe a massive depression is possible in the US -- no one.  The response I love most -- "the government will never let it happen."    

 

Same was true in 1998 -- everyone knew tech companies were valued at 60x earnings (at best) and in many cases 60x revenues...it was reported every day in the papers -- clear as day.  Yet most still bought the stocks, never thinking a crash was possible or ever better, believing they would be the smart ones to get out just before the top.  And in fact, stocks went straight up for the next 18 months...and then the music stopped.

 

As for today, Sokol, Munger, and Howard Marks are among some the voices stating very clearly that the US faces major challenges that we will be fortunate to overcome.  These folks are not influenced by the media, ever.  I urge all to read Munger's essay "Basically, it's over" -- published earlier this year.

 

I would add that the media report first what the people want to hear, because the more that's what they want, the more people read them, the more advertising revenues they get.

 

Reality is that people read what they want to believe and hear what they want to hear.  And no one wants to hear that their life will soon get a lot worse.

 

Best.

 

[Dorsia1]

Munger,

 

Do you even know what arguments Prem was making before the credit crisis?

 

 

[Guest broxburnboy]

 

Reality is that people read what they want to believe and hear what they want to hear.  And no one wants ot hear that their life will soon get a lot worse.

 

Best.

 

 

Amen.

 

There is no doubt  denial is the order of the day. Everyone seems to "believe in the greatness of capitalism" or some such variation, when their own eyes and daily experiences are telling them otherwise. Not many people are willing to believe that they are undertaxed in comparison to government expenditures and that some day borrowed money must be repaid. We all have a vested interest in believing that our profligacy is sustainable even in the face of daily reminders otherwise. We have lived through a generation of credit expansion and now the cycle has turned and like most down cycles will probably be a more severe correction, but of shorten duration, before we delever and a new cycle begin.

A wise investor should invest in situations where the paper he is buying is not supported by debt, but by cash flow from the sale of a basic commodity

or service. 

My .02

Cheers

[Parsad]

You have got to be kidding me.  There were articles every day about the housing bubble and a US consumer spending beyond their means.  Everyone was aware of the risks but still didn't believe housing prices could decline while also believing the US consumer could go on forever.

 

It seems that way to you now, because you are viewing it in hindsight.  There were very few articles on credit derivatives, the housing bubble, overvaluation in equities, the narrow spreads between corporate bonds and treasuries, etc at the time.  I know because everyone on our board was following what Prem was saying, and most people on Wall Street viewed him as a kook!  Just like they did about the lawsuit against the hedge funds, or that a Japan-style deflationary period was possible.

 

CNBC had the top mortgage executives on their show on a regular basis.  I remember seeing Angelo Mozillo touting new 110% financed mortgages.  Only a very small handful of people were talking about risks to the economy.  Every channel on television had a new show about flipping houses or the new hedge fund managers that were making a killing.  Frickin' Ron Insana joined SAC and started the Insana Legendary Fund (lasted 9 months) and David Robinson, the former basketball player, also started a hedge fund. 

 

Ironically, at the bottom of the bear market (last week of February and first week of March 2009), there were very few articles talking how cheap the market had gotten.  I remember talking about WFC at $11 and GE at $8 on here, and almost no one wanted to bite.  Today, everyone thinks WFC can do no wrong.  Everything becomes apparent and 100% accurate in hindsight!  Cheers!

[Munger]

There were very few articles on credit derivatives, the housing bubble, overvaluation in equities, the narrow spreads between corporate bonds and treasuries, etc at the time.

 

This statement is just not true.  Not sure how to resolve other than to agree to disagree. 

 

 

How many articles do you read about the US entering a massive depression in the next 5 years?

 

Forget that -- how many economists or anyone in the mainstream believe a double dip is possible? 

 

How much do we see/read about the once in a lifetime opp in quality large cap stocks?

 

 

[twacowfca]

There were very few articles on credit derivatives, the housing bubble, overvaluation in equities, the narrow spreads between corporate bonds and treasuries, etc at the time.

 

This statement is just not true.  Not sure how to resolve other than to agree to disagree. 

 

 

How many articles do you read about the US entering a massive depression in the next 5 years?

 

Forget that -- how many economists or anyone in the mainstream believe a double dip is possible? 

 

How much do we see/read about the once in a lifetime opp in quality large cap stocks?

 

 

 

 

And, how much do you see about how the market tanked again in the late 1930's when taxes went up as money got tighter.

[Parsad]

This statement is just not true.  Not sure how to resolve other than to agree to disagree.

 

I've got an easy way to resolve this.  Do an advanced Google search for a few of the words you've entered in the sentences below and add "2010".  How many hits do you get?

 

How many articles do you read about the US entering a massive depression in the next 5 years?

 

Entered "Coming Depression 2010".  Result:  96,000,000 hits

 

Forget that -- how many economists or anyone in the mainstream believe a double dip is possible? 

 

Entered "Double-dip recession 2010".  Result:  1,330,000 hits

 

How much do we see/read about the once in a lifetime opp in quality large cap stocks?

 

Entered "Cheap large cap stocks 2010".  Result: 61,000 results

 

Cheers!

[opihiman2]

I have to agree with Munger.  I also remember seeing and hearing more about the equities bubble in 2000 preceding up to the crash.  Most people simply didn't want to believe it, or just abandoned their beliefs as the market headed higher (Blodget is one notorious example of this).  I was somewhat new to investing, but from what I've learned about equities at that point, and listening to Buffett and even CNBC, I was able to avoid the tech crash.  I distinctly remember the warnings growing louder up till the bust.  Likewise, prior to the recent crash, I was well aware of the housing bubble.  The chorus became increasingly loud throughout 2008.  The wake up call was Countrywide.  At that point, if you didn't believe that housing was about to blow up, you were delusional.  It reminded me of the big cracks that were forming in the dot com bubble.

 

Regardless, although those two bubbles were (or should have been) easy to see, I think we're in no man's land here.  I believe we're hitting a soft patch, but that was to be expected: stimulus spending is wearing off, stocks have taken a hit, employment is stalling.  Real GDP growth is down by 50%, but it's still growing above 2%.  And I believe the economy, barring any major shocks like sovereign default or a collapse in commercial credit, could be poised to do well in 2011.  Commercial bank lending to consumers and small businesses grew significantly in July.  Is this a one time event?  Too early to tell.  But if that trend continues, it bodes well for 2011.  

 

I think it's a good time to find companies with strong balance sheets and nice economic moats.

[Munger]

I've got an easy way to resolve this.  Do an advanced Google search for a few of the words you've entered in the sentences below and add "2010".  How many hits do you get?

 

C'mon -- you're smarter than that my man.

[omagh]

Munger, this community works best with positive contributions and that includes valid criticism.  Criticism in socially unskilled ways is best left to other forums.

 

-O

I've got an easy way to resolve this.  Do an advanced Google search for a few of the words you've entered in the sentences below and add "2010".  How many hits do you get?

 

C'mon -- you're smarter than that my man.

[Munger]

just to add to the comedy of the "google suggestion"

 

"must buy stocks today" yields 113,000,000 hits

[Dorsia1]

Munger,

 

Maybe you missed my earlier question. It wasn't rhetorical.

Just to add to the comedy.

[Munger]

Munger, this community works best with positive contributions and that includes valid criticism.

 

I was being honest -- Parsard is much smarter than what was nothing more than a flippant response.  And I believe my most recent post shows the validity.

[opihiman2]

This statement is just not true.  Not sure how to resolve other than to agree to disagree.

 

I've got an easy way to resolve this.  Do an advanced Google search for a few of the words you've entered in the sentences below and add "2010".  How many hits do you get?

 

How many articles do you read about the US entering a massive depression in the next 5 years?

 

Entered "Coming Depression 2010".  Result:  96,000,000 hits

 

Forget that -- how many economists or anyone in the mainstream believe a double dip is possible?  

 

Entered "Double-dip recession 2010".  Result:  1,330,000 hits

 

How much do we see/read about the once in a lifetime opp in quality large cap stocks?

 

Entered "Cheap large cap stocks 2010".  Result: 61,000 results

 

Cheers!

 

There is a problem with using the Google methodology for argument rebuttal.  That result set you're looking at?  It's estimated.  If you continue to iterate through the result set, you might be surprised to find only a few thousand URLs.  Also, here's another big problem (and this, IMO, is much bigger than the cardinality of the data set problem) with using Google to prove something: key words can skew the result set.  For example, does a search on banana bread return a true estimation of the popularity of banana-bread?  Or does it just show how popular banana or bread is?  Or, maybe there are links that mention banana or bread in passing.  One way to resolve this is to use quotes to use the AND operator on the key words.  However, with more keywords, there is more subjectivity to the result set.  Also, how do you resolve that "Cheap large cap stocks" may be equivalent to "cheap large capitalization stocks", or that a keyword search on cheap large cap stocks may not even be about cheap large cap stocks but something entirely different?  The result set is not meaningful in these cases.  I would probably only use this kind of analysis if the keyword was a single word or a compound word (for example, "banana bread").  Anything beyond that is suspect.