All the negative news

[watsa_is_a_randian_hero]

I had to move on when I read the assertion "inflation is wealth redistribution."

 

Inflation destroys the masses.

 

And deflation is not a bad thing.  Folks who speculated with debt and/or lived beyond their means need to be accountable -- this is capitalism.  Deflation also clears the system of bad debts, restoring the economy to a firmer foundation from which to grow.   Hard work and thrift would be restored as virtues in our country.  No one ever mentions the massive downturn in the US economy post WW1 because the pain (which was significant) was over quickly and the economy then moved forward.

 

I dont understand.  Are you really refuting the concept inflation causes wealth redistribution?  It is textbook.  Econ 101.

 

this is just from a quick google search:

http://www.nd.edu/~cwilber/econ504/504book/outln13c.html

 

Chapter 13 Outline

III. EFFECTS OF INFLATION

   A. The Redistribution of Income and Wealth

1. Unanticipated inflation, inflation that is not expected, will redistribute income and wealth.

 

   a. Redistribution of income occurs because some wages and salaries increase more rapidly than the price level while other wages and salaries increase more slowly than the price level.

   b. Redistribution of wealth occurs because some asset prices increase more rapidly than the price level while other asset prices increase more slowly than the price level.

2. One important redistribution of income and wealth that occurs during unanticipated inflation is the redistribution between debtors and creditors.

 

   a. Debtors gain from inflation because they repay creditors with dollars that are worth less in terms of purchasing power.

3. Anticipated inflation, inflation that is expected, results in a much smaller redistribution of income and wealth.

 

   a. When inflation is anticipated individuals take actions to protect themselves from the effects of inflation.

4. Inflation can decrease the production of goods and services.

 

   a. Because inflation erodes the purchasing power of money people devote more resources to reducing money holdings and fewer resources to the production of goods and services.

[opihiman2]

 

Also, QE is definitely not wealth redistribution.  I need a citation from a credible source, Watsa.  

 

 

QE = Inflation  (this is the whole point, search any source you'd like)

A surprise or unexpected increase in inflation can create wealth redistribution from creditors to debtors  (this is also obvious)

 

No, it's not.  You might like conjecture, but I don't.  If this was the case, I would start believing in things like the Bible, Heaven and Hell, and an afterlife.  Also, QE does not equal inflation.  I think Japan disproves your idea of QE--which I believe has it's origins as a defined word in Japan during the 80's.  And the idea that it's a form of wealth redistribution is absurd. 

[opihiman2]

I had to move on when I read the assertion "inflation is wealth redistribution."

 

 

Yeah, me too.

[Parsad]

Generally, quantitative easing does lead to elevated levels of inflation.  Japan's experience, and what could be our experience of a non-inflationary environment, occur because lenders are afraid to distribute the cash they are sitting on and thus the normal multiplier effect in the monetary system doesn't occur.  They just have excess reserves that they cannot utilize.  Cheers!

 

http://en.wikipedia.org/wiki/Quantitative_easing

[twacowfca]

I had to move on when I read the assertion "inflation is wealth redistribution."

 

 

Yeah, me too.

 

 

Watsa + is correct.  Imagine instantaneous inflation:  The US decides to do a two for one split of the dollar.  The next day everyone has twice as many dollars in the bank etc.  But loan balances are the same.  Ergo,  Loan balances are much easier to pay off.  But lenders are gypped because the dollars they get will quickly lose value.

[watsa_is_a_randian_hero]

I had to move on when I read the assertion "inflation is wealth redistribution."

 

 

Yeah, me too.

 

 

Watsa + is correct.  Imagine instantaneous inflation:  The US decides to do a two for one split of the dollar.  The next day everyone has twice as many dollars in the bank etc.  BUt loan balances are the same.  Ergo,  Loan balances are much easier to pay off.  But lenders are gypped because the dollars they got will quickly lose value.

 

That is what I'm trying to argue.  Japan just didn't do strong enough stimulus.

 

Imagine a $1 million tax credit.  Everyone is a millionaire.  All loans repaid.  Debt is no problem

 

At the margin, QE does have inflationary effects.

[opihiman2]

You made a statement that says QE equals inflation and leads to wealth redistribution.  This is clearly wrong, and the fact that you guys are still arguing for it is mind boggling.  First, the statement that QE equals inflation is clearly false as the situation in Japan shows.  If the statement is wrong, then you must alter your assumption or hypothesis.  Perhaps QE alone does not lead to inflation when it doesn't stimulate lending or borrowing.  Whatever the new statement or hypothesis is, it must accommodate this new observation or proof.  Parsad makes at statement that it generally leads to inflation, and offers a reason why it may not.  I can accept this.  But to make the assertion that QE leads to inflation is preposterous.  I just gave a counter example that proves it doesn't. 

[Parsad]

I think you guys are arguing about semantics.  I'm guessing that Watsa meant that quantitative easing generally leads to elevated levels of inflation and thus a redistribution of wealth, but Munger and Ophi are saying that it is not definitive and there are exceptions to the rule.  Sort of the same as some guy named Carl telling me to eat more fiber because it makes you less hungry, yet I'm completely fibered out and can use a nice Steakburger!  ;D  Cheers!

[scorpioncapital]

The Japanese central bank did not deposit the equivalent of $1 million USD into the bank accounts of every Japanese citizen. Until it does so, any argument that QE in Japan didn't work is not conclusive.

 

 

[watsa_is_a_randian_hero]

In any economy there can be various countervailing effects at any time.

 

To say that QE is not inflationary because Japan did not have inflation I do not believe is evidence.  Japan QE that occurred was just not large enough to offset the deflationary headwind. 

 

 

Imagine this scenario: US gov buys back every treasury.  Thats it, no more treasuries, banks, insurers, pensions can either hold cash or lend.  And in addition to this, the US uses fiscal stimulus, runs a deficit, lowers tax rate to 0, gives refundable credits, and prints more cash to fund all of it.  $13 trillion of debt monetized isn't inflationary?

 

My point is, seigniorage is inflationary at the margin.  Monetizing debt, printing money, QE, whatever you want to call it, it is all a form of seigniorage and is inflationary in nature.

 

 

[Guest ValueCarl]

Whoa, Sanjeev! Can you believe I just had my glass of "no fat" milk with Walgreen's own "Wal-Mucil" brand, the regular flavor much better priced than the Metamucil name brand! It's delicious and reminds me of that Malt O Milk flavor I once had as a kid, and didn't mind as a general rule. 

 

Of course, I'm sure you know that my messages sometimes contain encryption-not exactly innovative for this board and its players- and I believe in placing ones hard earned shekels in sufficient amounts of "optical fiber" because at some point in the medium term, "There SHALL NOT be" sufficient amounts to satisfy the world's THIRST, never mind HUNGER for STEAKS and BURGERS!, for all kinds of PRODUCTIVITY enhancements and savings be it business or consumer purposes that will be quite "ENTERTAINING" for all of us to DRINK.

 

Yes, you can call me Carly The Bull, on FIBER beyond ones long term DIET! I do know this one dastardly telecom name that does control it, and will continue doing so as far as the HUMAN EYE wants to see! So, go ahead and drink some Kool Aid over your OPTICAL FIBER. ;D

[Cardboard]

Zimbabwe and Weimar Germany got inflation and a lot of it. Did you like the end result? Food inflation is actually a perfect recipe for civil unrest.

 

What about the Chinese? Do you think they will just sit there while you are destroying their reserves? Do that and I can almost guarantee you that they will invade Taiwan.

 

No matter what is implemented by our governments, there is a certain amount of pain required to offset the party that people went to. It could be short and painful (30's) or long and not as painful (Japan). There is no magical solution with debt, it has to be repaid one way or another. It is either at the borrower/lender level or at the population level if the debt is absorbed by the government via whatever method. Then if you make suffer another country by not paying your debts the right way, you can expect some backlash.

 

I am also amazed that people still believe in the infinite power of our governments. The biggest interventions were in September 2008 with TARP, the saving of AIG and a few other manipulations. Interestingly, the stock market really started its plunge post September. At the end of September 2008 we were higher than today! It may sound like bullish, but it just shows how little these tricks did to improve the actual situation.

 

And they are still manipulating today. Maybe that some of you never watch the overall market, but any familiar observer can see on many, many days that the market opens lower on bad news and then by 10:30 am some mysterious force comes out and push the market ever higher until the end of the trading day. Daily reversals used to be extremely rare. Not anymore.

 

Capitalism and free markets can do wonders. They are volatile, but they are the only way to cleanse the system. It is also quite good at evaluating firms properly. The market right now is so illogical it makes me sick. This will end badly.

 

Cardboard

[twacowfca]

You made a statement that says QE equals inflation and leads to wealth redistribution.  This is clearly wrong, and the fact that you guys are still arguing for it is mind boggling.  First, the statement that QE equals inflation is clearly false as the situation in Japan shows.  If the statement is wrong, then you must alter your assumption or hypothesis.  Perhaps QE alone does not lead to inflation when it doesn't stimulate lending or borrowing.  Whatever the new statement or hypothesis is, it must accommodate this new observation or proof.  Parsad makes at statement that it generally leads to inflation, and offers a reason why it may not.  I can accept this.  But to make the assertion that QE leads to inflation is preposterous.  I just gave a counter example that proves it doesn't.  

 

 

Your example  is a poor one.  Japan was slow to increase their money supply when their crisis and market meltdown occurred about 20 years ago.  They didn't increase their money supply substantially until they had bottomed into a deep liquidity trap.  Even then they didn't put the pedal to the metal.  They flooded their system with government debt rather than money and kept zombie companies alive.  The zombies had no interest in investment or job creation; they were entirely focused on covering up their insolvency while pretending all was well.

 

The saddest example that illustrates Watsa +'s point is what happened in the Weimar Rpublic.  Their government started printing Marks and stuffing them into the financial system.  At first, there was no inflation because they were in a deep postwar depression.  So they kept stuffing more Marks into the economy . In several months the economy picked up, but instead of raising taxes or turning off the monetary taps, they kept the printing presses rolling.

 

The rest is a very sad story.

[Aberhound]

I would bet that where we each live largely determines how optimistic or pessimistic we are. We probably read the same blogs each day.

 

I live in Vancouver so I am optimistic. I am optimistic despite the fact that I agree with Munger's analysis regarding balance sheet recessions. You cannot read Hoover's auto-biography of the great depression and not worry about the parallels.

 

Vancouver is great because it is a crossroads. I hear about investors who are now experiencing full on housing bubble in India and India doesn't even have easy mortgage financing yet. One house went from $700,000 to $1,250,000 over the last year. (I bet I know where the QE money has gone.) Yet the seller wants to invest the proceeds near Houston!

 

If the US adopts sensible policies and allows a modern version of the Yankee carpet baggers circa 1865 there could be a flood of immigrants and capital which will reverse the housing crisis within months. I expect by now there has been a steady flow of Indian born and US educated and trained investment bankers who have returned to India and are now in a position to create easy mortgage financing in India. How long will it be before we see uncontrollable loan growth in India? It is still much nicer to live in North America. Vancouver is essentially a beautiful country club with the entrance fee being the expensive real estate. Capitalism works.

[Rabbitisrich]

The SF Fed posted two articles that are relevant to this topic:

 

http://www.frbsf.org/publications/economics/letter/2009/el2009-19.html

 

This article references a model that looks at lighter than expected declines in core inflation to infer that the ouput gap is less than estimated by the CBO. If the natural unemployment rate has risen--8.6% in the August 2010 update!--then pricing pressures should be comparatively subdued.

 

 

 

http://www.frbsf.org/publications/economics/letter/2009/el2009-16.html

 

This other article looks at Japan's non-financial private business develeraging throught 90s as a benchmark for U.S. household deleveraging.

 

Assuming an effective nominal interest rate on existing household debt of 7%, a future nominal growth rate of disposable income of 5%, and that 80% of future saving is used for debt repayment, the household saving rate would need to rise from around 4% currently to 10% by the end of 2018. A rise in the saving rate of this magnitude would subtract about three-fourths of a percentage point from annual consumption growth each year, relative to a baseline scenario in which the saving rate did not change.

 

Emphasis added. The model assumes a near-term impact of (.5%) on GDP along with a 5% growth rate of disposable income in a 10% savings rate environment :-*.

 

 

[rick_v]

You guys should all read a book by Freeman Tilden titled: A World in Debt

 

It was published in 1935 and is probably one of the single best pieces of literature out there about this topic.

 

 

[rick_v]

Twacow I just saw your post been at the ball game!

 

1) Pretty content with 12% , size is 9 figures but we have been pretty lucky this year on some buyouts and preferred stock positions. My bread and butter value plays are cheaper today then they were in January or April, which is why I believe the situation is getting interesting enough to deploy more capital. We are about 30% cash with the remaining equally split between equity positions and fixed income/preferred. I bought a ton of Bank preferred's at issue that have really been kicking ass! Also I should mention that of the roughly 40~ in equities over half can be attributed to companies I have owned for over 5 years and so they are my forever positions. So really we are not heavily positioned for a loss if the "day of reckoning" presents itself. I have just been around long enough to know that betting on the prosperity of humans is more profitable than betting on their demise. I also am a believer in gold which is a whole different story.

 

Johndoe700m also responding to you a bit late:

 

The funny thing is I agree with almost everything Munger is saying I just think he is being super naive assuming that the entire market is mis-priced or that as a whole stocks are not providing a sufficient margin of safety based on a theory of future macro events unfolding exactly how they did in Japan. I also have not heard one rebuttal for you Japan-phobes which basically is this: Money supply in Japan did contract but the value of the yen has expanded at roughly the same rate to the upside (if not more and please don't hold me to the exact numbers on all this macro crap). So really the purchasing power of the japanese on a global basis has been increasing even though the amount of actual money in their system has been decreasing per say.

 

I also have a huge problem with many of the guys here who read about Buffet situations and assume that just because Mr. Buffet exuded so much confidence in his positions at the time of buying them that it was SO obvious to the rest of the world. I have bought positions that went against me -20,-30,40-70% yes even -70% only to end up returning me several times the investment amount and at any time during the acquisition of these stakes I would have written up a storm about how confident I was while the world believed the opposite. Buffet is an incredible investor for a reason, he sticks to his guns regardless of the market quote. And just because one reads about it decades later doesn't mean situations will present themselves EXACTLY the same way.

I can flip your WPO situation beautifully if I wanted to and I can assure that there were other reasons at play.

 

The market has been pretty sophisticated since the late 30's there was never a time where everyone was just totally oblivious to valuations. Valuations would become attractive based on grahamian principles because the world was too busy being focused on other BS so the grahamites filtered that stuff and say well who cares what can happen one or two years down the line things are pretty cheap here lets buy some! And it works plain and simple, it also has to do with the deployment of permanent capital with no exit strategy. If you can do that you are at a huge advantage with ANY type of investment.

 

Maybe I just don't invest in as many billion dollar+ companies as you all do but in the world of 50-500m companies there are have been great bargains over the past year and they continue to get better.

 

What will happen if the so called "day of reckoning" will just involve some type of a restructuring with China? What happens if the RMB appreciates? What happens if the IMF introduces a global currency? What happens if off-balance sheet assets are brought to the table? (yes those exist too). There are just too many variables to deal with, its much easier focusing on whether company a will continue to make money and if they make a little bit less for a while they can still be attractive. But a cash and go investment strategy is not a good one it just doesn't work with a substantial amount of capital. I would rather hear investment ideas of how to profit from such crazy theories than debating their potential and how and why we shouldn't invest in stocks because of such potential.

 

Thanks

 

Just thought about something for fun, going to run a bloomberg screen tomorrow on japanese components of the nikkei aggregate net earnings average from their "day of reckoning" until today but adjusting the value of the yen to US Dollars. It will be interesting to see if my theory is right, that even though the amount of yens they earned decrease the amount of USD went up. If that is the case it could end a lot of this argument. You see this ties into the belief that only one central bank regulates the flow of GLOBAL CURRENCIES and in today's globalized economy that just isn't so.

 

 

[Uccmal]

 

 

The saddest example that illustrates Watsa +'s point is what happened in the Weimar Rpublic.  Their government started printing Marks and stuffing them into the financial system.  At first, there was no inflation because they were in a deep postwar depression.  So they kept stuffing more Marks into the economy . In several months the economy picked up, but instead of raising taxes or turning off the monetary taps, they kept the printing presses rolling.

 

The rest is a very sad story.

 

Just a point of order here Twacow:  Most of the reason Germany was in recession post World War I was due to the insane reperation fees demanded from the rest or Europe who were in turn paying debt to the US.  Hitler got elected and promptly stopped paying the fees.  This is what led to the Marshall Plan after WWII.  Avoid the mistakes of the past. 

[Uccmal]

Just thought about something for fun, going to run a bloomberg screen tomorrow on japanese components of the nikkei aggregate net earnings average from their "day of reckoning" until today but adjusting the value of the yen to US Dollars. It will be interesting to see if my theory is right, that even though the amount of yens they earned decrease the amount of USD went up. If that is the case it could end a lot of this argument. You see this ties into the belief that only one central bank regulates the flow of GLOBAL CURRENCIES and in today's globalized economy that just isn't so.

 

Please let us know how this turns out!

 

Thanks, Uccmal

[rmitz]

I would bet that where we each live largely determines how optimistic or pessimistic we are. We probably read the same blogs each day.

 

I live in Vancouver so I am optimistic. I am optimistic despite the fact that I agree with Munger's analysis regarding balance sheet recessions. You cannot read Hoover's auto-biography of the great depression and not worry about the parallels.

 

Vancouver is great because it is a crossroads. I hear about investors who are now experiencing full on housing bubble in India and India doesn't even have easy mortgage financing yet. One house went from $700,000 to $1,250,000 over the last year. (I bet I know where the QE money has gone.) Yet the seller wants to invest the proceeds near Houston!

 

Definitely some truth in here too.  I, personally, don't really see the bad economy, except in the headline numbers and statistics, and maybe the occasional human interest piece.  I live in Pittsburgh which has been slowly recovering from the departure of most of the Steel industry for many years.  Things have pretty much continued with barely a pause.  There was very little of a real estate dip here because there was never really a boom in the first place.  Some articles place the local real estate market here as the best in the country (the raw numbers are no better than they were, but when you're playing football against a guy with one leg, you can do OK).  The city finances still suck, but many other places are now much worse.

 

So whatever happens in the economy, mostly just affects my mind, not my life.

[Guest broxburnboy]

 

The saddest example that illustrates Watsa +'s point is what happened in the Weimar Rpublic.  Their government started printing Marks and stuffing them into the financial system.  At first, there was no inflation because they were in a deep postwar depression.  So they kept stuffing more Marks into the economy . In several months the economy picked up, but instead of raising taxes or turning off the monetary taps, they kept the printing presses rolling.

 

The rest is a very sad story.

 

There is a reason the Weimar Republic didn't stop the printing presses - they couldn't. If the money creation stopped or taxes were raised, the economy would revert to the depressionary state they were trying to cure. The mistake this government and others made was believing that fiat paper was money and can be created by the magic of the press. Once a government substitutes IOUs

for production backed fiat currencies or gold backed currencies, and reaches the point when previous debt and malinvestment is paid off woth more debt, inflation is compounded until the money becomes worthless and the economy reverts to barter.

[Guest ValueCarl]

Yra Harris answers my question from yesterday, that being the stupidity behind skipping mortgage payments versus credit card debt not being as stupid as it appeared on the surface. BK laws and "non recourse" versus "recourse" it seems.

 

In the mean time, Becky Quick, was QUICK to point out "FOOD PURCHASES" as being more important than a roof over ones head by the time such POWE FOLK must leave their present abodes! Ultimately, I guess more HOMELESS PEOPLE with credit cards in their pockets until they can't find the resources for satisfying them without jobs, are better for the economy than not!

 

Either way, the utter lunacy tied to a DEBT GONE WILD WORLD continues to defy most human imagination.

 

Welcome to, "The Twilight Zone."  :'(

 

http://www.cnbc.com/id/15840232/?video=1574259939&play=1

[oec2000]

Seems like this discussion has turned into a kind of slugfest where people are taking punches at anyone who's view is different from theirs.

 

Parsad calling Sprott "nuts" (tongue in cheek or not) just because "he does the opposite of what I do" (Buffett bought silver once and the Br Real another time - did you call him "nuts"? C'mon.)

 

Some of you guys are beating up on Munger rather unfairly just because he has a different view. Shouldn't we be thankful to have someone who disagrees with us so that we can retest our own views? It seems like everyone has become so wedded to their own views here that they think their view cannot be wrong.

 

Despite your "bullishness" about values available, Rick_v, I'm surprised you only have 40% in equities and 30% in cash. I'm assuming yours is a 100% equity fund?

 

Parsad, iirc you turned somewhat cautious in your posts some months back after the market had its huge rally and saying that you were reducing positions. What has changed?

 

Watsa talks with complete certainty about QE resulting in inflation without worrying about the unintended consequences. Sure, what you say may be true but do you really think your type of QE ($1m tax credit per person) is the type that you want to be fully invested for?

 

John Doe quotes Buffett on the futility of macro forecasting without taking into account the fact that Buffett is not necessarily so dogmatic in his views. I believe there are times when macro circumstances are at such extremes, that you can make long term macro calls with a high degree of confidence - which is when he has made both market and macro calls.

 

I think it may help for each of us to rethink why we might be wrong in our views, just in case. In this respect, I think it is instructive to take into consideration the positions the real Watsa has taken in recent months. Surely we don't think he is "nuts" because he just spent $200m betting on deflation?

[omagh]

Seems like this discussion has turned into a kind of slugfest where people are taking punches at anyone who's view is different from theirs.

 

...and all done tastefully and respectfully, which makes this community great!  Come to the annual Fairfax shareholder's dinner and meeting and you can do it in person.

 

-O

[watsa_is_a_randian_hero]

Watsa talks with complete certainty about QE resulting in inflation without worrying about the unintended consequences. Sure, what you say may be true but do you really think your type of QE ($1m tax credit per person) is the type that you want to be fully invested for?

 

Not sure how that was misconstrued as me advocating the $1m tax credit.  I am a libertarian.  If anything, I would advocate abolishing the FED and make people take their medicine now rather than this "delay and pray" strategy.

 

My only point is the government does have, contrary to what some have indicated here, all the ammo in the world it needs to create inflation.  Deflation is preventable.  I was using the hypothetical $1m tax credit to illustrate that point.  

 

That was my only point.

 

I think it may help for each of us to rethink why we might be wrong in our views, just in case. In this respect, I think it is instructive to take into consideration the positions the real Watsa has taken in recent months. Surely we don't think he is "nuts" because he just spent $200m betting on deflation?

 

I think this is a great hedge.  Great optionality.  It cost them approximately 1% of notional to protect against inflation lower than 2% for 10 years.  They did this when the 10 year was at almost 4% though.  Now it is at 2.5%.  Not sure if you can interpret the trade as Prem thinking deflation is the most likely outcome.  I interpret the trade more as a hedge (which is exactly why I hold a large portion of my portfolio in FFH - it represents a hedge for me).