The US Ponzi Economy and Bernanke leading the masses right off a cliff

[watsa_is_a_randian_hero]

Exactly what specific trait, aptitude, or track record would suggest that you understand the circumstances better than Packer? 

 

 

Because unless we change US capitalism, you can't get more dollars without more debt! -- stunning that most most don't understand this reality...this is indisputable -- basic 101 stuff and by no means rocket science.

 

Best.

 

seigniorage

[Munger]

Ben will print if he has to...

 

Not true -- Ben can influence the monetary base but has no control of the money supply.  He can't just increase dollars in circulation.  Always amazed at how widely misunderstood this fact is...

 

And inflation would solve nothing -- ss, medicare, medicaid, all state/local entitlements are all indexed to inflation.

 

 

[Ballinvarosig Investors]

And so many abuse Buffett's "ignore the macro" comments.

What Warren Buffett might say, and what he does can be entirely different things. I personally think that Buffett does pay attention to macro factors, but he may do so without even realising it.

[Guest broxburnboy]

I haven't tracked the posts on the thread, but the only way out for the US is to print money.  If you think they will balance the budget, pull my leg and it will play jingle bells.

 

Inflation will be on the horizon in the U.S., just as it always has been.  We all have stories have "how much a candy bar cost when I was a kid". 

 

The inflation right now is simply deleveraging.  Once that is done, we will see inflation, although I would expect to see it more than other areas than real estate. 

 

From an investing perspective, you can still do ok with multinationals.  People still need to eat, brush their teeth, etc.  Foreign markets will continue to grow, and the U.S. will remain tops in the one area it dominates - intellectual property generation. 

 

It is amazing to me that no one in politics really talks about the modern U.S. corporation.  Intellectual property generated here.  Right to sell products are out-licensed overseas (b/c US tax rates are too high).  That shifts profits and tax revenue overseas - oh well.  Then we shift all (well not all, but we all get it) manufacturing overseas and to latin america.  Then we try to shift profit overseas tied to that manufacturing.  Ireland, Singapore, Puerto Rico - we all know why they are chosen as manufactuing bases. 

 

The US will be ok from a multinational point of view b/c of the intellectual property generation.  But are politicians are either shallow or stupid to allow the scenario I described to play out.  Our stinky, smelly government gives our job creators INCENTIVE to shift production, jobs, value, and profits overseas.  Still scratching my head.

 

The best books I have read on the rise of the modern corporation is the timeless "The New Industrial State" and "the Affluent Society", both by JK Galbraith.

We have lived through a generation where economic power and decision making has been transferred from the State to the modern corporation to the point that we can now say that the state is a subsidiary of the military industrial financial complex. The purse strings in the US and its clients and associates are controlled by a private institution the Federal Reserve.

If you want an exercise in futility, try to discover who are the beneficial owners and in what portion  of the Fed. The best descriptor of this form of government is monopoly capitalism or corporatism, where the supply side has the market power and demand is manipulated by the issue of cheap credit and the ongoing relentless promotion of the consumerist lifestyle. The object of all corporations is to build a moat around their income (achieve monopoly or cartel member status) within their field of endeavour, then they can set price, maximize profits. At this point, for the main part R&D and innovation fall off, and advertising budgets increase. (think GM and the big Three in autos),

To this end we have seen the "consolidation" of  a number of sectors, from the railroads, technology, airlines to the local real estate agent, corner grocer, the independent mechanic, the barber and on to the final consolidation - the banking industry under the TBTF banks. All of this has been enabled by a supply of cheap (often free) money to favoured interests. We have also seen the suppression of enforcement of previous anti trust, consumer and environment protection laws whenever they interfere with the process of consolidation or current profits.

Unfortunately corporatism ultimately is self defeating - we're seeing that now- too many people are unproductive in the processes of financial and legal consolidation.

We have too many lawyers because of the complexity of the legal system, which the lawyers themselves have made needless complex for their own collective profit. Ditto for accountants and politicians and their staff. The funding of aspiring politicians and the legislative agenda is controlled by the myriad of lobbyists, introducing a huge inefficiency into the allocation of public funds.

No economy can prosper under such conditions, manufacturing employment has been exported and will continue to be, the number of people efficiently employed continues to drop especially when you subtract the number who are incarcerated, unemployed, underemployed, malemployed and overcompensated.

I guess my point here is that do not count on the creation of new intellectual property for ongoing economic growth, in many cases with the possible exception of the war industries, meaningful innovation ceases when monopoly is achieved.

 

[Guest Bronco]

Of course IP will lead to economic growth.  Look at Microsoft - how many jobs were created from the tech revolution?

How many people does Google employ?  Of course some here will argue that other jobs were destroyed, which is true, but come on.

 

Perhaps you think we would be better off picking cocunuts off of trees.

 

The problem with this country (US) aren't the corporations, it is the government policies of social (and military) spending.  And we seem to have a small, tiny problem controlling leverage and derivatives.

 

 

[Guest ValueCarl]

Anchors away, my boys!

 

Listening to Charles T. Munger in the FLESH at his WESCO, 2008, ASM, in advance of the 09 corresponding bottom and implosion, was enlightening.

 

He instructed his shareholders at that time, "INFLATION has been very good to you." The subliminal message with hindsight, of course, was hold onto your asses because we're about to take a WHIPPING!  

 

The FAKE MUNGER on this board is speaking to men who are "ANCHORED" in "PAST INFLATION" as though it is "GUARANTEED" to continue moving ahead.

 

These men, I'm confident to say, have NEVER lived in a "GREAT DEPRESSION."

 

With little doubt, it's coming to large swaths of POPULATIONS near you soon. Too many people, too little "PRODUCTION," and way too much "DEBT" predicated upon a FOUL ODOR that wrests inside that "BEAST" from "Jekyll Island."

 

Let me put my conspiracy hat on again, before the US JUSTICE DEPARTMENT begins to single out "enemies of their state" who reference people and systems with sufficient power to incorporate their NWO to our world.

 

We have an EPIC BATTLE taking place between the central banks of Europe and North America represented by ROTHSCHILD and ROCKEFELLER. Rothschild operatives include Soros and Bow Tie Jimmy Rogers, while the Hard Rocks have Goldmen, and now Buffett on their side.

 

Who will have their way next! From my perspective, ADVANTAGE ROTHSCHILD! imo

 

 

 

 

   

[Guest broxburnboy]

Of course IP will lead to economic growth.  Look at Microsoft - how many jobs were created from the tech revolution?

How many people does Google employ?  Of course some here will argue that other jobs were destroyed, which is true, but come on.

 

Perhaps you think we would be better off picking cocunuts off of trees.

 

The problem with this country (US) aren't the corporations, it is the government policies of social (and military) spending.  And we seem to have a small, tiny problem controlling leverage and derivatives.

 

Yes, let's look at all the "tech revolution" from the start to now, the tremendous growth during the consolidation of market power and the period of innovation during the rise of the tech monopolies - Microsoft in particular.

As market dominance was achieved, rivals were either devoured or defeated, then meaningful innovation ceased, Microsoft successfully resisted anti trust regulatory attempts, acheived near monopoly status but  now  is burdened with aging obsolescent technologies like the Windows O/S, Microsoft Office suite. It failed to capture the Internet driven computing space, losing primarily to Google and Apple. Microsoft is now on the downward side of the monopolist cycle.. it has lost its pricing power, its forays into ancilliary markets has been rebuffed. R&D has largely been exported to emerging economies - software development to India, Ireland, eastern Europe- hardware long ago to Taiwan and the rest of Asia.

Like in the auto industry before it, innovation has largely moved overseas.

The claim that America is the home of innovation flies in the face of these very obvious trends and the rise of the borderless trans-national corporation.

[oec2000]

 

In a case like Fairfax, they have huge insurance reserve liabilities, and their ability to meet those responsibilities could be severely undermined if markets moved down.  Thus, they are protecting their portfolio due to the leverage they operate with.  This is not the same circumstance for the average, unleveraged investor. 

 

Let's look at this more closely.

 

As at Q1 2009, FFH had $4.1b in stocks (at cost), $4.5b in s/holders equity, and $18.5b in long term liabilities (incl insurance reserves).

As at Q2 2010, FFH had $3.2b in stocks, $8.3b in equity, and $20.5b in long term liabilities.

 

They had no equity hedges in Q1 2009, and 93% equity hedge Q2 2010 even though their balance sheet leverage to stocks have dropped significantly. They are more exposed to an adverse move in bonds yet they are not hedged for a rise in interest rates. The data would suggest that the hedging decision is not driven by leverage per se but more by a concern of a drop in stocks.

 

The deflation insurance purchase gives further clues as to Prem's mindset. Although, it has been explained as protection for the insurance business, I don't quite understand why because their business seems more vulnerable to inflation and higher interest rates than deflation and lower rates. In any case, the fact that they bought deflation rather than inflation insurance is a very good clue as to what his macro views are.

 

Munger, while there is definitely some validity in your views, what is difficult to accept is the certainty with which you seem to hold your views. Have you considered the impact on your portfolio if you are wrong? Have you looked at your past track record of macro calls - do you have a 100% success rate?

 

Rick_v, you seem to be saying that we should ignore macro and decide purely based on stock valuation. It's a perfectly sound concept but what I don't get is why your exposure to equities is so low. (From thread on negative news.) Care to share your thoughts?

 

 

 

 

 

[scorpioncapital]

I for one am excited about certain stocks.

 

Here's the most important thing to realize about this whole mess: What matters is REAL numbers not nominal. As long as the world has businesses and those businesses make a buck, what you have is a REAL return in ANY environment. An entrepreneur will make money as long as he charges more than his cost and that occurs pretty much in any environment - ignore the bad businesses of course!

 

Rogoff did a comprehensive study on nations and showed that eventually all those that control their currency get over the crisis through a combination of a) a bit of growth and b) a bit of devaluation, sometimes more of one than the other, but the results I saw show it's about 50% growth, 50% devaluation.

 

 

[Munger]

Have you considered the impact on your portfolio if you are wrong?

 

Yes -- I will miss some upside, which I'm willing to concede because it won't be significant.  And one thing I am absolutely certain about -- there will be fat pitches in the future, which will always be the case.  So I'll happily wait for a better risk/reward.

 

what is difficult to accept is the certainty with which you seem to hold your views.

 

Fair enough.  But I've done the work and the certainty reflects the belief that 1+1 must always equal 2 -- i.e., basic math always holds true.  The imbalances are so extreme that the odds of some unimaginable positive economic development radically changing the equation are extremely low -- I'm willing to take those odds.

[Guest Bronco]

My final comments...

 

1) how many people work for MSFT in the US?

2) how much were profits from inception?

3) how much in salaries paid out to MSFT employees in the US from inception

4) how much wealth created in the US from MSFT stock?  

5) of wealth created in US, how much reinvested into other industries (or charities for that matter)

6) how many consultants paid in the US to support products?

7) how many software companies created to support MSFT platform since inception. How much wealth, salaries, etc. created from these

8) how much value and wealth created to those Indian (i.e. Genpact) employees or contractors that are programming?  

 

I'll take #1-7 over #8 any day.

[Guest ValueCarl]

How do I know Rothschild is winning the battle, anecdotally speaking, you might ask?

 

It's the PRICE of MILK(non-discretionary) at Munger/Buffett's stake in COSTCO FACILITIES!

 

They're stealing MILK from the children again!  >:(

[ERICOPOLY]

but I think Fairfax is more of a hdege than an outright bet due its holdings of other real assets .  It will be interesting to see the outcome.     

 

Also one thing I noticed:

 

I think Fairfax has bet $200m on these CPI deflation hedges which is only about 3% of shareholder's equity -- and I think they have a 10 yr term.  The CDS hedge comprised 10% of shareholders' equity (or was it a bit more than 10%?) -- and they had a 5 yr term.

 

3% vs 10%.  And the former is of twice the duration of the latter.

 

It says to me that they are not looking to hit it out of the park as they did with the CDS -- less conviction I think.

 

 

[oec2000]

what is difficult to accept is the certainty with which you seem to hold your views.

 

Fair enough.  But I've done the work and the certainty reflects the belief that 1+1 must always equal 2 -- i.e., basic math always holds true.  The imbalances are so extreme that the odds of some unimaginable positive economic development radically changing the equation are extremely low -- I'm willing to take those odds.

 

"The only things that are certain in life are death and taxes" is all I can say. I have plenty of scars to prove it. :)

[biaggio]

WEB does think of the macro

 

Found this old NYT oped (I was looking for the one that said that he was buying America + found this one, you gota luv google...I had never seen this one before)

 

http://www.nytimes.com/2009/08/19/opinion/19buffett.html

 

OP-ED CONTRIBUTOR

The Greenback Effect

By WARREN E. BUFFETT

Published: August 18, 2009

[beerbaron]

Why is it that the threads that people spend most time on are macro threads? Look at the amount of reply on this thread and on the Negative market sentiment thread...

 

Aren't we suppose to focus on the opportunities? For example jasonw1, posted a valid question yesterday about a China stocks but no replys yet.

 

Nobody seems to have any opinions on stocks but everybody has an opinion on macro forecasts. It's like politics, debates get heated and people lose focus on what they want to achieve in the first place.

 

BeerBaron

[Munger]

Buffett writes:  "With government expenditures now running 185 percent of receipts, truly major changes in both taxes and outlays will be required. A revived economy can’t come close to bridging that sort of gap."

 

This country has no clue and is not prepared for the magnitude of the changes coming down the pike.  The US will prosper again but it is going to be an ugly road.

[goldfinger]

There are smart people on both sides of this issue (Baupost - inflation, Fairfax (deflation)) but I think Fairfax is more of a hedge than an outright bet due its holdings of other real assets

 

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.

[Partner24]

beerbaron wrote:

 

Why is it that the threads that people spend most time on are macro threads? Look at the amount of reply on this thread and on the Negative market sentiment thread...

 

It's somewhat strange. I don't remember having seen something of this magnitude over the last 7 years on this message board. You don't bring food by watching The Weather Channel and make your self-made rain prediction for the next day. You bring food on the table by putting your fishing rod into the water and catching fish.

 

Everybody should keep their eyes on opportunities , because there is some very interesting ones out there, and then keep their head cold and take the long term view. People can worry about top-down stuff, but basicaly Berkshire Hathaway business model is all about bottom up, or long term value fundamental investing if you prefer. To paraphrase a BRK Chairman letter from my memory, what matters is to build an ark, not predicting rain. You build an ark by buying quality and attractively priced stuff. Think about the BRK backed municipal bonds that FFH bought, some high quality and cheap big caps, etc. That IS building an ark.

 

 

 

 

 

 

 

[tooskinneejs]

Munger, may I ask you a question?  Do you follow Robert Prechter and/or the Elliot Wave Theory?

[Munger]

Munger, may I ask you a question?  Do you follow Robert Prechter and/or the Elliot Wave Theory?

 

I have read his book, among many.  I am not a huge believer in an "elliot wave" but the Prechter's fundamental analysis seems directionally correct -- just wouldn't then move to the conclusion that there are these long general waves that recur throughout history and are predictable.  Many years were required for the US to reach the current state -- whether this is part of some predictable, recurring wave, I'm highly skeptical.  But again, I think his fundamental analysis of the current problem is thorough and generally accurate.

[Parsad]

The deflation insurance purchase gives further clues as to Prem's mindset. Although, it has been explained as protection for the insurance business, I don't quite understand why because their business seems more vulnerable to inflation and higher interest rates than deflation and lower rates. In any case, the fact that they bought deflation rather than inflation insurance is a very good clue as to what his macro views are.

 

Let me ask you something?  And this is coming from the guy that worships at the feet of Buffett and Watsa...do you think Prem could be wrong?  Do you think there is the possibility that Hamblin-Watsa's thesis could be wrong, or at the very least, not a prolonged deflationary period?  Personally, I don't think Prem even knows for sure by any means.  I think he's got an idea, and they've seen first hand what has happened in Japan, so his natural instinct is to protect the capital because he's not going through another God-damn "seven lean years!"

 

Then also ask yourself, exactly what does Prem have to lose if he is wrong?  The hedges cost 1-2%, he has tons of high-yield muni bonds that will produce plenty of interest income, and much of the equity portfolio he holds will also yield 2.5-3.5% in growing dividends annually.  He is leveraged 3.5 to 1, so all he has to do is get about a 4-4.5% yield from his entire portfolio and he's laughing.  Why would Prem invest in equities when he doesn't even have to!  Now let me ask anyone here if they operate with 3.5 to 1 leverage...outside of your home or any other real estate?  Cheers!

[Parsad]

I have read his book, among many.  I am not a huge believer in an "elliot wave" but the Prechter's fundamental analysis seems directionally correct -- just wouldn't then move to the conclusion that there are these long general waves that recur throughout history and are predictable.  Many years were required for the US to reach the current state -- whether this is part of some predictable, recurring wave, I'm highly skeptical.  But again, I think his fundamental analysis of the current problem is thorough and generally accurate.

 

Well, that friggin' explains why I've felt like I'm hitting my head against a rock during this whole thread!  Geez Munger, you could have saved me alot of time by just telling me that in the beginning.  ;D  I think technical analysis is the antithesis of rational thought when it comes to the investment process, and there are enough nutterbugs already in the world chattering away about gold, depression, guns and ammo.  Cheers!

[rick_v]

Partner - Because on a Macro Thread nobody has to own up to anything. The posts are completely arbitrary and even in Munger's case no matter how things turn out he will somehow rationalize that his theory was the correct one.

 

I never took part in such waste of time. We are all here because we understand pretty well the concept of Margin of Safety, however some of you here are obviously newer to investing then the rest, and then from the ones that have been investors for a I am not too sure quite frankly how many have made millions or tens of millions or even hundreds of millions in the market over the years.

 

You can see how quickly and easily the market reverses on a day like today, its almost impossible to build a good position in an up market its a lot easier when things are sideways or to the downside as they have been for the most part of the YEAR!

 

I would like to hear an investment idea from Munger. Its obvious he is very intelligent and has soaked up a ton of information but how does all that make him a better investor. It doesn't even have to be something that is available today it can be a hypothetical scenario within a reasonable range of today's market. But saying "I will buy KO @ 5x FCF" is a complete pipe dream as if everything plays out in the fashion Munger proposes KO will have a lot of shitty quarters and so the 5X he will be attributing will have to be for past cash flows which he will be unsure if they will ever return. So again this is not a practical investment thesis.

 

Here is another company I see little reason NOT to accumulate in this environment: US:MIM

 

Sorry it was MIM

 

 

[Munger]

Parsard -- it pains me to say this given your passion.

 

But...

 

First by demonstranting a complete lack of understanding about the relationship between debt and money supply, you have shown to be a full fledged novice.

 

Now by commenting on Prechter's book without actually reading the book, you come across as a complete blowhard.  

 

I think technical analysis is the antithesis of rational thought when it comes to the investment process, and there are enough nutterbugs already in the world chattering away about gold, depression, guns and ammo.

 

Prechter's fundamental analysis is not based on technicals AT ALL.  And the vast majority of his book is a fundamental analysis.  And this wave he talks of has nothing to do with technicals or charts.  What a blowhard.

 

Well, that friggin' explains why I've felt like I'm hitting my head against a rock during this whole thread!  

 

No you have this feeling because you are trying to offer an opinion without any informed foundation -- you are basically talking uninformed nonsense and can't comprehend the analysis (not understanding how the system works is a key problem).  Akin a minor leaguer trying to play in the big leagues.

 

 

And now by reaching to ask -- And this is coming from the guy that worships at the feet of Buffett and Watsa...do you think Prem could be wrong?

 

I ask who is anchored.

 

Your supposed hero CLEARLY agrees with me despite all of your nonsensical rationalizing and he has said as much in print on multiple occassions.

 

Reality hurts but you'll be better off in the long run -- cheers!!!!!