Hussman slams QE2

[Myth465]

Aw but Munger. Is cash not just another asset that is likely overvalued with a low yield?

 

We are always choosing between assets. Buffett agrees with that. You seem to think cash is the best game in town and most people on this board and probably in the industry disagree with you.

 

Only time will tell.

[Parsad]

Now let's see if you are honest -- you are basically asserting that if two assets are overvalued, one greater than the other -- buy the lower valued asset regardless of absolute value...no?  This has nothing to do with Buffett style value investing -- period.

 

Munger, you have a tendency to put words in people's mouthes.  If you are talking about ABSOLUTE values Munger, then the assumption would be that you left the market somewhere in 1998, returned in 2003, left again in 2007 and returned in March of 2009...is that correct?  

 

Unfortunately, that's not how the world works.  You have various degrees of overvaluation and undervaluation at any given point of time.  Capital will always move to where it is utilized most efficiently.  Thus capital moved from overvalued assets (fixed income instruments) to undervalued assets (equities) in the last two months.  Institutions need to cover their cost structure, generate income and qualify their existence.  The same institutions will move from asset class to asset class...bouts of rationality balanced with bouts of fear and panic.

 

Did I ever say I was fully invested in the last three months?  Did I say that I hold no cash?  We have over 35%...almost 40% cash right now, and we were never less than 20% in the last 3 months.  But you take one comment and assume I'm espousing investors go all in at any given moment.  Perhaps, if you just calmed down and interacted with people on a more social level, you wouldn't have this desire to prove everyone wrong.  Hussmann's math is incorrect...are you going to email him?  Cheers!

[Guest Bronco]

hawks - get the ball rolling...don't know if I have heard from you...what is your best Buffett/value play?  Would be interested...always trying to learn.

 

Harry - where are you?  All these fireworks and you aren't even involved!

[Munger]

Bronco -- I'm with you bud..."There is no credibality to me when someone says "that stock just went up 500% and I caught it at the bottom".  

 

No interest in people who tout either lucky calls or recommendations after the fact.  You will never see me on this board bragging about a past investment that I didn't disclose prior to the appreciation.  And you'll never see me touting my performance in a mindless fed induced bull market as reflective of my "great ability."  The great ones shine when others are in serious pain.

 

Despite my very bearish macro view, most of my time is still spent searching for individual stock ideas.  I would like nothing more than to have a great idea.

 

I have no great conviction ideas -- none.  I'll admit to being tempted by BH and have a small position but don't have enough confidence that management is on our side -- that opinion could change...also concerned about commodity inflation on all food related businesses -- although my sense is that SNS has some pricing flex given they have lowered prices more than the competition in the past.  I have also previously disclosed the EBAY was the closest I could find to value in the market -- stock has done quite well since.  Last, I have disclosed that I have a small position in OSTK.  

 

More generally, the Fed is trying to artificially inflate all asset values, which has temporarily worked.  In this environment, I'll enjoy the popcorn and sleep well at night.  Anyone who asserts there are numerous opportunities offering a high margin of safety in the market is either a fool or trying to talk their book.

 

I have well more than 50% of my fund in cash.  And before anyone jumps to call me a fool because I don't realize "cash is trash" I would also add that the fund is up more than the market this year -- I am up more than I would have anticipated on an absolute basis, thanks largely to Ben Bernanke and the lemmings that followed his implicit call and David Tepper's explicit call that the "risk trade is on"...  

 

The holdings that I do have in equities represent relatively small positions in companies I intend to hold forever as they possess the rare combination of great management teams, great business models, and sustainable competitive advantages.  Only small positions because at best these companies are fairly valued and many are clearly overvalued based on what is knowable today.  Over the very long term, I'll do OK with these positions from current price levels.  In a market downturn, I'll get hurt but perform much better than the market.  I have a few speculative positions, OSTK being one.  And cash provides tremendous option value -- dry powder to capitalize on any steep sell off in a great company (which is inevitable).  I like dry powder because I know the fat pitches will come.  

 

 

 

 

 

 

 

 

 

[Myth465]

Great post, I think Parsad was right on the social thing. You sound much more reasonable when its not in lecture format.

 

I think many on the board share your concerns (I do but have resolved to let it ride with 10% - 20% cash) and it appears that you and Parsad own a few of the same stocks and hold similar amounts of cash.

 

Who would have thought?

 

Sam Zell makes a good point in the article I just read - He said for the first time investors in the US have to invest with political risks. I agree. It should be interesting.

[Hawks]

Bronco

 

I have been here before, but not as active and resourceful and insightful as some of you (so I probably benefit the Board that way). But that's why I love this Board because of the thought process and analysis that goes on. I did post recently about oil stocks and European stocks, but got no replies. And awhile back, I posted about "why is everyone so negative"; huge response to that thread which was extremely interesting and rewarding.

 

So, since you asked, I think some of my best ideas right now (buyer beware here; my opinions only) are companies like Bank of New York Mellon (fees give them their value), Cdn Natural Resources (oil sands negativity is high but too important to the U.S. to right off), Diageo (good play on emerging markets and great brands), Fortress Paper (Cdn company in Switzerland and Canada; banknote printing and specialty cellulose producer which will be used to manufacture rayon, a substitute for cotton), Petrobank Energy (mid sized Cdn oil producer; doing spinoff of international operations), Qualcomm (collects fees on hand held devices, but this part is undervalued by the market imo),  Seaspan (mentioned on this Board before, and have met every ship target they set out all thru 2008-2010; dividend should be restored in 2011/2012), and Vodafone (divesting non-core assets, cash rich, great dividend). Again, these are my opinions only; I will live with the results.

 

[Guest Bronco]

munger - not looking to insult anyone.  Thanks for the post.

[Munger]

Parsard -- to avoid any confusion -- here goes again...

 

If you are talking about ABSOLUTE values Munger, then the assumption would be that you left the market somewhere in 1998, returned in 2003, left again in 2007 and returned in March of 2009...is that correct?

 

Like all -- I have made mistakes (which I've learned from) but I have strictly focused on absolute value -- this has served me well...we'll leave at that...  I refuse to engage in a bragging contest.

 

I quote you directly -- Unfortunately, that's not how the world works.  You have various degrees of overvaluation and undervaluation at any given point of time.  Capital will always move to where it is utilized most efficiently.  Thus capital moved from overvalued assets (fixed income instruments) to undervalued assets (equities) in the last two months.  Institutions need to cover their cost structure, generate income and qualify their existence.  The same institutions will move from asset class to asset class...bouts of rationality balanced with bouts of fear and panic.

 

Will you at least acknowledge that the investments you make based on analysis of relative yields and consequent predictions of capital flows is not an approach consistent with traditional Buffett/Graham absolute value investing?  Will you acknowledge that success in the approach described above is not sustainable and largely based on luck/timing the capital flows correctly? -- or do you believe you can predict with certainty the timing and direction of  macro capital flows based on relative asset yields? -- and even if you believe you can do this, will you acknowledge that this approach is not consistent with traditional Buffett/Graham absolute value investing?

 

Not trying to put words in your mouth -- I've directly quoted you and then asked questions to which you can respond in your own words.

 

 

Here is my approach, which will never change -- I search for companies that possess great businesses models, great management teams, and sustainable competitive advantages and will establish large positions only with the margin of safety is high (stated atlernatively, when the absolute value is compelling).  If I find a very high margin of safety but the business doesn't possess the three attributes above, I will occasionally establish a position.  Occasionally, I will take small speculative positions but I won't kid myself into otherwise thinking I am making an investment. Record low yields will NEVER push me into a "less overvalued" asset just so I can get a higher yield than is offered in cash.

 

Best.

 

 

 

 

[Munger]

Bronco -- not offended at all.  I agree with you.  And if ever catch me spouting any BS about past performance/bottom ticking stocks, call me out.

 

Myth -- I hear you.  Will avoid lecture format -- not appealing at all, even if correct.

 

Best.

[Ross812]

1% increase in S&P = 0.042% increase in GDP

1.47*(10^13)*(0.042%)*(1/100%)= 6.17*(10^9); 6.17 B

________________________________________________

The math is correct but does not matter!  As stated in the article (and a blaring red flag to any reader) stock market increase does not CAUSE GDP increase.  Let us back up for a second and think about this; If a 1% S&P increase causes (0.042%+.035%) increase in GDP, then a 1% increase in GDP corresponds to ~13% increase in the S&P.  GDP has grown at 2% rate nearly linearly over the past 100 years; the market has not grown anywhere near the rate of 26% over the last 100 years.  I don't know where anyone is getting their numbers but the entire argument seems pointless.

 

truth is that institutions moved in because yields were so much lower elsewhere.  I told you that over two months ago, and said it was a certainty that capital would eventually move in looking for higher yields...you disagreed vehemently...guess what?  

 

At some point in the near future, you will see a natural correction in equities.  Further down the road, we may see a large scale correction.

 

Just to be clear -- I acknowledged at the time that stock prices could well rise for the reason you cite...but this would be trading based on the greater fool theory.

 

And -- "The truth is that institutions moved in because yields were so much lower elsewhere."   This would be somewhat analogous to a Fed induced Ponzi scheme -- no?  

 

Now let's see if you are honest -- you are basically asserting that if two assets are overvalued, one greater than the other -- buy the lower valued asset regardless of absolute value...no?  This has nothing to do with Buffett style value investing -- period.  

 

Also -- let's get this on the record...are you claiming the ability to accurately predict with certainty the timing and direction of  macro capital flows based on relative asset yields?  Your assertion that "I told you that over two months ago, and said it was a certainty that capital would eventually move in looking for higher yields"  would suggest you carry this delusional belief in your ability.  And also recognize, this assertion that you are pounding your chest about has nothing to do with value investing and everything to do with speculation/luck.

 

Munger,

Assuming every company in the market is over valued is quite short sighted unless you subscribe to the efficient market hypothesis.  I agree that the S&P at a P/E of 22 is overvalued but so what?  As a value investor you are looking to buy companies at a discount on the dollar.  What is the discount? Your margin of safety.  If you feel the market is overvalued then you should require a higher margin of safety but stating that buying any equity is a fools game is laughable.  I think you should have some respect for your fellow value investors to select companies they feel are trading at an acceptable margin of safety.  An over valued market does not mean their are not deals out there; it just means you have to look harder to find them.  Parsad was right in asserting that big money would start moving into equities looking for yield.  He did not give a time frame nor state he could divine the markets.  

 

Now lets listen to Hawks and get back to some value investing.  Complaining the market is overvalued is just whining and rationalizing to yourself why you shouldn't put in the work to find a good investment.  

 

PS: I'm terrified of precious metals, AAPL, NFLX, and spiders (the eight legged kind)!

 

 

 

[Parsad]

Munger, if you plan on using my board, please have the courtesy to not butcher my name.  I think a couple of people corrected you on this in the past.  If you disagree with any comments I make...fine!  But I operate using my real name and not behind some moniker, so I would hope that you have the decency to respect that.  

[Guest Bronco]

Ross - fear not the Apple.

 

While the debates may continue on holding cash, cash flow is still king. 

 

These guys are the best. 

 

 

Full disclosure - no position.  My only fear with this company is Steve Jobs' health.

 

Looking to get back in soon if the price is right.

[Munger]

Ross -- your post was silly since it has no basis in reality as I'll show...

 

Assuming every company in the market is over valued

 

Where did I say every company? -- please quote directly as I have done when addressing anyone's prior comments.

 

stating that buying any equity is a fools game is laughable.

 

Where did I state that buying ANY equity is a fools game? -- please quote directly as I have done when addressing anyone's prior comments.  Go back and read again.  In fact, I've also stated that I own some stocks.  

 

An over valued market does not mean their are not deals out there

 

Where did I state this? -- please quote directly as I have done when addressing anyone's prior comments.

 

Parsad was right in asserting that big money would start moving into equities looking for yield.

 

I ask again -- Will you at least acknowledge that the investments you make based on analysis of relative yields and consequent predictions of capital flows is not an approach consistent with traditional Buffett/Graham absolute value investing?  Will you acknowledge that success in the approach described above is not sustainable and largely based on luck/timing the capital flows correctly? -- or do you believe you can predict with certainty the timing and direction of  macro capital flows based on relative asset yields? -- and even if you believe you can do this, will you acknowledge that this approach is not consistent with traditional Buffett/Graham absolute value investing?

 

Ross -- I agree...go back to looking for stocks.

[Guest Bronco]

Hawks - excellent!

[Munger]

Munger, if you plan on using my board, please have the courtesy to not butcher my name.  I think a couple of people corrected you on this in the past.  If you disagree with any comments I make...fine!  But I operate using my real name and not behind some moniker, so I would hope that you have the decency to respect that.

 

Not intentional.

[Parsad]

% increase in S&P = 0.042% increase in GDP

1.47*(10^13)*(0.042%)*(1/100%)= 6.17*(10^9); 6.17 B

________________________________________________

The math is correct

 

Actually, it's not correct, but neither were we earlier.

 

$14,700,000,000,000 * 0.00042 = $6,174,000,000...but you have to multiply that by ten to get the change in GDP with a 10% move.

 

Thus the correct number for change in GDP in the first year would be $61,740,000,000.  Cheers!

[Ross812]

Bronco:

 

Some examples of what I felt were good deals recently:

 

Your idea of IBAL (buy order in at $0.55)

 

 

ESI when phoenix recommended it and still a good deal now.

 

BAC warrants at $6 (great board idea till a few days ago)

 

LPS <$30 (all October)

 

NE at $32 (June-Sept)

 

CORE at <30 (may-september)

 

TNDM under $12 (all august and September) (I have been adding since $16)

 

MC was under $200 6 times May through September!

 

I still think MFRI, MU, and IPSU are undervalued

[Myth465]

Bronco -- not offended at all.  I agree with you.  And if ever catch me spouting any BS about past performance/bottom ticking stocks, call me out.

 

Myth -- I hear you.  Will avoid lecture format -- not appealing at all, even if correct.

 

Best.

 

This is actually shaping up to be an informative thread.

 

Also you do realize Buffett held Coke and a few other names at up to 55 times earnings and a good chunk of his portfolio has done nothing for a decade. Relatively and Absolutely they were overvalued. He has said so himself.

 

Again I think you quote Buffett when it works with your mental model and dismiss all else. I think most people do this though so its not such a big deal. Buffett has also said cash is the worst of all assets and he hates holding it but will when he cant find much else to do. I hold some cash but am no fool. I know its a terrible asset class and will be worth less in years to come. I hold it because its a good hedge, and allows one to purchase more when the right opportunity comes up. I do not however act as though its the optimum asset class.

 

When you have permanent capital you have to do something with it. Especially when you have $60 billion dollars. We dont all have the ability of collecting 1%-3% in Management fees to hold cash, or returning cash to shareholders every 2 or 3 years cause we have fears about the market. We are paid to manage the money through the cycle.

 

Grantham is excellent at pointing out some of the flaws in value investing thinking. If everyone did it nothing would ever happen. No new businesses, no risk, no nothing. It doesnt make sense for pension funds, insurance funds, hedge funds, and mutual funds to collectively hold cash or dart in and out of the market. They are all competing against each other with different goals, risk tolerances, time horizons, and skills. Thats what makes a market. It makes sense for an insurance company to move from cash. They have bills to pay, as do pension funds, and other types of pools of capital. Not everyone can sit around making macro centered bets.

 

You can afford to wait and wont be pushed by low yields. Thats great. II have the same ability and have a similar stance. But realize not every Manager, Endowment, Insurance Company, or Pension fund has that ability. They arent fools or greater fools, just doing what they have to do. Choosing between a bunch of crappy choices.

[Myth465]

Munger you should stop quoting Buffett and start quoting Jeremy Grantham.

 

He is saying the same thing you say, but so much better. Perhaps its the English accent.

 

http://www.gurufocus.com/news.php?id=113554

 

Something to munch on. I agree with him on commodities.

[SharperDingaan]

 

You might want to consider why the fed felt that it still had to do QE2 - as it is highly likely that they would have been fully aware of the firestorm that it would set off.

 

We woud suggest that the foreclosure moratorium & state/municipal budget setting, are going to generate ugly surprizes in Q4/Q1, big enough to force many back to the well for additional capital. When even sovereigns cannot afford to roll their debt at 5%, what do you think will happen if some of the US states cannot do it ether? QE2 or a PIIGS type crisis on US soil - just when many have to go back to market? Which is the least damaging? 

 

Import prices will go up (by FX devaluation &/or cost push inflation), import volume will fall, Americans will pay more for their goods, & their current account gap will fall. That said - less things bought, & more local buying employing more local people, is not such a bad thing.

 

SD