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Appears likely to get a lot worse if...


Munger
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...this analysis is correct, which I believe is probable (and have for some time).  Video is worth watching -- analysis details the numbers behind the panic.  I have no opinion on the solutions offered but doubt they will be followed.  Michael Lewis' recent article on Germany suggests no willingness to bailout the rest of Europe.

 

With commercial paper being pulled from the European banking system, several large Euro banks could well be zero's in the not too distant future.  Analysis also speaks to the problem created by a collapsing stock price during periods of stress.

 

Continued patience is probably a good approach -- there are selective opportunities emerging but always demand a high margin of safety from Mr. Market.  Personally -- still hold roughly 45% cash, having put about 5% new capital to work over the past 2 weeks.  Remember, we still have the Japan mess to get through -- which will happen at some point over the next 5 years...no doubt.

 

Here is the video link...

 

http://video.cnbc.com/gallery/?video=3000040348

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I have not watched the video yet, but I could not resist mentioning the following:

 

S&P earnings would have to collapse by roughly 78% from their current level and stay there for 10 years to match the current U.S. 10 year treasury yield. This is fear at its extreme guys. I am convinced that many will look back at this period and wonder wtf they were thinking.

 

Waiting to buy the many bargains out there is simply trying to squeeze more returns. It is as risky as not knowing exactly when to cover a profitable short.

 

Cardboard

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The interviewee made a lot of good points. The EU is going through their own version of the debt ceiling crisis by offering the underfunded EFSF without explicit and open ended support from the ECB. Cardboard, you are likely correct, but the EU is going to have to make a choice between releasing money to support their financial system, or accepting the bankruptcies and deflating their way to "recovery" (what about exports?). There could be a panicky period when the market forces the ECB to choose.

 

After that crisis, then we can have a panic over chinese fixed investment spending!

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S&P earnings would have to collapse by roughly 78% from their current level and stay there for 10 years to match the current U.S. 10 year treasury yield. This is fear at its extreme guys. I am convinced that many will look back at this period and wonder wtf they were thinking.

 

Waiting to buy the many bargains out there is simply trying to squeeze more returns. It is as risky as not knowing exactly when to cover a profitable short.

 

 

Very well said.

 

Berkshire and Burlington Northern eagerly issuing debt currently is another data point worth pondering.

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You might also want to consider that many of the worlds premium companies have implied sovereign guarantees on them - especially those that employ a lot of people.

 

- GECapital - assistance rolling their commercial paper during the credit freeze

- GM/Chrysler - auto industry bail-out

- Japanese electronic manufacturers, BP/Exxon/Elf, etc?

 

In todays world of every-day state intervention, there may well be a lot less risk than everybody seems to think.

 

SD 

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You might also want to consider that many of the worlds premium companies have implied sovereign guarantees on them - especially those that employ a lot of people.

 

- GECapital - assistance rolling their commercial paper during the credit freeze

- GM/Chrysler - auto industry bail-out

- Japanese electronic manufacturers, BP/Exxon/Elf, etc?

 

In todays world of every-day state intervention, there may well be a lot less risk than everybody seems to think.

 

SD 

Sharper you are clearly one of the smartest big picture guys here. The transference of risk from private to public hands however does not make the risk go away what it allows is more time for crises to be resolved and perhaps better realizations on distressed assets. With govt intervention thru bailouts etc we are seeing for instance much lower unemployment than one would have experienced through a pure private sector solution. I am completely convinced that without govt involvement we would have experienced a 1929 to 1932 scenario, the great recession would have been the great depressionII. The ultimate price we pay however with higher lows in asset prices and economic activity is lower highs in the same, no free lunches. This line of thought leads me to conclude that Blue chip types of investments and single family homes in the US with a tennant will be the best performing asset classes for the next decade just not so sure about the next few months. LOL
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Here is a great summary of the issues in Europe with a potential solution (split Euro into two zones). Hard to see how things in Europe do not get worse before they get better. The key challenge is the uncertainty as hard decisions will not be made in advance (not politically possible). It will take a crisis to hit, for people to feel like therre is no other option, for the tough decisions to be made. Hard to see how financial markets don't get even more ugly as Europe burns. seekingalpha.com/article/287823-going-dutch-one-possible-solution-to-the-euro-debt-crisis

 

As an example, I was looking at the re-insurers (Partner RE, Munich Re etc). They are trading at historic lows which would suggest a decent margin of safety. However, when I overlay the European debt markets and the Euro I have no way of understanding the puts and takes. Bottom line I am not looking to buy companies tied to Europe.

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Completely agree on the 1929-1932 scenario.

 

Not so sure on total risk, simply because we expect that a stable transference cannot be done without taking big write-downs (actual write-offs, valuations, etc). We essentially end up with everything being worth less, & investing at a lower cost base. Less risk.

 

Nice thing about most of the names is that they are also capital intensive, with high depreciation & no-where for the cash to go. Sadly though, it is effectively industrialized hostage taking - & you get rewarded (buybacks, div increases, etc) for doing it.

 

SD

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It may get worse, and it may get better.  Who knows?  Unless you are retiring in the next 3-4 years, you should not be overly concerned.  And if you are retiring or retired, you are perfectly fine if you live within your means. 

 

The S&P500 is at the same place it was 13 years ago.  In between, there was a whole lot of volatility and excitement.  Yet, here we are and the index is at the same level as in 1998.  Whether this continues for a few more years as the system deleverages should not matter.  This is where investors get tested.  It's always easy to talk about investing for the long-term, yet people don't want to do that when the crap hits the fan. 

 

Some of the financial and technology stocks are so battered, that it's almost amusing to watch how low they can go.  It is night and day from 3 years ago.  I've been investing for nearly 17 years and I've never seen corporate balance sheets so good.  I've never seen underwriting standards for loans and insurance so good.  When the world believes things will never get better, they ultimately do get better, and those waiting are caught on the sidelines.  Cheers!

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