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"If you wrapped up all the $100 bills in circulation...


Eric50
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...it would form a cube about 74 feet per side. If you stacked the money seven feet high, you could store it in a warehouse roughly the size of a football field. The value of all that cash would be about a trillion dollars. In a hundred years, that money will have produced nothing. In a thousand years, it is likely that the cash will either be worthless or worth very little. It will not pay you interest or dividends and it won’t grow earnings, though you could burn it for heat. You’d have to pay someone to guard it. You could fondle the money."

 

Einhorn latest letter... :-)

 

http://www.scribd.com/doc/95291566/Einhorn

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He's in fact just saying what Buffett is; good assets bought now at reasonable prices will produce more value than cash ever will in the longer term, even if that means you are possibly buying right before a big economic panic or whatever. We can only buy things cheap and cannot really predict what the future holds.

 

Btw, it is interesting to see how more and more people (here and elsewhere) are again extremely aware about the global economic situation after equities dropped a bit again. Noticed this again today for ex. with the topic "more pain to come?" posted here. When equities made a new 4-year high (?), most (incl. me) were all posting or returns for 2012..  :) I'm not smart enough to play that timing game and I'm not going to lie awake of predictions by so called experts that a "global recession" is on the way.

 

Oh, thanks for the letter!

 

 

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He's in fact just saying what Buffett is; good assets bought now at reasonable prices will produce more value than cash ever will in the longer term, even if that means you are possibly buying right before a big economic panic or whatever. We can only buy things cheap and cannot really predict what the future holds.

 

Btw, it is interesting to see how more and more people (here and elsewhere) are again extremely aware about the global economic situation after equities dropped a bit again. Noticed this again today for ex. with the topic "more pain to come?" posted here. When equities made a new 4-year high (?), most (incl. me) were all posting or returns for 2012..  :) I'm not smart enough to play that timing game and I'm not going to lie awake of predictions by so called experts that a "global recession" is on the way.

 

Oh, thanks for the letter!

 

You appear to have misunderstood the point of Einhorn's parable which was to poke fun at Buffett's description of gold. Einhorn brilliantly demonstrates how gold is superior to cash as it cannot be printed by the central bankers and that any argument about gold not generating yield is stupid given that cash too generates no yield.

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Reread it and it seems that you are correct. I was too hasty in posting my thoughts. Not that I agree as Buffett is no fan of holding cash and is only willing to hold a necessary buffer. It's not because A is better than B over the long haul that A is any good, both are likely quite bad over the long term compared to alternatives.

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Moore, if that's what it it, then Einhorn misunderstood Buffett, because Buffett doesn't like cash anymore than he likes gold. He likes productive assets, and that was his point (and Munger's point as well about "jerks").

 

But is Einhorn a gold bug? I think maybe he was making a different point (you can dislike cash and gold, as Buffett does, it doesn't have to be one or the other). Or maybe he is... I don't know. Either way, painting Buffett as a fan of the US dollar or any other currency is a misrepresentation.

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That analogy was less than brilliant.

 

Our country's businesses will continue to efficiently deliver goods and services wanted by our citizens. Metaphorically, these commercial "cows" will live for centuries and give ever greater quantities of "milk" to boot. Their value will be determined not by the medium of exchange but rather by their capacity to deliver milk. Proceeds from the sale of the milk will compound for the owners of the cows, just as they did during the 20th century when the Dow increased from 66 to 11,497 (and paid loads of dividends as well).

 

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I don't think he was taking a poke at Buffett.  Just using the same analogy Buffett used for gold, he applied it to cash as well.  Not terribly original, but I don't think it was a slight at Buffett.  Cheers!

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I think it was definitely a jab at Buffett.  Einhorn could be categorized as a 'gold bug'.  He has a sizable portion of his fund's assets in gold bars locked up in a vault.  I thought the section regarding cash in his letter seemed awkward and out of place with the obvious reference to Buffett.  As others have said, Buffett would put gold and cash in the same bucket. 

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Long term:

Productive assets the winner  (gold and cash losers)

 

Short term:

Gold can dramatically underperform cash in a global meltdown -- just look at October 2008 if you deny this

 

 

My conclusion:

Hold cash if you are interested in buying at bottom of global meltdown over a short-term horizon.  Otherwise hold productive assets.

 

That leaves no room for gold.  I believe that's what Buffett's position on this is.

 

 

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I think Buffett would rank gold higher than cash. He mentioned in this year's annual letter that gold will most likely increase in value long term, just not nearly as much as productive assets. On the other hand, he always mentions how cash is a long term loser.

 

I think he would if you were to hold both for the long-term, but he's not interested in either.

 

For the short-term, cash is better because it's more liquid and you can buy companies/productive assets with it, and you don't have to pay to store it and it won't fall rapidly when everybody's hit with margin calls.

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Gold can dramatically underperform cash in a global meltdown -- just look at October 2008 if you deny this

 

That was a deflationary meltdown. In an inflationary meltdown, it would be the other way.

 

I agree with you, but, just wanted to add this.

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Gold can dramatically underperform cash in a global meltdown -- just look at October 2008 if you deny this

 

That was a deflationary meltdown. In an inflationary meltdown, it would be the other way.

 

I agree with you, but, just wanted to add this.

 

Out of curiosity, what was the last big inflationary 'meltdown' and did gold do well when it hit?

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Long term:

Productive assets the winner  (gold and cash losers)

 

Short term:

Gold can dramatically underperform cash in a global meltdown -- just look at October 2008 if you deny this

 

 

My conclusion:

Hold cash if you are interested in buying at bottom of global meltdown over a short-term horizon.  Otherwise hold productive assets.

 

That leaves no room for gold.  I believe that's what Buffett's position on this is.

 

 

 

Agreed, though I was referring to the long term. If he had to hold either gold or cash for the next 100 years, he'd pick gold.

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It makes sense to own a few gold coins and a hoard of cash in your personal safe. One never knows when you may have to bribe the border guards, beyond that they are perfectly awful long term investments but gold wins over cash unless the cash is invested in t-bills.

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It makes sense to own a few gold coins and a hoard of cash in your personal safe. One never knows when you may have to bribe the border guards, beyond that they are perfectly awful long term investments but gold wins over cash unless the cash is invested in t-bills.

 

This is how I view gold as well.  Buffett/Munger have had a tremendous advantage: their entire lives they've been able to sit in a comfy office chair and play the market.  They've never had to live through (a) government collapse, (B) currency collapse, © outright confiscation of personal wealth, and live in the United States (our currency has been the "gold standard" for their entire lives.)

 

The wealthiest person I know personally is from China.  He is probably in his mid-60's.  He wears a hideous gold necklace all the time.  I asked him once why he wears such an odd necklace.  He said when his family was trying to escape China, his mother gave it to him.  She said to never take it off because, no matter where he ended up if they couldn't make it together, he could trade it for food, clothing, temporary housing, etc. 

 

Gold is the universal store of value.  It's held more value than almost every other currency and you could take a time machine back 1000 years and it'd still be a form of payment.

 

That being said, assuming the US is a relatively stable place over the next 100 years, productive assets will probably destroy the returns of gold many, many times over. It's a "if shit hits the fan" investment, nothing more.

 

But that doesn't mean it doesn't belong in someone's portfolio at some percentage.  And it doesn't certainly mean only uncivilized people buy it (per Munger - total bonehead comment on his part.) 

 

But it is funny to me that hedge fund managers buy it for their fund.  If shit really does hit the fan, am I going to go to New York and get it from Einhorn? Or am I going to trade my account statement on the black market?  If his view is on massive inflation, why not just buy an instrument directly tied to inflation?

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(per Munger - total bonehead comment on his part.)

 

If you put it back in the context of Munger and what he meant, I don't think it was a "bonehead" comment. I'm sure Munger would agree that some gold can be useful to bribe a border guard or whatever, especially in unstable parts of the world.. I think he was referring to investors like Paulson who will buy billions of the stuff and sit on it hoping to sell it back to someone else at a higher price later (more or less the definition of speculation).

 

Munger said: "I don’t see how you become rational hoarding gold. Even if it works, you’re a jerk."

 

I believe he was implying that allocating capital to good businesses "helps the civilization", as he would say, and that working hard to understand what makes a good business, how to value it, and how the productive economy works is a valuable skill. But that hoarding tons of gold and sitting on it waiting for someone else to pay more is not "helping the civilization" and kind of a waste of talent and resources.

 

But that's just my mental model of how Munger thinks based on his speeches and interviews...

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WEB on Squawk Box:

 

BECKY: I know you said that you don't like gold or a lot of other places to put your money, but John Merrill writes in with a pretty good question. He says, "Would you rather have, if you had to have one of the two, all the gold ever mined or all the paper dollars ever printed? The choice is between two monetary assets, either of which could be used to buy Exxon or farmland." And what's your answer on that?

 

BUFFETT: I definitely don't like paper money. I like physical assets. So I would — I — but I wouldn't buy gold or I wouldn't buy rare stamps, although I was a stamp collector. I wouldn't buy paintings, although, you know, a number of them I appreciate. I would buy something that's productive. I bought a farm in the mid-1980s. You know, I mean, that farm is more productive now in terms of it actually — farming techniques have improved somewhat, fertilizers and all that, and then prices are somewhat higher. That farm will always be a good asset, and I don't get a quote. I've never had a quote on it in 25 years. I've never turned into the farm channel, you know. But it will be a productive asset. I would rather own that than own some asset that just looks at me.

 

WEB analogizes holding gold to having a rare stamp collection or art collection (or a wine collection, in Aubrey McClendon's case).  Einhorn's letter appears to retort that gold is not just a normal unproductive asset but is instead an alternative currency that is a substitute, in some sense, for paper money. 

 

Not a bad thing to point out, and I sort of agree with Einhorn on the notion that gold is like an alternative currency.  But Einhorn never really gets into why gold is a good investment.

 

I mean, would anyone say that cash is a good investment?  Yes, the purchasing power associated with your cash may go up if there is deflation or if the currency it's denominated in appreciates relative to other currencies.  But you're not really making an investment, per se, when you just hold onto cash, are you?

 

Also, what's the deal with Einhorn's gold funds?  Do they just hold bullion or also gold-related stocks?  Not a bad way to keep AUM sticky by offering them a way to put some of their money that's kept with you in gold

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(per Munger - total bonehead comment on his part.)

 

If you put it back in the context of Munger and what he meant, I don't think it was a "bonehead" comment. I'm sure Munger would agree that some gold can be useful to bribe a border guard or whatever, especially in unstable parts of the world.. I think he was referring to investors like Paulson who will buy billions of the stuff and sit on it hoping to sell it back to someone else at a higher price later (more or less the definition of speculation).

 

Munger said: "I don’t see how you become rational hoarding gold. Even if it works, you’re a jerk."

 

I believe he was implying that allocating capital to good businesses "helps the civilization", as he would say, and that working hard to understand what makes a good business and how the productive economy works is a valuable skill to have. But that hoarding tons of gold and sitting on it waiting for someone else to pay more is not "helping the civilization" and kind of a waste of talent and resources.

 

But that's just my mental model of how Munger thinks based on his speeches and interviews...

 

I was referring to this quote of his:

 

"...gold is a great thing to sew onto your garments if you're a Jewish family in Vienna in 1939 but civilized people don't buy gold - they invest in productive businesses."

 

Maybe I am interpreting it wrong but he is basically making fun of people who buy gold thinking the shit will hit the fan (hence the holocaust reference.)

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I was referring to this quote of his:

 

"...gold is a great thing to sew onto your garments if you're a Jewish family in Vienna in 1939 but civilized people don't buy gold - they invest in productive businesses."

 

Maybe I am interpreting it wrong but he is basically making fun of people who buy gold thinking the shit will hit the fan (hence the holocaust reference.)

 

That's one way to read it, but I interpret it more as two halves (I don't think he was absolutely clear when he said it, but it's hard to be 100% unambiguous and punctuate everything perfectly when speaking on camera):

 

-"gold is a great thing to sew onto your garments if you're a Jewish family in Vienna in 1939"

 

If you expect real trouble soon, it can be useful (though he would probably also say that a lot of goldbugs today who say that this is what they are doing are actually investing/speculating rather than just putting aside some portable currency, which is obvious when you look at the quantity of gold some of them buy and at the vague and far-off nature of the supposed threats they want to protect against)

 

-"civilized people don't buy gold - they invest in productive businesses."

 

If what you are looking for is an investment, it is more "civilized" to invest in productive assets than to speculate in gold.

 

That's how I understand it. I can't call him up to ask for clarifications.. but knowing how smart and sensible Munger is, between two interpretations, I always give him the benefit of the doubt for the interpretation that makes more sense :)

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Lot's of talk about how governments can print money and increase the money supply. All true of course.  Less talk about how with gold, lot's of new financial inventions now allow investors to speculate in this commodity without ever having to worry about storage or cost of storage.  Its a positive feeback loop. Investors speculate in gold by buying up GLD. The trust must physically buy gold from the open market. Prices positively effected. The rising price of gold reinforces the speculators decision and more units are acquired ...

 

That's the worry ... When those speculators change their mind the positive feedback loop works in both directions.

 

 

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