Monday, November 30, 2009

FPA Capital Fund Letter to Shareholders which includes the Final Fund Commentary from Robert Rodriguez

Thanks to Steve for passing this along.

One final thought that brings me to the intensifying issue that we have written about several times before — the explosion in Treasury debt outstanding. Since September 30, 2008, Treasury debt has risen from $10 trillion to $11.9 trillion, a rate of $5 billion per day. There is no end in sight for this out of control debt growth, as reflected by federal government deficit forecasts, which we consider optimistic, that total between $7 and $9 trillion for the period 2010 to 2019. In our March 2009 Letter to Shareholders, we estimated that US Treasury debt would swell to between $14.6 trillion and $16.6 trillion by the end of 2011. If we stay on this present trend, we should reach this range which, in our opinion, is outrageous and fiscally irresponsible. This insanity is not a Democratic Party or a Republican Party "thing." Both parties are responsible, but who is ultimately more responsible than these two parties? It is we, the citizens, who keep re-electing these power-centered financially inept politicians and it will be our children and grandchildren who will have to "pay the piper." It is not right and is morally reprehensible that one generation would do this to another.

Our country is currently in this financial mess because consumers, corporations and government succumbed to the temptations of excessive spending, debt growth and risk taking. Just as any family or company can get into trouble with too much debt, so can a state or country. California is a perfect example of a state government that has been devoid of economic reality and totally irresponsible in its finances, with spending far exceeding revenue growth for years. Our federal government also exemplifies this unsound and unwise trend. Before new expenditure programs are created and laid upon preexisting ones, we should be demanding that federal, state and local governments get spending under control first. We cannot trust most politicians because they practice "bait and switch" tactics in proposing new programs. The true long-term program costs are always understated because new benefits are added subsequently that were not included in the original optimistic cost estimates — Social Security, Medicare and Medicaid are perfect examples of this process, and the proposed new health care spending program, if passed, will likely follow this same course.

As a beginning, no new programs should be created until others have been eliminated to offset these costs in the year of origination. We should have government prove to us first that this new budgetary balance can be achieved and maintained. Once at approximate equilibrium, we can begin to focus on debt reduction through the process of expenditures growing at less than the rate of revenue growth. Most families know that before they can regain control of their finances, they first have to control their spending. If our elected officials cannot agree to meet this principle of fiscal discipline and be held accountable to it immediately, they should be ousted from office. Most of our current elected representatives would fail this test. As is the case with any company or family that does not deal with its pre-existing debt first, and then proceeds to take on additional debt beyond its means to pay, foreclosure or possibly bankruptcy will likely result. The same goes for a country, unless it can continue issuing debt denominated in its own currency. In this case, it can expunge its debt through the process of printing money and, thus, it can create a monetary inflation that destroys the purchasing power of previously issued debt. Our lenders will not stand for this and current trends show that foreign central banks are beginning to shift their holdings from Treasury notes and bonds to much shorter term Treasury bills. This is an ominous trend. At FPA, we began this process several years ago in our fixed income management accounts.

I urge all of you to convey to your elected representatives that this spending madness must stop. If it does not, we will eventually face a crisis that will be far worse than the one we are in now. This potential risk is in our thinking at FPA and we are making contingency plans, as we did for this current crisis, so that we may manage through it well. As a first generation American, I hope and pray that we make the difficult decisions rather than pass them on to the next generation.


Related video – Robert Rodriguez on WealthTrack:

Monday, November 23, 2009

Hussman Weekly Market Comment: Alert for Tanks

The inevitability of profound credit losses here is unnervingly similar to the inevitability of profound losses following the dot-com bubble. In that event, it wasn't just that people were excited about dot-com stocks in a way that might or might not have worked out depending on how fast the economy grew. Rather, it was a structural issue that related to the dot-com industry itself – those bubble investments couldn't have worked out in a competitive economy, because market capitalizations were completely out of line with what could possibly be sustained in an industry that had virtually no cost to competitive entry. If you understood how profits evolve in a perfectly competitive market with low product differentiation, you understood that profits would not accrue to the majority of those companies even if the economy and the internet itself grew exponentially.

In the current situation, the assumption that the credit crisis is behind us is completely out of line with what possibly could result from the marriage of deep employment losses and an onerous reset schedule on mortgages that have extremely high loan-to-value ratios. A major second wave of mortgage losses isn't a question of whether the economy will post a positive GDP print this quarter or next. Rather, it is a structural feature of the debt market that is baked into the cake because of how the mortgages were designed and issued in the first place.

What if a Recovery Is All in Your Head? - By Robert Shiller

Beyond fiscal stimulus and government bailouts, the economic recovery that appears under way may be based on little more than self-fulfilling prophecy.

Consider this possibility: after all these months, people start to think it’s time for the recession to end. The very thought begins to renew confidence, and some people start spending again — in turn, generating visible signs of recovery. This may seem absurd, and is rarely mentioned as an explanation for mass behavior late in a recession, but economic theorists have long been fascinated by such a possibility.

Tuesday, November 17, 2009

Is Warren Buffett Worried About Hyperinflation?

It is interesting to review the couple of questions and answers pasted below from the Ruane, Cunniff & Goldfarb Investor Day earlier this year, considering that Mr. Buffett has recently bought Berkshire Hathaway a railroad and significantly increased its stake in Wal-Mart. If anyone happens to have the annual letters for the Sequoia Fund from the 1970’s and 1980’s, I would be very grateful if you could email them to me:

Ruane, Cunniff & Goldfarb Investor Day, May 15, 2009 – Excerpt from Transcript:


Do you think the companies in your portfolio have the pricing power to protect their earnings from inflation? Or should you put on hedges to cover you from that inevitability?

Bob Goldfarb:

I would say that pricing power varies. I think probably the strongest in terms of pricing power would be the rock companies, the quarry companies, namely Martin Marietta and Vulcan, which have continued to raise prices despite very significant declines in demand. You don’t see that combination very often — maybe cigarettes or railroads.

But I’d also add that if you go back to Warren Buffett’s article in Fortune about inflation and common stocks, I think he put more emphasis on the cash generating nature of the businesses than on their pricing power. That’s not to dismiss pricing power, but as he pointed out, in an inflationary period what you want to avoid are capital intensive businesses that are forced to reinvest a fair amount of the cash that they throw off back into the business just because of increased inflation in working capital as well as plant and equipment. On that score of cash generation, we’ve had a strong emphasis for a long period of time and that should serve us well in a period of accelerating inflation.

Greg Alexander:

I would add one thing, which I think most people know. The problem with inflation is not just the direct problem of inflation. Bond investors are not stupid; fixed income investors are not stupid — if the inflation rate goes from two percent to six percent, they’re not going to keep accepting two percent on their Treasury bonds and on their bank deposits. So interest rates will go up. And if interest rates were in the higher single digits, that would be bad for the economy and bad for stocks.

So that would be a secondary effect. It would make the economy weaker. I saw a pretty good comment in Jeremy Grantham’s latest missive to the effect that he is worrying that the large deficits spawned by the — referring back to Bob’s initial point in his prepared comments — that the large deficits spawned by the quote “stimulus plan” may have the effect of making the recession less severe at the expense of lengthening it. So I thought that was pretty well said, as it usually is.


A professor at Columbia University’s value investing program has suggested that a large part of Wal-Mart’s success has been due to the local competitive advantages it created by expanding geographically in tightly concentric circles. He suggests that Wal-Mart benefited mightily from economies of scale especially with regard to distribution by dominating local and regional markets as it grew. I’m wondering if you agree with that and also if you feel that Target and perhaps Fastenal are taking a similar strategy with regard to their growth.

David Poppe:

I agree with that. Wal-Mart’s competitive advantage, the reason Wal-Mart has the lowest cost, is in large part because it has a substantial advantage in distribution versus almost anyone. Target has not expanded in the same kind of tightly concentric circles because Target requires a little bit higher demographic neighborhood for the store to work and be successful. So it’s not as simple an issue for them to just build them out two miles at a time across the country.

So Target’s strategy is a little bit different. Target’s got low cost but they will never be as low as Wal-Mart’s. They will never have as many stores as Wal-Mart because Target has a narrower customer base. On the other hand, however, I would say Target has a pretty desirable store base because they opened a lot of stores in large metro markets that will be difficult for Wal-Mart to penetrate. I think they’ll both be successful, but Wal-Mart certainly is and will continue to be the low cost provider. Bob talked about companies that are well-positioned for inflation — I can’t think of too many companies that are better positioned for hyperinflation than Wal-Mart.


Related previous post: Warren Buffett's Comments on Inflation

Robert Huebscher talks with Bruce Greenwald - Part 2

Has the way you practice value investing changed as a result of the financial crisis?

We changed our focus on risk management. Many other value managers did as well, because they were blindsided.

There are three principles that I believe good risk managers and value managers should pursue to protect themselves from permanent impairment of capital and variance.

The first principle is that the quickest way to permanently impair your capital is to overpay for something. So you always want to have a margin of safety.

The second issue is that, you go wrong with your margin of safety because your intrinsic value is wrong. Something happens that surprises you. That is almost always – if it’s a permanent impairment of capital – a company problem, where a product doesn’t work or a competitor comes in, or an industry problem, like newspapers, where they get destroyed. Sometimes it’s a particular national problem, like in Venezuela. But those risks tend to be diversifiable. So the value investors who had always been very concentrated, like Glen Greenberg, who is a wonderful investor, got burned. He had five to seven positions.

For the sake of risk management, you’ve got to have at least 20 to 30 globally diversified positions. This second lesson of diversification applies because the risk of permanent impairment of capital tends to be unsystematic and specific to impairment of capital management and to variance management. We were very diversified.

The third rule is that, even within a diversified portfolio, if you have a total loss that affects 3% to 4% of your portfolio, you are asking for trouble. The thing that will convert temporary impairments, which are the macro fluctuations, to permanent impairments is leverage. We’ve always been extremely careful when it comes to leverage.

I think the value community has learned this lesson. The guys like Marty Whitman who got burned were in financial services, where there were enormous amounts of leverage. We’ve learned that if you want to do a stub, which is a highly leveraged position, you want a five- to six-times upside, because the downside is zero. You’ve got to start thinking in those terms. People have learned to think about leverage differently and to be warier of leverage, and only be willing to do it in a restricted part of a diversified portfolio.

The fourth thing we’ve learned is that when you build your portfolio you have to think about macro risks in terms of scenarios. Basically it comes down to two scenarios: You can have stagnation and deflation and a recession for extended periods with inadequate demand, or you can have inflation. You have to know, holding by holding, what your vulnerability is. For example, real assets – real estate, natural resources, and things like that – are going to do very well in an inflationary environment but are going to get killed in a deflationary environment. Fixed income is going to do very well in a deflationary environment and is going to get killed in an inflationary environment.

Which assets give you the best overall protection?

The assets that are most attractive are the franchise businesses that have pricing power, because you can pass along inflationary price increases and you are not subject to competition from excess capacity, the way you are in industries like autos and steel. You have much more control on the downside.

When you have a set of positions, you are looking for a discount to intrinsic value, but after you’ve built that portfolio you want to know that it is reasonably balanced. Fortunately, at the moment, the best bargains are in franchise businesses. You are getting 8% to 11% and in some cases 13% to 14% sustainable earnings returns. With no growth at all, you have a safe asset with really attractive returns in selective areas.

People have learned to look at their portfolios with this degree of balance as a result of this experience. Realistically, I don’t believe in inflation in this environment, but nobody can be absolutely confident of what will happen with respect to price expectations and inflation.

We’ve learned about diversification, the cost of leverage, looking at our portfolios from a macro perspective, and looking for balance in our exposure. The other thing we did inadvertently, when our macro exposure looks to be too much for the balance of our portfolio, is to think about buying hedges. The hedge that we’ve had is gold, which has protected us. The attractive thing about gold is that it has no industrial uses. It’s strictly something that, when everything goes wrong, it’s going to do really well. I think people have learned to appreciate that.

The other great way to hedge is to recognize that when the risks are the biggest is when nobody thinks there are any risks at all. When that’s the case, the implied volatilities in derivatives are going up, and you get really good prices on deep out-of-the money puts on overvalued indices like the Russell in the summer of 2007, and you get really good prices on credit default swaps. You can buy credit default swaps that are trading at four basis points, which implies one default in 2,500 years – in the most volatile region on Earth or on the most volatile commodity. Mutual funds really can’t use this strategy, but good value funds are thinking about hedges, which are really forms of insurance. For the last several months, hedges have been extremely expensive, but they are finally coming down in price.

In our mutual fund, gold is the primary hedge. We have some cash, which is clearly a safe asset carrying a low yield. Most of our risk management is that we are consciously moving our portfolio – because that’s where the bargains are – to the areas where we believe the macro risks are considerably more attenuated.

What surprised you in this environment?

The biggest surprise, in a funny way, is the way that franchise companies, like Deere, have weathered this period in terms of their profit performance. The auto companies got slaughtered, but Deere, which typically would have gone from making money to losing money, is maybe down 35% in earnings.

These companies increasingly make their money on services. The part of the package you need from Deere, if you own a Deere tractor, is service. If it breaks down, you need it fixed. Deere has a dense network of dealers with lots of parts availability and lots of capacity. You’re going to get much better service and you are going to get a higher price for that. That’s a competitive advantage that protects them against price competition. As the package of what these manufacturers offers moves in the direction of service, they are going to have more local monopoly power in different areas, because the services are locally produced and consumed.


For Part 1 of the interview, see: Robert Huebscher talks with Bruce Greenwald

Monday, November 16, 2009

The Economist: I am become Death, destroyer of worlds

The story of how the dinosaurs disappeared is getting more and more complicated

EVERYONE knows that the dinosaurs were exterminated when an asteroid hit what is now Mexico about 65m years ago. The crater is there. It is 180km (110 miles) in diameter. It was formed in a 100m-megatonne explosion by an object about 10km across. The ejecta from the impact are found all over the world. The potassium-argon radioactive dating method shows the crater was created within a gnat’s whisker of the extinction. Calculations suggest that the “nuclear winter” from the impact would have lasted years. Plants would have stopped photosynthesising. Animals would have starved to death. Case closed.

Well, it now seems possible that everyone was wrong. The Chicxulub crater, as it is known, may have been a mere aperitif. According to Sankar Chatterjee of Texas Tech University, the main course was served later. Dr Chatterjee has found a bigger crater—much bigger—in India. His is 500km across. The explosion that caused it may have been 100 times the size of the one that created Chicxulub. He calls it Shiva, after the Indian deity of destruction.

Dr Chatterjee presented his latest findings on Shiva to the annual meeting of the Geological Society of America in Portland, Oregon, on October 18th. He makes a compelling case, identifying an underwater mountain called Bombay High, off the coast of Mumbai, that formed right at the time of the dinosaur extinction. This mountain measures five kilometres from sea bed to peak, and is surrounded by Shiva’s crater rim. Dr Chatterjee’s analysis shows that it formed from a sudden upwelling of magma that destroyed the Earth’s crust in the area and pushed the mountain upwards in a hurry. He argues that no force other than the rebound from an impact could have produced this kind of vertical uplift so quickly. And the blow that caused it would surely have been powerful enough to smash ecosystems around the world.

Hussman Weekly Market Comment: "Should Come as No Shock to Anyone"

Increasingly, the Fed has decided to forgo the idea of repurchase agreements (which require the seller to repurchase the security at a later date), and is instead making outright purchases of the debt of government sponsored enterprises (GSEs such as Fannie Mae and Freddie Mac). Again, the Fed used to purchase only Treasuries outright, but it is purchasing agency securities with the excuse that these securities are implicitly backed by the U.S. government.

This strikes me as a huge mistake, because it effectively impairs the Fed's ability to get rid of the securities at the price it paid for them, should Congress change its approach toward the GSEs. It simultaneously complicates Congress' ability to address the problem because Bernanke has tied the integrity of our monetary base to these assets. The policy of the Fed and Treasury amounts to little more than obligating the public to defend the bondholders of mismanaged financial companies, and to absorb losses that should have been borne by irresponsible lenders. From my perspective, this is nothing short of an unconstitutional abuse of power, as the actions of the Fed (not to mention some of Geithner's actions at the Treasury) ultimately have the effect of diverting public funds to reimburse private losses, even though spending is the specifically enumerated power of the Congress alone.

Sunday, November 15, 2009

Saturday, November 14, 2009

Warren Buffett on Charlie Rose

Also, be sure to click on the 'Web Exclusive' tab to see part of the interview that didn't air on TV.

Excerpt from the transcript:

CHARLIE ROSE: You have also said and been very clear that you think in this conversation and every other one, you know, that we had to pour a lot of money at a crisis, and we may very well have presented ourselves with a problem that is as difficult as the crisis.

WARREN BUFFETT: Well, when you -- when you use old medicines in unprecedented dosages, and even invent some new medicines as we had to do last fall -- you know, there are side effects and after-effects. And probably they’re somewhat proportional in certain ways to the extreme nature of the dosages. So, you know, we cannot keep running fiscal deficits like we are currently without having a lot of consequences over time. And ...

CHARLIE ROSE: $1.4 trillion for 2009.

WARREN BUFFETT: Yeah, a lot -- you know, that’s just, you know, even for a guy like me, I mean ...

CHARLIE ROSE: Those are real numbers.

WARREN BUFFETT: Trillion gets my attention. So, you know, that has consequences. And we are not saving $1.4 trillion to finance that deficit. And we faced huge deficits in World War II. I mean, relative to GDP then, to fight a war, and there were inflationary consequences after, even a little bit during the war.

CHARLIE ROSE: So inflation will be inevitable because of the amount of money we ...


WARREN BUFFETT: And then the question is whether -- and basically, it’s Congress. I mean in the end, Congress is the one that determines the value of the dollar over time. They -- if they follow policies that require us printing too much of it, monetizing debt and all of that sort of thing, dollars -- dollars will become worth a lot less.

CHARLIE ROSE: So Congress has to do what?

WARREN BUFFETT: They -- they have to, once the economy is rolling again, they’ve got to -- they’ve got to apply some, you know, they’ve got to raise taxes now that income will go up as the recession ends anyway, but they’re going to have to -- they’re going to have to close the gap between expenditures.

CHARLIE ROSE: They’ve got to find more revenues.

WARREN BUFFETT: They’ve got to ...

CHARLIE ROSE: The expenditures is a harder thing to do than the -- finding the revenues. Isn’t it?


CHARLIE ROSE: I mean -- go ahead, tell me. Which is easier, cutting expenditures or raising the revenues?

WARREN BUFFETT: They have got to do one of the two, because the gap between the two, you know, is as wide as the percentage of GDP -- is wider as a percentage of GDP than we’ve ever seen except in wartime.

CHARLIE ROSE: It’s now what, ten percent?

WARREN BUFFETT: Yes. That’s exactly. Just a touch over ten percent is the gap. And that’s huge.

CHARLIE ROSE: And what’s acceptable? Six?


CHARLIE ROSE: It was six during Reagan. It was six ...

WARREN BUFFETT: We can work -- if we have a gap of about 2, 2.5 percent and we have sort of normal growth, then debt as a percentage of GDP doesn’t grow. So, the country gets more valuable over time and we have more productive capacity, and all. So we can handle more debt, but it should not be -- it should be proportional to, in a sense, the wealth and earnings of the country. And -- and we can take a couple of percent gap over time, and have that debt not grow proportionally.


WARREN BUFFETT: It’s about -- the net outstanding is about 55 percent of GDP now. There’s nothing wrong with that. But you don’t want to just keep climbing. And at a point it gets out of control and interest on debt compounds and all of that sort of thing. But of course, in good years, if you’re going to average 2 percent, you’d better not have 2 percent be the base, because you’ll get into years like this with ten percent, and it will pull the average up a lot.

CHARLIE ROSE: This question is asked frequently. Will at some point the deficit and the debt and the decline of the dollar get to a point that people who hold our debt will no longer want to buy and then we’re in a crisis?

WARREN BUFFETT: Well, the rest of the world doesn’t have much choice, in a sense. I mean, if we -- if our current account surplus -- deficit, is $400 billion, we’re handing 400 billion to the rest of the world. They’ve got to buy something with it, and one way or another they have to buy something in dollars. I mean, if they get those dollars and they buy government bonds of the United States and they decide to sell them to buy stocks, you know, they still get dollars when they sell the government bonds. They can -- they can choose among assets. They can’t really choose not to invest in the United States.

CHARLIE ROSE: But they can choose as to where else they go for new investments, can they not?

WARREN BUFFETT: Well, they -- in effect, if we’re running a $400 billion deficit figure, the rest of the world is getting $400 billion worth of I.O.U.’s of one sort or another from the United States.

CHARLIE ROSE: Right. Right.

WARREN BUFFETT: Now, if they invest that in France -- because some say the Chinese buy stuff from France -- now France has got the dollars. The only way you can bring down that is to actually get rid of the current account deficit over time. And -- but in any event ...

CHARLIE ROSE: And that’s having to do with the costs and savings, the consumption savings rate.

WARREN BUFFETT: But if you are running a $1.4 trillion deficit, even if you are exporting $400 billion of I.O.U.’s in effect to the rest of the world, that leaves another trillion. And, you know, the domestic savers are not going to come up with a trillion. I mean, so these numbers are unsustainable over time, what we’re doing. It is true, though, that if you keep flooding the world with your debt and people see your fiscal policies are sort of out of control, they’re going to get less and less and less enthused about your debt, and then one of two things happen. Either you keep paying more and more to roll over that debt or you start monetizing it like crazy. And I mean, the Federal Reserve can buy the debt and issue -- issue currency for it, but then the currency gets worth less.

CHARLIE ROSE: But is what you just described the reality we’re facing if we don’t do something dramatic soon?

WARREN BUFFETT: Fairly soon. And we still want the economy to come back. I mean, we want to put out the fire. You know, but then make sure ...

CHARLIE ROSE: You worry about that later after we put out that fire.

WARREN BUFFETT: Then we don’t -- (inaudible) just squirting water on those buildings. We have to know when the fire is out.

CHARLIE ROSE: Yeah, but how do we know that? That’s my question.

WARREN BUFFETT: Oh, well, well, we will know -- unemployment will top out late. But we’ll know when the economy is really coming back.

CHARLIE ROSE: What will be the indication of that for us?

WARREN BUFFETT: Well, it will be -- it will be retail sales. It will be automobile sales. It will be when home construction starts coming back. It’ll be -- there’ll be plenty of economic signs -- they may be a little late in getting recognized. There’s you know, the depth (ph) comes a little late.

CHARLIE ROSE: Right. Right.

WARREN BUFFETT: But we’ll know. We’ll know. We won’t know -- we won’t know when the turn happens, but three or four months later, we will know it’s happened.

CHARLIE ROSE: And it’s inevitable that’s going to happen in the next year or two or later?

WARREN BUFFETT: Well, I like two better than one. But when you say inevitable, that doesn’t mean it can’t happen earlier.

CHARLIE ROSE: But I mean -- what would you worry about that might -- that we might not come back the way we ought to, that somehow there have been repercussions from this that will have lasting impact?

WARREN BUFFETT: Well, there will be some lasting impacts of certain types, but in terms of coming out of it, I don’t worry. If you had some big exogenous event -- if you had a major-- either by a country or by terrorists -- sort of a 9/11 squared or something ...

CHARLIE ROSE: Right. Right.

WARREN BUFFETT: ... a huge anthrax attack or something like that, you know.

CHARLIE ROSE: Or oil went to $250 a barrel or something like that.

WARREN BUFFETT: If oil rose to $250 a barrel, there can be certain exogenous effects that could ...

CHARLIE ROSE: So, that kind of thing would worry you the most that’s likely to happen. Otherwise ...

WARREN BUFFETT: I mean, for some reason or another, 5 million barrels a day of oil out of the 85 million barrels, you know, got shut off, and more or less looked like permanently at the time, you know, there would be a lot of disruption in this world.

Friday, November 13, 2009

Howard Marks Memo: Touchstones


Resisting – and thereby achieving success as a contrarian – isn’t easy. Things combine to make it difficult, including natural herd tendencies and the pain imposed by being out of step, since momentum invariably makes pro-cyclical actions look correct for a while. (That’s why it’s essential to remember that “being too far ahead of your time is indistinguishable from being wrong.”) Given the uncertain nature of the future, and thus the difficulty of being confident your position is the right one – especially as price moves against you – it’s challenging to be a lonely contrarian.

A few things that can help, however. First, after even a little time spent in the investment business, everyone should know that the herd is usually wrong at the extremes and pays dearly for its error. Second, some contrarians have records that are very impressive. And third, an accurate reading of investor mood and behavior – perceptive inference of danger or opportunity based on what others are doing in the market – can give investors a good leg up toward being effective contrarians.

I say we never know where we’re going, but we sure as heck ought to know where we are. The cycle isn’t unknowable or unbeatable. Touchstones like those enumerated above are there for everyone to see, but few people take full advantage. The key is to be among those who do.

* * *

The philosopher Hannah Arendt wrote:

. . . no matter how much we may be capable of learning from the past, it will not enable us to know the future. (The Origins of Totalitarianism, 1951)

We cannot know what the future holds, and history cannot tell us. But awareness of that limitation is a key lesson in itself. Mastering it increases our likelihood of investment success.



CNBC TRANSCRIPT: Warren Buffett & Bill Gates - Keeping America Great

The embodiment of the American dream, Warren Buffett and Bill Gates, self-made billionaires whose values run as deep as their wealth. One redefined an industry, the other the modern investor. But both put their stock in America, and by investing in business and humanity, reaped the rewards of this great country's capitalist tradition. Today that tradition is under siege, our way of life questioned. And with America at an inflection point, a future generation looks for guidance from the world's two greatest capitalists. Now, they are going back to school, not to learn, but to teach. Showing the next generation of business leaders that wealth is not about the money you amass, but the number of lives you enrich.


Mr. Buffett will also be appearing on Charlie Rose tonight (Nov 13).


Video from Keeping America Great:

Thursday, November 12, 2009

On the folly of rewarding A, while hoping for B

Great find by Miguel at Simoleon Sense!


Malcolm Gladwell, Steven Levitt & Stephen Dubner on Charlie Rose - 11/11/2009

Link to: Malcolm Gladwell, Steven Levitt & Stephen Dubner on Charlie Rose


The interview with Harvard Professor Ken Rogoff on the 11/10/2009 show is also worth watching, in my opinion.

Tuesday, November 10, 2009

Robert Huebscher talks with Bruce Greenwald

Which countries are in a position to play a leadership role in solving the crisis?

There is one iron rule that must hold, which is that the sum of all the surpluses and the deficits across all countries has to be zero.

Somebody has to eat the surpluses. It used to be Malaysia, Korea, Indonesia, and Thailand, and they paid the price and went from deficit to surplus, but somebody still has to eat their surpluses. So ultimately it goes to the country who can accommodate that, because it can borrow in its own currency. When the dollar falls, we don’t suffer the way the Koreans did, with unserviceable debt. The US is the deficit country of last resort.

The Asian countries are running protectionism – just differently – by manipulating their own currencies. They don’t do tariffs, and that’s why the dollar hasn’t been able to fall.

The problem from the perspective of the US is that if we are importing 9% more of our GDP than we are exporting, it is very difficult to sustain full employment. You basically have to have a zero saving rate or a bubble in the internet or housing. But you have to have some substitute demand.

Is there a sustainable source for that demand?

There is a phenomenon that helps this take place, and it’s really what generated the financial crisis. If the US buys $900 billion more than we sell overseas, the surplus countries accumulate that $900 billion. That number is growing every year. They have to get rid of that money, and the only way they can get rid of that is to go from surplus to deficit, and that would destroy their economic growth.

The US controls how surplus countries deploy dollars in the US. They are not going to be able to buy US equities – we showed them that in Chevron – and they are going to have to buy US fixed income. That drove down long Treasury rates, and Alan Greenspan had nothing to do with it. They got tired of the low yields, and they looked for other fixed income. They are poor, uninformed investors, and we sold them a lot of bad mortgage-backed investments. Interest rates got to be really low in the US, and there was a housing and consumer lending bubble, and savings rates went to zero. And that’s what sustained growth in the US, which sustained demand, which sustained all the manufacturing industries.

There’s a weird stability to this, because the Chinese can’t do anything about it. If they try to get rid of their dollars, they can buy Euros. But then the Europeans have the choice of letting the Euro go to $3.00 or buying the dollars themselves. And then they go back and buy the Yuan, and then the Chinese have the choice of letting the Yuan go up and undermining their exports.

The problem comes with consumer demand in the US. Basically the saving rate went to zero. In the US, the top 20% of people have 40% of the income and save about 15% of their income. A lot of that is pension plans and paying off principal on mortgages, so it’s automatic savings. If you take 15% of 40% you have a savings rate of 6%. This means that the bottom 80% is earning about 60% of the income and is spending 110% of their income. That is not sustainable. So, finally when housing prices collapse and the defaults in consumer finance occur, that whole system falls apart.

Monday, November 9, 2009

WSJ: The Man Who Predicted the Depression - By Mark Spitznagel