Buffett Rules Out Double-Dip Recession Amid Growth

Warren Buffett ruled out a second recession in the U.S. and said businesses owned by his Berkshire Hathaway Inc. are growing.

“I am a huge bull on this country,” Buffett, Berkshire’s chief executive officer, said today in remarks to the Montana Economic Development Summit. “We will not have a double-dip recession at all. I see our businesses coming back almost across the board.”

Berkshire bought railroad Burlington Northern Santa Fe Corp. for $27 billion in February in a deal that Buffett, 80, called a bet on the U.S. economy. The billionaire’s outlook contrasts with the views of economists such as New York University Professor Nouriel Roubini and Harvard University Professor Martin Feldstein, who have said the odds of another recession may be one in three or higher.

“I’ve seen sentiment turn sour in the last three months or so, generally in the media,” Buffett said. “I don’t see that in our businesses. I see we’re employing more people than a month ago, two months ago.”

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Link to video: Buffett Speaks at Montana Economic Summit

Days of Reflection for Man Who Defined Singapore

Found via Simoleon Sense.

“SO, when is the last leaf falling?” asked Lee Kuan Yew, the man who made Singapore in his own stern and unsentimental image, nearing his 87th birthday and contemplating age, infirmity and loss.

“I can feel the gradual decline of energy and vitality,” said Mr. Lee, whose “Singapore model” of economic growth and tight social control made him one of the most influential political figures of Asia. “And I mean generally, every year, when you know you are not on the same level as last year. But that’s life.”

In a long, unusually reflective interview last week, he talked about the aches and pains of age and the solace of meditation, about his struggle to build a thriving nation on this resource-poor island, and his concern that the next generation might take his achievements for granted and let them slip away.

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Related previous post: Charlie Rose: 2009 Interview with Lee Kuan Yew

Hussman Weekly Market Comment: Impulse Response

Except for a burst of census hiring that briefly pushed payroll growth above trend during the second quarter of this year, job growth has been perpetually below trend over the past two years. During the post-war period, the civilian labor force has historically grown at about 0.15% each month, which currently implies that normal "trend" job growth should be about 225,000 jobs per month.

While last month's labor report was favorably received by Wall Street, that reception was based strictly on the fact that job losses were not as bad as anticipated, given concerns about a "double dip" in the economy. The problem with this celebration, however, is that analysts continue to overlook the typical lags between deterioration in leading indicators and deterioration in coincident measures, much less lagging ones. As I've noted frequently in recent commentaries, the typical lag between deterioration in say, the ECRI Weekly Leading Index and the ISM Purchasing Managers Index is about 13 weeks, and sometimes longer. The typical lag with respect to new claims for unemployment is about 23-26 weeks (which puts the likely window of deterioration at about the October - November time frame), and the typical lag with respect to the payroll unemployment report is, not surprisingly, about 4 weeks beyond that. The critical risk area here extends for several months, not a few weeks.

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The most serious risk

Yet even the near-term risks to employment and the economy are not the greatest risks that investors face. Rather, the most serious risk for investors here is the persistent and misguided eagerness of Wall Street to value long-term assets based on short-term earnings results. Investors have priced the S&P 500 in a manner that is far too dependent on the achievement and maintenance of profit margins about 50% above historical norms. This is a mistake. Profit margins normalize over time, and on the basis of normalized earnings, the S&P 500 is about 40% above robust historical valuation norms (and even further above valuation levels that have represented "generational" buying opportunities such as 1974 and 1982, when well-covered corporate dividend yields averaged about 6.7%, versus the current 2%).

Yes, bond yields are low here, but 10-year bonds are a 7-year duration instrument while U.S. stocks are roughly 50-year duration instruments at present. Wall Street analysts appear very comfortable advising their clients to "lock-in" prospective long-term equity returns for the next 50 years at yields that are dramatically below the norm, simply because 10-year Treasury yields are depressed. But where will the 10-year Treasury yield be in 5 years, in 10, in 15, in 20, in 25, in 30 years? Whatever the yield is today will be a distant memory then, but will the return that investors "locked in" for stocks still look like a value?

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For our part, we remain focused on identifying companies with stable revenues, stable profit margins, and a record of distributing cash flows or reinvesting them for growth. We are enormously skeptical of share repurchases and takeovers, which are weak uses of cash with little historical evidence of effective return. If share repurchases were highly counter-cyclical, so that companies massively repurchased stock at depressed valuations and not at elevated ones, we might have more confidence. But that's not what we observe. We prefer companies with stable, predictable cash flows, at reasonable valuations, that earn a consistent return on assets and invested capital, and that don't show earnings with one hand and quietly rob investors of them with the other. These opportunities always exist. In an economy that appears likely to remain difficult, we refuse to value stocks in a way that relies on a resumption of normal economic growth and assumes profit margins 50% above the norm.

Inflation? Deflation? It's All About 'Meflation' - By Jason Zweig

Thanks to Will for passing this along.

Inflation or deflation?

Pick your poison, says Wall Street. Either Uncle Sam's borrowing binge will flood the system with money, leading to a replay of the 1970s as inflation eats away at your purchasing power. Or all that debt and the liquidation of distressed financial assets will paralyze the economy and send prices falling, like the deflation Japan has suffered for the past 20 years.

Market pundits everywhere are insisting that getting this "call" right is critical to investing success. The reason is obvious: If you design a portfolio meant to be a bulwark against inflation, and deflation stalks the land instead, your wealth will suffer. Likewise, a deflation-proof portfolio will get killed if inflation takes off.

No wonder online forums (and my mailbox) are full of questions from investors desperate to figure out whether they should protect against inflation or against deflation.

As obvious as it may sound, the belief that you ought to make a call and then overhaul your portfolio accordingly is wrong.

The problem is simple. No one knows how to predict, with any degree of reliability, whether the cost of living is going to go up or down. In 1979, as U.S. inflation was peaking, most experts predicted that it would stay high for years to come. Ten years later in Japan, the consensus was that stocks and real estate would continue to boom; no one foresaw that the nation was about to sink into a two-decade morass.

"What matters isn't whether somebody's forecast for inflation or deflation is more convincing to you," says Larry Swedroe, director of research at Buckingham Asset Management in St. Louis. "Instead, what matters is which of these risks would be most damaging to you."

So stop trying to guess the answer to the highly uncertain question of whether we will be hit with inflation or deflation. Start thinking about the much more knowable issue of what I call "meflation": the direct, personal impact of the changing cost of living on your investments, your budget and your labor income.

Depending on your circumstances, either a rise or a fall in the cost of living could be good for you.

Vaclav Smil’s 2004 article on Garrett Hardin

In the world fond of simple associations, Garrett Hardin will be remembered above all as the man who made millions familiar with a concept known as "the tragedy of the commons." He wrote an article with that title for Science in 1968, when the first wave of environmental consciousness was swelling. That short essay became one of the most famous (and among the most cited and reprinted) pieces of ecological or, as Hardin would have preferred, "bioethical" writing.

Contrary to the usual perception, this concept was not Hardin's invention. Such grand generalizations almost always have important precedents. Hence it is doubtful that even Aristotle, who pointed out long ago that "what is common to the greatest number has the least care bestowed upon it," was the first to reach this conclusion. Hardin does, however, deserve credit for recognizing the magnitude and the inevitability of this tragedy: It's not a deviancy or madness but rather perfectly rational behavior that leads to the long-term ruin of the commons, a word that evokes communal agricultural lands but also applies to ecosystems, rivers, oceans, organisms or mineral resources. That is, actions that benefit the individual (meaning single persons, households, villages, companies or nations) in the short term often end up hurting the collective.

Hardin's greatest service was presenting this notion in the form of a captivating parable about an overgrazed pasture and expressing it in precise, resonant language that left no room for appealing the initial verdict. He wrote: "Ruin is the destination toward which all men rush, each pursuing his own interest in a society that believes in the freedom of the commons." (Today's editors would, of course, have tried to force Hardin to change "men" to "people" or some other politically correct choice—probably to no avail.) He realized that this ruinous dynamic operates in any number of cases involving environmental pollution and the degradation of ecosystems. These instances include three of the leading concerns of our generation: extensive and drastic commercial overfishing of the oceans, continuing deforestation of the humid tropics and rising emissions of greenhouse gases, which may cause serious global warming during the latter half of this century.

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Related book (also a Charlie Munger recommendation): Living within Limits: Ecology, Economics, and Population Taboos

C-SPAN Q&A with Meredith Whitney

Found via The Big Picture.

Related book: The Big Short

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Beware of Greeks Bearing Bonds - By Michael Lewis

Found via Farnam Street.

As Wall Street hangs on the question “Will Greece default?,” the author heads for riot-stricken Athens, and for the mysterious Vatopaidi monastery, which brought down the last government, laying bare the country’s economic insanity. But beyond a $1.2 trillion debt (roughly a quarter-million dollars for each working adult), there is a more frightening deficit. After systematically looting their own treasury, in a breathtaking binge of tax evasion, bribery, and creative accounting spurred on by Goldman Sachs, Greeks are sure of one thing: they can’t trust their fellow Greeks.

P/E Expansion & Contraction - Secular Stock Market Cycles

Good post from Barry Ritholtz.

Yesterday, Peter Boockvar referenced two WSJ articles on P/E: The Decline of the P/E Ratio and Is It Time to Scrap the Fusty Old P/E Ratio?

I believe these articles are asking the wrong question. Rather than wondering if the value of P/E ratio is fading, the better question is, “What does a falling P/E ratio mean?” The chart below will help answer that question.

We can define Bull and Bear markets over the past 100 years in terms of P/E expansion and contraction. I always show the chart below when I give speeches (from Crestmont Research, my annotations in blue) to emphasize the impact of crowd psychology on valuations.

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Related book: Unexpected Returns: Understanding Secular Stock Market Cycles

Declining by degree

Will America’s universities go the way of its car companies?

FIFTY years ago, in the glorious age of three-martini lunches and all-smoking offices, America’s car companies were universally admired. Everybody wanted to know the secrets of their success. How did they churn out dazzling new models every year? How did they manage so many people so successfully (General Motors was then the biggest private-sector employer in the world)? And how did they keep their customers so happy?

Today the world is equally in awe of American universities. They dominate global rankings: on the Shanghai Ranking Consultancy’s list of the world’s best universities, 17 of the top 20 are American, and 35 of the top 50. They employ 70% of living Nobel prizewinners in science and economics and produce a disproportionate share of the world’s most-cited articles in academic journals. Everyone wants to know their secret recipe.

Which raises a mischievous question. Could America’s universities go the way of its car companies? On the face of it, this seems highly unlikely. Student enrolments are higher than ever this year, as Americans who cannot find jobs linger or return to education. Cambridge, Massachusetts, shows no outward sign of becoming Detroit. Yet there are serious questions about America’s ivory towers.

Annaly Salvos: The Camel’s Back

Ireland’s rating downgrade by Standard & Poor's on August 24 and the related news of its struggling millstone, Anglo Irish Bank, bring our attention back to the ongoing challenges facing sovereign entities in the postdiluvian financial world of 2010. We are not alone in this endeavor, as the International Monetary Fund just published research on a similar theme. What can we learn from the current array of sovereign fiscal woes to better anticipate potential outcomes in the United States?

Let us state up front that while there are similarities between the U.S. and other problem countries, the differences are also profound. What happened in Ireland, Greece, Latvia, Iceland, Japan or any country experiencing the wrenching tribulations of fiscal imbalances, higher borrowing costs and/or reduced liquidity might not happen here. These countries do not print the world’s reserve currency. Nor are their currencies, unlike the US Dollar (or even the yen), viewed as a “safe haven” for investors. Moreover, the United States has a robust and diversified economy and the scale of deep capital markets that mitigate the risk of capital flight by foreign investors. In other words, the whole world is long and leveraged to the US, and that is a form of protection.

Nonetheless, the similarities are worthy of consideration. After all, the European Union is long and leveraged to Greece (and Spain and Portugal), and the UK is long and leveraged to Iceland. So these circumstances only prove that the potential collapse by a country will spur action by those most at risk, but the crisis can still occur. So what are some of the similar characteristics of countries that have faced financial crisis?