Buffett on the Spot - by Roger Lowenstein

Found via The Corner of Berkshire & Fairfax.

America has a way of elevating its heroes beyond the realm of mere mortals. This has not been an issue on Wall Street, where heroes do not exist. Warren Buffett has been the glaring exception. An Omahan who was not of Wall Street so much as above it and who spoke in cracker-barrel English derived more from Twain than from J. P. Morgan, he fulfilled (I once wrote) America’s secular myth. He was the man from the Plains whose virtue offered an antidote to the corrupt Northeast and to Wall Street in particular. It is a measure of his reputation that a radio interviewer asked me whether Buffett had, until late, behaved in a “near perfect” manner. No flesh and blood, examined up close, can meet such a standard. As the saying goes, “No man is a hero to his valet.” The David Sokol affair, in which an executive of Buffett’s Berkshire Hathaway was caught in a serious ethical trespass, and in which Buffett failed to deliver a rebuke, has shown us a bit of the great man’s undergarments. The question for the 40,000 shareholders converging on Omaha for Saturday’s annual meeting (a.k.a. Buffett’s “capitalist Woodstock”) is whether the Sokol business tells us anything new, and perhaps dispiriting, about Buffett.

Hussman Weekly Market Comment: Monetary Policy in 3-D

Last week, my friend John Mauldin reprinted our April 11 market comment Charles Plosser and the 50% Contraction in the Fed's Balance Sheet . John told me that he had received several nearly identical questions, along the lines of "Wait, now I'm confused - I thought that the Fed reduces inflation pressures by raising interest rates. Why would higher interest rates trigger inflation?"

So, this is where that phrase "external upward pressure" comes in. We have to distinguish between what economists would call an "endogenous" increase in interest rates - one that the Fed itself provokes by reducing the monetary base - and an "exogenous" increase in interest rates - one that is produced by changes in the behavior of investors and the economy, independent of actions by the Fed.

See, when the Fed decides to raise interest rates, it does so by reducing (or slowing the growth) of the monetary base, which can reasonably be viewed as an "anti-inflationary" policy. However, if interest rates rise independent of any change in the monetary base, then cash - which doesn't bear interest - becomes a "hot potato" that is suddenly less desirable. In that case, you get one of two outcomes: people holding cash may bid up Treasury bills, lowering short-term interest rates to the point where people are again indifferent between cash and non-cash alternatives, or failing that, the attempt to get rid of cash holdings in other ways provokes inflation and a depreciation in the foreign exchange value of the dollar (which was the outcome in the 1970's).

As I've argued elsewhere, one of the primary sources of exogenous inflationary pressure is growth in unproductive forms of government spending (spending that creates demand but does not expand capacity or incentive to produce), but I'll leave that feature of the argument for another time.

Monetary Policy in 3-D

The extreme stance of monetary policy is such a critical factor in the financial markets here that it is worth spending a bit more time on the relationship between interest rates, inflation, and the monetary base.

Chanticleer Q1 Letter

Below are a few sections (slightly edited for public viewing) from a letter just sent to the investors of a fund I help manage. If you’re interested in receiving our letters, feel free to email either Matt or me at the email addresses listed HERE.

Link to: Chanticleer Q1 2011 Letter

Chanticleer Q1 2011 Letter - Edited for Public Viewing

Daniel Pink - Motivation 3.0

Thanks to Barry for passing this along.

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Related book: Drive: The Surprising Truth About What Motivates Us

Related previous post: TED Talk - Dan Pink on the surprising science of motivation

TED Talk - Kathryn Schulz: On being wrong

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Related previous post: Risky Business: James Bagian—NASA astronaut turned patient safety expert—on Being Wrong - By Kathryn Schulz

Book: Being Wrong: Adventures in the Margin of Error

Global Energy: The Latest Infatuations - By Vaclav Smil

Found via Miguel at Simoleon Sense.

To follow global energy affairs is to have a never-ending encounter with new infatuations. Fifty years ago media ignored crude oil (a barrel went for little more than a dollar). Instead the western utilities were preoccupied with the annual double-digit growth of electricity demand that was to last indefinitely, and many of them decided that only large-scale development of nuclear fission, to be eventually transformed into a widespread adoption of fast breeder reactors, could secure electricity’s future. Two decades later, in the midst of the second energy “crisis” (1979–1981, precipitated by Khomeini’s takeover of Iran), rising crude oil prices became the world’s prime existential concern, growth of electricity demand had slumped to low single digits, France was the only nation that was seriously pursuing a nuclear future, and small cars were in vogue.

After world crude oil prices collapsed in 1985 (temporarily below $5 per barrel), American SUVs began their rapid diffusion that culminated in using the Hummer H1, a civilian version of a U.S. military assault vehicle weighing nearly 3.5 tonnes, for trips to grocery stores—and the multinational oil companies were the worst performing class of stocks of the 1990s. The first decade of the 21st century changed all that, with constant fears of an imminent peak of global oil extraction (in some versions amounting to nothing less than lights out for western civilization), catastrophic consequences of fossil fuel-induced global warming and a grand unraveling of the post-WW II world order.

All of this has prompted incessant calls for the world to innovate its way into a brighter energy future, a quest that has engendered serial infatuations with new, supposedly perfect solutions: Driving was to be transformed first by biofuels, then by fuel cells and hydrogen, then by hybrid cars, and now it is the electrics (Volt, Tesla, Nissan) and their promoters (Shai Agassi, Elon Musk, Carlos Ghosn) that command media attention; electricity generation was to be decarbonized either by a nuclear renaissance or by ubiquitous wind turbines (even Boone Pickens, a veteran Texas oilman, succumbed to that call of the wind), while others foresaw a comfortable future for fossil fuels once their visions of mass carbon capture and sequestration (CCS) were put in practice. And if everything fails, then geoengineering—manipulating the Earth’s climate with shades in space, mist-spewing ships or high-altitude flights disgorging sulfur compounds—will save us by cooling the warming planet.

This all brings to mind Lemuel Gulliver’s visit to the grand academy of Lagado: No fewer than 500 projects were going on there at once, always with anticipation of an imminent success, much as the inventor who “has been eight years upon a project for extracting sunbeams out of cucumbers” believed that “in eight years more, he should be able to supply the governor’s gardens with sunshine, at a reasonable rate”—but also always with complaints about stock being low and entreaties to “give … something as an encouragement to ingenuity.” Admittedly, ideas for new energy salvations do not currently top 500, but their spatial extent puts Lagado’s inventors to shame: Passionately advocated solutions range from extracting work from that meager 20-Kelvin difference between the surface and deep waters in tropical seas (OTEC: ocean thermal energy conversion) to Moon-based solar photovoltaics with electricity beamed to the Earth by microwaves and received by giant antennas.

And continuous hopes for success (at a low price) in eight more years are as fervent now as they were in the fictional 18th century Lagado. There has been an endless procession of such claims on behalf of inexpensive, market-conquering solutions, be they fuel cells or cellulosic ethanol, fast breeder reactors or tethered wind turbines. And energy research can never get enough money to satisfy its promoters: In 2010 the U.S. President’s council of advisors recommended raising the total for U.S. energy research to $16 billion a year; that is actually too little considering the magnitude of the challenge—but too much when taking into account the astonishing unwillingness to adopt many readily available and highly effective existing fixes in the first place.

Enough to Go Around?

Although all this might be dismissed as an inevitable result of the desirably far-flung (and hence inherently inefficient) search for solutions, as an expected bias of promoters devoted to their singular ideas and unavoidably jockeying for limited funds, I see more fundamental, and hence much more worrisome, problems. Global energy perspective makes two things clear: Most of humanity needs to consume a great deal more energy in order to experience reasonably healthy lives and to enjoy at least a modicum of prosperity; in contrast, affluent nations in general, and the United States and Canada in particular, should reduce their excessive energy use. While the first conclusion seems obvious, many find the second one wrong or outright objectionable.

Gundlach: Treasuries will Rally When QE2 Ends - By Robert Huebscher

The bonds that PIMCO’s Bill Gross sold to take a 3% short position in the Treasury market may have found a buyer in Doubleline’s Jeffrey Gundlach. In a conference call with investors last week, Gundlach said that Treasury prices would rise in the near term, once QE2 expires on June 30.

For over a year, Gundlach has forecast a “long-term bottoming process” in government bond yields. Last week he said he remains committed to that outlook.

If you are a buy-and-hold investor with a 10-year horizon, Gundlach said, you should position your portfolio with the expectation of inflation. But he doesn’t expect inflation to unfold any time soon. “I am not in the camp that believes Treasury rates are about to rocket higher because of the end of QE2,” he said. “I think just the opposite, actually.”

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QE1 was announced (the first red arrow on the left) amid and because of a global banking panic, Gundlach said. The result was a continued decline in rates that ended in December of 2008.

When the purchases actually began, though, bond yields started to rise. That was counterintuitive, Gundlach said, because government’s buying actions should have pushed prices up and yields down. His explanation was that bond investors get nervous when there is a strong inflationary-biased policy. While government buying supported the prices of newly issued securities, investors holding the other $8 trillion of Treasury bonds were unsettled and pushed yields on the 10-year from 2% to 4%.

When QE1 was extended, yields rose even further.

On March 31, 2010, purchases from QE1 ended and bond yields collapsed. Gundlach said this was probably because the stimulus that quantitative easing represented was withdrawn, and that hurt the economy. The withdrawal of QE1 may have also made bond investors feel better that inflationary policies were no longer being pursued.

“The implementation of quantitative easing has produced exactly the opposite market behavior that some people intuitively expected,” he said.

When QE2 was announced, yields bottomed, and when bond purchases began, yields rose.

“The idea that ending QE2 would necessarily mean a rate rise flies in the face of the bloodless verdict of the market,” he said, “which is that when quantitative easing was in place, bond yields rose, and when it was taken off it led to weaker economy and rates falling. I think that is going to happen again.”

Gundlach also said that the start of QE1 triggered a rally in equities, and that rally was amplified when QE1 was extended. When QE1 ended, stocks fell. Stocks rallied again when Bernanke made his speech in Jackson Hole announcing QE2 and rallied again when the buying program began. Gundlach said he expects that pattern to repeat, and that stocks will go down when QE2 ends. “The discounting for that should be starting in the relatively near term,” he said.

Howard Marks Quote (2001)

From his October 2001 Memo “What Lies Ahead?”:

I have no interest in being a pessimist or a bear, and I don't like to think of myself that way. I just may be more impressed by the unknowability of the future than most people. When I reflect on all of the mottoes I use, it seems half of them relate to how little we can know about what lies ahead.

John Mauldin: The Cure for High Price

Now let’s fast forward to Sunday and the elections in Finland. Yes, Finland, that bastion of euro correctness.

It turns out that some of the nation’s voters don’t see why they should “donate” to a fund that will bail out Greece, Ireland, and Portugal (for openers – forget about Spain!). There is a party, called (in translation) the True Finns party. It is a very nationalistic party and generally does not get more than 4% of the vote. But recent polls show their level of support has more than tripled and is approaching that of the three biggest parties: Center, National Coalition, and Social Democrats, which each have about 20 percent. It is very possible that the True Finns could get a sizeable vote. If the polls are right.

Why? Because they are the only way Finnish voters can say no to using their money to bail out other countries. Some 60% of 2,400 respondents in an April 8 survey by Think If Laboratories said they opposed bailouts, while 31 percent approved. The margin of error was 3 percentage points. (Canadian Press)

The True Finns note that no one rushed to their aid when they had their own crisis in the ’90s. The country has since gone on the “straight and narrow.”

60%! Wow! The True Finns have made it clear they will not go into coalition with any government that votes for more bailout funds. Think that same sentiment is not rising in Germany? Most people are concerned about the debtor nations rejecting the terms of the deal. Finland may show us on Sunday that the no vote works both ways!

As I understand the treaty, even the debtor nations must “guarantee” the debt that is used to bail out other countries, even as they accept bailouts. It is all for one and one for all. But what if Finland says no? Does that mean the end of the debt bailouts? Will the rest go on without Finland? Will other voters in countries with little deficits also decide that enough is enough? Can Angela Merkel keep her coalition together in Germany? The possibility of a crisis is high and rising. Stay tuned.

ECRI on The Latest Inflation Data

Thanks to Will for passing this along.

ECRI's Lakshman Achuthan spoke with Fox Business News about the latest CPI data update, with a focus on the core rate of inflation.