Post by brosin on Aug 15, 2010 20:29:24 GMT -5
We’re All In, America
Sunday 3/1/10 by Brosin
The striking thing in Warren Buffett’s letter to shareholders (2/28/09) was not that his Berkshire Hathaway had its worst year in his career. To me, it was striking that his words sounded like those of a 78-year-old man who wishes to warn the world about what scares him before his time has run out. Never before has Warren Buffett sounded so emotional and forthcoming; nor has he ever sounded his age. This year he seemed to be ‘spilling the beans’ as the popular phrase goes. In the letter, he warns that derivatives were very dangerous and that many firms had knowingly created this system stating,
“From this irritating reality comes The First Law of Corporate Survival for ambitious CEOs who pile on leverage and run large and unfathomable derivatives books: Modest incompetence simply won’t do; it’s mindboggling screw-ups that are required.”
The superstar investor continued, writing:
“In poker terms, the Treasury and the Fed have gone all in. (emphasis added). Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel. These once-unthinkable dosages will almost certainly bring on unwelcome aftereffects. Their precise nature is anyone’s guess, though one likely consequence is an onslaught of inflation.”
He also mentioned a Treasury bubble – as described in my previous post – that may be as extraordinary as the internet and housing bubbles.
The Treasury and Fed are all in with our money. So, we’re all in. The few who responsibly managed their budgets are now bailing out the majority who didn’t, albeit on an individual or a business level. Moral hazard is now an extinct ideology. There is no incentive to be responsible even if it were possible to overcome being soaked dry by ‘the “good” of the people.’ I know this: I’m no good at poker, but if I had the hand America is being dealt, I sure wouldn’t want to go all in, especially if Buffett’s assertions are even partially true. Our debt is in a bubble set to pop, we owe the world $10.9 trillion, and we plan to allocate an addition $3.7 trillion to the federal budget this year, which includes $1.75 worth of more deficit borrowing. The only thing still holding this all together is that the rest of the world depended on our stupidity. Their exports have fallen dramatically as we stop consuming so much. It’s only a matter of what will happen first – will the rest of the world find other people to sell their goods to, or will our economy recover fast enough to where they still remain dependent on us in the future?
Warren Buffett said that he agreed with the government’s actions, because without them, we would have faced cataclysmic consequences. So I guess maybe we look at it this way: if you only have one chip left, maybe you do have to go all in. So there you have it. We’re all in, America.
The market watch for March doesn’t look too promising. The Dow and S&P indices closed on 12 year lows on Friday. That said, the government” hope bubble,” as described in the previous post, was alive and well this week. Before a pull-back on Friday, when the government took up to a 40% stake in Citigroup, the index tracking the banking sector was on pace for the best week in history on hopes that government actions would be beneficial for banks. With Warren Buffett’s disclosures on derivatives showing how much they were hurting even someone like him, it is clear that the government cannot and will not save the banks from mounting losses they don’t even understand. At this point, it seems equally dangerous to be invested in Treasuries or equities. If the financial sector sees a further break-down, the effects on all areas of the economy will suffer. Precious metals like gold and silver seem to be the safest asset class as it is inevitable that inflation takes off at some point as countries all over the globe destroy their currencies. Stocks seem cheap right now, but it is likely what’s known as a “value trap. “ There is a reason that stocks are at 12 year lows. Future earnings for companies are very uncertain, repercussions of government actions remain unclear, and perhaps most importantly, people don’t have money to invest. All asset classes are seeing heavy withdrawals and redemptions, which means that the deleveraging is far from over. Commercial real estate is seen as a looming disaster, which means the economic woes are far from over. It is not a bad idea to start buying some small positions in quality stocks and adding to them as the market declines in the next few weeks or months, but I would not be putting serious money into stocks right now just because they are ‘on sale.’ If you can get them for cheaper later, why buy now? Don’t go all in like our leaders have done. It’d be one thing if those were my naive words but when they are the words of the greatest investor of our time, it makes you stop and think.
Sunday 3/1/10 by Brosin
The striking thing in Warren Buffett’s letter to shareholders (2/28/09) was not that his Berkshire Hathaway had its worst year in his career. To me, it was striking that his words sounded like those of a 78-year-old man who wishes to warn the world about what scares him before his time has run out. Never before has Warren Buffett sounded so emotional and forthcoming; nor has he ever sounded his age. This year he seemed to be ‘spilling the beans’ as the popular phrase goes. In the letter, he warns that derivatives were very dangerous and that many firms had knowingly created this system stating,
“From this irritating reality comes The First Law of Corporate Survival for ambitious CEOs who pile on leverage and run large and unfathomable derivatives books: Modest incompetence simply won’t do; it’s mindboggling screw-ups that are required.”
The superstar investor continued, writing:
“In poker terms, the Treasury and the Fed have gone all in. (emphasis added). Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel. These once-unthinkable dosages will almost certainly bring on unwelcome aftereffects. Their precise nature is anyone’s guess, though one likely consequence is an onslaught of inflation.”
He also mentioned a Treasury bubble – as described in my previous post – that may be as extraordinary as the internet and housing bubbles.
The Treasury and Fed are all in with our money. So, we’re all in. The few who responsibly managed their budgets are now bailing out the majority who didn’t, albeit on an individual or a business level. Moral hazard is now an extinct ideology. There is no incentive to be responsible even if it were possible to overcome being soaked dry by ‘the “good” of the people.’ I know this: I’m no good at poker, but if I had the hand America is being dealt, I sure wouldn’t want to go all in, especially if Buffett’s assertions are even partially true. Our debt is in a bubble set to pop, we owe the world $10.9 trillion, and we plan to allocate an addition $3.7 trillion to the federal budget this year, which includes $1.75 worth of more deficit borrowing. The only thing still holding this all together is that the rest of the world depended on our stupidity. Their exports have fallen dramatically as we stop consuming so much. It’s only a matter of what will happen first – will the rest of the world find other people to sell their goods to, or will our economy recover fast enough to where they still remain dependent on us in the future?
Warren Buffett said that he agreed with the government’s actions, because without them, we would have faced cataclysmic consequences. So I guess maybe we look at it this way: if you only have one chip left, maybe you do have to go all in. So there you have it. We’re all in, America.
The market watch for March doesn’t look too promising. The Dow and S&P indices closed on 12 year lows on Friday. That said, the government” hope bubble,” as described in the previous post, was alive and well this week. Before a pull-back on Friday, when the government took up to a 40% stake in Citigroup, the index tracking the banking sector was on pace for the best week in history on hopes that government actions would be beneficial for banks. With Warren Buffett’s disclosures on derivatives showing how much they were hurting even someone like him, it is clear that the government cannot and will not save the banks from mounting losses they don’t even understand. At this point, it seems equally dangerous to be invested in Treasuries or equities. If the financial sector sees a further break-down, the effects on all areas of the economy will suffer. Precious metals like gold and silver seem to be the safest asset class as it is inevitable that inflation takes off at some point as countries all over the globe destroy their currencies. Stocks seem cheap right now, but it is likely what’s known as a “value trap. “ There is a reason that stocks are at 12 year lows. Future earnings for companies are very uncertain, repercussions of government actions remain unclear, and perhaps most importantly, people don’t have money to invest. All asset classes are seeing heavy withdrawals and redemptions, which means that the deleveraging is far from over. Commercial real estate is seen as a looming disaster, which means the economic woes are far from over. It is not a bad idea to start buying some small positions in quality stocks and adding to them as the market declines in the next few weeks or months, but I would not be putting serious money into stocks right now just because they are ‘on sale.’ If you can get them for cheaper later, why buy now? Don’t go all in like our leaders have done. It’d be one thing if those were my naive words but when they are the words of the greatest investor of our time, it makes you stop and think.