Albert Edwards Takes On Rail Traffic, The Dollar And Idiot Sell Side Analysts (Most Of Them)

Tyler Durden's picture

Albert Edwards is threatening to upstage David Rosenberg, with his ever
increasing (healthy) cynicism that permeates all his recent letters to
an ever greater degree. His latest missive "As the Japanese say,
?Darkness lies one step ahead?" is yet another pinnacle in this
escalation. Exhibit A: the following summation: "Now, I have to admit
that I?ve been working in finance since the very start of the long bull
market in 1982. It?s been fun and I?'ve met many very interesting
people over the years. But there are an awful lot of puffed-up toucans
in this business, strutting around and fluffing themselves up so as to
appear incredibly self-important."

The reason for this
condemnation arises from Edwards' concern that Buffett may
have jumped the shark with his purchase of BNI and his "all clear" call
on America. Zero Hedge readers know we follow the APA data weekly, and
we have yet to see any material improvement, or any tangible shift in
the deterioration cycle. Edwards seems to agree:

We all know that Warren Buffet is not one of those. The investment guru's foray into railroads this week has attracted much attention. The FT's Lex column called it "one almighty bet on the US economic recovery." Funnily enough I was looking at railroad traffic earlier in the week. It was notable, I thought, that on a seasonally adjusted basis, there is very clear evidence that the cycle is stalling out (see chart below).


Never one to mince his words, Albert throws a zinger aimed directly at the morons who rush over each other to perpetuate self-fulfilling upgrade or downgrade circle jerk prophecies:

While I'm on the subject of gurus, I've come to the very sorry conclusion that many sell-side strategists purport to be financial gurus, yet strangely move from job to job as their employers find them to be empty vessels. There are very few in this business I would wrap my arms around, kiss on both cheeks and embrace as a true guru.

And in closing, some very useful observations on the dollar, and continued margin improvements:


The dollar may be breaking upwards (see chart above). If this is the start of a large upward
move, driven in large part by huge short positions that might be forced to be unwound, this
may crush correlated risk positions. In addition, the end of the $300bn Fed program of buying
US Treasuries last week is causing jitters. Yet amid the noise one should focus on the longterm
fundamentals (see chart below). Nominal quantities matter.



Although arithmetically, bond yields are a statistical artefact of short-term interest rate expectations, the above chart shows that trends in nominal GDP growth are the key driver. In the 1960s and 1970s, the continuous tendency of nominal GDP to grow well in excess of current bond yields provided an irresistible driver for higher yields. Conversely, the collapse in nominal GDP growth below bond yields in the early 1980s marked the start of the long bull market that continues to this day. Indeed, it is notable that nominal GDP growth is once again so far below bonds that a major move down in yields may be very close indeed. The continual ebbing of nominal quantities towards the deflationary Ice Age end is something we continue to bang on about in these pages. The charts below, for example, highlight what is happening to wage and benefits inflation. This cycle has ground wage inflation even closer to zero. And indeed the private sector data is even weaker than what you see below.



Now a bull would say this is all jolly good news as company profits can be increased by continued cost cutting and margin expansion. But as Andrew Lapthorne pointed out in a recent note, with margins already so very high, it is impossible for companies to cost-cut their way to sustained profits growth - link. Hence nominal revenue growth will be the key driver to the profits outlook. In targeting margins, companies are currently driving the US economy to the very abyss of outright deflation - something we will all realise as this cycle soon stalls.


And, as always very little of this matters: the only relevant metric is how much higher does the Fed need to see equity markets before it stops its loose monetary policy. If prior periods are any indication, even the complete collapse of the economy, which is what we would be having if it weren't for stimulus after stimulus, is completely irrelevant as manifested by unprecedented multiple valuations on numerous companies. One thing that is certain is that as long as there are tens of billions of free dollars flooding the market courtesy of Chairman Ben, there is little in terms of actual underlying data that will prevent i) the dollar from falling ever lower and ii) an equity melt up. Yet with every passing day, the Rubicon of the liquidity/dollar short unwind approaches, and when it does occur not even the threat of printing trillions of dollars in billion dollar bills daily will be enough to prevent the complete collapse of not just equities but all risky and safe assets: the ultimate bubble implosion. The Fed can now only hope to contain that day, as it can no longer be stopped.

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Anonymous's picture

Don?'t you mean ?brovo??

lizzy36's picture

As i watch the march to dj 10,000 (BREAKING NEWS, yet again this week), read the news about yet another "rounding error" (or blankfein's 2009 bonus) insider trading bust and Fannie Mae's plans to rent foreclosed homes back to borrowers, one cannot help think that the timeline for the bubble implosion is closer to infinity than 3 years.

That said, Albert Edwards words of wisdom are always appreciated.  His (and Tyler's) thoughts on Sell Side Analysts are spot on.  But then anyone who believes that a sell side analyst's job is to do anything other than support corporate finance activities is a fricking idiot. 

Oso's picture

Buffett Revisits Hunting Ground for Survivors: Alice Schroeder

2009-11-03 21:42:59.809 GMT



Commentary by Alice Schroeder

     Nov. 3 (Bloomberg) -- Warren Buffett called Berkshire Hathaway Inc.’s deal to buy the part of Burlington Northern Santa Fe Corp. that it doesn’t already own an “all-in wager on the economic future of the United States.”

     If so, it’s a survivalist bet. The railroad business is never going away, but it’s not going to lead the economy out of recession, either. Buffett has spent a lot of time in the last year burnishing his legacy by tackling Franklin Roosevelt’s role as the verbal antidepressant for this wretched economy. As I have said before, though, Buffett isn’t as bullish as he sounds.

     This deal has a feel about it of Berkshire’s 1998 acquisition of General Re, the last monster acquisition, which was overpriced and done with stock for complex motives that reached far beyond the appeal of the underlying business. Like General Re, Burlington is an uncharacteristically expensive deal. Berkshire is paying more than 18 times Burlington’s 2010 earnings, with 40 percent of the price in stock.

     Fortunately, this time he’s getting a less risky company.

This deal is mostly about managing risk. One of the many motives is to soak up Berkshire’s capital while Buffett is at the wheel.

That lowers the danger of his successor doing something dumb. In that sense, it furthers a goal that Buffett once told me about:

to create a company that will last a generation beyond his death. He can’t ensure it but he is going to try.


                      Railroads as Survivors


     Buffett likes companies that make bricks and boots and paint and electric utilities because they are survivors. So are railroads. Financial services have always been an exception -- the risky rocket fuel that leveraged the rest of Berkshire.

Buffett acknowledged that he bought General Re during the Internet bubble partly to dilute Berkshire’s equity holdings in stocks that couldn’t easily be sold, such as Coca-Cola Co.

     The combined effect of Berkshire’s huge and leveraged financial business cost the company its AAA credit rating during the financial crisis. Buffett considered the top grading the company’s “most precious asset,” something he would never do anything to endanger. He has downplayed the loss of the rating in public, but a motive of the Burlington deal is that it allows Buffett to protect his legacy by diluting Berkshire’s exposure to financial services. Who knows what it will take to manage risk in the markets 10 years from now?


                          Trial Balloon


     Buffett has to be thinking about what that means for his successor, yet another motive. For some time, he has been floating the name of David Sokol, who runs his utility business and NetJets, as a trial balloon (meaning he can yank the string back at any time). I admire and respect Sokol, but my comfort with him as chief executive officer is in inverse proportion to Berkshire’s exposure to financial services. Even brilliant CEOs often can’t manage such companies. The Burlington acquisition makes me a lot happier with Buffett’s choice of Sokol.

     There are many other motives. Burlington is well-managed.

Railroads are a bet against the U.S. dollar and in favor of higher energy costs. Railroads are a play on the trade deficit because this is how we haul all those containers of stuff imported from Asia. In recent years, they have become somewhat like electric utilities that earn a respectable return on capital. U.S. railroads, which have been around since the early 1800s, won’t disappear any time soon. Berkshire is lobbying on energy policy, and this deal gives it more clout. There are some subtle synergies between the utility business and the railroad.


                          Stock Mincing


     A final motive I am confident about is that Buffett finally has a plausible excuse to split Berkshire’s B shares. He has spilled a lot of ink over the years decrying stock splits. A 50-

to-1 ratio isn’t a stock split, it is a mincing. Why do it?

Buffett has just given Standard & Poor’s the ticket it needs to add Berkshire to the S&P 500 Index at a time when S&P is desperate for large, solvent, high-quality companies to replace the casualties of last year’s carnage. It is high time for Standard & Poor’s to do this, but the stock’s liquidity has always been the sticking point.

     Buffett would never admit to wanting Berkshire to join the S&P, but becoming an acknowledged peer to other major companies is part of the path to his legacy. It isn’t enough for him that Berkshire lives on profitably long after he does. Berkshire is his “didactic enterprise,” his way of teaching the world how he thinks a business should be run.

     Of course, this is about Buffett’s ego, but then so are most great achievements. The business world would have been a lot better place in the past two years if more companies were run with survival and longevity in mind like Berkshire Hathaway.

     It’s safe to say, therefore, that as long as he is able, Buffett will keep an eye looking backward over his shoulder for possible acquisitions toward the companies such as railroads that he studied in his childhood. From the perspective of his almost 80 years, this is a hunting ground for more survivors.

bugs_'s picture

Buffet has a stake in LVLT and may be
interested in running fiber along BNI's
right of way.  The deal is more complex
than it looks on the surface.

good article otherwise!

TraderVix's picture


BNI transports a lot of coal. LVLT has interests in coal mining plants also. Their network is pretty built out and I think they are reducing their domestic footprint.

SDRII's picture


if the BOE is seen as a precursur to the Fed, and MBS buying simply can not end - whata re the alternative structures that they could pursue to continue to subsidy. Term facilities extension? repo extension?

Bob the Horse's picture

No toucan is more puffed up than Mr Edwards himself.

IE's picture

Buffett isn’t as bullish as he sounds....Fortunately, this time he’s getting a less risky company.... This deal is mostly about managing risk.... Buffett likes companies that make bricks and boots and paint and electric utilities because they are survivors. So are railroads. Financial services have always been an exception -- the risky rocket fuel that leveraged the rest of Berkshire....

I agree with this, Oso.  This is exactly what I said yesterday.  This isn't bullish at all - it is diluting BH risk dramatically.  Paying 18x for BNI's deep recession earnings seems like a lot... until you consider the toxic garbage percentage of what he traded for it.  BNI shareholders went from all-good (value producing assets) to partially-bad.  Buffett went from bad to less-bad.  Did the BNI shareholders really want to own WFC, BOA, GE, AMEX or toxic debt-burdened insurance companies?  I don't think so.

Oso's picture

i agree.  i mean, truth of the matter is, no one is building new rail-roads.  its a great asset to hold if u have a 20 yr time horizon (or a legacy to look after).  but for a guy who's favorite metric is rail-car loadings, he has got to see that things are not getting better, despite easier YoY comps.  if had waited even a month, he d prob get BNI for a lot cheaper.  nothing about this is buffett-esque.  He'd have done better to not worry about his legacy that everyone already held in high-esteem.



Anonymous's picture

great to see such an article come out. in fact our operation was short BNI, and covered out before the buyout.

my opinion is that this investment was not working out for Mr. Buffet so he had to find a way to preserve his investment status of greatness. so buying the rest of BNI and taking it private makes for a great way to keep BNI from getting wrecked from daily stock price devaluations. now he can claim organic cash flow generation while only few will take the time to perform illiquid private market valuation exercises.

yeah he will own it forever, because that is how long the organic cash flow will take to offset the original investment capital losses in BNI from the start.

the magic comes via the immediate recognition of this investment loss through an eps dilution hit investors take from the 50 to 1 split. a charitable consolation, "just so BNI employees can afford to purchase the Berkshire stock".

never in the world of money, except church and philanthropy, does one get economic charity.

1. buffet announced he was investing in BNI...why the announcement? support the stock after he bought it.

2. since that did not work, he takes BNI private, splits the stock 50 to 1 to absorb the loss.

3. lipsticks the pig by stating its for the charity of BNI employees, etc making the stock more affordable.

Rating agencies now re-considering the credit quality of Buffet's operation are actually adding value for once.

Dear SEC, it is the buying manipulation that is the problem, not the shorting. There would be less to short if the buyers did not manipulate the price higher in the first place. You are looking at the wrong part of the problem.

Dear Warren Buffet....certainly if one holds an investment that can generate its own cash flow for a long time the trade will work. However, during this time horizon, the exposure to equity risk may be the highest risk factor of them all.

Many "investors" are duped to believe buy and hold is less risky. it just makes for a great way to collect management fees, while "investors" put their blind folds back on and cross the street. business neglected is business lost and that is what "investors" do when they invest their money with managers for the long run.

I have to admit you have done a fine job extracting money from the world. i myself am working on doing the same. i do hope that along the way i do not lose my way, become overweight, or need to pull a BNI and jam the loss to my investors by diluting them. i know you are better than that...maybe this was the best way to handle the matter.

enjoy your remaining years on this earth dealing with "deflation".

at least teach investors the risk factor buy and hold really entails.

the widows and orphans deserve to know that when they deposit [lend] their money to the bank in return for 1% interest that their money is getting levered 10X and lent to high risk operations, all behind the veil of FDIC insurance, which is just a clever gate keeping the depositors [original lenders] from pulling their loans or deposits from the bank.

bankers SUCK and deserve everything coming to them. taking candy from a baby is honorable.

Dear GS traders go operate a hedge fund and put accredited money at risk. what a joke. or at least only accept accredited investor capital as a deposit, not widows and orphans.

Takingbets's picture

Your website is experiencing a bug regarding the comment counts. This post shows zero comments posted on the front page, when clearly at this moment I count 7.

Also the other posting counts do not make any mathematical sense to me. (see example below)

Anonymous's picture

A true ZH reader would have long ago adjusted their expectations.

Takingbets's picture

I thought the governments accounting methods were being used there for a minute. :-)

Thanks for fixing it guys!!!!

Anonymous's picture

This is a wonderful analysis. It also provides a recap and analysis of Roubini's dollar carry trade unwind view as well as (somewhat) his strident defense of the position that gold will not melt up to $2000 before it collapses into the abyss.

I think he is wrong (on gold), but it is reiterated by some very reliable sources including, unless I misconstrue, our own Fight Club aficionado.

blackebitda's picture

if i was the fed i would pump stock prices higher too. how else can you get rid of the crappy collateral you took from lehman? this entire play is about back filling holes in the ground. problem is that if you build your house on sand, you're gonna sink.

Dear Ben: you better dig that hole back up and put some rock in there. never mind, just put concrete in there next time. dont worry, you will have your chance in no time. meanwhile, while you are not going to be doing anything, for the next year, might as well craft a concrete plan. you best make haste, at anytime, you may need to implement it, because you are standing on sinking sand.   

Mark Beck's picture

It may be the FED could tighten based on real estate prices. To me the FED bubble warfare is only won when prices show a 30% correction upward from March Lows. I think this is what the extend is all about, recovery to an unrealistically high price level compared to mean wages. With passage of H.R. 3548, the first time home buyer credit is extended, and with it the subsequent price increase leverage of FHA. 

Is this really the plan? to re-inflate the housing bubble in order to protect legacy investments in this asset class.

Anonymous's picture

alice very nice review

Anonymous's picture

"Buffett isn’t as bullish as he sounds...Buffett likes companies that make bricks and boots and paint and electric utilities because they are survivors. So are railroads...Railroads are a bet against the U.S. dollar and in favor of higher energy costs.

I'd go along with this type of thinking. This isn't as bullish as it sounds, it actually best accomodates a massive bear. Railroads will still be here in 20 years. Railroads will perform the relative best in a depression. They will survive and out-perform other modes of transportation because they are the low-cost mover. With higher oil prices and low dollar, their relative advantage increases. In a depression, car companies and air carriers will massively reduce, and many long distance trucking companies will fail Rail will survive, because its the only way we will be able to afford to move anything long distances...maybe even masses of people.

Anonymous's picture

Second guessing Warren, yeah that's a bright idea. Last time I checked, he's a Billionaire, and Edwards is not. No doubt, he knows when he drops trow, in his heart of hearts, that he doesn't measure up. Edwards is fighting back from obscurity, toiling at some third rate, French(redundant?) broker, trying to be provocative enough to get some press. Kudos on Al calling the bear market about 10 years early - proof of the broken clock, and little else of value.

I'm , long and up about 60% YTD, AL, how you doin?

Sherman McCoy's picture

Second guessing Warren, yeah that's a bright idea. Last time I checked, he's a Billionaire, and Edwards is not. No doubt, he knows when he drops trow, in his heart of hearts, that he doesn't measure up. Edwards is fighting back from obscurity, toiling at some third rate, French(redundant?) broker, trying to be provocative enough to get some press. Kudos on Al calling the bear market about 10 years early - proof of the broken clock, and little else of value.

I'm , long and up about 60% YTD, AL, how you doin?

Anonymous's picture

5 year average of 19%. I can be conservative. I bottom feed, I don't chase rising markets, so I occasionally get beat in the short term. I like to keep my winnings.

Still 42% cash, but I don't want to screw myself. Cash might be handy if I join the ranks of the unemployed. The ability to outlast is important to me.

steve from virginia's picture

I don't know about Buffett, he seems to have lost a step. Then again, perhaps not ...

Mebbe he thinks the government will nationalize his rights- of- way. Look to the other three big railroads to see if they see buyout offers- if Goldman is involved. Goldman is finance's Triple Canopy or Blackwater. At some point the US must nationalize its railroad ROW's and increase trackage significantly- the private railroad companies cannot possibly begin to do this. Only governments, with eminent domain powers can significantly expand RR real estate and trackage. I suspect most of the next ten year's GDP (what's left of it) will be directed to rebuilding/increasing the nations rail infrastructure, to replace the now- obsolete highway/auto and air transport systems.

Peak oil, babes! It happened 11 years ago. The country needed to take steps thirty years ago ... but, decided to party hearty instead. Now ... we all have to pay and pay and pay.

This isn't an economy, it's a horror movie. I know what is going to happen next:

Cue Edward's deflation/long dollar argument; he's right and again the trade to watch here again is oil/dollar. The last foray into the stratospheric $84 crude price had Wall Street nervously eyeing the exits to all sorts of 'dollar- short' trades.

Ouallah! We have a hard currency, the US dollar! Betcha didn't know! Forget gold ... so old fashioned! We all have oil, what did you put into YOUR tank this morning? Certainly not gold but the public participation that buying and burning gas represents manifests itself as deflation.

You are swapping dollars for something there is always less of - oil - rather than buying something with limitless supply - a 'highly- innovative financial security' cleverly crafted out of thin air. Dollars have become proxies for (shrinking) oil, both here (USA) and there (KSA). Oil is the perfect deflation trap; finance cannot buy it all (like it tried to do in the futures markets last summer) without making it too pricey for end- users and ruining themselves thereby.

Buying and burning shrinks the available supply that much faster, pushing on the relative price. Oil prices have already pushed the good jobs - and business customers - overseas, what's next?

The only way to avoid the deflationary deleveraging leg that is beginning right now in financial markets is a nationwide gasoline buyers' strike. 

A strike that puts Exxon out of business and throws the fear of Allah into Saudi Arabia. Otherwise, the sky falls and it is heavy.

The dollar/oil paradigm is turning Ben Bernanke's inflation strategy inside out. A hard dollar has severe implications worldwide: the dollar short- carry trade which has 'stimulated' the past few month's world- wide economic rebound is in jeopardy. The oil market is telling the other markets the dollar is worth more than the Federal Reserve and Wall Street suggest. People will ignore the markets for awhile as 'noise' but as the correlation between stocks that fall when oil prices reach that 'certain level' becomes more obvious, it will get traders attention.

When speculators come to the same conclusion I have here, the dollar shorts will start to unwind their positions and the dollar carry trade will come to an end. Since almost all speculators are on the 'dollar short' side of the trade, the first to close their positions will pocket a nice profit.

The rest will be guillotined. There will be a massive dollar short squeeze. There simply aren't enough cash dollars in circulation to support the scaffolding of dollar- denominated speculation built on top of the small money base.


Anonymous's picture

I like railroad networks too but I own ALL of Brazil. All the fun of choo choos plus a non-fucked economy.

Anonymous's picture

Thanks for sharing. I think the team at Soc Gen is a rare example of strategists unencumbered by their investment banking departments. Anyone else miss Montier? Heard he is speaking at a GMO conference in Boston this week.