Warren Buffett

As Warren Buffett himself once said, "If you’ve been playing poker for half an hour and you still don’t know who the patsy is, you're the patsy." The central bank bond market poker game has been in train for a good deal longer than half an hour, and the stakes have never been higher. Sometimes, if you simply can't fathom the new rules of the game, it's surely better not to play. But such madness is not limited to the world of bonds. Malign, unthinking mental slavery has fixed itself upon the equity markets, too. And as stock markets have powered ahead, index trackers have enjoyed their highest ever retail inflows.

There is a saying that you don’t ring bells at the top. It’s not really true. Every time the market forms a major peak, at least in the last 15 years, there are usually a preponderance of signs of excessive speculation and leverage.

We have corporate insiders selling the farm, investment legends warning of a collapse, institutional investors selling stocks, and global growth slowing rapidly.

“Money amplifies our tendency to overreact, to swing from exuberance when things are going well to deep depression when they go wrong.”

For everyone whose bucket list included seeing a billionaire gathering which includes Warren Buffett, Mike Bloomberg and Lloyd Blankfein live at least one time, you can now cross that particular item off.

Volatility is the academic's choice for defining and measuring risk; but Oaktree Capital's Howard Marks warns Bloomberg TV's Stephanie Ruhle that "while volatility is quantifiable and machinable... it falls far short as 'the' definition of investment risk." In fact, he berates, "I don't think most investors fear volatility. In fact, I've never heard anyone say, 'The prospective return isn't high enough to warrant bearing all that volatility.' What they fear is the possibility of permanent loss." With $91 billion under management, perhaps it's worth listening to (and reading) his perspective: "In brief, if riskier investments could be counted on to produce higher returns, they wouldn’t be riskier. Misplaced reliance on the benefits of risk bearing has led investors to some very unpleasant surprises."

Does the use of leverage (properly defined) and derivatives (properly defined) create trading risks that wouldn’t be there if you just bought the Vanguard 60/40 fund and called it a day? Sure. But we believe risk-balancing strategies mitigate far more dangerous risks to a public pension portfolio – particularly an over-reliance on equity markets. Public pensions are complex entities whose liability structures are often many times greater than the size of their investment portfolios. The common practice to resolve this dilemma has been to pursue an equity-dominated asset structure that has greater chances of achieving the required return to make the entire structure work. The problem is that equities are themselves leveraged, but it’s hidden leverage and thus hidden risk.

• Islamic State executes soldiers, takes hostages at Syria base (Reuters)
• Buffett Burger King Funds Flip Obama’s Inversion Calculus (BBG)
• Equities Reach Record $66 Trillion as S&P 500 Hits 2,000 (BBG)
• Central Banks Playing Own Version of Plaza-opoly With FX (BBG)
• Russia court closes McDonald's branch for 90 days (Reuters)
• Finland Says NATO an Option After Russia ‘Violates’ Border Laws (BBG)
• Netanyahu Hit With Domestic Criticism Over Gaza Truce (BBG)
• Biggest Danish Fund Readies for Rate Shock as Exit Narrows (BBG)
• Nonprofit Hospitals' Profits Fall (WSJ)

President Obama would have proudly proclaimed Warren Buffett a true patriot in his bailing out of the banking system with expensive loans and his 'realization' that those earning more than $1 million should be tax-tax-taxed. However, the "Buffett Rule" appears to have one caveat... if you are making over a $1 billion, you're good to go with tax-avoidance strategies. In one of his career's most hypocritical moves Warren "tax-me-more" Buffett has decided that putting his money where his mouth is no longer makes sense.. and is funding $3billion of Burger King's "tax-inversion" takeover of Canada-based Tim Hortons. Somewhere on a golf course, a Presidential Putter is being snapped across a knee...

• That will teach the UAE who's boss: U.S. Won’t Consult Syria on Militant Strikes: White House (BBG)
• Putin Set to Meet Poroshenko as Ukraine Tensions Escalate (BBG)... but the de-escalation algo?
• Tim Hortons’ Canadian Fans Squeamish of American Hookup (BBG)
• Israeli air strikes target more Gaza high-rises (Reuters)
• How Steve Ballmer Became a Rookie Basketball Mogul (WSJ)
• Buffett to Help Finance Burger King Tax-Saving Deal (BBG)
• U.S. Factories Keep Losing Ground to Global Rivals (WSJ)
• Boehner, Camp Profit From Corporate Bid to Avoid U.S. Tax (BBG)
• Experimental U.S. hypersonic weapon destroyed seconds after launch (Reuters)
• The Neo-Neocons (WSJ)

The world’s central bankers have given companies the urge to merge. Merger and Acquisition (M&A) activity has already reached $2.2 trillion this year according to Thomson Reuters Deals Intelligence, up 70% from this time a year ago. The deals are big, with eight acquisitions, each over $5 billion, being announced in just a single week in July. However CEO buying sprees do not create new jobs and new products that make our lives better, but are instead just wasteful malinvestments that destroy capital. The cost of capital is integral to making these assumptions. The lower the assumed interest rate or cost of capital, the higher the price for the acquisition that the models will justify. Once interest rates go up, these valuation models will be blown to pieces.

• Barack Obama's 'vacation from hell' (Politico)
• Russian aid convoy checked; military vehicles mass near Ukraine (Reuters)
• Ukraine Says APCs Entered From Russia to Aid Insurgents (BBG)
• Islamic State Said to Challenge Al-Qaeda for Leadership (BBG)
• Missouri protests calmer after governor puts black police captain in charge (Reuters)
• Finally someone will prove the US is a pyramid scheme (in a 1000 page presentation): Ackman’s Pershing Square Sues U.S. Over Fannie, Freddie (BBG)
• Banks, Financial Firms Load Up on Cheap Debt (WSJ)
• Putin to Meet Finnish President as Threat of Cold War Grows (BBG)

"Far away from Congress is the real forgotten man, the taxpayer who foots the bill... For if human liberty is to survive in America, we must win the battle to restore honest money."

"the paper money disease here may take many years to run its course...but when that day arrives, our political rulers will probably find that foreign war and ruthless regimentation is the cunning alternative to domestic strife."

Up until this point Angela Merkel, and German media in general, had been staunchly on the side of the west when it comes to dealing with Russia, Putin and realpolitik in broader terms. That changed dramatically today when Gabor Steingart, the chief editor of Handelsblatt, Germany's leading economic newspaper, came out with a stunning op-ed, in German, English and Russian, titled simply that "The West on the wrong path" in which the editor comes out very vocally against the autopilot mode German media has been on for the past several months and calls for an end to a strategy of sanctions and Russian confrontation that ultimately "harms German interests" and is a dead end.

There is a war being conducted out there in the financial markets. A war between debtors and creditors, between governments and taxpayers, between banks and depositors, between the errors of the past and the hopes of the future. How can investors end up on the winning side ? History would seem to have the answers. We would argue today that central bank bubble-blowing has made the entire market high-risk, with a broad consensus that with interest rates at 300-year lows and bonds hysterically overpriced and facing the prospect of interest rate rises to boot, stocks are now "the only game in town". If history is any guide, the identity of the losers seems to be self-evident.