Warren Buffett

Life ain’t fair

Here we come:

• MOODY'S CUTS 4 FIRMS BY 1 NOTCH
• MOODY'S CUTS 10 FIRMS' RATINGS BY 2 NOTCHES
• MOODY'S CUTS 1 FIRM BY 3 NOTCHES
• MORGAN STANLEY L-T SR DEBT CUT TO Baa1 FROM A2 BY MOODY'S
• MOODY'S CUTS MORGAN STANLEY 2 LEVELS, HAD SEEN UP TO 3
• MORGAN STANLEY OUTLOOK NEGATIVE BY MOODY'S
• MORGAN STANLEY S-T RATING CUT TO P-2 FROM P-1 BY MOODY'S
• BANK OF AMERICA L-T SR DEBT CUT TO Baa2 BY MOODY'S;OUTLOOK NEG

So the reason for the delay were last minute negotiations, most certainly involving extensive monetary explanations, by Morgan Stanley's Gorman (potentially with Moody's investor Warren Buffett on the call) to get only a two notch downgrade. And Wall Street wins again.

• Greek radical leftist SYRIZA leader Tsipras says will not join coalition government (as expected)
• Egypt Islamists claim presidency as army tightens grip (Reuters)
• French Socialists vow reforms after big poll win (Reuters)
• Greeks Back European Bailout (WSJ)
• France, Socialists Win a Solid Majority (WSJ)
• Denmark Warns over Pressure on Krone (FT)
• Obama to press Putin on Syria at G20 amid skepticism (Reuters)... Putin to smile
• China Home Prices Fall in Record No. of Cities (Bloomberg)
• Europe Gets Emerging Market Crisis Ultimatum As G-20 Meet (Bloomberg)
• Wolfgang Münchau – What Happens if Angela Merkel Does Get Her Way (FT)

What makes for a good investment is price. Price is everything. You need to receive value in excess of the price paid. An investment’s value is the amount of real cash its underlying assets can reasonably be expected to deliver to its shareholders in the future, discounted for its risk – period. The investment’s price will either be higher than its value (an uncompensated risk), the same as (neutral) or lower than its value (a compensated risk). But since value is an imprecise measurement, the best one can do is to build in a margin of safety by buying investments that are at deep discounts to a reasonable estimated value. Too many investors let an investment’s short-term price movements, or perceptions of short-term price movements drive their decisions. But since short-term price moves are unknowable, irrelevant and independent of investment merits, this is not worthy of any time spent analyzing. If short-term price moves were knowable, then a cadre of top-performing chartists and market technicians would have far greater net worths than Warren Buffett, Charlie Munger and the Saudi Royal Family. They would need only apply leverage to their process and repeat it a few times in order to accrue hundreds of billions of dollars. Question: How many market technicians occupy the Forbes 400? Answer: Zero. Why? Because successfully guessing future price moves based on charts, MACD indicators or tea leaves is not a repeatable process. Investors who do this generally have poor outcomes because they are pursuing answers to the wrong question.

The right question is: where is the value?

Greece, Spain, Portugal, Italy and others besides have fallen into the trap of bribing their electorates with promises that become ever more unsustainable. In each of these states, expectations have been created that cannot be met and that cannot now be undone. This is surely a recipe for social unrest. These will not be the only countries to succumb to failure. The national debt, the unaffordable long-term cost of social security, health care and a myriad other entitlements and the mounting evidence of the insolvent state point to the same outcome for the UK and the US. Failure is ensured; the more pressing question is, what happens next?

Experienced investors try to avoid the "confirmation bias" trap by asking what supports the other side of the trade. Confirmation bias is our instinct to find data to support our position once it is taken. To counter this bias, we must attempt to build a plausible case against our position. If the effort is sincere, we gain a fuller understanding of the market we are playing (or perhaps avoiding). That the global economy is going to heck in a handbasket is self-evident. If you over-weight anecdotal "on the ground" evidence and fade the ginned-up official statistics, it is obvious the global slowdown is picking up speed in Europe and China, two of the world's largest "linchpin" economies.

John Maynard Keynes, Charlie Munger and Warren Buffett all said or implied that gold was a barbarous relic. But what’s the barbarous relic? The precious metal that shows prices without a veneer of manipulation, or the paper currency that smudges the true state of supply and demand through money printing, thus misleading markets and society? Charlie Munger says gold is not for civilised people, but in reality gold may be the most civilised currency of all — because it allows civilised people to purchase insurance against the risk of civilisation failing.

Explaining why and how the global monetary system is failing, why it is too late to stop, what will come next, and why the crisis is only financial – not commercial.

• China Industrial Output Growth Slows Sharply In April (WSJ)
• Indian industrial output shrinks unexpectedly (AFP)
• China’s Inflation Moderates, Adding Room for Easing (Bloomberg)... a nickel for every "imminent RRR-cut" prediction
• Drew Built 30-Year JPMorgan Career Embracing Risk (Bloomberg)
• Spain Offered Time to Curb Deficit (FT)
• France Entrepreneurs Flee From Hollande Wealth Rejection (BBG)
• Venizelos Eyes Unity Deal After Agreement With Democratic Left (Ekathimerini)
• Berlin Reaches Out to the Periphery (FT)
• Bernanke Speaks About Risks From End of Pro-Growth Plans (Bloomberg)

As can be seen in the attached clip Warren Buffett, as part of his anti money tirade, both real (gold) and fiat, the Chairman of Berkshire is certainly not a fan of holding cash in any form. To wit: "cash is as risky an asset you can own over time." In other words, the opportunity cost of not owning something else with that cash is indicative of even more risk in the equities arena. So one wonders: is the fact that Buffett's firm now has a record amount of cash on its books more an example of senility or hypocrisy.... Or is all hell about to break loose as per Buffett's own words? We can't decide.

While Charlie Munger has so far to comment on the 24K content of made in the basement tribalware, he and his partner have made quite a few other statements on items ranging far and wide, during the annual Berkshire Omaha convention, which year after year represents the annual pilgrimage for thousands to a crony capitalist Mecca, and which with the passage of time, has become increasingly more irrelevant. Why? Because with a $58 billion bet (on $37.8 billion in cash and equivalents) that asset prices will go higher, it is rather clear on what side of the 'bail out' argument, and its 'all in' fallback: central planning, Warren Buffett sits. 

Those calling for taxing the richest more are not doing the same cost-benefit analysis I am doing that suggests that raising taxes won’t raise more revenue. But they’re not unfairly looking for a scapegoat, either. While probably the greatest culprits for the problems of recent are in government (Bush, Greenspan, Obama, Bernanke) Americans are right to be mad at the rich.

Why?

This isn’t about tax. This is about jobs, and growth. The rich, above and beyond any other group have the ability to ameliorate the economic malaise by spending and creating jobs, creating new products and new wealth. The top 1% control 42% of all financial wealth. But that money isn’t moving very much at all— the velocity of money is at historic lows. It should not be surprising that growth remains depressed and unemployment remains stubbornly high.

I have to confess, I am tired of writing "structured" articles, the ones where I have to limit my thoughts to 800 words.  So with this one I am taking a break.  This is an unstructured stream of thought, in no particular sequence.  

• China’s Biggest Banks Are Squeezed for Capital (NYT)
• Greeks detect hypocrisy as Dutch coalition stumbles (Reuters)
• Hollande Blames Europe’s Austerity Plan for Le Pen’s Rise (Bloomberg)
• In a Change, Mexico Reins In Its Oil Monopoly (NYT)
• China Tire Demand Slows as Economy Decelerates, Bridgestone Says (Bloomberg)
• Social Security’s financial forecast gets darker; Medicare’s outlook unchanged (WaPo)
• Fed’s 17 Rate Forecasts May Confuse More Than Clarify (Bloomberg)
• Senate to vote on array of Postal Service overhaul proposals (WaPo)
• Weidmann Says Bundesbank Is Preserving Euro Stability (Bloomberg)

Is the "rest of the world" finally discovering the Exter inverted pyramid?