Buffett, Boomers, & The End Of A Bygone Era

Authored by Paul Brodsky via Macro-Allocation.com,

Golden Age

Once upon a time the capital markets consisted of a fairly closed community, comprised on one side by mostly clever, well-connected men working together in syndicate to maintain control over national economic and financial affairs, and on the other side by mostly high earners spread disparately across the land hobnobbing with the syndicate’s local representatives.

It was a privileged ecosystem sanctioned by legally-greased law makers and reluctantly accepted by the great unwashed that acquiesced because capitalism was better than recently defeated fascism and postWar communism, and because, with hard work and production, they too could join the club.

A sequential series of naturally-occurring events successfully transformed and democratized the formerly clubby ecosystem, but in doing so embedded CAT 5 risks into the global productive economy. Consider...

  • Over-spending by US lawmakers in the 1960s led to the end of the global fixed exchange rate monetary system in the 1970s. US dollars and global assets could begin to be leveraged without limit. Global exporters of oil demanded more money in exchange for their finite resource.
  • In the early 1980s, the value of dollars (i.e., US interest rates) was raised to levels that created demand to hold them again, which in turn allowed global trade could resume.
  • Wall Street outsider, Drexel Burnham, using unregulated credit as tool to challenge the control of businesses and asset prices formerly determined unilaterally by the closed ecosystem.
  • Self-directed retirement accounts were created in 1986. They were promoted and adopted throughout society and opened the door for widespread interest in stocks and bonds.
  • The advent and broad adoption of digital technology in the 1980s and 1990s allowed limitless trade processing and easy record keeping.
  • Asset prices rose over time because debt could be easily refinanced at ever lower rates.
  • Law makers were consistently corrupted by their access to unlimited spending, brought about by the debt-generated appearance of broad prosperity through asset growth and political support from beneficiaries nearest to the credit distribution system.
  • Market regulators and economic policy makers were consistently corrupted by law makers exerting pressure on them not to upset the debt-fueled broad economy.
  • Economies successfully migrated from emphasizing private sector production and saving to emphasizing public/private financial management of equity and debt assets that cross collateralized government and household balance sheets.         

Economies became accounting schemes with mutable identities, which is where they stand today. Most Baby Boomers are blithely unaware or unconcerned about the gutting of production-based wealth creation and the unsustainability of the financially-based global economy they built. Gen Xers have trapped themselves between the unstoppable force of deflationary digitization they are building and the immovable object of The Boomers’ Rube Goldberg inflation machine.

Meanwhile, most Millennials care nothing of what was and could be, or of the structural changes they will be expected to endure. (Hey, Gen Xers and Millennials, stop voting for 70 year-olds! Find a 35 year-old to help reconstruct your future.)

A Soon-to-be Bygone Era

Check out the mystery graph immediately below.

Whatever it represents, we have been trained to think its hockey stick pattern must represent irrationality in some way, shape or form, right?

As we said...

We are fans of Mr. Buffett, admire his talent, and wish him a long, prosperous life, but we could think of no better way than his unquestioned success as a financial asset investor to get readers to begin thinking about what they accept as stable and what they accept as bubbles.

While the fact remains that Mr. Buffet has increased his net worth consistently throughout his long life (consistency the graph cannot show because his net worth at fourteen was too small relative to the last few figures), the parabolic rise of his net worth later in life poignantly symbolizes the timing of the underlying shift from production to finance. As he insists in his folksy, humble way, he happens to be the very rare exception in the universe of investors, and if it were not him it would be someone else.

As usual, he is right but oversimplifying things. We can do that too. His investment style, that began as Graham value and drifted into a hybrid that included macro and distressed, always had one unifying constant: inflation. Berkshire and its holdings include insurance and consumer brands with unrivaled moats. All or most of his businesses have had pricing power, which is to say insurance premiums paid today will likely always be higher than claims tomorrow in future dollars, and Coca Cola will likely always keep its profit margins whether a can sells for a nickel or $5. Further, the structure of Mr. Buffet’s investment portfolio means he has been able to defer most of his taxes in perpetuity. 

Mr. Buffet was born in 1930 and so he was positioned to make hay when the golden age of credit and asset inflation arrived.
He has been a professional investor for sixty years. He increased his net worth by about 10,000 times in his first 30 years, from 1956 to 1986 (v. the S&P 500, up about 5 times), and by about 55 times in his second thirty years, from 1986 to now (v. S&P 500, up about 12 times). Don’t let his folksy humility fool you; his talent allowed him to get rich quick many times over six decades.

We have two main observations:

1) Warren Buffet is that very rare individual who was already well-staked, able to quickly identify the shift from production to finance, and then willing to optimize his investment strategy to suit it, and;


2) he would have performed even better with his original brand of value investing had the US policy makers not encouraged every Tom, Dick and Mary to use the public markets as piggy banks. 

Mr. Buffet’s experience in public asset markets is not repeatable.

Already high valuations, investor participation and economic leverage levels ensure that public markets will provide the mass of investors, and even one that may come along as talented as he, with the inability to produce significant real alpha. It was fitting that the Oracle himself predicted last week that the Dow Jones Industrial Average would hit 1,000,000 in the next hundred years. That implies only a 3.87% compounded annual return before inflation. Who are we to argue with the golden boy in his golden years?  


LindseyNarrate… Mon, 09/25/2017 - 15:31 Permalink

WE MUST START CALLING-OUT (((who))) IS DOING THIS TO US, ALL, AND (((why))) IT IS, ALL, HAPPENING, FOLKS, OR WE ARE GOING TO NOT "JUST" GET NOWHERE, WE ARE FUCKING DOOMED. http://whoolisblog.blogspot.com/2017/09/lindsey-from-atlanta-on-ksco-11… call-in of mine, was dealing with the critical-importance of nationalism, in-saving our nations of "The West", and how TOTALLY-DESTRUCTIVE (((multi-culturalism))) is, and how (((it))) has been used by (((the cabal))) to DILUTE, and to DEGENERATE/DESTROY, PHYSICALLY, our nations of "The West".I used what happened to, and with, Iceland in 2007-2008, AND THE SMALL, AND VERY NATIONALISTIC, NATION, SAVING ITSELF, BY COMING-TOGETHER, AS NATIONALS, AND DOING WHAT NO OTHER NATION THAT WAS UNDER-ATTACK, THEN, WAS ABLE TO DO, as THE primary-example of how ONLY nationalism will save us, and that it is time for people to stop lying-to-themselves, being intellectually-dis-honest, AND REALIZE THE TRUTH OF WHAT IS HAPPENING, AND (((who))) IS DOING THIS TO US, ALL.Lindsey

Paul Kersey Chipped ham Mon, 09/25/2017 - 17:16 Permalink

"had the US policy makers not encouraged every Tom, Dick and Mary to use the public markets as piggy banks."

Tom, Dick and Mary are broke and have no piggy banks. 78% of Americans are living paycheck to paycheck. Meanwhile, Buffett is a multi-billion dollar financial criminal.

Wells Fargo Bank and Moody's, which Buffett owns, have one purpose, and that is to separate Americans, by any means necessary, from any wealth or earnings they may ever have. It's hard to know how many hundreds of millions of dollars Well Fargo has been fined for getting caught in criminal enterprises, but there is no doubt that those criminal enterprises have earned the bank hundreds of billions of dollars. Moody's, of course, gave worthless sub-prime mortgage backed CDOs AAA ratings. Buffett is less reputable than a common horse thief, and you know what they used to do with horse thieves (and what they should have done to house thieves).

In reply to by Chipped ham

Endgame Napoleon BaBaBouy Mon, 09/25/2017 - 16:46 Permalink

For the rich, the status quo is a gravy train, assuming their assets are not Yugely overvalued. Some articles suggest most of the leading companies are overvalued.

Buffett must think the status-quo globalism and the "accounting-based economy," as opposed to the production-based economy that he grew up in, will prevail.

Trump talked a lot about changing the economy, structurally, shifting it back to a production-based model. It helped him win the election due to all of the millions of U.S. citizens whose lives are much worse than the lives of the majority of Baby Boomers and older generations, like Buffett's.

It is funny how the Baby Boomers took the success of the production-based economy built by the Greatest Generation and the ones that came right after them for granted, shirking it for this rigged-up accounting-style economy, with a few brilliant ones capitalizing on its demise to the max.

You can't blame Buffett for using his talents. Politicians did not have to set economic policy to destroy the U.S. middle class. Policymaking is their job. The Swamp is just corrupt. And I do think we need some younger people to run for office.

The Gen X, my generation, came of age right in the middle of that shift to a globalist, "accounting-style" economy. A lot of Xer politicians are invested in promoting that type of thinking. But age is no panacea. Sometimes, young people get too caught up in theory, ungrounded by life experience. It cannot get worse than the Swampians, though.

In reply to by BaBaBouy

LindseyNarrate… LindseyNarrate… Mon, 09/25/2017 - 15:51 Permalink

 Make sure to post the following, in other chat-rooms, and message-boards, that you people frequent, OK?: http://www.yahoo.com/news/pittsburgh-steelers-stay-off-field-173325595.htmlREAD THE COMMENTS..."(212)450-2000 Call the league office during the week and let them know how you feel! This was on at "Soldier Field"? What a bunch of disrespectful pigs! NFL is going be hurting bad after this week!"Please call them, and let them know you feel, about the players, AND COACHES, dis-respecting our NATION, and PRESIDENT TRUMP. Lindsey

In reply to by LindseyNarrate…

armageddon addahere svs9000 Mon, 09/25/2017 - 18:16 Permalink

He started with a paper route at 10. Tnen he added another paper route, and another, and another, and another. By the time he was 14 he had 4 paper routes, all delivered by other boys while he collected the money.He also bought used golf balls in bulk and resold them by the dozen to his father's friends. He used to laugh about how he made more money than the guy who gathered them up and sold them.Somewhere along there he began to buy used pinball machines and place them in bars and barber shops.He was not poor when he did all this, his father was a US Congressman in Washington DC. He did not do it for food or warm clothes, he did it because he was an incurable greed head from the day he was born.

In reply to by svs9000

chubbar Mon, 09/25/2017 - 15:31 Permalink

Oh Bullshit. The "Baby boomers" didn't have fuck all to say about NAFTA, CAFTA or any of the other multitude legislations that drove our manufacturing offshore. No one that I know either wanted or voted for this shit. Just like we have nothing to say about pulling the troops out of the Mid East.

Rubicon727 Bes Mon, 09/25/2017 - 18:34 Permalink

"oligarchy puff piece"Someone needs to hire a large ship that easily traverses the rough Atlantic Ocean. Fill it with the top 6,000 criminal oligarchs and let them sink into the vast terrain of a very angry ocean. Make sure ALL of their stolen billions are distributed evenly to the most hard-pressed billions of human beings. 

In reply to by Bes

Grandad Grumps Mon, 09/25/2017 - 15:33 Permalink

I think that Buffet might say that being rich makes him a better person than others. He might not... but he has not deviated from accumulating more wealth in favor of spiritual or other pursuits.

Endgame Napoleon Grandad Grumps Mon, 09/25/2017 - 17:50 Permalink

He was probably just good at mathematical thinking. When someone is good at something, it goes against human nature not to do it.

The current rigged, globalist economy is the fault of corrupt politicans. We need politicians that represent Americans citizens--naturalized and native-born--not elected politicians who represent the interests of their global business contacts, corporate lobbyists, the low-cost labor in other countries and the low-cost labor that we import.

Due to the money grubbing of The Swamp, it is almost impossible to get this simple representation of your economic interests as an individual, non-crony voter in a Republic.

The Swamp even makes committee chair appointments based not on expertise, but on how much money the particular Swampian has raised for his/her party. When elected leaders must raise money from multinational corporate lobbyists to get anywhere in The Swamp, how can they make economic policy in an unbiased, fair way?


In reply to by Grandad Grumps

venturen Mon, 09/25/2017 - 15:39 Permalink

he is so sad....people like carniegie, rockfeller and numerous other "robber barons" made tons of money and then set about improving society. This guy only knows one thing MAKING MONEY...he doesn't even know how to enjoy it....Really a pathatic human!

Endgame Napoleon venturen Mon, 09/25/2017 - 17:56 Permalink

He bought into the globalist philanthropy model, whereas the Rockefellers gave an enormous amount to their own country:

Huge amounts of land worth billions for the national parks;

A whole university (The University of Chicago);

A free (to anyone) hospital, staffed with something like 24 nobel laureates;


Carnegie gave a ton to this county -- the USA -- too.

Vanderbilt gave some.

In reply to by venturen

amadeus39 venturen Mon, 09/25/2017 - 19:47 Permalink

He enjoys making it. It's a game that he is good at. Do you enjoy playing a game that your good at and win a lot.  Why is that difficult for you to understand? Maybe your not good at playing games. Maybe your a loser in life. Life is a game. Play to win by enjoying it. If you have enjoyed your life then you are a winner. Mr Buffett is a winner. .  

In reply to by venturen

ThePhantom Mon, 09/25/2017 - 15:41 Permalink

I know some boomers ... they watch at least 2 hours of MSNBC every night.. all i hear for months and months is russia this russia that russia russsia russia russsia russia russia ... its that bad. they are fucking morons.. try to tell them something they don't know and wham they think maybe they should jump around like a fucking ape and maybe kill you....crazy fucking retards wont' even investigate themselves. what can you do for morons? they will only try and kill you.

amadeus39 Rainman Tue, 09/26/2017 - 12:20 Permalink

Why state the obvious...and meaningless. If he sold all his equity before he dies, he would tank the markets big-time. He won't do that because he is one of the good guys. He will also have donated most of his liquid wealth to worthy, charitable causes. He's a better man than me and you...you twit. 

In reply to by Rainman