Buffett's Bailout: Let's Call it 'Trickle-Up' Economics

In our view, the situation on Wall Street has moved into a new and dangerous realm. Warren Buffett has decided to pony up a large amount of capital to Goldman Sachs (GS). Mr. Paulson, a man with long and deep interests in Goldman, is telling everybody that will listen that we must immediately approve a plan that would give him broad and unchecked powers to provide an additional $700 billion to whomever he sees fit to accept it. No strings attached.

The US public and our representatives in Washington on both sides of the aisle are not buying it. They want the clean baby but not the bathwater. The US dollar is weakening on the prospect of an upcoming need for $1 trillion of fresh US debt and gold and oil are up in a flight to quality mixed with the effect of a weakening dollar.

The bailout will pass before next week in an altered form and the markets will rally on the news. The world will buy our debt and the dollar will stabilize. The commodities, which are rising on anxiety, will reverse course on much slower global growth. Indeed, we have begun hearing the D word again; deflation.

Probably the most critical news is Mr. Buffett's investment in GS. We applaud the man. He is leading the way in private equity bailing out the banks as opposed to socialization.

The question for us is, should we follow his lead and begin buying?

We are willing to hold off for now in order to tilt the probabilities in our favor. While we may miss an initial surge, we can still participate on the follow-through rally. Mr. Buffett secured a perpetual preferred in Goldman that yields 10% and is backed by a government put. If we were to buy GS here at approximately $130 per share, we do not receive any guaranteed yield. Did we forget to mention the GS warrants entitling Berkshire Hathaway (BRK.A) (BRK.B) to buy billions of GS in the future at a share price of $115?

Again, we applaud Mr. Buffett's bailout. Politically, we understand Washington's reluctance to capitulate to the administrations demands but, the clock is ticking and the machine needs more grease.

We will commit our capital once we see follow through in an upcoming rally.

Disclosure: Author holds a small position in IWM

Comments

[Shaggieman:]

I don't trust Buffet, Paulson or Bernanke to do what's right for this country and I say "NO MORE TAXPAYER DOLLARS."

2008 Sep 24 11:03 AM

[User 143167:]

So you think if the government does throw another 700b to the market and the oil price will go down due to deflation outlooks? and it is a boost to the confidence in dollar?
With US imports jumped off the cliff and oil prices down, you still think OPEC countries and Chinese just can't wait to refinance the US while their own surplus are evaporating?
You also think the market will rally with a deflation outlook but tell me for when can house prices stablize under deflation? Or probably you believe the market will rally with a continueously slumping housing prices?
I don't know what you are eating, but I do want part of them.

2008 Sep 24 12:05 PM