CaptainJJack

Berkshire Hathaway Stock Portfolio: At Risk of Resembling an Index Fund?

I own BNI, and I disagree with Berkowitz and the critics of Buffet's deal.

Yes, he paid a lot. But, in my opinion, you get a lot when you become an insider.

But, by far, the overriding dynamic is that railroads are now clear monopolies in most of the areas they operate. Just look at a railroad map of the US, and you find little overlap.

The main competition is trucking, and if you look at the economics of that business, you find it turns on finding and holding on to truck drivers.

Their key constraint is capital: They have to find a way to fund the initial costs of a trucker getting into the business. I haven't seen much on this lately, but I am guessing that banks are reluctant to loan person enough money to buy a rig and finance their first years in operation.

So, I think the railroads will be very profitable in the future, and I am willing to bet rates will rise even if other prices are falling.

Stock Market Still Riding a Thermal Wave

While I cannot argue that the stock market is likely going to correct at some time, I think it is more do to future GDP expectations being too high than it is due to excess liquidity.

The issue is not the STOCK of money, which we all know is VERY high, it is the FLOW of money, which has been very, very low.

Contrary to all the gold bugs, just because Treasury floats a lot of debt, and the Fed buys that debt, does NOT mean there is excess liquidity in the system. All that means is that the banks have a lot of money to lend, but if they do not lend it, the system liquidity is unchanged.

When the banks start ACTUALLY lending money, THAT'S when there will be excess liquidity in the system, and every thing I read says they are not lending to the private sector.

As I see it, there are two problems: people quit buying things, and banks are worried about the loans they hold now -- they are worried about capital adequacy.

If you want to worry about something, worry about this: by implicit agreement with the Fed, the banks are borrowing (deposits) from the Fed (I.e. the excess money supply), and they are buying long US government bonds. This is a common strategy employed by the Fed to recapitalize the banks.

It is also providing a convenient back door way the monetize the debt, temporarily, as the banks buy what the Fed would have had to buy if it wanted to monetize the debt, as the gold bugs fear. Treasury is happy, too, because it has a buyer to fund the US deficits (i.e. banks ARE lending, but only to the US government)

BUT, this is a very dangerous game. The Fed has little real control over the long end of the curve, and if the long rates start to increase, the banks could face HUGE losses in their long bond portfolio.

And THESE losses are marked to market immediately.

Finally, I have to admit, I do not understand the carry trade. I used to think that it was a way to get LEVERAGE in a country whose interest rates are low and whose currency is expected to remain stable or weak.

While the dollar debt would make sense, GIVEN the ability to borrow against your capital, I cannot imagine why a bank would want to lend to a hedge fund on this basis without requiring so much overcapitalization that the trade makes no sense.

Erosion in the M2:M1 Relationship and the Burgeoning Eurodollar Bubble

The carry trade is only a piece of the puzzle. The key, to me, is leverage.

If I take a $1million of treasury bond and use it as collateral for overnight borrowing, I haven't increased my leverage.

As I understood the Japanese Carry Trade, a hedge fund would BORROW at 35 to1, AND THEN take the money and use it as collateral to borrow in Japanese Yen and Japanese interest rates.

Without the initial leverage, the transaction doesn't make much sense to me.

The question I have, then, is who is lending to the hedge fund at 35 to 1?

Or do I have this wrong?

And Bernanke Didn't Think Unemployment Would Reach 10%

Come in waves, do they?

You must be very rich. After all, since these waves come around so often, you must have been in short term Treasuries before this last crisis, and since it was a wave, you must have bought around the bottom knowing it will eventually turn up.

In 1982, Barrons ran story showing that if you bought a single interest rate futures contract in 1975, and ALL YOU DID was call the right DIRECTION of interest rates in each of the successive three months, and kept rolling over your gains, you would have been worth $3 BILLION.

They went on to say that since they didn't see a lot of 3 billionaires walking around Wall Street, it might have been harder than it looked.

By the way, when are we going to get the next wave?


On Nov 08 11:48 AM Michael Clark wrote:

> Check back in 2019 and we'll see if they really avoided the Depression.
> These things come in waves.
>
> In the 1930's:
> 1929-1932: depression wave.
> 1932-1935: recovery wave.
> 1936-7: depression wave.
> 1937-38: recovery wave.
> 1939-45: world war depression wave.
> 1944-46: recovery wave.
> 1946-47: depression wave.
>
> Don't be surprised when the next wave hits: 2010.
>
> Don't give any Nobel Prizes out just yet to Bernanke and Hank Paulson
> (Paulson will go down in history as the greatest Plunder Artist in
> the history of the world). He has his own place in Hell reserved
> for him, next to Crassus and Plutus.

And Bernanke Didn't Think Unemployment Would Reach 10%

Well, let's see.

The alternative plan promoted by the Republican house was a tax cut bill that amounted to $400 billion split between individuals (2/3) and business (1/3).

The current stimulus has about $250 billion in individual tax cuts and very little business tax cuts.

However, since businesses lost money, last year, and since over 90% of small business file as individuals anyway, the effect would be about what we are seeing now.

Further, since most investments are in qualified plans, Capital gains taxes no longer have any significant effect, it is hard to argue that ANY cut in capital gains taxes would do much.

SO, I conclude that Obama administration underestimated the mess we were in, but they did a FAR better job than Bush and Republicans would have done.

If we would have followed the Republican plan, we would have decimated our capital stock FAR worse than we have already done. Creative destruction is one thing, but allowing whole industries to disappear, together with all the skills involved, is quite another.

As for the deficit, Bush was racking up trillion dollar deficits, but like all good politicians, he hid a third of it in Off Balance Sheet items.

While Bernanke and Paulson should have done more to prevent this mess, I would give them both Presidential Medals for avoiding a Depression.

By the way, when you compare today with the Depression, remember to include the fact that the unemployment numbers in the Depression INCLUDED unemployed farm workers.

Finally, I could find THOUSANDS of quotes that could embarrass either side of this debate.

Your analysis adds very little.

Obama's Donut Economics

You can add tax policy to the list of ineffective job creation ideas.

The tax cuts under Bush helped low wage workers buy more Chinese goods at WalMart and high wage workers buy more BMWs from Germany.

You factor out the purchases financed by home equity loans, and the US GDP did not grow at all under Bush lower taxes.

Obama's tax cuts are no better and are about as effective as the tax cuts last year. What people didn't save, they bought from China.

Who Is Really to Blame for the Deficit?

This is the best article I've seen on the subject, and I think it assesses the blame about right: Bush got us into this mess (especially the 2001 tax cuts and the Iraq war), and Obama continues most of his policies.

The big one, though, is Medicare. If we don't get the Medicare costs under control, there is no way to balance the budget, or even close.

And we are running out of time. If we don't fix this soon, the interest on the debt alone will be so big no tax increase and/or spending cuts will work.

It's like have a credit card where the balance is so big, you can't make the minimum payment.

Is the Employment Picture Really Better Now than in 1933?

The biggest difference between the 30s and now is that we do not include farm employment in today's number. If we measured just non-farm employment in the 30s, the unemployment number would reach well into the 35% range.

Putting it differently, we could have zero unemployment TOMORROW.

All we would need do is outlaw farm machinery.

Why Is the U.S. Borrowing Less from Abroad?

The reason we are borrowing less is that we are BUYING less from abroad. The major portion of the borrowing was seller financing -- i.e China loaned money to us to buy their goods.

The borrowing had been going on for a long time, at relatively low levels, until the Bush tax cuts of 2001. In effect, Bush borrowed $2 trillion and gave it away as tax cuts so that the rich could buy luxury goods and the poor could go to Wal-Mart and buy stuff from China.

He also borrowed another $1 trillion for the war in Iraq.

Even if the stimulus had not passed, the "real" budget Bush left us, which included all of his off-budget military expenses, was $1.2 trillion.

All of this borrowing was not a problem (Cheney: "deficits don't matter") until Obama started doing it.

Reinstate the Uptick Rule?

You make the false argument that anybody wants to do away with short selling. I want regulations for short selling, but I do not propse doing away with it.

There primary benefit of short selling is price discovery. At an average of 2 billion + shares traded a day, liquidity is not the primary benefit.

However, there is NO public good served by manipulating a stock price of a given company. I believe that it is possible to do this in an unregulated market --- that is why I think regulations are needed.

Stated a different way, markets are NOT efficient, nor are they necessarily self correcting.

While the uptick rule is not a particularly effective rule in most cases, there is some benefit in extreme cases.


On May 14 12:04 PM viewfromnyc wrote:

> Traders realize a few things about markets. There are many different
> types of participants in the equity market, to list a few; short
> term momentum traders, hedgers, speculators, long term value holders,
> long term growth (momentum), short sellers, mean reversion traders.
> Understanding the interaction between and the behaviors of the different
> types of participants helps the best traders and investors profit.
> Introducing an asymmetry in the market through an uptick rule simply
> creates an environment that favors long sellers over short sellers.
> The tick rule allows long sellers to sell first and at a higher price,
> compare the hypothetical execution of a long sell market order and
> a short sell market order in a decling market. The long seller will
> tap out the first bid and the short seller's trade won't get executed
> unitl the market stops declining and ticks up.
>
> In capitalism, the main purpose of a stock market is to lower the
> cost of equity capital by providing liquidity. Anything that reduces
> liquidity, e.g. restricting short sales through a tick test, raises
> the cost of capital for companies that raise capital. Short sellers
> are the only market participants that eventually need to buy. Removing
> or reducing the participation leads to higher volatility, since short
> selling has a potential dampening effect as they amplify the effect
> of mean reversion value investors, buying in big declines and selling
> on big moves up. All those who are skeptical of the academic work
> on short selling that led to the removal of the up tick rule by the
> SEC, should look at the Australian market during the period when
> short selling was banned.
>
> Finally as a long time arbitrageur, the outcry over naked short selling
> is completely overblown. For the past 15 years that I have been
> in the market almost every NYSE and actively traded NASDAQ stock
> has been available to borrow, albeit some at a steep cost as high
> -30% rebate. Naked short selling is only a problem in the penny
> stock and OTCBB arenas where no real investors should be anyway.

Reinstate the Uptick Rule?

Correction: "the shorts have limited downside (par value)".

This should be: "the shorts have limited downside -- the loss of the CDS premium paid"

Reinstate the Uptick Rule?

I completely disagree, but I think fixing just the uptick rule is like locking one car door.

The public policy benefit of short selling is primarily price discovery, and before the CDS market, the fact that shorts faced unlimited risk, as the shorted stock price rose, but limited gain, as stock prices fell, prevented the manipulation we have seen, especially in the banking stocks. In effect this asymmetry provided a policing mechanism.

Now, however, the shorts can have this asymmetry work for them -- just short the bonds by buying credit default insurance without holding the underlying bond.

In the CDS market, the reverse is now true -- the shorts have limited downside (par value), and very high upside (the difference between the premium and the par value). This allows them to significantly affect the bond's pricing.

This strategy is especially effective in the financial sector because the primary things that banks trade on is security and trust (you can see for yourself from the last 6 months that this strategy works far better with banks than with industrials).

All you have to do is put on a huge short position in the bonds, buy some levered puts, and possibly put on a limited short starting position in the stock --- and then allow the rumors to start flowing on why the "CDS spreads on Goldman blew out" (not that these hedge funds would have ANYTHING to do with starting the rumors).

Add to this the fact that some banks ARE insolvent and deserve a low stock price, and you can send fear throughout the entire banking sector, causing the banks to stop lending even among themselves.

Once this spiral starts, you just simply continue to pile on with levered puts and you and your buddies can drive the stocks of the industry down to zero.

The big issue for me is that the short selling asymmetry is largely gone, and this significantly reduces the risk in a short position. This needs to be fixed -- and soon.



On May 14 08:32 AM Baboon wrote:

> People should leave short-selling alone. Short-selling has nothing
> to do with the current crisis. The stock market collapsed in 2008
> because of the long sellers (who didn't see the value in companies
> that were about to slash their dividends) not short sellers. People
> get used to the idea that the stock market does not always go up.
> Spread your investment between uncorrelated asset classes to minimize
> the risk instead of looking for a scapegoat.

Will Deficit Stimulus Spending Help or Hurt Economic Recovery?

The biggest reason for government stimulus, in my opinion, is to preserve our capital base in key industries. With tax reductions, the private sector decides more of the winners and losers, and with government spending, the government has the key say.

While everyone would (should) immediately gravitate to the lower tax/private model, there have been HUGE issues:

The effect of investment tax reductions like those of Kennedy and Reagan, have been largely eliminated due to 401(k), IRA, and other qualified plans. If I remember right 70% of equity capital is ALREADY tax free -- tax deductions have lost a lot of their impact.

Private sector allocations include offshore. The 2001 tax deductions encouraged a lot of buying BMWs from the Germans (the rich) and buying Chinese goods at WalMart (the middle class/poor). Capital stock was eliminated in the US in favor of lower capital/labor costs offshore.

The corresponding foreign dollar surpluses drove a huge US investment by foreigners in "investment grade" MBS securities and quasi government securities, like FNMA, and the sheer flood of capital coming back to the US had a big part in the last bubble.

Now government spending has its own issues, the biggest being that the government calls winners and losers.

But we are so close to losing control over our manufacturing base that we do not have much choice, in my opinion. This is morphing into a national security issue as much as it is economic.

Obama Wants a 'Better Plan'? Here's One: Bite the Bullet

There is a profound difference between today and other recessions I lived through. What we are going through right now is closer to a depression than a recession. As Ray Dalio puts it, it is a D-process.

We are going through the painful effects of de-leveraging, the painful effect of a downward spiral in globalization, and the unintended consequences that always occur when the government gets involved.

However, I see no reason to support the idea that we now should slide into a depression based on your belief system.

I am always amazed at comments that we are facing hyperinflation when the velocity of money has fallen off a cliff. YES the FED is printing money, and YES the FED is monetizing some of the debt.

But, to suggest that this automatically leads to hyperinflation when the value of EVERY asset class, other than gold, has fallen dramatically, makes no sense to me.

If anyone seriously thinks that nationalizing Citi or BofA will lead to a better outcome with the Feds running it would have to prove to me that the Feds, with all of the attendant politicization, are better at managing banks --- something I have not ever seen.

I would suggest there are PROFOUND differences between the economies of Norway and the US. For example, the politicians in Norway get very high ratings and have a high degree of credibility;i.e. people trust that the government would do a good job.

Finally, the Japan crisis was more than just "zombie" banks, as I read it. It was the fact that the banks were continuing to prop up their insolvent sister companies in their Keiretsu. They were not only holding bad loans at book value, they were loaning to insolvent entities, making the problem worse.

G-20 on Protectionism: A Cause for Optimism?

You do not need to hypothesize about how free trade does or does not work, over time. All you need do is look at the US. While there are limits to this analogy, especially in the area of taxes and incentives, I think it is a useful one.

The US is the largest economy in history, and WITHIN its borders, there is virtually free trade. So, let's think about how that has turned out, over the years.

We see that over time, lower value manufacturing shifted from the North to the South. Even car assembly plants (foreign, mostly), have centered in the mid south, but other manufacturing, like weaving and clothing moved down.

We see that states with great research universities created high value jobs that more than made up for the losses to the economy of the manufacturing shift --- but this took a lot of time, and caused a lot of pain.

Think about all the efforts to stop a plant closing or a merger because of the effect on the local economy. But, think also about how new capital flowed to technology and innovation in new and different areas of the country.

The US benefited from the "Globilization", writ small, and the huge winners as well as losers and ghost towns predict fairly well, I think, the future of globalization brought to a world scale.

But, politically, it is impossible for a country to become a sustained loser, and the easiest solution is to "keep what you have". Political stability is traded for the chance to win in the world markets

So, it is not surprising that politicians hedge their words promoting free trade because, in the end, it is a promise they may not be able to keep.