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Housing's Big Picture Isn't Pretty

It's disturbing when economists get so used to crunching numbers and watching charts that they come to think the future must be in the charts. Historical trend lines and long term averages are meaningless and have no bearing on where home values will bottom in this recession.

No home buyer or seller will ever check the 100 year trend line in making an offer or setting a list price.

It should be obvious that home prices will continue to be, as always, simply a function of supply and demand, with these long term historical trends having no causative effect. It's a mistake to use past results to predict the future. From 1900 to 2000, the Dow Jones Industrial Average rose 175 fold from 66 to 11,000. If that trend line holds, the DJIA will be at almost 2 MILLION in the year 2100! Ain't gonna happen.

Buffett Serving Free Lunch? (Part II)

Those puts Berkshire sold are big news now because of being such a large bet and just a few months old, while deep underwater. Truth is, by 2019, the major indices will be far above the strike prices and these worthless puts long-forgotten. The market is so cheap now in comparison with LONG TERM corporate earnings that by 2020 the market will long since have woken up and the Dow should be in the 20,000+ range and still at a reasonable P/E multiple.

Bear markets always forget that economic growth is a GEOMETRIC mathematical function, with profits being leveraged to grow faster than GDP. Every single bear market in US history would have made an excellent buy-in point. This one is no different.

Critics of this like to point out that someone buying the Dow in 1929 would not have broken even for some 25 years (dividends notwithstanding). But 1929 was no bear market; quite the opposite.

We are 45% down from the peak, so this does not resemble buying in 1929. Also, the dividend yield in the 30's and 40's was excellent due to depressed equity prices and worth owning even without share appreciation. So is the dividend yield now. 3% yield of the indices might not seem like a lot, but given that fact that dividend payers tend to grow their dividends, that 3% can be an annual yield of easily 15+% on original principal a dozen years hence.

How many over Buffet's long and stellar career have critiized positions he had when they were underwater? Where are they now and where is he?

The Financial Crisis: Getting the Best of Warren Buffett?

The recent criticisms of Buffet based on Berkshire shares falling or these so called derivatives he wrote are not well based. They are ignorant even. Buffet's genius lies in his ability to determine true risks and business moats, and to spot highly favorable math situations.

Though the insurance business is something of guesswork, which he admits, large premiums up front are super cheap capital which can be invested very profitably with his great expertise and the insurance business is thus not that risky.

BRK shares being down doesn't bother him. He knows that the businesses the shares represent will continue to grow earnings over time and have healthy and growing returns on equity, so if the market is beating down the companies he owns because of widespread pessimism, he'll be glad to buy more shares. Watch for his year end report and mark my words, you'll find he has been buying like crazy. That doesn't mean the shares won't fall further, but 5-10 years from now you can bet their earnings, book value, and eventually share price will climb very nicely.

As for the puts on the major indices starting around 2019, the buyer was an idiot! A dozen years out for at the money (current index level)! Any money manager of billions of $ ought to have better math skills and some knowledge of economic history. As long as GDP doesn't stagnate for a whole decade with little to no growth, the growing economy will be reflected in growing businesses that leverage even faster-growing profits. The beauty of an index bet is that you don't have to pick the winners. As long as the whole pie grows just as it has consistently (except during the Great Depression) since the days of the Pilgrims, Buffet will pay nothing on this bet.

The key is the simple and profound principle of long term compounding, which the stock market currently does not understand. The growth of an economy such as ours is by a percentage of the prior year rather than a fixed amount. That is why the DJIA grew 175-fold in the last century, from a value of 66 to 11,500, which is only 5.3% annually! The Dow was simply loosely tracking the GDP. Why anybody would pay serious money to protect against a stagnant or falling GDP after a dozen years is beyond me, given that history lesson. Buffet does not "play" in risky derivatives. Selling these puts was a steal.