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Warren Buffet's Annual Shareholder Letter 2011

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Look at his rant against gold.

 

Breathtaking.

 

 

 

Investment possibilities are both many and varied. There are three major categories, however, and it's

important to understand the characteristics of each. So let's survey the field.

• Investments that are denominated in a given currency include money-market funds, bonds, mortgages,

bank deposits, and other instruments. Most of these currency-based investments are thought of as "safe."

In truth they are among the most dangerous of assets. Their beta may be zero, but their risk is huge.

Over the past century these instruments have destroyed the purchasing power of investors in many

countries, even as the holders continued to receive timely payments of interest and principal. This ugly

result, moreover, will forever recur. Governments determine the ultimate value of money, and systemic

forces will sometimes cause them to gravitate to policies that produce inflation. From time to time such

policies spin out of control.

Even in the U.S., where the wish for a stable currency is strong, the dollar has fallen a staggering 86%

in value since 1965, when I took over management of Berkshire. It takes no less than $7 today to buy

what $1 did at that time. Consequently, a tax-free institution would have needed 4.3% interest annually

from bond investments over that period to simply maintain its purchasing power. Its managers would

have been kidding themselves if they thought of any portion of that interest as "income."

17For tax-paying investors like you and me, the picture has been far worse. During the same 47-year

period, continuous rolling of U.S. Treasury bills produced 5.7% annually. That sounds satisfactory. But

if an individual investor paid personal income taxes at a rate averaging 25%, this 5.7% return would

have yielded nothing in the way of real income. This investor's visible income tax would have stripped

him of 1.4 points of the stated yield, and the invisible inflation tax would have devoured the remaining

4.3 points. It's noteworthy that the implicit inflation "tax" was more than triple the explicit income tax

that our investor probably thought of as his main burden. "In God We Trust" may be imprinted on our

currency, but the hand that activates our government's printing press has been all too human.

High interest rates, of course, can compensate purchasers for the inflation risk they face with currency-based

investments – and indeed, rates in the early 1980s did that job nicely. Current rates, however, do not come

close to offsetting the purchasing-power risk that investors assume. Right now bonds should come with a

warning label.

Under today's conditions, therefore, I do not like currency-based investments. Even so, Berkshire holds

significant amounts of them, primarily of the short-term variety. At Berkshire the need for ample

liquidity occupies center stage and will never be slighted, however inadequate rates may be.

Accommodating this need, we primarily hold U.S. Treasury bills, the only investment that can be

counted on for liquidity under the most chaotic of economic conditions. Our working level for liquidity

is $20 billion; $10 billion is our absolute minimum.

Beyond the requirements that liquidity and regulators impose on us, we will purchase currency-related

securities only if they offer the possibility of unusual gain – either because a particular credit is

mispriced, as can occur in periodic junk-bond debacles, or because rates rise to a level that offers the

possibility of realizing substantial capital gains on high-grade bonds when rates fall. Though we've

exploited both opportunities in the past – and may do so again – we are now 180 degrees removed from

such prospects. Today, a wry comment that Wall Streeter Shelby Cullom Davis made long ago seems

apt: "Bonds promoted as offering risk-free returns are now priced to deliver return-free risk."

• The second major category of investments involves assets that will never produce anything, but that are

purchased in the buyer's hope that someone else – who also knows that the assets will be forever

unproductive – will pay more for them in the future. Tulips, of all things, briefly became a favorite of

such buyers in the 17

th

century.

This type of investment requires an expanding pool of buyers, who, in turn, are enticed because they

believe the buying pool will expand still further. Owners are not inspired by what the asset itself can

produce – it will remain lifeless forever – but rather by the belief that others will desire it even more

avidly in the future.

The major asset in this category is gold, currently a huge favorite of investors who fear almost all other

assets, especially paper money (of whose value, as noted, they are right to be fearful). Gold, however,

has two significant shortcomings, being neither of much use nor procreative. True, gold has some

industrial and decorative utility, but the demand for these purposes is both limited and incapable of

soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still

own one ounce at its end.

What motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the

past decade that belief has proved correct. Beyond that, the rising price has on its own generated

additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis.

As "bandwagon" investors join any party, they create their own truth – for a while.

Over the past 15 years, both Internet stocks and houses have demonstrated the extraordinary excesses

that can be created by combining an initially sensible thesis with well-publicized rising prices. In these

bubbles, an army of originally skeptical investors succumbed to the "proof" delivered by the market,

and the pool of buyers – for a time – expanded sufficiently to keep the bandwagon rolling. But bubbles

blown large enough inevitably pop. And then the old proverb is confirmed once again: "What the wise

man does in the beginning, the fool does in the end."

18Today the world's gold stock is about 170,000 metric tons. If all of this gold were melded together, it

would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At

$1,750 per ounce – gold's price as I write this – its value would be $9.6 trillion. Call this cube pile A.

Let's now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400

million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world's most

profitable company, one earning more than $40 billion annually). After these purchases, we would

have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying

binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?

Beyond the staggering valuation given the existing stock of gold, current prices make today's annual

production of gold command about $160 billion. Buyers – whether jewelry and industrial users,

frightened individuals, or speculators – must continually absorb this additional supply to merely

maintain an equilibrium at present prices.

A century from now the 400 million acres of farmland will have produced staggering amounts of corn,

wheat, cotton, and other crops – and will continue to produce that valuable bounty, whatever the

currency may be. Exxon Mobil will probably have delivered trillions of dollars in dividends to its

owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The

170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can

fondle the cube, but it will not respond.

Admittedly, when people a century from now are fearful, it's likely many will still rush to gold. I'm

confident, however, that the $9.6 trillion current valuation of pile A will compound over the century at

a rate far inferior to that achieved by pile B.

• Our first two categories enjoy maximum popularity at peaks of fear: Terror over economic collapse

drives individuals to currency-based assets, most particularly U.S. obligations, and fear of currency

collapse fosters movement to sterile assets such as gold. We heard "cash is king" in late 2008, just

when cash should have been deployed rather than held. Similarly, we heard "cash is trash" in the early

1980s just when fixed-dollar investments were at their most attractive level in memory. On those

occasions, investors who required a supportive crowd paid dearly for that comfort.

My own preference – and you knew this was coming – is our third category: investment in productive

assets, whether businesses, farms, or real estate. Ideally, these assets should have the ability in

inflationary times to deliver output that will retain its purchasing-power value while requiring a

minimum of new capital investment. Farms, real estate, and many businesses such as Coca-Cola, IBM

and our own See's Candy meet that double-barreled test. Certain other companies – think of our

regulated utilities, for example – fail it because inflation places heavy capital requirements on them. To

earn more, their owners must invest more. Even so, these investments will remain superior to

nonproductive or currency-based assets.

Whether the currency a century from now is based on gold, seashells, shark teeth, or a piece of paper

(as today), people will be willing to exchange a couple of minutes of their daily labor for a Coca-Cola

or some See's peanut brittle. In the future the U.S. population will move more goods, consume more

food, and require more living space than it does now. People will forever exchange what they produce

for what others produce.

Our country's businesses will continue to efficiently deliver goods and services wanted by our citizens.

Metaphorically, these commercial "cows" will live for centuries and give ever greater quantities of "milk"

to boot. Their value will be determined not by the medium of exchange but rather by their capacity to

deliver milk. Proceeds from the sale of the milk will compound for the owners of the cows, just as they

did during the 20

th

century when the Dow increased from 66 to 11,497 (and paid loads of dividends as

well). Berkshire's goal will be to increase its ownership of first-class businesses. Our first choice will be

to own them in their entirety – but we will also be owners by way of holding sizable amounts of

marketable stocks. I believe that over any extended period of time this category of investing will prove to

be the runaway winner among the three we've examined. More important, it will be by far the safest.

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Look at his rant against gold.

 

Breathtaking.

 

Yeah I know.

 

I mean what could that old fool possibly know huh?

 

He's talking BTW about investment vs store of value etc.

 

And the reasons why an investor (those looking to amplify their wealth and the means of wealth production) would choose Assets (that which produces more than it costs to upkeep). As opposed to choosing a store of value.

 

He is after all an investor, therefore he wants to get paid to allocate his capital.

 

As opposed to waiting to sell to the greater fool...

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It's amusing that he even feels the need to rant about gold. I wonder if the government/bankers put him up to it - to keep the population in the dark.

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Brodsky On Buffet On Gold

We must assume his aggressive gold comments have been meant to force the price of gold lower. (We do not know why he is so interested in doing so though we do have a reasonable theory, for another time). We strongly disagree with Mr. Buffett’s views and we thought it would be best to explore his comments and provide our counter-arguments

We believe true savers across the world not beholden to Western financial assets understand or will soon understand the difference between relative nominal returns and absolute real returns. They do (or will) not care about the views of very successful leveraged money changers. Yes, an inert rock today will be an inert rock tomorrow. But it will be an even scarcer inert rock tomorrow relative to the fiat currency in which it is priced (same for fine art). Levered productive assets will lose their value against both unlevered scarce inert rocks and unlevered inelastic commodities. The only things they will outperform in a period of great monetary inflation are bonds and cash (both also levered).

Mr. Buffett is no doubt brilliant but we respectfully disagree with his sense of real value. We find inspiration in the good sense and graciousness of Sir John Templeton who became fabulously wealthy investing in capital building enterprises and always seemed to maintain an objective and flexible investment perspective.

 

 

http://www.zerohedge.com/news/brodsky-buffet-gold

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Quite right. Even the most slack-jawed halfwit out there knows that, realistically, the price of gold can only go up from here-on. It's gone up every single year for a decade and a half, without looking back. In these troubled economic times, what kind of insane fool would bet on it turning around now?

 

I've been investing in my spare time for nearly six months now, and I have already made nearly ONE HUNDRED DOLLARS. That's PURE PROFIT (before tax). So you'd better believe me when I say that I know what I'm talking about. I speak from experience when I say a here-today, gone-tomorrow, fly-by-night, know-it-all cowboy geriatric has-been like Warren Buffett is trying to talk down the market by bashing gold in his annual letter, which must be read by at least several thousand people world-wide. It's a blatant market manipulation if ever I saw one.

 

Well, it won't work. How do I know? Because I for one have been buying gold. Why, only last month I spent nearly TWO THOUSAND DOLLARS when I purchased a WHOLE OUNCE of gold. I've talked all my family and friends into cashing in their 401Ks and swapping their worthless fiat paper to buy gold, too. They have spread the good word to all their friends, who have spread the word to their friends... and so on. We've all been buying gold and look what's happened - the gold price has kept on rising! This is absolute and unequivocal proof that we are right, that the fiat currencies are about to collapse real soon now, and that the holders of any other type of asset are going to lose absolutely everything.

 

 

Sure, there have been historical price corrections in every asset class, most recently in property. Those who put their life savings into property have been crucified, and it basically serves them right for being greedy and overleveraged. But when it comes to gold, this time it's different. Though I'm wise enough to know that past returns are no guarantee of future returns, I intend to keep avoiding property and stocks and instead make gold my pension. I'll eat my hat if I'm wrong! Which I won't be, because only the oppressive fascist overlord elite try to talk down the market in gold. I know this for a fact. Only last week I was driving down the road when I was pulled over by a policeman. He seemed to think I had been drinking, so I informed him that I paid his wages through government-approved theft called "taxation", and that he was an unwitting tool of a self-serving money-grubbing elite being manipulated into committing treasonous acts by oppressing our individual liberties. When he threatened to arrest me and forced me to blow into the tube I commented upon the irony that his actions proved my prior point. He didn't have the good grace to concede that I was right, so I then told him in no uncertain terms to cash in his 401K, sell his house, car, and one of his kidneys and use the proceeds to buy gold. He ignored me, issued me a speeding ticket, and told me to "piss off". Some people are so stupid and ignorant, it is unbelievable. Why, only the other day, I was mid-way through committing the physical act of love with my wife, when I advised her to stop visiting the hairdresser, and stop purchasing cosmetics and perfume (and other lady products for that matter), and use the money saved to buy gold. I followed up by describing how the cabal of one-percenters as governed by the elders of Zion aim to enslave the rest of us by debauching the currency and starting a third world war, to be followed by a fourth and a fifth. All my wife could say at that point was that I was no longer tumescent and that she was leaving me. This is typical of the brainwashing inflicted upon the imbecilic public by the Bilderbergers. I'm just glad that I'm clever enough to know better than the arrogant and stupid general public, and invest accordingly.

 

Now, what Warren Buffett really should do, if he knows what is good for him, is sell all assets that peddle worthless printed government paper to the sheeple, and buy gold. Coca Cola, J&J, IBM, BNSF, Wells Fargo and Tesco should all be disposed of as the worthless paper-swapping junk they all clearly are. For purposes of diversification and sensible asset allocation I would urgently recommend Buffett to perhaps spend a few billion on some of the small gold mining companies with licenses to dig in places like South Africa. That's where Nelson Mandela and Desmond Tutu come from, so you know it's a very honest country and your investments will be safe.

 

And if you don't agree with me, then by definition you are one of the stupid sheeple. A pox on you and your house. You're a fool, a prancing, prattling nancy-boy. I'll bet you're a communist too, and quite possibly a closet paedophile. I hate you. I hope you end up destitute, torn apart and urinated upon by packs of ravenous wild dogs. Then we'll see who doesn't like gold.

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Yeah I know.

 

I mean what could that old fool possibly know huh?

 

He's talking BTW about investment vs store of value etc.

 

And the reasons why an investor (those looking to amplify their wealth and the means of wealth production) would choose Assets (that which produces more than it costs to upkeep). As opposed to choosing a store of value.

 

He is after all an investor, therefore he wants to get paid to allocate his capital.

 

As opposed to waiting to sell to the greater fool...

 

He's no old fool, but he is an an old crony capitalist of an era dominated by the issuance of American paper. He's a man of his time. He rails against gold because he knows his time is up.

 

I think you're confused about savers and investors Mabon. The notion that savers should have to buy Exxon to maintain their purchasing power is ridiculous. As is the notion that buying Exxon is some how morally superior and that gold depends upon a "greater fool". This from the guy who invests based on the market's mispricing of assets. Presumably Warren doesn't feel that exploiting the people (pension funds, mutual funds) doing the mispricing makes them fools?

 

"Mr Market" is comprised of living breathing people (fools), no matter how badly the 'investors' try to disassociate from them. And the funny thing is, gold doesn't need a greater fool. It's the universal reference point for value. Given its unique stock-to-flow ratio, gold is the only asset that is priced by its holders.

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Quite right. Even the most slack-jawed halfwit out there knows that, realistically, the price of gold can only go up from here-on. It's gone up every single year for a decade and a half, without looking back. In these troubled economic times, what kind of insane fool would bet on it turning around now?

 

Snip...

 

A sneering post railing against er, people sneering? Such is the ever-present irony of the internet.

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Yeah I know.

 

I mean what could that old fool possibly know huh?

 

He's talking BTW about investment vs store of value etc.

 

And the reasons why an investor (those looking to amplify their wealth and the means of wealth production) would choose Assets (that which produces more than it costs to upkeep). As opposed to choosing a store of value.

 

He is after all an investor, therefore he wants to get paid to allocate his capital.

 

As opposed to waiting to sell to the greater fool...

 

'there is time to do things and there is time to do other things'.

 

And then there are times to not do anything but wait.

 

I am waiting to put my wealth to good use. I certainly am not keen to buy assets which are overpriced.

 

Buffet perhaps owns 2 to 3 tons of physical gold anyway. He does not want you to buy the gold now. He sells to suckers. And I ain't one.

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Only last week I was driving down the road when I was pulled over by a policeman. He seemed to think I had been drinking, so I informed him that I paid his wages through government-approved theft called "taxation", and that he was an unwitting tool of a self-serving money-grubbing elite being manipulated into committing treasonous acts by oppressing our individual liberties. When he threatened to arrest me and forced me to blow into the tube I commented upon the irony that his actions proved my prior point. He didn't have the good grace to concede that I was right, so I then told him in no uncertain terms to cash in his 401K, sell his house, car, and one of his kidneys and use the proceeds to buy gold. He ignored me, issued me a speeding ticket, and told me to "piss off".

 

Why did he give you a speeding ticket for drinking?

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Why did he give you a speeding ticket for drinking?

 

Well obviously he had to charge me with something once he had pulled me over. Maybe I was a wee bit over the speed limit, maybe not. That's what these pettifogging jobsworth bureaucrats do - target the honest hard-working man on mere pretences of the slightest infractions. But to accuse me of driving drunken , as if I couldn't hold my liquor - the sheer outrage of it! You should have seen the look on his face as the reading came back negative - I wiped the smug little grin right off his face. If it hadn't been for that, the incident would have spoiled the journey back from my favourite opium den. But don't worry, I intend to sue them for defamation of character, harassment, emotional distress and so on. It'll be just like having my own little taxpayer-funded bail-out! Doubles all round!

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Additional required reading

 

 

Were it not for government bailouts, for which Buffett lobbied hard, many of his company’s stock holdings would have been wiped out.

 

Berkshire Hathaway, in which Buffett owns 27 percent, according to a recent proxy filing, has more than $26 billion invested in eight financial companies that have received bailout money…

 

…It takes remarkable chutzpah to lobby for bailouts, make trades seeking to profit from them, and then complain that those doing so put you at a disadvantage.

 

Elsewhere in his letter he laments “atrocious sales practices” in the financial industry, holding up Berkshire subsidiary Clayton Homes as a model of lending rectitude.

 

Conveniently, he neglects to mention Wells Fargo’s toxic book of home equity loans, American Express’ exploding charge-offs, GE Capital’s awful balance sheet, Bank of America’s disastrous acquisitions of Countrywide and Merrill Lynch, and Goldman Sachs’ reckless trading practices.

 

And what of Moody’s, the credit-rating agency that enabled lending excesses Buffett criticizes, and in which he’s held a major stake for years? Recently Berkshire cut its stake to 16 percent from 20 percent. Publicly, however, the Oracle of Omaha has been silent.

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Quite right. Even the most slack-jawed halfwit out there knows that, realistically, the price of gold can only go up from here-on. It's gone up every single year for a decade and a half, without looking back. In these troubled economic times, what kind of insane fool would bet on it turning around now?

 

I've been investing in my spare time for nearly six months now, and I have already made nearly ONE HUNDRED DOLLARS. That's PURE PROFIT (before tax). So you'd better believe me when I say that I know what I'm talking about. I speak from experience when I say a here-today, gone-tomorrow, fly-by-night, know-it-all cowboy geriatric has-been like Warren Buffett is trying to talk down the market by bashing gold in his annual letter, which must be read by at least several thousand people world-wide. It's a blatant market manipulation if ever I saw one.

 

Well, it won't work. How do I know? Because I for one have been buying gold. Why, only last month I spent nearly TWO THOUSAND DOLLARS when I purchased a WHOLE OUNCE of gold. I've talked all my family and friends into cashing in their 401Ks and swapping their worthless fiat paper to buy gold, too. They have spread the good word to all their friends, who have spread the word to their friends... and so on. We've all been buying gold and look what's happened - the gold price has kept on rising! This is absolute and unequivocal proof that we are right, that the fiat currencies are about to collapse real soon now, and that the holders of any other type of asset are going to lose absolutely everything.

 

 

Sure, there have been historical price corrections in every asset class, most recently in property. Those who put their life savings into property have been crucified, and it basically serves them right for being greedy and overleveraged. But when it comes to gold, this time it's different. Though I'm wise enough to know that past returns are no guarantee of future returns, I intend to keep avoiding property and stocks and instead make gold my pension. I'll eat my hat if I'm wrong! Which I won't be, because only the oppressive fascist overlord elite try to talk down the market in gold. I know this for a fact. Only last week I was driving down the road when I was pulled over by a policeman. He seemed to think I had been drinking, so I informed him that I paid his wages through government-approved theft called "taxation", and that he was an unwitting tool of a self-serving money-grubbing elite being manipulated into committing treasonous acts by oppressing our individual liberties. When he threatened to arrest me and forced me to blow into the tube I commented upon the irony that his actions proved my prior point. He didn't have the good grace to concede that I was right, so I then told him in no uncertain terms to cash in his 401K, sell his house, car, and one of his kidneys and use the proceeds to buy gold. He ignored me, issued me a speeding ticket, and told me to "piss off". Some people are so stupid and ignorant, it is unbelievable. Why, only the other day, I was mid-way through committing the physical act of love with my wife, when I advised her to stop visiting the hairdresser, and stop purchasing cosmetics and perfume (and other lady products for that matter), and use the money saved to buy gold. I followed up by describing how the cabal of one-percenters as governed by the elders of Zion aim to enslave the rest of us by debauching the currency and starting a third world war, to be followed by a fourth and a fifth. All my wife could say at that point was that I was no longer tumescent and that she was leaving me. This is typical of the brainwashing inflicted upon the imbecilic public by the Bilderbergers. I'm just glad that I'm clever enough to know better than the arrogant and stupid general public, and invest accordingly.

 

Now, what Warren Buffett really should do, if he knows what is good for him, is sell all assets that peddle worthless printed government paper to the sheeple, and buy gold. Coca Cola, J&J, IBM, BNSF, Wells Fargo and Tesco should all be disposed of as the worthless paper-swapping junk they all clearly are. For purposes of diversification and sensible asset allocation I would urgently recommend Buffett to perhaps spend a few billion on some of the small gold mining companies with licenses to dig in places like South Africa. That's where Nelson Mandela and Desmond Tutu come from, so you know it's a very honest country and your investments will be safe.

 

And if you don't agree with me, then by definition you are one of the stupid sheeple. A pox on you and your house. You're a fool, a prancing, prattling nancy-boy. I'll bet you're a communist too, and quite possibly a closet paedophile. I hate you. I hope you end up destitute, torn apart and urinated upon by packs of ravenous wild dogs. Then we'll see who doesn't like gold.

Did you write that yourself?

 

Possibly the best rant I have ever read of these forums. Bravo, sir :D

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warrensbubble_0.jpg

 

Warren Buffett loves to bash gold — claiming that stocks are inherently superior, because they produce a return, whereas gold just sits. Trouble is, stocks (and all paper assets) are subject to counter-party risk, whereas physical gold isn’t. Gold doesn’t overcompensate its CEOs, it doesn’t leverage its productive capital in toxic derivatives, it doesn’t cause industrial disasters like Deepwater Horizon, its value isn’t dependent on central banking, or securitisation, or American imperialism, or the machinations of the military-industrial complex. It just sits, retaining its purchasing power.

 

Warren Buffett had a great ride: he grew his wealth and businesses in an era of unprecedented growth powered by OPEC oil, and later by Chinese industrialism. That era — the era of the American free lunch — is coming to an end. His insights are applicable to that era. Today is a different world.

 

http://www.zerohedge.com/news/guest-post-warren-buffett-priced-gold

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David Stockman economy Q&A: Economic disaster in the works

By Bernard Condon, Associated Press

Updated 9h 12m ago

NEW YORK – He was an architect of one of the biggest tax cuts in U.S. history. He spent much of his career after politics using borrowed money to take over companies. He targeted the riskiest ones that most investors shunned — car-parts makers, textile mills.

 

  • David-Stockman-Economic-disaster-lurks-D71390H4-x.jpg

    By Louis Lanzano, AP file


     

    David Stockman, left, in Manhattan in 2007.

 

That is one image of David Stockman, the former White House budget director under Ronald Reagan who, after resigning in protest over deficit spending, made a fortune in corporate buyouts.

 

But spend time with him and you discover this former wunderkind of the Reagan revolution is many other things now — an advocate for higher taxes, a critic of the work that made him rich and a scared investor who doesn't own a single stock for fear of another financial crisis.

 

Stockman suggests you'd be a fool to hold anything but cash now, and maybe a few bars of gold. He thinks the Federal Reserve's efforts to ease the pain from the collapse of our "national leveraged buyout" — his term for decades of reckless, debt-fueled spending by government, families and companies — is pumping stock and bond markets to dangerous heights.

 

Known for his grasp of budgetary minutiae, first as a Michigan congressman and then as Reagan's budget director, Stockman still dazzles with his command of numbers. Ask him about jobs, and he'll spit out government estimates for non-farm payrolls down to the tenth of a decimal point. Prod him again and, as from a grim pinata, more figures spill out: personal consumption expenditures, credit market debt and the clunky sounding but all-important non-residential fixed investment.

 

Stockman may seem as exciting as an insurance actuary, but he knows how to tell a good story. And the punch line to this one is gripping. He says the numbers for the U.S. don't add up to anything but a painful, slow-growing future.

 

Now 65 and gray, but still wearing his trademark owlish glasses, Stockman took time from writing his book about the financial collapse, The Triumph of Crony Capitalism, to talk to The Associated Press at his book-lined home in Greenwich, Conn.

 

Within reach was Dickens' Hard Times— two copies.

 

Below are excerpts, edited for clarity.

 

Q: Why are you so down on the U.S. economy?

 

A: It's become super-saturated with debt.

 

Typically the private and public sectors would borrow $1.50 or $1.60 each year for every $1 of GDP growth. That was the golden constant. It had been at that ratio for 100 years save for some minor squiggles during the bottom of the Depression. By the time we got to the mid-'90s, we were borrowing $3 for every $1 of GDP growth. And by the time we got to the peak in 2006 or 2007, we were actually taking on $6 of new debt to grind out $1 of new GDP.

 

People were taking $25,000, $50,000 out of their home for the fourth refinancing. That's what was keeping the economy going, creating jobs in restaurants, creating jobs in retail, creating jobs as gardeners, creating jobs as Pilates instructors that were not supportable with organic earnings and income.

 

It wasn't sustainable. It wasn't real consumption or real income. It was bubble economics.

 

So even the 1.6% (annual GDP growth in the past decade) is overstating what's really going on in our economy.

 

Q: How fast can the U.S. economy grow?

 

A: People would say the standard is 3, 3.5%. I don't even know if we could grow at 1 or 2%. When you have to stop borrowing at these tremendous rates, the rate of GDP expansion stops as well.

 

Q: But the unemployment rate is falling and companies in the Standard & Poor's 500 are making more money than ever.

 

A: That's very short-term. Look at the data that really counts. The 131.7 million (jobs in November) was first achieved in February 2000. That number has gone nowhere for 12 years.

 

Another measure is the rate of investment in new plant and equipment. There is no sustained net investment in our economy. The rate of growth since 2000 (in what theCommerce Department calls non-residential fixed investment) has been 0.8% — hardly measurable.

 

(Non-residential fixed investment is the money put into office buildings, factories, software and other equipment.)

 

We're stalled, stuck.

 

Q: What will 10-year Treasurys yield in a year or five years?

 

A: I have no guess, but I do know where it is now (a yield of about 2%) is totally artificial. It's the result of massive purchases by not only the Fed but all of the other central banks of the world.

 

Q: What's wrong with that?

 

A: It doesn't come out of savings. It's made up money. It's printing press money. When the Fed buys $5 billion worth of bonds this morning, which it's doing periodically, it simply deposits $5 billion in the bank accounts of the eight dealers they buy the bonds from.

 

Q: And what are the consequences of that?

 

A: The consequences are horrendous. If you could make the world rich by having all the central banks print unlimited money, then we have been making a mistake for the last several thousand years of human history.

 

Q: How does it end?

 

A: At some point confidence is lost, and people don't want to own the (Treasury) paper. I mean why in the world, when the inflation rate has been 2.5% for the last 15 years, would you want to own a five-year note today at 80 basis points (0.8%)?

 

If the central banks ever stop buying, or actually begin to reduce their totally bloated, abnormal, freakishly large balance sheets, all of these speculators are going to sell their bonds in a heartbeat.

 

That's what happened in Greece.

 

Here's the heart of the matter. The Fed is a patsy. It is a pathetic dependent of the bigWall Street banks, traders and hedge funds. Everything (it does) is designed to keep this rickety structure from unwinding. If you had a (former Fed Chairman) Paul Volcker running the Fed today — utterly fearless and independent and willing to scare the hell out of the market any day of the week — you wouldn't have half, you wouldn't have 95%, of the speculative positions today.

 

Q: You sound as if we're facing a financial crisis like the one that followed the collapse of Lehman Bros. in 2008.

 

A: Oh, far worse than Lehman. When the real margin call in the great beyond arrives, the carnage will be unimaginable.

 

Q: How do investors protect themselves? What about the stock market?

 

A: I wouldn't touch the stock market with a 100-foot pole. It's a dangerous place. It's not safe for men, women or children.

 

Q: Do you own any shares?

 

A: No.

 

Q: But the stock market is trading cheap by some measures. It's valued at 12.5 times expected earnings this year. The typical multiple is 15 times.

 

A: The typical multiple is based on a historic period when the economy could grow at a standard rate. The idea that you can capitalize this market at a rate that was safe to capitalize it in 1990 or 1970 or 1955 is a large mistake. It's a Wall Street sales pitch.

 

Q: Are you in short-term Treasurys?

 

A: I'm just in short-term, yeah. Call it cash. I have some gold. I'm not going to take any risk.

 

Q: Municipal bonds?

 

A: No.

 

Q: No munis, no stocks. Wow. You're not making any money.

 

A: Capital preservation is what your first, second and third priority ought to be in a system that is so jerry-built, so fragile, so exposed to major breakdown that it's not worth what you think you might be able to earn over six months or two years or three years if they can keep the bailing wire and bubble gum holding the system together, OK? It's not worth it.

 

Q: Give me your prescription to fix the economy.

 

A: We have to eat our broccoli for a good period of time. And that means our taxes are going to go up on everybody, not just the rich. It means that we have to stop subsidizing debt by getting a sane set of people back in charge of the Fed, getting interest rates back to some kind of level that reflects the risk of holding debt over time. I think the federal funds rate ought to be 3% or 4%. (It is zero to 0.25%.) I mean, that's normal in an economy with inflation at 2% or 3%.

 

Q: Social Security?

 

A: It has to be means-tested. And Medicare needs to be means-tested. If you're a more affluent retiree, you should have your benefits cut back, pay a higher premium for Medicare.

 

Q: Taxes?

 

A: Let the Bush tax cuts expire. Let the capital gains go back to the same rate as ordinary income. (Capital gains are taxed at 15%, while ordinary income is taxed at marginal rates up to 35%.)

 

Q: Why?

 

A: Why not? I mean, is return on capital any more virtuous than some guy who's driving a bus all day and working hard and trying to support his family? You know, with capital gains, they give you this mythology. You're going to encourage a bunch of more jobs to appear. No, most of capital gains goes to speculators in real estate and other assets who basically lever up companies, lever up buildings, use the current income to pay the interest and after a holding period then sell the residual, the equity, and get it taxed at 15%. What's so brilliant about that?

 

Q: You worked for Blackstone, a financial services firm that focuses on leveraged buyouts and whose gains are taxed at 15 percent, then started your own buyout fund. Now you're saying there's too much debt. You were part of that debt explosion, weren't you?

 

A: Well, yeah, and maybe you can learn something from what happens over time. I was against the debt explosion in the Reagan era. I tried to fight the deficit, but I couldn't. When I was in the private sector, I was in the leveraged buyout business. I finally learned a heck of a lot about the dangers of debt.

 

I'm a libertarian. If someone wants to do leveraged buyouts, more power to them. If they want to have a brothel, let them run a brothel. But it doesn't mean that public policy ought to be biased dramatically to encourage one kind of business arrangement over another. And right now public policy and taxes and free money from the Fed are encouraging way too much debt, way too much speculation and not enough productive real investment and growth.

 

Q: Why are you writing a book?

 

A: I got so outraged by the bailouts of Wall Street in September 2008. I believed that Bush and (former Treasury Secretary Hank) Paulson were totally trashing the Reagan legacy, whatever was left, which did at least begin to resuscitate the idea of free markets and a free economy. And these characters came in and panicked and basically gave capitalism a smelly name and they made it impossible to have fiscal discipline going forward. If you're going to bail out Wall Street, what aren't you going to bail out? So that started my re-engagement, let's say, in the policy debate.

 

Q: Are you hopeful?

 

A: No.

 

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IMHO, it's an empty, hollow argument from azizonomics / zerohedge. This can be demonstrated by substituting an obviously absurd alternative to support an identical argument:

Warren Buffett loves to bash tulips— claiming that stocks are inherently superior, because they produce a return, whereas tulip bulbs just sit. Trouble is, stocks (and all paper assets) are subject to counter-party risk, whereas physical tulips aren't. Tulips don't overcompensate their CEOs, they don't leverage their productive capital in toxic derivatives, they don't cause industrial disasters like Deepwater Horizon, their value isn't dependent on central banking, or securitisation, or American imperialism, or the machinations of the military-industrial complex. Tulips just sit, retaining their purchasing power.

 

Don't get me wrong here: I'm not seriously suggesting that gold and tulips are equivalent asset classes. I'm merely pointing out that a lot of talking heads are making very specious arguments about the merits of gold as a safe haven.

 

I'm not actually a precious metal "bear". I certainly wouldn't fault anyone for maintaining a position in gold (or a basket of PMs including platinum, palladium and silver for that matter). I do myself. The point of my earlier childish rant is not to rubbish gold as an asset class; it's to compare the arguments of some gold speculators with the arguments made over the past 15 years by idiotic bone-headed asset speculators, particularly those who have made a healthy living by exploiting the recent property bubble.

 

I wonder about the emotive language, the invective and personal attacks used by many in their diatribes written about Buffet's latest letter. It rings warning bells in my mind. All Buffet has done is buy stuff he perceives as being cheap when valued using criteria defined a long time ago by the likes of Ben Graham. Like it or not, such value investing techniques have demonstrated a better track record at building wealth (not just maintaining purchasing power) than any other approach. He even freely admits when he cocks up, which is more than I've ever seen from any dogmatic asset speculator, be it in property, gold, stocks, bonds or whatever.

 

I'm not interested in blindly agreeing with whatever Buffet has to say; I'll make up my own mind thank you very much. But I'll pay even less attention to those over-emphatic pedants who insist I'm a fool, a communist, a terrorist, a paedophile, an anti-American, a Wall Street shill or Ben Bernanke's bum-boy for not ditching everything and moving into gold, tins of beans and shotgun shells wholesale. At least Buffet offers a credible point of view (e.g. on the valuation of gold). A number of pro-gold pundits here at GEI offer a far, far better argument in favour of gold than that crappy azizonomics article.

 

Of course, I could be completely wrong, economic Armageddon might happen tomorrow and we'll all be doomed. But I don't think gold would be the answer to all my problems in that situation, either.

 

Jus' me tup'nyworth

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He's no old fool, but he is an an old crony capitalist of an era dominated by the issuance of American paper. He's a man of his time. He rails against gold because he knows his time is up.

 

I think you're confused about savers and investors Mabon. The notion that savers should have to buy Exxon to maintain their purchasing power is ridiculous. As is the notion that buying Exxon is some how morally superior and that gold depends upon a "greater fool". This from the guy who invests based on the market's mispricing of assets. Presumably Warren doesn't feel that exploiting the people (pension funds, mutual funds) doing the mispricing makes them fools?

 

"Mr Market" is comprised of living breathing people (fools), no matter how badly the 'investors' try to disassociate from them. And the funny thing is, gold doesn't need a greater fool. It's the universal reference point for value. Given its unique stock-to-flow ratio, gold is the only asset that is priced by its holders.

 

What are you prattling on about?

 

If you want to 'save' money then buy some gold as a store of value. Simple yes?

 

If you want to make an investment then buy an asset that produces a yield. Even Simpler yes?

 

The point is quite simple.

 

For me Gold is NOT an investment and shouldn't be treated as one.

 

But if you or anyone else wants to speculate IN the price of gold be my guest.

 

As for Warren. I've never met him.

 

So I can't comment further about your speculation as to his character or indeed his 'motives' (other than he likes to make a lot of money).

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I think a good analogy for Buffett is Alan Greenspan. Alan started out as an honest man. One only needs to read his "Gold and Economic Freedom" Treatise he wrote in 1967 to realize that not only was it brilliantly succinct, but could have only have been written by one who had a heart of truth. But over a career, Alan became fully seduced and corrupted by the monetary system. By the end of his term as Fed chairman one would not recognise him as the same man who wrote his 1967 piece.

 

I have read most of Warren's annual reports from years past, (rec The essays of Warren Buffett: Lessons for Corp America, Lawrence Cunningham) and in his early years he was brilliant, honest seeking, and totally represented the shareholders interest. At this point in his life, it is clear, at least to me, that he embodies today's crony capitalist. He has become fully corrupted as Alan became. An advocate of higher taxes, sending his secretary to the state of the union, as a phony symbol. Crony deals with GS, Wells, on and on. Now blatantly misrepresenting the role of gold and allowing himself to be used as a political tool in return for govt guarantees.

 

Seems he has lived his life trying to prove his father was wrong. His father was a staunch supporter of sound honest money. The whole thing is rather sad to witness the transformation of what was once a great investor and representative of the average investor.

Recommend looking at a 10 yr chart of Berkshire/$gold Warrens rant doesn't look as good then

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