Buffett's Politics

This note was originally published March 29, 2011 at 07:59 in  

“Most of those in political office, quite understandably, are firmly against inflation and firmly in favor of policies producing it.”

-Warren Buffett, May 1977


I’ve studied Warren Buffett very closely since I came to America in the mid 90’s. I wrote my Senior Thesis about him while I was an undergrad at Yale. I’ve applied many of his value-investing strategies to both the long and short side of my portfolios for the last 12 years.


Sadly, Buffett’s Politics have compromised the integrity of some of his post 2008 investment opinions. His 2010 testimony on Moody’s reminded me that if there is a transparent and accountable investment God on this good earth, it’s not him.  That said, if I were in his shoes, I’d probably game these government people for my own benefit too.


If you didn’t know that Buffett’s Politics largely focus on pushing his own book, now you know. His #1 priority has been, and always will be, generating returns for the shareholders of Berkshire Hathaway. If you think this jolly looking fella has you in mind when he sits down with The President of the United States, think again…


If you go back and study the late 1970s Buffett, you’ll find a man who didn’t need the market to succeed in order for his overall invested position to. In fact, I think if you go back and read the article that we snagged the aforementioned quote from (“How Inflation Swindles The Equity Investor” – Fortune Magazine, 1977) and change the date on it to 2011, you might think it was something Hedgeye’s Howard Penney wrote last night.


Ah the 1970s…


Those were the days when Growth Was Slowing As Inflation Accelerated. Those were the days when the US Government’s heavy hand of Big Intervention tried everything from the Fed monetizing America’s debt to both Nixon and Carter signing off on a debauchery of the US Dollar. Those were the days of the 1970s – days when plenty of buy-the-dip folks went away.


My defense partner (and Columbia Business School Value Investing Program graduate) Daryl Jones, wrote an outstanding research note intraday yesterday questioning the premise of buying-the-dip on “valuation” (email if you’d like a copy). Without rehashing the note in full, the conclusion was based on my old Yale professor’s (Robert Shiller) CAPE P/E multiple whereby the US stock market looks at least one standard deviation overvalued. 


We’ve been saying this since the start of the year, but it’s worth repeating. With corporate margins at 30-year highs, it’s unlikely that earnings will grow into their multiple. And while this wasn’t the topic of Buffett’s 1977 article on The Inflation, he’d be the first to remind you that you don’t buy a cyclical (the SP500) on peak earnings and peak margins of a cycle (you buy it before the cycle turns, like we did with the SP500 in March of 2009).


Back to what The Warren Buffett really thinks about The Bernank’s Inflation


1979 Shareholder Letter:


“Our book value at the end of 1964 would have bought about one-half ounce of gold and, fifteen years later, after we have plowed back all earnings along with much blood, sweat and tears, the book value produced will buy about the same half ounce.”


“The rub has been that government has been exceptionally able in printing money and creating promises, but is unable to print gold or create oil.”


“… but you should understand that external conditions affecting the stability of the currency may very well be the most important factor in determining whether there are any real rewards from your investment in Berkshire Hathaway.”


1980 Shareholder Letter:


“High rates of inflation create a tax on capital that makes much corporate investment unwise.”

“The average tax paying investor is now running up a down escalator whose pace has accelerated…”


“As we said last year, Berkshire has no corporate solution to the problem. We’ll say it again next year, too. Inflation does not improve our return on equity.”


Back to the morning Global Macro Grind


No matter where you go this morning, there is no “stability of the currency” in this country. The US Dollar is already down again for the week-to-date. There’s only The Bernank and The Inflation. Sure we can turn on the TV and watch the latest disciple of the Keynesian Kingdom cheer on the last leg of The Policy to inflate. But we don’t have to support them. We should fight them – out loud - and hold them accountable… before it’s too late.


Inflation is sticky. So … as Growth Slows, you end up with The Stagflation. This morning, you can see slower global economic growth being priced into many asset classes, across durations:

  1. Asian Growth Slowing – Thailand reported an industrial production growth number last night of -3.4% (year-over-year) for the month of February versus a +4.1% growth report in January. While growth slowing on the East Side of this world isn’t new news (we’ve been calling for it since November), it’s scary to think that the slowdowns were this sharp BEFORE Japan’s quake.
  2. European Growth Slowing – Germany, which has been our favorite Western Economy for the last 2 years, is starting to show the first signs of high-frequency growth data slowing in March. This is not good. Neither is all of the Pig Paper countries falling down on the sword of GDP “growth” promises for 2011 (Portugal revised expectations to negative y/y GDP growth last week).
  3. Dr. Copper Slowing – Copper prices are getting pounded again early this week, trading down -2.3% so far for the week-to-date. Critically, the price of copper is now broken on 2 of our 3 core risk management durations @Hedgeye with TREND line resistance now at $4.36/lb.

Now, quickly, the US-centric stock market bull should be yelling at me – “buy-the-damn-dip.” At least until month and quarter end on Thursday… (that’s when most of us get paid). But that’s not going to stop gravity. If you want to do that – and I mean stop The Inflation before you stop The Stagflation – you’ll need to have your local Central Planner in Washington re-read Buffett circa 1977.


My immediate-term TRADE lines of support and resistance for WTI Crude Oil are $100.34 and $107.94, respectively (we are long oil). My immediate-term TRADE lines of support and resistance for the SP500 are 1292 and 1323, respectively (we are short the SP500).


God bless America and a Strong US Dollar.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Buffett's Politics - Chart of the Day


Buffett's Politics - Virtual Portfolio


The Macau Metro Monitor, March 31, 2011




Sands China said it’s being investigated by the Hong Kong Securities and Futures Commission for alleged breaches of regulations. 


Economic Services Bureau (DSE) director Sou Tim Peng said authorities from both Mainland China and Macau have agreed to implement measures to smooth the issuance of visas for MICE events.  Local authorities have already sent a list of MICE events being held in Macau this year and 40 of those events have been recognized by the Chinese authorities as relevant for mainland enterprises and businessmen, he added. 


Initial Claims 

The headline initial claims number fell 6k compared to last week's revised claims to 388k. Last week's number was revised up 12k to 394k, so this week's headline is 6k higher than last week's headline print. Rolling claims rose 4k to 391k. On a non-seasonally-adjusted basis, reported claims were flat WoW.  


We have been looking for claims in the 375-400k range as the level that can begin to bring unemployment down.  If this level is held, we expect to see unemployment improve. We consider unemployment to be ~200 bps higher than the headline rate due to decreases in the labor force participation rate. In other words, if the labor force participation rate were at the long-term average level of the last decade, unemployment rate would be 10.9% rather than 8.9%. So when we say that claims of 375-400k will start to bring down the unemployment rate, we are actually referring to the 10.9% actual rate.








One of our astute clients pointed out the relationship between the S&P and initial claims shown below.  We show the two series in the following chart, with initial claims inverted on the left axis.




Yield Curve Remains Wide

We chart the 2-10 spread as a proxy for NIM. Thus far the spread in 1Q is tracking 40 bps wider than 4Q.  The current level of 266 bps is tighter than last week (271 bps).






Financial Subsector Performance

The table below shows the stock performance of each Financial subsector over four durations. 




Joshua Steiner, CFA


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Notable news items and price action from the past twenty-four hours.  Today, we are adding a column on the right hand side of our price table with our fundamental views on select names. 

  • MCD is having to boost imports to Japan to counter supply-chain disruption in the wake of the recent earthquake and resulting tsunami.  A number of the company’s processing plants and a distribution center were damaged by the tsunami, Simone Hoyle, VP of Supply Chain for McDonald’s Asia, Pacific, Middle East and Africa region told The Wall Street Journal.
  • SBUX CEO is set for a mixed reception at Harvard on Friday as a protest is being planned for his appearance at Harvard Business School, according to The Harvard Crimson.  Organizers of the event, including employees of Starbucks and Harvard, hit out at Shultz’ “phoniness” in this new book and the reality of conditions for workers at SBUX being bad and getting worse.
  • Roberio Silva, Brazil’s candidate to head the International Coffee Organization told Bloomberg that “coffee prices will stay “firm” in the next two years as producing countries such as Colombia and Vietnam recover from harvest damage.
  • COSI traded down on massive volume yesterday.  Our conviction on this name remains high and we view this pullback as a buying opportunity.
  • BKC’s exodus continues.  Burger King’s manager for product innovation, Robert Thomas, stepped down Wednesday, making him the latest of several executives to leave the burger company.
  • HSY on Wednesday said it raised wholesale prices by 9.7 percent.
  • Dunkin' Brands is considering an IPO in the second half of 2011. Reuters reports, citing sources, that the IPO could be in the range of $500-750M. The company is still in preliminary discussions regarding the IPO and has not yet selected underwriters.
  • Dunkin’ is going to be sold as “growth” story…  Continuing its steady expansion around the world, Dunkin' Donuts, the world's leading baked goods and coffee chain, today announced the opening of its 3000th restaurant outside the United States




Howard Penney

Managing Director

CHART OF THE DAY: Until Ben Blames Himself, Stay Long of The Inflation



CHART OF THE DAY: Until Ben Blames Himself, Stay Long of The Inflation - Chart of the Day 4

Blame Yourself

“It was a matter in which we have heard some other persons blamed for what I did myself.”

-Abraham Lincoln, 1862


That’s one of the many outstanding leadership quotes in the book I highlighted yesterday, “Team of Rivals – The Political Genius of Abraham Lincoln.” If he wants to get re-elected, President Obama should think long and hard about Lincoln’s example of transparency, accountability, and trust. Rather than giving lip-service to being like the great American leaders who came before him, Lincoln was his own man - and he lived these principles out loud.


Whether you like following politics or not, you need to get the direction of their leanings right if you want to get your Global Macro positioning right. Currency markets move on policy – policy is set by politicians. And while that’s a pathetic and sad statement about our said “free market” system altogether, you can’t get bogged down by it – you need to play the game that’s in front of you.


Currently, the most important game in Global Macro Risk Management is the cross-asset-class correlation-risk associated with what the US Dollar does. If you get policy right, you’re likely to get the US Dollar right. If you get the US Dollar right, you’ll get fewer things wrong.


This is where my only political advice to the President of the United States (or whoever realizes that they could win his office) comes into play – get the US Dollar right (strengthen it) and you’ll Deflate The Inflation. If you Deflate The Inflation, The People will believe in you.


Strong US Dollar Policy isn’t a partisan thing. It’s an American thing. Reagan had it. Clinton had it. Nixon and Carter devalued it. Nixon and Carter also had a Dollar Debauchery man at the Fed named Arthur Burns.


Reagan had Volcker. President Obama has The Bernank.


Obama will be the first to tell you he took on a lot of Bush’s baggage. He’ll be the last to tell you he made a mistake in taking on Bush’s Bernanke. So, Mr. President, let’s strap on the accountability pants, Blame Yourself, and take a walk down that path – because your General-in-Chief on all things US economic policy definitely won’t be doing it for you anytime soon. Some of his Generals in the Fed’s ranks will.


In one of the great 2011 accountability headlines coming out of the US Federal Reserve last night, Kansas City Fed President, Thomas Hoenig, explained the following by effectively blaming himself:

  1. “Once again, there are signs that the world is building new economic imbalances and inflationary impulses…”
  2. “The longer policy remains as it is, the greater likelihood these pressures will build and ultimately undermine world growth…”
  3. “…remember, I’m not advocating tight monetary policy… I’m advocating a non-crisis policy. Zero is a crisis policy that by itself should be temporary.”

Now this isn’t Hoenig’s first rodeo. He joined the Federal Reserve Bank of Kansas City in 1973. He is the longest serving member at the Fed and his 8 consecutive “dissents” (English for publically disagreeing with The Bernank) recently tied Henry Wallich’s 1980 record for most disagreements with Fed policy (Wallich has been validated as being very right). Hoenig is a known inflation hawk – most likely because he faced it in the 1970s and joined Wallich and Volcker in fighting it.


Does the President of the United States really want to test the waters on $120/oil and 1970s style Jobless Stagflation? Does he want to roll the bones on The Quantitative Guessing experiments in Japan gone bad? Does he want to run against someone in 2012 who will crush him like a bug with the simple conclusion that Growth Slows As Inflation Accelerates?


I don’t think so. Remember, he’s a professional politician – after all…


As opposed to someone holed up in a room of academia’s Keynesian Kingdom, I’m in the soup. I’m managing risk in this cross-asset-class correlation-risk game each and every day. I have been writing these morning strategy notes since I started this firm without bailout moneys 3 years ago – and I’ve made 19 calls on the US Dollar since (long and short side) – and I’ve been right 19 times. If you want a USD opinion – at least ours has some credibility.


Call me politically irrelevant. Call me Canadian. Call me names from the heavens, Mr. Big Government Intervention man. But don’t call me a McClellan (1862) in this currency war, because it’s The US Monetary Policy that’s managed by you, the unaccountable generals, at the front of The Inflation lines who are perpetuating the problem.


Back to the Global Macro Grind


Now that the IMF is cutting their US GDP Growth estimate for 2011 this morning (to 2.8%), I’ll assume that our call for Growth Slowing As Inflation Accelerates is being absorbed into the craws of consensus. The leading indicator that is the price of Dr. Copper remains bearish and broken with intermediate term TREND resistance (which was longstanding support) at $4.38/lb.


Consensus doesn’t mean that Growth Slowing signals don’t continue to flash amber lights – it simply means the 6.5% intra-quarter SP500 correction had more to do with a longer-term global reality (piling sovereign debt-upon-debt-upon debt structurally amplifies inflation and impairs growth) than a tsunami of complacency.


Japanese and Chilean Industrial Production Growth reports for February (pre quake) came out yesterday and both slowed again sequentially. Eurozone inflation (CPI) for March accelerated again, sequentially. And while the US Dollar trading up for 2 of the last 3 weeks has helped Deflate The Inflation this week (bullish for Equities), it looks like that reverts back to the mean of Burning Buck and up oil again this morning. I’m staying long oil and long gold.


My immediate-term TRADE lines of support and resistance for oil are now $102.13 and $107.95, respectively. My immediate-term TRADE lines of support and resistance for the SP500 are now 1305 and 1333, respectively.


Looking forward to seeing everyone at Hedgeye Soho’s launch party in NYC this evening – no government bailout moneys required for us to buy you drinks.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Blame Yourself - Chart of the Day


Blame Yourself - Virtual Portfolio

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.52%
  • SHORT SIGNALS 78.67%