“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
-Warren Buffett
If the US stock market casino were to shut down for the next 10 years, I am not sure what Warren Buffett would do with his massive exposure to US financials, insurance, derivatives, etc… but don’t worry about that - he’s “All-In”.
Assuming Buffett is paying his new favorite banking friends the lion’s share of the fees associated with a $44B acquisition, is Buffett assuring us that Goldman is officially too big to fail, or too big not to pay? Approaching $200 Billion in enterprise value, is Berkshire too big to fail?
The answers to those questions are very straightforward, so instead of parroting the latest Buffett wager on America, understand not only how he gets paid, but the scenario whereby Berkshire doesn’t. His company is no longer about buying carpet and ice cream companies, holding them for 10 years, and harvesting the cash flows. Berkshire is an All-In, fully leveraged bet, on a levered long economy.
Notwithstanding that my senior thesis at Yale was about Buffett’s strategies and that I respect him tremendously, I have to look at yesterday’s $44B investment for what he called it – a Macro wager. At least he’s trying to make a serious dent in Berkshire’s exposure to the US Financial Service sector. Buying a big nasty railroad company will definitely diversify his holdings. If the commodity market shuts down for 10 years, maybe he’ll sell train rides to the Dairy Queen too.
If you can’t wakeup laughing at the US Financial System’s leadership, you probably aren’t awake. No matter where you go this morning, Warren Buffett and Goldman Sachs will still be looking for $3B in US tax credits from Fannie Mae. This isn’t about “value investing” anymore – at least not the kind that I learned from Graham & Dodd. This is about size.
Newsflash to the legions of Business School students of America who have been brainwashed by the ‘Bigger Is Better’ mantra for the last 3 decades: Bigger isn’t better. Bigger just means that we, the citizenry, really are All-In.
In and of itself, hearing Buffett talk in poker terms is emblematic of our ‘how much money does he make’ crackberry culture. Harvard’s Niall Fergusson ripped into Pepsico’s Indra Nooyi about this at an investment event last night. America needs to seriously wake up and smell the coffee here. The world’s economy is becoming increasingly interconnected at the same time as a bigger American unit of perceived financial wisdom loses credibility.
Today, the one and the only, Captain America, Ben Bernanke will likely drop moneys from the heavens, reiterating the compromised and conflicted message of the too big to fail. Never mind that price of gold ripping to $1098/oz yesterday boys. Oil at $80.34/barrel again this morning? Seriously, don’t worry about that either. You guys are All-In!
If you are amongst the remaining observers of America’s capital markets who aren’t willfully blind, I salute you. Kudlow bashing Obama is no more ridiculous than Buffett bashing Bush. Our politics have taken over the asylum of economic consensus, and that is both a very sad and dangerous thing.
We can’t flip two Democrat Governors for two Republican ones last night and say, “cool”, assuming this is part of the fix. We have to simply stop being political instead of being pragmatic, or the only world vote that matters is going to continue to crush us.
That world vote is issued, real-time, every second, of every day, via the marked-to-market price of the US Dollar. After rightfully respecting the fiduciary responsibility of being the world’s reserve currency during the Reagan and Clinton years (strong dollar policy’s that weren’t based solely on rhetoric), we are gambling it all away.
After all, on the topic of gambling, this is what the Oracle of Omaha himself had to say:
"To quite an extent, gambling is a tax on ignorance. I find it socially revolting when the government preys on the ignorance of its citizenry.”
Interesting advice Mr. Buffett. I hope Charlie reminded you of as much before you went All-In. America’s economic future is fully levered to this ‘All- In’ government sponsored mantra. It’s fear-mongering with a credible threat from the too big not to pay, and you know it. This is the house of cards that American leverage built, and Brother Bernanke is tee’d up to roll the bones on the Burning Buck at 215PM EST. Rub the rabbit foot.
The immediate term TRADE line for the SP500 remains broken – that line is up at 1065. The intermediate term TREND line has held at 1025. Those are definitively critical lines whereby I suggest you manage risk as those with the perceived wisdom of the American casino place their next bets.
Best of luck out there today,
KM
LONG ETFS
EWZ – iShares Brazil — President Lula da Silva is the most economically effective of the populist Latin American leaders; on his watch policy makers have kept inflation at bay with a high rate policy and serviced debt –leading to an investment grade credit rating. Brazil has managed its interest rate to promote stimulus. Brazil is a major producer of commodities. We believe the country’s profile matches up well with our reflation call.
EWT – iShares Taiwan — With the introduction of “Panda Diplomacy” Taiwan has found itself growing closer to mainland China. Although the politics remain awkward, the business opportunities are massive and the private sector, now almost fully emerged from state dominance, has rushed to both service “the client” and to make capital investments there. With an export industry base heavily weighted towards technology and communications equipment, Taiwanese companies are in the right place at the right time to catch the wave of increased consumer spending spurred by Beijing’s massive stimulus package.
XLU – SPDR Utilities — We bought low beta Utilities on discount (down 1%) on 10/20. TRADE and TREND bearish.
FXC – CurrencyShares Canadian Dollar — We bought the Canadian Dollar on a big pullback on 10/20 and again on 10/28. The TREND and TAIL lines for the Canadian Dollar remain bullish.
EWG – iShares Germany — Chancellor Angela Merkel won reelection with her pro-business coalition partners the Free Democrats. We expect to see continued leadership from her team with a focus on economic growth, including tax cuts. We believe that Germany’s powerful manufacturing capacity remains a primary structural advantage; with fundamentals improving in a low CPI/interest rate environment, we expect slow but steady economic improvement from Europe’s largest economy.
GLD – SPDR Gold — We bought back our long standing bullish position on gold on a down day on 9/14 with the threat of US centric stagflation heightening.
XLV – SPDR Healthcare — We’re finally getting the correction we’ve been calling for in Healthcare. We like defensible growth with an M&A tailwind. Our Healthcare sector head Tom Tobin remains bullish on fading the “public plan” at a price.
CYB – WisdomTree Dreyfus Chinese Yuan — The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.
TIP – iShares TIPS — The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield. We believe that future inflation expectations are currently mispriced and that TIPS are a efficient way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.
SHORT ETFS
XLI – SPDR Industrials — Industrials shot up +1.1% on 11/3 because of a monster Berkshire bid. That’s now in the price of XLI. We’ll short expectations for V-shaped recovery.
EWU – iShares UK — Despite areas of improvement, broader fundamentals remain shaky in the UK: government debt continues to expand, leadership in critical positions lacks, and the country’s leverage to the banking sector remains glaringly negative. Q3 saw its GDP contract by -0.4%. The announcement of further bank stimulus and talk of the BOE increasing its bond purchasing program suggest that this will not end well.
XLY – SPDR Consumer Discretionary — We shorted Howard Penney’s view on Consumer Discretionary stocks on 10/30. The sector is broken from an immediate term TRADE perspective.
EWJ – iShares Japan — While a sweeping victory for the Democratic Party of Japan has ended over 50 years of rule by the LDP bringing some hope to voters; the new leadership appears, if anything, to have a less developed recovery plan than their predecessors. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.
UUP – PowerShares US Dollar — We re-shorted the US Dollar on strength on 10/20. There continues to be no government plan to support it.
FXB – CurrencyShares British Pound Sterling — The Pound is the only major currency that looks remotely as precarious as the US Dollar. We shorted the Pound into strength on 10/16.
SHY – iShares 1-3 Year Treasury Bonds — If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.
