Dave Gonigam – May 8, 2012
- Buffett and Munger’s exercise in begging the question: Which is more “unproductive” and “uncivilized” — gold… or bailouts?
- The newest “magazine cover indicator”? Barry Ritholtz on why Main Street shunning Wall Street is a good thing
- Gold tests $1,600 as the Chinese step up buying sixfold… and gamblers pay a 13% premium over spot for bullion from a machine
- Two perspectives on “leaving the labor force”… reader nominates a surprising candidate to leave the euro… How you’re no longer a citizen but a “revenue target”… and more!
There he goes again.
“A decent productive asset will kill an unproductive asset,” said Warren Buffett yesterday on CNBC.
The “unproductive asset,” as if you hadn’t guessed, is gold — which is once again in Buffett’s sights.
“When we took over Berkshire,” he prattled as Becky Quick looked on worshipfully, “Berkshire was selling at $15 a share and gold was selling at $20 an ounce. And gold is now $1,600 and Berkshire is $120,000.”
Ah, the old selective time frame trick. Almost makes us wonder if someone slipped the Oracle this piece of Addison’s from The Daily Reckoning — complete with the following chart…
Nor does the chart tell the whole story, for what would Berkshire be today without the $700 billion monstrosity known as TARP?
“Berkshire Hathaway firms in total received $95 billion in TARP money,” Addison writes in the most-recent Apogee Advisory. “Berkshire, you’ll recall, held stock in Wells Fargo, Bank of America, Goldman Sachs and American Express. Not only did these companies receive TARP funds… they also dipped into the FDIC’s treasury to back their debt. Total bailout: $130 billion. TARP-enabled companies accounted for 30% of the Oracle’s publicly disclosed stock portfolio.
“And to sharpen the sting, he even got a better deal to help ailing Goldman Sachs than our own government. Buffett got a 10% preferred dividend, while the Feds got all of 5%. He cleaned up with $500 million a year in dividends. Without the bailout, you can bet many of his stock holdings would have gone near-zero instead.”
“I think gold is a great thing to sew into your garments if you’re a Jewish family in Vienna in 1939,” added Buffett’s right-hand man Charlie Munger last week, “but I think civilized people don’t buy gold. They invest in productive businesses.”
That… or they suck on the taxpayer teat, while telling the rest of us to “suck it in.”
Recall it was Munger last fall who told a group of college students, “You should thank God” for bank bailouts, for the alternative was too horrible to contemplate. “Hit the economy with enough misery and enough disruption, destroy the currency, and God knows what happens.”
[Destroy the currency? Isn’t that why you keep gold? But we digress…]
“Now, if you talk about bailouts for everybody else,” Munger went on, “there comes a place where if you just start bailing out all the individuals instead of telling them to adapt, the culture dies.
“At a certain place, you’ve got to say to the people, ‘Suck it in and cope, buddy. Suck it in and cope.”
There, in a few outrageous sentences, you have the raw essence of what’s increasingly labeled the “extraction” culture.
“Washington’s empire extracts resources from the American people for the benefit of the few powerful interest groups that rule America,” writes economist Paul Craig Roberts. “The U.S. Constitution has been extracted in the interests of the Security State, and Americans’ incomes have been redirected to the pockets of the 1%.”
Addison delves further into this theme in the next issue of Apogee — examining perhaps the mother of all “extraction” schemes. If you have an IRA or 401(k), you don’t want to miss this issue, only days away. Subscribe here.
Traders who shrugged off yesterday’s euro-scare suddenly have the willies today. The pro-bailout parties in Greece couldn’t twist enough arms to form a majority in parliament. Now it’s the turn of an anti-bailout party to try.
The Euro Stoxx 50 index surrendered all of yesterday’s gains, and then some. Major U.S. indexes, which fought back to end yesterday mostly flat, are down as much as 1.5%.
The S&P 500, which lost its grip on 1,400 only last Thursday, clings to 1,350 as of this writing.
“It may surprise some people to learn this is both an expected and positive development,” says the inimitable Barry Ritholtz, reacting to the latest “magazine-cover indicator.”
Not that the editors of USA Today consciously set out to imitate the 1979 BusinessWeek cover pronouncing “The Death of Equities”… but the resemblance can’t be denied…
“Stocks remain out of fashion,” the rag reports, “even though the stock market has risen more than 100% since the bear market ended three years ago.”
“This is no surprise,” says Mr. Ritholtz — “between the run of scandals in the 1990s and 2000s, the dot-com implosion, analyst scandal, the 2007-09 crash, housing collapse, the flash crash and HFT, mom and pop have taken their ball and gone home.”
“Whenever I give a market presentation at a conference, I always use the chart below. It explains in great detail how Main Street investor psychology impacts the long secular cycles of bull (green) and bear (red) markets. Note the metric at bottom, which is P/E ratio.”
We’ve been in a secular bear market since 2000. “The dominant feature,” he explains, “is that investors are willing to pay less and less for that same dollar of earnings.”
“We see that today. Profits going up as volumes go down; investor interest ebbs and flows. It’s how markets can go sideways or even rally and still see P/E ratios fall.”
“Ultimately, when the process generates enough investor disgust, we can form a lasting market low, typically, in the single-digit P/E ratios.”
[Ed. Note: Perhaps Mr. Ritholtz will venture a guess about when that will happen when he makes a return appearance at the Agora Financial Investment Symposium this July. He’s quickly becoming a fixture — as reliable as old hands like Doug Casey, Rick Rule and Bill Bonner.
Dr. Marc Faber is back after a two-year hiatus… and for the first time, historian Niall Ferguson will join us for some truly big-picture insights about “the West and the Rest” — the subtitle of his new book. You can still secure a handsome discount on registration… but seats are filling up fast.]
Small-business owners are feeling their perkiest in more than a year. The optimism index issued by the National Federation of Independent Business jumped two full points last month, to 94.5.
On the one hand, the number equals that set at the start of the “official” recession in December 2007. On the other hand, the number is also the same as it was in February 2011. “No surprise,” says the NFIB report, “since nothing much happened during that time that would make owners more optimistic about the future.”
But we do find something interesting in the part of the survey that asks its members to identify their “single most-important problem.” The categories “poor sales,” “taxes,” and “government regulations/red tape” each pulled between 18-20%.
A year ago, “poor sales” clearly led the other two, at 25%.
The resumption of the euro-scare is kicking Mr. Buffett’s “unproductive asset” in the teeth today.
Gold is off more than 2%. It dipped below $1,600 earlier and still hangs on just barely. Silver’s down to $29.29 — a four-month low.
Gold’s fall from $1,900 eight months ago has done nothing to deter the Chinese from scooping up more of an asset that produces no cash flow.
China’s gold imports from Hong Kong have exploded sixfold in the space of a year: First-quarter imports during 2012 totaled 135.5 metric tons. The Q1 2011 figure was a mere 19.7 metric tons.
“The purchases through Hong Kong,” Bloomberg reports, “may signal that the mainland is accumulating reserves, London-based brokerage Sharps Pixley Ltd. said in February. “The nation last made its reserves known more than two years ago, stating them at 1,054 tons.”
We’ll correct Bloomberg here: More than three years ago. And going by past performance, the Chinese government won’t update that number until 2015.
Regardless, China’s well on the way to surpassing India as the world’s biggest gold consumer this year.
Here in the States, gold is coming into vogue among… gamblers.
Long-time 5 readers have kept up with the “Gold to Go” vending machine ever since a prototype debuted in Frankfurt in May 2009. Now comes word of a second American location.
“The machine made its glitzy debut at Golden Nugget Atlantic City on April 26,” according to the local paper, “when the casino staged a grand opening ceremony to celebrate the completion of its $150 million renovation project.”
The only other U.S. location is the Golden Nugget Las Vegas… which makes us wonder what happened to the first U.S. machine, installed around Christmastime 2010 in Boca Raton, Fla. At the time, we mentioned the machine charged a reasonable 5% premium over spot.
“A 1-ounce gold bar was selling for $1,853 on Thursday,” says the Atlantic City Press… which is a rather steep 13% premium over the price that day.
Maybe they figure the high rollers are easier marks…
“I am 71 and recently got fired,” writes a reader with his own perspective on the phenomenon of people “leaving the workforce.”
“It took three years to get a job from a guy even older than me. (There is a bit of age discrimination for old f**rts.) Over the years, I started several businesses, even industries, and ‘created’ hundreds of jobs. A couple of badly timed investments left me holding the bag.”
“I grew up to take responsibility for my situation and would never think of applying for unemployment (I think of it as a visit to the DMV).”
“I wonder how many of us are not counted.”
“Not discouraged, just waiting.”
“You seldom mention the effect of the so-called underground economy when you comment on the disappearing workers from our labor force,” observes another.
“Even in my 80s, I don’t have to look far to see many examples of a vast mass of workers working on barter and ‘off the books’ transactions. All kinds of marginal workers get their daily beer and bread as well as a place to sleep this way.”
“How big is it and what effect does this have on our downturn? Things could well be escalating as the ‘official’ numbers get manipulated by our glorious leaders!”
The 5: Ah, “System D” as it’s coming to be known… Our compatriots at The Daily Reckoning have been onto it all this year.
Robert Neuwirth, author of the 2011 book Stealth of Nations estimates the worldwide off-the-books economy at roughly $10 trillion… although he concedes his calculation is “very rough and almost certainly on the low side.”
“I am very much inclined,” writes a reader in Switzerland, “to adhere to Dan Amoss’ euro analysis,” presented in yesterday’s episode.”
“Personally, I was always of the opinion that the euro is flawed. It might, however, be a drawn-out piece. We’ve still got French parliamentary elections to come on June 10 and 17. It is quite likely that Hollande will get a majority, but one never knows. His desire to renegotiate the fiscal compact is probably going to fail. The French had too much of a say under Sarkozy; other countries might wish to be listened to too.”
“As far as Greece goes, talk shows that there will be no government formed within the next 10 or so days, thus compelling another general election, probably on June 10.”
“Nice perspectives ahead for all of us.”
“Watch the Netherlands as well,” advises another reader.
“I have a dear Dutch friend who once ran worldwide operations for both Phillips and Motorola. He says the Dutch central bank has already developed a plan to leave the euro in the course of a long weekend.”
“They have, apparently, already printed the necessary guilder notes, formulated their distribution plan, drafted legislation to change the currency in all contracts and written computer programs to enable banks and businesses to convert accounts to guilders. All that is lacking is the order from government and a central bank decision establishing the official conversion rate.”
“Boy, you guys were/are so right about cities and revenue,” writes a member of both the Reserve and the Laissez Faire Club.
“Look at what LA is proposing to wring out of people from parking on the streets that they NEED to park on. ‘Revenue targets’ — LOL.”
“Thanks for all the good work!”
The 5: Our correspondent passes along an article about how Los Angeles Mayor Antonio Villaraigosa’s latest budget proposal jacks up parking fines for the sixth time in seven years.
If the city council goes along, parking in a verboten zone on a street-sweeping day — to cite only one example — would cost you $78. As recently as 2005, it was $45.
As the mother of all financial bubbles starts to pop, you’ll feel it on the local level first: As the man says, we’re all “revenue targets” now. Can’t wait for the drones.
Regards,
Dave Gonigam
The 5 Min. Forecast
P.S. Friedrich von Hayek was born on this day in 1899. “Laissez Faire Books is the proud publisher of a new edition of Hayek’s Tiger by the Tail, an outstanding compilation of Hayek’s best writings on unemployment and inflation,” writes LFB executive editor Jeffrey Tucker.
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It’s so powerful, it an element in the “Economics in One Library” set — bound copies of four essential volumes we send to every new member of the Laissez Faire Club.
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