Warren Buffett & co. Abandons ‘Buy India’ Theme

Former value investor and now Obama crony Warren Buffett cut losses from his investments in India along with other major investors.

From the Bloomberg: (bold mine)

Little more than two years after Warren Buffett labeled India a “dream market,” the economy is expanding at the slowest pace in a decade and the nation’s debt ratings are at risk of being cut to junk.

In the last three months, ArcelorMittal (MT) and Posco scrapped plans for $12 billion of investments, while global funds pulled $12.6 billion from Indian stocks and bonds. The exodus drove the rupee to a record low and caused short-term borrowing costs to soar, sending the government’s two-year bond yield to the biggest premium to the 10-year rate in Bloomberg data going back to 2001. Even Buffett packed up and left, with Berkshire Hathaway Inc. (BRK/A) exiting an insurance distribution venture.

Earlier the legendary investor Jim Rogers said that he has shorted India, while Greed and Fear author CLSA’s Chris Wood sees India as highly vulnerable to a sovereign debt crisis.

Despite the sharp rebound of India’s markets, India’s problems has been structural, has been intensifying and has been highly dependent on a risk ON environment

From the same Bloomberg article: (bold mine)

Investors see little prospect of India tackling budget and current-account deficits that drove the rupee down 20 percent in two years as Prime Minister Manmohan Singh boosts food subsidies to woo voters before a May 2014 election. Standard & Poor’s said this month there is more than a one-in-three chance the nation will lose its investment-grade rating within two years, while Pacific Investment Management Co. sees a “large” chance of a cut in as little as 12 months. Last year’s economic growth of 5 percent compares with an average 7.6 percent in the previous decade…

Weakened by corruption scandals and the loss of allies, Singh’s government has passed the fewest bills ever by an administration sitting a five-year term. That is allowing imbalances to build in Asia’s third-largest economy.

The current-account deficit widened to a record 4.8 percent of gross domestic product in the fiscal year ended March 31, while the 4.9 percent shortfall in public finances was the highest among the four largest developing nations. The World Bank estimates more than 800 million people live on less than $2 per day in India, where consumer-price inflation has held close to 10 percent for more than a year.

Data this month showed gains in wholesale prices unexpectedly accelerated to a six-month high of 6.1 percent in August. Every 10 percent decline in the rupee adds as much as 80 basis points, or 0.80 percentage point, to wholesale-price inflation, Nomura Holdings Inc. estimates show.

The emergence of bond vigilantes has only exposed on the structural defects of highly politicized economies as India. 

India’s war on gold for instance is a symptom of shrinking real markets due to expansive political controls.

Yet fickle foreign funds stampede in and out of Indian markets

Raghuram Rajan outlined a plan to give concessional swaps for banks’ foreign-currency deposits when he took charge as the 23rd governor of the Reserve Bank of India on Sept. 4. That, along with the U.S. Federal Reserve’s decision this month to continue monetary stimulus that has buoyed emerging-market assets, has helped the rupee pare some losses. Foreign funds have bought a net $2.04 billion worth of Indian shares in September and outflows from debt have slowed to $594.6 million.

The rupee has rallied 5.8 percent in September, after a 14 percent slide in the previous three months that was the worst performance among 24 emerging-market currencies tracked by Bloomberg. The S&P BSE Sensex (SENSEX) of local shares has climbed 6.8 percent this month as Rajan’s measures and the Fed’s policy boosted inflows. It fell 5.8 percent in the June-August period.

Those ‘financial tourist dollars’ flowing into India of late represents the throng of frantic yield chasing players, in the words of CLSA’s Chris Wood "crowded into quality, albeit expensive stocks that have outperformed".

And proof of this has been the wide divergence between blue chips and small companies, again from Bloomberg:

India’s smallest companies are trailing its biggest corporations by the most since 2006 in the stock market. The S&P BSE Small-Cap Index, a gauge of 431 companies with a median market value of $91 million, has tumbled 26 percent this year, compared with a 2.4 percent advance in the Sensex, where the median value of 30 firms is $16.9 billion, data compiled by Bloomberg show.

The most important development has been in India’s bond markets, which appears to be signaling a forthcoming recession or even a crisis via an inverted yield curve, again from the Bloomberg (bold mine)

A cash crunch created by the RBI to shore up the exchange rate caused short-term interest rates to exceed long-term ones, inverting the yield curve that gauges the length of investment against returns. Three-month government debt costs jumped to as high as 12 percent at the end of August, from 7.31 percent three months earlier. Two-year bond yields exceeded 10-year rates by as much as 272 basis points on July 31. Notes due in a decade pay 8.72 percent, compared with 2.63 percent in the U.S., 0.69 percent in Japan and 3.98 percent in China. 

Inverted yield curves typically reflect investors’ lack of confidence in an economy and presaged bailouts in Europe in the past three years. Greece’s two-year debt started paying more than 10-year securities a month before the government sought financial aid for the first time in 2010, while Portugal’s curve inverted a week before it sought a rescue.

Inverted yield curves are manifestations of the transition from policy induced inflationary boom to a deflationary bust.

As Austrian economist Gary North explains (bold original)

This monetary inflation has misallocated capital: business expansion that was not justified by the actual supply of loanable capital (savings), but which businessmen thought was justified because of the artificially low rate of interest (central bank money). Now the truth becomes apparent in the debt markets. Businesses will have to cut back on their expansion because of rising short-term rates: a liquidity shortage. They will begin to sustain losses. The yield curve therefore inverts in advance.

On the demand side, borrowers now become so desperate for a loan that they are willing to pay more for a 90-day loan than a 30-year, locked in-loan.

On the supply side, lenders become so fearful about the short-term state of the economy -- a recession, which lowers interest rates as the economy sinks -- that they are willing to forego the inflation premium that they normally demand from borrowers. They lock in today's long-term rates by buying bonds, which in turn lowers the rate even further.

An inverted yield curve is therefore produced by fear: business borrowers' fears of not being able to finish their on-line capital construction projects and lenders' fears of a recession, with its falling interest rates and a falling stock market.

An inverted yield curve normally signals a recession, which begins about six months later. The stock market usually begins to fall six months prior to any recession. So, the appearance of an inverted yield curve normally is followed very shortly by a falling stock market. Fact: The inverted yield curve is an anomaly, happens rarely,and is almost always followed by a recession.

So while the yield chasing manic crowd may drive India’s frothy markets to even higher levels, the emergence of the inverted yield curve implies of a escalating risk of a market shock.

India epitomizes what has been going on globally; manic yield chasing punts pushing up markets, even as unsustainable imbalances have become more evident and more prone to violent adjustments.

Warren Buffett’s Declining Popularity; Fund Raising Charity Lunch Crashes by 71%

Perhaps, like me, many may have come to realize that a shift of investing paradigm from “value” to “rent seeking” cronyism requires little financial acumen. 

And a political route towards investing means partisanship that leads to polarization and ethical erosion. Thus Warren Buffet may have been losing lots of fans as measured by the latest charity fund raising lunch.

Writes the Zero Hedge (bold original)

Demand for Warren Buffett, the investor, peaked in 2012 when an anonymous donor bid $3,456,789 for the annual Glide Foundation's eBay lunch with the Octogenarian of Omaha. Demand for Warren Buffett, 82, the Obama tax and fairness advisor, however, is a mere fraction as the stunned Glide Foundation found out last night when the final bid for the "Power Lunch for 8 with Warren Buffett to Benefit GLIDE Foundation" auction closed at the lowest possible 6 digit increment, or an embarrassing $1,000,100. This was the lowest demand to have lunch with Buffett since 2007.This is a stunning result considering that with every passing year, for obvious reasons, the likelihood of many more such "power lunches" drops exponentially. We hope Buffett-demand is not a proxy leading indicator for the stock market or else a 71% plunge is coming.

Poetic justice?

Warren Buffett: Bet on Natural Juices of Capitalism

For all the repeated calls of taxing the rich and the need for interventions, former value investor and now political entrepreneur (crony) does a U-turn and unexpectedly praises capitalism

From Bloomberg, 

Warren Buffett, the billionaire chairman of Berkshire Hathaway Inc. (BRK/A), said investors should bet on the “natural juices” of capitalism in the U.S. even as lawmakers struggle to narrow the budget deficit.

People tend to “focus too much on what the government’s done, and to give them either credit or blame,” Buffett said in an interview conducted by the chief executive officer of Business Wire, the Berkshire subsidiary that distributes press releases. “The real credit belongs to our system.”

Buffett, 82, has used annual letters to shareholders and public appearances to highlight the prospects for the world’s largest economy, where most of Berkshire’s operations are based. He’s also called for an increase in taxes on the wealthiest individuals to help reduce budget deficits and forestall cuts, an approach that Republicans say would hurt growth.

The U.S. economy “is coming back because of the natural juices of capitalism and not because of government,” Buffett told Business Wire’s Cathy Baron Tamraz in a video interview posted online today. “We have a wonderful system that eventually is self-cleansing and always moves forward.”

Perhaps Mr. Buffett could just be rationalizing his actions due to the recent bullish bets he made, part of such acquisitions involved 28 newspapers for $344 million. Yet this should be an example of how people use "capitalism" when it is convenient for them.

Or perhaps he may just have read the book package sent by Austrian school of economics in fulfillment of his father’s request.

Dad Howard Buffet’s Wish for Son Warren Buffett Delivered

I earlier posted that the prominent libertarian Howard Buffett, father of one of the world’s richest man, Warren Buffett, wrote the great dean of Austrian economics Murray Rothbard to ask where he could buy the latter's book "The Panic of 1819".  That book was intended for his son, Warren.

 

Unfortunately for dad Howard, son Warren not only turned from a value investor into a political entrepreneur (crony) but embraced a political  philosophy that justified his actions, which runs diametrically in contrast with his dad.

Nonetheless, Austrian school professor and economist Mark Thornton fulfills dad Howard’s wish, 51 year after. 

Writes Daniel Sanchez at the Mises Blog 

Warren Buffett’s father Howard (an anti-New Deal and anti-interventionist Congressman) wrote to Murray Rothbard in 1962 about sending some of Murray’s books to his son. Judging from Warren’s recent comments, it seems the books were lost in the mail. So Mark Thornton has sent this care package to the billionaire investor.

  

The Fiscal Cliff Deal and Crony Capitalism

Yesterday’s bipartisan last minute “Fiscal Cliff deal” exhibits or signifies an example of the unjust and immoral distribution of political-economic privileges (which favors those with political connections or the political class)

From ABCNews.go.com (hat tip Zero hedge)

The “fiscal cliff” compromise has been heralded as a saving grace for middle class taxpayers, their families and the unemployed.

But buried in the fine print of the 150-page deal are also some lesser-known New Year’s gifts to some of Washington’s favorite industries.

So what industries are these?

From the same article (bold original)

$430 million for Hollywood through “special expensing rules” to encourage TV and film production in the United States.  Producers can expense up to $15 million of costs for their projects.

$331 million for railroads by allowing short-line and regional operators to claim a tax credit up to 50 percent of the cost to maintain tracks that they own or lease.

$222 million for Puerto Rico and the Virgin Islands through returned excise taxes collected by the federal government on rum produced in the islands and imported to the mainland.

$70 million for NASCAR by extending a “7-year cost recovery period for certain motorsports racing track facilities.”

$59 million for algae growers through tax credits to encourage production of “cellulosic biofuel” at up to $1.01 per gallon.

$4 million for electric motorcycle makers by expanding an existing green-energy tax credit for buyers of plug-in vehicles to include electric motorbikes.

Unnamed in Washington’s favorite industries is Warren Buffett’s Burlington Northern Santa Fe who will be one of the major beneficiaries (perhaps compensation for being Obama's mouthpiece).

Add to the above:

Wind farms, motorsports tracks, global banks and other businesses won revived tax breaks in a $75.3 billion package included in a last-minute budget deal Congress passed yesterday… (Bloomberg)

Political power blocks, special interest groups and pet projects of politicians accounts for as the main beneficiaries of the latest fiscal deal.

The above hardly has been about "unregulated capitalism", but about cronyism via state capitalism or participatory fascism

As Professor Thomas DiLorenzo at the Mises Institute aptly described, 

It is a system of crony capitalism financed by a central bank, government borrowing, and pervasive taxation. It is a system that is of plutocratic elites, for plutocratic elites, and by plutocratic elites (to paraphrase Abraham Lincoln, the true founding father of this system). The massive welfare state is merely used to buy enough votes to maintain the “legitimacy” of the system.

Warren Buffett’s Berkshire Share Buy Backs: Do What I Say and Not What I Do

When people talk or preach about politics, the best measure of candidness is to see how they act rather than to simply adhere to what they say. In Austrian economics lingo this is called demonstrated preference.

Crony Warren Buffett is a wonderful example. As a major beneficiary of Mr. Obama’s policies, he continues to promote President Obama’s class warfare “tax-the-rich” policies. That’s because the yoke of his proposed taxation will be borne more by his peers as he deftly applies tax avoidance schemes. So taxes becomes an anti-competition or protective “moat” for his companies.

Recently, along with other cronies such as Mr. George Soros, Mr. Buffett even signed a petition to increase estate taxes.

Because of his political rhetoric you’d probably have the impression that Mr. Buffett would have no qualms with paying the US government on what he believe are his "obligations".

Yet in real life, Mr. Buffett does the opposite: he fervently avoids taxes.

From the Guardian.co.uk

Billionaire Warren Buffett's conglomerate Berkshire Hathaway spent $1.2bn buying its own shares from the estate of an unnamed investor. The anonymous purchase was made at $131,000, or 117% of book value. Berkshire said it bought 9,200 Class A shares from "the estate of a long-time shareholder". The shares represent 1% of Berkshire's Class A stock.

Buffett – known as the Sage of Omaha – has always been reluctant to conduct share buybacks and agreed to it last year only after Berkshire hit historically low valuations. In its most recent filing, Berkshire said it had not made any repurchases in the first nine months of 2012, and spent just $67.5m on buybacks in 2011.

Berkshire's Class A shares rose after its announcement, up 2.8% at $134,500.

The repurchase came less than a month before the looming "fiscal cliff", automatic tax rises and spending cuts set for 1 January that the White House and members of Congress are negotiating to avoid.

Among other levies, the estate tax is expected to rise in the new year package by as much as 20 percentage points.

Buffett was a signatory to an open letter released on Tuesday that called for a lower starting point for the tax and a higher tax rate, beginning at 45%.

So Berkshire's recent buyback has been meant to protect “the estate of a long-time shareholder” from the same estate taxes which he proposes to raise.

I'd see this as galling pretentiousness.

Why Warren Buffett Loves to Tax the Rich

In a recent article, Billionaire Warren Buffett proposes, once again, to tax his contemporaries, but this time by imposing a “minimum tax on the wealthy”.

Does Mr. Warren Buffett truly practice what he preaches? Or is he merely a sly and sleek talking famous personality promoting a hidden political agenda?

Well it would seem that despite his progressive “soak-the-rich” class warfare rhetoric, in reality, Mr. Buffett has been averse to taxes.

Mr. Buffett’s flagship, Berkshire Hathaway, still has tax issues with Internal Revenue Services. The company hasn’t even been paying due taxes since 2002.

As the New York Post notes in August of 2011

As Americans for Limited Government President Bill Wilson notes, the company openly admits that it owes back taxes since as long ago as 2002.

“We anticipate that we will resolve all adjustments proposed by the US Internal Revenue Service (“IRS”) for the 2002 through 2004 tax years ... within the next 12 months,” the firm’s annual report says.

It also cites outstanding tax issues for 2005 through 2009.

In November 2011, Berkshire Hathaway subsidiary NetJets also sued the IRS for “mistakenly assessing ticket tax” to recoup $643 million in taxes

So Mr. Buffett hasn’t been pro-tax at all: That’s when taxes applies to his business interests.

And this extends to the way Mr. Buffett and or his company uses tax avoidance maneuvers. Harvard Professor Greg Mankiw exposes them

But on closer examination, one realizes that Mr Buffett never mentions doing anything to eliminate the tax-avoidance strategies that he uses most aggressively.  In particular:

1. His company Berkshire Hathaway never pays a dividend but instead retains all earnings.  So the return on this investment is entirely in the form of capital gains.  By not paying dividends, he saves his investors (including himself) from having to immediately pay income tax on this income.

2. Mr Buffett is a long-term investor, so he rarely sells and realizes a capital gain.  His unrealized capital gains are untaxed.

3. He is giving away much of his wealth to charity.  He gets a deduction at the full market value of the stock he donates, most of which is unrealized (and therefore untaxed) capital gains.

4. When he dies, his heirs will get a stepped-up basis.  The income tax will never collect any revenue from the substantial unrealized capital gains he has been accumulating.

In short, Mr. Buffett proposes taxing everyone else but himself.

Lastly, Mr. Buffett seems to be promoting President Obama’s agenda because he benefits substantially from them.

Mr. Buffet’s Berkshire Hathaway had been a major beneficiary of the Wall Street Bailout

Writes Eric Fry at the Daily Reckoning,

During the depths of the 2008 Credit Crisis and stock market selloff, “Wall Street was of fire,” recalls Peter Schweizer in his expose, Throw Them All Out. “[But] Buffett was running toward the flames…with the expectation that the fire department (that is, the federal government) was right behind him with buckets of bailout money…Indeed, Buffett needed the bailout…Beyond Goldman Sachs, Buffett was heavily invested in several other banks that were at risk and in need of federal cash. He began immediately to campaign for the $700 billion TARP rescue plan that was being hammered together in Washington.”

“As the political debates surrounding the proposed $700 billion Troubled Asset Relief Program (TARP) bailout bill heated up,” recalls blogger, Pat Dollard, “Buffett maintained an appearance of naiveté, an ‘aw shucks’ shtick that deferred to the judgment of politicians. ‘I’m not brave enough to try to influence the Congress,’ Buffett told the New York Times.

“Behind closed doors, however, Buffett had become a shrewd political entrepreneur,” Dollard continues. “The billionaire exerted his considerable political influence in a private conference call with then-Speaker of the House Nancy Pelosi and House Democrats. During the meeting, Buffett strongly urged Democratic members to pass the $700 billion TARP bill to avert what he warned would otherwise be ‘the biggest financial meltdown in American history.’”

“If the bailout went through,” Schweizer correctly observes, “it would be a windfall for Goldman. If it failed, it would be disastrous for Berkshire Hathaway.”

Buffett’s “hard work” paid off.

“In all, Berkshire Hathaway firms received $95 billion in bailout cash from the Troubled Asset Relief Program (TARP). Berkshire held stock in the Wells Fargo, Bank of America, American Express, and Goldman Sachs, which received not only TARP money but also $130 billion in FDIC backing for their debt. All told, TARP-assisted companies constituted a whopping 30% of its entire company disclosed stock portfolio.”

But these billions of dollars represented only the most visible portions of the bailout funds that flowed to Berkshire’s companies. Wells Fargo, for example, received “only” $25 billion of TARP funding, but it also received another $45 billion at the same time from the Federal Reserve’s Term Auction Facility (TAF).

Incredibly, Wells Fargo’s borrowings paled alongside those of Goldman Sachs. Throughout the crisis, Goldman gorged itself at every available government trough. The morally challenged investment bank borrowed only $10 billion from the TARP. But at the same time Goldman was griping about “being forced” to take the $10 billion TARP loan, the company was borrowing tens of billions of dollars more from obscure government lending programs with acronyms like: CPFF, PDCF and TSLF.

And that’s not all!

Amidst much fanfare and self-congratulatory press releases, Goldman repaid its TARP loan in June 2009, but only after securing $25 billion of government capital at a different trough. As we observed in a December 15, 2010 edition of The Daily Reckoning:

On June 17, 2009…thanks to some timely, undisclosed assistance from the Federal Reserve, Goldman repaid its $10 billion TARP loan. But just six days before this announcement, Goldman sold $11 billion of mortgage-backed securities (MBS) to the Fed. In other words, Goldman “repaid” the Treasury by secretly selling illiquid assets to the Fed.

One month later, Goldman’s CEO Lloyd Blankfein beamed, “We are grateful for the government efforts and are pleased that [the monies we repaid] can be used by the government to revitalize the economy, a priority in which we all have a common stake.”

As it turns out, the government continued to “revitalize” that small sliver of the economy known as Goldman Sachs. During the three months following Goldman’s re-payment of its $10 billion TARP loan, the Fed purchased $27 billion of MBS from Goldman. In all, the Fed would purchase more than $100 billion of MBS from Goldman during the 12 months that followed Goldman’s TARP re-payment.

Is it any wonder that Buffett’s $5 billion “investment” in Goldman Sachs succeeded so nicely?

“Later, astonishingly,” recalls Peter Schweizer, “Buffett would publicly complain about the bailouts in his annual letter to Berkshire investors, claiming that government subsidies put Berkshire at a disadvantage…”

And as previously pointed out, Berkshire Hathaway’s Burlington North Santa Fe has also profited from Obama’s energy (oil pipeline) policies.

In essence, Warren Buffett not only has altered or overhauled his winning investing formula from "value investment" to the political entrepreneurship of rent seeking by becoming Obama’s premier crony, he has been using Obama’s policies to quash competitors. It looks as if Mr. Buffett's tax increases have been implicitly designed to attain this.

[As a side note, maybe the Occupy Wall Street movement should consider occupying Berkshire Hathaway too]

It’s sad to see how Mr. Buffett seems to have condescended or has sold his soul to the political demons by veering away from the laudable libertarian principles embraced by his dad, Howard Buffett. Or perhaps Mr. Buffett’s string of investing success may have gotten into his head. 

Howard Buffett’s portrait in Warren Buffett’s office (courtesy of Business Insider’s Tour of Warren Buffett’s office)

Given son Warren’s patent hypocrisy, dad Howard must be rolling in his grave.

Is Financial Knowledge Key to Successful Investing?

The public doesn’t know how to manage their finances, that’s according to a study commissioned by the US SEC.

From the Wall Street Journal Blog,

Good news for those intent on committing fraud. Bad news for most everyone else. American investors apparently don’t know much about anything financial.

According to a review released Thursday of years of surveys of individual investors, they are presumably ripe for the picking by fraudsters because they don’t have much knowledge to counteract any outlandish offerings.

Here’s the key and rather astonishing quote: “These studies have consistently found that American investors do not understand the most basic financial concepts, such as the time value of money, compound interest and inflation. Investors also lack essential knowledge about more sophisticated concepts, such as the meaning of stocks and bonds; the role of interest rates in the pricing of securities; the function of the stock market; and the value of portfolio diversification…”

That is from the Library of Congress, which conducted the review on behalf of the Securities and Exchange Commission. The SEC, for its part, needed to study Americans’ financial literacy and assess what investors wanted to know about investments and advisers and how they wanted to receive the information. The SEC had a mandate for all that from the 2010 Dodd-Frank Act.

This generalized lack of knowledge (there certainly are plenty of exceptions) is particularly worrisome since more and more people are responsible for their own investment decisions as part of defined-contribution retirement plans, usually 401(k)s.

The Library of Congress said: “If employees do not have the requisite knowledge, they will not be prepared to make informed decisions regarding the management of their financial affairs, including investing for a secure retirement.”

The public (not limited to Americans) may not be technically sophisticated in the realm of finances but to claim that they are “not be prepared to make informed decisions regarding the management of their financial affairs” looks outrageously untrue.

This misleading assertion presupposes that government should play a role to compel people to get educated "financially".

In reality, America’s standard of living has been higher than most of the world because of capital accumulation.

As the great Ludwig von Mises wrote,

The average standard of living is in this country higher than in any other country of the world, not because the American statesmen and politicians are superior to the foreign statesmen and politicians, but because the per-head quota of capital invested is in America higher than in other countries. Average output per man-hour is in this country higher than in other countries, whether England or India, because the American plants are equipped with more efficient tools and machines. Capital is more plentiful in America than it is in other countries because up to now the institutions and laws of the United States put fewer obstacles in the way of big-scale capital accumulation than did those foreign countries.

Americans not only knew but appropriately acted to manage their state of affairs through the productive balancing of savings and investments which resulted to such high levels of capital accumulation

Moreover, having financial knowledge does not necessarily translate to having the expertise for “investing for a secure retirement”

In reality, financial knowhow does not make one infallible from loses.

In debunking the idea that financial success comes out of high IQs, I recently wrote,

The landmark bankruptcy by Long Term Capital Management in 1998 had been a company headed by 2 Nobel Prize winners. The company’s failure has substantially been due to flawed trading models.

In 2008, the 5 largest US investment banks vanished. These companies had an army of economists, statisticians and quant modelers, accountants, lawyers and all sort of experts who we assume, because of their stratospheric salaries and perquisites, had high IQs.

When Queen Elizabeth asked why ‘no one foresaw’ the crisis coming, the reply by the London School of Economics (LSE)

"In summary, Your Majesty," they conclude, "the failure to foresee the timing, extent and severity of the crisis and to head it off, while it had many causes, was principally a failure of the collective imagination of many bright people, both in this country and internationally, to understand the risks to the system as a whole."

Imagination had been scarce because the same army of experts heavily relied on mathematical models in dealing with investments. They did not follow the common sense advise by the real experts.

These people had all the supposed “expertise” yet they all burned investor's money.

The failure of pseudo financial mastery explodes the idea that “generalized lack of knowledge” will not enable people “to make informed decisions”.

To add, if one looks at the list of the victims of fraud committed by scam artist Bernie Madoff, they had hardly been about financial ignorance

Again I wrote,

Thus, it is no different when Bernard Madoff bamboozled $50 billion off from the who’s who list which includes top rated financial institutions among them banks, (e.g. BNP Paribas,Banco Santander, Fortis Bank Netherlands, HSBC Holdings, Nomura Holdings, Royal Bank of Scotland and etc.) insurers (CNP Assurances, Clal Insurance, Harel Insurance) and Hedge funds (Tremont Group Holdings, Fairfield Greenwich).

To consider, these institutions account for as supposedly smart money outfits since they are backed by an army of “elite professionals”, e.g. economists, accountants, risk managers, quants etc…). Yet at the end of the day, smart money seemed like everybody else; they got what they deserved because they substituted prudence with fad

In reality, inflationist “bubble” policies, which obscures price signals and whets the speculative or gambling appetite, have been the principal influence to fraud.

As a side note: even the most successful stock market investor Warren Buffett admits of occasional investing mistakes.

In Manias, Panics and Crashes Charles Kindleberger’s insight has been highly relevant, (I quoted from my previous article)

Commercial and financial crisis are intimately bound up with transactions that overstep the confines of law and morality shadowy though these confines be. The propensities to swindle and be swindled run parallel to the propensity to speculate during a boom. Crash and panic, with their motto of sauve qui peut induce still more to cheat in order to save themselves. And the signal for panic is often the revelation of some swindle, theft embezzlement or fraud

Bottom line: having financial knowledge is necessary but not sufficient reason for securing financial success.

Relevant theory backed by quality information from the desire to profit (stakeholder's dilemma) has to be used as framework for such analysis.

Morris Cohen in his 1944 book, A Preface to Logic provides a useful insight (quoted by Professor Don Boudreaux)

There can be no doubt that statistics deals with actuality, and that knowledge of actualities is always empirical, i.e., that we cannot obtain knowledge by purely a priori methods. There is, however, no genuine progress in scientific insight through the Baconian method of accumulating empirical facts without hypotheses or anticipation of nature. Without some guiding idea we do not know what facts to gather. Without something to prove, we cannot determine what is relevant and what is irrelevant.

And this should be complimented by emotional intelligence and self-discipline.

Warren Buffett Sees Rising Municipal Bankruptcies

Obama crony Warren Buffett predicts that municipal bankruptcies will increase

From Bloomberg,

Warren Buffett, the billionaire chairman of Berkshire Hathaway Inc. (BRK/A), said municipal bankruptcies are set to rise as there’s less stigma attached after three California cities opted to seek protection just weeks apart.

The City Council of San Bernardino, California, a community of about 210,000 east of Los Angeles, decided July 10 to seek court protection from its creditors. The move came just weeks after Stockton, a community of 292,000 east of San Francisco, became the biggest U.S. city to enter bankruptcy. Mammoth Lakes, California, also sought the shelter this month.

“The stigma has probably been reduced when you get very sizeable cities like Stockton or San Bernardino to do it,” Buffett, 81, said in an interview today on “In the Loop with Betty Liu” on Bloomberg Television. “The very fact they do it makes it more likely.”

Cities and towns across the U.S. have been strained by rising costs for labor, including pensions and retiree health benefits, while the longest recession since the 1930s crimped sales- and property-tax revenue.

I don’t think “stigma” has anything to do with the real issue of the unsustainable financial and economic conditions of the excessively (welfare and bureaucracy) bloated public sector, driven by Keynesian policies. As per Herb Stein’s Law, if something cannot go on forever, it will stop.

So goes with Munis.

Warren Buffett’s Political Entrepreneurship Investing Paradigm

Warren Buffett has been unabashed crony for the Obama regime, to the extent that has even spited on the principles embraced by his Dad, Howard.

From an erstwhile venerable “value” investor, today Mr. Buffett’s investing formula has pronouncedly shifted into rent seeking.

Peter Schweizer of Reason reckoned in his March exposé on Warren Buffett that this folksy fellow “needed the TARP bailout more than most.”

Let’s run through the numbers. Berkshire Hathaway firms in total received $95 billion in TARP money. 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.

He’s definitely one of the top beneficiaries of the big bank bailout. 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.

That’s from Addison Wiggins of the Daily Reckoning.

As I previously wrote, I think Mr. Buffett has been desperate about preserving his popularity, social privileges and political clout which seems to have mainly been latched on the sustenance of his track record, where the scale of his portfolio may have met the law of diminishing returns using his traditional "value" methods.

So instead of admitting reality, egoism has motivated him to radically shift strategies and to sacrifice principles for convenience.

Warren Buffett and the Austrian Business Cycle Theory

Warren Buffett’s dad the prominent libertarian Howard Buffett in a letter to Murray Rothbard wanted to share the latter’s book, “The Panic of 1819”, to his son, perhaps to introduce the Austrian Business Cycle Theory (ABCT).

from the Lew Rockwell Blog

Excerpted from the second to the last paragraph… (hat tip Bob Wenzel)

Somewhere I had read that you wrote a book on the "Panic of 1819". If this is correct, I would like to know where I can buy a copy of it. I have a son who is a particularly avid reader of books about panics and similar phenomenon. I would like to present him with the book referred to.

It’s interesting to know that Warren Buffett’s adapted philosophy has been in the opposite dimension relative to his Dad, especially amplified today...Warren’s twilight years.

Ironically, son Warren has even furiously assailed on the essence of what his Dad believed in.

The sad part is that Warren Buffett evolved from being a model value investor and deigned himself into a major crony for the Obama administration, where the son Warren may have sold out Dad’s principles for convenience, status and wealth.

This reminds me of Jedi master Yoda who warned apprentice Jedi Anakin Skywalker in the final episode of the prequel Star Wars Episode III: Revenge of the Sith

The fear of loss is a path to the dark side.

I am inclined to think that the prospect of the loss of the above privileges could have been a key influence behind the son’s embrace of the state…and the dark side.

Poker Bluffing Central Bankers Means Gold Bullmarket Should Continue

Everytime gold prices goes into hibernation, devotees of the state yell “where is inflation?!”

The “No Inflation” Propaganda

As I have been repeatedly saying, the impact of monetary inflation has always been relative. Inflation affects different economic sectors at different degrees and at different times. Politically favored sectors are the primary beneficiaries followed by the sectors that commercially interact with them, thus the gradient multiplier effect to the economy as earlier explained.

In the stock market, this phenomenon is manifested through what I call as the rotational process.

Yet today’s seeming benign conditions of consumer price inflation (CPI), which account for as symptoms of monetary inflation, does not imply of the absence of CPI inflation nor has CPI inflation solely been manifested on gold prices alone.

Nonetheless anti-gold arguments based on reductio ad absurdum and the fallacy of reading history into the future represents no less than pretexts for further inflationism and government interventions: no inflation today, thus inflate more!

These people should be reminded that economic laws are always in operation and applies equally to everyone. And that the inflation disease operates through different stages which means that CPI inflation could explode at any given time.

In reality, gold has been up for the 11^th straight year despite the ephemeral bout of deflationary episode during the crisis of 2008.

Chart from Goldmoney.com

And gold’s 11 year phenomenal record rise came amidst the US Federal Reserve’s Bubble blowing policies.

The point is, prices of gold will continue to respond to policies and that there hardly are any market trends that moves in a straight line—unless the marketplace endures an episode of extreme pressure from embedded imbalances.

As I previously wrote,

If they do, then markets must be experiencing an episode of extreme stress, symptomatic of the ventilation of acute systemic imbalances on the marketplace. They appear in the form of a blowoff phase (climax) of a bubble cycle or of hyperinflation in motion.

These extreme episodes are the black swan moments.

And the seemingly harmless CPI inflation landscape has been prompting for what seems as the crisis-political response feedback loop mechanism: where policymakers intervene in response to the market reactions and vice versa.

Political agents and their followers will naturally ‘selectively focus’ on data that supports or fits on their views, for the simple reason any admission of the CPI inflation threat will force them to reverse on their policies that would discomfit the markets and work against their interests (more below).

Until we see CPI inflation surge and or a major political backlash on central bank actions, we should expect this cycle of political interventionism/inflationism to continue.

And such actions will come under the half-truth discourse of a “no” or “little” inflation risk environment.

Gold Outperforms Obama Crony Warren Buffett’s Berkshire Hathaway

And it is also important to point out that gold has beaten the portfolio of the Obama crony and statist, Warren Buffett in spite of his repeated ranting against gold.

Whether priced in the equivalent of gold grams...

Chart from Pricedingold.com

Or based on relative performance…

Chart from the Daily Reckoning

“Unproductive” gold has clearly outperformed Mr. Buffett’s flagship Berkshire Hathaway over the past few years.

While past performance may not guarantee future outcomes, the second point is that fundamental drivers underpinning gold’s bullrun remains firmly in place.

Inflationism (expansion of monetary base in the US—see lower window—as well as in other developed economies) and the policy of negative real rates worldwide should continue to drive gold higher in spite of the current consolidation phase (chart from US Global Investors)

So, aside from highly distorted markets through various forms of market interventionism, I think this phase can be construed as a normal profit taking consolidation phase following the recent record run.

And reading price signals over the short term in an environment of heavy interventions can mislead, as acts of market interferences may have short to medium term volatile effects on the market’s price channels.

And given these highly politically influenced conditions, gold should continue to defy any statist expectations and beat the returns of Berkshire Hathaway.

Poker Bluff, Redux

It can also be observed that many of the current attributions to weak gold prices have centered on the supposed reluctance by policymakers to continue with “further stimulus”.

Such blarneys over withholding stimulus have been the dominant narrative and may have partly influenced the recent violent downside swing of September of 2011 and in March 2012 (two arrows indicated). I don’t recall of what news was ascribed to the December decline, I was on vacation.

Yet it has been a predilection, if not a habit, of the mainstream to associate current events to the market’s price actions (available bias).

We have seen this happen before through the gibberish of so called “exit strategy” in 2010. Then, I called this nonsensical propaganda as poker bluffing central bankers.

In reality in 2011, the US Federal Reserve monetized about 61% of US treasury issuance or a “whopping 8.6% of gross domestic product (GDP) on average per annum” according to Lawrence Goodman of Center for Financial Stability.

The US Federal Reserve financed most of the expenditures of the US government to compensate for the insufficiency of funding sources from private sector savings and the decline of foreign demand for US government papers. As US government expenditures continue to swell, the buyer and financier of last resort will be the US Federal Reserve.

The third point is that any constrains towards further “stimulus” would extrapolate to an outright default by the US government. Such event would ripple across the political spectrum that would adversely impact the favored banking industry and to welfare-warfare state. And US politicians and bureaucrats won’t likely resort to this option as this would put in jeopardy the survival of current political institutions or the cartelized central banking-welfare warfare state-banking system.

So policymakers will find ways and means to conduct more inflationism through overt or through stealth and possibly will come in different names.

Alternatively, this means another round of poker bluffing chatters.

Gold’s Correlation with Various Asset Classes

Lastly gold’s correlations with asset markets have been vacillating.

For most of the past years, the inflation tide has been manifested with gold’s leading the way relative to the equities as represented by the US S&P 500.

But this relationship appears on the rocks. During parts of 2011 (red ellipses), prices of gold and US equity markets parted ways. This came coincident to the end of QE 2.0 and the policy dithering by the US Federal Reserve. Then, gold prices rose as US stocks fell. This divergence was finally resolved when central bankers abroad reintroduced their versions of QE.

However, such divergence—but on an opposite path where gold has been in consolidation gold while the US S&P continues to ascend—seems to have remerged anew today.

My guess is that gold will close this anomalous divergence by heading higher.

My impression is that the gold appears to partly mirror the actions of the euro.

While the gold-Euro correlations has been loose over the past 3 years, where the upward streak of gold’s trend came amidst the sharp gyrations of the euro, recently gold seems to be moving in sympathy along with the euro’s decline.

Correlation should not be read as causation though. It would be mistake to think of gold as plainly anti-US dollar trade.

In reality, gold is the nemesis of fiat or political money, whether the US dollar, European euro, China’s yuan, Japanese yen, British pound or the Philippine Peso.

The bottom line is inflationism will continue to breath life into gold’s bullmarket, current volatility notwithstanding.

Betting against gold, says Professor Gary North, is the same as betting on governments. He who bets on governments and government money bets against 6,000 years of recorded human history.

Are High IQs Key to Successful Investing?

Yale Professor Robert Shiller thinks so.

Writing at the New York Times,

YOU don’t have to be a genius to pick good investments. But does having a high I.Q. score help?

The answer, according to a paper published in the December issue of The Journal of Finance, is a qualified yes.

The study is certainly provocative. Even after taking into account factors like income and education, the authors concluded that people with relatively high I.Q.’s typically diversify their investment portfolios more than those with lower scores and invest more heavily in the stock market. They also tend to favor small-capitalization stocks, which have historically beaten the broader market, as well as companies with high book values relative to their share prices.

The results are that people with high I.Q.’s build portfolios with better risk-return profiles than their lower-scoring peers.

Certainly, caution is needed here. I.Q. tests are controversial as to what they measure, and factors like income, quality of education, and family background may not be completely controlled for. But the study’s results are worth pondering for their possible implications.

So how valid is such claim?

Let’s get some clues from some of my favorite investors.

Here is the legendary Jesse Livermore (bold emphasis mine)

The market does not beat them. They beat themselves, because though they have brains they cannot sit tight. Old Turkey was dead right in doing and saying what he did. He had not only the courage of his convictions but also the intelligence and patience to sit tight.

When I am long of stocks it is because my reading of conditions has made me bullish. But you find many people, reputed to be intelligent, who are bullish because they have stocks. I do not allow my possessions – or my prepossessions either – to do any thinking for me. That is why I repeat that I never argue with the tape.

Mr. Livermore simply posits that intelligence can be overwhelmed by egos and cognitive biases (particularly in the second quote the endowment effect, Wikipedia.org—where people place a higher value on objects they own than objects that they do not.).

Here is the 10 investing principles by another investing titan the late Sir John Templeton

1. Invest for real returns 2. Keep an open mind 3. Never follow the crowd 4. Everything changes 5. Avoid the popular 6. Learn from your mistakes 7. Buy during times of pessimism 8. Search worldwide 9. Hunt for value and bargains 10. No-one knows everything

More from John Templeton

“Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.

Here is value investor turned crony, Warren Buffett. I’d say that Mr. Buffett’s original wisdom has been a treasure. (bold emphasis mine)

‘I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.’

‘Read Ben Graham and Phil Fisher read annual reports, but don’t do equations with Greek letters in them.’

‘Never invest in a business you cannot understand.’

‘You’re neither right nor wrong because other people agree with you. You’re right because your facts are right and your reasoning is right – that’s the only thing that makes you right. And if your facts and reasoning are right, you don’t have to worry about anybody else.’

Does all the above sound like high IQ stuff? Evidently they represent more common sense and the school of hard knocks stuff.

Yet to the contrary, high IQs can translate to portfolio disasters.

The landmark bankruptcy by Long Term Capital Management in 1998 had been a company headed by 2 Nobel Prize winners. The company’s failure has substantially been due to flawed trading models.

In 2008, the 5 largest US investment banks vanished. These companies had an army of economists, statisticians and quant modelers, accountants, lawyers and all sort of experts who we assume, because of their stratospheric salaries and perquisites, had high IQs.

When Queen Elizabeth asked why ‘no one foresaw’ the crisis coming, the reply by the London School of Economics (LSE)

"In summary, Your Majesty," they conclude, "the failure to foresee the timing, extent and severity of the crisis and to head it off, while it had many causes, was principally a failure of the collective imagination of many bright people, both in this country and internationally, to understand the risks to the system as a whole."

Imagination had been scarce because the same army of experts heavily relied on mathematical models in dealing with investments. They did not follow the common sense advise by the real experts.

My favorite iconoclast author Nassim Taleb in Fooled by Randomness offers an explanation (emphasis added)

it is also scientific fact, and a shocking one, that both risk detection and risk avoidance are not mediated in the “thinking” part of the brain but largely in the emotional one (the “risk as feelings” theory). The consequences are not trivial: It means that rational thinking has little, very little, to do with risk avoidance. Much of what rational thinking seems to do is rationalize one’s actions by fitting some logic to them.

What the consensus mistakenly thinks as rational is, in reality, the emotional. Thus, we need more Emotional Intelligence (EI) rather than high IQs

The most important observation or lesson is one of the repeated botched attempts by high IQ people to transform investing into ‘science’.

Well, because investing involves people’s valuations and preferences, all of which constitutes human action, in truth, investing is more than science…

As the great Ludwig von Mises explained. (bold highlights mine)

For the science of human action, the valuations and goals of the final order at which men aim constitute the ultimate given, which it is unable to explain any further. Science can record and classify values, but it can no more "explain" them than it can prescribe the values that are to be acknowledged as correct or condemned as perverted. The intuitive apprehension of values by means of understanding is still not an "explanation." All that it attempts to do is to see and determine what the values in a given case are, and nothing more. Where the historian tries to go beyond this, he becomes an apologist or a judge, an agitator or a politician. He leaves the sphere of reflective, inquiring, theoretical science and himself enters the arena of human action.

...but rather, investing is an art.

Again Professor Mises from the same article.(emphasis added)

The position of science toward the other values of acting men is no different from that which it adopts toward aesthetic values. Here too science can do no more with respect to the values themselves than to record them and, at most, classify them as well. All that it can accomplish with the aid of "conception" relates to the means that are to lead to the realization of values, in short, to the rational behavior of men aiming at ends.

Bottom line: The art of managing our emotions or emotional intelligence, via common sense and self-discipline, is more important than having high IQs.