giofranchi

That’s simple. To cure the debt problem with more debt… I don’t understand how it should work: so, either I am dumb, or it is too complicated. Probably, the former. :( giofranchi No, no, no. I think you choose not to understand since it does not conform to your view of the world. :) I do that all the time. On this particular issue, I have changed my own opinion on this a couple of years back. I would lay out my understanding briefly and you can point out where you disagree. I am talking just about US here. Consumers took out more debt than they can service over the past several years for a variety of reasons (housing bubble, easy loans, falling interest rates, central bank encouragement, stagnating wages, etc.). The financial crisis of 2008-2009 with falling asset prices, unemployment, etc made debt servicing more difficult for consumers who have logically pulled back from spending and started saving, thus beginning the process of reducing debt levels. The reduced spending by consumers creates headwinds for the economy resulting in sub par growth and also reduces government revenues. The government at this time can choose not to do much and just let nature take its course and let those who have recklessly borrowed more money suffer. The result would be that economy would take a much sharper downturn, housing and other assets deflate, bad banks get wiped out, lenders take haircuts on the money lent. Once this process works through, economy regains strength. The problem with this approach is that it would cause tremendous suffering. We are probably talking about GDP declines of peak to trough of something like 10-15%, unemployment shooting to 20%, etc. Jim Grant, Hussman, Rodriguez and many others think this should be the process that should be followed. There is a moral component to this line of reasoning. This approach has been argued as the quicker way to resolve the crisis, but we cannot be sure about that. We have tried this in 1929 with disastrous results. The other approach has been for Government to step in and try to take debt for a while as the consumer slowly deleverages. The Government does take on debt so Government spending would try to offset some of the reduction in spending by consumers. Monetary policy is kept as loose as possible via various mechanisms to allow borrowers to deleverage via lower interest rates or via higher inflation. We do know this is not sustainable for ever and this is not without risks. But this would be the best of the bad options. Vinod Vinod, thank you for everything you have written. All your thoughts are very well expressed and convincing. I agree with all of them. I probably misunderstood Mr. Krugman’s point. When I speak of debt, I always think about TOTAL debt. Because total debt is what really matters. So I implicitly thought he was advocating a further increase in total debt as a percentage of GDP... Now you have explained to me that his idea is to increase only government debt, while decreasing private debt, hoping that way to slowly decrease total debt to a more manageable level. In fact, that is something I can understand. ;) What I still don’t understand is why people choose to point at 1929, when they don’t like to leave the markets alone, and never refer to the Weimar Republic in Germany or Japan during the last 20 years. First of all, the Great Depression saw mixed policies: from 1929 until 1932 the markets were left to adjust alone, just like Mr. Mellon suggested. But from 1933 until 1937 the New Deal implemented some of the most interventionist policies ever conceived. The results from 1938 until 1949 were far from convincing… Second, the examples of the Weimar Republic and recent Japan clearly show that government interventions might fail to be very useful. So, here is my “view of the world”, as you put it: there is no easy way out. I don’t know of a single MAJOR (there are some exceptions, like Canada in the ‘90s and others, but they all were on a far smaller scale) deleveraging in history which didn’t have bad consequences. Let the markets alone: restructurings: bad consequences. Intervene: austerity + inflation: bad consequences. A little bit of restructurings + a little bit of austerity + a little bit of inflation: probably the best solution: bad consequences. My view of the world: the moment you get into debt, you are screwed up. Mr. Vanderbilt said about debt: “If you had bought a hundred shares instead of a thousand, you could have held on. Never be in too great hurry to get rich.” So, here is the only true solution! I repeat: “Never be in too great hurry to get rich.” As long as we won’t be able to control and subdue our greed and ego, nothing will change, and we will always get into trouble. Once in trouble: bad consequences. So, I don’t believe in anyone who claims to possess the only right formula to get us out of this mess like a walk in the park. To me they are just charlatans. Where does this all lead me? Well, it actually has some investing implications. If most asset classes are far from cheap, not many bargains can be found, and bad consequences are possibly lurking down the road, I would be very careful… meaning that I would pile on cash reserves. Right now is the time where I prefer to own “a hundred shares instead of a thousand”. giofranchi

Recent Dylan Grice's speech. Would Keynes be a Keynesian today? giofranchi Dylan_Grice-Witch_Hunts_Inflation_Fears_and_Why_Im_Bearish_in_2013.pdf

No one is saying there is a magical solution. That is a strawman argument. Monetary policy is not the right tool to fight a liquidity trap, but Fed is doing what it can with the tools it has. From "End the Depression Now" Can Debt Cure a Problem Created by Debt? One of the common arguments against fiscal policy in the current situation—one that sounds sensible—runs like this: “You yourself say that this crisis is the result of too much debt. Now you’re saying that the answer involves running up even more debt. That can’t possibly make sense.” Actually, it does. But to explain why will take both some careful thinking and a look at the historical record. It’s true that people like me believe that the depression we’re in was in large part caused by the buildup of household debt, which set the stage for a Minksy moment in which highly indebted households were forced to slash their spending. How, then, can even more debt be part of the appropriate policy response? The key point is that this argument against deficit spending assumes, implicitly, that debt is debt—that it doesn’t matter who owes the money. Yet that can’t be right; if it were, we wouldn’t have a problem in the first place. After all, to a first approximation debt is money we owe to ourselves; yes, the United States has debt to China and other countries, but as we saw in chapter 3, our net debt to foreigners is relatively small and not at the heart of the problem. Ignoring the foreign component, or looking at the world as a whole, we see that the overall level of debt makes no difference to aggregate net worth—one person’s liability is another person’s asset. It follows that the level of debt matters only if the distribution of net worth matters, if highly indebted players face different constraints from players with low debt. And this means that all debt isn’t created equal, which is why borrowing by some actors now can help cure problems created by excess borrowing by other actors in the past. Think of it this way: when debt is rising, it’s not the economy as a whole borrowing more money. It is, rather, a case of less patient people —people who for whatever reason want to spend sooner rather than later—borrowing from more patient people. The main limit on this kind of borrowing is the concern of those patient lenders about whether they will be repaid, which sets some kind of ceiling on each individual’s ability to borrow. What happened in 2008 was a sudden downward revision of those ceilings. This downward revision has forced the debtors to pay down their debt, rapidly, which means spending much less. And the problem is that the creditors don’t face any equivalent incentive to spend more. Low interest rates help, but because of the severity of the “deleveraging shock,” even a zero interest rate isn’t low enough to get them to fill the hole left by the collapse in debtors’ demand. The result isn’t just a depressed economy: low incomes and low inflation (or even deflation) make it that much harder for the debtors to pay down their debt. What can be done? One answer is to find some way to reduce the real value of the debt. Debt relief could do this; so could inflation, if you can get it, which would do two things: it would make it possible to have a negative real interest rate, and it would in itself erode the outstanding debt. Yes, that would in a way be rewarding debtors for their past excesses, but economics is not a morality play. I’ll have more to say about inflation in the next chapter. Just to go back for a moment to my point that debt is not all the same: yes, debt relief would reduce the assets of the creditors at the same time, and by the same amount, as it reduced the liabilities of the debtors. But the debtors are being forced to cut spending, while the creditors aren’t, so this is a net positive for economy wide spending. But what if neither inflation nor sufficient debt relief can, or at any rate will, be delivered? Well, suppose a third party can come in: the government. Suppose that it can borrow for a while, using the borrowed money to buy useful things like rail tunnels under the Hudson, or pay schoolteacher salaries. The true social cost of these things will be very low, because the government will be employing resources that would otherwise be unemployed. And it also makes it easier for the debtors to pay down their debt; if the government maintains its spending long enough, it can bring debtors to the point where they’re no longer being forced into emergency debt reduction and where further deficit spending is no longer required to achieve full employment. Yes, private debt will in part have been replaced by public debt, but the point is that debt will have been shifted away from the players whose debt is doing the economic damage, so that the economy’s problems will have been reduced even if the overall level of debt hasn’t fallen. The bottom line, then, is that the plausible-sounding argument that debt can’t cure debt is just wrong. On the contrary, it can—and the alternative is a prolonged period of economic weakness that actually makes the debt problem harder to resolve. I have been pissed off with Krugman's columns in NYT for various reasons (too partisan) but his book is a gem. Vinod Well Vinod, if you believe that… As far as I am concerned, only a professor or a journalist could have written something like that… Listen, I really hate complicated things. Because they might seem brilliant and convincing, but they just don’t work. Every businessman knows that. In business the only things that work are the ones easiest to implement and the outcome of which is almost certain. Everything else is a waste of time and resources 90% of the times. In a system much more complex than a single business, like the global economies are, the principle of simplicity should be followed even more rigorously. Krugman writes: That’s simple. To cure the debt problem with more debt… I don’t understand how it should work: so, either I am dumb, or it is too complicated. Probably, the former. :( giofranchi

Ned Davis Research. Zeal LLC. It boggles the mind why Hussman doesn't employ an "ensemble" of market analyses - clearly his methods have failed during one of the greatest bull markets in market history.... Thank you bmichaud! One more question: is Ned Davis for free?! ;D What do you mean with “ensemble” market analysis? When Mr. Hussman says “overvalued, overbought, overbullish, rising-yields” syndrome, isn’t that an “ensemble” market analysis?! giofranchi

I thought they were merely trying to offset the deflation that is otherwise going on, but Mr. Paul suggests they are trying to create wealth. Do I simply misunderstand our stimulus spending or does Mr. Paul misunderstand/misrepresent their intentions? But in just a few short sentences Professor Hans-Hermann Hoppe eviscerates the Krugmans of the world by pointing out the obvious: If governments or central banks really can create wealth simply by creating money, why does poverty exist anywhere on earth? Why haven’t successive rounds of quantitative easing by the US Fed solved our economic recession? And if Fed money creation really works, and doesn’t create inflation, why haven’t Americans gotten richer as the money supply has grown? I think that Mr. Paul is pointing out something obvious: things have consequences, choices have consequences. And you cannot escape those consequences, simply printing more and more money. We are at the end of a 70-years debt super-cycle, that has happened over and over again trough history. You cannot party for 70 years, and then find a magical solution to feel no hangover! Of course, things can change, we are not doomed to repeat the past. But the right change would be to prevent unsustainable debt accumulation in the first place. Once the reckless path has been followed again, there is no magic wand (or magic printing press!) to avert the inevitable consequences. I think that’s what Mr. Paul is warning us against. Is he right? I don’t know… we will see… But it makes sense to me, and I always like someone who warns me of possible dangers ahead. giofranchi

I think a lot of it depends on what it means to forecast correctly. Broken clocks and all that. It's pretty easy to forecast certain things if you aren't held to a time frame. I mean I can tell you with certainty there will be a recession, but when is it? If I just say its coming, well, is that a month from now, a year from now, 3 years from now, or when? That's not to say Hussman will or won't be right, but a lot of these guys have been fighting the last war (the financial crisis) since late 2009. Perhaps they will be right someday, but I don't necessarily give them credit for predicting it. I almost put in parentheses whatever "right" means. He can't claim he was ultimately right if the market doesn't fall well below 1,100, as he was fully hedged coming out of the 2011 bottom. I think if the secular bear finally ends somewhere in the vicinity of 10x Schiller EPS, or 900 or lower in a few years, he can claim he was right. That's the fascinating aspect of investing though - those with different time horizons can all end up being right....think Berkowitz with BAC and JOE, or somebody owning Apple stock through the doldrums. Maybe different time horizons can solve a lot of things… but, if you study history, if you study Mr. Rothschild, Mr. Gould, Mr. Sage, Mrs. Green, Mr. Baker, Mr. Mellon, Mr. Baruch, Mr. Templeton, and, yes!, Mr. Buffett too, they all have two things in common: 1) they all have been extremely successful investors, and 2) they all have had a lot cash available at the right moment, they all have had a lot of cash, when others were panicking. Also Mr. Buffett, who claims to be always fully invested, somehow had a ton of cash to put to work in late 2008, early 2009. Also Mr. Buffett, who claims to be always fully invested, somehow managed to shut down his partnership in the late ‘60s, right at the start of a secular bear market for stocks, and then was able to feel like “a sex-starved man in a harem” in 1974-1975. I think Mr. Watsa today is doing the same thing. How to have a lot of cash, when others are panicking? Of course, I don’t have a formula… But every week I read Mr. Hussman’s commentary and I find it to be the most rigorous analysis of the stock market out there. If someone knows something better, please let me know. I cannot say if in the future Mr. Hussman will have a lot of cash to put to work, when others are scrambling for liquidity… but I would bet so! giofranchi

Y-Charts calculates US Total Debt vs. GDP at 349.8% (last reading 09/30/2012): http://ycharts.com/indicators/us_total_debt_gdp The Economist puts it at 289%. Does someone know what the exact percentage is? Thank you, giofranchi

Mr. Ron Paul on balance sheet wealth illusion. giofranchi tst1-21-2013.pdf

Personally, I think that what matters is always total debt. And total debt as a percentage of GDP has never been higher than today in peace time. After WWII total debt was more or less 160% GDP: compare that with a total debt of 350% GDP we have today. Let’s say a family pays a 5% interest on its debt and its debt amounts to 3.5 times its revenues. Each year that family must pay 5% x 3.5 = 17.5% of its revenue in interest alone. Compare that to the US personal saving rate which today is 3.6%. If savings = investments, it means that we spend (Europe is the same, actually even worse!) almost 5 times more in interest than we invest. I don’t know if a family can prosper that way… What I know is that, if a business were to use its capital that way: spend on interest payment 5, invest 1; it would be very well on its way to bankruptcy. giofranchi

Find the Commentary in attachment. giofranchi Q4_2012_Commentary.pdf

Hi biaggio, sorry I have missed your question until now! I buy books at amazon.com and then I download the audiobooks from audible.com. I always like to have both the paper version, which I use to underline the most important ideas and to take some notes, and the audio version. :) giofranchi

Richard W. Fisher (Federal Reserve Bank of Dallas) on ending "too big to fail". giofranchi Ending_Too_Big_To_Fail.pdf

That old echo feeling. giofranchi 595_eva1.18.13na.pdf

I too would love to see it. In doing this kind of data massaging, one has to very careful, or you might only find what you want to find. The first flag is the survivor bias I got a hard copy of the study a year or so ago as I like to do when reading interesting long doccuments. It's in another residence. I think it used the Compustat database, which is capable of eliminating survivor bias. To the best of memory, the study's methodology was good. Well, sincerely, I don’t need any statistical study at all… To me it is just plain common sense! Any business owner knows this, because he experiences every day how tough it is to keep up with very motivated, shrewd, and opportunistic competitors. Do you remember the movie “Heat”, starring Al Pacino and Robert De Niro, directed by Michael Mann? Pacino plays the cop, while De Niro is the villain. Before the robbing of a bank, there is a scene in which Jon Voight warns De Niro about how skillful Pacino really is, saying something like the following: “He is a fanatic, always at work, never takes a break, with someone like him at heel, I wouldn’t rob that bank.” It turned out he was right! ;) giofranchi

Giofranchi -- now you are embarrassing me! And while we're on the subject, I enjoy your posts a lot. Perhaps that's because I can most identify with your style of investing and I'm desperately seeking out others to confirm my innate bias! Hopefully not.... And as for my infrequent posts, may I just say that I look at the amount of posts that you and some other very regular contributors make and I think -- how do they do it, where do they get the time?? I can barely keep up with what's been written, viewing videos posted up etc. that by the time I'm finished it's late and time for bed. I must be seriously slow! I think what my friend was referring to was that the most successful and well-known of the owner-operator companies are likely to be close to the end of their lives and that somebody else -- an inferior owner-manager if you like -- will be running the company in the not too distant future. He likened it to buying great companies after they've already been great. As you say giofranchi, what we should ideally be doing is hitching a ride from those owner-operators who likely have a couple of decades of their working lives ahead of them. You bring up another crucial point in my opinion. I don't believe it's enough to buy any old owner operator -- some of them are complete plums and have become very wealthy despite themselves. You've got to feel confident that the owner-operators "get it". They systematically look for bargains, try to buy the proverbial 50 cent on the dollar. My thesis is that this attitude (combined with a great work ethic) at the top permeates down through the organisation and invariably this culture gets ingrained into DNA long after the father figure has departed. Think about Berkshire or Leucadia or Fairfax or Markel. Will the culture there change after Buffett / Munger / Steinberg / Cummings / Watsa / Markel (x2) retire? Perhaps they won't have the same drive or same genius, but even at that I believe they'll be more equipped to grow value for OPMIs than the vast majority of agent managers. Anyone disagree with my thesis? Well, I agree 100%! But you already knew that! ;) And, please, don’t tell my partners that I spend so much time posting on this board… they are a bunch of dull engineers… they won’t understand… and I will run the risk to get fired!! ;D giofranchi

One of the reasons I like this board so much is that “out there” in the “cold” world I am usually looked at with “great” suspicion… sometimes, even amusement… “Has he got some serious problems?”, “Is he a little crazy?”… I have a whole apartment that I use as my own personal office, and it so much full of shelves stacked up with books, annual reports, etc., that anyone who comes in starts looking at me with disbelief… On this board, instead, everyone behaves like I do!! What “out there” seems to be so unconventional, and therefore difficult to accept, on this board is just common and obvious!! :) giofranchi

Thank you very much sportgamma, you see what I mean? Would you short such a lady?! Well, you will end with a dart in your neck, or falling down a cliff, if you do that!! Clearly not my idea of “profitable” fun!! ;D ;D ;D I enjoy your videos tremendously! Please, keep posting them! giofranchi

Ended reading “Antifragile” yesterday. It took me 5 weeks to listen to its whole audiobook. And I listened to it only in times when I couldn’t have worked anyhow, when I couldn't have been productive. 17 Hours that I would have lost driving, running at the gym, walking on the street, etc. Audiobooks: a very useful invention! :) giofranchi

WhoIsWarren, thank you very much. You don’t write often, but anytime you post something, it is always very interesting, very well thought out, and very well written (which is at least as important as the first two). I agree with your friend that the list of companies in the wealth-index is just fertile ground for further investigation… well, actually he thinks it is fertile ground to find short candidates, while I think it is fertile ground to find long candidates! ;D Anyway, I look for owner-managers in their 40s, 50s, or early 60s, with a time horizon of at least 2 decades left to go on compounding capital. I also look for some sort of value investing philosophy underlying their past deeds, I look for them to have shown strategic thinking and opportunism in the past. I look for someone who is in the business of buying $1 bills for 50 cents, is very good at it (no, an outlier is better! ;) ), and has the possibility to go on doing that business for the next 20 years. The sole exception in my firm’s portfolio is Mr. Malone, who is in his early 70s. With Liberty Media I was forced to compress my time horizon to “just” 10 years. Please, ask your friend if he would short the company run by the kind of manager I have just described. I really would like to know his answer, because all I know about business screams to go long, not short! giofranchi

I never took you for a Mafioso ;) You don't like blood on your hands, so your hired gun (FFH) invests in such banks (WFC -- a non-owner operator bank) on your behalf. You have no direct knowledge of any such crimes. Hi Eric, I was the first to say that big banks might very well be an amusement park for grown-ups, or a sort of free lunch! And, if Mr. Watsa likes to play that game, that’s perfectly fine with me! It is also the game you are now playing with great success! It just isn’t MY game, or better, it isn’t what I enjoy to spend my time doing. My game, instead, is: 1) Extract as much free cash as possible from the businesses I manage, 2) Use it to partner with outstanding managers who own outstanding businesses, always paying great attention to price, 3) Trust them and let them do what they do best. Of course, my game might be less profitable than yours. But, when you get to be financially independent, I think it is much more important to enjoy what you are doing than to add one or even two zeros to you bank account! :) giofranchi

Well, my idea of an owner-operator follows: a person who is a real workaholic, a person who thinks only about his firm 14 hours a day, 7 days a week, and derives immense pleasure from doing so. I don’t think Mr. Gates is that person anymore. I don’t know Mr. Ballmer well enough to judge if he resembles my description of an owner-operator. Even if he did, I would stay away from MSFT: technology, in my opinion, is fraught with too many dangers, and I just don’t see why I should run those risks. giofranchi

Dell and Yahoo are both in too fast changing industries. Even the best manager can get it wrong in the PC business or in the online search engine business. That’s why I tend to stay away from them, even if they are owner-operators. Microsoft, on the other hand, is an owner-operator no more. At least, not by the outstanding manager who built it from scratch. And that’s what counts: accept no substitute for it! ;) giofranchi

Yes, that’s another thing I look at: I generally don’t like companies that are already too big, because to grow something to the sky might be challenging also for the shrewdest of capital allocators. I pay a lot of attention to the age of “the wealthy”. I don’t want them to be too young, and therefore unproven, but I also don’t want them to be too old, and therefore most probably unable to compound capital for many years to come. Mr. Charles Ergen is exactly the kind of outstanding manager I look to partner with: at 59, he has already proven himself many times, but still might enjoy a two decades horizon to make his firm’s capital compound. If you filter by the “nature” of the business, by its size, and by the age of its major owner / manager, you shrink the number of companies to concentrate on very much. twacowfca, for instance, shrank that number to only 3 companies!! ;) giofranchi

Thank you hellsten, instead of an index approach, I also pay attention to the "nature" of a business. Specifically, I don’t like very fast changing businesses. I try to stick with businesses that will continue to stay almost the same for as long as possible. If I can find them, I am almost sure my return will depend only on the capital allocation abilities of “the wealthy”, and “the wealthy” are the best capital allocators out there (that’s the reason why they are “the wealthy”!! ;) ). I stick with finance (insurance, real estate), with entertainment (I just don’t see entertainment go out of fashion any time soon!), with energy and infrastructure, and with the fast-food business. Vice versa, I tend to stay away from technology, retail, pharmaceuticals, fashion, etc. giofranchi

+1 giofranchi