ERICOPOLY

My thinking for myself on gold goes like this... 1) There isn't much of it in absolute total value if you take the total known supply and price it in dollars at the current market price. Thus, if we go back to a gold standard it will need to go sky-high in price (so that the total value of it will begin to make sense). This will be a big win for gold owners, but to everyone else it really won't matter. Prices of bread in dollars will be the same, it's just that those dollars will be backed by gold all of a sudden. Life would go on. My reasoning to support this ho-hum scenario is that the world was already flooded in dollars over the past 40 years since taken off the gold standard. And so pricing already reflects the flood of printed money. The thing that would need to catch up is gold prices. Meanwhile there are other ways of finding value instead of betting on a rebasing in gold of the USD. So I'm playing that game instead. And I agree with Watsa on the idea that goods are priced by the amount of dollars chasing them. A car for example is going to be priced (all other things being equal) on the wages of the person interested in buying one. If a person doesn't get a raise, he can't bid up the price of that car. So just because the Fed inflates reserves, it doesn't actually push up prices in the real world unless that money gets into the wages of ordinary people who buy things. And why would it get into their hands if they are not in demand (wages stagnant)?

I think Watsa is making the straight supply/demand argument for pricing (and thus inflation). I've never heard him discuss the idea of sudden hyperinflation from currency collapse -- except that in a 2007 quarterly conference call he answered a question on gold simply to say "We don't invest in gold". http://www2.canada.com/business/fp/prem+watsa+what+comes+next/2287614/story.html?id=2287614&p=2 Q The market's corrected but is the worst over? A 80% of the economy [the private sector] is de-leveraging. 20% is government stimulus. Companies are operating at 65% of capacity or utilization rate. Unemployment is rising. If in six to 12 months' time, the stimulus and bailouts don't work, and we are at zero interest rates, what then? We had 20 years of good, meaning no recession to speak of, and only one year of bad. We are not worried about inflation, just the opposite. If wages start to go up, there will be inflation. But there is lack of demand. That's the problem. I did read earlier in 2009 his comments saying he'd be worried if the government pulled back it's spending. And actually if you look at how the markets have performed ever since the big debate over raising the debt ceiling this summer, I think the markets are likely most worried about this very scenario -- the government gets new religion over austerity and balances the budget on spending cuts.

I was short, I covered. How did you like the "short" thread? I didn't pay much attention to it. I pay attention to long ideas, and normally ignore the short ones. However why were you shorting a large cap given your thinking around outsmarting the herd of people who follow large caps? Even if any given large cap situation ends up being profitable, overall, the odds in the large cap space are probably stacked against us, and if they are not right now, will increasingly be over time. As you know, I am not a discretionary investor, so I'm not at an inherent disadvantage in the large cap space. Everybody wins with MSFT. You won because you traded on a dip, and anyone that held on during that period beat the market and will continue to do so I believe if held for a sufficient time. Your point though about being discretionary.... I feel the large cap space is going to be one where people basically agree on the future earnings. I'm not for example going to have any advantage in valuing WFC's 2012 or 2013 forecast versus the experts in the field. Yet, you take the consensus forecasts of banks for example. The sector is so out of favor psychologically that they can be cheap and easy to spot as cheap by the discretionary investor without needing to disagree with the consensus earnings estimates (in other words, Mr. Market is at odds with the industry analysts). So you can just side with the people who spend their lives specializing in covering the banking sector. A person can easily win if they merely are determined to wait out the turn in psychology, which will come when time passes along. It doesn't really matter if multiples ever expand -- you just won't do poorly long term making 15-20% earnings yield when the overall market is getting 7%. So just because they are heavily analyzed doesn't mean squat during these exceptional times. Similarly, Coca Cola was heavily analyzed but any old fool could see that at 40x earnings the long term returns would be poor. So there is no reason to stay away from large caps when the prices are completely out of whack with what reasonable industry experts agree will be the likely earnings. The time to stay away is when the price too closely reflects what they believe will be the future earnings. In other words, don't try to be a better forecaster of earnings than the industry experts. Rather, just buy when the market prices the assets in complete disregard for their expert opinions. But they are sometimes totally wrong of course. What were the 2008 earnings forecasts for Citigroup back in early 2007? But nobody seriously predicts a WFC or a USB is about to go under -- that's not why they're cheap relative to the market as a whole. So very small caps are just different in that you might be the only one covering them.... where that certainly won't be the case with large caps. At any rate, you can play a psychology angle with the large caps (high earnings yield because they are hated) even though you have no information angle.

I was short, I covered. How did you like the "short" thread? I didn't pay much attention to it. I pay attention to long ideas, and normally ignore the short ones. However why were you shorting a large cap given your thinking around outsmarting the herd of people who follow large caps? Even if any given large cap situation ends up being profitable, overall, the odds in the large cap space are probably stacked against us, and if they are not right now, will increasingly be over time.

In a few years we can see how the MSFT bet goes. Harry's system is shorting it. Will the computer be "eviscerated"?

His latest letter says that Tilson has covered his MBIA short position. Also, Jay Brown (CEO) just bought another 100,000 shares at 7.60 (I'm guessing this is why the price held it's ground on Friday).

I already did that. Currently I have a little one that's in preschool and another that just started kindergarten. Being at home with them is a full time job. I feel like if I went and got really busy right now in a job I'd be missing out on quite a bit -- how long will they want to hold my hand in public? Once they get older perhaps my life will get empty, although I like flyfishing quite a bit and could easily travel around the country catching fish for a while.

I realize you were talking about the other two guys but... Prem's 1:100 year event isn't a monetary crisis though. He went more heavily into USD exposure when he took on more ORH, and has been more worried about deflation. Plus he agreed with the policy actions in early 2009.

As befits the chairman of the world's largest food-production company, Peter Brabeck-Letmathe is counting calories. But it's not his diet that the chairman and former CEO of Nestlé is worried about. It's all the food that the U.S. and Europe are converting into fuel while the world's poor get hungrier. ... according to Mr. Brabeck-Letmathe, while "world-wide about 18% of sugar is being used for biofuel today." Perhaps if they added less sugar to their products at Nestle, he could turn that land into producing other crops. I bet the rising price of corn is making the HFCS (which is not food) that goes into his baby formula more expensive, and that's what prompted his thinking here.

What did the long term bond yields forecast in the 1940s? Did the long term bond yields in 2006 and 2007 forecast what was about to happen in 2008? Then at the bottom in late 2008, did they forecast the turn that took place in 2009? Personally, I think they are reactive. EDIT: And of course, what did long term bond yields forecast in the 1980s when they were in the teens?

I like the home construction numbers, I think they are very good for the bulls. Construction is huge, impacts so many jobs. Reason #1: they can't get much worse (low risk of that industry doing much further damage) Reason #2: they have a long way to run to get back to normal (potential to support a sustained recovery) I would be more worried if home construction were presently at normal levels, instead of lowest-ever levels.

I believe I read that the upcoming month is the deadline for filing these lawsuits (something akin to a statute of limitations). If that's correct, it explains the feeling that they just keep coming every week. They have to file just to keep their foot in the door (or lose their right forever), and later they can decide what they want to actually do with the lawsuit.

Here is a more upbeat spin on flat data: http://ceridianindex.com/multimedia/video/july-index-dips/ "The critical postponable items, which are homes and cars, are not in a position to contribute significantly to a downturn for the rest of this year".

Regarding mutual fund redemptions -- they can change their minds pretty quick: http://seattletimes.nwsource.com/html/businesstechnology/2016004853_fundnews28.html

I think I'd be more concerned about those macro things if my stocks were expensive. Like if BAC were trading at 12x peak earnings, rather than say 3x-4x.

Which items are you worried about?

A lot of stocks have lost value though. They don't need to have a reason to go down in price do they? Again, the day of the AIG $10b lawsuit announcement both AIG and BAC went down in price. The pundits said that BAC dropped because of the new lawsuit (and it was more than a $10b drop that day), but did AIG go up 25% that day (about $10b)? Nope, it went down of course! There is just no logic out there.

I think the PE10 will improve substantially over the next 2.5 years even without any market drop. It's dealing with some depressed numbers that are about to wash out with time. 2002 $31.50 2003 $35.44 Suppose we use $80 in earnings average for 2011, 2012 and 2013. That would be a big disappointment versus the consensus forecasts of over $100 for 2012 and 2013. This would bring us to a 10 year average earnings of $68. So today's market is 17.39x trailing 2014 PE10 (using $80 forward earnings targets instead of $100 forward targets). And that figure includes the 2009 earnings of only $13.

too true... By this measure markets have been overvalued my entire investing career except a few days in Mar 09. Walter Schloss was always in the market with hundreds of stocks and had consistent 19-20% returns over nearly 50 years. I dont buy the market. What would the PE10 look like if you ignore the 2009 earnings? Tossing out true outliers is something completely reasonable. How much of an outlier was it? Well, it was consistent with the lowest reported earnings of the 1940s (inflation adjusted). http://www.multpl.com/s-p-500-earnings/

There is probably a supply&demand component. Anybody can write a call, but not anyone can write a warrant. So if the market is not pricing the warrants the way it would price an option, perhaps that's why?

I'm not sure where exactly I'd draw the line. But certainly KO is a passive investment for Berkshire. Curiously, if they held a KO bond they'd pay 35% tax rate on the income, but the equity dividend is taxed at only 10.5%? I don't want to discourage passivity -- I just don't think it should be a lure for tax sheltering behavior. If Berkshire can pay 35% tax on income from a bond, why can't it pay 35% tax on the BofA income? The reason why I even mention the word "passive" was to insinuate that it's not income from operations -- a subsidiary is not considered a passive investment, even though it may be passive for all intents and purposes (Buffett says he only acquires businesses with management intact that run themselves). So I suppose I'd give him a free pass on those dividends so as not to make conglomerates impractical. Thus, even my suggestion to raise taxes up to normal corporate rates on common stocks dividends doesn't solve the whole problem as Buffett has achieved the scale to just swallow up whole entire companies (thus avoid my "passive" tax proposal). But hey it's a start... he can't buy all of BofA -- and he has to pay a huge premium for takeovers so it's not all a free lunch (like the BNSF premium he paid).

I'd prefer it if we could all put after-tax dollars into an investment account where it could be left compounding tax deferred until withdrawn. I'm just beating on old Warren because he holds himself out as if he is voluntarily raising his tax bill for the good of the nation... but hey, I can see that over 90% of his look-through dividends are taxed lower than my present 15% rate. Any idiot can see that Warren isn't discussing the main source of his dividends, and that he is the one pulling the levers on when that dividend gets paid (if ever).

This is incorrect. Whether a corporation is onshore or offshore makes no difference. http://www.irs.gov/businesses/small/article/0,,id=106572,00.html I don't see any reference to the personal holding company tax in that link. Can you just quote the reference for me? I can't even find the word "holding" on that page using the search feature. EDIT: However, I can't find the reference either that backs up what I said. I may have scrambled things in my head, but I swear the ruling for the personal holding company tax on undistributed earnings was just for domestic holding companies. Could very well be wrong, won't be the first time my memory has failed me.

Is the low rate just applicable to the insurance company subsidiary? If so, then I suppose the reason is that the insurance industry as a whole takes on risk in return for the chance to earn a profit on passive investments after losses. I don't know enough about how this deduction works. No the lower rate on dividends is for all C corporations. The tax code actually attempts to do what I advocated regarding INTER vs INTRA dividends. Only, by still making it overly generous (10.5% is the highest rate, which is 70% lower than the corporate income tax rate) it does not deter the desire for billionaires to hold their passive investments within their corporations. Once you own too much of the C corporation (personal ownership test) or have too much of the C corp's earnings coming from passive investments (income test), you trigger the "personal holding company tax". There are some exceptions, like if you have an insurance company where the primary operations of the business necessitate high amounts of passive income from bonds for example. A person with a few million bucks can't just go out and make a C corporation as others told me to do earlier this year. Were I to try that, I'd be slapped with the personal holding company tax for not distributing the earnings as a taxable distribution. Back when the income tax was 70%, people just started C corporations and sheltered their passive income in the corporation. This is why the personal holding company tax was invented. I suspect Berkshire is somewhat of a throwback from those days. Personally I believe corporate structures are to promote a public good -- to enable people to engage in oil drilling for example. Avoidance of personal income tax is not a public good. And corporations (for all I can tell) do not bring anything to the table in terms of holding passive investments, except the lower tax rate. Having billionaires shelter their income in such a way that brings no public good didn't fly with the people that backed the personal holding company tax. I believe is why some people have offshore corporations -- I'm pretty sure the personal holding company tax doesn't apply to offshore corporations. So once the loophole was closed for onshore C corporations, people just brought them offshore. Sure, they'll get hit when they bring the money back onshore, but they don't have to bring it back onshore is my guess (because they have so damn much of it onshore already). Bringing them back onshore (legalizing them again) might just raise the overall tax revenue. After all, it's not like you can't have one today, you just have to have it offshore.

In theory, we have corporations so that we can engage in business without being held personally liable. Makes sense. I'm not going to drill in the Gulf of Mexico if I could be held personally liable for the mess right? So here's the odd thing... Why encourage (via the tax code) passive investments to be held by corporations (this low rate on preferred stock dividends for example)? It's not like you need the protection of corporate laws within which to make a passive investment. In the case of the oil driller, there is a public good (we need oil). But in the case of the corporation that is just buying passive investments, what is the public good? Why are we protecting them through the corporate tax code?