The US Ponzi Economy and Bernanke leading the masses right off a cliff

[rick_v]

Unless we are going to figure out a way to hook up our brains to the GPS system we will continue to buy more and more Garmins.

 

Take some more time to learn about GRMN you will like what you see I promise!

 

Tell my why even if I think GRMN could go to 13 I wouldn't start to build a position today. Do you know what type of a valuation such a company will receive from Mr. Market during economic prosperity!!! even in 10 years and in the interim I get paid almost 6% to wait!

 

 

 

 

 

[Munger]

Unless we are going to figure out a way to hook up our brains to the GPS system we will continue to buy more and more Garmins.

 

Yes we will continue to use GPS.  But far from clear we will use the Garmin device to get the GPS.  Cell phones will have GPS, satellite radio will have GPS, car dashboards, PDAs will have GPS -- GPS will be everywhere.

 

With that said, you might have a good trade on your hands...I have no clue. Good luck with it.

[Myth465]

Take a look at GRMN

 

I want you all to do some quick analysis.

 

Tell me as a long term investor with permanent capital why building a position in GRMN today would be a bad idea?

 

I envision a world where everyone has a smart phone with a built in free GPS.

What role will garmin play in that world. That world is a few years out. Outside of rental car companies I dont know how Garmin will make money. Its a USMO situation. IF they want to put the business in run off and pay off excess cash then I would consider buying. Anyway thats my 2 cents after 5 minutes of research. Nice cash flow though and great net cash.

 

 

Some want 10x FCF with a large cap that is fairly immune to macro and you want the same or a lesser quality company but with a 5x FCF.

 

What I am saying is that paying 10-15x does not compensate for the very high risk that FCF will be much lower (on average) in the future -- in effect, you are paying higher than 10-15x FCF today.  Hell, FCF would be much lower TODAY if the gov't weren't running a 11-14% budget deficit and artificially depressing interest rates, both of which are completely unsustainable.

 

Layering more debt onto an already over-levered system is insane.

 

Agreed, my point is we all know this. Everyone agrees in theory you just want things cheaper. What I am saying is we should all agree to disagree. One person wants 7x, one 10x, one 4x. All think the economy is in various stages of sucking, and all think one day things will recover. 1 thinks the worst is behind us, 1 thinks its yet to come, 1 thinks it doesnt really matter.

 

I am saying we all seem to agree on the basis thesis but, disagree on the place in the cycle and the multiple demanded. I think we should agree to disagree, and focus on identifying bargains (how ever we choose to define them).

[Munger]

I think we should agree to disagree, and focus on identifying bargains (how ever we choose to define them).

 

Fair enough and I agree.  What I would say and the reason for the post is that most don't fully appreciate how bad, bad will be...and the current Gov't policies are only compounding the ultimate pain, which is insane.

 

Best.

[Packer16]

According to the study the decline is 50% for the depression so I don't know how to compare to a 69% number that may have a different source.  

 

Inflation does not require more debt just more dollars which will make debt smaller in proportion to other income producing assets.  Given the deflationary bias in prices printing money may not cost as much inflation as in the past.  If this scenario comes to pass then income producing assets will keep up with inflation and the debt holders will lose value (my most likely scenario).   The idea that any Western country would allow a debt deflation to occur when the inflation alternative exists to exit the debt trap doesn't make any sense to me.  That is why most debt crisis end in inflation not in a deflation according to Reinhast & Rogoff.  

 

You state cost cuts are unsustainable but firms appear to have done well over the past few years what is not to say they could do the same again if demand falters?

 

Packer

 

 

 

 

Packer

 

[rick_v]

Not going to go into the rest of my research on Garmin. You all have missed the point.

 

This was a market call though and you can hold me to this one.

 

I suggest you take a good look at Garmin as an example of a business that would ordinarily not be available at such valuations if the market were not bad. A perfect convergence of multiples going from one extreme to the next burning most investors in the last 7 years, all the while the business keeps getting more and more profitable and the brand increasing its intrinsic value.

 

 

 

[Munger]

Inflation does not require more debt just more dollars

 

How do you get more dollars Packer?

 

Before investing, everyone should fully understand how the system works -- this error in thinking is stunning and scary because I'm sure Packer is not alone.

 

Best.

[Myth465]

I think we should agree to disagree, and focus on identifying bargains (how ever we choose to define them).

 

Fair enough and I agree.  What I would say and the reason for the post is that most don't fully appreciate how bad, bad will be...and the current Gov't policies are only compounding the ultimate pain, which is insane.

 

Best.

 

And Munger, I do appreciate your thoughts. I tend towards optomise and your posts are a healthy dose of reality. As I said in the gold post, part of my problem is if things get severally bad then my small amount of capital wont matter. I will be fairly screwed either way. Eventually I would be laid off and my savings would be exhuasted. I have to think we will muddle though and it will be painful.

 

Everyone hopes they are just right. I can agree things look bad, but can also admit I have no idea what will happen. I have been raising cash, closing options position, and demanding a higher margin of safety. I shun large caps because I dont see a 100 billion dollar company doubling very easy. With that said, im still 75% invested and hope things will improve.

 

Politically, We are in a situation with no good answers, and I wouldnt want to be in power. The paradox of thrift makes taking your medicine seem rather pointless, and the other options look pretty bad also.

 

----

 

Rick we got the point. Just from a surface level review see a declining business model. Similar to USMO, Blockbuster, Yellow Books, or any other declining business. You asked why not invest. We answered. Now maybe they are moving into another market, or something but ...

 

ATSG is at 4 x FCF and growing. I own it for the same reasons you own Garmin.

[Viking]

Munger, thanks for getting this thread going. I must admit that I am a history buff. I find I am spending lots of time these days thinking about the past, present and future. I am having a very hard time reconciling much. The Nikkei was 40,000 in 1989 and today it is trading at 8,870 (20 years later). I do not think this fall in value was due solely (or even primarily) to the Bank of Japan making policy mistakes. The 30's were a terrible time for many; my grandmother carried the lessons from that time to her grave (frugality; risk aversion etc). I also think that many things go in long cycles (i.e. bull markets & bear markets). To me China does look like the real deal; perhaps they will continue to develop and be a catalyst of growth. I also think John Mauldin is on to something when he says the US will rebound as some engine of growth will emerge (it always does, like WWII, computers, the internet etc); we just can't see it today (hence, why we tend to be pessimistic).

 

If I was in my 20's or early 30's perhaps I would think about this stuff less and just invest and dollar cost average. Given that I am in my mid 40's and taking some time off, capital preservation is top priority for me (I am now 96% cash). I am more than happy to simply wait for a GREAT pitch from Mr. Market. My experience tells me to be patient and I will once again be rewarded in the next year or two (perhaps much sooner). Am I a market timer? Sure looks like it. But I don't care what it looks like as this approach has served me very well over the years and lets me sleep very well at night.

 

Prem also is being very cautious right now; 12 months ago he was loading up with equities... FFH certainly makes massive changes to their portfolio over a 12 month period. Looks to me that they pay attention to the macro and also are students of history...

[Parsad]

How do you get more dollars Packer?

 

Before investing, everyone should fully understand how the system works -- this error in thinking is stunning and scary because I'm sure Packer is not alone.

 

Munger, what makes you so sure you understand how the system works?  Please don't take this the wrong way, but some of your posts have the faint whiff of hubris.  Exactly what specific trait, aptitude, or track record would suggest that you understand the circumstances better than Packer?  

 

It takes a certain amount of intelligence to say "to hell with the world, I know I'm right because of my reasoning", but it takes just a modest amount of humility and common sense to say "there is always the possibility I may be wrong".  That goes for me too.  Take it for what it's worth.  Cheers!

[Munger]

Exactly what specific trait, aptitude, or track record would suggest that you understand the circumstances better than Packer? 

 

 

Because unless we change US capitalism, you can't get more dollars without more debt! -- stunning that most most don't understand this reality...this is indisputable -- basic 101 stuff and by no means rocket science.

 

Best.

[Munger]

Let me add that this is the very foundation of our economic system -- so questions in this regard are stunning and scary.  No hubris.

[Munger]

And take one step further -- if you understood the above dynamic you would see clearly why it is point certain that QE is not the solution to our current problem...no way, no how...only compounds (dramatically) the ulimate pain.  Bernanke is out of his mind.

[Munger]

One more thing before calling a night -- let me stress that there is no hubris.  What you may sense is frustration -- we are in a truly perilous situation and most don't fully comprehend -- innocent people are going to get hammered...if fully understood, they would be demanding a huge margin of safety from Mr. Market.  I firmly believe Buffett and Munger fully comprehend  the dangers of the current situation -- however, if they screamed fire, the whole system would collapse tomorrow.  Buffett has also built Berkshire to survive the worst.  

 

The US will recover and go on to far greater prosperity but the odds of a period of extreme pain are much higher than accepted.  Tread carefully -- what's the downside?  Wait for that fat pitch.  Only buy from Mr. Market when he is begging to sell to you.    

[ERICOPOLY]

The Nikkei was 40,000 in 1989 and today it is trading at 8,870 (20 years later).

 

I believe the Nikkei also had a trailing P/E of 60x in 1989, and today it's trading at 13.5x forward earnings.

 

That's a 77.5% decline in P/E ratio vs a 76% decline in the index (I think they actually peaked at 37,000).

 

The US stocks I believe are trading at about 12.8x forward earnings today -- that's a much lower terminal point than what Japan began with.

 

(yes, I understand the limits of "forward" earnings, I'm using forward estimates for both US and Japan today).

 

The point is that the big drop in the market for the Nikkei put it at a lower P/E ratio -- and that's the P/E ratio that the US market is ALREADY at today.

 

So while it looks scary to say that the market is down 76% 20 years later in Japan -- it really is different here in that we're not currently looking at a terminal start point of 60x P/E.

 

Now, I have a question.  Is the value of the Nikkei index inclusive or exclusive of dividends?  What I mean is this:  if it starts at 10,000 one morning and pays a 1% dividend that night, will it be valued ex-dividend at 10,000 or at 9,900?  I'm trying to determine if an investor would have made a positive return from the Nikkei if it's starting P/E had been 13.5x rather than 60x. 

 

 

[Investmentacct]

Quoting Charles Dickens:

 

"Credit is a system whereby a person who can not pay gets another person who can not pay to guarantee that he can pay." - Charles Dickens - (Born 7 February 1812 – Died 9 June 1870)

[goldfinger]

The US will recover and go on to far greater prosperity but the odds of a period of extreme pain are much higher than accepted

 

It may take longer than anyone expect to recover however... and the issue is not located in the US only which in reality compounds the problem. All in all I am very close to Munger's analysis like discussed in previous posts.

[Packer16]

You do not need to borrow to generate more dollars you print more dollars to pay for tax cuts and spending.  The Fed could double the money supply overnight.  It just has not been done in the US so it may be unthinkable now but has been done in other places.  That is all I am pointing out.  This is the most common way to remove a large amount of soverign debt (per Reinhart and Rogoff) as they have studied this problem ove the past 3 to 4 centuries across the globe.  This is common but not in the US since after the revolution and the Civil War in the South.  We are in interesting times in that combining the deflation in the private sector with the printing press may allow the debt to be devalued with a modest amount of inflation versus hyper inflation in more normal times.

 

Summing up I think the bottom line is how does this effect your investments.  I think the corporate assets are a good hedge against both scenarios.  I looked at security prices through the Depression and found as Sanj pointed out consumer prodcuts firms and gold mining firms did well.  You can look at the data your self in Wigmore "The Crash and its Aftermath".  The other alternative is to hold cash, gold or some other store of value.  The problem with holding cash is devaluation which will hit $ denominated fixed payment asset the worse.  Lets take an example.  The Fed decieds to purchase alot of new gov't bonds issued for tax cuts and stimulus and other debt in the market. Then gov't decides to restructure this debt (lower principle and strech out payments), similar to what they did with mortages.  Under this scenario, real  assets would retain their value wihile $ denominated payemnts  (cash) would suffer.  There are smart people on bith sides of this iisue (Baupost - inflation, Fairfax (deflation)) but I think Fairfax is more of a hdege than an outright bet due its holdings of other real assets .  It will be interesting to see the outcome.   

 

Packer

 

[manualofideas]

QE is not the solution to our current problem...no way, no how...only compounds (dramatically) the ulimate pain.  Bernanke is out of his mind.

 

Agreed that QE is not the solution, but it is one thing: money printing.  How can you decry QE but then conclude that one should hold cash?  Cash is exactly the thing that QE can destroy.  Why would you trade the hard work you have put in over the years, which has resulted in the savings you have, for something that Bernanke can produce just by pressing a button?  Cash is one of the worst things to own right now, except for long-term fixed-rate bonds.  If you know that Bernanke will go wild with QE, then put your cash in things that cannot be printed -- cheap high-quality businesses like KO, or commodities.  I feel much better owning equities -- even if they decline in the short term -- than owning pieces of paper that may have little real value once Bernanke is done with QE.

[Guest Bronco]

I haven't tracked the posts on the thread, but the only way out for the US is to print money.  If you think they will balance the budget, pull my leg and it will play jingle bells.

 

Inflation will be on the horizon in the U.S., just as it always has been.  We all have stories have "how much a candy bar cost when I was a kid". 

 

The inflation right now is simply deleveraging.  Once that is done, we will see inflation, although I would expect to see it more than other areas than real estate. 

 

From an investing perspective, you can still do ok with multinationals.  People still need to eat, brush their teeth, etc.  Foreign markets will continue to grow, and the U.S. will remain tops in the one area it dominates - intellectual property generation. 

 

It is amazing to me that no one in politics really talks about the modern U.S. corporation.  Intellectual property generated here.  Right to sell products are out-licensed overseas (b/c US tax rates are too high).  That shifts profits and tax revenue overseas - oh well.  Then we shift all (well not all, but we all get it) manufacturing overseas and to latin america.  Then we try to shift profit overseas tied to that manufacturing.  Ireland, Singapore, Puerto Rico - we all know why they are chosen as manufactuing bases. 

 

The US will be ok from a multinational point of view b/c of the intellectual property generation.  But are politicians are either shallow or stupid to allow the scenario I described to play out.  Our stinky, smelly government gives our job creators INCENTIVE to shift production, jobs, value, and profits overseas.  Still scratching my head.

[Guest longinvestor]

From an investing perspective, you can still do ok with multinationals.  People still need to eat, brush their teeth, etc.  Foreign markets will continue to grow, and the U.S. will remain tops in the one area it dominates - intellectual property generation. 

.....  That shifts profits and tax revenue overseas - oh well.  Then we shift all (well not all, but we all get it) manufacturing overseas and to latin america.  Then we try to shift profit overseas tied to that manufacturing.  Ireland, Singapore, Puerto Rico - we all know why they are chosen as manufactuing bases.  The US will be ok from a multinational point of view b/c of the intellectual property generation.  But are politicians are either shallow or stupid to allow the scenario I described to play out.  Our stinky, smelly government gives our job creators INCENTIVE to shift production, jobs, value, and profits overseas.  Still scratching my head.

 

http://www.businessweek.com/magazine/content/10_28/b4186048358596.htm

This may have been posted here earlier but here is Andy Grove's considered opinion on this subject.

"The US will be OK because of IP development" is a naive broad brush stroke from the past. The world has changed a lot and is about to change even faster.

[Partner24]

I guess I understand deeper why a lot of investors don't buy stocks when they get historicaly cheap. Part of the reason might be because they get somewhat intoxicated with macroeconomical fear. They see with binoculars and get affected with presbyopia.

 

When they get specifical offers that normaly someone would jump on with their two feets (some big caps, some P&C insurance companies, etc.), their fear make them ask for more because they think that it will go lower.

 

Just a guess, but having been on this message board since more than 7 years now, I don't remember a lof ot times when people where writing about macro stuff as much as now.

 

 

 

 

[Guest Bronco]

Actually, I said from an investing perspective, you can do ok with multinationals.  I didn't really say the US would be ok due to IP. But I did you give the best solution to our problems.  I am also curious as to natural gas - is it a solution to our energy import woes (but I am not an expert on this).

 

Going back to your point, I don't see a foreign threat on the IP front.  When you compare the innovation in the US to the ROW, no other country holds a candle.  They can't even find the f'ing candle.

 

 

[Munger]

and the issue is not located in the US only which in reality compounds the problem.

 

This is vey true.  Japan and Europe will face a world of hurt, both of which could be the catalyst for US problems.

 

You do not need to borrow to generate more dollars you print more dollars to pay for tax cuts and spending.  The Fed could double the money supply overnight. 

 

This is complete and utter nonsense.  Not true.

 

 

[Guest Dazel]

 

Money supply is dropping off a cliff in the U.S...contrary to what those that want inflation say because they are talking their book.

 

Hoisington"s complete deflation scenario is based on the money supply shrinking as it has been.

They have been right and concise the whole time...buy zero coupons long term treasuries...at market highs I might add...(also talking their book!)

they praised Big Ben's actions for flooding the market with liquidity in 2009...as highly effective but not enough to stop debt deflation which is a

"contraction of the money supply"....beacuse of delevering.

The U.S consumer has the lowest credit card debt since 2001...this truly amazing for that amount of time..they are deleveraging but that takes money out of the system. watch the facts

not the headlines. It will continue...

 

We will not have Japan for the same reasons we will not have a depression...Ben will print if he has to...and cash will become trash once again if he goes to far. The

world needs this for now...austerity...is Fairfax's fear and why they hedge.

 

My guess is that we will go back and forth for sometime...as economies always do. the key is to pull away the punch bowl at the right time...the fed tried this..guess what money supply

dropped and we have a partial slow down..they will put in more punch!

 

Dazel.