The Warren Buffett Economy – Why Its Days Are Numbered (Part 3) – David Stockman’s Contra Corner 06-11-15

Salient to Investors:

David Stockman writes:

  • The ratio of finance to GDP has risen to 540% vs. the historic norm of 200%. Central bank driven bubble finance since the late 1980s has resulted in the GDP deflator-adjusted value of corporate equities and credit market debt outstanding rising 8 times, while real median household income has not gained at all.
  • Warren Buffett’s real net worth rose 19 times in the same period, not by value investing – he is not a genius, nor invented anything – but by buying consumer names of the baby boom demographic wave, buying what he believed slower footed investors would be buying later, and by buying the banks and other companies that fed from the public purse. Under a regime of honest money and free market finance, no insurance company portfolio manager could make 19 times in real terms in 27 years.
  • The financial busts since 1987 were caused by the Fed, not by investor exuberance, deregulation, Wall Street greed and corruption, or Chinese workers saving too much money and causing low mortgage rates and a runaway housing boom in America.
  • Market capitalism is not chronically unstable, and the business cycle does not needs constant management and stimulus by the state. Every economic setback of modern times, including the Great Depression, was caused by either inflationary war finance or central bank fueled credit expansion.
  • The rationale for monetary central planning and state intervention – the Keynesian model – is completely wrong. Keynesian aggregate demand management tools seemed to work for three decades only due to a one-time monetary parlor trick – households, etc were repeatedly encouraged to “lever up” via periodic cycles of cheap money stimulus, and so did not generate new, sustainable wealth but borrowed economic activity from the future.
  • The potential GDP and full employment story is a crock and consists of made-up benchmarks that are absolutely meaningless in today’s global and tech economy.
  • Monetary central planning has been practiced on a global basis for most of this century and is causing enormous over-investment in industrial capacity owing to the repression of capital costs. For example, China has more excess steel capacity than the entire steel industry of the US and Europe combined.

Read the full article at http://davidstockmanscontracorner.com/the-warren-buffett-economy-why-its-days-are-numbered-part-3/?utm_source=wysija&utm_medium=email&utm_campaign=Mailing+List+Mid+Day+Thursday

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Buffett’s ‘All-Equities’ Pensions Escape Bill Gross Drama – Bloomberg 10-02-14

Salient to Investors:

  • Warren Buffett said his firms’ pensions funds are all-equities with no bonds. Buffett said he assumes Pimco would have all kinds of professional money managers managing money so would not have changed just because Bill Gross left.
  • Buffett and deputy investment managers, Todd Combs and Ted Weschler, concentrate their stock picks. At year-end 2013, more than 60% of plan assets were in just four US equities and almost all the rest was in other stocks, with 1% in fixed-income securities.

Read the full article at http://www.bloomberg.com/news/2014-10-02/buffett-s-all-equities-pensions-escape-bill-gross-drama.html

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What Turned Warren Buffett Into a Car Guy? Economics – BloombergBusinessweek 10-02-14

Salient to Investors:

  • Warren Buffett has said he likes industries that come with barriers to entry. Many publicly traded dealers own 60 to 100 stores, so would be attractive acquisitions to Buffett’s automotive division, with the type of recurring revenue streams from service and parts that Buffett likes.
  • Morningstar said the 10 largest US auto dealerships account for less than 10% of new vehicle sales.
  • Meyer Shields at Keefe Bruyette & Woods said dealers selling auto insurance to car buyers would be a key policy shopping juncture.
  • Greggory Warren at Morningstar said Buffett may be attracted by the dealer sector being the best part of the automotive supply chain from a competitive advantage perspective, with all the publicly traded firms having developed narrow economic moats around their operations.
  • David Whitson at Morningstar said more stores bring economy of scale and pricing of inventory.

Read the full article at http://www.businessweek.com/articles/2014-10-02/what-turned-warren-buffett-into-a-car-dealership-guy-economics#r=rss

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Buffett’s Search for Sure Thing Propels 76-Year Junk Food Quest – Bloomberg 08-26-14

Salient to Investors:

  • Warren Buffett says no business has ever failed with happy customers and said in 2012 that more people will be drinking Coca-Cola 10 years from now, or chewing Wrigley’s gum. Suzie Buffett said her father’s food investments mirror his tastes.
  • Tony Scherrer at Smead Capital Mgmt said Warren Buffett can look into the future with fast-food chains and candy and soda companies and not have to wonder if they’re going to be doing great things – generations to come will be eating Mars candy bars.
  • Dean Ornish at the University of California San Francisco said Coca-Cola and the red meat in Burger King’s Whopper are among the biggest contributors to obesity-related illnesses. Ornish said red meat increases the risk of premature death from heart disease as well as cancer. Harvard School of Public Health said regular consumption of sugary drinks increases the risk of developing type-2 diabetes by 26 percent.
  • Richard Cook at Cook & Bynum Capital Mgmt owns Berkshire Hathaway and Coca-Cola but said hunger for healthier food may hurt Buffett’s fast-food bets. Cook sees a real risk that the societal belief that sugar is a poison will affect consumer habits – at the margin, it lowers valuations for these companies and the growth of Coca-Cola over the next 20 years.
  • John Gordon at Pacific Mgmt Consulting said restaurant chains like Chipotle and Panera Bread have put pressure on fast-food providers.

Read the full article at http://www.bloomberg.com/news/2014-08-27/buffett-search-for-sure-thing-propels-76-year-junk-food-quest.html

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Buffett Waits on Fat Pitch as Cash Hoard Tops $50 Billion – Bloomberg 08-04-14

Salient to Investors:

  • Few businesses are large enough to merit Warren Buffett’s attention. Berkshire Hathaway spent a third of the total from a year earlier on equities in half1 2014, while sales of stock more than doubled. Buffett dislikes paying a dividend and rarely buys back shares.
  • David Rolfe at Wedgewood Partners said Buffett’s list of ‘fat-pitch’ companies is not large and Warren – the best market timer he ever saw – won’t spend for the sake of spending.
  • John Fox at Fenimore Asset Mgmt said it is more difficult, across the board, to find cheap assets.
  • Preqin Ltd said private-equity firms were sitting on a record $1.16 trillion of capital as of July.
  • David Fann at TorreyCove Capital Partners said private equity has record levels of capital to spend.
  • PitchBook Data said transactions of more than $250 million were valued at 10.2 x EBITDA in Q1 2014 versus 9.8 x EBITDA in the prior period. Bain & Co. say a reasonable LBO price is under 8 x EBITDA.

Read the full article at http://www.bloomberg.com/news/2014-08-04/buffett-waits-on-fat-pitch-as-cash-hoard-tops-50-billion.html

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Buffett to Expand Energy Wager ‘As Far as the Eye Can See’- Bloomberg 06-09-14

Salient to Investors:

Warren Buffett has been shifting toward capital-intensive businesses like energy and transportation, while reducing reliance on insurance operations and stock-picking. He is planning more investment in energy, in part in renewable power, as far as the eye can see.

Buffett sees the steady but far from spectacular gains of the past five years continuing.

Read the full article at http://www.bloomberg.com/news/2014-06-09/buffett-to-expand-energy-wager-as-far-as-the-eye-can-see.html

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Trailer Parks Lure Wall Street Investors Looking for Double-Wide Returns – Bloomberg 04-10-14

Salient to Investors:

Investors are getting rich renting the concrete pads and surrounding dirt on which residents park their homes. JLT & Associates say rents nationwide average $390 per pad per month.

Many US counties have banned or discouraged construction of new trailer parks because the inhabitants are poor, pay little in taxes and drain resources. Demand is higher than ever because so many people never got back on their feet after the recession and more of the US middle class is sliding into poverty. 

Warren Buffett purchased Clayton Homes, the largest manufacturer of mobile homes, over a decade ago. Private-equity firms are starting to invest.

6 percent of Americans lived in mobile homes in 2012. Once a tenant trucks a home to a site, he is unlikely to leave because it costs at least $5,000 to move a home.

The way to instant profits is to find a distressed park, where rent checks are late, water meters don’t exist and trailers date from the 1980s or 1990s, and buy it cheaply and turn it around.

Read the full article at http://www.bloomberg.com/news/2014-04-10/trailer-parks-lure-investors-pursuing-double-wide-returns.html

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Gen Re’s Gilbert Says Fed Sets Up Stocks for a Decline – Bloomberg 12-03-13

Salient to Investors:

John Gilbert  at General Re-New England Asset Mgmt, a unit of Berkshire Hathaway, said:

  • Fed policy has lifted stocks but has created systemic risk in the world financial system for which they take little responsibility, because what happens outside the US is not their assignment. A slowdown in Asia contributed to Russia’s default in 1998 and triggered the Long Term Capital Management meltdown, which in turn disrupted stock markets.
  • Twitter is an example of euphoria as it is valued at over $20 billion without having reported a profit and gravity wins in time. (The average estimate of Twitter underwriters Goldman Sachs, Deutsche Bank, JPMorgan Chase and Bank of America predicts Twitter will trade around $43 a year from now. )
  • Low interest rates have led companies in emerging-markets to borrow in dollars – leverage at Asia ex-Japan corporations is at the highest level since the late 1990s financial crisis there. Weakening currencies in Russia, Brazil and other nations this year may be a sign of trouble ahead.

Laurence D. Fink at BlackRock said in November that the Fed’s bond-buying program could be creating a bubble. David Einhorn said the Fed stimulus is like eating too many jelly doughnuts.

Read the full article at http://www.bloomberg.com/news/2013-12-03/gen-re-s-gilbert-says-fed-sets-up-stocks-for-a-decline.html

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You Can Invest Just Like Warren Buffett, If You’re a Quant Hedge Fund – Bloomberg 12-02-13

Salient to Investors:

The National Bureau of Economic Research found:

  • A robot could replicate Warren Buffett’s stock-picking performance.
  • The ingredients of that robot are 1.6x leverage, which is what Buffett runs at Berkshire Hathaway, and a statistical factor-weighting investment approach that overweights growing, high-payout, profitable companies with low betas.

Read the full article at http://www.bloomberg.com/news/2013-12-02/you-can-invest-just-like-warren-buffett-if-you-re-a-quant-hedge-fund.html

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Buffett Says Gains in Housing Fall Short of Equilibrium – Bloomberg 10-24-13

Salient to Investors:

Warren Buffett said the US housing market is coming back but housing starts are not at an equilibrium point, where they match household formation. Buffett said housing will rebound because of increasing population and limited supply. Buffett said the US has made significant progress since 2009 after being hit by something that has never happened since he was one or two years of age.

Freddie Mac said the average rate for a 30-year fixed mortgage is 4.13 percent.

Read the full article at  http://www.bloomberg.com/news/2013-10-24/buffett-says-gains-in-housing-fall-short-of-equilibrium.html

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