Dear Mr. Munger:
I read, with interest, your recent interview as it was recapped in Yahoo Finance. I must say that I found it less provocative than that of your partner, Warren Buffett. To refresh yourself, click here: http://markostake.blogspot.com/2010/09/open-letter-to-warren-buffett.html. Nonetheless, I found this statement by you particularly troubling.
"I don't have the slightest interest in gold. I like understanding what works and what doesn't in human systems. To me that's not optional; that's a moral obligation. If you're capable of understanding the world, you have a moral obligation to become rational. And I don't see how you become rational hoarding gold. Even if it works, you're a jerk."
I guess that makes me and my fellow gold-philes jerks. Mr. Munger, doesn't that also make your partner a jerk, too? According to Silver Monthly: "Beginning in 1997, the Oracle of Omaha (Warren Buffett) saw the value of silver glinting in the dust of depressed prices. From 1997 until 2006, his investment fund-Berkshire Hathaway-accumulated over 37% of the world’s known silver supply-even more than the COMEX! During that time, he was not only an oracle but also the all-time silver bull". Say WHAT? I guess hoarding Gold is bad, while hoarding Silver is good? Please 'splain it to me.
Charlie, my lips are sealed. The last thing I want to see are two octogenerians in a cage match. Leave that to Vince McMahon, would ya?
Mr. Munger, you are a very educated man. Let's take out our notebooks as we review the history of Gold for a second. Gold is the only form of currency that has EVER endured. Surely, you would invest in currencies, wouldn't you? Oh, but then there's the old argument that you can't eat Gold. True enough. I'll bet those stock and bond certificates are particularly tasty. So is real estate. Hell, so is a Hundred Dollar bill with butter and garlic. And a barrel of crude...YUM!
You can eat bread and meat, but the problem is they don't keep very long. They go rotten, dude. Gold has a pretty decent shelf life of a few billion years, give or take an eon. Oh, and have you heard? There is a whole planet of jerks who will ACCEPT Gold as a form of paying for things that we DO eat.
I'm sure you were delighted by the ridiculous decisions to de-emphasize Gold. When the Gold window was closed at Bretton Woods in 1971 and we went totally to paper, boy did our financial system take off! Remember how fun and prosperous the 1970's were?
Now, I'm also confused by this quote from the Charlie Munger book of quotes: "Recognize reality even when you don't like it - especially when you don't like it."
Would I be correct that this particular statement was advice given to others, rather than a credo you live by?
Do I detect a wee bit of hypocrisy, here?
Charlie, the letter contained in the Berkshire Hathaway (BRKA, BRKB) annual report is legendary and read by millions of sycophantic investors everywhere. May I suggest that you at least include "Marko's Take"? After all, shouldn't you recognize reality, even when you don't like it?
Mr. Munger, TAKE ME ON!
Marko's Take
Showing posts with label Berkshire Hathaway. Show all posts
Showing posts with label Berkshire Hathaway. Show all posts
Tuesday, September 28, 2010
Monday, May 31, 2010
Bond Rating Agencies Yield Junky Results
Think a certain credit rating means something? Think again!
Amid the financial crisis which enveloped the global financial system in 2008-2009, Standard & Poors (S & P) and Moody's played a central role. So much paper with sub-prime mortgages defaulted that were originally given Triple A ratings, that any scintilla of crediblity these agencies had has vanished.
The meaning of an AAA rating is that the likelihood of default is virtually nil. Yet, in the 2008-2009 period, thousands of Collateralized Debt Obligations (CDOs) not only defaulted, but suffered principal losses of up to 90% of face.
The problem with the entire business of rating credit has been that issuers "pay" to have their bonds rated to make them marketable to institutional investors, who often base their asset allocations on how highly rated an issuer is. Since S & P and Moody's are paid by the issuers, they're beholden to their customers and not the investors that will ultimately rely on the ratings themselves.
Another side-effect is that the rating agencies are incredibly slow to issue downgrades. A recent example is Spain, which was just downgraded by Fitch to AA+ from AAA. Spain's bonds already trade at levels more akin to comparable issuers rated either A or BBB with yield spreads in excess of 150 basis points. When issuers ARE about to be downgraded, they often fight the downgrade, delaying it further.
Credit ratings have ZERO informational content. Studies performed by my own firm, Helix Investment Partners, indicated that the yield spreads needed to compensate investors for the probability of default were highly correlated with 3 market driven variables: a company's market capitalization (share prices times shares outstanding), its market-adjusted DEBT/EQUITY ratio (debt divided by market capitalization) and the volatility of the issuer's common stock.
Once these variables were considered appropriately, a company's credit rating was absolutely meaningless statistically, In all likelihood, the 3 aforementioned variable captured imputed information much more accurately since money is on the line. A credit rating imperfectly captures these market indicators and is, therefore, nothing but a poor cousin.
Last week, in a Senate hearing, former Moody’s and S&P employees admitted that the agencies tried to please investment banks that were paying big fees to get high ratings. The three largest ratings companies, Moody's, S&P and Fitch (a unit of France's Fimalac SA), generated combined revenues of $3.6 billion on bond ratings last year.
Nowhere has the failure of the rating agencies been more prounced than in the mortgage securities market. Of all the issues assigned Triple A ratings in both 2006 and 2007, a full 90% have been downgraded to junk or defaulted!
On the corporate side, there are now only 4 issuers carrying Triple A ratings: Automatic Data Processing (ADP), Johnson & Johnson (JNJ), ExxonMobil (XOM) and Microsoft (MSFT). Even Berkshire Hathaway, whose bond yields are LOWER than Uncle Sam's, does not qualify for this very small club.
Yet, Triple A ratings on collateralized mortage paper was given out freely.
There is no need to even have this industry. The bond market, including the Credit Default Swap (CDS) market, is much more accurate in pricing in true credit risk at NO cost to the issuer. CDSs reflect the cost of "insuring" debt against default and have an excellent record of reflecting the latest information. By comparison, credit ratings are adjusted very infrequently and only "rubber-stamp" what the market already knows and has already priced in.
If the financial system is truly to be restructured to eliminate the unbridled greed and conflicts of interest which imperil investors, one component of reform should be to eliminate any requirements that bonds be rated and paid for by the issuers. A better system would be to have the rating agencies provide information to the investor community and get paid if their information proves valuable. It isn't. No sophisticated investor would pay to know what S & P, Moody's or Fitch thinks. Therefore, the problem will eliminate itself.
Marko's Take
Want to know you to fix the ponzi-scheme/FRAUD known as Social Security? Tune in to our new video, entitled "Social In-Security: The Solution", which will be posted shortly on You Tube. To get more background on this heinous, unconstitutional and immoral program, click here http://www.youtube.com/markostaketv#p/u/0/twFn9XyP2rI.
Amid the financial crisis which enveloped the global financial system in 2008-2009, Standard & Poors (S & P) and Moody's played a central role. So much paper with sub-prime mortgages defaulted that were originally given Triple A ratings, that any scintilla of crediblity these agencies had has vanished.
The meaning of an AAA rating is that the likelihood of default is virtually nil. Yet, in the 2008-2009 period, thousands of Collateralized Debt Obligations (CDOs) not only defaulted, but suffered principal losses of up to 90% of face.
The problem with the entire business of rating credit has been that issuers "pay" to have their bonds rated to make them marketable to institutional investors, who often base their asset allocations on how highly rated an issuer is. Since S & P and Moody's are paid by the issuers, they're beholden to their customers and not the investors that will ultimately rely on the ratings themselves.
Another side-effect is that the rating agencies are incredibly slow to issue downgrades. A recent example is Spain, which was just downgraded by Fitch to AA+ from AAA. Spain's bonds already trade at levels more akin to comparable issuers rated either A or BBB with yield spreads in excess of 150 basis points. When issuers ARE about to be downgraded, they often fight the downgrade, delaying it further.
Credit ratings have ZERO informational content. Studies performed by my own firm, Helix Investment Partners, indicated that the yield spreads needed to compensate investors for the probability of default were highly correlated with 3 market driven variables: a company's market capitalization (share prices times shares outstanding), its market-adjusted DEBT/EQUITY ratio (debt divided by market capitalization) and the volatility of the issuer's common stock.
Once these variables were considered appropriately, a company's credit rating was absolutely meaningless statistically, In all likelihood, the 3 aforementioned variable captured imputed information much more accurately since money is on the line. A credit rating imperfectly captures these market indicators and is, therefore, nothing but a poor cousin.
Last week, in a Senate hearing, former Moody’s and S&P employees admitted that the agencies tried to please investment banks that were paying big fees to get high ratings. The three largest ratings companies, Moody's, S&P and Fitch (a unit of France's Fimalac SA), generated combined revenues of $3.6 billion on bond ratings last year.
Nowhere has the failure of the rating agencies been more prounced than in the mortgage securities market. Of all the issues assigned Triple A ratings in both 2006 and 2007, a full 90% have been downgraded to junk or defaulted!
On the corporate side, there are now only 4 issuers carrying Triple A ratings: Automatic Data Processing (ADP), Johnson & Johnson (JNJ), ExxonMobil (XOM) and Microsoft (MSFT). Even Berkshire Hathaway, whose bond yields are LOWER than Uncle Sam's, does not qualify for this very small club.
Yet, Triple A ratings on collateralized mortage paper was given out freely.
There is no need to even have this industry. The bond market, including the Credit Default Swap (CDS) market, is much more accurate in pricing in true credit risk at NO cost to the issuer. CDSs reflect the cost of "insuring" debt against default and have an excellent record of reflecting the latest information. By comparison, credit ratings are adjusted very infrequently and only "rubber-stamp" what the market already knows and has already priced in.
If the financial system is truly to be restructured to eliminate the unbridled greed and conflicts of interest which imperil investors, one component of reform should be to eliminate any requirements that bonds be rated and paid for by the issuers. A better system would be to have the rating agencies provide information to the investor community and get paid if their information proves valuable. It isn't. No sophisticated investor would pay to know what S & P, Moody's or Fitch thinks. Therefore, the problem will eliminate itself.
Marko's Take
Want to know you to fix the ponzi-scheme/FRAUD known as Social Security? Tune in to our new video, entitled "Social In-Security: The Solution", which will be posted shortly on You Tube. To get more background on this heinous, unconstitutional and immoral program, click here http://www.youtube.com/markostaketv#p/u/0/twFn9XyP2rI.
Monday, March 22, 2010
Gold Market Update: Time To Go To Cash!
Boy I hate being wrong! For the last week, we've mentioned a number of companies in anticipation of "the new leg" launch upward. Get your eggs and tomatoes ready if you plunged your hard-earned cash in. Gulp! I think it may be best to go to cash. (Ducking!)
What changed? Friday's action was horrible! Monday morning's action, so far, has been horrible! The Dollar, which looked cooked, now seems to have gotten a second wind. Not that it's in great shape mind you. The EURO and POUND are in WORSE shape!
So, what's spooking me? Not the fundamentals, but the technicals. If we were really ready to launch into a new bull run, the GOLD market would absolutely NOT have gotten smacked for $20 Friday and another $15 this morning as we went to print.
I learned the hard way that it's best NOT to fall in love with either a particular viewpoint nor a particular position. I love the viewpoint that GOLD is going sky-high, but the evidence, AT THIS TIME, does not support that it's imminent.
Markets often telegraph as to what's coming, whether we listen or not is up to us. The action of the last couple of days is suggesting that all is not right in the USA.
U.S. Treasuries now yield MORE than Berkshire Hathaway, Proctor & Gamble, Johnson & Johnson and Lowe's corporate debt of the same maturity. I believe this is unprecedented.
Banks are continuing to fail in near-record numbers. Regulators on Friday shut down 7 more banks in 5 states, bringing the number to 37 so far this year. This follows the 140 that were closed or sold last year.
Banks that are surviving, have tightened their lending standards. U.S. bank lending last year posted its steepest drop since World War II, with the volume of loans falling $587.3 billion, or 7.5% from 2008, the FDIC reported recently.
These signs add credence to the notion that the "second dip" of the "Double-Dip Hyperinflationary Depression" is just around the corner. Stocks are in trouble. Gold is in trouble. All financial assets and commodities are in trouble.
One key, if not THE key to surviving financial markets is being flexible. Since no one has a crystal ball, it's vital to factor in new information as it comes and, if necessary, abandon old viewpoints in favor of new ones.
Marko's Take? Bad time to be stubborn. Time to go to cash! However, please be aware that this is a SHORT-TERM viewpoint only. I maintain my LONG-TERM view that Gold will head to $5,000 per ounce.
If you want to castigate me for imploring a bum short-term investment in the Gold market, TAKE ME ON!
Marko's Take
Please check us out on YouTube http://www.youtube.com/markostaketv.
What changed? Friday's action was horrible! Monday morning's action, so far, has been horrible! The Dollar, which looked cooked, now seems to have gotten a second wind. Not that it's in great shape mind you. The EURO and POUND are in WORSE shape!
So, what's spooking me? Not the fundamentals, but the technicals. If we were really ready to launch into a new bull run, the GOLD market would absolutely NOT have gotten smacked for $20 Friday and another $15 this morning as we went to print.
I learned the hard way that it's best NOT to fall in love with either a particular viewpoint nor a particular position. I love the viewpoint that GOLD is going sky-high, but the evidence, AT THIS TIME, does not support that it's imminent.
Markets often telegraph as to what's coming, whether we listen or not is up to us. The action of the last couple of days is suggesting that all is not right in the USA.
U.S. Treasuries now yield MORE than Berkshire Hathaway, Proctor & Gamble, Johnson & Johnson and Lowe's corporate debt of the same maturity. I believe this is unprecedented.
Banks are continuing to fail in near-record numbers. Regulators on Friday shut down 7 more banks in 5 states, bringing the number to 37 so far this year. This follows the 140 that were closed or sold last year.
Banks that are surviving, have tightened their lending standards. U.S. bank lending last year posted its steepest drop since World War II, with the volume of loans falling $587.3 billion, or 7.5% from 2008, the FDIC reported recently.
These signs add credence to the notion that the "second dip" of the "Double-Dip Hyperinflationary Depression" is just around the corner. Stocks are in trouble. Gold is in trouble. All financial assets and commodities are in trouble.
One key, if not THE key to surviving financial markets is being flexible. Since no one has a crystal ball, it's vital to factor in new information as it comes and, if necessary, abandon old viewpoints in favor of new ones.
Marko's Take? Bad time to be stubborn. Time to go to cash! However, please be aware that this is a SHORT-TERM viewpoint only. I maintain my LONG-TERM view that Gold will head to $5,000 per ounce.
If you want to castigate me for imploring a bum short-term investment in the Gold market, TAKE ME ON!
Marko's Take
Please check us out on YouTube http://www.youtube.com/markostaketv.
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