Friday, August 7, 2009

Weekend Reading and Listening

Podcast with John Mauldin: In this interview with King World News, Mauldin talks about what a potential economic recovery in the US would look and feel like. He argues definitively that if and when the recovery comes, it won’t look anything like the V-shaped recovery the bulls are hoping for. He then claims that we could be between 4 years and 11 years from the end of the secular bear market he believes we are in. Therefore, he suggests that we should not expect 8-10% returns from the stock market from where we are today. Instead, we should be satisfied with 3-4% over the next 10 years. This is why he favors absolute return strategies. Also, he believes we are at risk of 10% levels of inflation and asserts that we should not expect a housing recovery until 2011-2012. According to Mauldin, we will only see meaningful levels of construction after the entire inventory has been worked through and foreclosures have abated. I read his Outside The Box newsletter every week and I suggest listening to this podcast if you enjoy his letters.

The US economy is a giant Ponzi scheme: I found this link on Seeking Alpha and I thought it was a very honest assessment of the US’s current situation. In this piece, SA contributor Tim Iacono uses the ideas of Ponzi schemes and confidence games to describe the US economy. His concern is that no matter what the government does to help increase consumer confidence, the structural headwinds when it comes to unemployment and necessary de-leveraging are going to limit spending for years to come. He also contends that safety nets like social security are just classic Ponzi schemes as the money that is taken out of wages goes to pay current beneficiaries and is never even allocated to the trust fund that will need to grow precipitously to be able to cover the increasing number of retirees who live longer. Finally, Tim warns that with the decline in recent years of dividend payouts, investors have become too dependent on asset appreciation for returns. Thus, the goal of fiscal and monetary policy seems to be to re-inflate asset prices that were based on an unsustainable amount of leverage, a circumstance that could lead to another collapse in the future.

Richard Russell on the markets: I came across these recent comments by Dow Theory creator Richard Russell via Zero Hedge and The Pragmatic Capitalist. Sadly enough, Russell implies that he has lost faith in the legitimacy of our markets:

I have become almost hopelessly cynical about the markets. Is anyone ethical? Is anyone honest? I’m starting to wonder. Where money is concerned, is there anything Wall Street or the bankers won’t try?

Rumors of manipulation have been around ever since I started writing Dow Theory Letters in 1958. I always pooh-poohed those rumors, believing that it was the losers who always blamed their losses on manipulation. But now I’m not so sure.

However, despite his concerns about manipulation, he believes that the market cannot be unfairly exploited over the long run. Russell claims that man has yet to invest a way to consistently forecast the direction of the stock market and is certain that we never will. The conclusion he draws from his study of the market is that the recent rally is a bear market rally or a “cyclical bull market” within a broader bear market. It remains to be seen whether he is right or wrong but I sure don’t want to bet against a guy with his track record and experience.

The Ticker Guy responds to his critics (and me): After receiving a good amount of criticism regarding his piece yesterday on Warren Buffett, Karl Denninger decided to write a follow up pots to clarify his position. The piece starts with the sentence:

It seems my previous article has garnered a bit of criticism from someone I hold in rather high regard, indicating that perhaps I have been less than clear in my criticism.”

While Karl and I did trade some good spirited emails yesterday, I am assuming his opening was not in reference to the piece that I wrote yesterday in defense of Buffett. In any case his more detailed thesis is that Buffett and Berkshire have benefitted from the government’s numerous bailouts and that the companies he owns and likes to publicly discuss are not necessarily the best actors. He goes on to imply that The Oracle almost always has a not so obvious agenda and engages in what Denninger calls “ruthless capitalism.”

In our email exchange yesterday, he indicated to me that he does not care if Buffett talks his book. What he is more concerned about is if Buffett’s position and status allowed him to make investments during the worst part of the credit crisis with information that was not public. When I presented that argument to Janet Tavakoli (who wrote a book about Buffett and thought enough of my piece to send it to The Oracle himself) she told me that Buffett is not actually as plugged into Washington as one may think. She also was very dubious of the idea that Buffett had foreknowledge that allowed him to safely invest in GE and GS.

None of us know what happened, but as a value investor and a believer in Buffett as man with a strong moral compass, I would like to think he made those investments based on the risk-reward he saw and irrespective of what the government had planned.

(Picture of John Mauldin courtesy of