The financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.
So … I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but U.S. government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in U.S. equities.
Why?
A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors.
It’s my sense that this is the first time in many years that Buffett has sounded so positive about stock returns over the next decade or so.
The following is today’s “money quote” (so to speak) for me:
[blockquote] Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts. [/blockquote]
That’s something I hadn’t thought of, though it makes perfect sense and will be an important point to keep in mind. Cash is necessary for near-term expenditures but for long-term investing — not so much.
Inflation, or hyperinflation will certain result in positive stock returns. However I think hard assets including selected US real estate might do better, especially in an era of stagflation.
I do agree that 10 year Treasuries are a dreadful investment though 2 year Treasuries or CDs might be quite reasonable.
What I hear Buffet say, however, is not “happy days are here again” but “inflation cometh”. I agree. Once this deflation finishes (in six months to 18 months), inflation may spike quite high.
I said in an earlier post that there are those who make a lot of money off troubled markets – this is a more benign example.
Don
Warren Buffett’s advice about investing is always worth hearing. He’s probably right in this case. We’re heading into a painful readjustment. But if you have money to invest for 5-10 years or more, buying stocks makes sense.
http://www.minyanville.com/articles/treasury-deflation-yield-Bubble-term-long/index/a/19582
Yup. Buffett is reading the same numbers I am. As seen above, long term Treasuries has more supply than demand for the first time in a long, long time.
Inflation is stealthily making her entrance stage left, while Deflation declaims on center stage.
Interesting times.
#4 DonGander,
You’re quite right. Warren Buffett has made his money by using perfectly honest and straightfoward investing principles, which he has been willing to share with all who might want to adopt them. I’m especially glad to see this article at this particular time, and hope it will be a calming and helpful influence on the investing public.
I have been very concerned about the prospect of hyperinflation from the first announcement of the “bailoutâ€. I hope that I am completely wrong…a chicken little…when it comes to this issue. I think that hyperinflation holds far more risk for extreme political changes in our Republic than a depression would. That has been the case historically, at least.
That being said, I think that inflation may not necessarily lead to a rising stock market as some are hoping. The decade of the 1970s is a case in point. The recession began with an oil shock, much as the one we recently experienced.
[blockquote]…inflation-adjusted S&P;500 lost 55% of its value before hitting an interim low in December 1974, and another 6% by the time it finally reached a bottom in July 1982. Over this approximately 14-year “bear market,” the inflation-adjusted per capita net worth of households rose a meager 0.2% per year.
Source: http://www.frbsf.org/publications/economics/letter/2003/el2003-09.html#subhead1 [/blockquote]
We had a 14-year bear market. That’s a long time, even if you have a twenty-year horizon for retirement, which I do not. The “buy and hold” philosophy of the 1990s [and still being touted in some circles to this day] would be an insane strategy in that type of market.
During that period, we had high unemployment, a flat market, high inflation, and stagnant housing prices [“adjusted per capita net worth of households rose a meager 0.2% per year”]. By the way, stock market P/Es fell to 6.6 compared to around 20 today.
Despite all that pain, it took until Oct 6, 1979 for Paul Volker, under President Jimmy Carter, to finally figure out that we needed to try something different if we wanted to get a different result. The route chosen was to raise interest rates. It took a while for it to work, but eventually the inflation rate fell, employment improved, etc.
The problem? Here we are, 30 years later, in the same position. Not much is different. The actual root of the problem was not “fixed”. In my opinion, the actual root of the problem is fiat currency. Without the unlimited ability to expand the currency, the sort of problem we find ourselves in is harder to achieve.
Another issue is that in the absence of a metal standard, another commodity has become the defacto standard for the dollar. Oil. Oil is the defacto standard for our currency because oil is traded in dollars. When the oil supply is contracted [by OPEC for instance] the price of oil increases…meaning that the value of the dollar decreases relative to a fixed quantity of oil. Our currency is at the mercy of the international oil market. Is it any wonder that we went to war over oil [if the claims of some are true]?
I think we would be better served by returning to a gold and silver standard for our currency, at the current rate of about $10 per ounce of silver. Then, over a period of about 30 years, gradually reduce the number of dollars per ounce of silver until we achieve a one for one parity between the Dollar and an ounce of silver. There should also be legislation that severely limits or eliminates fractional reserve banking, so that banks cannot inflate the currency in an unrestricted manner. Insurance companies are required by law to maintain sufficient reserves to pay off claims, yet they remain highly profitable. Why cannot banks adopt the same model? If actuary tables can be developed for mortality, why not for more predictable business loans, mortgages, etc.?
I do not understand the seemingly irrational aversion to using silver and gold as a standard for our currency. That was the standard for about 3,000 years of human history. It worked pretty well. If one really wishes to limit inflation, as the Federal Reserve states it’s mission to be [“stabel prices”], then a metal standard is extremely effective. If, on the other hand, one wishes to continue to steal purchasing power through the hidden tax of inflation, then we should continue on with fiat currency and just raise interest rates to eventually pull ourselves out of this depression/recession and begin the boom/bust cycles and inflationary theft again.
Incidentally, if one considers that oil is the defacto standard for the dollar, it certainly explains the long-term intransigence [to the point of appearing nearly conspiratorial] vis-à -vis energy independence, alternative fuels, improved café standards, etc. It would also explain much of the resistance to nuclear power [proven in France to be a viable national source of energy] in the U.S.
It is much more plausible that keeping the oil/currency standard intact has caused us to halt all new nuclear power plant construction rather than the idea that the Three Mile Island incident, in which no one was killed or injured and the release of radiation in a 10 mile radius was limited to about 1/3 of the annual natural background radiation [or about a single chest x-ray] did.
How would U.S. foreign policy change if we were not on a defacto oil standard for our currency?
How would our defense needs [carrier task force groups to keep open the sea lanes] and spending [2009 base budget US$515.4 billion] change if oil were not the defacto standard for our currency?
How would our auto industry change [café standards] if oil were not the defacto standard for our currency?
How would our economy be different if inflation were checked by a hard currency based on a precious metal rather than the highly volatile defacto oil commodity standard used our currency?
How would that change the saving rate? How would that change the housing industry? How would that impact education costs? Medical costs?
How would that change the political debate in our nation?
Warren Buffet is likely correct, in the long term, that investing in U.S. stocks is a prudent move in the current crisis. However, it will do nothing to correct the underlying problem with our economy.
If the dollar is on a de facto “oil standard,” then why—from spring 2001 to spring 2008—did the value of the dollar fall 73% against the value of oil? It fell even more against oil than it did against gold (69%) and the euro (41%).
#7: “I think we would be better served by returning to a gold and silver standard for our currency, at the current rate of about $10 per ounce of silver. Then, over a period of about 30 years, gradually reduce the number of dollars per ounce of silver until we achieve a one for one parity between the Dollar and an ounce of silver.”
Hah! Hah! Hah! Right now there is a global silver shortage for physical metal and we have long emptied our mints of any serious silver. We buy the stuff from Mexico to make into bullion, and right now bullion is rationed. The reason that silver prices are low is because silver shares are sold without the need to hold physical silver. It is the same fractional banking idea. A bank agrees to “loan” you 100,000 dollars for a house but has only 1 thousand dollars in deposits on tap. It’s fine as long as you pay back the loan. Its all “paper”. If the borrower defaults, then all of a sudden the bank is bankrupt being 99 thousand dollars in the hole.
Silver is traded similarly. I agree to sell you one hundred thousand ounces of silver but I “hold” the silver for you. In point of fact I have only a thousand ounces in my vault, and I had no business “selling” silver. You then trade “paper silver” for “paper oil” stock shares or whatever. It is all fine until the silver users (cell phone makers whatever) or investors want to collect actual physical silver. Then all of a sudden there is no silver to be found. If the US went on a 10 dollar conversion to silver we would go even further into debt. Silver sold in coin shops sells for 20 dollars an ounce, as does silver sold on ebay. Once the nature of the shortage is clear (right not there is less above ground silver than there is gold) silver will streak upward. However that may not be for 10 years.
I agree with a gold/silver standard. It would be better than oil. However under an actual free market silver standard silver would be somewhere like a 100 dollars (or more) an ounce and everybody in the US would be amazed at how little their dollars could buy.
We are on the oil standard because we have managed to talk the Gulf nations in letting us be their policemen and mercenaries in return for their supporting our dollar. This allows us to live better than we deserve, on the backs of our servicemen. If we went off the oil standard, our standard of living would plunge.
Obama is going to get us out of the Middle East. Watch and learn.
“The reason that silver prices are low is because silver shares are sold without the need to hold physical silver”
No, if silver prices are low, that’s because supply outstrips demand.
“If the dollar is on a de facto “oil standard,†then why—from spring 2001 to spring 2008—did the value of the dollar fall 73% against the value of oil?”
Perhaps it is because there appears to have been an initial international decoupling of oil from dollars. Oil exporters appear to now be relying less and less on the US than ever before, and are increasingly purchasing European manufactured goods and products.
During the 1970’s, about 19% of oil producing nation imports were from America. They are now about 9%, or about half of what they were. At the same time imports from the EU to oil producing nations have risen dramatically. As oil prices have increased recently, more goods were purchased in Euros rather then dollars. Also, as the dollar weakened, dollar based commodities became cheaper for non-US buyers. Then of course, there were the speculators that were shorting the dollar while going long on oil as a hedge.
Not being an economist, I don’t know for sure the answer to your question, but these all seem to be fairly plausible explanations.
Here is some interesting reading for those so inclined: http://www.bloomberg.com/apps/news?pid=20601103&refer=news&sid=aCVBzwWdstPk
http://www.ccc.nps.navy.mil/si/nov03/middleEast.asp
http://www.globalpolicy.org/nations/sovereign/dollar/2000/1101baghdad.htm
http://www.energybulletin.net/node/7707
[BTW, thanks for the correct spelling of “de facto” and apologies for my earlier misspellings.]
If silver won’t do, how about copper?
Copper might work.
It is not possible for there to be a physical shortage at a time that silver prices are dropping. silver is the most manipulated of markets, and the gap between physical silver and paper silver grows daily.
http://news.silverseek.com/SilverSeek/1224214345.php
So much so that anybody who wished to become an easy millionaire, who has silver need only sell his silver on ebay, while replentishing is stores from the mint. Physical silver commands a 50% premium and the gap widens daily.
(Did you get the catch? You sell your silver first and then see how long it take you to replentish your stores from the mint!) (Try never).
The reason that the market is so manipulated is because two US banks, hold a naked silver short position that is greater than all the silver that has ever been mined in the history of the world. The larger holder is JP Morgan Chase, who as we recall was also given lucrative favors in regards to Bear Steins, and was allowed to dump its toxic waste on Lehman before they went belly up.
This sort of financial game is the same sort of game that was played using CDOs etc and makes lots of people rich for a while. That while can be a long time (decades) but (as with housing) cannot be forever. Eventually the person without income who bought the house defaults, and the industry who wishes to use silver in order to make a component of cell phones asks for delivery of physical metal. The CDO catastrophe was absolutely predictable. The PM short problem (which is a more limited problem) is equally predictable. Right now, the shorts are being called in..
http://www.stockhouse.com/Bullboards/MessageDetail.aspx?s=GPR&t=LIST&m=23702831&l=0&pd=0&r=0
http://www.investmentrarities.com/weeklycommentary.html
You know, I really find this finance stuff as interesting intellectually as Medicine. It feels like being a medical student watching one’s first “code”. Every disaster is an amazing learning experience.
Watch and learn.
#7 “I do not understand the seemingly irrational aversion to using silver and gold as a standard for our currency.”
One problem is that in a global economy the nation with the strongest currency will eventualy become the world’s debtor. This is part of what happened to America. Because dollars were so valuable, it was profitable for other nations to sell us goods at below costs in order to receive valuble greenbacks.
Any government that linked to something real (whether gold, silver, copper or oil) will find their stores running out. The Saudis are running out of oil right now, just as we were running out of gold when we closed the Bretton Woods window. The gold standard works only if everybody is doing it. As long as country A who possesses nothing worthwhile other than a printing press can whip up a million credits to buy a single piece of silver, then if the dollar is linked to silver the weak currency will drain the strong currency.
If you have a defacto gold/copper standard but refuse to part with your gold, then the dollar will rise, and your manufacturers will die. (What happened to the US) as long as there was a single country capable of global trade that did not follow the same standard.
The only way this could work is for all international business to be settled in gold/silver with no digital money or paper money crossing borders.
This will destroy international finance, but will restore honest money. Short of a new Dark Ages I do not see it happening. (And I would rather live with bouts of hyperinflation, deflation etc, than with a new Dark Ages). We will get through this cycle also, but it will take until 2020 before times improve.