Monday, February 27, 2012

The Curious Warren Buffet

Warren Buffet is so 1980's.  His aura peaked in the 1990's.  He should've sold out and moved to the South Pacific.  By the time he dies, he will have made himself look like a complete jack-ass, especially with regard to his comments about gold.
Before I start in on my commentary, I wanted to post a little update to the housing data that has been released over the past few days.  I think these numbers further support claim that the housing data is misleadingly manipulated and fraudulent and that the housing market is headed a lot lower.  New home sales were reported on Friday for the month of January to be a better-than-expected "seasonally adjusted" 321,000 annualized rate.  Here's the real data:  Only 22,000 new homes were contracted for in January;  in total, 4,000 new home sales actually closed;  6,000 were vacant lots - 12,000 have not started in construction.  Now how does the new home sales report look?  You can draw your own conclusions.

For me, Warren Buffet epitomizes everything about myth vs. reality and the power of the media's ability to influence the perceptions of large masses of the population.  The mainstream public and it's penchant for instant gratification will typically, at best, catch only brief snippets of real news, preferring to feed any thirst for news and gossip with "reality tv" and shows like Jersey Shore and The View.  What better way to shape perception than to flash ads with images of a smiling Warren Buffet sipping Cherry Coke?  The myth that, despite his billions, he lives in the same small red brick house in Omaha, Nebraska with his wife is just that - pure myth.  He hasn't lived in that house or with his wife for many years.  He has beautiful homes and mistresses all over the country in places where the very wealthy "quietly" congregate, like Sun Valley and Santa Fe.  I remember back in the mid-1990's reading an article that outlined the man vs. myth about Buffet which detailed how his simple "wrinkled, cheap sack suit" look was in truth very expensive Italian suits tailored for that look in order to give Buffet the Willy Loman veneer.  It's also pure bullshit that he's going to put all of his wealth in a charitable trust when he dies rather than pass it on to his heirs.

There have been several recent examples that have slipped out of the "do as I say, not as I do" reality of Warren Buffet.  A few years ago he wrote a piece that famously referred to derivatives as being financial weapons of mass destruction and said that he avoided them in his course of business.  But then not too long after that one of Berkshire Hathaway's large insurance companies, General Re, revealed that it was sitting on huge derivatives losses.  Executives at the company subsequent to that were prosecuted for accounting and business fraud.   In the latest reported quarter Berkshire's earnings were directly affected by big derivatives losses.  And how about Buffet talking big about how the very wealthy should pay more taxes, and yet Buffet's personal marginal tax rate is significantly lower than that of the secretaries who work for him.  To paraphrase NJ Governor Christie, Buffet should either shut the f_ _ k up or write the Government a big check.

I am going into all of this because I want to underscore the true lack of credibility Buffet has when he uses his annual shareholder meeting, in part, as a forum to make derogatorily incorrect statements about the investment value of gold.  How many of you reading this knew that Warren Buffet's father was a 4-term Congressman from Nebraska who championed the use of gold as a currency anchor?

Buffet spent - dare I say "wasted?" -  a considerable amount of space in his widely read shareholder letter explaining why gold is not a good investment.  You can see his thoughts on the matter  HERE.  In one sense, on a superficial level (of course, everything about Buffet's public display is superficial), his thoughts make perfect sense.  I'm not going to "invest" in gold to produce something useful in the same manner that I would invest in farmland or invest in a plant to produce widgets. 

But "investing," in that context and meaning of the term, is not why you buy gold.  In fact, you don't really buy gold.  When you acquire a holding in physical gold that you control, you are really doing no more than exchanging fiat dollars - which are used as a currency - for gold, which is the world's oldest currency.  It just so happens that over the last 10 years the number of dollars it takes to exchange into an ounce of gold has increased.  Why?  Because fiat dollars are rapidly being devalued by catastrophic public policy AND the dollar appreciation of gold - gold as currency - is not going up in value the way a successful investment might but instead is merely reflecting the fact that the market demands more paper fiat dollars in order to exchange gold for those fiat dollars.

Here's an interesting way to look at it.  In 1971, right before Nixon closed the gold window and took the $35 fixing off of the price of gold, oil was roughly $3/barrel and an ounce of gold would buy 11 barrels of oil.  Today, with gold at $1750 and West Texas oil around $109, an ounce of gold will buy 16 barrels of oil.  If the world was on a currency exchange standard that was based just on oil and gold, does it look like the price of gold is in some kind of investment bubble, as Buffet would have you believe?  That example shows the remarkable stability of gold as a currency versus the remarkable depreciation of fiat dollars, as it takes slightly less gold in 2012 to buy a barrel of oil than it did in 1971 BUT it takes 36 times more fiat dollars to buy the same damn barrel.  Which would you rather hold in your pocket to use as a currency?

But perhaps this is why Buffet is so unhappy with gold:

This chart shows the number of ounces of gold it takes to buy 1 share of Buffet's Berkshire Hathaway class A stock.  In 1999, at the peak of the internet bubble (which was fueled by Greenspan's money printing/dollar devaluation), it took 280 ounces of gold to buy one class A share.  Currently it takes just under 70 ounces of gold.   A picture says 1000 words, huh?  In less that 1000 words, and in summation of the chart, a market participant would be about 400% wealthier if they had exchanged their investible fiat dollars for gold in 1999 and simply held it until now than if they had invested in Warren Buffet.  No wonder he's coming out of his Depends over gold.

As you can see, gold is not an investment at all.  It's a currency that embodies relative purchasing power in the same way that the U.S. dollar or the euro contain relative purchasing power against each other and against the goods and services these currencies are used to procure.  The relative purchasing power of each global paper fiat currency pretty much fluctuates on daily basis.  But it is a fact that the relative purchasing power of each currency against gold has been rapidly declining over the past 11 years. 

So gold isn't even an investment, contrary to the notion of gold which Buffet absurdly attempts to explain.  Gold is a nothing more than something that possesses decorative value as jewelry, but more significantly has functioned for over 5,000 years as a remarkably stable currency for the purposes of commerce.  Looked at properly, Buffet's long-winded written pontification on why gold is not a good investment seems absolutely silly.


  1. Dave

    You'll like this analysis.

    1. Thanks! Will read it after I watch the latest episode of House tonight.

  2. we have to remember that Warren talks his book. Annuities are great when individual tax rates are high, and it so happens Warren has a company that sells annuities.

    When Estate Taxes are high, high net worth folks whose money is tied up in businesses (sometimes because of high income taxes) need life insurance (including farmers if they want to keep the farm in the family). Warren has a company that sells life insurance.

    But the goal of investing (and business) is not only to make money (and I know that in some quarters thats not the goal--some would say a goal of business is to provide employment.

    And since Warren has missed out on a hugely profitable investment that's a strike against him.

    He gets a strike for selling index puts in December 2007 (although he used the mark to fantasy accounting to lessen the blow)

    And a third strike for investing in financials so heavily. If mark to fantasy accounting was not used, and if our wonderful leaders did not bailout Warren-err the banks with citizens money, I would dare say BRK would be in a whole world of hurt.

    Proving once again its not what you know its who you know.

  3. Warren invests in Gold...Gold-man Sachs....those who are bailed need to support the bailers

  4. Somethings up with this guy, too...wasn't Sprott et all prompting miners to hold onto their bullion? I was thinking upside crash..

    Silver Criticality
    For the purposes of this letter we were particularly interested in the study of the premonitory phases before a crash, in our case, applicable to silver. Have we been experiencing the endogenous formation of 'ruptures', that is, sudden transitions from a quiescent state to a crisis or catastrophic event? Such ruptures involve interactions between structures at many different scales.
    We believe that the market has been exhibiting the precursory signatures of power law behaviour, and that the internet power law of participation phenomena has produced a point of criticality whereby we have seen the top in silver for this half of the year. We believe a real shake out is imminent*, in the order of $15 dollars over 3 to 5 days.
    We are not going to examine any of the fundamentals here in this piece, although in following months we will address this, as they are in a fluid state, both on the demand and supply side.

  5. Tavakoli: The Great MF Global Comedy Cover Up

    Powerful interests are involved. Too Big To Fail and Too Connected To Jail.

    This brief piece is noted financial analyst and author Janet Tavakoli at her incisive best. The coverage of MF Global by the financial print media has been laughable, with the notable exception of Forbes. MF Global was the eighth largest bankruptcy in the US, with thousands of customers victimized by theft, and yet one hardly ever hears about it.

  6. How many others?

    State Pension Fund Managers Must Be IMPRISONED

    This sort of behavior ought to earn a long stay in prison -- not continued employment:

    ALBANY — When New York State officials agreed to allow local governments to use an unusual borrowing plan to put off a portion of their pension obligations, fiscal watchdogs scoffed at the arrangement, calling it irresponsible and unwise.

    And now, their fears are being realized: cities throughout the state, wealthy towns such as Southampton and East Hampton, counties like Nassau and Suffolk, and other public employers like the Westchester Medical Center and the New York Public Library are all managing their rising pension bills by borrowing from the very same $140 billion pension fund to which they owe money.
    How the actuaries and other financial watchdogs allow this is beyond me.

    This is a fraud upon the public, a fraud upon the pensioners, and a fraud upon the workers who are being promised those pensions. It is a scam; you cannot borrow from yourself and claim you have somehow improved your own lot, as you've done no such thing -- you have simply moved money from one bucket to another.

    When this sort of scam becomes commonplace you know that the end of the line is near -- this is such a blatant rip-off that nobody in their right mind would attempt it unless they were literally at the end of their rope. By borrowing from the very fund that you're allegedly funding you are, in each and every instance, destroying the already-accumulated surplus that is already pledged to pay other people! off mode?

  7. Ron Paul Michigan State University Auditorium Intro and Crowd - 2-27-12


  8. Grant Williams On The Simplicity Of Owning Gold

    Simplicity 2 - Williams expands specifically on Gold - with key insights on owndership, supply, demand shifts, demographics, and central bank behavior with a succinct summation of reasons to own and reasons to exit that should help many deal with the ebbs and flows.

  9. Character Matters: Interview with Janet Tavakoli

    JT: This will sound Clintonesque, but it depends on your definition of "we" and which crisis we're talking about since there is more than one. On a personal level, I could say "what crisis?" One must also remember to give thanks for things one does not want and does not have, such as a legacy account at MF Global. If I wanted to complain, I'd have to make something up. But when one looks at the big picture, we're losing ground.

    The IRA: Yes, we discussed MF Global last week on CNBC in a good discussion with Carlos Quintanilla and Rick Santelli. This looks like another win for the large banks and especially the lobbyists for the largest OTC derivatives dealer banks. But leaving aside such overt acts of fraud and deception for a moment, what's your take on the landscape facing investors?

    JT: What should concern earners and investors? First, the strongest predictor of default is obsolescence, and one should be alert to value traps. There is also a direct correlation between leverage and default risk. Finally, the world is interconnected, and the nature of global financial risk is that it is highly clustered risk. Means do not exist; we see rapid jumps. "Correlations"-I'd ban the misuse of this word if I could-between rating and default do not hold up. One can look at the Eurozone and argue its model is obsolete and it's highly leveraged. Take a look at the Fed balance sheet, and one sees a surge in hard-to-quantify assets. Moreover, the Fed is not good at valuing opaque assets, and neither is its consultant, Blackrock. Congress and regulators are more captured than ever, and the big money interests like it that way. Fraud is rampant and unpunished, and it will inevitably lead to the next crisis. A crisis is the only motivation for the pretense of action by our elected officials. Yes, there is pain ahead and it involves inflation of things we want and need and deflation of many bulk asset values. I call it stranguflation.
    Janet: Structured finance covers a lot of territory including currencies, commodities, credit derivatives, interest rate swaps, M&A hedging, leveraged finance, corporate finance and securitizations that incorporate these elements. But if you're asking about asset backed securitization, it's broken. The shadow banking system is on its knees. Until transparent clean products can be relied upon, the shadow banking system will stay on its knees. An important financing tool has been devastated by corrupt finance and the denial of widespread fraud. No prudent investor should trust that problems have been solved, and if investors want to consider these products, the bar for due diligence has to be set very high. Organizations like SIFMA have done nothing to restore credibility and deny fraud and other serious problems. SIFMA is a lobbying organization. In my view, it is part of the problem, a barrier to cleaning up the mess.

  10. Who's not doing this???Wall to wall fraud from coast to coast....

    Liu’s Mayoral Campaign Treasurer Charged in Donation Scheme
    Fake Donors

    Hou used at least 40 people to pose as legitimate campaign donors in order to send the campaign large, illegal donations far above the individual contribution limit set by the city’s Campaign Finance Board, prosecutors said.

    Using this method, Hou was also able to fraudulently increase the amount of matching funds the board provided to the campaign, the U.S. said. She worked with individuals who served as intermediaries in connection with fundraising events where the fake donors were reimbursed, prosecutors alleged.

  11. Goodbye, First Amendment: ‘Trespass Bill’ will make protest illegal — RT

  12. Doubtful Signs of a Criminal Case Against MF Global
    Investigators have not accused Jon S. Corzine, former chief executive of MF Global, of wrongdoing in the firm’s collapse.Jonathan Ernst/ReutersInvestigators have not accused Jon S. Corzine, former chief executive of MF Global, of wrongdoing in the firm’s collapse.

    Federal authorities are struggling to find evidence to support a criminal case stemming from the collapse of MF Global, even after a federal grand jury in Chicago has issued subpoenas.

    Investigators, unable to find a smoking gun amid thousands of e-mails and documents, increasingly suspect that chaos and poor risk control systems prompted the disappearance of more than $1 billion in customer money, according to several people involved in the case.

    What they need to do is think....

  13. Silver Cartel Dumps 225 Million Ounces In 30 Minutes

    Ron Paul To Ben Bernanke: "People Lose Trust In The Government Because You Lie To Them About Inflation"
    Ron Paul, guns blazing, asks the Chairman if he does his own shopping, if he is aware of what true inflation is, and if he knows that Americans don't trust the government because they are being lied to about inflation. And it only gets better, once Paul starts brandishing a silver coin.

  14. See how easy it is! And technical traders say sell. The tin foil hats are weak. When have we seen a 60 move up. If you really did an analysis now from 2008 bottom the conventional stocks with dividends beat handsomely. Why should one be in this high risk with very little reward. That is if you are Jonny come latelys.

    If Golds advance only depends on the future activities of the Governments and not what has been then you can forget.

    And ontop of it the financials are doing to bad with their "punch bowl" in question. This is only a media performance.
    It is just so simple. Sure Silver had a good run - but all those pumpers pumping mining shares are "out to lunch" like Hathaway fondly says.

  15. IMF Staff Backs Currency Intervention as a Policy Tool in Emerging Markets

    Currency intervention is a valid instrument for central banks of emerging markets to use alongside interest rates, the International Monetary Fund staff said in a report.

    Many developing economies have chosen to set an inflation target to anchor expectations after a history of price instability, according to the report. Openly adopting a second policy tool focused on managing exchange rates is likely to strengthen central banks’ credibility rather than undermine it, the IMF economists argue.

    The report reflects recent efforts at the IMF to challenge macro-economic beliefs...

    ...well we all know gold's a currency....

  16. I have been reading Harvey now for ages and all this rubbish about smoke under the hood and physical tightness - blah blah. Tell me then why hasn't anybody taken the registered ounces out then - they aren't that many??? With over 200mill ounces of silver now shorted - probably more. That's almost a quarter of a years production and we idiots can't do anything about it.

    And the tin foil hats have now got to change their tune - every blogger and their servant was calling for QE to infinity. Well the system learns and it seems that the tin foil are on the back foot. Now the story changes and the metals will have to go up relative to what has happened in the past and not the future. And they are blind in any event - with all the liquidity that is going into the system without a word being said.

    And you want the sheeple to take the miners and the precious metals off you while being derogatory to them.

    Good night to you all

    1. I agree that there's a lot of hype that goes on about any physical tightness that may or may not exist out there. Especially people like Ranting Andy, who seem to think the activity on Ebay is the market barometer.

      I don't know why a big buyer does not go onto the Comex and try to squeeze the market, other than out of fear over what happened to the Hunts. I would not discount that dynamic. Also, someone who is trying to accumulate a large amount of silver will use the Comex as the last bastion of sourcing physical silver because once the Comex gets squeezed - because of its visibillity - the party is over and the era of cheap silver is over.

      Having said that, there's is no doubt that the amount of paper liabilities is several multiples higher than the amount of deliverable physical silver. At some point there will be a reconciliation of the absurd imbalance and that "reconiciliation" will be much higher prices.

      I do get irritated and fatigued by the hype just as you do. Hang on to your positions and you will be rewarded.

  17. Recently did a post on Buffett as well.

  18. Impressive post, and I like it. It was well written and impressive. Big thanks for sharing.

    Charles A