The Demand for Income Will Only Get More Acute

The demand for income will only get more acute if Citi credit Matt King’s forecast is correct. In a June 27 report called The Power of Doves, Mr. King wrote,

“secular stagnation is a real phenomenon … the bursting of [asset] bubbles has caused the last few recessions, but in each case the bubble was ultimately resolved by the taking on of still more debt. That each bubble ultimately proved vulnerable at successively lower levels of real interest rates is therefore not a bug, but a feature. .. it seems highly likely that the next recession will also be caused by a sell-off in asset prices, conceivably at an even lower level of interest rates still – and probably long before inflation has risen to reach [developed market] central banks’ targets.”

The low productivity growth inherent in secular stagnation, along with occasional asset bubbles and low inflation, is a recipe for lower and lower interest rates as North American populations age and need reliable cash flows.

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The Story of a Great Monopoly

I found this great read while doing some research. It’s from The Atlantic’s archive. It was published by H.D. Lloyd on March 1881. The article grabs the climate of the time on railroads, Standard Oil, Rockefeller, the Vanderbilt, corruption and politics.  The article address the “railroad problem” of the time and the power of monopolies. It’s a big article and it will take a while to read. If you read the book Titan, you will like this article.

Currier & Ives - Library of Congress
Currier & Ives – Library of Congress

The Story of a Great Monopoly

Repost from The Atlantic
By H.D. Lloyd

”These incidents in railroad history show most of the points where we fail … to maintain the equities of ‘government’—and employment—‘of the people, by the people, for the people.’”

Continue reading “The Story of a Great Monopoly”

2019 Berkshire Hathaway Shareholder Meeting Notes

Here’s 78 pages of notes from the 2019 BRK Shareholder Meeting last weekend.

2019 Berkshire Hathaway Shareholder Meeting Notes

I didn’t type these notes. They were sent to me. The raw text is from CNBC.com and the personal responsible for the notes compiled them for their own reading. I though the notes were excellent and asked for permission to share.

Buffett.cnbc.com/annual-meetings is a great Buffett archived that you should check out.

Here’s the full CNBC interview with Buffett, Munger, and Gates.

Charlie Munger, Unplugged

Charlie Munger spoke to WSJ reporters Nicole Friedman and Jason Zweig for six hours over dinner in his Los Angeles home on April 23. He covered a wide array of subjects. Here is an edited transcript from that conversation and a follow-up telephone discussion.

Reposted from The Wall-Street Journal
By Jason Zweig and Nicole Friedman

Q: What do you make of the world-wide fan club that you and Warren Buffett have attracted?

A: Well, the world is very peculiar. And these people that like me are mostly nerds in China or India. It’s a very deep attachment. They’re so passionately interested in improving themselves. Some of them just want to get rich in some easy way, but mostly they’re trying to improve themselves.

An awful lot of graduates of great engineering schools are investors. I wouldn’t call a man who uses computer science to sift vast amounts of data for correlation, and then starts trading the correlation and if it works, keeps going, and if it doesn’t, stops, I wouldn’t call him an investor. It’s really, what he is is a trader. And those correlations are very peculiar…. Of course, the more people that try and trade that one correlation, once they find it, the less well it works.

Q: If you were just starting out as an investor, what approach would you take?

A: Well, the original [Benjamin] Graham approach of looking for cases where you’re getting more than you’re paying for is correct. All good investing involves getting a better investment than you’re paying for. And you’re just looking for it in different places, just as a fisherman can fish in one place or another. But he’s always looking for more value than [he’s] paying for. That will never go out of style. I mean, that is just basic and fundamental.

Some people look at it in stocks where the earnings are going up all the time, some look at consumer goods, some look at bankruptcies, some look at distressed debt. There are different ways to hunt, just like different places to fish. And that’s investing.

And knowing that, of course, one of the tricks is knowing where to fish. Li Lu [of Himalaya Capital Management LLC in Seattle] has made an absolute fortune as an investor using Graham’s training to look for deeper values. But if he had done it any place other than China and Korea, his record wouldn’t be as good. He fished where the fish were. There were a lot of wonderful, strong companies at very cheap prices over there.

Let me give you an example. One guy in Korea, he cornered the sauce market. And when I say cornered, he had like 95% of all the sauce in Korea. And he couldn’t stand anybody else  ever selling any sauce. So he could have made two or three times as much if he wanted to by raising the prices.

Li Lu figured that out. It’s called Ottogi. And of course we’ve made 20 for 1. There was nothing like that in the United States. Continue reading “Charlie Munger, Unplugged”

What Is Bank Capital, Anyway?

Below is a good primer on bank capital from the NYT. The article dates from 2013 but is still relevant. American banks are about to find out if the Feds approve their plan to return capital to shareholders. It’s good to review what is bank capital and why it is important.


What Is Bank Capital, Anyway?
By William Alden

New-York Times

Regulators are butting heads with banks this week over capital, with new rules on the table that could force banks to hold more of it. But what exactly is capital, and why is it so important?

The question gets at the heart of finance today. In the crisis, a lack of capital brought some banks to the brink. Now, by requiring banks to bolster their capital, the government is trying to eliminate the need for taxpayer bailouts in the future.

Though capital is a centerpiece of Wall Street regulation, it resists a simple definition.

Capital is often described as a cushion that banks hold against losses. That’s true, but the implications are not always clear. One unfortunate misconception that can arise is that capital is a “rainy day fund.”

Related Links
Regulators Seek Stiffer Bank Rules on Capital (June 9, 2013)
To understand capital, think about how a financial firm does business. In a typical transaction, a firm pays for an investment with a combination of debt and equity. The more debt, or leverage, that finances the transaction, the more money the firm can make (or lose).

Say a firm pays for its investments with nine parts borrowing and one part equity. By using debt, the firm can magnify the return it makes on its equity. This is a principle banks use when determining how to finance their operations.

A bank’s capital is analogous to equity in the above example. More capital (so, less debt) means banks are more able to withstand losses. But it also means they can’t make as much money. This dynamic – more capital leading to lower returns – helps explain why banks tend to argue that holding more capital is “expensive.”

But even banks won’t deny that capital is essential. Without it, the tiniest loss would put a bank out of business.

Think about capital this way: It designates the percentage of assets that a bank can stand to lose without becoming insolvent.

If a bank’s assets decline in value, it has to account for that by adjusting the source of financing that it used. Liabilities like debt and deposits can’t be reduced, as they represent money that the bank has promised to pay to bondholders or depositors.

But what’s useful about capital is that it can be reduced, or written down. That’s the whole point. Shareholders, who contribute to capital, agree to absorb losses if the bank falls on hard times. So, rather than a “rainy day fund,” capital is a measure of a bank’s potential to absorb losses.

How does a bank increase its capital? There are few ways to do this, none of which banks particularly love. One is for banks to retain more of their profit, and not pay it out as dividends or spend it on share buybacks.

Another is to sell more shares in the market. That’s generally unappealing to banks because the shares would very likely be sold at a discount, and the slug of new shares could dilute the stakes of other shareholders.

A third method is reducing assets. This doesn’t actually increase the nominal level of capital. But it does increase ratio of capital to assets, which is one way that regulators measure the adequacy of a bank’s capital. If banks sell some of the things they own, that can have the effect of bolstering capital ratios.

When banks threaten to reduce lending or sell assets if they are forced to raise capital, this is the dynamic they are referring to.

The issue is complicated enough as it is, without the political posturing that is taking place. As regulators tinker with the rules, an understanding of capital will help reveal what’s at stake.

Elon’s Email to SpaceX Employees Regarding Taking The Company Public

Elon’s email to SpaceX employees regarding taking the company public (excerpted from Ashlee Vance’s biography)


From: Elon Musk
Date: June 7, 2013, 12:43:06 AM PDT
To: All <All@spacex.com>
Subject: Going Public

Per my recent comments, I am increasingly concerned about SpaceX going public before the Mars transport system is in place. Creating the technology needed to establish life on Mars is and always has been the fundamental goal of SpaceX. If being a public company diminishes that likelihood, then we should not do so until Mars is secure. This is something that I am open to reconsidering, but, given my experiences with Tesla and SolarCity, I am hesitant to foist being public on SpaceX, especially given the long term nature of our mission.

Continue reading “Elon’s Email to SpaceX Employees Regarding Taking The Company Public”

Good Blockchain Primer

Barron’s featured story this week is Beyond Bitcoin: How Blockchain Is Changing Banking. It can be a little complicated but you don’t need to be a tech nerd to get it. The article does a good job explaining how the whole thing works to the average Joe. By now most of us have heard about the Bitcoin mania but have a little understanding on how the whole thing works. Blockchain, the technology behind Bitcoins, is not a fad. It’s the real deal and many industries outside finance, such as medical and insurance are testing.

To simply put it, a blockchain is a digital ledger that is kept and validated simultaneously by a network of computers. Think of a shared Excel document that no one person can change without the agreement of the others. Importantly, it allows deals to be made without the blessing of a “trusted intermediary,” such as a clearinghouse. It has many advantages.

Blockchain will gain wider acceptance soon. Why? Well lots of money can be save. But also it has been proven to be secure, reliable, and operates at a lower cost than traditional mechanism. Why is it more secure? True record is kept by all participants and doesn’t depend on one person but by all participants. There’s not a single point of failure. For example, your notary can make a mistake that wouldn’t normally happen.  Executives know they need to understand blockchain, but not everyone is clear yet on how exactly it will help their business. I’m in the same boat. I don’t want to buy or invest in bitcoins, but I understand that blockchain is the way forward.

Here’s a copy of the article:


Beyond Bitcoin: How Blockchain Is Changing Banking
by By Avi Salzman from Barron’s

The hottest investment of the first half of the year wasn’t Amazon.com, Netflix, or even Tesla. In fact, your broker probably isn’t pitching it, and it is barely even recognized by the Securities and Exchange Commission. Yet cryptocurrencies—the most famous of which is Bitcoin—are shooting out the lights.

Investors who bought Bitcoin for $5 or less just five years ago are millionaires today, as its price has soared above $2,500. Unlucky ones have lost small fortunes simply by misplacing a password, much like leaving a suitcase full of cash at the train station. Bitcoin, which has nearly tripled in price this year alone, is blamed for fueling drug sales and for helping hackers wreak havoc on businesses and governments. On some days, its price swings 20% up or down, often on a whim or a rumor. (See related story: “How to Invest in Bitcoin.”
Continue reading “Good Blockchain Primer”

Henry Singleton Forbes 1979 Article

“[Warren Buffett] considers that Henry Singleton of Teledyne has the best operating and capital deployment record in American business.” – John Train’s The Money Masters

“He understood how to move between real assets and financial assets in a way you don’t see today…He was the most brilliant industrialist that I’ve ever met, and I’ve met many”Leon G. Cooperman speaking about Henry Singleton

Dr. Henry E. Singleton (1916-1999) was a business genius. He’s the founder of Teledyne, at the time one of the US’s largest conglomerates. Created in 1960, Teledyne was formed to capitalize on the coming revolution in which digital technology would replace analog devices and systems in everything we could touch and imagine. Loosely translated, Teledyne means Power Through Communication.

Henry Singleton was the idea behind the outstanding book The Outsiders by William N. Thorndike. Singleton is a master capital allocator and absolutely crushed the market. He could read a book a day and play chess blindfolded. He kept a low key profile and rarely gave interviews. This explains in part why most people aren’t familiar with him. Little is known today of Singleton’s achievements as a capital deployer and there’s a lot to learn.

Here’s the 6 pages Forbes article.

Henry Singleton Forbes 1979 article

Something to listen to in the car:

 

I Ran the C.I.A. Now I’m Endorsing Hillary Clinton

Below I reposted a solid article by the former deputy director of the Central Intelligence Agency, Michael Morell. The article is clear, rational, and straight to the point.  What you would exactly expect from a CIA guy. With so much nosense floating around, this article is refreshing.


Repost from the New-York Times
I Ran the C.I.A. Now I’m Endorsing Hillary Clinton.
By Michael J. Morell

During a 33-year career at the Central Intelligence Agency, I served presidents of both parties — three Republicans and three Democrats. I was at President George W. Bush’s side when we were attacked on Sept. 11; as deputy director of the agency, I was with President Obama when we killed Osama bin Laden in 2011.

I am neither a registered Democrat nor a registered Republican. In my 40 years of voting, I have pulled the lever for candidates of both parties. As a government official, I have always been silent about my preference for president.

No longer. On Nov. 8, I will vote for Hillary Clinton. Between now and then, I will do everything I can to ensure that she is elected as our 45th president.

Two strongly held beliefs have brought me to this decision. First, Mrs. Clinton is highly qualified to be commander in chief. I trust she will deliver on the most important duty of a president — keeping our nation safe. Second, Donald J. Trump is not only unqualified for the job, but he may well pose a threat to our national security.

I spent four years working with Mrs. Clinton when she was secretary of state, most often in the White House Situation Room. In these critically important meetings, I found her to be prepared, detail-oriented, thoughtful, inquisitive and willing to change her mind if presented with a compelling argument.

I also saw the secretary’s commitment to our nation’s security; her belief that America is an exceptional nation that must lead in the world for the country to remain secure and prosperous; her understanding that diplomacy can be effective only if the country is perceived as willing and able to use force if necessary; and, most important, her capacity to make the most difficult decision of all — whether to put young American women and men in harm’s way.

Mrs. Clinton was an early advocate of the raid that brought Bin Laden to justice, in opposition to some of her most important colleagues on the National Security Council. During the early debates about how we should respond to the Syrian civil war, she was a strong proponent of a more aggressive approach, one that might have prevented the Islamic State from gaining a foothold in Syria.

I never saw her bring politics into the Situation Room. In fact, I saw the opposite. When some wanted to delay the Bin Laden raid by one day because the White House Correspondents Dinner might be disrupted, she said, “Screw the White House Correspondents Dinner.”

In sharp contrast to Mrs. Clinton, Mr. Trump has no experience on national security. Even more important, the character traits he has exhibited during the primary season suggest he would be a poor, even dangerous, commander in chief.

These traits include his obvious need for self-aggrandizement, his overreaction to perceived slights, his tendency to make decisions based on intuition, his refusal to change his views based on new information, his routine carelessness with the facts, his unwillingness to listen to others and his lack of respect for the rule of law.

The dangers that flow from Mr. Trump’s character are not just risks that would emerge if he became president. It is already damaging our national security.

President Vladimir V. Putin of Russia was a career intelligence officer, trained to identify vulnerabilities in an individual and to exploit them. That is exactly what he did early in the primaries. Mr. Putin played upon Mr. Trump’s vulnerabilities by complimenting him. He responded just as Mr. Putin had calculated.

Mr. Putin is a great leader, Mr. Trump says, ignoring that he has killed and jailed journalists and political opponents, has invaded two of his neighbors and is driving his economy to ruin. Mr. Trump has also taken policy positions consistent with Russian, not American, interests — endorsing Russian espionage against the United States, supporting Russia’s annexation of Crimea and giving a green light to a possible Russian invasion of the Baltic States.

In the intelligence business, we would say that Mr. Putin had recruited Mr. Trump as an unwitting agent of the Russian Federation.

Mr. Trump has also undermined security with his call for barring Muslims from entering the country. This position, which so clearly contradicts the foundational values of our nation, plays into the hands of the jihadist narrative that our fight against terrorism is a war between religions.

In fact, many Muslim Americans play critical roles in protecting our country, including the man, whom I cannot identify, who ran the C.I.A.’s Counterterrorism Center for nearly a decade and who I believe is most responsible for keeping America safe since the Sept. 11 attacks.

My training as an intelligence officer taught me to call it as I see it. This is what I did for the C.I.A. This is what I am doing now. Our nation will be much safer with Hillary Clinton as president.

Michael J. Morell was the acting director and deputy director of the Central Intelligence Agency from 2010 to 2013.

Financial panic or slow burn?

I reposted an excellent article by Niall Ferguson. He’s a professor of history at Harvard and a senior fellow of the Hoover Institution at Stanford. While most financial news headlines focus on the current market noise, Niall takes the time to explain why it’s happening with some history.

Reposted from The Boston Globe
By Niall Ferguson

In the best-known scene of “The Revenant,’’ Leonardo DiCaprio is hideously mauled by a bear. The world’s investors now know exactly how that feels.

As I write, nearly every major equity index is down since the beginning of the year, with Italy as the worst performer (-23 percent) and Canada the best (-5 percent). The S&P500 is down 9 percent. With the exceptions of precious metals and safe haven sovereign bonds, it has been a rout.

The question now being asked on all sides is whether we are in for a repeat of the great crisis of 2008.
Continue reading “Financial panic or slow burn?”