Some thoughts from Warren Buffett in this CNBC interview on Wells Fargo:
They've run into much larger losses than anybody anticipated three or four years ago but they can handle them very easily. Last year we talked about 'em having 40 billion of pre-provision income in 2009, and you know, they had it, and that easily handles 20 billion, roughly, of losses.
Becky Quick of CNBC then asked what he thought of Wells needing to issue a lot more shares. Buffett's reply:
I didn't like it. (Laughs.) No, I mean, the government forced them to issue the shares. The government's done a lot of good things for the economy and net I'm a beneficiary and Berkshire Hathaway is a beneficiary of the things overall they've done. But they cost us real money at Wells Fargo.
Speaking to Joe Kernen of CNBC, he also had this to say about Wells Fargo's revenue...
...actually when the stress test was done in the spring of last year, that's where the people evaluating them were way off, was on the revenue number. Wells did not disagree with them on the possible losses number, but they felt that the people just didn't understand the revenue potential, that were looking at them, and I agreed with them.
Superior revenue generation and low cost deposits allows Wells Fargo to earn higher pre-provision pre-tax income on its asset base than most other banks. As a result, Wells Fargo can absorb more losses during downturns through this earning power and will (all things being equal) earn a higher return on equity across business cycles. I agree that Wells Fargo did not need to raise capital but it still worked out okay for shareholders. The key reason being that they were never forced to raise capital at an extremely low price...just an annoyingly low price.
The stock should be quite a bit higher in 5 years. It's just that this process of forced dilution took some of the upside away. Personally, I don't think it is as unfair as Buffett says. It could not have been handled much better given the circumstances in my view. It would be difficult to have a stress test that was fair to every bank. The big picture here though is that WFC has approximately 50% more shares outstanding (before the crisis they had ~3.4 billion, now they have roughly 5.2 billion). That sounds bad on the surface but consider the following: By my math, they roughly doubled their asset base (from $ 600 billion to 1.2 trillion) and long-term earning power (pre-provision pretax from $ 20 billion/year to $ 40 billion/year) through the acquisition of Wachovia during that time. I'll take 50% dilution with a 100% increase in earning power any day. The bottom line is normalized after tax income should easily exceed $ 20 billion/year and the market value of the bank is $ 141 billion using last Friday's close.
Obviously future forced dilutions would damage this thesis and, though it seems remote right now, that risk of dilution remains out there.
Adam
Long position in Wells Fargo
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Monday, January 25, 2010
Thursday, January 21, 2010
Buffett on Kraft-Cadbury Deal
From this CNBC interview on January 20th. Buffett pulls no punches here. He doesn't like the deal.
First, he thinks they should not have sold what he thinks is a very good pizza business. In his view, the after tax proceeds (there was little tax basis) was too low relative to the earnings.
Second, he thinks they paid too much for Cadbury.
Basically, he sees it this way. They are selling the earnings of one business for 9 times to buy another at 16 or 17 times.
"...the actual multiple, if you look at the value of the Kraft stock, is more like 16 or 17 and they sold earnings at nine times. So, it's hard to get rich doing that. And I've got a lot of doubts about the deal."
Buffett had a few other comments on Kraft later in the interview...
"...I think Kraft has got a wonderful portfolio of businesses including their pizza business which Nestle now has...And I think Irene has done a good job in operations. I like Irene. I mean, she's been straightforward with me. We just disagree. She thinks it's a good deal. I think it's a bad deal. I think she's a decent person. She could be a trustee under my will. I just don't want her making this particular deal."
He added that he thinks that Kraft is still undervalued just less so after the deal. It wasn't a great deal but Kraft-Cadbury should still have a bright future.
Adam
Long position in KFT
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
First, he thinks they should not have sold what he thinks is a very good pizza business. In his view, the after tax proceeds (there was little tax basis) was too low relative to the earnings.
Second, he thinks they paid too much for Cadbury.
Basically, he sees it this way. They are selling the earnings of one business for 9 times to buy another at 16 or 17 times.
"...the actual multiple, if you look at the value of the Kraft stock, is more like 16 or 17 and they sold earnings at nine times. So, it's hard to get rich doing that. And I've got a lot of doubts about the deal."
Buffett had a few other comments on Kraft later in the interview...
"...I think Kraft has got a wonderful portfolio of businesses including their pizza business which Nestle now has...And I think Irene has done a good job in operations. I like Irene. I mean, she's been straightforward with me. We just disagree. She thinks it's a good deal. I think it's a bad deal. I think she's a decent person. She could be a trustee under my will. I just don't want her making this particular deal."
He added that he thinks that Kraft is still undervalued just less so after the deal. It wasn't a great deal but Kraft-Cadbury should still have a bright future.
Adam
Long position in KFT
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Wednesday, January 20, 2010
Shareholders Approve 50-1 Split of BRKb
Warren Buffett took some questions at the meeting at the special shareholders meeting but, according to CNBC, Charlie Munger was not there...
Charlie Munger is not present, but there is a paper cutout with his photo. Buffett also has a recording of Charlie saying, "I have nothing to add" that's been played a few times after Buffett answers a question. (That's what Charlie often says after Buffett answers a question during a lengthy Q&A session at the regular shareholders meeting each May.) - CNBC
He also had some comments on BRKb being added to the S&P 500.
He tells shareholders that it would now be "logical" for Berkshire to be added to the S&P 500 now that the Class B shares will be trading in double-digits with greater liquidity and volume. He thinks that will happen eventually because the company will be so large it can't be ignored. It would be a slight benefit to shareholders, he thinks, to be added to the S&P.
He adds, "The B may be the tail that wags the dog now.- CNBC
In the CNBC article, Buffett also said that the Burlington Northern deal was not cheap and that he would want to split the stock even if that deal did not end up going through.
Adam
Long BRKb
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Charlie Munger is not present, but there is a paper cutout with his photo. Buffett also has a recording of Charlie saying, "I have nothing to add" that's been played a few times after Buffett answers a question. (That's what Charlie often says after Buffett answers a question during a lengthy Q&A session at the regular shareholders meeting each May.) - CNBC
He also had some comments on BRKb being added to the S&P 500.
He tells shareholders that it would now be "logical" for Berkshire to be added to the S&P 500 now that the Class B shares will be trading in double-digits with greater liquidity and volume. He thinks that will happen eventually because the company will be so large it can't be ignored. It would be a slight benefit to shareholders, he thinks, to be added to the S&P.
He adds, "The B may be the tail that wags the dog now.- CNBC
In the CNBC article, Buffett also said that the Burlington Northern deal was not cheap and that he would want to split the stock even if that deal did not end up going through.
Adam
Long BRKb
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Monday, January 18, 2010
On Mutual Fund Performance
This recent Wall Street Journal article points out that of the 2,301 stock funds (those with over $ 100 million in assets) just 3% have positive returns (source: Morningstar) over the past two years.
Seems reasonable to look at 2008 and 2009 (at least) to gauge the performance of money managers.
Many lost 40-60% in 2008. Some of the coverage of 2009 mutual fund performance has ignored what happened the year before.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Seems reasonable to look at 2008 and 2009 (at least) to gauge the performance of money managers.
Many lost 40-60% in 2008. Some of the coverage of 2009 mutual fund performance has ignored what happened the year before.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Friday, January 15, 2010
Diageo's Captain Morgan
While Diageo's (DEO) stock price has gotten a bit expensive (not outrageously expensive...but a bit), it remains a very good business with a wide moat, modest but steady growth prospects and by far the best combination of global distribution and brands among spirits makers. Diageo has 8 of the top 20 global brands. In the short run the global recession has caused some trade down to occur away from the firm's premium brands but this should not be a long-term problem. In the long run it seems reasonable to expect the business to go on producing high returns on capital. Growth will probably be steady but not spectacular.
Diageo's operating margins worldwide approach 30% and are even higher in the U.S. Its brand portfolio includes: Baileys, Tanqueray, Smirnoff, Johnnie Walker, Jose Cuervo, Guinness, and Captain Morgan among others. Most of these brands are number 1 or 2 in their respective categories. By my math approximately 60 million servings of Diageo products are consumed everyday.
This Wall Street Journal article describes the history of Captain Morgan, one of the company's many successful brands and the fastest growing rum brand in the world. Captain Morgan has 25% of the global rum market.
From the article:
Long before Captain Morgan became a hit in the States, it was so associated with serious drinking in Canada that Maritime Provinces slang for a bender is to be "out with the Captain."
John Steinbeck's first novel was "Cup of Gold: A Life of Sir Henry Morgan, Buccaneer, with Occasional Reference to History." In it, he writes of Morgan's plundering and...
...then pulling his fleet of ships up to an island. Morgan tells his men that he wants to reward them: "He rolled out forty kegs of rum onto the beach." The drunken crews are soon too far gone to notice that Morgan and his core group of pirates have sailed off in the night with all the treasure.
The article references William Geist writing about a Rolling Stones concert...
On the way there, he and a friend stopped at a sketchy liquor store "where a gentleman was passed out on the floor with a smile on his face." In a hurry, Mr. Geist said, "Just give us what he's having." They got a bottle of Captain Morgan Original Spiced Rum.
I hear it is pretty good.
Adam
Long position in DEO
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Diageo's operating margins worldwide approach 30% and are even higher in the U.S. Its brand portfolio includes: Baileys, Tanqueray, Smirnoff, Johnnie Walker, Jose Cuervo, Guinness, and Captain Morgan among others. Most of these brands are number 1 or 2 in their respective categories. By my math approximately 60 million servings of Diageo products are consumed everyday.
This Wall Street Journal article describes the history of Captain Morgan, one of the company's many successful brands and the fastest growing rum brand in the world. Captain Morgan has 25% of the global rum market.
Long before Captain Morgan became a hit in the States, it was so associated with serious drinking in Canada that Maritime Provinces slang for a bender is to be "out with the Captain."
John Steinbeck's first novel was "Cup of Gold: A Life of Sir Henry Morgan, Buccaneer, with Occasional Reference to History." In it, he writes of Morgan's plundering and...
...then pulling his fleet of ships up to an island. Morgan tells his men that he wants to reward them: "He rolled out forty kegs of rum onto the beach." The drunken crews are soon too far gone to notice that Morgan and his core group of pirates have sailed off in the night with all the treasure.
The article references William Geist writing about a Rolling Stones concert...
On the way there, he and a friend stopped at a sketchy liquor store "where a gentleman was passed out on the floor with a smile on his face." In a hurry, Mr. Geist said, "Just give us what he's having." They got a bottle of Captain Morgan Original Spiced Rum.
I hear it is pretty good.
Adam
Long position in DEO
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Wednesday, January 13, 2010
Kraft and Cadbury
Kraft (KFT) filed an 8-K today raising its earnings guidance. In the filing the company's CEO also had this to say:
"As we complete our turnaround, we’re delivering high-quality earnings growth, despite the difficult economic environment,” said Kraft Foods’ Chairman and CEO Irene Rosenfeld. “And we’re doing this while continuing to invest in our brands and businesses. As a result, we’re well positioned to deliver sustainable top-tier performance, with or without Cadbury."
With Cadbury (ADR: CBY) publishing a similar statement yesterday...both company's seem to be trying to win the "I'll be just fine without the other" PR battle.
Commenting on the 2009 performance, Todd Stitzer, Cadbury's CEO said: "Our performance in 2009 was outstanding. We generated good revenue growth despite the weakest economic conditions in 80 years."
The statement by Cadbury also gives more reasons why it believes the Kraft offer is still very unattractive.
Adam
Long position in KFT
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
"As we complete our turnaround, we’re delivering high-quality earnings growth, despite the difficult economic environment,” said Kraft Foods’ Chairman and CEO Irene Rosenfeld. “And we’re doing this while continuing to invest in our brands and businesses. As a result, we’re well positioned to deliver sustainable top-tier performance, with or without Cadbury."
With Cadbury (ADR: CBY) publishing a similar statement yesterday...both company's seem to be trying to win the "I'll be just fine without the other" PR battle.
Commenting on the 2009 performance, Todd Stitzer, Cadbury's CEO said: "Our performance in 2009 was outstanding. We generated good revenue growth despite the weakest economic conditions in 80 years."
The statement by Cadbury also gives more reasons why it believes the Kraft offer is still very unattractive.
Adam
Long position in KFT
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Friday, January 8, 2010
Liquidity
"I think the notion that liquidity of tradable common stock is a great contributor to capitalism is mostly twaddle. The liquidity gives us these crazy booms, so it has as many problems as virtues." - Charlie Munger
Charlie Munger on Reading, Thinking, IQs, and Temperament
Here's an interview with Charlie Munger in Kiplinger's from several year ago. It covers some familiar territory.
Excerpts:
What are your work styles like?
We [Warren and I] have certain things in common. We both hate to have too many forward commitments in our schedules. We both insist on a lot of time being available almost every day to just sit and think. That is very uncommon in American business. We read and think. So Warren and I do more reading and thinking and less doing than most people in business. We do that because we like that kind of a life. But we've turned that quirk into a positive outcome for ourselves.
How important is temperament in investing?
A lot of people with high IQs are terrible investors because they've got terrible temperaments. And that is why we say that having a certain kind of temperament is more important than brains. You need to keep raw irrational emotion under control. You need patience and discipline and an ability to take losses and adversity without going crazy. You need an ability to not be driven crazy by extreme success.
Check out the entire interview.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and are never a recommendation to buy or sell anything.
Excerpts:
What are your work styles like?
We [Warren and I] have certain things in common. We both hate to have too many forward commitments in our schedules. We both insist on a lot of time being available almost every day to just sit and think. That is very uncommon in American business. We read and think. So Warren and I do more reading and thinking and less doing than most people in business. We do that because we like that kind of a life. But we've turned that quirk into a positive outcome for ourselves.
How important is temperament in investing?
A lot of people with high IQs are terrible investors because they've got terrible temperaments. And that is why we say that having a certain kind of temperament is more important than brains. You need to keep raw irrational emotion under control. You need patience and discipline and an ability to take losses and adversity without going crazy. You need an ability to not be driven crazy by extreme success.
Check out the entire interview.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and are never a recommendation to buy or sell anything.
Tuesday, January 5, 2010
Berkshire on Kraft Bid
From today's Berkshire Hathaway News Release on the Kraft bid for Cadbury:
Berkshire Hathaway has voted "no" on Kraft's proposal to authorize the issuance of up to 370 million shares to facilitate the acquisition of Cadbury.
...The share-issuance proposal, if enacted, will give Kraft a blank check allowing it to change its offer to Cadbury – in any way it wishes – from the transaction presented to shareholders in the proxy statement. And we worry very much that, indeed, there will be an additional change from the revision announced this morning.
To state the matter simply, a shareholder voting "yes" today is authorizing a huge transaction without knowing its cost or the means of payment.
What we know with certainty, however, is that Kraft stock, at its current price of $27, is a very expensive "currency" to be used in an acquisition. In 2007, in fact, Kraft spent $3.6 billion to repurchase shares at about $33 per share, presumably because the directors and management thought the shares to be worth more.
Does the board now believe those purchases were a mistake and that Kraft's true value is only the current price of $27 per share – and that it is therefore fine to structure a major acquisition based upon that price? Would the directors use stock as merger currency if the price were, say, $20 per share? Surely the true business value of what is given is as important as the true business value of what is received when an acquisition is being evaluated. We hope all shareholders will use this yardstick in deciding how to vote.
Our understanding is that Kraft must announce its final offer for Cadbury by January 19th. If we conclude at that point that the offer does not destroy value for Kraft shareholders, we will change our vote to "yes."
Management teams (and directors) at the acquiring company do this all too often. An undervalued currency (in this case Kraft's stock) ends up being used to buy an asset for "strategic reasons". As the battle unfolds to capture that asset the "animal spirits" kick in and before you know it the management team overpays.
Buffett is attempting to keep this process in check. Asserting some influence to avoid potential destruction of Kraft shareholder value by overpaying with a temporarily weakened "currency".
He obviously knows the game well.
If the transaction goes through at current prices, use of that undervalued stock to buy Cadbury functions as a wealth transfer from Kraft to Cadbury shareholders.
Adam
Long Berkshire Hathaway and Kraft
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Berkshire Hathaway has voted "no" on Kraft's proposal to authorize the issuance of up to 370 million shares to facilitate the acquisition of Cadbury.
...The share-issuance proposal, if enacted, will give Kraft a blank check allowing it to change its offer to Cadbury – in any way it wishes – from the transaction presented to shareholders in the proxy statement. And we worry very much that, indeed, there will be an additional change from the revision announced this morning.
To state the matter simply, a shareholder voting "yes" today is authorizing a huge transaction without knowing its cost or the means of payment.
What we know with certainty, however, is that Kraft stock, at its current price of $27, is a very expensive "currency" to be used in an acquisition. In 2007, in fact, Kraft spent $3.6 billion to repurchase shares at about $33 per share, presumably because the directors and management thought the shares to be worth more.
Does the board now believe those purchases were a mistake and that Kraft's true value is only the current price of $27 per share – and that it is therefore fine to structure a major acquisition based upon that price? Would the directors use stock as merger currency if the price were, say, $20 per share? Surely the true business value of what is given is as important as the true business value of what is received when an acquisition is being evaluated. We hope all shareholders will use this yardstick in deciding how to vote.
Our understanding is that Kraft must announce its final offer for Cadbury by January 19th. If we conclude at that point that the offer does not destroy value for Kraft shareholders, we will change our vote to "yes."
Management teams (and directors) at the acquiring company do this all too often. An undervalued currency (in this case Kraft's stock) ends up being used to buy an asset for "strategic reasons". As the battle unfolds to capture that asset the "animal spirits" kick in and before you know it the management team overpays.
Buffett is attempting to keep this process in check. Asserting some influence to avoid potential destruction of Kraft shareholder value by overpaying with a temporarily weakened "currency".
He obviously knows the game well.
If the transaction goes through at current prices, use of that undervalued stock to buy Cadbury functions as a wealth transfer from Kraft to Cadbury shareholders.
Adam
Long Berkshire Hathaway and Kraft
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
Monday, January 4, 2010
Financial Sector Growth
From Grantham's 3rd Quarter 2009 letter:
...in 1965 the financial sector of the economy took up 3% of the GDP pie. The 1960s were probably the high water mark (or one of them) of America's capitalism. They clearly had adequate financial tools. Innovation could obviously have occurred continuously in all aspects of finance, without necessarily moving its share of the economy materially over 3%. Yet by 2007 the share had risen to 7.5% of GDP!
The financial world was reaching into the GDP pie and taking an unnecessary extra 4%. Every year! This extra rent is enough to lower the savings and investment potential of the rest of the economy. And it shows. As mentioned earlier, the growth rate of the GDP had been 3.5% a year for a hundred years. It had proven to be remarkably robust. Even the Great Depression bounced off it, and soon GDP growth was back on the original trend as if the Depression had never occurred. But after 1965, the growth of the non-financial slice, formerly 3.4%, slowed to 3.2%. After 1982 it dropped to 3.1% and after 2000 fell to well under 3%, all measured to the end of 2007, before the recent troubles. These are big declines. It is as if a runner has a growing and already heavy blood sucker on him that is, not surprisingly, slowing him down. In the short term, I realize that job creation in the financial industry looked like a growth driver, as did the surge in financial profits (which we now realize were ludicrously overstated). But in the long term, like a sugar high, this stimulus was temporary and unhealthy.
The financial system was growing because it could. The more complex and confusing new financial instruments became the more "help" ordinary citizens needed from the experts. The agents' interests were totally unaligned with the principle/clients' interests.
Check out the entire letter.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
...in 1965 the financial sector of the economy took up 3% of the GDP pie. The 1960s were probably the high water mark (or one of them) of America's capitalism. They clearly had adequate financial tools. Innovation could obviously have occurred continuously in all aspects of finance, without necessarily moving its share of the economy materially over 3%. Yet by 2007 the share had risen to 7.5% of GDP!
The financial world was reaching into the GDP pie and taking an unnecessary extra 4%. Every year! This extra rent is enough to lower the savings and investment potential of the rest of the economy. And it shows. As mentioned earlier, the growth rate of the GDP had been 3.5% a year for a hundred years. It had proven to be remarkably robust. Even the Great Depression bounced off it, and soon GDP growth was back on the original trend as if the Depression had never occurred. But after 1965, the growth of the non-financial slice, formerly 3.4%, slowed to 3.2%. After 1982 it dropped to 3.1% and after 2000 fell to well under 3%, all measured to the end of 2007, before the recent troubles. These are big declines. It is as if a runner has a growing and already heavy blood sucker on him that is, not surprisingly, slowing him down. In the short term, I realize that job creation in the financial industry looked like a growth driver, as did the surge in financial profits (which we now realize were ludicrously overstated). But in the long term, like a sugar high, this stimulus was temporary and unhealthy.
The financial system was growing because it could. The more complex and confusing new financial instruments became the more "help" ordinary citizens needed from the experts. The agents' interests were totally unaligned with the principle/clients' interests.
Check out the entire letter.
Adam
This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and never a recommendation to buy or sell anything.
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