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David's Macro Blog

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Tag: Warren Buffett

Before I share with you my 2010 predictions, we should first take a look back at the prior year’s predictions and the actual results. The main thing I keep in mind is humility. It is extremely difficult to predict the future in regard to specific targets and time ranges. Instead it is much easier to make general predictions based upon the fundamentals.

This reminds of one of Warren Buffett’s well known quotes:

“In the short term the market is a popularity contest; in the long term it is a weighing machine.”

What Happened in 2009?

  • Stock market bottom and recovery
    • Intraday low on the S&P of 666 in March and year finish at 1115.
  • Real estate prices fall but show some stabilization
    • Residential prices plummeted but leveled off in most markets. Some price appreciation at the very low end in growth markets like Phoenix and San Diego.
    • Commercial real estate price continued to fall because rents and occupancy are down and loans are difficult to qualify for.
  • Unemployment rose above 10% (from just 4% in only 2 years).
    • Any decrease in unemployment is due a reduction in the workforce participation rate, not new people actually getting jobs.
  • Credit crunch still in place but has loosened some.
    • The main question is what will happen when the Federal government stops all support of the credit markets (Fannie & Freddie, FHA, commercial paper, FDIC), and many other programs to buy debt.
  • The Federal government has a trillion dollar budget deficient and of course over 10 trillion dollar debt.
  • State governments have deficits and debts and the problem got worse.
  • TBTF – Too Big To Fail – became mainstream language
  • “Privatize the profits and socialize the losses” became apparent to the public
  • Failure to pass sweeping national health care reform
  • Failure to pass sweeping banking regulations

Essentially the US and the world have avoided Financial Armageddon so far. The government, the Fed, and the Treasury deserve credit for the short term fix. However the main problem is still there: there is more debt than can be serviced. Many of the debts just got moved from the private sector to the public sector (i.e. Privatize the profits and socialize the losses).

Most Accurate Predictions from Last Year

“There will be a surplus of government intervention to combat mass unemployment. I expect we get close to 10% unemployment (U3) by year end.”

Right on, December’s unemployment was 10.0% (U3)

“Defaults grow beyond comprehension and models for these debts” (mortgages, credit cards, other loans)

Look at the charts and you’ll see defaults are beyond any models considered accurate just 2 years ago.

“Debt monetization and bail out of the FDIC (which wouldn’t be allowed to fail).”

Had you ever heard of “debt monetization” prior to last year? The Fed has monetized the debt through quantitative easing plus the FDIC was given an unlimited lifeline to additional funds.

Least Accurate Predictions from Last Year

“The markets have been in an uptrend since the market low in November around 748 on the S&P. This appears to be a bounce/retrace of the October market crash. A standard 50% rebound would have the S&P peak between 1000-1100. Naturally I expect this rebound to be short lived and for new lows in 2009 as companies report very low earnings.”

Well, much of this was correct, the market did retrace over 50% to the 1100 range but essentially I predicted a fall back to the market lows which never occurred. Thus, this is definitely a miss.

“Economic growth in China turning negative.”

Totally missed this one. Even if we don’t trust the numbers from the Communist government, the growth rate didn’t go negative.

“Unemployment will peak at 8.5%” under the Obama rescue plan

OK, this wasn’t my prediction (it was President Obama’s), but it just shows how clueless politicians are in general about the economy and perhaps that they are willing to say anything to be politically popular.

Quotes of 2009

“The ego has landed.”

“I had to hold my nose and stop those firms from failing.”

— Ben Bernanke, US Fed Chairman

Also check out: Favorite Videos of 2009.

Warren Buffett calls derivatives “financial weapons of mass destruction.”  Do you believe him?

Derivatives are financial instruments whose prices are derived from underlying assets.  One example would be a futures contract between a farmer and a food processor.  In this case the underlying asset is the grain harvested by the farmer and the derivative is the contract to deliver that grain at a specified price, time, and location.

This all sounds reasonable enough.  So why would Warren Buffett call derivatives “financial weapons of mass destruction”?

What if a Wall Street trader could make financial bets that rewarded the trader with bonuses and the firm with earnings all without setting aside capital or assets to cover that bet?  How many of those bets would you make?  How many would you make when you get immediately rewarded for wins and little or no apparent penalty for losses in the unforeseeable future?  Finally, how many would you make when your expert with a PhD from MIT says his mathematical model shows those bets are risk free?

Now that you’ve thought about those questions, watch this video from Khan Academy regarding Credit Default Swaps (CDS).   Listen for the part about a cascading failure which starts in one location and ripples through the whole system, ultimately destroying everything that looked seemingly safe and sound.

Khan Academy – Credit Default Swaps 2