Week 15 of quarantine
‘That is no market for old men. The young with their Robinhood accounts. Money growing on trees. Those dying generations — left behind.’
With apologies to poet William Butler Yeats
SALTA CITY, ARGENTINA — Poor Warren Buffett. At 89 years of age, he can’t keep up. Out of sync with the markets. A relic of a by-gone era.
The Sage of the Plains made only an 11% gain in 2019 at his holding company, Berkshire Hathaway, while the S&P 500 rose more than 30%.
And now, he’s doing even worse. From the Financial Review:
‘The famed stockpicker had his worst performance versus the S&P 500 in a decade in 2019, and 2020 is shaping up to be nearly as bad. Instead of taking advantage of the coronavirus crisis that hit markets in March, Buffett was a casualty.
‘The question comes more loudly now than at any time since Berkshire missed out on the dotcom boom: has Buffett lost his touch?’
Our question for today:
Has the Oracle of Omaha lost his touch? Or have other investors lost their minds?
Everybody knows this is no market for a ‘value investor’ like Buffett. He’s wasting his time sharpening his pencils and taking apart balance sheets…carefully balancing assets against liabilities.
Nobody cares about assets. Or liabilities. Today’s investors think balance sheets are something you use when you do yoga. This is a new world…with a different kind of market.
This is a bubble market…our fourth in the last 21 years. The first ended in 2000…the next in 2008…the next in 2020…and now, scarcely three months later…another one!
Thank you, Fed.
To fully understand what is going on…and put all dear readers on the same page…we must go back to the world that shaped Warren Buffett. That is, we must go back to when there was real money — before 1971.
There were only two bubbles in the entire 20th century. One of them is the one that blew up just as the century ended (mentioned above). The only other one collapsed just before Buffett was born in 1930.
All bubbles blow up. The best thing to do is simply let the markets pick up the pieces and get back to work as soon as possible.
But in the year Buffett was born, the feds intervened to stymie the natural recovery process, turning the following decade into the Great Depression. That is now standard procedure.
In 1971, the US changed the currency from a limited, gold-backed dollar…to a virtually unlimited, unbacked ‘Federal Reserve Note’. The key difference: Without the need for gold backing, the feds could print as many FRNs as they wanted…and intervene on a much larger scale.
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But it wasn’t until Alan Greenspan took charge at the Federal Reserve in 1987 that the US’ central bank began to fully partake of the lunacy available to it.
After the brief stock market crash in 1987 came the ‘Greenspan Put’ doctrine, which told investors that if stocks ever sank…the Fed would come in with more of these new fake dollars to push them back up.
It is hard to imagine a more idiotic thing for a central bank to do. The Fed put out word that it had investors’ backs…and that, no matter how goofy their stock selections or to what wacky highs they pushed stock prices, the Fed would make sure they didn’t lose money.
‘Don’t fight the Fed’ was a hoary truth on Wall Street for a long time. But the Greenspan Put gave rise to an addendum: ‘and front-run the stupid bastards’. That is, buy stocks and bonds before the Fed pushes up the prices.
And now, bubbles and crashes are a way of life. Prices bubble up when the Fed gives Wall Street more money. They crash when it stops the handouts.
But bubbles are no place for old men. They’ve seen too many promises that were never kept…too many schemes that went belly-up…and too many pies-in-the-sky that turned bitter and fell to the ground. They have too much experience; they know bubbles never end well.
Buffett once described how he sizes up business leaders:
‘You’re looking for three things, generally, in a person: intelligence, energy, and integrity. And if they don’t have the last one, don’t even bother with the first two.’
Now, it’s the whole market that lacks integrity. It has been corrupted by the Fed and its fake money. This is not a market suited to the talents of the dying generation.
Emboldened by naivety
But who is it suited to? On the evidence, it is perfect for day traders, Robinhood account holders, and callow youths too confident to worry…too green to see the danger signs…and too naïve to imagine that Mr Market might be laying a trap.
Just look at car rental firm, Hertz. Like so many other companies lured by the Fed’s low interest rates, it borrowed heavily…and now finds itself with about $4 billion in outstanding bonds, recently trading below 50 cents on the dollar.
Plus, used car prices have gone down sharply, meaning their assets are worth even less than before. And air travel — the start of most Hertz customers’ journeys — is only a fraction of what it once was…and recovering slowly.
The company filed for bankruptcy last month. Stockholders rank after debtholders in a bankruptcy. So a reasonable expectation for a Hertz shareholder is that he will get nothing…zero…for his stock.
And yet…Hertz stock went up 680% after the bankruptcy. This so emboldened the Hertz team that it proposed selling more stock — in an Initial Bankruptcy Offer (IBO) — worth $500 million…or even up to $1 billion.
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Of course, it had to admit:
‘There is a significant risk that the holders of our common stock, including purchasers in this offering, will receive no recovery under the Chapter 11 Cases and that our common stock will be worthless.’
Even so, the Not-Warren-Buffett’s out in Bubbleland probably would have scooped up the new shares, had not the US Securities and Exchange Commission (SEC) put the kibosh on the whole scheme.
When you’re young…in love…in a war…or in a bubble…
…there’s no time to think straight…or even think at all.