An interesting article in this weeks BusinessWeek.  I’ve always liked the Facetime section of the magazine, and since Maria Bartiromo quite writing the column, I’ve wondered who will fill her shoes.

This week, Diane Brady chats with Pay Czar Ken Feinberg on the TARP program and its effectiveness.

Naturally, Feinberg is elated that the big banks are in a proverbial race to pay back the TARP money they borrowed from the government to help keep them out of Chapter 11. To hold any contempt would come off as sinister and socialistic.

The article speculates that it was the pay cap of $500,000 that really persuaded companies to pay back the money at such a rapid pace.  Feinberg does a great job of trying to spin the results into a “yeah, we knew it would happen this way”.  He goes on to say that the Government has no business regulating pay for companies that haven’t, or don’t, take tax payer money.  While I hope he and his compatriots in Washington actually believe that, unfortunately, I’m not buying it.

Lately my mantra has become, as the late Bob Novak put it: “Always love your Country, but never trust your Government”.

I believe the Government never wanted the banks to repay the money, at least not this quickly.  The fact that they want to turn around and hand the returned TARP money out for a second round of stimulus should be evidence enough.

In the end, the Government will end up getting most of the TARP money back, but not because companies suddenly became healthy enough to do so.  They got the money back because the banks found out how terrible it is to sleep with the Government, and wanted out ASAP.

Incompetence in Washington… abolish the Fed, abolish the Treasury… Yeah, that about sums it up.

Obviously the jobs number out last week was positive, although I wouldn’t read too far into it.

You’d expect jobless claims to decrease this time of year due to seasonal employment. How many seasonal jobs are there? No one knows, but hopefully this data will tide us over until the economy starts swinging to the upside.

Since I’m a firm believer that history repeats itself, I got to wondering how things turned out in the past for economies facing our current challenges.

Fortunately, I didn’t have to go too far back in time to find out.  I did, however, have to go overseas.

The Greeks are in much the same boat we are in the States, although their ship has taken on a bit more water.

The Greek government has pushed social welfare programs that they can’t seem to find the funds for.  The budget deficit will be more than 12% of GDP this year, and the elected officials campaigned on extra spending, yet they now find themselves having to cut costs dramatically just to keep their head above water.

And to say the EU is a bit peeved is an understatement.

Since Greece is on the Euro, they really don’t have the ability to print money like the U.S. does.  The European Central Bank is suggesting that the Greeks, among other European countries, are on the verge losing their credibility, adding that it could stall the recovery process.

The rest of the countries on the Euro will be on the hook to bail out Greece or cut them loose from the currency all together (a rather unsettling proposition).  If the Germans, French and English will be forced to bail out Greece, you can bet it will be with some very unfavorable terms.  Screw me once, shame on you, screw me twice…

The total national debt in Greece is expected to increase from 99% of GDP to 135% by 2011 without significant cuts in spending. Compare this to a ratio of 90% for the U.S. and rising to over 101% by 2011.

The elected George Papandreou instituted a pay freeze for state workers earning more than  €2,000 a month which did nothing but cause an uproar within the Hellenic Socialists party.

The U.S. has some eerily similar financial stats as compared to Greece.  The one thing we can do that they can’t is print money and expect the general population to underwrite the transaction.

I suspect the underwriters of the U.S. national debt will not be happy.  Just ask the French… and Germans… and English…

There have been a number of wild rides through bubbles in the last decade or so.  There was the dot-com bubble that closed out the 90’s and welcomed in the new millennium.  Then there was the financial bubble, the credit bubble, the housing bubble…

Arguably many of those are inter-related, and chances are, you were affected by at least one of them.

So where is the next bubble?

First, I’ve come to accept the fact that history will repeat itself.  We are all poor students of history, but deeper, no one can really understand all the forces at play to effectively stave off a repeat of a certain event.

With that, it’s realistic to assume there is another bubble brewing as we speak.

With all the government intervention in finances, and the U.S. Fed’s “as low as we can go” interest rate policy, I suspect the next bubble will be in interest rates.

If there is one thing that history tells us, and it seems those in power never seem to study enough, is that the Fed is notoriously late when it comes time to act on monetary policy.

Most recently, Fed Chairman Greenspan was slow to lower interest rates which kept borrowing at bay when borrowing was most needed.  To that tone, I suspect Fed Chairman Bernanke will be slow to raise interest rates in an effort to keep inflation at bay.

Since any sort of monetary policy is based on lagging economic data (by 3 months or so), it’s understandable why interest rate moves also suffer from the same lag.  Historically though, interest rate moves have been late to the game by as much as 8 and arguably 10 months.

In the end, I suspect Bernanke will delay raising interest rates until late next year, and he’ll be forced to raise them to levels he’d not anticipated to keep the wraps on inflation.

So what makes this the Mother Of All Bubbles?

In one word, China.

Unlike the past, the Chinese are taking a great interest in our monetary policy, primarily because they own so much of our debt and currency.  To say the Chinese aren’t really happy with how things are going would be an understatement.

The Fed wants to keep rates low for fears that increasing rates will hamper an economic recovery.  But the Chinese have more leverage in our debt than they do in our unemployment rate.  They’re really looking out for their own financial interests, and who can blame them.

The Chinese are worried that the current U.S. policy is creating insurmountable risks to the recovery of the global economy, and they’re worried we’ll bring them down with us.

Any freshman in a college history course knows that the Chinese will do just about anything to keep their economic freight train steaming down the tracks, and they’re not real happy about the prospect of U.S. monetary derailing that train.

They own a lot of U.S. debt, and they’re not afraid to use that debt to influence policy in the States.  Higher interest rates will appease them as it will increase the value in their holdings.  It’s only a matter of time before Bernanke will have to oblige.

Higher interest rates is what they’re looking for, and higher rates they will get.

I suspect that interest rates will be late to go up, and will go higher and stay higher for longer than they need to.   All in the name of keeping the Chinese at bay.

There’s a giant billboard on the side of the interstate that I drive by several times a week, advertising for a local car dealership.  The premise of their advertisement is that they sell affordable new cars and trucks.  At first I didn’t think much of their pitch, but now I’m starting to hear that term, affordable, pop up on television and in the newspaper.

Affordable.  Isn’t that a relative term?

You see, I always thought it was up to me to determine what I can afford, and what I can’t.  I never imagined that someone else could have the insight to tell me I could afford their products.

I may be able to afford a $20,000 new car, but my next door neighbor may only be able to afford a $10,00o version.  In effect, it’s all relative to our own financial situation; earning power, savings, cash flow, investments, job security…  All of that influences what each of us can afford to pay for a product.

“Affordable” health care.  Another example.

On a daily basis, there is some talking head on T.V. telling us we need “affordable” health care for everyone.  The Obama administration has even taken that effort up as a primary goal for his first term.  But what does “affordable” health care really mean?

I may have the extra income to facilitate paying $300 per month for health care, but my neighbor may not.  Maybe he only has an extra $100 he can part with on a monthly basis.  Or to an even greater extreme, maybe he doesn’t have any extra money to shell out for health care.  So affordable to me is not affordable to him.

So really, to make health care affordable to everyone in our country, it has to be free to everyone in our country.  And isn’t that socialism? Sounds like it.

In our capitalistic economy, it is up to the consumer to tell the supplier what is “affordable” and what isn’t.  Everyday Joe’s will tell car dealerships with 500 copies of a cheap sports car that they can’t afford a $50,000 sports car in this economy.  They may tell that same dealership they can afford a  $15,000 sedan that gets good gas mileage and is built well.  The dealership will adjust inventory accordingly.

So let’s get this out there in the clear right now.  No one tells me what is affordable and what isn’t; affordability is the most relative of terms.

CodePink is a women’s organization, generally opposing war.  War in Iraq, war in Afghanistan, potential war in Iran…

It seems as though they’ve expanded their message to include bailouts, as evidenced by the protest during a Larry Summers interview at the Economic Club in Washington.

While the group paints their views on war with a fairly broad brush, it’s hard to argue with their latest stand on Summers’ involvement with the economic policy coming out of Washington, and the fact that he received about $5.2 million over the past year in compensation from hedge fund D.E. Shaw, as well as hundreds of thousands of dollars in speaking fees from major financial institutions like J.P. Morgan, Citigroup, Goldman Sachs and Lehman Brothers.

I find it interesting that it took so long for the two women to be removed from the stage.  Larry himself didn’t even seem to object…

Barack Obama announced the establishment of a new panel to look at overhauling the existing tax code.  Former Fed Chair Paul Volcker will be in charge of the review, with the goal of closing loopholes, simplifying the law and generating more revenue.

Under Volcker, White House senior economic adviser to Obama Austan Goolsbee will be the staff director, and report back to Volcker.

Obama plans to ask Volcker, Goolsbee and the panel for a package of recommendations to be on his desk Dec. 4, which would leave enough time for decisions to be made and included as proposals in the White House budget for fiscal 2011, to be submitted to Congress in February 2010.

A little history.

Volcker served as Fed Chairman from 1979 to 1987 under Presidents Carter and Reagan, a time when inflation was running rampant leading Volcker to drive interest rates up to 20%; effectively choking off home-buying car purchases and other consumables.

Wages were driven down and corporate America was redefined through numerous strikes and high unemployment (over 11% in the early 80’s).  Arguably the economic mess, influenced by Volcker contributed to Carter’s defeat to Reagan, but interestingly enough, Reagan retained Volcker as Treasury Secretary throughout his presidency.

With striking irony, it was during this time period that the Democrats first bailed out the Chrysler Corporation as Carter provided loan guarantees in return for wage cuts by the UAW.

Fast forward to today.

With Volcker back in Washington, the game should seem familiar.  The Democratic President is in the process of bailing out the big three auto manufacturers while demanding wage concessions from the UAW.  In a round about way, Volcker transformed what was then a very dominant portion of America’s working class in to politically exploited labor group.

In addition it should come as no surprise that Obama touts Volcker as an ideal candidate for the “Economic Recovery Advisory Board”, considering the considerable amount of money (on the order of $2,500) Volcker contributed to Obama’s campaign.  It helps that Volcker’s historical decisions align well with Obama’s vision of “change” for the future.

Corner Office Comments

When I first read the headlines, I was elated.  Finally Obama was going to do something good for the country and simplify the tax code.  After paying $800 per year to have a professional prepare my taxes, resulting in nearly 150 pages of documents, you can understand why I’d be interested in this proposition.

After thinking about it though, Obama’s motive for revamping the tax code isn’t to make my life easier, it’s to bring in more money.  He really wants to close existing loopholes while sliding increased rates into the code, all under the guise of simplifying the code.

The fact that he brought Paul Volcker in to lead the team doesn’t bode well given Volcker’s experience raising interest rates (another suggestion that inflation is coming, with higher interest rates to follow).  In essence, it’s a match made in heaven: the guy who drove down wages through higher unemployment rates labor strikes in the auto and mining industry, teams up with the guy who strives to do the same, just on a much more grandiose scale.

I suspect that redefining the tax code will segue nicely with increasing interest and tax rates, while whitewashing the public into believing that it’s all part of his “hope and change” scheme… it’ll just require a lot of patience.

I’d like to see more proposals like the FairTax and the flat tax get more air time and be part of further discussion.  I particularly like the FairTax idea, which taxes consumption versus earnings.  More on the FairTax idea later…

I had a deep thought today while sitting in a meeting that I really didn’t need to attend in the first place:

If the United States (the entire country, good, bad and ugly) were a publicly traded stock, would you invest in the stock?

Think of it like this:  President Obama is the CEO, Joe Biden the Vice President, Geithner and Bernanke would be co-CFO’s, and we the people are the employees of the company.  You could lump a number of the other players into a “Human Resources” category.

In terms of a financial analysis, you’d look at the assets the county holds, the liabilities it has including the paper debt, etc…

So a new poll, if the U.S. were a stock do you buy or sell the ticker?

You just need to know where to look.

John B. Taylor is a professor of economics at Stanford University, and debunks the notion that deregulation spurred on today’s financial crisis.

What a day.  Checking in on the markets around noon Central time, I was wondering if we’d seen the top of the bear market rally. There wasn’t much positive price action in the equities I’ve been watching, and gold (GLD: chart, web, Y!) wasn’t making any great shakes either.

Then Bernanke went on a shopping spree.

When I checked back in around the close, nearly everything I was watching not only reversed course, but went into overdrive.

The Fed committed to buying up to $300 billion in long-term Treasurys over the course of the next six months, as well as nearly double the purchasing power of mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac, totaling $1.25 trillion (remember, trillion is the new billion).

To top it all off, the Fed also doubled the amount of debt it committed to purchase from the inept mortgage lenders.

Effectively, this action is much akin to chopping interest rates even further; when you’ve hit bottom on the interest rates, the next best thing to do is buy the debt.  In a round about way, this increases the leverage on the banks side allowing them to borrow money at an even deeper discount.

Corner Office Comments

While all this sounds good on paper, and the market surely agrees, long term I’m not convinced this move was well thought out.  What is the Fed going to do with all this debt in the long term?  There was no exit strategy revealed.

Further more, anyone holding long term debt when inflation kicks in is going to get chewed up and spit out like something rotten.  The Fed included.  As the value of the dollar decreases, as readers of this blog remember I’m laying a significant amount of chips on some massive inflation, it’s going to take more of those dollars to service the debt the Fed is absorbing.  The fact that gold and petroleum products rallied on the Fed statement seems to reinforce that position.

This move seems to spread much of the financial strain in localized sectors of the economy, more broadly the financial sector, further out over the entire economy.  No longer are nearly worthless mortgage backed securities held by Fannie or Freddie, they’re held by the entire populous of the country (you and me).

From my standpoint Bernanke is throwing up his arms and wiping bad assets of public companies balance sheets, letting them start over, and forcing you and I to eat the bad tasting financial slop.  Things will look rosy for a while, until inflation starts creeping into play and the government will need to print even more money to service the debt.

Any further upside to this rally should be used to capitalize on gains and readjust into a hedge against inflation, in my opinion.

Hopefully I’m not the only one that’s noticed that the tone regarding the economy coming out of Washington has changed markedly in the last week.  And it should come as no surprise.

The Obama administration desperately needed to convey how bad things were to garner support for the $700+ billion “stimulus” bill, as well as the $400+ billion budget.  There would be no way he’d have the votes if people thought that kind of money weren’t needed.

Now that those two bills have passed, Obama has become the nation’s loudest cheerleader.  And for good reason.  His entire political capital rests in the success of those two packages to somehow speed economic recovery.

It also doesn’t help that the Chinese are questioning their investment in U.S. debt, to which Obama responded with such arrogance as to question why they would even be worried.  In fact, he’s trying to sell the Chinese even more debt; an effort akin to selling bullshit to a cattle rancher.

In effect, there’s really no reason for Obama to maintain any further pessimism, as doing so no longer helps his cause.

I hope the American public is tuning into the political game that Obama has forced us all to join.   After all, now that he owns Boardwalk and Park Place, he can’t help but encourage you to make a run at GO!  And if you land yourself in jail, not to worry, he’s got incentive to bail you out.

I can hear the construction commencing on those four hotels on the most expensive property on Monopoly.

I’m always interested in how a leader at the top of an enterprise communicates with regard to his own business.  A lot depends on the corporate structure, however there are some leaders that can speak intelligently about any aspect of their company.  Others have a broad understanding for how their business works, and shy on details of minutia.

There are others that must defer every question to the resident expert for that topic.

It’s with that basis for which Barack Obama’s leadership is telling.  The fact that he uses teleprompters for every public communique suggests that while he can pen intelligent prose while sitting at his desk, he can’t speak off the cuff to those details of minutia that the public so dearly wants to hear.  The fact that he won’t answer pointed questions at press conferences reinforces that trait.

The lack of deep minded intelligence from the administration as a whole is also reflected in its policy.

Tim Geithner

Obama’s  Treasury Secretary Tim Geithner (see: Oh, I need to pay my taxes?) talked about the tax implications of Obama’s budget proposal on the oil and gas sector earlier this month, and he too revealed a lack of deep-level understanding of the energy sector.

On the tax breaks given to oil and gas companies, Geithner had the following comment while speaking to the Senate Finance Committee:

“We don’t believe it makes sense to significantly subsidize the production and use of sources of energy (like oil and gas) that are dramatically going to add to our climate change (problem). We don’t think that’s good economic policy and we think changing those incentives is good for the country.”

That’s good economic policy?  I think not.  That might be good environmental policy, if it were true.

It takes little critical thinking to realize that, if you believe in the money-making, man-made global warming, any and all contributions to global warming would come from the consumption of petroleum products, not the production of petroleum products.

The government doesn’t increase taxes on cigarette manufacturers whose products are known to cause lung cancer, they increase the taxes on the consumer.

Why would the energy sector be any different?

Because there would be a huge backlash if the government came out and said it was increasing taxes on gasoline and other refined petroleum products because those products may cause global warming.

The administration went further to reveal the lack of understanding by proposing “a $4 per acre annual fee on energy leases in the Gulf that are designated as non producing.  The budget proposal projects the fee would generate $1.2 billion from 2010 to 2019″.

Perhaps someone in Obama’s energy cabinet should explain to the smooth talking President that not every acre out in the big Gulf of Mexico has petroleum reserves on it.  The fact that an oil company hasn’t drilled a well on acreage may mean that there’s no oil or gas to be found on that acreage.

The administration needs to get past the notion that “big oil” is holding back exploration and production in an effort to drive up the price in crude.  The most recent bust of the crude market should be evidence of that, but as the President suggests, we shouldn’t look to the markets to make long-term policy decisions.

Brilliant.

Evidently Geithner suggests that these new policies that roll out of Obama’s budget proposals are justified since the oil and gas companies are making such great money.

The additional taxes “can be absorbed” by the oil and gas companies, given the billions of dollars they have earned from high energy prices. -Tim Geithner, Source

Contrary to the fact that Exxon’s fourth quarter profit decreased 33% due to falling oil and gas prices, the Obama administration thinks that since they’ve made all that money in the past, they should spread the wealth in the future.

“The impact of these subsidies are very small relative to revenues produced by U.S. oil and gas producers.” -Tim Geithner, Source

It’s too bad that Geithner doesn’t understand that not every oil and gas producer has the balance sheet of Chevron or Exxon.  Furthermore, if the government does have the countries best interest at heart and wants to see these major oil producers expand into the renewable energy sector, they would be best served not to put a damper on those efforts through “relatively small tax increases”.

It’s clear to me that the Obama administration is trying to squeeze every dollar out of every nook and cranny in the American economy it can without actually thinking, or understanding where those dollars are actually coming from.

No one from the administration has shown that they can speak intelligently about the economy, finance or the budget, and that lack of intelligence will do our country more harm than good in the long run.  It will only be when real leaders with knowledge of the subjects of which they speak  step to the podium that our economy will start to right itself.

Until then, we wait for the next speech.

Last week’s issue of Business Week contains an interview article by Maria Bartiromo with global investor Jim Rogers.  The bulk of the article is on Rogers’ view of the current economic health and the fidelity of the economic policy from the Obama administration.

Reading the article, it was almost as if Rogers was reading my mind.  A few excerpts from the article, but I’d encourage you to read the entire thing here.

Bartiromo: So what should they be doing?

Jim Rogers: What would I like to see happen? I’d like to see them let these people go bankrupt, let the bankrupt go bankrupt, stop bailing them out. There are plenty of banks in America that saw this coming, that kept their powder dry and have been waiting for the opportunity to go in and take over the assets of the incompetent. Likewise, many, many homeowners didn’t go out and buy five homes with no income. Many homeowners have been waiting for this, and now all of a sudden the government is saying: “Well, too bad for you. We don’t care if you did it right or not, we’re going to bail out the 100,000 or 200,000 who did it wrong.” I mean, this is outrageous economics, and it’s terrible morality. -Source

I agree.  It’s as though in this day in age the term “bankruptcy” is a death sentence.  The fact is, bankruptcy should be looked at as a tool to restructure a company to regain a healthy business plan and achieve profitability.  The airline industry has been a friend to Chapter 11 for decades, and airlines have been healthier for it; not to say airlines are well run, just that they take advantage of a system put in place to deal with corporate shortcomings.

Rogers doesn’t stop with the financial sector, either.  He advocates his “let them go bankrupt” mindset across the board:

Bartiromo: What about Citigroup? What about the car companies?

Rogers: They should be allowed to go bankrupt. Why should American taxpayers put up billions to save a few car companies? They made the mistakes! We didn’t make the mistakes! I’m sure they’ll give them the money, but I’m telling you, it’s a mistake. It’s a horrible mistake. -Source

The real beauty of capitalism is that it allows people and businesses achieve great success, but only because it also allows them to fail.

There seems to be this wide-spread notion today that everyone deserves success, and everything should be “fair”; that there needs to be a level playing field all across the board, and no one person or entity should have an advantage over another.  If this continues, our capitalistic society will itself, fail.

Below is an interview with Jim Rogers on Glenn Beck’s radio show.  His overall outlook on the U.S. economy is pretty grim, and may even be extreme to a point, however I don’t think he’s too far off.

An especially good quote from his radio interview: “If you look to Obama and the government for investing advice, you will go bankrupt.”

It seems the market has lost all confidence in the Obama administration’s policies, and rightfully so.  Every time he opens his mouth and moves his silver tongue the stock market shudders.  Tim Geithner doesn’t help, Bernanke comes off as the smart one in the group, and Press Secretary Gibbs is revealing himself as a two-bit hack when it comes to politics and communication.

You don’t single out the most highly visible characters on Wall Street, take a few back handed shots at them, and expect the market to have any trust in your leadership, especially when those shots follow the revelation that it’s Obama’s desire for capital gains rates to go up on nearly everyone.  Not to mention the fact that Obama wants to raise taxes on the “rich”; lest we forget that the “rich” are the ones still spending money these days.  Brilliant!

The fact that Gibbs is making any mention of Rush Limbaugh indicates that the administration is looking for a diversion from its own policy, or lack there-of.

The President tells the nation that it should go out and invest in stocks, even after his own treasury secretary (Geithner) goes on camera and single handily drops the market like an old pair of underwear with a rotten waistband.  No details for the financial sector, no bull market bounce for you, Mr. Geithner.

Further, Obama tells the public that the stock market shouldn’t be viewed as a “tracking poll”; obviously worried about how he and his administration are to be perceived when those monthly brokerage statements hit the mailbox.  The fact is, the stock market is the biggest tracking poll we have about our economic health (at least when it’s not manipulated by the government) of which the policy of Barack Obama narrowly guides.  Ask anyone with some skin in the market how their account is looking today and you’ll get a glimpse at those poll results.

Obama is a great speaker, to be sure, and the words he uses are well thought out, the sentences well structured, and the tone well managed.  However, at the end of the day, that’s all he’s got; a bunch of empty words with little real leadership and understanding of major problems needed to inject any substance into his rhetoric.

Buffett

The Oracle of Omaha has posted his annual tome to shareholders, reflecting on Berkshire Hathaway’s performance in 2008.  While the performance of the company as a whole should come as no surprise given the economic health of the markets in 2008, the outlook for the future is a bit more interesting.

However you regard Warren Buffett, his annual letter to shareholders is always a good read, and this years letter in particular is enlightening, if anything because it offers up some humility many less affluent and savvy investors have realized in the last 6 to 8 months.

I’ll offer up some of the highlights from The Corner Office perspective:

Owning up to mistakes.

With any business or investment decision, it’s important to own up to your mistakes while taking credit for your success.  Buffett is savvy enough to understand this, and comes clean in several paragraphs in his letter.

During 2008 I did some dumb things in investments…

I told you in an earlier part of this report that last year I made a major mistake of commission (and maybe more; this one sticks out). Without urging from Charlie or anyone else, I bought a large amount of ConocoPhillips stock when oil and gas prices were near their peak. I in no way anticipated the dramatic fall in energy prices that occurred in the last half of the year. I still believe the odds are good that oil sells far higher in the future than the current $40-$50 price. But so far I have been dead wrong. Even if prices should rise, moreover, the terrible timing of my purchase has cost Berkshire several billion dollars. -Source

Current events guidance to the future.

This debilitating spiral has spurred our government to take massive action. In poker terms, the Treasury and the Fed have gone “all in.” Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel. These once-unthinkable dosages will almost certainly bring on unwelcome aftereffects. Their precise nature is anyone’s guess, though one likely consequence is an onslaught of inflation.  Moreover, major industries have become dependent on Federal assistance, and they will be followed by cities and states bearing mind-boggling requests. Weaning these entities from the public teat will be a political challenge. They won’t leave willingly. -Source

Sound advice for anyone.

In good years and bad, Charlie and I simply focus on four goals:

1. maintaining Berkshire’s Gibraltar-like financial position, which features huge amounts of excess liquidity, near-term obligations that are modest, and dozens of sources of earnings and cash;
2. widening the “moats” around our operating businesses that give them durable competitive advantages;
3. acquiring and developing new and varied streams of earnings;
4. expanding and nurturing the cadre of outstanding operating managers who, over the years, have delivered Berkshire exceptional results.  -Source

Maintain some sense of humor.

Our meeting this year will be held on Saturday, May 2nd. As always, the doors will open at the Qwest Center at 7 a.m., and a new Berkshire movie will be shown at 8:30. At 9:30 we will go directly to the question-and-answer period, which (with a break for lunch at the Qwest’s stands) will last until 3:00. Then, after a short recess, Charlie and I will convene the annual meeting at 3:15. If you decide to leave during the day’s question periods, please do so while Charlie is talking.

The best reason to exit, of course, is to shop. We will help you do that by filling the 194,300-squarefoot hall that adjoins the meeting area with the products of Berkshire subsidiaries. Last year, the 31,000 people who came to the meeting did their part, and almost every location racked up record sales. But you can do better. (A friendly warning: If I find sales are lagging, I lock the exits.) -Source

The Corner Office Comments

There are many other sound highlights in Berkshire’s annual report, and I encourage you to read the entire document.  I think Buffett’s view of the recent government action regarding the economy is telling, as is his prediction that inflationary guidance will be a strong part of his outlook going forward.

If the last several years in the market has told us anything, it’s that we should be more forward looking.  What will be the long-term effects of today’s policy and actions, and how can I capitalize on them?

We’ve come out of an era of credit, and I think Buffett’s guidance to widen the financial moat and increase or maintain an excess of liquidity and cash should rule the day, regardless of the scale of your portfolio.

As I’ve mentioned before, inflation going forward is as nearly a sure thing as you can get.  You can’t dump trillions of dollars into an economy and expect to keep inflation at bay.  This, above anything, should guide investing decisions going forward.

I tried listening to Obama’s speech last night, but got distracted doing other things.

I must say, Barack Obama is one of the most eloquent speakers I’ve listened to in a long time.  He has a way of telling you what you want to hear while getting you on board with what he wants to accomplish.  But maybe that’s the problem, he wants to accomplish so much that he really doesn’t focus on any one issue long enough to tell you how he plans to bring the endeavor to fruition.

As many readers of The Corner Office know, I’m not a big fan of big government, and quite frankly I believe most in Washington D.C. need a history lesson, and I’m not talking about going back to the civil war era.  The last 15 to 20 years would be a good start.

I’m tired of hearing about what Obama inherited; I really don’t care, and it seems like he’s trying to proactively cover his backside if by chance these billions of dollars he just printed don’t work out.

I really want this country to get back to taking ownership for one’s own self, and I believe that in the end, that’s what truly empowers Americans.

President Obama is a great speaker, but his words lack substance; details of how we’re going to get from point A to point B and not end up wishing we were back at point A.

I can’t help but think that with all the money the Government is dumping into the economy, particularly money we don’t have and must borrow or print, that our country is due for some serious inflation in the somewhat near future.  You can’t dump trillions of extra dollars into an economy and expect the value of the dollar compared to the cost of goods to stay the same.

So, in my macro-economic scope, if this is what’s coming, how can I capitalize on it?

If you believe that inflation in our country is around the corner, where can you put money to either hedge against the negative trend, or perhaps increase your return?  To answer that question, you have to understand what inflation really is in order to know where to funnel your money.

What Does Inflation Mean?

Inflation is the rate at which the general cost of goods and services compares to purchasing power for those goods and services.  For instance, if the value of the dollar goes down and the intrinsic value of, say, toilet paper stays the same, it will take more dollars to buy toilet paper with rising inflation.

There are lots of things that could devalue the almighty dollar, and directly diluting the value by printing more money is one of them.  If you put it in investment terms, it’s a bit like diluting stock by printing more shares to raise capital.

To be certain, sometimes diluting stock or currency can be a good thing so long as the return on that money is greater than the cost of borrowing the money in the first place.

So how do I hedge against inflation?

Gold.

Gold has been the time-tested and preferred hedge against inflation when markets panic and governments try to “help”.  The reason?  Gold is the universal currency that holds its own value.  Sure, it’s valued in US Dollars on the open market, but since its accepted as a form of payment around the globe, the real value of the precious metal precedes the US currency.

There are ways to buy gold without actually taking delivery of the metal itself, which is good since it’s not an attractive option to have to ship, and even more costly, store the tangible asset.  However, gold coins are always an easy way to insulate yourself and they’re small enough to store in a safety deposit box.

Another way is to buy a gold ETF like SPDR Gold Shares (GLD: chart, web, Y!).

What are other options?

You can also look at Treasury Inflation Protected Securities (TIPS).  These are typically treasury bonds that protect against inflation.  Essentially TIPS pay a fixed coupon plus a rate that rises with inflation and falls during deflation.  The portion that adjusts for inflation gives investors protection against erosion in the purchasing power of the dollar.

TIPS are indexed to the Consumer Price Index (CPI), which is released monthly and tracks prices paid by consumers for a representative basket of goods and services.
Investments like the iShares Lehman TIPS Bond Fund (TIP: chart, web, Y!) or the SPDR Barclays Capital TIPS ETF (IPE: chart, web, Y!) will fit the bill if this is the direction you want to go.  The iShares Lehman TIPS Bond Fund is by far the largest of the ETF’s, valued at over $10 billion.  It maintains a portfolio of 28 TIPS with a weighted average maturity of about nine years out.  The fund will typically pay out a monthly distribution during times of inflation, but may actually reduce or cut the distribution in times of deflation.

In either case, keep an eye on the monthly CPI data to determine where your TIPS investment is headed.

Commodities?

Another avenue to hedge inflation is to invest in commodities.  Much like gold, commodities represent the tangible asset that the devalued dollar is used to purchase.  If the value of the dollar goes down in times of inflation, chances are the intrinsic value of the tangible assets goes up.

Commodities like crude oil ($wtic: chart) and natural gas ($natgas: chart)  are good bet, as demand is still steadily increasing globally.  Funds like the U.S. Oil Fund (USO:  chart, web, Y!) seems to track the price of crude oil fairly well, although there are some fees taken out of the price structure, so it’s not a one-to-one direct comparison to crude.

Corner Office Comments

There are many other ways to hedge against inflation, like real estate or other natural resources or precious metals.  However, I still fundamentally like gold as it’s fairly simple to track, and there’s no index weighted against any government numbers that you need to be concerned about.

As I’ve mentioned before, I picked up some shares of GLD at $90/share and will continue to invest on dips in the near future.

Regardless of what side you’re taking on this stimulus mess, John Boehner does seem to have a good point.  1,100+ pages in a bill, and our representatives are given less than 10 hours to digest it before they’re expected to make a decision on how to vote.

I still say this whole thing stinks.

I’ve been restraining myself for the last several months when I hear the talking heads refer to our economic woes in terms of a crisis.  “It’s so bad right now, and going to get worse.”

Yeah, it’s pretty bad, at least in terms of jobs.  Jobs are lost every day, and no one is safe.  Even those of us here in the Midwest where the peaks aren’t very sharp and the valleys aren’t that deep.

Just ask my buddy MJ who just got laid off for the second time in a matter of months.  What’s really irritating isn’t so much that he lost his job (don’t slight me for it buddy, I feel for you), it’s that the company hired him thinking they needed his technical expertise (he’s an engineer) to perform a specific role in the company, knowing the financial strengths and weaknesses of their balance sheet, and having some short-term idea of where the company was headed.

In short, if times go so bad that they needed to lay people off, why did they hire MJ in the first place just months ago?  To be certain, that’s a reflection of the company, not the employee.

I agree with MJ that things are getting worse, and not better, and there are a lot of good people losing jobs.  Luckily I’m not one of them yet, but MJ didn’t have any warning, either.  So who knows.

But is it a crisis?

The jobs numbers stink and they’re getting worse every day (the day they don’t get worse is when we turn the corner at the bottom, in my opinion).  But is this really a crisis?

The news clips lead you to believe that the sky is falling with unemployment rates on the order of 7-8%.  Personally I look at things from another perspective; 92-93% of the workforce still has a job.  I lean towards the glass-half-full part of the crowd.

Consumer prices have stabilized for the most part, energy prices have moderated and the government hasn’t jacked taxes through the roof (yet).

Consumer spending on the other hand, is way down, and it should be.  We went through a period cheap money, easy credit and euphoria.  The harder they rise, the harder they fall.

The consumer needs to strengthen their own financial situation and shore up their emergency funds before they start buying high-priced luxury items again, and I think this is healthy.

If you look past the jobs reports, things aren’t all that bad for those of us who take care of our own finances, save for those few who are in foreclosure and don’t deserve to be.

Yeah, times are tough, but this isn’t a crisis, and certainly not one the government can step in and fix overnight with the promise of artificially created jobs.  It could get a whole lot worse, even outside the employment numbers.

As for MJ?

He’ll be alright.  He’s a pretty tough guy who’s been knocked down before and picked himself up, all the stronger for it (a trait I’m slightly jealous of).

He’ll find a job (and if you need a good mechanical/manufacturing engineer in the Kansas City area, email me and I’ll patch you through) just like the rest of the recently unemployed will, and life will go on.

As for me, I’m polishing up the old resume.  Who knows, I might be next.