Ooooh that smell
Can't you smell that smell
Ooooh that smell
The smell of death surrounds you
Can't you smell that smell
Ooooh that smell
The smell of death surrounds you
This wonderfully lovable skunk, Pepe Le Pew, was brought to our attention today by Bill Gross of PIMCO. I've referenced a lot of Bill's work on these pages and will continue to do so, at least until I disagree with him. Bill's April missive is especially noteworthy. In it he compares Pepe's smell and sweet words to the smell and sweet words emanating from the halls of Congress. Below are some highlights, but I recommend reading the entire note here: http://www.pimco.com/Pages/Skunked.aspx PDF
Bill does an excellent job laying bare our massive deficits and this line sums it up rather nicely, “I sit before you as a representative of a $1.2 trillion money manager, historically bond oriented, that has been selling Treasuries because they have little value within the context of a $75 trillion total debt burden." He goes on to say, "Unless entitlements are substantially reformed, I am confident that this country will default on its debt; not in conventional ways, but by picking the pocket of savers via a combination of less observable, yet historically verifiable policies – inflation, currency devaluation and low to negative real interest rates." And finally he goes on to talk about our only way out of this smelly mess, "The only way out of the dilemma, absent very large entitlement cuts, is to default in one (or a combination) of four ways: 1) outright via contractual abrogation – surely unthinkable, 2) surreptitiously via accelerating and unexpectedly higher inflation – likely but not significant in its impact, 3) deceptively via a declining dollar– currently taking place right in front of our noses, and 4) stealthily via policy rates and Treasury yields far below historical levels – paying savers less on their money and hoping they won’t complain."
This is it, the unvarnished truth. "Can't you smell that smell." This is why you must look to diversify your assets globally, via stocks, bonds, real estate, commodities, currencies and gold.
Best first quarter since 1998:
I know it seems hard to believe; with surging prices for food and oil, uprisings and wars in the Middle East, earthquakes, tsunamis, nuclear fallout, and the continuing fiscal solvency issues in Europe, but the S&P 500 is UP 5.5% so far this year. This is even more unbelievable when you consider that the S&P 500 was actually negative year-to-date on March 16. Thats right, we are up over 6% since March 16!!
Clearly the biggest reason for this strong upward bias in stocks continues to be the Feds Zero Interest Rate Policy (ZIRP), which is forcing investors out of cash and into anything else with the promise of a positive return. QE2 (Quantitative Easing), where the Fed actively prints money to buy our own debt, has been going on since last fall and is a major reason for this equity market melt-up. QE2 is scheduled to end in June, and while there is some talk of a new QE3 taking its place, it appears unlikely unless the economy really swoons. But maybe QE3 has already happened, at least on a global basis. The Bank of Japan has spewed the equivalent of their own QE2 -- in just three days! Yes, the world is awash in liquidity, and it is finding a home in stocks and other risk assets.
Historically when there was turmoil in the world money would flow to the US dollar and Treasury bonds, that is not the case today. No, today with the Fed forcing the dollar lower, the flight-to-safety trade is into US stocks and gold.
Mini Oracle Of Omaha's Sure Fire Way To Riches:
We've always known that one of the strengths of Warren Buffett's Berkshire Hathaway was their ability to see and participate in deals that the rest of us mere humans weren't privy too. It appears that the mini Oracle, David Sokol, was doing his boss one better. It was revealed last night that Mr. Sokol bought, for his own account, a mere $10 million worth of Lubrizol after researching it for his boss, and was then surprised that his boss, Mr. Buffett, actually went out and bought the entire company. Surprised that even after setting up a meeting with Lubrizol's management, and recommending the stock to Mr. Buffett, that he actually bought it.
Who is David Sokol? Mr. Sokol spent a long career as the founder of NetJets, subsequently sold it to Berkshire Hathaway, worked along side of Mr. Buffett, and was on the very short list to succeed Mr. Buffett. Instead he decided to front run his boss and pocket a quick $3 million by buying Lubrizol before Buffett did. The scary thing is that neither he nor Mr. Buffett sees anything wrong with that.
Wow, not only was this event shocking, but Mr. Sokol's interview on CNBC ( Sokol’s Surprise ) and his total lack of understanding of fiduciary duty was even more shocking. When asked if he would change anything after seeing the hooplah that it caused he said, "I guess knowing today what I know, what I would do differently is that I would have never mentioned it to Warren, and just made my own investment and left it alone." Doesn't Mr. Sokol work for Berkshire Hathaway, and doesn't he have a fiduciary duty to act in the best interest's of his shareholders? He goes on to say, "You can't -- or at least I don't think you can tell executives to not invest their family's capital in a company that Berkshire had no interest, or even knowledge of, and somehow police that. The only thing you can do is just say if you invest your own money, don't ever mention it to anyone at Berkshire." Ahhhh, yes you can! In fact that is exactly what is done at every investment company that I know of. For the last couple of decades I was almost completely prohibited from purchasing any individual stocks. If we liked a company enough to buy it then we should buy it in our funds. If we wanted to invest our families money then we should invest it in our funds. The fiduciary duty lies with your clients/shareholders, not with your family. If you want to invest for your family then don't work for someone else.
Don't worry about Mr. Sokol, or Mr. Buffett, the SEC will turn a blind eye. "Can't you smell that smell."
Be careful out there, and keep the lights on,
Chris Wiles, CFA
412-260-7917
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This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management. The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
This is over ten years old and still relevant:
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