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Berkshire Hathaway
It All Comes Down to Time

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By hartmanbirge
September 1, 2005

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I hate to return from my move abyss on such a tragic event. What does one say at a time like this? Perhaps nothing is the best option for something that is borderline OT but.... Unbelievable. It's obviously a major event of economic impact that's going to hit us for months and there will be a lot more repercussions. These are indeed some of the most horrific images I have ever seen and the sheer magnitude of what flashes across my TV is breathtaking. The hurricane happened to hit the same day that our furniture and household goods finally arrived (30 days wait) and as we gladly received the return of our lifestyle it struck me that the people left homeless by this calamity won't be having any arriving shipments of the oh so cherished household goods. Gone. Destroyed. I can only imagine the despair as you look your kids in the eye and realize that you're completely helpless to make their plight better. This one is massive which I think is obvious to anyone who sees the extent and magnitude of this storm. The talking heads who banter about the multi-billion dollar damage figures now just seem... what's the word � pathetic. When it's all said and done this isn't going to be about the damage figures. $25 billion is a big hit for any industry but it's to be expected � part of the normal routine of doing business in the insurance industry. Back in the day I was a commander in a water purification battalion which gave me the chance to see what it takes to support a humanitarian catastrophe. This one is going to be a whopper.

The Humanitarian Undertaking

These things evolve in somewhat predictable patterns and we have yet to see the second and third order effects at the humanitarian level... First comes the shock of the event itself and the immediate need for life-saving evacuation transport � the phase which we're in the early stages of now. It is always a coordination nightmare. The preexisting infrastructure probably won't be sufficient to handle what needs to get out and what needs to get in at the same time. Well-meaning citizens who rush to help will often make matters worse by clogging already crowded roads � that creates delays and a loss of precious time that will cost lives. As always, there is not a system in place to evacuate as many people as what it looks like are trapped � helicopters can not evacuate a city. The elderly and the young who are trapped by flood waters can only wait � they have no water... they have no food... they are trying to cope during sweltering days.... As we can see, they have nothing but the clothes on their backs. Many who are alive today will die if they are not reached before too much longer and I think they know it. Desperation will grip. The immediate crisis is to get people into locations which can be logistically sustained with clean water, sanitation, food, and logistics transport which has to be created from scratch � and secondly to get all that stuff "into theater" and established into something that can sustain for months. It takes time to establish all that. A week I think would be extremely optimistic. Once the stuff arrives to the general vicinity the long pole in the tent is always distribution. Someone commented on MREs... From a logistics standpoint they are a godsend. MREs may not taste great but you can get them into theater in a preserved state and distribute 2500 calories a pop. They will save lives. Yea I guess that's a good stock to buy (made in Cincinnati Ohio). The sadest thing is to have the food and water in theater only to watch people die because you can't get it to them. After the first week there will be a significant risk of cholera outbreaks and the spread of disease. Desperation sets in... If structure and security can not be brought to bear, the breakdown in the social fabric soon becomes pervasive and complete � a tribal caste system will take root � my how we take social order for granted and how terribly critical it is to everything. The scenes of looting (if looting is all that happens we're lucky) remind me of Somalia and Haiti from other disasters gone by � every man for himself � someone said Lord of the Flys....yes. I'm afraid that I prefer a very brutal, authoritarian response from our governing authorities to lawlessness and looting. That said, at the moment the authorities are not capable of enforcing anything so the rampage spirals into pervasive lawlessness. Looting will be the first symptom but if unchecked it will lead to abundant rapes, murders, shootings, and other more sinister signs of societal collapse (ala Berlin 1945) � a total social and moral collapse. How long before we see the first mass food riot? It will take the military to restore law and order but I estimate at least until next week before they can get set up and begin the task in sizeable force. Speaking of time - Time is now critical and precious and can be termed as a precious resource � it takes time to mobilize a logistics infrastructure � time that people don't have. That gap is what will kill the most people... people will probably still be dying in this first shock-wave a week from now. The net effect is a million people who are now completely dependent on their own survival instincts in the short term and the federal government longer term. Many of the elderly will die. Unlike most humanitarian crisis broadcast to our living rooms from some far off place the details of this one (the above effects of lawlessness are present in nearly all humanitarian crisis) will come into focus and heighten the shock effect. It's got to have an effect on the national psyche. When all is said and done the above humanitarian crisis will make everything else pale by comparison and I am of the opinion that the second and third order effects are going to be with us for quite some time.

The Business Aspect

Who pays? The taxpayer will pick up most of the tab but there is more � very large second and third order effects. I think that many people and CNBC commentary are entirely missing the boat. The threat to Wal Mart and Home Depot is not the flooding of 30 � 40 stores and the loss of some regional revenue (a non-event in practical terms). I will argue that the threat is a widespread societal one due to a not insignificant shock to discretionary income that hits every wallet in this country. Refined petroleum and gas are costs that hit everyone. Other commodity prices soar as the Mississippi delta infrastructure is severely damaged. There will now be competition for those same facilities to bring in relief supplies. How long before the free flow of shipping is restored? The impact is the same whether it be a loss of discretionary income due to a shock such as this or a tax increase or a rise in mortgage rates. Those consumers who are on the borderline (many) and who see their discretionary income dwindle will soon have issues financing the essential costs - such as their debt burdens and mortgages. Those monster homes financed with ARMs with little room to spare will soon be seen as an expensive albatross to service the heating and cooling costs. A big chunk of the American economy is dependent on the fact that the American consumer has more discretionary income than his counterpart in Europe or Asia.... I think we just lost a bit of that cushion. Could this finally be the trigger to something far larger and more sinister? I can no longer use the term "I hope so" waiting for Berkshire to deploy its billions into a fallen market.... I didn't want it to happen this way. As with the desperate victims trying to escape rising waters, it all comes down to time. How long will it all last? How long can the American consumers who have been riding the precipice hold on? I think that's the main unknown factor but my guess is that this is going to take awhile to recover from and I don't think the strapped consumer can last that long. I hope I'm wrong.

As for Berkshire I think the hit will be minor � at least in the short-term. Most of the big damage was due to flooding, which as I understand it goes to the taxpayer. As predictable as the sun rising tomorrow Buffett will conservatively account for Berkshire's total loss, Berkshire will take the ding to a quarterly income statement, and we'll move on. It's always a nice thing not having to worry about that.

HB


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