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Berkshire Hathaway
Listen-It will Change your Life

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By duxburyrj
September 23, 2005

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I just started reading the book, "Listen" It will change your life" by Charles Page. I stumbled upon this book after reading about it in Andy Kilpatrick's 4th edition, "Of "Permanent Value-the 2006 literary edition". Trying to emulate what Charlie (Munger) has taught us; I decided I better learn at the knee of someone that has already mastered an important subject matter, rather than figure it out myself. Then it dawned on me...we aren't listening.

I have appreciated for years the Peter Lynch admonishment that "spending 10 minutes on macro a year is 10 minutes too long" and the warnings from WEB and CTM about avoiding "fortune tellers". Moreover, WEB and CTM have compared reading macro forecasts to that of reading the funny pages. Like a good Berkshire disciple I tuned out the macro noise, I tried to focus on franchise businesses that I could understand, having sustainable competitive advantages, where the financials are strong, where management is shareholder oriented and where the price is right. That, however, started to change a few years ago after the tech bubble collapsed. Around 2001, I started to ask myself-how did this happen? After reading Janet Gleason's book-Millionaire (which I strongly encourage everyone to read), I began to realize that it wasn't a tech bubble but a credit bubble. This now famous bubble was created the same way ALL financial bubbles have throughout financial history-easy money. As I dug deeper, I started to fixate and become infatuated with money and credit and the history of that subject matter. I wasn't certain but I suspected that I might be on to something...a variant perception.

At times I felt guilt, as I felt like I strayed from the teachings of WEB and CTM who I idolize. That, however, all changed when the WEB Fortune article from Carol Loomis was released and people began to learn of WEB's now famous $22B anti-dollar bet. My confidence grew. WEB wasn't just warning about the over-issuance of dollar claims ("a rich family giving away a bigger and bigger piece of the farm each year"), he was backing up his rhetoric with real money...this was different. I knew I was on the right track. Moreover, his blatant public profile on this theme intensified, with comments about "the force feeding of $2B a day to foreign investors". In addition, when WEB intentionally took time out of the 2005 annual meeting and read, verbatim, the Paul Volker editorial from the Washington Post (see the speech here that was the basis for the Op-Ed), I almost fell out of my chair. Here was the most prominent Central Banker of all time, indirectly warning of excessive money and credit creation and the subsequent imbalances that now pose a risk to the global financial system.

The confidence continued to grow. After re-reading my stack of OID's, I stumbled upon Seth Klarman's letter to Baupost Group's investors at the end of 2004 (OID-April 30, 2004). Seth Klarman is the embodiment of value investing. He is strict Graham and Dodd and would never pay-up for good businesses as Munger and Buffett have over the years. Macro? Are you kidding me...he wouldn't give thirty seconds to a "top down" thought. Yet as I read his diatribe it had new feel and language that I had never seen before in his prior letters. Some of the quotes that struck home included: "As with any form of debt financing, until the spigot is turned off, you cannot understand the enormous impact readily available leverage has on prices and psychology. Increase the leverage available to asset classes and prices will rise." And this: "We also believe that Federal Reserve Chairman Alan Greenspan has become an increasingly dangerous man." Seth Klarman too began to figure out that we did not have a tech bubble in the late 90's but a credit bubble and that credit bubble had now extended into the consumer and mortgage finance space, creating the now famous housing bubble.


The confidence really started to accelerate. In early spring of this year, my 2004 Leucadia National (LUK) annual report showed up in my mailbox. The incorrectly referred to, mini-Berkshire, is run by the very shrewd Ian Cummings and Joe Steinberg (see historical performance here) both of which have close ties to Omaha (i.e.-Berkadia). The Leucadia National annual report reads similar in tone and style to that of BRKA and the insights and commentary are always value added. As I perused the letter, I noticed the concluding paragraph entitled, "The Future", and I began to realize that more great minds had moved into "the trade". Right there in black and white, another great duo was warning about the potential for a currency crisis and a run on the dollar. They too had figured out that there had been an over-issuance of credit and hence the dollar.

So where am I going with all this? I am trying to say that we all need to listen more carefully. All the smart guys have weighed in and are telling us what the risks are and how they are likely to unfold. Connecting the dots, with the help of Buffett, Steinberg, Cummings and Klarman, is becoming increasingly easy. In other words, one doesn't even have to be smart to figure this out anymore. It is nothing more than third grade math...we are creating money and credit at a much, much faster rate than output. Claims against output are increasing at the rate of 20% per year and are growing 3x faster than output grows on a nominal basis. It now takes five units of debt to get one incremental unit of GDP...the productivity of money and credit is crashing from its over-issuance. No, this is not Malarbe of twenty years ago, this is unprecedented. This as Charlie says is "Sodom & Gomorrah" and "this is the most extreme period in the history of capitalism." This potentially trumps everything and makes traditional "bottoms up" analysis useless. As Munger said at the 2004 annual meeting-"If Argentina happens here, we can't save you." So yes, I think the big picture does matter for the first time in my investment lifetime, I think it is time to use much higher discount rates on all paper investments and I think looking at non-traditional stores of value (like gold and oil) are not to be dismissed in the new era of default of debasement. The discount rate the market currently uses is wrong. Again, this is not a macro concept but basic third grade math. Out of control credit creation means debasement and much higher discount rates. Slug it out all you want, poverty is coming your way without massively increasing the discount rate, buying hard assets and listening.


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