Peter Schiff: Holding the Dollar Could be Riskier Than Stocks

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Berkshire Hathaway Down to Neutral

Zacks downgraded Berkshire Hathaway stock to Neutral on December 5, 2013. The stock was previously ranked at Outperform. The downgrade was due to the earnings miss, and the company gave a negative surprise of 6.9%. The stock is currently listed as a Hold.

Why Downgrade Berkshire Hathaway?

During the third quarter of 2013, Berkshire Hathaway reported operating earnings of $1.49 per share. They missed Zacks consensus estimate by $.11, because they believed it would be $1.60 per share. The decline came from a lack of underwriting income in the insurance business of the company, all because they suffered a catastrophic loss during the third quarter.

The company’s earnings are always subject to volatility, and this is especially true because of the exposure to catastrophes. Zacks believes that the exposure to catastrophes can result in more large individual losses, and they believe it will also produce more volatility in the casualty and property underwriting results.

Another area in question is the successor of Warren Buffett, the current chairman and CEO of Berkshire Hathaway. Many investors look at this as a real concern. We know that Buffett has a succession plan in place and a successor is already chosen, but the name of the individual is currently being kept under wraps. So there is still uncertainty in the market as to whether or not the new CEO is going to be able to perform at the same level of Warren Buffett.

Also the huge company investment in derivative contracts creates volatility with company earnings.

After the third quarter earnings report, Zacks Consensus Estimate for the year 2014 went down. One of two of its estimates was lowered by 0.5% to the amount of $6.22 per share.

Even so, Berkshire Hathaway has shown that it has a strong favorable operating performance over many quarters in the past, and each one of its segments has shown growth.

Its noninsurance businesses – retail, service, manufacturing, energy and utilities – are all performing very well even though they suffered substantial earnings declines in the recent past because of the current weak economy.

The financial products segment is also performing well, plus they are seeing trends improve in the business segment now that the housing market has gradually improved as well.

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Marc Faber: A Financial Crisis is Looming on The Horizon

As a distant but interested observer of history and investment markets I am fascinated how major events that arose from longer-term trends are often explained by short-term causes. The First World War is explained as a consequence of the assassination of Archduke Franz Ferdinand, heir to the Austrian-Hungarian throne; the Depression in the 1930s as a result of the tight monetary policies of the Fed; the Second World War as having been caused by Hitler; and the Vietnam War as a result of the communist threat.

Similarly, the disinflation that followed after 1980 is attributed to Paul Volcker’s tight monetary policies. The 1987 stock market crash is blamed on portfolio insurance. And the Asian Crisis and the stock market crash of 1997 are attributed to foreigners attacking the Thai Baht (Thailand’s currency). A closer analysis of all these events, however, shows that their causes were far more complex and that there was always some “inevitability” at play.

Simply put, a financial crisis doesn’t happen accidentally, but follows after a prolonged period of excesses…

Take the 1987 stock market crash. By the summer of 1987, the stock market had become extremely overbought and a correction was due regardless of how bright the future looked. Between the August 1987 high and the October 1987 low, the Dow Jones declined by 41%. As we all know, the Dow rose for another 20 years, to reach a high of 14,198 in October of 2007.

These swings remind us that we can have huge corrections within longer term trends. The Asian Crisis of 1997-98 is also interesting because it occurred long after Asian macroeconomic fundamentals had begun to deteriorate. Not surprisingly, the eternally optimistic Asian analysts, fund managers , and strategists remained positive about the Asian markets right up until disaster struck in 1997.

But even to the most casual observer it should have been obvious that something wasn’t quite right. The Nikkei Index and the Taiwan stock market had peaked out in 1990 and thereafter trended down or sidewards, while most other stock markets in Asia topped out in 1994. In fact, the Thailand SET Index was already down by 60% from its 1994 high when the Asian financial crisis sent the Thai Baht tumbling by 50% within a few months. That waked the perpetually over-confident bullish analyst and media crowd from their slumber of complacency.

I agree with the late Charles Kindleberger, who commented that “financial crises are associated with the peaks of business cycles”, and that financial crisis “is the culmination of a period of expansion and leads to downturn”. However, I also side with J.R. Hicks, who maintained that “really catastrophic depression” is likely to occur “when there is profound monetary instability — when the rot in the monetary system goes very deep”.

Simply put, a financial crisis doesn’t happen accidentally, but follows after a prolonged period of excesses (expansionary monetary policies and/or fiscal policies leading to excessive credit growth and excessive speculation). The problem lies in timing the onset of the crisis. Usually, as was the case in Asia in the 1990s, macroeconomic conditions deteriorate long before the onset of the crisis. However, expansionary monetary policies and excessive debt growth can extend the life of the business expansion for a very long time.
In the case of Asia, macroeconomic conditions began to deteriorate in 1988 when Asian countries’ trade and current account surpluses turned down. They then went negative in 1990. The economic expansion, however, continued — financed largely by excessive foreign borrowings. As a result, by the late 1990s, dead ahead of the 1997-98 crisis, the Asian bears were being totally discredited by the bullish crowd and their views were largely ignored.

While Asians were not quite so gullible as to believe that “the overall level of debt makes no difference … one person’s liability is another person’s asset” (as Paul Krugman has said), they advanced numerous other arguments in favour of Asia’s continuous economic expansion and to explain why Asia would never experience the kind of “tequila crisis” Mexico had encountered at the end of 1994, when the Mexican Peso collapsed by more than 50% within a few months.

In 1994, the Fed increased the Fed Fund Rate from 3% to nearly 6%. This led to a rout in the bond market. Ten-Year Treasury Note yields rose from less than 5.5% at the end of 1993 to over 8% in November 1994. In turn, the emerging market bond and stock markets collapsed. In 1994, it became obvious that the emerging economies were cooling down and that the world was headed towards a major economic slowdown, or even a recession.

But when President Clinton decided to bail out Mexico, over Congress’s opposition but with the support of Republican leaders Newt Gingrich and Bob Dole, and tapped an obscure Treasury fund to lend Mexico more than$20 billion, the markets stabilized. Loans made by the US Treasury, the International Monetary Fund and the Bank for International Settlements totalled almost $50 billion.

However, the bailout attracted criticism. Former co-chairman of Goldman Sachs, US Treasury Secretary Robert Rubin used funds to bail out Mexican bonds of which Goldman Sachs was an underwriter and in which it owned positions valued at about $5 billion.

At this point I am not interested in discussing the merits or failures of the Mexican bailout of 1994. (Regular readers will know my critical stance on any form of bailout.) However, the consequences of the bailout were that bonds and equities soared. In particular, after 1994, emerging market bonds and loans performed superbly — that is, until the Asian Crisis in 1997. Clearly, the cost to the global economy was in the form of moral hazard because investors were emboldened by the bailout and piled into emerging market credits of even lower quality.

…because of the bailout of Mexico, Asia’s expansion was prolonged through the availability of foreign credits.

Above, I mentioned that, by 1994, it had become obvious that the emerging economies were cooling down and that the world was headed towards a meaningful economic slowdown or even a recession. But the bailout of Mexico prolonged the economic expansion in emerging economies by making available foreign capital with which to finance their trade and current account deficits. At the same time, it led to a far more serious crisis in Asia in 1997 and in Russia and the U.S. (LTCM) in 1998.

So, the lesson I learned from the Asian Crisis was that it was devastating because, given the natural business cycle, Asia should already have turned down in 1994. But because of the bailout of Mexico, Asia’s expansion was prolonged through the availability of foreign credits.

This debt financing in foreign currencies created a colossal mismatch of assets and liabilities. Assets that served as collateral for loans were in local currencies, whereas liabilities were denominated in foreign currencies. This mismatch exacerbated the Asian Crisis when the currencies began to weaken, because it induced local businesses to convert local currencies into dollars as fast as they could for the purpose of hedging their foreign exchange risks.

In turn, the weakening of the Asian currencies reduced the value of the collateral, because local assets fall in value not only in local currency terms but even more so in US dollar terms. This led locals and foreigners to liquidate their foreign loans, bonds and local equities. So, whereas the Indonesian stock market declined by “only” 65% between its 1997 high and 1998 low, it fell by 92% in US dollar terms because of the collapse of their currency, the Rupiah.

As an aside, the US enjoys a huge advantage by having the ability to borrow in US dollars against US dollar assets, which doesn’t lead to a mismatch of assets and liabilities. So, maybe Krugman’s economic painkillers, which provided only temporary relief of the symptoms of economic illness, worked for a while in the case of Mexico, but they created a huge problem for Asia in 1997.

Similarly, the housing bubble that Krugman advocated in 2001 relieved temporarily some of the symptoms of the economic malaise but then led to the vicious 2008 crisis. Therefore, it would appear that, more often than not, bailouts create larger problems down the road, and that the authorities should use them only very rarely and with great caution.

Source: http://dailyreckoning.com/that-financial-crisis-was-no-accident/

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Soros tunes in to Nine Entertainment

US billionaire George Soros is set to emerge as a shareholder in Nine Entertainment when the media company begins trading on the Australian stockmarket tomorrow.

Mr Soros, a Hungarian-American business magnate known as the man who broke the Bank of England, is understood to have placed an order for Nine shares via New York-based Soros Fund Management.

Source :http://www.theaustralian.com.au/media/soros-tunes-in-to-nine-float/story-e6frg996-1226775434252#

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Jim Rogers: Where to Buy in 2014

With equity markets starting off December on a losing streak, Jim Rogers is out with another characteristic stark warning. This is all going to end badly. Jim Rogers told a CBC that eventually, the entire world is going to collapse.

Rogers boils it down to a singular notion that will tear at the fabric of system. Debt.

Jim Rogers – Gold Not Going Anywhere

Even with gold prices getting hammered by QE taper fears, Rogers doesn’t see an end to the commodity bull supercycle. Jim Rogers thinks this is just the normal ebb and flow of the market, and it isn’t unusual to have corrections. During the interview with CBC, he reiterates his bullish stance on agriculture. Hard not to be bullish on that, we all have to eat.

One area he does push back on is Natural Gas. Fracking is getting some hard PR as more and more communities reassess whether they want that type of drilling in their backyard. Rogers says is it best ‘not to get too excited about fracking’.

The Next Crisis
It wouldn’t be a Jim Rogers interview if he didn’t talk about the next massive crisis. Hey, they don’t make those doomsday prepper shows for nothing. His words are simple – the next one is going to be worse than the last.

“2008 was so much worse than 2000 because the debt was so much higher, you wait until 2014 or 2015 when the next crisis hits… debt has gone through the roof, the next one’s gonna be really bad”

Rogers ends the interview on a cautionary note – Be prepare, be worried and be careful. In other words stock up on the usual. It’s going to be a wild ride.

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