Articles Archive for February 2009
In the book “The Snowball” – a wonderful biography of Warren Buffett’s life and absolutely worth reading in my opinion – Warren Buffett summed up the actual situation of the world’s economy in the last chapter “Coupons” using the words: “It’s a hard time. This is now another world, and nobody knows what will happen to the world.”
But let’s take a look on what happened in the last months. After the fall of Lehman a big shock wave spread over the financial markets inexorably. In the course of that shock wave, the Dow Jones fell from its all-time high of 14,000 Points to 8,000 Points and bank titles such as Bank of America or Citygroup have lost 85% of their former market capitalisation. The former chairman of the NASDAQ Bernard Madoff was able to dupe his investors to the tune of $50,000,000,000. Several personalities of the financial world have committed suicide, including the German investor and multibillionaire Adolf Merckle.
What will happen now? Will we really face a crisis just like the crisis in 1929? First of all, I want to say that nobody can predict the future but the similarities to the year 1929 are really frightening. The crash of 1929 for example had it’s roots in much too high stock values caused by the wide range of credit offers banks offered the people in order to achieve larger profits. Four years after the crash the U.S. government passed a sequence of central economic planning programmes called “New Deal” in order to stabilize the economy and above all regulate the completely runaway stock market. The deal worked and as banks weren’t allowed to spread credits to everyone in order to fund huge financial bubbles, governments did’t have to deal with the consequences of such enormous financial bubbles for more than 75 years – until now. But in the year 2000 bankers had a new exciting idea on how to offer credits to the masses. Instead of giving direct credits to the people like in 1929 they now gave mortgages to nearly everybody. This had the effect of raising housing prices and when the price of your home is very high you are also more creditworthy. But of course this bubble also had to burst and now we are facing a huge credit-funded pile of fragments again. The story of Bernard Madoff has also already existed, albeit in a slightly weakened form: Richard Whitney, who was the chairman of the N.Y. stock exchange in 1929 was sentenced to 5 years prison in 1938 for embezzling millions of dollars from his clients between 1929-1930.
But let’s sum up the facts: The advantage this time around is that our governments know how to deal with recession much better than they did in 1929. Sir John Maynard Keynes developed his theories on fiscal policy and instead of making things more worse our governments know that they have to invest in order to get the economy going again. The disadvantage of this policy is that national debts have to be paid back one day, or governments have to abandon their currency. But the economical supremacy of the U.S.A. can’t be defeated when the government will start to pay back their 14 trillion dollar debt. On the other hand, the disadvantage is that this crisis is a different type of crisis: This crisis has hit the economy at its weakest spot: its banks. The cash flow between banks and companies has been nearly zero for a long time. Many banks have securities which nobody knows how much they are worth – or better said if they are worth anything. Now the U.S. government finally created a “Badbank” worth $2,000,000,000,000 which should release the credit markets from their state of shock. Nevertheless it has to be said that the consequences of this “Badbank” on the international bank sector can’t be predicted yet. Another problem is that people often forget the past in times of crises. The “Buy American clause” for example would in my opinion be the first step into a catastrophe. Because when the first country starts to protect their markets, others will follow and that would have unpredictable consequences in our fully globalized world.
In conclusion it can be said that we are definitely facing a deep deep recession which will either hit quick and painful or slow and painful. Unemployment rates will be very high for a long time and the average rate of return for securities won’t be over 4% for many years. But if the crisis really turns into a depression like in the years 1929-1935 can’t be said, yet. In my opinion that depends on our governments now.
The Pilgrimage to Warren Buffett’s Omaha by Jeff Matthews is an enjoyable read for everybody who is interested in the insights of the Berkshire Hathaway Annual Meeting in Omaha and who seeks answers to investment questions from Warren Buffett.
Every year, they come to Omaha. Far from the stock market in Wall Street, in a place more known for cattle and corn, investors from all over the world gather for one purpose: Warren Buffett and his annual Berkshire Hathaway meeting. For the uninitiated, it’s an event wrapped in mystique and mystery. It’s a chance to have Buffett himself, the Oracle of Omaha, answer their questions.
In Pilgrimage to Warren Buffett’s Omaha: A Hedge Fund Manager’s Dispatches from Inside the Berkshire Hathaway Annual Meeting the reader gets an in-depth look at this unusual experience. The book covers the 2007 and 2008 meetings, a time when Bear Sterns was collapsing and more than 31,000 people came to seek advice from the investment guru.
The book is written by Jeff Matthews, a hedge fund founder and financial blogger. He got his own highly-coveted ticket to the Berkshire Hathaway meeting held only for shareholders and proceeded to post reports on his blog, offering tempting glimpses into the much-discussed meeting. Offering a thoroughly entertaining first-hand account of Berkshire Hathaway’s meeting, he answers questions investor’s are asking.
Personally, I liked the book and found it to be an enjoyable read. Jeff Matthews takes the reader into the world of Warren Buffet and his shareholders. You get a different point of view than usual and get a look at Buffet’s investing methods along with the way he interacts with his shareholders.
All in all, I can recommend this book to anyone who is interested in investing. If you want to learn even more about Warren Buffett, and you probably will after this book, you might also check out The Snowball.