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Euro's Collapse Is Not "Unthinkable": Warren Buffett

Here is more of the latest out from Warren Buffett.

Below is a brief excerpt followed by the video:

Warren Buffett told CNBC Thursday that the collapse of the Euro zone's single currency is far from "unthinkable."

"I know some people think it's unthinkable...I don't think it's unthinkable," Buffett said in an interview.

Still, Buffett said he believes there will be "huge efforts" put forth to preserve the euro. In the meantime, struggling peripheral countries like Portugal must find a way to resolve fiscal crises.

"You can't have three or four or five countries that are in effect free-riding on the other countries. That won't work over time—they have to get their fiscal houses in reasonable harmony," he said.

























Disclosure: No position

About the author:

Jacob Wolinsky
My investment ideas have been inspired by many of value investors including Benjamin Graham, Charles Royce, John Neff, Joel Greenblatt, Peter Lynch, Seth Klarman,Martin Whitman and Bruce Greenwald. .I live with my wife and daughter in Monsey, NY. I can be contacted jacobwolinsky(AT)gmail.com and my blog is www.valuewalk.com

Visit Jacob Wolinsky's Website


Rating: 3.3/5 (12 votes)

Comments

PFBerger
PFBerger - 3 years ago
I would add to that, that the collapse of the USD due to US Bankruptcy is thinkable and/or hardly avoidable. Furthermore, haven't California - the wealthiest State? - printed some kind of credit papers (IOUs) to replace missing funds (cash)?

http://www.cnbc.com/id/42246531

http://money.cnn.com/2009/07/02/news/economy/California_IOUs/?postversion=2009070218

yswolinsky
Yswolinsky - 3 years ago
Look at California's debt to GDP, the only reason they printed IOUs is because they are not allowed to run a deficit, unlike the Federal Government and the PIIGs.
PFBerger
PFBerger - 3 years ago
http://www.usdebtclock.org/state-debt-clocks/state-of-california-debt-clock.html - 18.8%

500bn(+) unfunded public pension liabilities - 25.5%

In fact they have to run deficits (due to politics) to keep the government in place, but debt still ok.

yswolinsky
Yswolinsky - 3 years ago
Interesting, did not know that, very insightful link.

However, as bad as their fiscal situation is, it is not as bad as the federal government's
kfh227
Kfh227 premium member - 3 years ago


The Euro never made sense. Having a bunch of countries with different laws and moentary policies sharing a currency was doomed from the start. England was the only smart country I know of that did not adapt the Euro.

superguru
Superguru - 3 years ago
Hmm.. as many here think collapse of both USD and EUR is a possibility, where will you put your cash in - Yuan, Yen or Gold?

I guess we call it preparing for another highly anticipated Black swan Event.
kfh227
Kfh227 premium member - 3 years ago
US dollar is going to be fine. As much as there are problems now, the regulations we have in place are the gold standards of fiat currency.
superguru
Superguru - 3 years ago
This 2008-2009 recession was very mild. Every time it drizzles, Media and people like Roubini and the muni bond lady (forget her name) have habit of calling it storm of the century so that they can sell their services.

Buffett is right everything will be just fine and best years for America, India, China, Brazil, Europe and everyone else is ahead.

To put it in perspective " A meteor striking earth and wiping all life is not unthinkable either."

paulwitt
Paulwitt - 3 years ago
This 2008-2009 recession was very mildWhere are you living, in Brazil? :)

superguru
Superguru - 3 years ago
I live in California,

Such event happen one to two times a decade with very regular frequency. I guess reading world economic history or even that "Random walk" book would help put things in perspective.

Dan Dellegrotti
Dan Dellegrotti premium member - 3 years ago
The U.S. cannot go bankrupt. Period. As long as US "debt" is denominated in dollars, insolvency is not possible. The U.S. is, in fact, a monopoly of its own currency. That is, unless the world refuses to deal in dollars, which will not happen anytime soon. And unless the Congress willingly defaults by not raising the debt ceiling.

U.S. states, on the other hand, can go bankrupt, as they have no ability to print its own currency. They are revenue constrained, just like households. But on the federal level, the U.S. government is not revenue constrained and cannot go bankrupt.
Dan Dellegrotti
Dan Dellegrotti premium member - 3 years ago


"I live in California,

Such event happen one to two times a decade with very regular frequency. I guess reading world economic history or even that "Random walk" book would help put things in perspective."

No offense, but you have obviously not read your history books lately. The closest similarity is Japan circa 1990. We will see how long it takes for us to break the "cycle." At least we have a bit of inflation, rather than the deflation Japan faced for 15+ years.

paulwitt
Paulwitt - 3 years ago
It is possible we are in a secular bull market with the BRIC countries and frontier markets opening up.

Dan Dellegrotti
Dan Dellegrotti premium member - 3 years ago
A lot of things are possible, but my money is literally on the opposite.
superguru
Superguru - 3 years ago
I am not an economist but I would say, "Do not confuse Japan or its companies with its Stock Market."

Dan Dellegrotti
Dan Dellegrotti premium member - 3 years ago
It's really "don't confuse the economy with the stock market," but since you brought up economics, that's what I responded to.

Dont confuse low liquidity, algo trading, momentum strategies, technical analysis strategies, and the biggest fiscal and monetary stimulus in history with a healthy stock market, or economy for that matter.
Dan Dellegrotti
Dan Dellegrotti premium member - 3 years ago
why else do you think that high-beta names and other trash have been flying since Jackson Hole of last year?

Earnings today are driven by productivity gains resulting from a lack of hiring (or preponderance of firing) in addition to a lack of capex. this can last...if the economy does not get better and demand does not grow. but it is not sustainable. the market is "cheap" is you dont normalize earnings or expect hiring and capex to grow due to higher demand at some point in the future.

You should also note that anything denominated in dollars goes up when the dollar goes down. It doesn't mean you are richer. Hopefully I am wrong and that you are right.

superguru
Superguru - 3 years ago
I have no clue what these are - "algo trading, momentum strategies, technical analysis strategies,"

low liquidity - We briefly saw that during crises due to fear.

Healthy Stock Market - Did not know there is such a thing as Healthy or unhealthy stock market.

There are buying opportunities, selling opportunities and do nothing for long time in between.

Dan Dellegrotti
Dan Dellegrotti premium member - 3 years ago
I have no clue what these are -

they are what is determining the price action.

As to liquidity, there has been insanely low volume since 2008. Excuse my mixed terminology.

Dan Dellegrotti
Dan Dellegrotti premium member - 3 years ago
Btw superguru, I feel like I am coming off too strong. It's not my intention. I appreciate your comments and debate. But to call 2008-2011 mild is quite an interesting statement.
superguru
Superguru - 3 years ago
"But to call 2008-2011 mild is quite an interesting statement."

Some one in housing, construction sector or mortgage/financial sector in US will find " 2008-2009 is mild" very insensitive.

Most other industries have bounced back very nicely.

But historically it is just another bubble/recession, of series of many, driven by human greed. Living through it would be hard for some but soon every one will forget it.

In global context, for some one outside US (and Europe) it was just a headline news in international page of their newspaper.

Dan Dellegrotti
Dan Dellegrotti premium member - 3 years ago
"But historically it is just another bubble/recession, of series of many, driven by human greed."

This is a simplification. First, a bubble does not equal a recession. Furthermore, you are not distinguishing between the business cycle due to credit, those resulting from exogenous shocks, and those coming from both. And you ignore the possibility of structural cycles. We are facing, imho, a structural cycle, 30 years in the making, and one which saw many business cycles in between.

Be careful when citing Buffetts trite remarks. Things like "fear and greed" are too simplistic. And he is no simplistic man; he just wants everyone to think that is the case.

superguru
Superguru - 3 years ago
"We are facing, imho, a structural cycle, 30 years in the making, and one which saw many business cycles in between."

Yes, I have been considering this another business cycle and recession and not as something structural. We had one here in 1990 housing related similar to this one and another one in 2000 which was more tech.



What makes you think it is structural this time?


Also I have started recognizing that our economy is addicted to low rates and high liquidity. Fed will increase rates occasionally to burst a bubble but most of the times they will be forced to keep very low rates like Japan. Political will to take economy off this addiction is very highly unlikely.

Again I have no background in economics and do not know what long term implications are. But whatever it is, it is surely worrying deep thinkers like Grantham and Klarman.

And you are right, Buffett has very optimistic outlook which he communicate and I share.

Also in my opinion, Japan is just fine and stock market is a very poor indicator of its economy and strength of its companies. (I am not considering the affects of current natural disaster on Japan yet)

I am thinking may be Economists are applying old rules of nation economies on new paradigm of global economy and hence thinking these to be structural issues where as it is a paradigm shift.
Sivaram
Sivaram - 3 years ago


I'm with Dan on this one (sorry SuperGuru ;) ). As usual, if one of not affected negatively, things never look bad.

The 2007-2009 period is one of the worst in American history. Whether you look at the economy or asset values (like stocks), it is one of the worst ever seen.

From an economic point of view, you just need to look at an unemployment chart, which is worse than all other recessions in the post-WWII era. Similarly, GDP change was very bad.

The stock market, real estate, and bonds (except govt bonds) also saw some of the biggest sell-offs of all time.

However, things weren't as bad as it could have been because of heavy borrowing and money printing. We saw the largest money printing and/or borrowing operation since the 1930's. The US government debt, which was quite low in the early 2000s skyrocketed to a fairly high level within 2 years.
Sivaram
Sivaram - 3 years ago


In global context, for some one outside US (and Europe) it was just a headline news in international page of their newspaper.

But it's always like that. How many people outside Europe and North America even knew what the Great Depression was?

You can't judget the severity of the situation by looking at what someone halfway across the world feels.
superguru
Superguru - 3 years ago
"The basic cause was, you know, embedded in, partly in psychology, partly in reality in a growing and finally pervasive belief that house prices couldn’t go down. And everybody succumbed, virtually everybody succumbed to that. But that’s, the only way you get a bubble is when basically a very high percentage of the population buys into some originally sound premise—and it’s quite interesting how that develops—originally sound premise that becomes distorted as time passes and people forget the original sound premise and start focusing solely on the price action. So the media, investors, mortgage bankers, the American public, me, you know, my neighbor, rating agencies, Congress, you name it. People overwhelmingly came to believe that house prices could not fall significantly. And since it was the biggest asset class in the country and it was the easiest class to borrow against it created, you know, probably the biggest bubble in our history. It’ll be a bubble that will be remembered along with South Sea bubble." - Buffett
PFBerger
PFBerger - 3 years ago
These posts are very interesting. I will just share a few bullet points with those who want

1. It seams to me (I live in Switzerland) that American citizen do not realize in which situation they really are. E.g. printing IOUs is creating credit and per definition running a deficit , nobody, over time can spend more than what they have - I am falling from the tree when reading that the US cannot go bankrupt. Do responsible citizen really know who is the ultimate debtor of national debt? That's the citizen xyz in the street who has a simple budget for the clothes, the car and the children who go to school - and how is he a debtor? He is the ultimate debtor because all the Federal liabilities are guaranteed by future tax income. Therefore, as long as foreign economies, who buy T-BILLS & T-NOTES its fine for the US, when foreign investors will realize the debt burden on each citizen is too high, they will not provide liquidities to the US anymore. In that case, FED will have to provide it and the USD would become worthless like in Zimbabwe.

2. I'm falling from the tree again - Swiss citizen are scared of future possible deficits in public pension fund liabilities in 20 years - and there is a national debate about it almost every year (how to finance the future deficit in a prophylactic way) - on the other hand in the US an already very tricky situation seems to be fine and there will be enough money in any case (who ultimately gives that money seems to be secondary).

3. In world history, empires are created and disappear and American bankruptcy can be thinkable - USD predomination in the world is only temporary, e.g. before WW1 the GBP dominated the world or once the Roman currency and in the future maybe a basket of currencies will be the dominating paradigm.

4. Warren Buffet warns American citizen about the long term eroding value of the USD and advises to favor investments in businesses rather than in bonds.

Thank you for reading

superguru
Superguru - 3 years ago
Depending on what economic theory you apply you might get different conclusions.

On Japan, from wikipedia

Keynesian economists tend to claim that Japan's economy is far stronger than generally believed.[33] Some mainstream economists acknowledge that Japan, which unlike most developed countries has maintained its industrial base, and has vast capital reserves, currently has a strong economic outlook.

http://www.btinternet.com/~pae_news/review/issue23.htm

I personally do NOT belong to "Sky is falling" camp.
superguru
Superguru - 3 years ago
Dan, Sivaram and PFberger

Assuming your macro economic readings are correct, and they may well be, what steps are you taking to protect your portfolio and investments against these structural issues, deficits, fall of USD etc?

PFberger - has Switzerland been impacted negatively by this downturn? Any good Swiss investments which are value nowadays? I plan to visit Switzerland this year for tourism.

PFBerger
PFBerger - 3 years ago
Would it be possible to say it is not necessary to know Keynes to understand the principle of sound finances and the implications of bad ones ?:) Politically, the US have to run a deficit as long as anybody wants to be reelected. It works as long as somebody pays for it, money doesn't fall from the money tree.

Actually Switzerland weathered the storm with max. 4% unemployment and now largely under 4%. Most hurt companies were precision auto components makers and banks otherwise the economy is very diversified wit chemicals, pharma, food,... It is interesting to check on Forbes how many companies are in the top400. Short term the USD might gain (e.g. it had a really nice run during the internet bubble), long term a diligent/sound financial situation should pay.

For single stocks, I think Swiss Re is interesting (Warren Buffet invested @CHF45 and Charles Brandes ownes some stocks. Otherwise I read an analysis on Pharma stocks on Gurufocus and someone talked about Novartis. Personally, I think this stock is interestind to follow (compare it total return, div. reinvested, in USD with Berkshire over 20years you will see).

How I am protecting my portfolio? I don't invest in the US local market anymore. I'm investing in Nigeria, Lithuania, Canada (already limit), looking at China, India (ADRs) and try to get to know better the opportunities in Switzerland.

You are very welcome to Switzerland and will enjoy it very much! I also plan to go to the United States.
superguru
Superguru - 3 years ago
"Nigeria, Lithuania,.."

Why and what is there in "Nigeria, Lithuania,.."?

Give your and Dan's and Sivaram's world view, I would be very surprised if any of you had much in USD or USD denominated assets or US stocks, Bonds etc.

To hedge the risk you are talking about, though I consider them low probability, I am also considering diversifying more to Emerging Countries Local bonds and Non US stocks,

Sivaram
Sivaram - 3 years ago


SUPERGURU: Give your and Dan's and Sivaram's world view, I would be very surprised if any of you had much in USD or USD denominated assets or US stocks, Bonds etc.

Actually although I'm bearish on US stocks in general--my track record is horrible though :(--I mostly have or am looking at US stocks. This has been a disastrous stance, especially if you are Canadian like me and (i) US$ has declined against C$, and (ii) US stocks have severely underperformed Canadian stocks.

Unlike others, I'm also bearish on foreign markets especially emerging markets so a bearish view of US stocks doesn't necessarily mean a bullish view of others.

There are a couple of problems with making country-based stock selections.

First of all, you have to be pretty good at macro calls to act on anything being suggested here. Every China bull or India bull is a genius now but I doubt more than a handful were bullish 10 years or even 5 years ago. It remains to be seen how many will remain a genius 5 years from now.

The market is efficient most of the time and you really have to have skill to make the macro calls. For example, how many would have said Brazil would work through its fiscal problems--note that a Brazilian company like Petrobras had a higher rating than the Brazilian government around 8 years ago--and become an attractive proposition?

Secondly, US corporations are generally the best run in the world--at least from a shareholder point of view. US companies have a very-very-long-term ROE of around 12% and there are very few other places like that. Management just isn't as good in other places and shareholder activism is weak in many other places. Even European companies with dominant brands and strong history tend to earn lower ROE (and when they don't, they often carry higher debt i.e. they are boosting the ROE by leveraging up).

If you are a Buffett-Prime-type investor (i.e. Buffet in 70's to 90's) it's hard to leave USA because you need to find companies that could internally re-invest their profits at high returns (i.e. need good ROE). Many megacap and largecap international companies are perhaps on par with American ones when it comes to moat, profitability, and the like, but the lack of shareholder activism, weak corporate governance, difficult M&A, etc, puts them a bit below many US-base companies.

Lastly, foreign markets generally aren't as diverse and don't have as great a selection. When people make country bets in many countries, they are really making heavily-concentrated industry bets since the stocks in those countries are dominated by a few firms.

The difficulty for people like me is that almost nothing is attractive in a general sense. I have felt like this for most of the last 5 years, except in 2008 or 2009 (even then, I didn't think the market was cheap near the bottom in 2009). Right now, it's not an easy time for contrarians or value investors. It almost feels like 2006 or 2007, except now we have a lot of money printing which confuses the matters greatly.
superguru
Superguru - 3 years ago
"Right now, it's not an easy time for contrarians or value investors." - Sivaram

It is not an easy time to buy, but easy time to prepare, research and wait for next opportunity, and easy time to sell if you bought in 2008 -2009 or get rid of your mistakes.

"I have felt like this for most of the last 5 years, except in 2008 or 2009 (even then, I didn't think the market was cheap near the bottom in 2009)" - Sivaram

2008 - 2009 They were relatively cheap. I agree massive intervention did not let assets become really cheap.

Corp Bonds were very cheap at that time but sadly I was new and lacked understanding of bonds and did not buy corp bonds or bond etfs/funds. I did buy stocks which were less cheap.

IMO, One does not have to wait for everything to become really cheap, though that would be perfect. There are small opportunities which come regularly - Europe last year, PIIGS etc.

PFBerger
PFBerger - 3 years ago


@guru

Allright, let's say it like that. I am an Africa Bull and we will talk again in 10 years. Now I invested in the Nigerian banking sector - they have quite advanced technologies & personnel who studied in the US + survived crisis (although currency is risky it is not doomed :))) ). You can check articles of Mark Mobius from Templeton about this country. Why Lithuania? My girlfriend is from there, we travel quite often to the country and therefore know it's a great opportunity for farming and agribusiness (e.g. they have almost no tractors and a lot of opportunities to use land) - also some lecture from Mobius available on Baltic States.

How to hedge? by buying a business linked to commodities, buying Chinese stocks, Indian ADRs, Norvegian bonds (sound currency, linked to oil), foreign companies who hedge their exposures in USD, ... But this currency matter would rather be an issue for buy & hold not speculation.

@Sivaram

"US corporations are generally the best run in the world" where is it taken from? From a book of Mischkin? Americans really think they are the center of the world - that's too much. Maybe there are more well run companies than in other developed countries because there are more companies in total in the US. If, in the US, there is one large Bank like Deutsche Bank that didn't need government help I'll be happy to know it.

Try to check the Bloomberg universe of active common stocks traded in the US and then in the European Union, I haven't done it but I'm sure there might be surprises.

Sivaram
Sivaram - 3 years ago


----

@Sivaram

"US corporations are generally the best run in the world" where is it taken from? From a book of Mischkin? Americans really think they are the center of the world - that's too much. Maybe there are more well run companies than in other developed countries because there are more companies in total in the US. If, in the US, there is one large Bank like Deutsche Bank that didn't need government help I'll be happy to know it.

Try to check the Bloomberg universe of active common stocks traded in the US and then in the European Union, I haven't done it but I'm sure there might be surprises.

----


As a stockpicker I agree with you that good opportunities lie everywhere. What I am speaking of is the whole universe as a whole. As a whole, US companies are better run than almost any other country. This is not to say that you can't pick a hundread foreign companies that are better run; you can definitely find bette run companies elsewhere. But as a whole you won't.

As for why I say US companies are best run, just look at ROE. US stocks have posted around 12% ROE in the very long run and hardly any other market is as good in the long run. On top of that US markets offer stronger property rights, lower taxes, more stable currency, etc but I'm not even talking about that. Strictly based on profitability for owners, US companies are the best in general.

As for a megabank that was well run, how about JP Morgan Chase? The only bailout help they received was for their buyout of Bear Stearns but apart from that they were largely clean. Admittedly, they have a trillion in deriaties and who knows how risky that is but so far, JP Morgan has done well. (Here is a chart of US-listed shares of Deutche BAnk (DB) and JPM (JPM))
Sivaram
Sivaram - 3 years ago


---

Corp Bonds were very cheap at that time but sadly I was new and lacked understanding of bonds and did not buy corp bonds or bond etfs/funds. I did buy stocks which were less cheap.

IMO, One does not have to wait for everything to become really cheap, though that would be perfect. There are small opportunities which come regularly - Europe last year, PIIGS etc.


---

I don't think I made a mistake avvoiding stocks back in 2009 but missing out on bonds was definitely a mistake of a lifetime. I made a big mistake in skipping bonds.

As for not waiting for things to get cheap, the problem I see is that the market can re-price everything downward very quickly. If the market is indeed overvalued, it may be re-priced downward, say, 30%, and the valuations for everything will compress as well.

Having said that, the risk with waiting is that you pay an opportunity cost: you earn practically nothing while precious time passes.
superguru
Superguru - 3 years ago
"but missing out on bonds was definitely a mistake of a lifetime." - I fully agree

And sad part is I actually did identify that at that time gurus were buying bonds and not stocks and felt that bonds are incredibly cheap. I posted the same many times on this forum also but was simply ignored.

I just did not have any understanding of what bonds are .... By the time I learned opportunity had passed. ( I know it sounds incredibly stupid or naive but you can guess what my level was. I had not heard of the word capital structure at that time)

My mistake was that I should have reached out to experts for advise.

I should identify some experts whom I can reach out to discuss when next opportunity comes. How to find those experts?

also, I am now better prepared for next opportunity - hopefully around 2015.

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