Billionaire Defender of the Statist Quo

Well-connected (Photo by Pete Souza)

Psychologists should have no problem explaining our tendency to readily attribute success in investing or trading to skill and not luck. This tendency is rather pronounced and one of the reasons behind the now frequently decried ‘bonus culture’ in the finance industry. I remember many instances where one or two good years in the markets were enough to elevate a young trader in the eyes of his bosses, his peers and most certainly himself to the status of certified market genius whom the firm had to stop from defecting to the competition at all cost –meaning with the help of a big check and instantly increased risk limits.

This is not to say that there is no skill involved in trading or investing, and that those who make money are simply lucky. But in every human endeavour the specific circumstances of time and place play a crucial role, and this is particularly the case when it comes to any involvement in such a complex and inherently unpredictable social phenomenon as financial markets. But, interestingly, in this field we have a powerful urge to discount chance. Older cultures had no problem with admiring people for simply being lucky, and in a way, we still do the same in today’s culture when we admire beautiful people. But when it comes to financial success and personal wealth, we want real heroes, the ones who beat the market because of merit, not luck, the ones who succeed due to their superior insights, knowledge or investment skill, and who can, as they don’t depend on the moody vagaries of fortune, simply keep on winning. And whom we can then emulate.

When Bill Miller, the star portfolio manager at Legg Mason, enjoyed an impressive 15-year run (or was it 18?) of beating the S&P 500 every single year, he used to tell his adoring investors – in a display of modesty that ran contrary to his industry’s conventions – that even if investing was a pure game of chance, the laws of probability could still be expected to produce somebody with his track record from time to time. Alas, I don’t think people really wanted to hear this. They wanted to believe that it was all him and that he could keep delivering. Things then changed for Miller rather drastically. In 2007 his fund lost 6.5% and in 2008 55% — wiping out his entire professional track record in two years. While I generally don’t believe the markets themselves, or the economy, are mean–reverting — if there is one thing with a strong tendency to mean-revert, it seems to be financial market success.

People WANT to believe that the market can be beaten consistently, that the supremely talented trader or investor exists, the star who alone can make sense of the apparent chaos of the market place and who will always come out on top– if not year in and year out so at least by a healthy margin over the long run. So when somebody appears to beat the market over a considerable stretch, the financial community readily worships him or her as the new investment god (goddess) who must be living on some higher plane of consciousness.

This is the only way we can rationalize the bizarre circus that any public appearance of Warren Buffett sets off these days: the almost religious devotion of his acolytes who lap up every word from the master on any topic, and the broad coverage that these events now get in the media.

Let me be clear on this: by all accounts, Warren Buffett is an outstanding investor. In this business, personal wealth is a powerful indicator, and the fact that Mr. Buffett started with very little in the mid-1950s and is now one of the richest men in the U.S., speaks for itself. Mr. Buffett is a stock-picker, and a practitioner of value-investing, and I am not suggesting for a second that his astonishing success is merely down to luck. Necessarily, he needed that, too, but I am ready to agree with his admirers –notwithstanding what I said above – that he is probably one of the best value-investors ever.

So far, so good. But Mr Buffett is today not merely asked to give his views on U.S stocks – where he made all his money – or even on the topic of equity investing in general. His views are solicited on all sorts of topics, such as the U.S. debt situation, the rally in gold, the European debt crisis, the U.S. tax system, Brazil, Russia, China, you name it. And every one of his utterances is reported and analyzed with the weightiness of something coming from the chosen few who simply see more clearly and from which we lesser mortals can always benefit.

But why should being a skilled stock-picker make somebody an authority on the economy in general, or on politics? In borrowing a phrase from Oswald Spengler, we may say that if you want to know how a horse works you ask a zoologist, not a jockey. Buffett and other successful investors, such as George Soros, seem to know how to ‘ride’ the markets; they are talented jockeys, for which they deserve respect, but that doesn’t make them deep thinkers with a superior grasp of economy, society and politics.

Of course, this is a free market in opinions, and everybody is at liberty to have a view on anything. But here is the rub: Have you paid attention to what Buffett has to say on economic and political issues? Have you listened to his – analyses?

C’mon, it is utter trifle, full of folksy platitudes and homely drivel. Where are the original and penetrating insights, the really thought provoking comments? Rather than challenging the minds of his audience he seems nowadays ever more intend to lull them into some comfortable doze of unarticulated optimism. My point is not that his worldview does not agree with my unconventional and more pessimistic assessment of things. I know that most people don’t share my perspective. I am just astonished at the lack of depth and originality in his comments – and how all this balderdash still gets reported by the media as if it emanated from one of our most superior thinkers.

“Thank you, dear government, for all the intervention!”

Exhibit A: Buffett’s sycophantic open letter to “Uncle Sam” via the New York Times from November last year, which – with all the economic literacy of a sixth-grader – portrayed an heroic government saving the nation from self-inflicted economic mayhem. Oracle of Omaha? You gotta be kidding me!

If anybody else had written that letter, other than a renowned billionaire, it would have never got published.

As Mr. Buffett praises the unlimited government backstop for institutions such as Fannie Mae and Freddie Mac – the mortgage giants that almost brought the system down – one wonders, where he was all those years before the crisis? I can only assume deeply buried in annual reports and income statements, value-investing himself another billion. Because even the most casual observer must have realized that the government’s fingerprints had been all over this crisis from the start, in particular the mortgage element of it. Fannie Mae and Freddie Mac are, of course, entirely creations of the state, part of a seven-decade long policy of subsidizing real-estate investment, whether via government-backed mortgage-insurance, preferential tax treatment or social-engineering laws, such as the infamous Community Reinvestment Act or the Home Mortgage Disclosure Act. Without the government, Fannie and Freddie would have never become the system-threatening monsters that they were in 2007/08 and that – thanks to the government- they still are today.

Buffett is right that every bubble is based on illusions. But it also needs easy money, and that came, for decades, from the Fed, now hailed by Buffett as our saviour. Whenever the economy appeared to roll over (1998/2001), the government lifted the balance sheet caps on the highly regulated Fannie Mae and Freddie Mac, and the Fed pumped more money into the system to keep the balloon from deflating—setting us up for the mother of all crises.

I know that, out there, alternative narratives of the crisis and the government’s involvement in it exist, but –please!– even the most starry-eyed U.S. liberal must cringe a bit at Buffett’s childish praise of the government backstop. And what does he advise us to do now that the promise of limitless state rescue clashes with the reality of annoyingly limited public funds? Last week Buffett stated that if Congress failed to raise the U.S. debt limit, it would be its “most asinine act” ever. And then he entertained his audience of ecstatic admirers with the little bromide that the U.S. would not “have a debt crisis of any kind as long as we keep issuing our notes in our own currency.”

You see, not to worry. We just print the money. But – that means inflation, right? Well, here Mr. Buffett admitted that the “printing press approach” came with serious inflation risks. But he also stresses that there is no point in buying gold!

Does it make sense? Not to me it doesn’t.

When asked about gold, the famed equity investor and his sidekick, Charlie Munger, could have just said, we don’t do commodities. Instead, they publicly ridiculed investment in gold – displaying an astonishing ignorance of monetary economics and monetary history. Rather than being a useless shiny metal that just sits there, as Buffett and Munger try to portray it, gold has for thousands of years functioned as THE monetary asset, a cosmopolitan and apolitical medium of exchange, which has always been requested as a facilitator of trade, in particular international trade. There are powerful and entirely logical economic arguments for using commodities as money, and for using gold in particular, although today many people seem to believe it’s more sensible to use electronic money created in ever larger quantities under a government monopoly, out of thin air, simply by bureaucrats pressing buttons on a computer at the Fed. Gold has survived as money while periods of paper money have been comparatively brief in human history – and always ended in disaster.

Idiot Savant

For a fuller analysis of the ‘value-investor’s’ aversion to gold, see this article by my fellow Austrian traveler, Robert Blumen, who makes the important point that Buffett’s value-approach may well be the rational way to assess stocks but that doesn’t mean it’s the only way to rationally asses every economic good there is, for example commodities. Very enjoyable is also this retort to Buffett by famed speculator, writer and anarchist, the inimitable Doug Casey, who has an interesting take on Buffett, labeling him an idiot savant — someone who is supremely skilled in a narrow field, in this case, value stock investing, but has nothing of any substance to say about anything else.

So, should we feel sorry for Buffett for being dragged out of his comfort zone of the equity market and being quizzed on everything else? Hell, no. Buffett is a global celebrity and he obviously loves it. These big media events that celebrate him are carefully orchestrated. The tiresome shtick of the loveable everyman from the American heartland who just happens to be a billionaire is a carefully fabricated public image that Buffett uses skillfully to his own advantage – not only to sell shares in his company but – apparently – also to be on good terms with political power. It appears that, while honing his public image of the traditional investor committed to time-tested investment principles, he simultaneously has a big lobbying effort going on Capital Hill, asking for exemptions from collateral requirements for some massive derivative trades his company has made. Maybe it’s time to write another gushing letter to ‘Uncle Sam’?

Seriously, I have nothing against the man. I think he deserves admiration for his investment success and he may well be a nice guy. But everything else is show – and probably a cynical show at that. As Porter Stansberry has one of his characters say in this fictional but very illuminating dialogue, Buffett is a member of the establishment and now has a vested interest in the status quo, in government support of the paper money system. But remember that when paradigms shift, fortunes change. When it comes to assessing the future of our monetary system the billionaire and legendary investor may well be wrong. If so, he has the means to survive it but what about the middle-class minions who adore him and follow him blindly and who – I think- he has been lulling into some false sense of systemic stability. In this context I found Munger’s remark that gold was a peculiar investment because it only does well when the world goes to hell, particularly objectionable. Is he implying that buying gold is somewhat —unpatriotic? In particular when compared with investing in Berkshire Hathaway?

If all these people are looking for any guidance from a member of America’s money elite, they are presently better advised to pay attention to Bill Gross rather than Warren Buffett, I believe.

Better yet, why not think for yourself? Keep an open and somewhat cynical mind – and don’t be blinded by track record! According to the logic of investment, there is nothing wrong with admiring Buffett for his past achievements yet violently disagreeing with him about the future.

That’s where I stand.