Juggling Dynamite

Every year the Berkshire Hathaway annual meeting brings a circus of media coverage along the lines of “why Warren Buffett is bullish [always] on America”. As I have pointed out before, part of this is because 55+ years of longevity and a high profile with billions in cash reserves have allowed Berkshire to be a lender of last resort that is able to extract sweeter yields and products than going rates. But also because as a major shareholder in publicly traded companies, Berkshire has necessarily become a long-always fund, unable to easily sell or downsize its positions.

On a personal level, Buffett and his partners are some of the world’s wealthiest billionaires with excellent cash flow who are now more concerned with legacy and tax planning issues than with the standard income and capital preservation needs of mere mortals. However, for those who are buying bullish statements from Berkshire and company, a look at its stock price (not the internal book value Buffett likes to talk about) is reflective of the real life investor experience over the past 10 years of our secular bear in stocks.

Like the S&P 500, after dropping more than 50% in 2009, Berkshire is now just slightly above the high it reached at the last cycle peak in 2007. Most important at this point however, is not that those who held on have just recently managed to recover the capital they lost 5 long years ago, but what is likely to happen to that capital in the next market downturn.

For an indication, we see warnings in a host of reliable valuation tools today. But it is instructive here to look at US stocks with the Oracle of Omaha’s very own stated favorite market valuation metric: “the market value of all publicly traded securities as a percentage of the country’s business–that is, as a percentage of GNP.” Here he is explaining in a 2001 interview with Fortune’s Carol Loomis:

“The tour we’ve taken through the last century proves that market irrationality of an extreme kind periodically erupts–and compellingly suggests that investors wanting to do well had better learn how to deal with the next outbreak. What’s needed is an antidote, and in my opinion that’s quantification. If you quantify, you won’t necessarily rise to brilliance, but neither will you sink into craziness.

On a macro basis, quantification doesn’t have to be complicated at all. Below is a chart, starting almost 80 years ago and really quite fundamental in what it says. The chart shows the market value of all publicly traded securities as a percentage of the country’s business–that is, as a percentage of GNP. The ratio has certain limitations in telling you what you need to know. Still, it is probably the best single measure of where valuations stand at any given moment. And as you can see, nearly two years ago the ratio rose to an unprecedented level. That should have been a very strong warning signal.”

So taking Warren at his word, here is what his preferred valuation tool says about US stocks as a percentage of Gross National Product today:

As plotted by the green line, the S&P 500 should be trading at about 1000 today given present US GNP. So at its present 1616, the S&P 500 is about 38% over-valued. Nothing the next bear market can’t cure of course, but certainly an indicator of probable losses for US stock prices ahead.

US stocks offer good value today Warren? Really? Thanks for the tip.

Today the impediments to transforming our energy use and dramatically lowering environmental costs and financial waste are not technical or economical but largely political and social. Conventional wisdom is just plain stubbornly dumb and must be overcome. The David Suzuki Foundation offers an excellent summary of recent studies and solutions here, see: Canada is ready for a transformative energy solution.

“You’ve probably heard the arguments: wind doesn’t always blow, sun doesn’t always shine, the technology’s not advanced enough, installations take up too much space, we need sources of baseload power that can only come from fossil fuels or nuclear power. And so we carry on, rushing to squeeze every last drop of oil and gas from the ground using increasingly difficult and destructive methods like fracking, deep-sea drilling and oil sands extraction, with seemingly little concern for what we’ll do after we’ve burned it all”.

A lot of research is challenging those skeptical assumptions, including some by the David Suzuki Foundation, working with the Trottier Energy Futures Project. “Canada has vast renewable energy resources in the form of hydropower, solar, wind energy, and biomass, as well as geothermal, wave, and tidal resources that are many times larger than current or projected levels of total fuel and electricity consumption,” the recent Trottier report, “An Inventory of Low-Carbon Energy for Canada”, concludes.

Those findings are confirmed by research and experience elsewhere in the world. A study by engineers at Stanford University reports, “it is technically and economically feasible to convert New York’s all-purpose energy infrastructure to one powered by wind, water and sunlight,” and doing so “shows the way to a sustainable, inexpensive and reliable energy supply that creates local jobs and saves the state billions of dollars in pollution-related costs.”

An article in the New York Times points to research by the Paris-based International Energy Agency, showing, “Thirteen countries got more than 30 percent of their electricity from renewable energy in 2011.”

The Stanford study’s lead author, engineering professor Mark Z. Jacobson, told the New York Times, “You could power America with renewables from a technical and economic standpoint. The biggest obstacles are social and political — what you need is the will to do it.”

Charlie Munger, Berkshire Hathaway vice chairman, shares his insights on the markets, and explains why he thinks bankers “are like heroin addicts,’ and high frequency trading is “legalized front running.” Here is a direct link.