Juggling Dynamite

July 2 (Bloomberg) — It must be a bear market because even billionaire Warren Buffett's Berkshire Hathaway Inc. has slumped almost 20 percent since December.
The decline exceeds the drop of the Standard & Poor's 500 Index and marks the worst first half for the Omaha, Nebraska- based investment and holding company since 1990. Price competition has driven down revenue at Berkshire's insurance units, which account for about half of its income.” See: Buffett's Berkshire Has Worst First Half Since 1990.
I have long been a fan of Warren Buffett and his investment discipline. But the fact is that Berkshire is a publicly traded company. This means that Buffett is not actually in charge of Berkshire's share price. Like all publicly traded securities Berkshire shares are driven by the ebb and flow of mass psychology in the market auction. When assets in the world become wildly over-priced as they did from 2005-2007, Berkshire's shares are swept up in the over-optimism and over-pricing too. In market cycles, what goes up, must come down, and now Berkshire is losing value along with the overall markets. So much for it being a “quality” “defensive” holding.
All that we can control is our exposure to the market cycle. Doing that well is the source of all lasting value. This is why the “trick” is having a discipline to buy and sell market assets, not buy and hold.
Oh, but then as the talking heads on Kudlow Company were pointing out last night, if you have 30 years or more for your equity investments to prove profitable, then you can just passively hold 'em. No need to fret about timing your exposure. Always buy, never sell. Don't worry be happy.
As Barry Ritholtz points out this morning on his blog in Pervasive Pollyannas of Prosperity: “Words such as these can only be spoken by someone who has never worked on a trading desk or managed assets professionally — or if they did, they lost most of their clients' money.”
No truer words were ever spoken. Amen.

The global equity sell-off resumed with great force this week all around the world. As we survey the carnage, I am wondering how the “decoupling” pundits are faring now.
A recent interview (worth reading) called “Inflation not the problem” with global asset strategists Albert Edwards and James Montier summed up something I was writing about on this blog last year. Now we are seeing the impact of the Western slow down on emerging market economies:
“Emerging markets earnings optimism is crumbling just as quickly as the developed markets. There is no decoupling at all, so if you've got a sharp slowdown in growth in China and in emerging markets generally, I think perceptions will be totally transformed in six month's time. But all you can do is sort of warn of these things.”
This is a problem for commodity perma-bulls that look to continued Asian demand to offset a prolonged decline in western demand. Their hope ignores how reliant Asia is on China continuing a 10% + growth rate. And how dependent China is on America and other western economies. Slowing demand will chip away at Asia's export driven expansion exponentially.
Westerners are spending less on cars, flat-screened televisions, cellular phones, name-brand clothing and other goods manufactured in Asia. The US consumer alone accounts for 19% of the world GDP demand. Housing and its leverage was the key to world consumption over the past few years, and its pull-back now is having an enormous drag on world economies.
In light of the worldwide de-levering and global earnings contraction now underway, asset prices even after recent declines, are still horribly expensive.

Warren Buffett gave an interesting interview with Bloomberg yesterday. You can watch the video clip here.
Highlights:
He has endorsed Obama for President in 2008 (remember Paul Volker has as well)
He's concerned about “stagflation,'' or slowing in the U.S. economy while inflation accelerates:
“We're right in the middle of it right now. I think the `flation' part will heat up and I think the `stag' part will get worse.''
Buffett, 77, is the world's richest person, and runs a company with a $72 billion portfolio. He's said the U.S. housing slump has been a drag on Berkshire's earnings, adding today he's unsure when the economy will recover.
“Capitalism has downturns… We are in one now. But we will come out of it, just like we did before…It's not going to be tomorrow, it's not going to be next month, and may not even be next year.”
I was talking about looming stagflation last year and the long always cheerleaders were pooh-poohing it. I have always said we will eventually come out of this difficult economic climate. But just because we will come out of difficult times eventually, does not mean investors should blindly stay the course throughout the downturn. Holding equity investments over the next few months is a very high risk proposition. The market will not be able to accurately price and discount the coming hit to earnings until we are further through the delevering process.
All the people urging investors to “buy the dips” over the past 18 months have been painfully wrong. Beware of those saying the same thing now.