February 13, 2012
[Editor's note: Professional money manager Tim Price is filling in for Simon today from London. His thoughts below on gold, bonds, and the false pretext of investing in equities is delightfully insightful.]
For value investors of a certain age (e.g. mine), discovering that Warren Buffett could be wrong is like suddenly not believing in Father Christmas. This twinkly-eyed, raspy-voiced, avuncular old gentleman almost embodies Clint Eastwood crossed with a Care Bear. And nobody can hold a candle to his long-term investment record.
And yet, the rot set in (at least as far as this writer is concerned) when Buffett went from investing in private non-financial businesses to siding with the establishment, using his institutional heft to win sweetheart deals in dubious banking institutions way beyond the reach of regular Joes.
In other words, somewhere along the line he went from representing the 99% to representing the 1%. And at the first sign of trouble, he simply wraps himself up in the American flag.
Buffett’s latest advertorial (for himself and for Wall Street), “Why stocks beat gold and bonds,” adapted from an upcoming version of one of his legendary shareholder letters and published in Fortune, may be the most irritating thing he’s ever written.
As an investor, he rightly draws attention to the critical requirement to maintain one’s purchasing power in the face of rampant state inflationism. He accurately highlights the staggering reduction of real value in the US dollar since 1965 (some 86%). He fairly declares a dislike for currency-based investments in a world of rapidly inflating, unbacked fiat.
And he then goes on to rubbish gold using the tired and specious argument that purchasers are simply displaying “greater fool” theory, eagerly awaiting new rises in price that will suck in new purchasers ad infinitum. It looks suspiciously as if Warren Buffett, for all his undoubted investment success, has never actually studied any monetary history.
We know that he has speculated in silver in the past, and that the experiment did not end well. He concedes that gold has industrial and decorative utility, but also states that “if you own one ounce of gold for an eternity, you will still own one ounce at its end.”
Erm, that’s kind of the point.
A straw man argument gets wheeled out that a pile of inert gold cannot hope to compete in terms of productive utility with a pile of farmland and Exxon Mobil stock of the same nominal value.
To which one is surely entitled to respond, “WTF?”
It would be surprising and not a little alarming if anybody who has ever purchased gold did so with the expectation of eating it, or using it as fuel.
Buffett would be on stabler ground if he made an intellectually valid comparison between gold as a store of value and, say, a big pile of T-Bills of the same nominal value. Or of the same US dollars he has already identified as a more or less guaranteed loser over anything other than the very, very short term.
The reason why Buffett’s views of gold should be ignored can be seen in the following charts, all courtesy of James Bianco at Bianco Research.
The first shows the extent to which the eight largest central banks (China, the ECB, the US, Japan, Bank of England, Banque de France, Swiss National Bank, and Germany’s Bundesbank) have allowed their balance sheets to explode, in a desperate attempt to compensate for banking and private sector deleveraging since the debt crisis began:
As Bianco points out,
“If the basic definition of quantitative easing (QE) is a significant increase in a central bank’s balance sheet via increasing banking reserves, then all eight of these central banks are engaged in QE.”
What’s particularly shocking about the data is that while every major central bank is busily printing money like it’s going out of fashion (which it is), one of the biggest culprits is the one most widely associated with sound monetary policy, namely the Bundesbank, which has been one of the biggest inflationists of all:
The Big 8 central banks now account for the equivalent of one third of world stock market capitalisation. Investors (like Buffett) buying stocks now may well be doing so because they anticipate more QE- which they are more or less certain to get, given that most of the West is turning into Japan.
Warren Buffett is not the only institutional investor to be offering unsolicited investment advice. Blackrock chairman and CEO Larry Fink, recently interviewed on Bloomberg television, gave a guarded opinion on asset allocation:
“Be 100% in equities.”
Interesting. I wonder if Blackrock, as a $3.5 trillion asset manager, has anything we could buy?
Fink’s and Buffett’s preference for equity investment may have nothing to do with expectations regarding things like economic growth or profits, just money printing. This is not founded on sound economic reasoning, rather simply shifting capital into an ever-rising bath.
What happens when central banks stop filling the bath? Or worse, take the plug out? Or worse yet, find that they are no longer in control of the water?
The investment world does not come down to an all-or-nothing decision between debt (mostly rubbish, now, admittedly) and equity. While the bigger picture is fraught with monetary mismanagement in response to a grave crisis, there are plenty of other investment choices out there, and a growing argument underpinning the ownership of real assets.
Director of Investment
PFP Wealth Management
Tim Price is Director of Investment at PFP Wealth Management in the UK. PFP is an independent wealth management partnership with over 20 years’ experience of institutional and private client investment management. Tim is a specialist in low risk, multi-asset, absolute return investing and has enjoyed success in the UK Private Asset Managers Awards programme, having been shortlisted for five successive years, and was a winner in 2005 in the category of Defensive Investment Performance. He was also shortlisted in the 2007 Spear’s Wealth Management Awards in the category of Asset Manager of the Year. He is a regular contributor to Money Week magazine in the UK and to other financial media.
PFP takes a more nuanced perspective, and in addition to holding high quality non-Anglo Saxon sovereign and investment grade debt (yielding more than 6% to boot), PFP holds selective high quality equity investments, but also completely uncorrelated trading vehicles, and precious metals.