Wednesday, May 6, 2009

When The Intelligent Munger Speaks, You Should Listen

Munger seldoms speak publicly about his thoughts on the economy or business. Hence when he speaks, you should pay full attention.


Berkshire’s Munger Sees ‘A Lot of Agony Ahead’ in U.S.: Voices

May 1 (Bloomberg) -- Berkshire Hathaway Inc. Vice Chairman Charlie Munger said losses in commercial real estate will cause “huge agonies” in the U.S. as the recession continues.

Munger spoke today in an interview with Bloomberg Television in advance of Omaha, Nebraska-based Berkshire’s annual shareholder meeting at the city’s Qwest Center tomorrow. A record 35,000 people are expected to attend.

On how much longer the U.S. recession will last:
“It’s far from over, yet a lot of very intelligent intervention has already occurred. We don’t know exactly how it will play out.” (Attention: The recession is FAR from over!!)

“I can see that agony spreading. Commercial real estate is in a state of paralysis and when it reopens, it’s going to reopen at lower levels in terms of prices, and those lower levels are going to cause huge agonies. That lies ahead. There is a lot of agony ahead. That’s not all in the past.”

“This is not going to pass like a summer shower.”

On the U.S. government’s reaction to the recession:
“I think in terms of promptly supplying massive liquidity, nationalizing Fannie Mae and Freddie Mac, they get an A-plus. I think a lot of intelligence and vigor has been displayed. When it gets into the regulatory battle, which lies ahead, I would expect the result to be not as good.”

“There is an old saying that lawyers sometimes use. They talk about those wise restraints that make men free. I would argue that we need wise restraints that dampen enormously the inevitable bubbles.”

On the influence of investment banks on national policy:
“We need to remove from the investment banking and the commercial banking industries a lot of the practices and prerogatives that they have so lovingly possessed. If they are too big to fail, they are too big to be allowed to be as gamey and venal as they’ve been -- and as stupid as they’ve been.”

“There is a huge vested interest in investment banking -- and commercial banking -- in the system as it presently exists, partly because it enables such large pay. The people who have been making all this money don’t want the system changed. They would like to get back as closely as possible to business as usual, and they have enormous political power. The top 10 investment banks and banks over the last 10 years have spent $500 million on political contributions and lobbying. This is an enormously influential group of people, and 90 percent of that influence is being spent to gain powers and practices that the world would be better off without. That’s what I mean when I say that it will be very hard to accomplish the kind of surgery that would be desirable for the wider civilization, because these people don’t want surgery.”

On credit-default swaps:
“Do you think it would be desirable if everybody in America could buy life insurance on any person they wanted to buy life insurance on, so you had a vast number of people who would make large profits if that person died? You would think that would be pretty dangerous for the person who is insured. And some of that danger exists once people get this vested interest in the destruction of some business. They also get a vested interest in manipulating the liquidation and distress process to maximize the destruction because what they get on the derivative contracts is based on what happens in the default. The whole mass of incentives created is quite counterproductive. I don’t think we needed this huge market in credit default swaps.”

“If I were the governor of the world, I would eliminate it entirely -- 100 percent. That’s the best solution. It isn’t as though the economic world didn’t function quite well without it, and it isn’t as though what has happened has been so wonderfully desirable that we should logically want more of it.”

On why Berkshire participates in the credit swaps market:
“We think that the national policy that allowed the derivative markets to develop as they did was a stupid policy and we think the derivative markets as they evolved have done more public damage than public benefit. That said, if they exist and they are legal and some opportunity therein is presented to us that we think makes sense to the shareholders of Berkshire, we would seize that opportunity. That’s all that’s happened, is that we made our investments because we thought they were intelligent investments and we made them in a system that the nation would have been more intelligent if they avoided creating at all.”

Berkshire Chairman Warren Buffett “made the decisions, but I think the derivative transactions that we did engage in were intelligent transactions on behalf of Berkshire and ultimately we will make a lot of money.”

On Moody’s Investors Service and Fitch Ratings cutting Berkshire’s credit rating and what it will mean for the company:
“I don’t think they will affect it very much, if at all. After all, who has better ratings?”
“We would prefer to have a triple-A. You’re right about that. But we’re not tearing our hair out by the roots.”

“We would naturally prefer the rating we formerly had from the people who rated us down, and we think Berkshire is a marvelous credit, so if you ask me if I personally agreed with the downgrade, I would say no. That said, we are not going to berate some process that judges us because we would have made a different decision if we had been the rater. At least it shows they’re independent.”

On why Berkshire retains its 20 percent stake in Moody’s parent company:
“We take these big positions in things. It isn’t like the position the size we have in Moody’s is some easy thing to trade, so on those larger positions, they tend to have an element of permanence when they are made by Berkshire.”

On Chinese battery and carmaker BYD Co.:
“BYD is one of the most interesting small companies in the world. If you stop to think about it, battery technology is one of the most important subjects affecting the technological future of man.”

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"There is the plain fool, who does the wrong thing at all times everywhere, but there is also the Wall Street fool, who thinks he must trade all the time. No man can have adequate reasons for buying or selling stocks daily - or sufficient knowledge to make his play an intelligent play." - Jesse Livermore