|October 2, 2013|
For the first nine months of 2013 our average account gained approximately +14.04%.
The last 100 days saw the American bond market take the sort of hit we have been forecasting for the last 500 days. Ten year Treasuries are down about 9%, the even more popular municipal bond market is down more than that, and it all seems such a sad waste. Why were people taking such a risk for so paltry a gain at 1 ˝% rates? Even at 2.8% the risk seems tremendous for a gain that still seems puny. We do hope this sorry episode does bring out one ray of enlightenment. If you follow a value minded approach to equities, and stick only to those that have terrific cash generating abilities, you can weather all sorts of stormy volatility with reasonable peace of mind. Over the long haul this has always counted, and in this age of financial oppression, when the Federal Reserve has so energetically rigged the bond market, the difference grows profound. The stock market gain vs. the bond market loss is startling year over year, but it works in our favor only because you, and we, stuck it out. Good on us.
This week we are being subjected to more of that despised volatility thanks to the bad behavior of the U.S. Congress. They plumb new lows by the hour, and it was predictable, and predicted. Our friend Congressman Jim Cooper (D-Tennessee) first won a house seat in 1983 at the age of 29. A few years later we had dinner, and he remarked, “Politics has really changed since I got in it.” We arched an eyebrow. He was all of about 35 at the time. “Politics used to be played on the 40 yard line,” he explained with a football metaphor. “A Republican would go after some of my votes, I would go after some of his, and policy would get made in the middle.” Then came the entrance of big money into the game. Congressman Cooper went on to explain that liberals give only to liberals, conservatives to their own; there is no pool of moderate money. And money is all important in winning re-election. So now when a savvy Democrat goes to Washington he picks three issues to be most extreme about within his own party. He stays faithful to these extremist views because he knows he is competing for money only amongst his own kind, and he must stand out. Republicans do the same. And since the money raising cycle lasts for at least 21 months, and electioneering goes on for at most 3, each side brays at its loudest at its own 10 yard line for 90% of the time. This explains, in part, why odd years used to produce political compromise in ages past, and now produces showdowns and shutdowns. It also helps to explain the likes of Senator Ted Cruz, who last week succeeded in alienating his own party almost as much as he infuriated his opposition, all of it in only 8 months in office. The Senator realizes standing and braying to the fringe of the fringe is a great fund raising strategy, and he is cynically making the most of it.
Bear in mind Jim Cooper foresaw all this 20 years ago and more, and it has been born out in every election cycle since. We salute his wisdom, but we tell this story to you to make a different point. He has been spot on about the decay in politics, but it hasn’t made one whit of difference in how we go about making money. Indeed, if we had known just how right we would prove to be we might have despaired, and stopped ourselves from making about 20 times our money over the period. America prospers despite Congress, not because of it, and it was ever thus. That these rascals can be seen in real time everywhere, and the heroic Jimmy Stewart could only be seen in a movie theater, is lamentable, but not investable.
What is also not investable is any prediction about what will come at the end of quantitative easing. Wall Street has exactly zero experience of a program of this size, this length and this level of aggression. In particular, the past has absolutely nothing to say to the future at this moment, the past being such a different country. We will hazard one tiny observation. Ben Bernanke is only human, and at age 59 not a particularly well off one, judging by his financial disclosure forms. He may also think himself hard done by by the ever graceless Obama administration. After all, if Warren Buffet publicly credits you with saving the financial system you might think you deserve a better send off than the bum’s rush he has been getting. Why then in his last 4 months would he be looking to make himself a sacrificial lamb? He may be thinking he gave at the office already.
So may be his successor. If so, “QE Forever” may not go on forever, but longer than the taper talk suggests now. And the brilliant economist Ray DeVoe really ought to be thinking of making a comeback with his “Cost of Living It Up” Index. Mr. DeVoe noted many years ago that the cost of luxury items advanced at a rate many times that of the CPI, and it was the basket of luxury goods that mattered to the monied classes that he was working for. We say this knowing full well there is a certain twice weekly New York Times economist who derides inflation fear mongering. We also know things look much different if you are signing the front of Princeton checks or the backs of them.
We would like to close noting how much credit our gains are due to the efforts of the managers in your portfolio’s holdings. Warren Buffett turned 83 in August and hasn’t missed a beat, outfoxing Goldman Sachs just this week for a $2 billion investment that is mostly all gains. Rick Going at Tupperware has 2.8 million striving women working for him, and he seems determined to shake the hand of each one of them once a quarter. Paul Jacobs may be on the verge of landing China Mobile as his biggest paying customer, and if he does there won’t be a smart phone in the world that doesn’t pay him a fee. Just to single out three seems to slight the others, so we will stop right there with an observation that through time managements really do matter, and we like ours.
Finally, and we hope we have not banged on about this issue so much as to have strained your patience, but the American energy miracle just goes on apace. This is from the third sentence of this morning’s paper, “A Wall Street Journal analysis of global data shows that the U.S. is on track to pass Russia as the world’s largest producer of oil and gas combined this year—if it hasn’t already.” This is transformative for the U.S. and worldwide, and it is remarkably underreported.
Edwin A. Levy
Michael J. Harkins