Monday, December 27, 2010

Jim Rogers, Ron Paul & Tom Woods Interviewed By Judge Napolitano

In a veritable quad-fecta of freedom loving interviews, Judge Napolitano interviews Congressman Ron Paul, Mises academic Tom Woods (and friend of TILB), and legendary investor Jim Rogers in this assembled video

Fourth in the quad-fecta is the combination of John Papola and Russ Roberts interviewed about their famous rap video concerning the debate between Hayek and Keynes.

Thursday, December 23, 2010

Russia Is A Seven: Sergei Magnitsky's Murder Officially Swept Under The Rug

HT: Big E

As long time tilb readers know, we've been following the murder of Russian lawyer Sergei Magnitsky in Russian prison. He basically helped uncover a massive tax fraud/embezzlement by Russian officials only to have the tables turned on him. The officials turned around and charged him with theft, jailed and tortured him then had him murdered in prison. Bill Browder of Hermitage Capital (who was Magnitsky's relevant client in uncovering the original fraud) has spoken out loudly only to have his complaints drowned out by silence.

The NY Times gave the story a few last breaths of life today.

Thursday, December 09, 2010

Human Freedom Relies On Gold Redeemable Money

I think the title of this post is pretty close to a piece Congressman Howard Buffett wrote in the first half of the 20th century (yes, Warren Buffett's father - they have slightly different political leanings).

In any case, I felt it was an apt title to the below video from Charlie Rose where he discusses gold, inflation, "quantitative easing", and dollar debasement with a few folks including Greenlight Capital's David Einhorn (whom we are a big fan of), Jim Grant (again, we're huge fans), the Chairman of Barrick Gold and John Hathaway of Toqueville Asset Management. Enjoy.

Jim Grant - "gold is money."



HT: TB

Thursday, November 18, 2010

Munis, Munis, Munis

Long-time TILB readers know that we are very concerned about the muni-market (click here for our coverage of the bankruptcy filing for Harrisburg, Pennsylvania - that fine state's capital city).

Certain states, like Texas and Virginia, appear to be in fine shape and are resonable credits (though you aren't getting paid enough to care, in our opinion). We'll call citizens of these states Future Subsidizors. Other municipalities - like California, New Jersey and Illinois (aka Future Subsidizor Supplicants) - will go through stress or outright distress.

Many of these Future Subsidizor Supplicants may at some point be great investments, if you know what you're doing. But the vast majority of the muni-market lender base (which is largely doctors and lawyers retail investors) have no idea what they are doing - nor do their advisors (e.g., muni mutual funds or private wealth advisors).

In the last few days the muni-market has become spooky. Examples - a small town outside Detroit, Michigan called Hamtramck has begun the process of seeking state permission to file for bankruptcy (link here). Additionally, some much bigger munis (like the state of California - which would be one of the largest sovereign issuers in the world if it were a standalone country) have pulled some offerings due to "tepid demand". At some point these municipalities are going to have to start issuing again in order to fund their deficits and - TILB supposes - many will have to fund at rates that far exceed their budgeted cost. This of course will lead to further strain on those government budgets, leading to higher interest rates, further budget cuts, more local economic straing, yet further strain on those government budgets, leading to higher still interest rates, etc., etc. ad nauseum...default (or restructure).

Beware. Skillful investors willing to take an active role in helping these munis "solve" their debt problems will be able to make money (Jenny Hedge Fund Manager will buy California's debt at 40c and selling back to Cali at 60c, thus making itself a quick 50% while helping Cali reduce that issuance by 40%), but Johnny Retail is about to get rolled.

Caveat Emptor - get ready for more Schwarzies.

Below are some excerpts from today's Wall Street Journal A1 page (all emphasis added):
America's strapped states and cities took another hit Wednesday, with California seeing tepid demand for its latest bond sale and other governments pulling about $700 million worth of borrowing deals this week as investors continued stepping away from the municipal bond market.

The normally staid market has grown volatile the past week, posting its sharpest selloff in nearly two years, as investors demand higher interest rates to buy paper issued by states, cities and counties to finance their operations. Localities have been hammered by a drop in tax revenue amid the downturn—and unlike the federal government, most are barred constitutionally from running deficits.

"The tax-exempt municipal bond market is a cold, cold world right now for issuers and taxpayers," Tom Dresslar, a spokesman for the California State Treasurer, said late Wednesday. He added that the state decided to cancel another $267.3 million bond sale it planned to price next week "in light of market conditions."
California's $10 billion bond sale this week was seen as a test of access for governments to the bond markets, and the middling interest signaled that municipalities could have to pay more to attract investors. The state further jolted the market by delaying the close of the bond sale, citing a lawsuit filed Tuesday that challenges a separate tactic the state is using to raise funds.

"California's timing unfortunately couldn't be worse," said Gary Pollack, head of fixed-income trading and research at Deutsche Bank Private Wealth Management. "This creates a fear among individual investors and probably could hurt the state in terms of paying a higher borrowing cost than if they'd done a deal at a different time."

After pouring billions into municipal bond funds most of the year, investors pulled $115 million out of the funds last week, the Investment Company Institute said Wednesday. That was the first weekly outflow in seven months, ICI said.

The fragility of government finances was also evident in a move by Moody's Investors Service to downgrade the city and county of San Francisco, as well as the city of Philadelphia, and by a request by Hamtramck, a small Michigan city, for permission to file for bankruptcy.

California, facing a projected $25 billion shortfall through June 2012, aimed this week to sell $10 billion in so-called "revenue anticipation" notes. Over three days, it reported total orders of about 60% of that amount, or $6.06 billion, for the securities, according to the Treasurer's office. In September 2009, California sold 75% of a similar offering to retail investors. The remainder of an offering is typically bought by big institutional investors.

...

The short-term notes mature next May and June and yield 1.25% and 1.5%, roughly what California paid a year ago, though higher than other states. "It's still an incredibly low rate, and it's an awful lot of bonds," said Matt Fabian, senior analyst at Municipal Market Advisors. [TILB note: Basically commercial paper for California - keep not extending maturities and rolling it short Cali, it will work out just fine...]

...

At the same time, concerns have been mounting over whether, after the double whammy of 2008 market losses and the economic downturn, municipalities will be able to maintain their reputation for always paying their bondholders.

Average yields on 30-year municipal bonds rose 0.13 percentage point Wednesday to 4.77% and are up roughly 0.5 percentage point in recent weeks. Yields on 5-year bonds rose 0.06 percentage point to 1.58% on Wednesday.

About $700 million worth of bond sales were pulled this week, according to Thomson Reuters. That is roughly 3% of the week's planned sales, according to data from Ipreo. Many of the bond sales were to refinance outstanding debt at lower rates, meaning the governments didn't need the money.

But postponed deals are atypical, market watchers say, and they attribute them to investor demand for higher interest rates amid a glut of bonds as well as the impact of the move in 30-year Treasurys.

...

Moody's cited "continued weakness of the city's finances" in its downgrade of Philadelphia, affecting $3.85 billion in outstanding debt. Rob Dubow, the city's finance director, said, "We understand we face fiscal challenges, and we have, but for us the timing is odd, because we feel like we have stabilized." As for San Francisco, the bond rater said the "city ended fiscal 2009 with a balance sheet that was weaker than at any time in the prior ten years."

A spokesman for San Francisco's mayor said the ratings downgrade was "not unexpected" given the challenging economy, and that the city still had a better rating than many other local governments.

As a brief aside, this whole thing is very sad. Most municipalities could handle their debt if they were willing to make hard choices. However, in a culture where homeowners now making "strategic defaults" on their mortgages, it does not surprise us that rather than cut back on trash service or government size, our municipalities are choosing to renig on their contractual and moral obligations to their lenders.

We think lenders - broadly - are not requiring enough compensation for this sea-change in risk.

Friday, November 12, 2010

"This Is True, The Plumber Is Clearly Smarter Than The Ben Bernanke"

I can't think of one thing that I disagree with in this. As an aside, I love when people use extraneous "the"s. Such as, "The Ben Bernank"[sic].



HT: O

Wednesday, November 03, 2010

Liberty Quote Of The Day: Rand Paul

We've Come To Take Our Government Back.
"Do we believe in the individual or believe in The State? Thomas Jefferson wrote the government is best that governs least. Likewise, freedom is best when enjoyed by the most. America can rise up and surmount these problems if we just get government out of our way."
-Rand Paul - 11/2/2010 U.S. Senate Acceptance Speech from Kentucky
Amen.

Tuesday, November 02, 2010

Vote or DIIIIIIIIIIEEEEEEEEEEEEEE!!!!!!!!!!!!!

Vote donkey today and don't ever complain again

OR

choose a different path: one that supports liberty, encourages a government that protects and serves its people rather than controls and harbors power over them, and that provides for its citizens to operate relatively unfettered by centralized influences.

Friday, September 24, 2010

Appaloosa's David Tepper On CNBC

Always great to listen to. He's a guy that was literally given a statue of a pair of brass balls by his hedge fund buddies. Enjoy.

First half of the interview:













Second half of the interview:













He doesn't give a shitszu.

Friday, September 10, 2010

Phil Davison Is Seeking The Candidacy For Stark County (Ohio) Treasurer

Democrats, you best come with your boots on, because Phil Davison is coming with guns blazing. He recognizes politics is not touch football, politics is winner takes all. It always has been and always will be. He does not apologize for his tone. THIS IS THE OPPORTUNITY WE HAVE BEEN WAITING FOR!!! NOW IS THE TIME TO SEIZE THIS OPPORTUNITY!!! (tear) HE WILL COME OUT SWINGING AND WILL END UP WINNING!!! ...AND HE LIVES IN A VAN DOWN BY THE RIVER!!!!!!!!!!!!!!!!



[HT: TT]

Wednesday, August 25, 2010

The Khan Academy - Brilliant

I'm embarassed to have not been aware of this before. This guy, Salman Khan - who's an ex-SF-based hedgie, has basically created a high quality, free online library of teachings on basically any subject you can think of related to math or science and is below String Theory. I suspect String Theory is coming. He also has extensive playlists that address finance, economics, and government policy (e.g., an entire set of objectively presented lectures on the "Paulson Bailout" and "Collateralized Debt Obligation (CDO)"). I haven't vetted those, but I can tell you the more traditional lectures are excellent - understandable, effective and consumable. This sort of thing has the potential to revolutionize education.

Click here to check out the Khan Academy and spread the good word. Here's his intro video that shows the schematic overview of basically everything that is available on his website.

Welcome to the future, the weather is great.



[HT: TD]

Tuesday, August 24, 2010

Yen:Dollar In Freefall

Wow - the yen's strength is remarkable (or is it the dollar's weakness - pick your poison). Say Sayonara to the Japanese government's budget. Say Ohaiyo Gozaimasu to QE52 in Japan and the ultimate destruction of their currency. As we've discussed several times in the past, this is a "when, not if" scenario.

Friday, July 30, 2010

St. Louis Fed President James Bullard On Deflation Risk

James Bullard, one of the Fed's few "inflation hawks" (which is a relative term when we're talking about people who's job it is to debase our currency, so being a hawk on the Fed really just means he's not as overwhelming an inflationist as some of his colleagues) is - out of left field - warning about deflation. Strangely, his argument is that the easy money language of the Fed "extended period of time", etc. is what is driving this. However, really what he's saying is that the interest rate isn't what matters at this point in a deflation cycle, that the Fed needs to be more forceful and adopt further quantitative easing. Interest rate movements simply incent borrowing and money creation whereas QE causes it explicitly.

Folks, QE2 is nearly upon us.

If you think Bernanke, an avowed currency debasor, isn't the puppetmaster coordinating this - even to the point of using one of his biggest inflation hawks to lead the debasement charge - then you are fooling yourself. By the way, Bullard is not just saying the fed needs further quantitative easing, he's saying they need to make an open-ended commitment to QE, they need to explicitly state their QE as part of ongoing policy, and that it should probably be a lot. Not QE2, but QEForever.

The first time around, the Fed simply did "a lot" but didn't make it open ended and explicit enough. Bullard says the Fed won't make the same mistake twice.

Folks, get your AU and AG now. We are entering crazy-land - these guys literally have no idea about the implications of what they are talking about.

BTW, they would not do this unless they were really, really worried about the state of the economy. I watch this and am legitimately frightened.













[HT: TD]

Wednesday, July 28, 2010

The SEC Is No Longer Subject To FOIA

Unf'ingbelievable. Or, as some crazy ranting guy I saw on Youtube said, "is it possible to be astonished but not surprised?" The hope and change that The Borg - I mean Administration - promised to bring forth continues to be oppression of freedom and strengthening of government control of your lives.

This article highlights how the new FinReg legislation has a brief, well hidden section that basically attempts to put the SEC above the law (fortunately, I don't think it is constitutional). It's ironic for our cheif enforcer of corporate governance to have used backroom agreements to institute horrible governance itself. Link to article.

Friday, July 23, 2010

Margaret Thatcher On The Income Gap

Since the Canadian Broadcast Corp has blocked our prior video clip of Maggie Thatcher, herein we enclose another great Maggie video:

Friday, July 16, 2010

Southeastern Asset Management's Mason Hawkins Levels High Frequency Trading

Southeastern Asset Management, the manager of the legendary Longleaf family of mutual funds, put together a scathing analysis of high frequency trading (HFT), debunking the myth of its "benefits" to market participants. This was assembled and presented by Southeastern founder O. Mason Hawkins and his team for and to Luis Angular of the SEC.

Must read.

2010-06 Southeastern to SEC Re HFT
[HT: Black Ball]

Wednesday, June 23, 2010

Li Lu's Forward To Chinese Edition Of Poor Charlie's Almanack

We are huge fans of Munger, as long-time readers know. With the work of Shai Dardashti and Enoch Ko, we have Li Lu's (of LL Capital/Himalaya Capital/Tiananmen Square student leader fame) forward to Poor Charlie's Almanack Chinese edition translated below. TILB has had the good fortune of meeting Li Lu, and expect he is one of Buffett's replacements on the public investing side.

Included below is Ko's translation. Many thanks to the source.
My Teacher: Charlie Munger

Author:Li Lu
May 21, 2010
Source: “Chinese Entrepreneurs”

【"China Entrepreneur" Magazine】Twenty years ago, as a young student coming to the United States, I couldn’t have imagined having a career in investments and would never have thought that I’d be fortunate enough to meet with the contemporary investment guru, Mr. Charlie Munger. In 2004, Mr. Munger became my investment partner and has since become my lifelong mentor and friend -- an opportunity I would have never dared to dream about.

I graduated from Columbia University in 1996 and founded my investment company in 1997, thus starting my professional investment career. Till this day, the vast majority of individual investors and institutional investors still follow investment philosophies that are based on "bad theories." For example, they believe in the efficient market hypothesis, and therefore believe that the volatility of stock prices is equivalent to real risk, and they place a strong emphasis on volatility when they judge your performance. In my view, the biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. Not only is the mere drop in stock prices not risk, but it is an opportunity. Where else do you look for cheap stocks? But I found that while, on the surface, famous fund managers appear to accept the theories of Buffett and Munger and show great respect for their performance, they are in actual practice the exact opposite because their clients are also the exact opposite to Buffett and Munger. They still accept the theories that say "volatility is risk" and "the market is always right."

A serendipitous opportunity led me to meet my lifelong mentor and friend, Mr. Charlie Munger.

Charlie and I first met at a mutual friend’s house while I was working on investments in LA after graduating from college. The first impression he gave me was “distant” -- he often appeared to be absent-minded to the presence of his conversation partners and was, instead, very focused on his own topics. But this old man spoke succinctly; his words full of wisdom for you to mull over.

Seven years after we’ve known each other, at a Thanksgiving gathering in 2003, we had a long heart-to-heart conversation. I introduced every single company I have invested in, or researched, or am interested in to Charlie and he commented on each one of them. I also asked for his advice on the problems I’ve encountered. Towards the end, he told me that the problems I’ve encountered were practically all the problems of Wall Street. The problem is with the way the Wall Street thinks. Even though Berkshire Hathaway has been such a success, there isn’t any company on Wall Street that truly imitates it. If I continue on this path, my worries will never be eliminated. But if I was willing to give up this path right then, to take a path different from Wall Street, he was willing to invest. This really flattered me.

With Charlie’s help, I completely reorganized the company I founded. The structure was changed into that of the early investment partnerships of Buffett and Munger (note: Buffett and Munger each had partnerships to manage their own investment portfolios) and all the shortcomings of the typical hedge funds were eliminated. Investors who stayed made long-term investment guarantees and we no longer accepted new investors.

Thus I entered another golden period in my investment career. I was no longer restricted by the various limitations of Wall Street. The numbers still fluctuate as before, but eventual result is substantial growth. From the fourth quarter of 2004 to the end of 2009, the new fund returned an annual compound growth rate of 36% after deducting operating costs. From the inception of the fund in January 1998, the fund returned an annual compound growth rate in excess of 29%. In 12 years, the capital grew more than 20 folds.

Buffett said that, despite the countless people he has met in his life, he has never encountered anyone else like Charlie. And in the years that I’ve known Charlie, and was fortunate to be able to intimately understand him, I am also deeply convinced that. Even from all the biographies of people from all ages, I have yet to see anyone similar to him. Charlie is such a unique man -- his uniqueness is in his thinking and, also, in his personality.

When Charlie thinks about things, he starts by inverting. To understand how to be happy in life, Charlie will study how to make life miserable; to examine how business become big and strong, Charlie first studies how businesses decline and die; most people care more about how to succeed in the stock market, Charlie is most concerned about why most have failed in the stock market. His way of thinking comes from the saying in the farmer’s philosophy: I want to know is where I’m going to die, so I will never go there.

Charlie constantly collects and researches the notable failures in each and every type of people, business, government, and academia, and arranges the causes of failures into a decision-making checklist for making the right decisions. Because of this, he has avoided major mistakes in his decision making in his life and in his career. The importance of this on the performance of Buffett and Berkshire Hathaway over the past 50 years cannot be emphasized enough.

Charlie's mind is original and creative, never subject to any restrictions, shackles, or dogmas. He has the curiosity of children and possesses the qualities of a top-notch scientists and their scientific research methods. He has a strong thirst for knowledge throughout his life and is interested in practically all areas. To him, with the right approach, any problem can be understood through self-study, building innovations on the foundation laid by those who came earlier. His thinking radiates out to every corner of business, life, and [areas of] knowledge. In his view, everything in the universe is an interactive whole, and all of human knowledge are just pieces to the study of the comprehensive whole. Only by combining of these knowledge through a latticework of mental models can they become useful in decision-making and in developing the proper understanding of things. So he advocates studying all the truly important theories in all disciplines, and building on this foundation the so-called “worldly wisdom” as a tool for studying the important issues in business and investments.

Charlie’s way of thinking is based on being honest about knowledge. He believes that in this complex and changing world, there will always be limitations to human cognition and understanding, so you must use all the tools at your disposal. And, at the same time, you must constantly collect new verifiable evidences, correcting and updating your knowledge, and knowing what you know and what you don’t know.

But even so, the true insights a person can get in life is still very limited, so correct decision-making must necessarily be confined to your "circle of competence". A “competence” that has no defined borders cannot be called a true competence. How do you define your own circle of competence? Charlie said, if I want to hold a view, if I cannot refute or disprove this view better than the smartest, most capable, most qualified person on Earth, then I’m not worthy of holding that view. So when Charlie truly holds a certain point of view, his thinking is not only original and unique, but also almost never wrong.

A beautiful lady once insisted that Charlie use one word to sum up the source of his success, Charlie said it was being “rational.” However, he has a more stringent definition of rationality. It is this kind of “rationality” that grants him the sensitive and unique vision and insight. Even in a completely unfamiliar territory, with just one look he could see through to the essence of things. Buffett calls this characteristic of Charlie the “two-minute effect” -- he said Charlie can, in the shortest time possible, unravel the nature of a complex business and understand it better than anyone else can. The process of Berkshire’s investment in BYD Auto is an example. I remember in 2003, when I first discussed about BYD with Charlie, despite having never met Wang Chuanfu (Chairman of BYD Auto), visited BYD’s factory, and being relatively unfamiliar with the Chinese market and culture, his questions and comments about BYD remains, till this day, the most pertinent questions a BYD investor need to ask.

Everyone has blind spots, and even the brightest people are no exceptions. Buffett said: “Benjamin Graham taught me to only buy cheap stocks, Charlie allowed me to change my thinking. That’s the real impact Charlie had on me. I needed a powerful force to walk out of the limitations imposed by Graham’s theories. Charlie’s ideas were that source of power -- he expanded my horizons.” I’ve also had this profound experience. Charlie pointed out the blind spots in my thinking; if it weren’t for his help, I’ll still be still in process of evolution, slowly crawling along.

Charlie spent a lifetime studying disastrous human mistakes and is particularly fond of catastrophic errors caused by human psychological tendencies. The most valuable contribution is that he predicted the disastrous consequence of the spread of financial derivatives and the loopholes in the accounting and auditing system. Back in the late 1990s, he and Mr. Buffett already raised the disastrous potentials of financial derivative products. They escalated their warnings with the proliferation of financial derivative products, calling financial derivative products finance-based weapons of mass destruction; if they were not stopped in a timely and effective manner, they would have a devastating impact on the modern society. The financial tsunami and global economic recession in 2008 and 2009 unfortunately validated Charlie’s far reaching vision and insights.

Compared with Buffett, Charlie has a far wider range of interests. For instance, he has strong interests and has done extensive studies in almost all fields of sciences and social sciences, integrating them to form the original and unique Munger ideology. Compared to anything coming from within the ivory towers’ system of thinking, Munger’s doctrines are built to solve practical problems. For example, as far as I know, Charlie was the first to propose and systematically study human psychological tendencies and its huge impact on decision-making processes in investments and business. Now, tens of years later, behavioral finance has become a popular area of research in economics, with behavioral economics winning the recognition of the Nobel Prize. The theoretical framework Charlie describes in the final chapter of this book, “the Psychology of Human Misjudgment," may become more widely understood and applied by people in the future.

Charlie is naturally full of energy. Charlie was 72 years old when I first met him in 1996. He is 86 years old this year. In the tens of years I’ve known Charlie, his level of energy has never changed. He is always energetic and is an early riser. Breakfast meetings always begin at 7:30 am. At the same time, because of dinner events, his spends less time sleeping than the average people, but that does not affect his exuberant energy. His memory is also amazing. He still remembers BYD's operating figures I discussed with him many years ago while my memories have already blurred.

The 86-year-old man has a better memory than this young man. These are his innate advantages, but he acquired through hard work the unusual qualities that contributed to his success. Once Charlie found one thing he wants to do, he can do it for a lifetime.

To me, Charlie is not just a partner, he is also an elder, a teacher, a friend, a role model for success and a role model in life. Not only did I learn from him the principles of value investing, I also learned from him how to live life. He made me understand that a person's success is not accidental. Timing and opportunities are, of course, important, but the inherent qualities of people are even more important.

Charlie likes to meet people for breakfasts, usually starting at 7:30 am. I remember the first time I had breakfast with Charlie, I arrived on time, only to find Charlie sitting there, finished with the day’s newspapers. While it was only a few short minutes away from the 7:30, but I felt bad letting an elderly man I respected wait for me. For our second date, I arrived about fifteen minutes earlier and still found Charlie sitting there, reading the newspaper. For our third meeting, I arrived half an hour earlier and Charlie was still reading the newspaper, as if he had been waiting there all year round and had never left the seat. For the fourth meeting, when I arrived an hour early at sat there to begin waiting at 6:30 am, and at 6:45 am, Charlie leisurely walked in with a pile of newspapers and sat down, not even looking up, completely unaware of my existence. Afterwards, I came to understand that Charlie will always be arrive early for meetings. But he doesn’t waste time either, he will take out the newspaper he prepared to read.

In my interactions with Charlie, there was another thing that made a big impact on me. One year, Charlie and I were attending an out-of-state meeting. After the event, I was hurrying to get back to New York and unexpectedly met Charlie at the airport terminal. When his huge body passed through the security detector, for some unknown reason the detector kept being set off. Charlie returned to again and again for the security check. He finally passed through the security checkpoint after a long and laborious effort, but, by then, his plane had already departed.

But Charlie was not in a hurry. He took out a book he carried with him and sat down to read while he waited for the next plane. Incidentally, my flight was also delayed so we waited for our flights together.

I asked Charlie: “You have your own private jet and so does Berkshire, why do you bother going through the trouble of flying commercial?”

Charlie replied:”Firstly, it is a waste of fuel for me to fly in my private jet. Secondly, I feel safer flying in a commercial aircraft.” However, the real reason is Charlie’s third reason, “I want to live an engaged life. I don’t want to be isolated.”

What Charlie can’t tolerate is to lose contact with the world because of money and wealth. To isolate yourself in a single room behind a labyrinth of offices, to require layers after layers of approvals to setup meetings, and to hide behind a complicated bureaucracy so you become hard to reach for anyone - that is how you lose touch with the realities of life.

"As long as I have a book in my hand, I don’t feel like I’m wasting time." Charlie always carries a book on him. Even if he’s sitting in the middle seat in economy class, as long as he has a book, he’ll have no complaint. Once he went to Seattle to attend a board meeting, taking the economy class as usual, he sat beside a Chinese girl who was doing her calculus homework throughout the flight. He was impressed with this Chinese girl because he has difficulty imagining American girls of the same age having such power of concentration to ignore noise on the aircraft and concentrate on studying. If he was aboard a private jet, he would have never had the opportunity to come into close contact with these stories of ordinary people.

Though Charlie has very strict self-discipline, he is very generous with others and treat people he cares and love really well. He is not stingy with money, always hoping others will benefit more. For his own travels, whether for business trips or for personal trips, he always flies economy class, but when traveling with his wife and family, he would take his own private jet. He explained: my wife brought up so many children in her lifetime and has given me so much. Now that her health isn’t as good as it used to be, I must take good care of her.

Charlie spent his lifetime studying the causes of human failures, so he has a profound understanding of the weaknesses of human nature. Because of this, he believes people must be strict and demanding on themselves, continuously improving their discipline in life in order to overcome the innate weaknesses of human nature. This way of life is, to Charlie, a moral requirement. To an outsider, Charlie might seem like a monk; but to Charlie, this process is both rational and pleasant and it allows people to having a successful and happy life.

Charlie is such a unique person. But if you think about it, if Munger and Buffett weren’t so so unique, how could they have built Berkshire’s performance over 50 years into one that is unprecedented in the history of investments and one that has yet to be replicated.

Over the years I’ve known Charlie, I often forget that he is an American. He is closer to being the traditional Literati (scholar-officials) of Imperial China that I knew.

After the Imperial examination system ended, over the past hundreds of years, the spirit of the Literati has been lost to reality. Especially in the highly developed commercial society of this time and age, the Chinese scholars who bear the spirit of the Chinese Literati are often confused about the value and ideals of their own existence. In a commercial society where tradition has been lost, is the spirit of Literati still applicable or useful? In the late Ming Dynasty, capitalism began to sprout in China, the merchants at that time raised the ideals of "a business person with a Literati’s soul.” Today, the forces of the commercial market has become the dominant power, and I think there are more possibilities for this ideal to become a reality.

Charlie can be said to be the best example of "a businessman with a Literati’s soul". First of all, Charlie is extremely successful in business. However, in the deep intimate interactions I’ve had with Charlie, I found Charlie to be essentially a moral philosopher and a scholar. He reads widely, is knowledgeable over a broad range of topics, is truly concerned about his own moral cultivation, and is ultimately concerned about the society. Charlie's value system, from the inside out, promotes self-cultivation and self-development to become the “saints” who help others.

After achieving business success and wealth, Charlie is still committed to charity and to benefiting the people of the world. He was complete dependent on his wisdom in achieving his success, and this is undoubtedly an exciting role model for Chinese scholars. He made full use of his own wisdom and achieved great success in business with the utmost integrity. Today, in the market economy, can the Chinese scholars be filled with the spirit of the Literati and, by improving themselves through learning and self-cultivation, achieve the successes of the secular society while realizing the value of their own ideals?

Charlie very much appreciates Confucius. I sometimes think that if Confucius was reborn in America today, Charlie will probably be the best incarnation. If Confucius returned 2000 years later to the commercialized China, his teaching will probably be: have your heart in the right place, cultivate your moral character, fortify your family, acquire wealth, and help the world!

(This article was written for the foreword to "Poor Charlie's Almanack - The Wit and Wisdom of Charles T. Munger” - published in May 2010, some paragraphs were cut, the title was added by the editor.)

Wednesday, June 16, 2010

J.P. Morgan Chase's Jamie Dimon Gives Syracuse University Commencement Address On Accountability

J.P. Morgan Chase's Jamie Dimon gave a terrific commencement address to Syracuse University's graduating class of 2010 on May 16, 2010. The speech was on accountability - both individual and external.

Some highlights include [full text below]:
Acquiring knowledge must be a life-long pursuit—it should never end. You learn by reading—read everything, all the time—and by talking to and watching other people. And you especially learn by listening to the arguments on the other side.

It's your job to constantly learn and develop informed opinions as you move forward in your lives. There are some very thoughtful people out there, and reading their views and analysis will help educate you.
...
Also, make sure you have friends and colleagues who will always bring you back to earth when you—like we all do at times -- are deceiving yourself.

In business and in life, it is very important to both be a truth-teller for others and to surround yourself with those who will be truth-tellers for you.
...
It takes knowing how to deal with failure to be accountable.
...
this wonderful country whose bounties we benefit from, was built by so many people who made endless and often the ultimate sacrifices… before we were even born.

It is important to respect what they have done and to be grateful for it…

[TILB adds that this also means we have to defend what we have, what those before us have given us, and not allow it to be taken away by the Wormwoods and thieves that purport to be something else]
Finally, we fully agree with this statement:
If you continue to be successful and go on to become a leader of people, that is the time when it becomes about them and not you. Leadership is an honor, and a privilege and a deep obligation.

Throughout your lives you will meet people who may not be as smart, talented and skilled as you. They may not have had all of the benefits that you have had. But many are doing the best they can possibly do… and they take great pride in doing their part well.

Being accountable to them requires a grace and generosity of spirit… it requires compassion and treating all with respect… from CEO to clerks… and it requires giving back.
Jamie Dimon - Syracuse - May 16 2010

Tuesday, June 15, 2010

SCHWARZIES!!!!

Ah, it feels so good. Long time TILB readers know that last year we had something of an obsession with California's 2009 vintage scrip, which we named Schwarzies.

Well, today we read an article (linked here) from Bloomberg which says California is not close to passing a budget and it will run out of cash by end of August. The article goes on to discuss how state legislators will (yet again) violate the state constitution and not provide a proposed budget to the Governator by midnight tonight (June 15th). This is perhaps our favorite quote of the year:
“We’re working on it,” said Alicia Trost, a spokeswoman for Senate President Darrell Steinberg, a Democrat from Sacramento. “The most important thing is that we have a fair and balanced budget instead of getting it done by a constitutional deadline.”
I know, right? I mean, like, who needs, like, to follow the constitution thingy?

In any case, in honor of hints of renewed Schwarzie issuance, the author of Directive 10-289 and friend of TILB sent along this song to celebrate the moment. Enjoy.
You are now about to witness the strength of Wall Street knowledge

Verse One: Arnie

Straight outta Sactown, crazy governator with his lats blown
From the gang called IOU
When I'm called out I get politically put out
Flex the pecs and raise the Tax no doubt
You too boy if don’t pay me
The police are gonna hafta come and get ya out of Cali
Off yo ass that's how I'm goin out
For the punk Kalifornians that's showin out
SoCal start to mumble, NoCal wanna rumble
Mix em and cook em in a pot like gumbo
Goin off on a governator like that
with a gat that's pointed at yo cash
So give it up smooth
Ain't no tellin when I'm down for a jack move
Here's a financial rap to keep you dancin'
with a debt record like Greece Athens
Schwarzie is the tool
Don't make me act the no payin' fool
Me you can go toe to toe, no maybe
I'm knockin' playas out tha box, daily
yo weekly, monthly and yearly
until them dumb democrats see clearly
that I'm down with the capital I.R.S.
Boy you can't play with me
So when I'm in your neighborhood, you better duck
Coz Arnie is pumped up like a buck
As I leave, believe I'm issuin, something missin'
but when I come back, boy, I'm comin straight outta Sactown.
Genius.

In case anyone wants the original, it's Ice Cube's opening verse to Straight Outta Compton.

Monday, June 07, 2010

Pershing Square's Bill Ackman On GGP - May 2010 Update

Bill Ackman of Pershing Square presented at the May 26, 2010 Ira Sohn Conference. In addition to opining on the ratings industry (see here), he spent 90 slides briefing the audience on why GGP is an attractive long investment. Long time TILB readers know that we have extensively covered Ackman, Hovde and Tilson's views on GGP and the resulting back and forth (and back and forth...and back...and forth...). Ackman lays out here why he thinks GGP still has a lot of value for shareholders.

Enjoy.
GGP - Ackman Presentation at Ira Sohn Monference - May 2010

Thursday, June 03, 2010

Pershing Square's Bill Ackman's Ira Sohn Presentation On The Ratings Agencies

Bill Ackman of Pershing Square Capital Management gave this presentation at the May 2010 Ira Sohn conference. He also gave an excellent presentation on General Growth Properties (GGP), though that presentation is not included here. This ratings agency pitch provides his assessment of how to "save" the ratings agencies (Moody's, S&P, Fitch) by modifying their incentive structure and limiting their ability to consolidate power. Having read Christine Richard's book on Ackman's justified holy jihad against the monolines (MBIA in particular), I understand why the man hates him some ratings agencies. Over and over, he gave the NRSROs detailed warnings that the monolines (which were misrated AAA) were ticking timebombs, and over and over the agencies listened and then promptly ignored him (largely due to their own perverse incentives).

Go get 'em, Bill.

Wait to Rate - Bill Ackman Presentation on Ratings Agencies - Ira Sohn - May 2010

Tuesday, June 01, 2010

Vaclav Klaus On The Failure Of The Euro Experiment

TILB Political Hall of Famer Vaclav Klaus, president of the Czech Republic, makes the point that "the Euro Zone has failed" in today's WSJ OpEd section. I could not agree more. Oh, to have Klaus as our president here stateside...

Below is the OpEd in its entirety and here is a link to the WSJ online site itself. The OpEd is basically a reprinting of an essay that he recently published via the Cato Institute (link here).
ESSAY - The Wall Street Journal
JUNE 1, 2010
'The Euro Zone Has Failed'
By VáCLAV KLAUS

After the fall of communism in 1989, the Czech Republic wanted to be a normal European country again as soon as possible, after being excluded from participating in the post-World War II European integration process for 41 years. The only way to achieve this was to become a member country of the European Union. We had no other choice, but the communist experience was still too "fresh." We wanted to be free and didn't want to lose our freedom and our finally regained sovereignty. Many of us were therefore in favor of a looser form of European integration, against the so-called deepening of the EU and against the creation of political union in Europe. People like me understood very early that the idea of a European single currency is a dangerous project which will either bring big problems or lead to the undemocratic centralization of Europe. My position was clear: With all my reservations, we had to apply for EU membership, but at the same time we had to fight against projects such as the euro.

As a long-standing critic of the idea of a European single currency, I have not rejoiced at the current problems in the euro zone because their consequences could be serious for all of us in Europe—for members and non-members of the euro zone, for its supporters and opponents. Even the enthusiastic propagandists of the euro suddenly speak about the potential collapse of the whole project now, and it is us critics who say we have to look at it in a more structured way.

The term "collapse" has at least two meanings. The first is that the euro-zone project has not succeeded in delivering the positive effects that had been rightly or wrongly expected from it. It was mistakenly and irresponsibly presented as an indisputable economic benefit to all the countries willing to give up their own long-treasured currencies. Extensive studies published prior to the launch of the European single currency promised that the euro would help to accelerate economic growth and reduce inflation and stressed, in particular, that the member states of the euro zone would be protected against all kinds of external economic disruptions (the so-called exogenous shocks).

This has not happened. After the establishment of the euro zone, the economic growth of its member states has slowed down compared to previous decades, increasing the gap between the rate of growth in the euro-zone countries and that in other major economies—such as the United States and China, smaller economies in Southeast Asia and other parts of the developing world, as well as Central and Eastern European countries that are not members of the euro zone.

Economic growth in Europe has been slowing down since the 1960s, thanks to the increasingly damaging economic and social system which started dominating Europe at that time. The European "soziale Marktwirtschaft" is an unproductive variant of a welfare state, of state paternalism, of "leisure" society, of high taxes and low motivation to work. The existence of the euro has not reversed that trend. According to the European Central Bank, the average annual rate of growth in the euro-zone countries was 3.4% in the 1970s, 2.4% in the 1980s, 2.2% in the 1990s and only 1.1% from 2001 to 2009 (the decade of the euro). A similar slowdown has not occurred anywhere else in the world (speaking about "normal" countries, e.g. countries without wars or revolutions).

Not even the expected convergence of inflation rates has taken place. Two distinct groups have formed within the euro zone—one (including most of the countries of western and northern Europe) with a low inflation rate and one (including Greece, Spain, Portugal and Ireland) with a higher inflation rate. We have also seen an increase in long-term trade imbalances. There are countries where exports exceed imports and countries that lastingly import more than they export. It is no coincidence that the latter countries also have higher inflation. It has no connection with the world-wide crisis. This crisis "only" escalated and exposed longtime hidden economic problems; it did not cause them.

During its first 10 years, the euro zone has not led to any measurable homogenization of its member states' economies. The euro zone, which comprises 16 European countries, is not an "optimum currency area" as defined by the economic theory. Even Otmar Issing, the former member of the Executive Board and chief economist of the European Central Bank, has repeatedly pointed out (most recently in a speech in Prague in December 2009) that the establishment of the euro zone was primarily a political, not an economic, decision. In such a situation, it is inevitable that the costs of establishing and maintaining it exceed its benefits.

My choice of the words "establishing" and "maintaining" is not accidental. Most economic commentators were satisfied by the ease and apparent inexpensiveness of the first step (the establishment of the common monetary area). This helped to form the impression that everything was fine with this project.

The exchange rates of the countries joining the euro zone probably more or less reflected the economic reality at the time when the euro was born. However, over the last decade, the economic performance of euro-zone countries diverged and the negative effects of the "straight-jacket" of a single currency have become more and more visible. When "good weather" (in the economic sense of the word) prevailed, no visible problems arose. Once the crisis (or "bad weather") arrived, the lack of homogeneity manifested itself very clearly. In that sense, I dare say that—as a project that promised to be of considerable economic benefit to its members—the euro zone has failed.

The second meaning of the term collapse is the possible collapse of the euro zone as an institution, the demise of the euro. To that question, my answer is no, it will not collapse. So much political capital had been invested in its existence and in its role as a "cement" that binds the EU on its way to supra-nationality that in the foreseeable future the euro will surely not be abandoned.

It will continue, but at a very high price—low economic growth. It will bring economic losses even to non-members of the euro zone, like the Czech Republic.

The huge amount of money that Greece will receive can be divided by the number of the euro-zone inhabitants, and each person can calculate his or her own "contribution." However, the "opportunity" costs arising from the loss of a potentially higher growth rate, which is much more difficult for a non-economist to imagine, will be far more painful. I do not doubt that for political reasons this price will be paid and that the euro-zone inhabitants will never find out just how much the euro truly cost them.

The mechanism that will save the European monetary union is the increasing volume of financial transfers that will have to be sent to euro-zone countries suffering from the biggest economic and financial problems. Yet everyone knows that sending massive financial transfers is possible only in a state, and the EU, or the euro zone, is not a state. Only in a state there is a sufficient feeling of solidarity among its citizens. Only in a state—and unified Germany in the 1990s is an excellent example—can massive financial transfers be justified and made politically viable. (By the way, the inter-German financial transfers in that era annually equaled the whole sum potentially needed for Greece to survive). Twenty years ago, I happened to be the minister of finance in a dissolving political—and monetary—union called Czechoslovakia. I have to confess that the country broke up because of the lack of mutual solidarity.

That is why Europe will have to decide whether to centralize itself politically as well. Europeans don't want that because they know (or at least feel) that it would be to the detriment of liberty and prosperity. There is, however, a real danger that the politicians will do it anyway—behind the backs of those who elected them. And this is what bothers me most. The recent dealings in EU headquarters in Brussels—literally behind closed doors—about the aid package for Greece demonstrated that there is no democracy there. The German-French tandem made the decision on behalf of the rest of the euro-zone countries, and I am afraid this will continue.

It is evident that the euro—the European single currency—and the currently proposed measures to save the euro do not represent any "salvation" for the European economy. In the long run, it can be saved only by a radical restructuring of the European economic and social system. My country had a velvet revolution and made a radical transformation of its political, economic and social structures. Fifteen years ago, I sometimes joked that after entering the EU we should start a velvet revolution there as well. Unfortunately, this ceases to be a joke now.

The Czech Republic has not made a mistake by avoiding the membership in the euro zone. I am glad we are not the only country taking that view. In April, the Financial Times published an article by the late governor of the Polish central bank, Slawomir Skrzypek. He wrote it shortly before his tragic death in an airplane crash near Smolensk, Russia. In that article, Mr. Skrzypek wrote, "As a non-member of the euro, Poland has been able to profit from flexibility of the zloty exchange rate in a way that has helped growth and lowered the current account deficit without importing inflation." He added that "the decade-long story of peripheral euro members drastically losing competitiveness has been a salutary lesson." There is no need to add anything to that.

Václav Klaus has served as president of the Czech Republic since 2003
[click here for video of an excellent interview with Klaus by Peter Robinson from 2009]

Thursday, May 27, 2010

FrontPoint's Steve Eisman's Speech And Presentation From Ira Sohn Conference

This is Steve Eisman's excellent presentation and speech from the May 2010 Ira Sohn Conference on why much of the for profit education space is a short. He specifically talks about ITT Education, APOL, WPO and COCO. He makes the analogy between these business models and the subprime debacle. The first 40 or so pages are the actual presentation and the last several pages are the text of his speech. We recommend reading the speech first, then digging through the presentation. Our notes on Eisman's talk are here.

You may know Eisman from his fame calling the financial collapse and shorting subprime securities as well as many of the links into subprime (e.g., originators, banks, etc.). Michael Lewis profiled Eisman (and Burry and others) in his new book The Big Short.

This whole industry is so dirty, it's easy to see how government regulation is the only way that it is sustained. Munger and others often talk about buying businesses that are good for their whole ecosystem (suppliers, employees, customers, and owners). Much of the for profit education system is actually a shitshow for huge portions of its ecosystem, most importantly its customers. Typically those sorts of businesses can only exist and thrive with the help of government's Visible Fist.

Anyway, read the speech first (near the end of the slide deck) then review the slides. Eisman's speech is titled, "Subprime Goes to College."
Steve Eisman - Ira Sohn Conference - May 2010

David Einhorn Complete Ira Sohn Conference Speech

As we discussed here and here, at yesterday's Ira Sohn Conference, David Einhorn gave a speech entitled "Good News for the Grandchildren" about why sovereign debts, huge structural budget deficits, and debt monetization/QE/quantitative easing will matter for our generation and will have to be dealt with well before our grandkids' time.

It was an excellent speech. Below is the unabridged version. Enjoy. Think gold.


David Einhorn - Greenlight Capital - Ira Sohn Conference Speech 2010 - Good News For The Grandchildren

David Einhorn OpEd: NY Times - Easy Money, Hard Truths

TILB friends know that we have followed Greenlight Capital's David Einhorn for years. A year and a half ago, when he first began to publicly disclose his position in gold, we took note.

As we reported from yesterday's Ira Sohn Conference, Einhorn gave a presentation called "Good News for the Grandchildren" (implying that the debt crisis will manifest itself in our generation, not theirs). In today's NY Times, he basically provided them with a slightly modified version of the speech as an OpEd.

Here is the OpEd from the NY Times. Because it's basically the transcript of a speech he gave yesterday, we provide it below in its entirety. Please support the NY Times, one of TILB's favorite newspaper.
Op-Ed Contributor
NY times
Easy Money, Hard Truths
By DAVID EINHORN
Published: May 26, 2010

Before this recession it appeared that absent action, the government’s long-term commitments would become a problem in a few decades. I believe the government response to the recession has created budgetary stress sufficient to bring about the crisis much sooner. Our generation — not our grandchildren’s — will have to deal with the consequences.

According to the Bank for International Settlements, the United States’ structural deficit — the amount of our deficit adjusted for the economic cycle — has increased from 3.1 percent of gross domestic product in 2007 to 9.2 percent in 2010. This does not take into account the very large liabilities the government has taken on by socializing losses in the housing market. We have not seen the bills for bailing out Fannie Mae and Freddie Mac and even more so the Federal Housing Administration, which is issuing government-guaranteed loans to non-creditworthy borrowers on terms easier than anything offered during the housing bubble. Government accounting is done on a cash basis, so promises to pay in the future — whether Social Security benefits or loan guarantees — do not count in the budget until the money goes out the door.

A good percentage of the structural increase in the deficit is because last year’s “stimulus” was not stimulus in the traditional sense. Rather than a one-time injection of spending to replace a cyclical reduction in private demand, the vast majority of the stimulus has been a permanent increase in the base level of government spending — including spending on federal jobs. How different is the government today from what General Motors was a decade ago? Government employees are expensive and difficult to fire. Bloomberg News reported that from the last peak businesses have let go 8.5 million people, or 7.4 percent of the work force, while local governments have cut only 141,000 workers, or less than 1 percent.

Public sector jobs used to offer greater job security but lower pay. Not anymore. In 2008, according to the Cato Institute, the average federal civilian salary with benefits was $119,982, compared with $59,909 for the average private sector worker; the disparity has grown enormously over the last decade.

The question we need to ask is this: If we don’t change direction, how long can we travel down this path without having a crisis? The answer lies in two critical issues. First, how long will the capital markets continue to finance government borrowings that may be refinanced but never repaid on reasonable terms? And second, to what extent can obligations that are not financed through traditional fiscal means be satisfied through central bank monetization of debts — that is, by the printing of money?

The recent United States credit crisis was attributable in large measure to capital requirements and risk models that incorrectly assumed AAA-rated securities were exempt from default risk. We learned the hard way that when the market ignores credit risk, the behavior of borrowers and lenders becomes distorted.

It was once unthinkable that “risk-free” institutions could fail — so unthinkable that the chief executives of the companies that recently did fail probably didn’t realize when they crossed the line from highly creditworthy to eventually insolvent. Surely, had they seen the line, they would, to a man, have stopped on the solvent side.

Our government leaders are faced with the same risk today. At what level of government debt and future commitments does government default go from being unthinkable to inevitable, and how does our government think about that risk?

I recently posed this question to one of the president’s senior economic advisers. He answered that the government is different from financial institutions because it can print money, and statistically the United States is not as bad off as some other countries. For an investor, these responses do not inspire confidence.

He went on to say that the government needs to focus on jobs now, because without an economic recovery, the rest does not matter. It’s a valid point, but an insufficient excuse for holding off on addressing the long-term structural deficit. If we are going to spend more now, it is imperative that we lay out a credible plan to avoid falling into a debt trap. Even using the administration’s optimistic 10-year forecast, it is clear that we will have problematic deficits for the next decade, which ends just as our commitments to baby boomers accelerate.

Modern Keynesianism works great until it doesn’t. No one really knows where the line is. One obvious lesson from the economic crisis is that we should get rid of the official credit ratings that inspire false confidence and, worse, are pro-cyclical, aggravating slowdowns and inflating booms. Congress has a rare opportunity in the current regulatory reform effort to eliminate the rating system. For now, it does not appear interested in taking sufficiently aggressive action. The big banks and bond buyers have told Congress they want to continue the current system.

As William Gross, the managing director of the bond management company Pimco, put it in his last newsletter, “Firms such as Pimco with large credit staffs of their own can bypass, anticipate and front run all three [rating agencies], benefiting from their timidity and lack of common sense.”

Given how sophisticated bond buyers use the credit rating system to take advantage of more passive market participants, it is no wonder they stress the continued need to preserve the status quo.

It would be better to have each investor individually assess credit-seeking entities. Certainly, the creditworthiness of governments should not be determined by a couple of rating agency committees.

Consider this: When Treasury Secretary Timothy Geithner promises that the United States will never lose its AAA rating, he chooses to become dependent on the whims of the Standard & Poor’s ratings committee rather than the diverse views of the many participants in the capital markets. It is not hard to imagine a crisis where just as the Treasury secretary seeks buyers of government debt in the face of deteriorating market confidence, a rating agency issues an untimely downgrade, setting off a rush of sales by existing bondholders. This has been the experience of many troubled corporations, where downgrades served as the coup de grâce.

The current upset in the European sovereign debt market is a prequel to what might happen here. Banks can hold government debt with a so-called zero-risk weighting, which means zero capital requirements. As a result, European banks stocked up on Greek debt, and sold sovereign credit default swaps, and now need to be bailed out to avoid another banking crisis.

As we saw first in Dubai and now in Greece, it appears that governments’ response to the failure of Lehman Brothers is to use any means necessary to avoid another Lehman-like event. This policy transfers risk from the weak to the strong — or at least the less weak — setting up the possibility of the crisis ultimately spreading from the “too small to fails,” like Greece, to “too big to bails,” like members of the Group of 7 industrialized nations.

We should have learned by now that each credit — no matter how unthinkable its failure would be — has risk and requires capital. Just as trivial capital charges encouraged lenders and borrowers to overdo it with AAA-rated collateral debt obligations, the same flawed structure in the government debt market encourages and therefore practically ensures a repeat of this behavior — leading to an even larger crisis.

I don’t believe a United States debt default is inevitable. On the other hand, I don’t see the political will to steer the country away from crisis. If we wait until the markets force action, as they have in Greece, we might find ourselves negotiating austerity programs with foreign creditors.

Some believe this could be avoided by printing money. Despite the promises by the Federal Reserve chairman, Ben Bernanke, not to print money or “monetize” the debt, when push comes to shove, there is a good chance the Fed will do so, at least to the point where significant inflation shows up even in government statistics.

That the recent round of money printing has not led to headline inflation may give central bankers the confidence that they can pursue this course without inflationary consequences. However, printing money can go only so far without creating inflation.

Government statistics are about the last place one should look to find inflation, as they are designed to not show much. Over the last 35 years the government has changed the way it calculates inflation several times. According to the Web site Shadow Government Statistics, using the pre-1980 method, the Consumer Price Index would be over 9 percent, compared with about 2 percent in the official statistics today.

While the truth probably lies somewhere in the middle, this doesn’t even take into account inflation we ignore by using a basket of goods that don’t match the real-world cost of living. (For example, health care costs are one-sixth of G.D.P. but only one-sixteenth of the price index, and rising income and payroll taxes do not count as inflation at all.)

Why does the government understate rising costs? Low official inflation benefits the government by reducing inflation-indexed payments, including Social Security. Lower official inflation means higher reported real G.D.P., higher reported real income and higher reported productivity.

Subdued reported inflation also enables the Fed to rationalize easy money. The Fed wants to have low interest rates to fight unemployment, which, in a new version of the trickle-down theory, it believes can be addressed through higher stock prices. The Fed hopes that by denying savers an adequate return in risk-free assets like savings deposits, it will force them to speculate in stocks and other “risky assets.” This speculation drives stock prices higher, which creates a “wealth effect” when the lucky speculators spend some of their gains on goods and services. The purchases increase aggregate demand and lead to job creation.

Easy money also aids the banks, helping them earn back their still unacknowledged losses. This has the perverse effect of discouraging banks from making new loans. If banks can lend to the government, with no capital charge and no perceived risk and earn an adequate spread, then they have little incentive to lend to small businesses or consumers. (For this reason, higher short-term rates could very well stimulate additional lending to the private sector.)

Easy money also helps the fiscal position of the government. Lower borrowing costs mean lower deficits. In effect, negative real interest rates are indirect debt monetization. Allowing borrowers, including the government, to get addicted to unsustainably low rates creates enormous solvency risks when rates eventually rise.

While one can debate where we are in the recovery, one thing is clear — the worst of the last crisis has passed. Nominal G.D.P. growth is running in the mid-single digits. The emergency has passed and yet the Fed continues with an emergency zero-interest rate policy. Perhaps easy money is still appropriate — but a zero-rate policy creates enormous distortions in incentives and increases the likelihood of a significant crisis later. It was not lost on the market that during this month’s sell-off, with rates around zero, there is no room for further cuts should the economy roll over.

EASY money has negative consequences in addition to the risk of inflation and devaluing the dollar. It can also feed asset bubbles. In recent years, we have gone from one bubble and bailout to the next. Each bailout has rewarded those who acted imprudently. This has encouraged additional risky behavior, feeding the creation of new, larger bubbles.

The Fed bailed out the equity markets after the crash of 1987, which fed a boom ending with the Mexican crisis and bailout. That Treasury-financed bailout started a bubble in emerging market debt, which ended with the Asian currency crisis and Russian default. The resulting organized rescue of Long-Term Capital Management’s counterparties spurred the Internet bubble. After that popped, the rescue led to the housing and credit bubble. The deflationary aspects of that bubble popping created a bubble in sovereign debt, despite the fiscal strains created by the bailouts. The Greek crisis may be the first sign of the sovereign debt bubble bursting.

Though we don’t know what’s going to happen next, the good news for our grandchildren is that we will have to face our own debts. If we realize that our own future is at risk, we might be more serious about changing course. If we don’t, Mr. Geithner and others might regret having never said never about America’s rating.

David Einhorn is the president of Greenlight Capital, a hedge fund, and the author of “Fooling Some of the People All of the Time.” Investment accounts managed by Greenlight may have a position (long or short) in the securities discussed in this article.

A version of this op-ed appeared in print on May 27, 2010, on page A35 of the New York edition

Ira Sohn Recap

We attended the Ira Sohn conference yesterday for the Tomorrow's Children's Fund. Klarman, Tepper, Arbess, Einhorn, Ackman, Dinan, Robbins, Zell, Eisman, Jacobson, S-Ratt, Grantham, and Niall Ferguson. In summary, this was by far the most macro oriented conference we've ever seen from a bunch of largely "bottoms up" investors.

Below are two sets of notes. One from your intrepid TILB author and the other from BTIG's Mike O'Rourke. O'Rourke writes BTIG's must read "Bedtime with BTIG" every night. While we are not much for technical trading, he provides technical insights and recaps that give a concise, useful review of the day past and preview of the day ahead. In any case, here are the notes. In both cases, these are not exact transcriptions. Also, sadly TILB had to leave in the middle of S-Ratt's brutal pack of lies, causing us to miss Larry Robbins, Bill Ackman, and Seth Klarman. Fortunately for you, O'rourke didn't leave and has complete notes. O'Rourke's notes are first, our's follow.

-----------------------------------
BTIG Notes - Ira Sohn
Posted on Thu, May 27th, 2010 at 7:17 am
by Mike O'Rourke

This is a summary of ideas expressed at the 15th Annual Ira W. Sohn Investment Research Conference.
The Ira Sohn Research Conference Foundation is dedicated to the treatment and cure of pediatric cancer and other childhood diseases.
NOTE: The notes below were taken in real time, but we apologize in advance for any transcription errors. THESE ARE THE OPINIONS OF THE SPEAKERS, BTIG DOES NOT AGREE OR DISAGREE WITH ANY OF THE STATEMENTS.

Jonathon Jacobson, Highfields Capital Management
Highfields is a long term value investor. Jacobson is worried about the current investment environment. Despite all of the looming macro headwinds the biggest threat is the “Clowns & Climate in Washington D.C.” Several states are hovering on the edge of bankruptcy and we the taxpayers will wind up paying for those losses. The administration has embarked upon a process of rolling vilification of industry after industry, Health Care, financial Services, Energy, Cable, Soft Drink, etc. The perception in Washington is that if someone has done well in this country, it was done at someone else’s expense. Rather than address the issues politicians will continue to “kick the can down the road.” Fundamentals are hard to handicap when the rules are constantly changing.

Jacobson is bullish on Sallie Mae (SLM). The company is currently misunderstood by the market because it is in transition from being a lending based company to a fee based company. The key point is if Sallie Mae were strictly in a run off mode as the government ends cuts back the FFELP program (which they are not) it would be worth $15, even with a conservative 12% discount rate. It currently has a $5 Billion market capitalization and is trading 2x pre-tax, pre-provision earnings and is trading 4x pre-tax earnings. Most competitors have gone out of business or in the process of exiting the business. Jacobson believes Sallie Mae is worth somewhere between $15-$25 per share. In 2011 he is forecasting $0.80 -$1.00 in earnings power. Additionally the company is well positioned to acquire additional servicing rights as competitors exit the business. Sallie Mae is larger than the 3 other government approved student loan servicers combined. Management is acquiring stock and aligning their interests with shareholders. 87% of the balance sheet is funded to term. Credit losses peaked in Q3 2009. Main risk is regulatory, but if management believes the best move for shareholders is to liquidate the company, they will.

Sam Zell
The theme of the election was change. A major change has occurred within the American economy. One party political dominance is changing how investors will act in the future. It is an environment of survival of the fittest. Zell presented a music video that was an ode to Charles Darwin. Extinction is for those who do not adapt and evolve. The winner is the one who builds the better boat, not the one who rearranges the deck chairs. He who adapts succeeds.

Dan Arbess, Perella Weinberg Partners
The foundations of the global economy are shifting. Fiscal imbalance and sovereign risk are only symptoms of the problems that will fuels this change. The trend of deficit spending over-consumption in the west and the export driven production of the east needs to reverse. Consumption in the east must rise and the west must exercise restraint to bring a semblance of balance back. Macro squalls can wreak havoc on a portfolio, so effective hedging strategies are important. The key them Arbess proposed was “Shaking hands with China.” The way to play the theme is to be long those companies who sell China what it needs and short those who make products that the Emerging Markets can make better. Consumption is only 35% of GDP in China, half of what it is here and the Chinese save half of what they make. China alone will increase its urbanization rate from 46% to 58%, adding 210 million urban residents in 70 million households. They need a lot of stuff to urbanize 20 million people a year, and Arbess wants to be long the guys who will be selling it to them.
Arbess believes weaker currencies and weaker sovereign credits should be sold. He is bearish on the Euro and on EU sovereign debt. This is the endgame of the debt supercycle and confidence in fiat currencies will erode, as such he likes Gold. The deflationary economic environment will lead to monetary debasement. The irony today is post-Maoist China has no entitlements and needs to create some to boost domestic consumptions and the U.S. more entitlements than ever.

He likes commodities and the commodity nations in the G-20 and even Africa, both fundamentally and as a currency debasement hedge. He says own junior mining companies that own big assets close to their customers. These will often start out trading at discounts as much as 90% to their cash flow potential, and often show less downside beta than large caps.

Arbess likes Ivanhoe mines (IVN). Its vast copper and other mineral deposits in Mongolia are close to the same size as Manhattan. Noncore assets are worth half of the current market capitalization of the company. Rio Tinto is a key partner of Ivanhoe, and its presence reduces the risk for the investor. Rio recently purchased shares above the current price levels Backing out the coal business and other peripheral assets, the stock at its current price around $13 creates the copper mine at less than $2.5 billion, which is less than half of what it’s worth on an NPV basis, and a tiny fraction of inground metal value, assuming $2.50 long term copper and $1000 gold. At recent commodity prices, Arbess thinks the stock could be worth up to $30 to Rio.

Arbess also noted Solution (SOA) and Celanese (CE) as other ways to play his theme and believes both have 50% upside from current levels. Another name he likes is YUM Brands (YUM) who had 37% growth in China last year. China’s successes of the last 30 years are real and the country is fiscally strong with $2.5 Trillion in reserves and fiscal responsibility. Another play on his theme is shorting the Japanese Yen versus the Canadian Dollar. Japan is shrinking while its debt is growing, exactly the opposite of the urbanizing emerging markets. Canada, by contrast, has arguably the soundest economy in the G-7. No coincidence, they really don’t like leverage up there. And the country is rich in Shake Hands With China resources. This is the end of the buy now and pay later mentality. The global rebalancing process will be messy, but it will also be rife with opportunity.

David Tepper, Appaloosa ManagementTepper started with an anecdote about the horse “output” problem in 19th century New York City and forecast that city would be buried under horse excrement . The moral of his story was “don’t listen to the crap.” Tepper was highlighting that the world changes and evolves and people and societies adapt. Tepper noted that everyone of the “PIIGS” has instituted austerity programs, something many would not have believed would happen. He mentioned the ECB buying debt despite its conservative Bundesbank roots and the Spanish Government shutting down the largest Caja run by the Roman Catholic church. All of these things at one point seemed unthinkable, but this is society adapting to the situation.

Tepper likes the AIG-8.175% Junior Subordinated Debt. It is trading at $0.72 on the dollar giving it a current yield of 11%. Right now there is $73 Billion of capital structure below it $49 Billion in Preferred and $24 Billion in equity. He thinks those two combined are really only worth $40 Billion. He warned that this did not mean the equity is worth zero, there is some option value and a conversion of government preferred into common could distort a capital structure arbitrage if set up. Tepper says AIG has $9 Billion of EBIT and other assets worth $45 Billion.
Tepper noted there are opportunities in the CMBS market. He said what you should really care about in the CMBS market is “Can they make the coupon?” These are 10 year securities and if they can make the coupon you should ask what will the environment be in 2016? You should not be looking at today, you should be looking at the future.

Tepper still likes Bank of America (BAC). He believes normalized earnings are $2.65-$2.70 per share and has a $27 price target. He also likes Banco Santander (STD). it is one of a handful AA rated banks in the world (no major U.S. bank is as high as AA). Only 30% of the banks exposures are to Spain, it is really an Emerging Market/Global play. They will earn $1.50 and that has the potential to double. Tepper concluded noting that 2000 was the beginning of the end and that today we are at the end of the beginning.

Niall Ferguson, Harvard University
Ferguson proposed being “Long virtue.” Focusing on nations with good fiscal situations as opposed to the overly indebted Western governments. Citing Bank of International Settlements long term forecasts Ferguson highlighted Pigs “R” Us. Which means that the U.S. and the U.K. are in equally precarious fiscal situations as the “PIIGS.” Ferguson noted that 40% of U.S. Debt is short term and that type of duration leaves one open to roll risk. “U.S. Debt is a safe haven similar to the way Pearl Harbor was.” Ferguson highlighted the “good boys, ” nations with better fiscal situations. Topping the list was Norway with net debt of -140% of GDP due to the nations effective management of its oil reserves. Other good boys were Sweden, Denmark and Switzerland. The U.S. leaves itself at risk by being highly reliant upon foreign capital.

Steve Eisman, Frontpoint
Eisman’s theme was “Subprime goes to College.” After what transpired in the subprime mortgage market a few years ago, Eisman though he would never see a business with the capability to prey upon the underprivileged to those extremes again. Then he came across the For Profit Education industry. Despite only having 10% of the students these schools get 25% of the government aid. The industry is in bed with Washington due to serious lobbying efforts and the back and forth of executives from the companies to Government positions and back. Title IV loans offered by government programs comprise 90% of for profit education revenues.

ITT Educational (ESI) has higher margins than Apple (AAPL), and margins in the for profit education industry are 3-4 times those in other industries that deal with the government. For profit schools target poorer people, often leading them towards degrees that won’t get them jobs. The companies also maneuver to acquire small failing schools in order to get their accreditation. The loans the students take out for profit education have high default rates. ESI and Corinthian (COCO) often provision 50%-60% for the loans they privately offer, so the default rates overall are likely 50%. The companies in the industry are Education Management (EDMC), COCO, Apollo Group (APOL) and Washington Post (WPO). WPO, more than 100% of its EBITDA comes from for profit education. Eisman calculates there could be $300 Billion in defaults over the next 10 years. The key catalyst going forward is that the government will publish a rule for gainful employment , that threatens the companies. The government is also seeking to fix the accreditation process.

Jeremy Grantham, GMO
IN GMO’s 7 year forecast U.S. High quality names are aberrantly cheap and should provide 7.6% real return per year. In constructing a portfolio Grantham said it should be 40% U.S. Blue Chips, 20% Emerging Markets and 30% EAFE Blue chips. Grantham notes that bonds are “grotesquely” overpriced predicted to post a real return 1.7% per year. Grantham’s 3 choices or recommendations are Timber which has 7.5% forecasted real annual return. Then Grantham likes Emerging Markets which he believes will go to a premium P/E to the rest of the world. Finally he likes high quality U.S. blue chaps. They are trading at a 17% discount to fair value and 55% of earnings come from around the world.

The bedrock of Grantham’s thinking is that “Things regress to the mean.” Of the 34 bubbles GMO has identified it takes about 3.5 years for the bubble to run up and it comes back down to the trendline nearly as quickly. All bubbles reverse. Grantham believes both the U.K. and Australia are in housing bubbles. The risks to betting against bubbles are career risk and business risk. Grantham believes debt has nothing to do with growth, and debt has less influence than most think. Grantham concluded by noting the importance of the upward bias in the third year of the presidential cycle.

David Einhorn, Greenlight Capital
Einhorn’s theme was “Good news for the Grandchildren.” In essence the fiscal challenges of the United States are so severe that they will need to be dealt with before our grandchildren inherit them. Our own future is at risk. Average public sector pay is nearly double that of private sector pay. Public sector workers “Retire to rehire,” and fuel a system that is heading in the same direction as Greece. Einhorn wonders how long will the capital markets continue to let the U.S. keep borrowing. Nobody knows where the line is, not the Government nor the ratings agencies. A credible plan to avoid the debt trap is necessary. Europe is a prequel to what will happen here.

Einhorn is short the ratings agencies Moody’s (MCO) and McGraw-Hill (MHP). Credit rating agencies provide a false sense of security and are pro-cyclical. Einhorn also questioned the validity of the Government CPI data . Citing Shadowstats, Einhorn noted inflation calculated under the 1980 methodology would be 9%, as opposed to the less the 2% it is today. The lower real rates will fuel inflation and bad behavior and create bubbles. This easy policy of bubble bailouts is an unhealthy cycle.
He believe the lower real rates tempts the central bank to monetize debt. As a hedge against this Einhorn is long Gold as well as African Barrick (ABG LN) . ABG LN trades at ½ the value of its peers, 6x Ebitda and with a 10% free cash flow yield.

James Dinan, York CapitalDinan commenced by noting people adapt, markets adapt and animal spirits prevail. Dinan believes large companies are in good shape. Dinan likes Coca Cola Enterprises (CCE). The company is going through restructuring in which Coca Cola (KO) is giving CCE $10 per share and some European bottling assets in exchange for U.S. bottling assets. Dinan stated Europe is a better place than the U.S. for the bottling business, due to less competition. The deal also gives CCE the option to expand its European footprint. After the deal and receiving the $10 per share new CCE will be $15 and trade 10x earnings and 6x EBITDA. New CCE will have 20% gross upside.

Dinan’s next long idea was ING Groep (ING). ING has a global presence as a bank and insurance company. As part of the bailout the company received during the crisis the company must split its banking and insurance businesses by 2013. The company is currently trading at €6.25 which is .6x book value. Dinan believes it can go to 1x book which would make it worth €8.50-€9.20 per share. The life insurance divestiture could be used to pay back the Government bailout, or it could spin out the insurance business. An 8x-10x P/E multiple on the combined bank and insurance company would make it worth €14-€18.

Dinan also sees opportunity in post bankruptcy equities. Currently one he is investing in is Lyondell (LALLF). Currently the stock is trading below its reorganization plan value. Q1 earnings tracked well ahead of expectations especially in the companies commodity business. A sum of the parts valuation gives Dinan a $22-$28 price target.

Steve Rattner
The former advisor to Treasury on the Auto industry restructuring provided a defense for the Obama Administration’s handling of TARP, the Stimulus (EESA), the Stress Test (SCAP) and the Auto rescue. Rattner said the Administration sought the middle ground on most issues and gave examples of the extreme views in each case.
Regarding the Auto industry restructuring Rattner addressed the question of whether the UAW received more than it deserved. Rattner said that Labor was a critical creditor and all stakeholders received more than they would have in an outright liquidation. Rattner noted that in the Chrysler plan the UAW’s VEBA received 40%-50% of what they were owed. In the GM plan VEBA received 84%-92% of what it was owed. In both cases warranty holders, dealers and trade/suppliers all received 100 cents on the dollar. Rattner used this as an example that the plans sought to protect as much franchise value as possible.

Rattner offered what to expect from the Administration going forward. He said the government will remain involved in the Financial sector. He noted taxes are going up. The Administration has avoided protectionism and is leaving business in the industrial and manufacturing sector alone.

Larry Robbins, Glenview Capital Management
Robbins started asking the question of why is the market’s P/E so low. The 3 potential explanations he offered were the “E” is wrong and estimates could be too high, or “the bigger the D.C. the smaller the P/E.”The last reason and one he highlighted was that it is not a math problem, but it is a psychology problem. He note market participants are suffering from Post Traumatic Stress Disorder.
Robbins noted that individual stocks were one of the best ways to tackle an uncertain environment. He looks for stable earnings growth, potential for multiple expansion and positive optionality. Robbins likes McKesson (MCK). He notes earnings are growing at 18% and it is trading under 11x forward earnings. The company proved it is acyclical by posting growth in Q1 2009. Robbins highlighted he expects MCK to have $5.2 Billion of “Dry Powder.” This is a combination of cash and Free Cash Flow expected to be thrown off over the next 18 months. Robbins also likes Express Scripts (ESRX). Earnings are growing 35% and although that won’t be sustainable it will still continue fast growth. Management has been superior over the past decade in retiring stock. The company is trading 14x 2011 earnings and under 13x Free Cash Flow. Robbins next pick was Life Technologies (LIFE) which is in a consolidating and over capitalized industry. The company has a 80% consumable product mix and is trading 11.5x 2011 earnings. Robbins last pick was Fidelity National Information. The company rebuffed private equity takeover attempt because the price was not high enough and figured they could do the same thing Private Equity planned by doing a leveraged recapitalization. The company is tendering to buy $2.5 Billion of shares , or 22% of the outstanding. Robbins thinks they could have done $3.5 Billion but were being conservative. Earnings grow this 15%-23% and the company is trading under 12x 2011 and 10x Free Cash Flow.

Bill Ackman, Pershing Square
Ackman started by outlining how he believed the credit ratings business should be reformed. The short version is NRSRO’s should not be allowed to rate an issue until 60 days after it comes. That would create a buyside environment that would attempt to handicap what the rating should be using market forces. The underwriter would also need the instrument to hold up in the secondary market and therefore is incentivized to make sure it is a quality product. All relevant information should be disclosed to the market and the ratings agency should disclose its model.
From there Ackman went into GGP part two. GGP will be split into two companies GGP and GGO. GGP will have 200 regional malls. It will have a competitive advantage because 80% of the properties will be single property non-recourse financing . Company owns 31% of Aliansce (ALSC3 BZ) in Brazil. GGP is benefitting from the economic recovery. GGO is where GGP’s noncore assets will go. They include housing development land, land in Hawaii, land on the Las Vegas strip and South Street Seaport. Ackman referred to GGO, that he hopes it to be a mini Berkshire Hathaway. Ackman thinks new GGP will be worth $15 and new GGO will be worth $5. He finished by saying he bought 150 million Citigroup shares but did not give his thesis.

Seth Klarman, Baupost Group
Klarman delivered what would be his opening statement if ever called before Congress. Klarman noted that most people on Wall Street operate honestly, ethically and provide good service. It is the land of caveat emptor and transactions should be entered skeptically. When it comes to the complexity of derivatives, the purchaser should know they will wind up overpaying. There is a culture of compliance. He guides his firm with two rules. The Wall Street Journal Rule, don’t do anything you would not be willing to read about in the WSJ the next day. The second is the football field rule, if run to close to the sideline you increase the risk of running out of bounds, instead cut to the middle. Financial Transactions among consenting adults are an important part of the capitalist system. He has a fiduciary obligation to his clients, not his counterparties. Short sellers are the policemen of the financial markets.

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TILB Notes - Ira Sohn - these are in reverse order because we were emailing them one by one and I'm too lazy to cut and paste to reorder them.

Steve Rattner - ex Quadrangle, Treasury Car Czar, Lazard.

Reflections on crisis. Necessary and appropriate response to crisis. TARP was critically important. Stimulus package - not perfect but good. Stress Test for banks - restored confidence. Auto rescues (detail to come).

Believes Administration deserves credit for finding the middle ground.

Autos: no private capital available. Would have been chpt 9, not chpt 11. Labor was a critical creditor to these companies. Nothing abnormal about different stakeholders getting different recoveries. Believes every creditor received more than they would have in a liquidation. Doesn't believe they abrogated or changed law.

Put $50B into GM and believe it's investment worth $40B today on paper. Deems that 20% loss a success. [TILB: Conveniently left Chrysler out of that analysis]

I can't stand listening to him any further. No more notes on S-Ratt.

Jamie Dinon - York Capital
Don't think end is near. People adapt, societies adapt, etc. Equities are a good place to be if you're worried about that. Flexible, long duration, inflation resistant (albeit perhaps lagged).

Event driven:
CCE (Coke Bottling) - KO buying domestic bottling assets for $10/share. Left with European assets plus KO's Swedish and Norwegian bottlers. European macro for KO better than US - faster growing due to low penetration, better comptttv position vis a vie Pepsi and other bottling competitio, option to buy KO's Germany business as well as potential for other European assets. 6x EBITDA and <10x earnings for the stub. Comps trade at 8x ebitda and 13-15x. Stub at $15 vs comps implied $20-25. Dual listing catalyst. Safe business.

ING - Netherlands global bank. (All numbers in euro). Had Alt-A problems in crisis. Received Dutch bailout. Forced by EU to split insurance from banking. Sum of Parts: insurance - 30% in developed Europe (assume 0.7x bk in developed markets and 1-2x bk in EM, so overall 1x bk assume). Backing out insurance, €9.30 tangible book for bank. Trades today at €6. Deserves better than book, decent bank. Decent banks should trade > book.

Like post-bk equities. "Resurgence" phase.
Lyondell-Basel - ticker: LALLF came out of bk in April. $9.5B mrkt cap. Below plant value and below rejected bid from Reliance. Bk plan calls for 1.8B ebitda in 2010. Did $0.6B in Q1. Specialities business is rock solid and does 1B ebitda like clockwork and was on track in Q1. So the non-specialty business is crushing it if you back into the projections for that business. Apollo is biggest owner. Sum of Parts is $18-22B. Normalized ebitda $3.5B. Put 5-6x multiple on that and big upside.

Liquidation Play: Icelandic bank Keupthenk (spelling sorry). Claims trade at 23c. 25% Yield to Recovery. Base case 39c. Downside 22c. Upside mid 50s. 7th largest bk in history. 27% market price in cash. Most of the balance is performing loans.

David Einhorn: Greenlight
Title "Good News for the Grandchildren" [referring to passing budget debts to grandkids]

Obama knows what he wants to do on every issue in advance, but he wants to start a blue ribbon commission for dealing with debt w/o promising to actually do anything about it.

This won't be our grandchildrens' problem - it will be our generation's problem. The mount of debt is mind-numbing. Gov't acctng is done on a cash basis, so future promises (unfunded mandates/entitlements) aren't even counted yet.

Rails on average public sector worker situation vs private sector. Ridiculous skew of compensation and job security. Amount of gov't workers has now made them a critical voting block.

Questions: 1) how long will capital markets accept this? 2) how much liability can we pay via central bank monetization?

AAA financial instttns collapsed and nobody saw it coming, even as it became inevitable in retrospect. Think of the implication to gov't.

Using The Administration's 10 year forecast which assumes low rates and robust economic growth shows structural deficits through the whole period (just in time for unfunded mandate costs to kick in).

Should get rid of ratings agencies entirely or at least rid of their govt legislated position. Made fun of ratings agencies using their own quotes (especially the sovereign analysts).

Procyclical ratings agencies will cause problems at the worst moment. Ill-timed (from borrower's perspective) downgrade can serve as a coup de gras.

Zero risk weighting for banks to buy gov't debt will massively exacerbate the problem. Practically ensures the problem will spread fast.

Greenlight still short Moody's and McGraw Hill (S+P).

Monetization likely. May even show up in gov't statistics (sarcastically delivered). Recent bout of of QE not showing CPI ramp may have provided central bankers false confidence.

Shadow Stats says pre-1980 methodology would show 9% CPI today vs 2% govt reported. Lots of other stats on bad govt CPI stats.

[Summary from TILB so far - buy gold]

Low rates drives "wealth effect" by driving up capital market asset prices. This is fake.

Failed banks balance sheets most recent financial statements show solvency despite the huge losses fdic takes upon failure. This is almost certainly also true in "solvent" banks. Easy money policy used to bail them out.

Low rates creating an addiction. Japan can't even accept normalization.

If the emergency has passed, why still have 0% rate emergency policy? Negative consequences in addition to debasement/inflation: bubble inflation [malinvestment risk]. Rips Bernanke, etc.

Fed seems to want to create a new bubble. [Goes through history of Greenspan's bubble machine and into Bernanke's sov debt bubble...]

Gold, African Barrick Gold (ABG). ABG trades at half value on nearly every metric (6x ebitda). Believe catalysts include major index inclusion.

Patrick Wolfe (the guy that plays five people blindfolded simultaneously in chess at Berkshire). Announced the new Ira Sohn San Francisco Excellence in Investing in the Fall. Will be an annual event.

Next up, Einhorn

Jeremy Grantham - GMO
Got out of intense company analysis 20 years ago and into the bullshitting business. So here I am.

7 year forecast updated through May 21. S+P 1.5% pa real, high quality is "aborrently" cheap. Small cap expected return negative. [Long quality/short small crap anyone?]

Bonds grotesquely overpriced. EM 6.1% pa.

Timber is his top pick at 6% real. Didn't lose money through great depression. EM is his second place pick. US quality third. Combination "would make quite an interesting portfolio, I think".

US large high quality at cheapest value ever. "And right when we need them!"

Bubbles always make it back to trend. When you see one, it's time to cash in on some of your Career Risk chips. Avg bubble take 3.5 years to form and slightly faster to return to trends.

Took some time to taunt French and Fama. Made fun of Bernanke.

When you find a bubble, fighting it is incredible pain.

Today's bubble? UK Housing bubble is incredibly massive being supported by variable rate financing (Aussie too). UK housing needs to fall nationwide in price by 33%. Aussie needs to fall 42% to trend.

[TILB - Overall, one of most entertaining speakers]

Steve Eisman - Frontpoint
Subprime Goes to College (for profit education shorting)

Basic short thesis on for profit education. Bad companies, gov't in bed with for profit education, nasty selling habits, etc.

Often gov't grants/loans are 90% of revenue. ITT - 40% op mrgn vs 7-12% for typical gov't contractors. Title 4 has accntd for more than 100% of rev growth. Same for Apollo (growth more than 100% from gov't).
Historically, lower means families seek lower cost instttns. Title 4 inverts this needed relationship - hence the subprime analogy.

Further, the industry doesn't successfully educate their students (on average). Calls out CoCo, Apollo and ESI (ITT). Drop out rates 50-100% per year. Quite alarming, particulalry given student debt that accompanies this. Defaults of gov't guaranteed loans skyrocketing, despite industry obfuscation. When industry makes private loans, they provision 50-60% up front.

None of this matters until gov't cuts them off. Unregulated (loosely regulated) sales practices. Also, schools battle being cut-off by controlling accreditation process (akin to ratings agencies) to stay eligible for govt guarantee loans. BPI example shows how for-profits acquire distressed not for profit schools to get their accreditation.

Gov't looking at instituting new requirements. In particular, a Gainful Employment measurement for grads. Will crush APOL even if cut costs by 15% (40% hit to profit in two years), ESI 50%, COCO 40%, EDMC lose massive money due to debt, Washington Post would go from very profitable to overall loss making.

Believes if nothing is done, on the cusp of social disaster.

Niall Ferguson (Harvard).
No investment experience. Pure academic. Kept accidentally referring to David Tepper (prior speaker) as "Steve." Was an KC yesterday at a Kauffman Conference about Expeditionary Economics. Was hopeful it meant sending Paul Krugman to Somalia.

Believe we should be long "virtue". Even if PIGS cut to austere levels, still will be >100% debt to gdp. Guess what: same analysis shows worse for US and UK. PIGS R US.

Metrics of Doom. Shows cyclically adjusted primary balance: US, UK, Greece and Japan are absymal. Lots of other analysis that keeps showing US is "Out-pigging the PIGS" on all sorts of metrics. All his charts basically show is what won't happen. Problems will explode before them.

40% of US federal debt rolls in next 12 months. Treasuries are a safe haven in the same way Pearl Harbor was. Don't expect to hold a 10 year to maturity.

Shows a list of the Good Boys. Switzerland, Australia, NZ, Denmark, Czech, Australia, Canada, Sweden, Norway, etc.

Good way to diversify away from EM. Some of the same concepts but perhaps less China risk.

Don't argue with nasty fiscal arithmitic. Predicts US has Greece problem by 2012-13.

David Tepper: Appaloosa - 30%+ annualized since 1992.

Spoke at conf in 1998 to 75 people.

Was $13B of AUM last month. Now $12B. Oh well.

Wrote a song but not going to sing it.
Story from 1800s: tells story of horseshit problem that Hance also occasionally shares. Crisis from urban horse "output." Crisis happens, markets adapt, people adapt. Most likely won't be hyperinflation or deflation. The ECB bought govt bonds - the Bundesbank - "holy Christ. it's like the chastity belt is off and the girl is starting to play." The world adapts.

Investment ideas:
AIG - small insurance company (har, har). 8.175 jr sub debt. $4B issue. $24B of common equity. $12B of preferred. $9B of EBIT. Has another $40B of jr debt to his bonds which trade at 72c on dollar. So $70+B of jr securities. Maybe not worth $70B, but probably positive value. Govt owns 80% equity. Do your own work.
CMBS: started investing in late-08. Typical: 30% equity in a property (or 10 eq and 20 mezz). In the mortgage AAA 70%, jr AAAs 10% and then another 8% jr AAAs. Cap rate's not the thing. It's "can they make the payment"? No building going on. Bought an AJ the other day near 20% YTM likely to retire at par. Not looking at today, looking at future.

Equity Market: in 98, talked about Kospi and Samsung and Posco. Not bad ideas at that time period. If you want to make a lot of $ today, financials. BAC will make normalized $2.70. We say worth $27. Santandar (we know people hate it). One of 5-6 banks in world still AA. 30% Spain, majority EM, rest US. Double from here.

Thoughts on the world: thinking back to 97-98 period. History rhymes. Initial sov debt crisis. Lagged by Russia default. Then LTCM. Then Fed eased like crazy and market +50% (begining of end of bull mrkt). Maybe today is the end of the beginning. We know what our troubles are and we can attack them. Won't be that bad either way. Somewhere in the middle.

Sings a quick ditty then says, "I'm done."

Dan Arbess - Perella Weinberg Xerion (restructuring expert - (youngest partner ever at White and Case - led their restructuring group)).
Introduced his son who is a Leukemia survivor (6yrs ago). Loud applause.

Unsustainable global growth model of East lending to West for consumption of its production. World must rebalance. No quick fix. East must consume and West must save. This is bigger than 2008. Fear we and our politicians might not be up to the task. Placid macro backdrop may be gone for balance of our careers (he's probably 45). Success demands we be on the right side of global themes and hedged against dark side of those themes.

Themes we like: shake hands with China (buy what China needs). Short overleveraged Western producers. Hedge debasement (precious metals). Used an example of the West as a boiling frog.

Our nation alone owes China a trillion and a half dollars. Gov't taking over private debts through balance sheet contamination process. Every scenario bad for Euro. Bearish on Euro and Euro sov debt. US Treasuries perhaps short term safe haven, but beware. Confidence in fiat paper will erode. Gold and other precious metals. Prepare for stag-asset inflation.

We need to buy less, eat less and study more. Post Mao'ist China has no social entitlements and we have more than we can afford - it's ironic. Prepare for East to rise up and West to shrink down.

Gov't intervention growing and growing (took an explicit swipe at Rattner who is a speaker later in the day - referncing S-Ratt's pressure when Xerion led the Chrysler Holdouts [as a personal aside, hard to brlieve that was only a year ago]).

Like commodity rich nations (including Africa and jr miners).

Ivanhoe Mines ($13/sh). Owns largest undeveloped copper mine and huge met coal assets. Met coal and other non-core assets worth half market cap. Rio Tinto strategic partner that will own 47% of company. Has bought from $10-16. Down 30% this month. Believe copper mine is implied at half NPV value.

Look for good downstream businesses with big mrkt shares and EM presence. Solutia. Like it a lot.

Even further downstream - EM consumer businesses. YUM Brands. Explosive growth in China.

70% of all products sold in WMT made in China [TILB - wow]. Short high cost leveraged balance sheet G-7 producers.

Doesn't believe in China bubble. Formidable competitive advantage and resource base. True that latest stimulus is inefficient but believe urbanization trend and fiscal situation will drive them through that.

Short Yen vs CAD. Summary: Japan is totally f'd. Canada best G-7 economy.

2008 learned banks aren't safe. 2010 even sovereigns may not be. What's next? American innovation and EM globalization will drive the rest of our careers. Rebalancing will be messy and restorative. Loaded with invstmnt opps.

Sam Zell
No particular stock pitch. Here to tell you thoughts on the environment.
Post election theme of change. We have real change. No doubt. We are going to extremes that will impact investors in the future.
Every year since 1976, I've sent/issued an annual gift that has my thoughts on the next year. Here's what I sent this year:
The Survival of the Fittest (played
Extinction from inabikity to adapt. Shakes out weaker and benefits stronger. Ability to look around the corner and see what's coming. "Charlie...Charlie Darwin...sumpin' smells like fear" [autos, tbtf, swaps, etc. all addressed] "the pie got smaller, who will eat, who will be eaten". "The DNA that will endure is the DNA of the entrepreneur."

"So I guess the message, in less than subtle terms is 'he who adapts will succeed, he who doesn't adapt may not be here next year.'"

Short and to the point. Basically a video of his last music box and the song.

Jon Jacobson (Highfields) Went first because Sam Zell wasn't there yet.
20-30 core positions.
Very worried today. Primarily about the "clowns and the climate" in Washington. 50% of those filing tax returns in 2010 will not pay tax. We will be on the hook for state's liabilities. Administration that is fundamentally anti-business with a rolling antagonism and villification of business. There seems to be something wrong with earning acceptable returns and being successful. Worried about class warfare and social unrest down the road.

As excited about the discounts available today in good businesses as ever. But how do you trust the environment when the rules constantly change.

That said, talking about Sallie Mae. Good underlying biz fundamentals and we understand why it's disliked.

2x pre tax, pre provision earnings. 4x pre tax earnings.
6x net income.

Dealt with refinance concerns. Congress eliminated FFELP in the health care reform bill. Despite that loss, still #1 by far.

Worth $15-25/share. Liquidation/runoff vale $15. By 2011, $0.8 - $1 per share earnings. Potential to acquire servicing rights and improve balance sheet $0-$2+/share ($1/share of earnings power is possible). Biggest, most efficient student loan servicer. Dept of Education has SLM as one of four servicers for Fed direct student loans. Bigger than next 3 combined.

Dominates private student loans. Parents co-sign more than 80% of priv student loans.

Most effective collector of defaulted loans. Biggest mngr of 529 plans.

As FFELP goes away, many smaller student lenders will need to shed servicing as they lose scale. SLM well positioned to buy them.

Mgmt totally aligned. Love mgmt. Co. has retired $6B of unsecured debt at attractive prices in last 12 months. CEO buying with his own money, etc.
87% of balance sheet is term funded. Can easily retire maturities as needed. Appropriately capitalized.

SLM legislation risk. Hard to assess. Every company under attack.
Bank Tax risk. Bankruptcy reform. CFPA could become a regulator. Believe mgmt would literally liquidate if that's the best value per share opportunity.