Saturday, October 1, 2011


I've talked about being in a recession for more than a few months and yet I'm still amazed that there is still an open discussion on the subject in play.  What led me to this post is a clip I found where our favorite guru from the Midwest was interviewed on Bloomberg and he gave another powerfully rosy call signaling that everything was "just fine".

Take a look.

See, don't you feel better?  I thought you might.  Today as I was getting all worked up over the Oracle's comments I thought to myself, why would he say such things?  And I came to the conclusion that he has several reasons to put lipstick on this pig.

  • First, he has been buying like crazy over the last several years and he is probably underwater in many of these positions (BAC and GS anyone?).  While I am one to give most people the benefit of the doubt, it is obvious that Warren Buffett talks his book all the time and in fact has had a staff that likes to front run their own trades, why would we think that Buffett is going to tell us what he really thinks?   He is more likely to tell us what we need to hear to push up his positions.
  • Second, our friend Warren is now pretty tight with our President isn't he?  If he says we are in a recession he pretty much turns the lights out on the Presidential bid for President Obama.  I would guess that Mr. Buffett won't call a recession till the ECRI and NBER guys call it, even if he knows it well before they do.
  • Finally, Warren Buffett is so "big" now that he can't be negative.  If Mr. Buffett were to come out and declare that we were in a recession, it simply would be the final nail in the coffin for the economy (recall, the Fed thinks that sentiment and asset values are everything).  Call it economic diplomacy right?  Just like the post the other day "GEITHNER LIES BECAUSE HE CAN - AND MUST," that I highlighted with Jon Corzine that stated that Tim Geithner could never tell us he wants a weak dollar.... essentially giving the implication that he does.  Buffett is such a market mover that he can't possibly say what he might really think because if he did it would be catastrophic. 
Well, what other perspectives might we have to see if Omaha's greatest investor is on track or not?

Let's grab a look at the Financial Conditions Index from Bloomberg.  In this index we have a measurement that includes all sorts of liquidity and credit metrics.  This is a measurement that is a standard deviation and essentially we find that any level above zero indicates an economy is expanding.  If the measurement is below zero, it indicates that we are in a recession.

Unfortunately the indicator doesn't look too positive to me as the the Financial Conditions Index took a nose-dive at the end of July and doesn't show any signs of reversing course.  The level indicated here is well under the key zero level.

If any of us had other thoughts that global demand is going to rebound, we can also see that global cement making company Cemex has dropped 56% in the 3rd quarter!  Cemex acquired Rinker, a cement company that produced 80% of US cement, so their results are very indicative of the US outlook too.

So while Uncle Warren tells us everything is just great, we have a couple of other perspectives that tell us he might be painting a picture that is just a bit too rosy.  If we didn't have a completely rigged bond market we might be able to look there for some truth, but alas, our Federal Reserve has destroyed that market too.

Next week we'll do the monthly update so we'll speak more about this issue and share more charts and data to determine if we can discern if Mr. Buffett is telling the truth.


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