What an interesting week we had on many fronts- an earthquake and hurricane on the east coast, Buffett bailing out another bank, and Bernanke’s speech.  The first two didn’t have much bearing on those of us in the Midwest, but the effects of the second two remain to be seen as trading opens on Monday.  I’ll share my thoughts on those below…

Buffett’s “Investment” in Bank of America

Warren Buffett’s Berkshire Hathaway decided to bailout another American bank.  This time around it is Bank of America (B of A). B of A (and banking in general) has been on the ropes for years and are only now still alive thanks to zero-interest rate policies and government funding.  In the last few weeks, risks have been rising globally for banks.  The mortgage mess for B of A, and many other banks, has not gone away.  See the trend here?

Back in 2008, Goldman Sachs was (still is) on the ropes and white knight Buffett came to his own rescue.  Wait, you mean he came to Goldman’s rescue, right?  No, he rescued himself.  Berkshire Hathaway is a public company and many of the companies Berkshire owns are public companies.  What would have happened to American stocks if Goldman went down?  It is likely for quite some time (perhaps longer than Mr. Buffett has left above ground) that the market would have been slammed and so, too, would a vast amount of his wealth.

Fast forward to this past Friday’s headline from Bloomberg – “Buffett deal latest to capitalize on bank weakness.”  I would re-title that truthfully as “Buffett props up another failing financial for his own self- preservation.”  Let’s line up the facts leading up to his “investment.”  Buffett spoke to Obama a few days before (probably to ensure that B of A is certainly a “Too Big To Fail” – TBTF).  Discussions were already underway within the government to limit all banks legal exposure to mortgage fraud.  B of A’s stock was plummeting; B of A’s risk exposure was rising; and B of A was telling the typical bank tale of being fine and not needing capitalization – lie.

What was the deal? In a nut shell, according to Bloomberg, “Berkshire gets preferred shares with a yield that’s more than 10 times greater than the lender’s common stock dividend, and warrants that allow Buffett to profit from gains in the share price.”  Sweet deal, huh?  Why not invest in something that appears to be no risk since the government will ensure Buffet gets paid by backstopping TBTF banks.

I am sure Warren Buffett is a smart, shrewd man. What I cannot come to terms with is why he is all of a sudden a distress investor.  I would expect such from the likes of Wilbur Ross (famed distress investor), but even Mr. Ross is smart enough to stay away from the financials.  It is hard for me to not think that if you told the tale of B of A to Mr. Buffett, provided him with the financials and painted the economic background (all without disclosing the company name) he would run the other way.  This is the same guy who bought a railroad.  I hope other Americans are starting to catch on to the cronyism, misdirection and disingenuous behavior of our government and capitalist leaders that are pulling the political puppet strings.

Bernanke’s Speech

The other big news was Fed Chairman Bernanke’s speech from the Fed meeting in Jackson Hole, WY.  The bottom line of Bernanke’s speech is that the Fed is not actively stepping in to support the markets with more QE or other tools, for now.  In addition, he appears to be punting the economic problems back to the government.  He remains either delusional or is lying about the state of the economy, inflation and US banks.  If you would like to read more I am going to pull quotes from the speech and provide my color commentary.

“…the U.S. banking system is generally much healthier now, with banks holding substantially more capital. Credit availability from banks has improved, though it remains tight in categories–such as small business lending–in which the balance sheets of potential borrowers remain impaired. Companies with access to the public bond markets have had no difficulty obtaining credit on favorable terms.”

Apparently no one bothered to tell Bernanke that B of A was just bailed out by Buffett, and that the CEO of Goldman Sachs has hired a defense attorney.  As well, let’s see how healthy the banks are if he pulls his stimulus back and/or raises interest rates.  This quote also tells us that small companies, which are the life blood of the economy, are having trouble borrowing, but big companies are having no problem.  Wonder why the economy is stuck.  

“…United States has risen nearly 15 percent since its trough, driven substantially by growth in exports. Indeed, the U.S. trade deficit has been notably lower recently than it was before the crisis, reflecting in part the improved competitiveness of U.S. goods and services.”

Read the above as export growth thanks to a severely depressed US dollar.

“The quality of economic policymaking in the United States will heavily influence the nation’s longer-term prospects. To allow the economy to grow at its full potential, policymakers must work to promote macroeconomic and financial stability; adopt effective tax, trade, and regulatory policies; foster the development of a skilled workforce; encourage productive investment, both private and public; and provide appropriate support for research and development and for the adoption of new technologies.”

Wow!  Now the Fed Chairman appears to be putting economic recovery back on the government.  I am certain more regulation, that is selectively enforced, (or not at all, read: Madoff, CME, SEC, etc…) will do more harm to private industry than good – especially small businesses.  Encouraging productive investment!  This from the Fed who has used US taxpayer money to prop-up failed banks that have mismanaged, lied and cheated their way to profits.  You have to be kidding me.

“The Federal Reserve has a role in promoting the longer-term performance of the economy. Most importantly, monetary policy that ensures that inflation remains low and stable over time contributes to long-run macroeconomic and financial stability.”

Now the Fed’s failed efforts to be master of the economy have been realized.  They appear to be downplaying their role and kicking the economic ball back to the government.  The statement that inflation remains low is laughable.  By true definition, the Fed has inflated the money supply to epic levels and prices are rising.  The really horrible part of this is the Fed is fighting on both fronts of the same war.  They are printing money, which is inflation (thereby creating price inflation), and at the same time encouraging government henchmen at the banks and exchanges to cap the prices of futures they are pushing up.  Consider oil and its price moving up.  Part of the price moving up in oil is the increased amount of US dollars in the world.  At the same time, we have the exchanges claiming speculators are driving the price up then putting in rules to try to push prices down.

Bernanke did extend the Fed’s next meeting in September to two days from one.  The point of the extension is to further review the current state of affairs.  As I have said, I think the Fed wants begged back to stimulus, and that will only happen with pain in the financial markets.  As of now, it appears the pain is not as great as them seeing the need to support the markets.  The beginning of September should be interesting with the release of the ISM manufacturing report, which could come in at a pretty nasty territory.  If the PMI (Purchasing Managers Index) reports that came in throughout August have any indication of ISM (as they typically are), then ISM will not be so hot, and the markets may find the selling mood once again.  

Do you have an investment strategy that seeks to protect your portfolio against volatile economic conditions?  Call me to schedule a free review of your current investment portfolio – 913.693.7918.

John P. Chladek, MBA, CFP® is the President of Chladek Wealth Management, LLC, a fee-only financial planning and investment management firm specializing in helping families and couples who are not yet retired realize their financial goals.  For more information, visit https://www.chladekwealth.com.

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