Buffett Bets Big On a Bottom

Although we wish Warren Buffet well on his railroad bet, we think he may be premature. Buffett tendered a $100 offer Tuesday for the 77 percent of Burlington Northern Santa Fe that he doesn’t already own, paying a 30% premium over the most recent share price.  He was quoted as saying it was an “all-in wager on the economic future of the United States,” but we’d guess he still holds quite a bit of capital in reserve. That is notwithstanding the fact that his net worth has probably been bludgeoned as badly by deflation as any other billionaires’. We assume this is so because 1) it is inconceivable to us that he was short the real estate market in 2007; and, 2) legendary bargain hunter that he is, we nonetheless doubt that he would have viewed gold as a “value investment” when it was bottoming below $300 some years ago. That kind of thinking does not exactly come naturally to the permabull. Nor would the Sage of Omaha likely have read Bob Prechter’s prescient “At the Crest of the Tidal Wave” to jolt his amazing brain into thinking so far out-of-the-box. 

That said, we should make clear that we LOVE incurable optimists like Buffet, since absolutely nothing would get built if everyone were as certain as we are that the U.S. economy is quietly slipping into a Second Great Depression. What a grim world this would be if Prechter’s book had lingered near the top of the best-seller list for a few years. By now, sixty million Americans would be hunkering down in the rental units for which they traded their homes, not spending a dime on frills and planning to cut back even more ahead of the holidays.  If Time magazine and CNBC headlined the same kind of stories we feature here so often, we probably would not have brought children into the world. (We did anyway, daringly conceiving our first-born during the 1990-91 recession that we thought was the beginning of the end.)

Chrysler’s Scrap Value

Regarding Buffett and other case-hardened optimists, it will be extremely difficult for them to resist the seeming bargains that come along in the next few years. And that is exactly why debt deflation poses such a investment challenge. If you’ve become adept a scooping up bargains, there are going to be bargains such as no one has seen since the depths of the 1930s Depression. The trick will be to distinguish between discount prices, distressed prices and extremely distressed prices. The example we have used here before is the East Side co-op that changed hands for $15 million in boom times. The discount price, which is where we are now, is $10 million; the distressed price is $4-$6 million; and the extremely distressed price – where we think things are ultimately headed – is $250,000. You could overlay the same downward trajectory on a chart of Chrysler Motors. Fiat is in at the distressed price, having bought its stake from private equity investors who thought they were getting a steal.  But when Fiat is forced to unload the company a few years down the road – the buyer will be Chinese, of course – the price will be close to scrap value.

Rick Ackerman

Subscribe to Rick’s Pick

Also by Rick Ackerman

Rick Ackerman is the editor of Rick’s Picks, a daily trading newsletter and intraday advisory packed with detailed strategies, fresh ideas and plain old horse sense. You can subscribe by clicking here.