With total U.S. non-government debt of close to $40T, if only 10% of all outstanding loans default we're still looking at a $4T price tag. In time, some say, Paulson's $700B will look like duck soup.
To put the problem into perspective, let’s just consider some base statistics.
The publicly issued debt of the Unites States was, until very recently, a massive $5.3 trillion. The total debt, including non-public IOU’s and unfunded obligations including social security and Medicare, is now a staggering $50 trillion! The total annual wealth generation, or GDP of America, is some $14 trillion.
Contrast those figures with the current debt problem ascribed to the reckless pursuit of predatory lending. Incidentally, predatory lending was made illegal in most states until overridden by President Bush to protect Wall Street profit opportunities.
The U.S. mortgage holdings are some $14.8 trillion, including some $3 trillion of commercial mortgages. Local government debt is some $3 trillion. But, even these gigantic figures pale in comparison beside the $20.4 trillion of consumer and corporate debt. Therefore, the total of non-Federal Government debt is some $38 trillion!
Of course, not all of it will default. All things being equal, possibly only a small proportion will fail, at least initially. But today, all things are not equal. We know that we are heading into a recession. This means that increasing amounts of debts will default.
The main problem is that predatory lending incurs a high default rate. So if only 10 percent of outstanding loans default, the Government will have to raise some $4 trillion, or more than 5 times what Congress is being asked. It will increase the U.S. Government public debt by some 80 percent.
Thursday, September 25, 2008
Wednesday, September 24, 2008
Goldman Sachs: Buffett's Buys Stake Signals Bottom?
I don't know if I've told readers this before....(ok maybe almost a hundred times)....but I love dividends.
In a market such as this, where volatility rules the day, dividends are the solstice in my investing activities that reminds me why I enjoy being paid to wait. Even if the market drops 20%, I'm not nearly as exposed to losses as indexed investors when my portfolio yields a hefty 4% of tax efficient dividends. Not only that but my tax-efficient cashflow is growing anywhere between 5-8% per year at a minimum and in depressed markets I'm simply adding to already undervalued shares with the prospects of a stress-free retirement with unlimited possibilities to keep my occupied.
Warren Buffett knows the value of cashflow, both personal and corporate. In the news yesterday, Goldman Sachs (GS) announced that Berkshire Hathaway (BRK.A), Buffett's investing vehicle, will purchase $5B worth of perpetual preferred shares with a 10% dividend being paid in return for exclusive use of this capital injection. Not only does Berkshire get a dividend nearly double that of Canadian bank issued perpetuals, but the holding company also receives warrants to purchase $5B of common stock at $115 during the next five years.
This effectively sets a floor price on the common stock of GS and gives them a much needed credibility boost in a market of much uncertainty. Buffett has already established a comfortable margin of safety in his investment even if the warrants are never exercised. With extensive experience in unwinding derivative positions in General Re Securities back in 2002, Buffett is likely to begin exerting significant pressure on Goldman management behind closed doors right away to limit its exposure to "toxic waste."
If Goldman balks at the move, the market will likely see Buffett exercising the warrants on the common in a move to send a clear message to both the market & company that he means business.
Buffett doesn't invest with any intention of losing money and he's given Goldman Sachs a rare opportunity to clean up their act with a vote of confidence from an investor revered as the best in the world. He buys for the long-term and has learned from past mistakes to take opportunities he can create in his favor to better position Berkshire for the future.
The Oracle of Omaha has been busy buying in recent days and weeks, and I find comfort in this behavior as I myself have seen these market troubles as opportunities to buy quality companies at much cheaper valuations that I would have otherwise expected.
Scott asked me earlier this morning, "Who better to navigate this minefield than Warren and Charlie?" and an investor has to wonder if we're better off simply buying Berkshire B shares (BRK.B) at this time of market uncertainty then attempting to navigate the cluttered minefield of exposed companies on our own.
As a keen student of Buffett and other value investors I've learnt a great deal that starts with the basic foundation of how to be successful when investing. I follow my Value Rules, buy quality companies that pay me a dividend and when I have an adequate margin of safety I buy some more. I might not always get the cheapest price than other investors, but over the long-term I believe I'm much better off buying a company that pays me every quarter to invest in their business. Over time I can reinvest those dividends into more shares of the same company or others and accelerate the compounding nature of my investments for the long-term.
Here's one thought for readers: Buffett's the milkman and he never forgets to deliver.
link: http://seekingalpha.com/article/97158-goldman-sachs-buffett-s-the-milkman-and-he-always-delivers
In a market such as this, where volatility rules the day, dividends are the solstice in my investing activities that reminds me why I enjoy being paid to wait. Even if the market drops 20%, I'm not nearly as exposed to losses as indexed investors when my portfolio yields a hefty 4% of tax efficient dividends. Not only that but my tax-efficient cashflow is growing anywhere between 5-8% per year at a minimum and in depressed markets I'm simply adding to already undervalued shares with the prospects of a stress-free retirement with unlimited possibilities to keep my occupied.
Warren Buffett knows the value of cashflow, both personal and corporate. In the news yesterday, Goldman Sachs (GS) announced that Berkshire Hathaway (BRK.A), Buffett's investing vehicle, will purchase $5B worth of perpetual preferred shares with a 10% dividend being paid in return for exclusive use of this capital injection. Not only does Berkshire get a dividend nearly double that of Canadian bank issued perpetuals, but the holding company also receives warrants to purchase $5B of common stock at $115 during the next five years.
This effectively sets a floor price on the common stock of GS and gives them a much needed credibility boost in a market of much uncertainty. Buffett has already established a comfortable margin of safety in his investment even if the warrants are never exercised. With extensive experience in unwinding derivative positions in General Re Securities back in 2002, Buffett is likely to begin exerting significant pressure on Goldman management behind closed doors right away to limit its exposure to "toxic waste."
If Goldman balks at the move, the market will likely see Buffett exercising the warrants on the common in a move to send a clear message to both the market & company that he means business.
Buffett doesn't invest with any intention of losing money and he's given Goldman Sachs a rare opportunity to clean up their act with a vote of confidence from an investor revered as the best in the world. He buys for the long-term and has learned from past mistakes to take opportunities he can create in his favor to better position Berkshire for the future.
The Oracle of Omaha has been busy buying in recent days and weeks, and I find comfort in this behavior as I myself have seen these market troubles as opportunities to buy quality companies at much cheaper valuations that I would have otherwise expected.
Scott asked me earlier this morning, "Who better to navigate this minefield than Warren and Charlie?" and an investor has to wonder if we're better off simply buying Berkshire B shares (BRK.B) at this time of market uncertainty then attempting to navigate the cluttered minefield of exposed companies on our own.
As a keen student of Buffett and other value investors I've learnt a great deal that starts with the basic foundation of how to be successful when investing. I follow my Value Rules, buy quality companies that pay me a dividend and when I have an adequate margin of safety I buy some more. I might not always get the cheapest price than other investors, but over the long-term I believe I'm much better off buying a company that pays me every quarter to invest in their business. Over time I can reinvest those dividends into more shares of the same company or others and accelerate the compounding nature of my investments for the long-term.
Here's one thought for readers: Buffett's the milkman and he never forgets to deliver.
link: http://seekingalpha.com/article/97158-goldman-sachs-buffett-s-the-milkman-and-he-always-delivers
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