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Buffett to Bernanke: It’s Easier to Buy Stocks Than to Sell

The newspapers and TV channels all reported the Dow 15,000 story as though it was just a stepping stone…a milestone on the way to 16,000…or 20,000…or 30,000.

Heck, the sky’s the limit.

Investors have reached a new level of bullishness. They’re borrowing again to buy stocks, confident that prices go in only one direction. Advisors, too, seemed sure that this was not the end of a trend, but the beginning of one. Just what you’d expect at a market top.

There’s also a swift current of economic analysis telling us that the commodities boom is over…the Federal Reserve has the situation under control…and the bull market in gold is finished.

All of which is amazing…and often breathtaking.

Stock market investors don’t seem to know or care that the only thing holding up their investments is something that will ultimately destroy them.

And that the longer it continues, the bigger the mess when it finally blows up.

We’re talking, of course, about the Federal Reserve’s monetary policy. It is ‘experimental’. It is ‘bold’. It is also reckless and potentially catastrophic.

Lending money at negative interest rates creates grotesque distortions. Savers get nothing for their trouble – thanks to zero interest rate policy. So they shift to speculating on stocks. The stock market goes higher…but it is not a market you can trust. It is not driven by genuine values…it is driven up by amateur speculators desperate for profit. This won’t go on forever.

It is also unnatural for a central bank to print up new money and use it, indirectly, to pay for government operations. If you could do that without penalty – that is, if you could pay for real things with fake money – you would do it all day long. Normally, central banks don’t even try. They know the penalties make it not worth the fleeting enjoyment.

Do you see any penalties, dear reader? We don’t. But the fact that the penalties have not yet been assessed doesn’t mean they don’t exist. And the longer we go without paying them, the greater they will eventually be.

At present, the feds get only rewards.

First, lower interest rates make it easier to finance federal debt.

Second, low debt interest payments reduce federal deficits…so the feds actually borrow less.

Third, while the feds borrow less the Fed continues to buy $85bn worth of bonds per month. This lowers interest rates even further.

Fourth, low interest rates…and new money from the Federal Reserve…boost stock prices as well as bond prices; rich bankers and rich campaign contributors get richer.

What’s not to like?

For the moment, nothing. But the markets won’t stay in this sweet spot for long. The time will come when the Federal Reserve will have to reverse its policies or face substantially higher inflation. But how? Instead of buying bonds, the Fed will have to sell them. But to whom?

Fortune Magazine reports:

Warren Buffett has a piece of advice for Ben Bernanke: It’s easier to buy than it is to sell.

Buffett, speaking on Saturday at Berkshire Hathaway’s (BRKA) annual meeting in Omaha, said he is worried about what will happen when the Federal Reserve tries to wind down its recent efforts to stimulate the economy. Via a program nicknamed QE, short for quantitative easing, the Fed in recent years has bought up over $2 trillion in bonds in order to lower interest rates and promote borrowing and investment.

Some have warned that when the Fed decides to sell its trove of bonds, or even just stops adding to it, stock markets could tank. Rising interest rates could cause banks to lose billions, perhaps igniting another financial crisis. Buffett says we don’t know what will happen, but he is concerned.

“QE is like watching a good movie, because I don’t know how it will end,” says Buffett. “Anyone who owns stocks will reevaluate his hand when it happens, and that will happen very quickly.”

“People make different decisions when they can borrow for practically nothing,” says Buffett. “It’s a huge experiment.”

Charlie Munger, Buffett’s long-term chief lieutenant, who was also talking at the meeting, says he worries about more than just inflation.

“What has happened in macroeconomics has surprised pretty much everyone,” says Munger. “Given that history, economists should be more cautious when they print money in massive amounts.”

Regards,

Bill Bonner
for The Daily Reckoning Australia

 

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Bill Bonner
Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.

3 Comments

  1. Chris says:

    Fed is where bonds go to die. They will not be sold.

  2. Gerry says:

    The further distortion of the equity markets by central banks using created “money” to buy equities is also again helping the top executives, even if that is not the direct purpose. They are cashing out significant numbers of their personal company shares in a gradual fashion at the progressive toppings of the market. They know the record share prices don’t reflect the true situation of their companies, yet they are being further rewarded. They are selling out personal holdings as others invest. The Central Banks have a lot to answer for as the ordinary investor will be financially slaughtered in real terms when the music stops. All the big boys will be hedged and covered etc etc.. same old..same old.

  3. slewie the pi-rat says:

    from: http://www.prudentbear.com/2013/05/thoughts-on-electronic-printing-press.html#.UY3PrNntD8o [Doug Nolan's Weekly "Wrap"]

    Debt issuance was huge. Investment grade issuers included JPMorgan $2.0bn, State Street $1.5bn, Berkshire Hathaway $1.0bn, Northeast Utilities $750 million, General Motors Finance $2.5bn, Brinker International $600 million, Perrigo $600 million, Bank of New York Mellon $500 million, Public Service Electric & Gas $500 million, XL Energy $450 million, Toll Brothers $400 million, PACCAR $400 million, Johnson & Son $400 million, Caterpillar $350 million, Hyatt Hotels $350 million, Piedmont $350 million, Alpha Natural Resources $345 million, Oklahoma Gas & Electric $250 million, University of Chicago $205 million and Oncor Electric Delivery $100 million.

    Junk bond funds saw inflows increased to $789 million (from Lipper). Junk issuers included Ford Motor Credit $1.5bn, Ball Corp $1.0bn, First Quality Finance $600 million, Atlas Pipeline $400 million, Penn Virginio Resource $400 million, Commercial Metals $330 million, Claire’s Stores $320 million, Cash America International $300 million, Istar Financial $565 million, Sonic Automotive $300 million, Harron Communications $290 million, BOE Intermediate $285 million, Federal Realty Investment Trust $275 million, Rolta $200 million, Gastar Exploration $200 million, Ion Geophysical $175 million, Tops Holding $150 million, Brunswick $150 million, Penta Aircraft Leasing $140 million, and Iracore International $125 million.

    Convertible debt issuers included Dana Gas Sukuk $425 million.

    The long list of international dollar debt issuers included European Investment Bank $5.0bn, BP Capital $3.0bn, Statoil $3.0bn, Australia & New Zealand Bank $2.5bn, Nordea Bank $2.5bn, HSBC Bank $2.0bn, Network Rail $1.75bn, Neder Waterschapsbank $1.5bn, Femsa $1.0bn, Leaseplan $750 million, NXP $750 million, Banco Del Estado $750 million, Want Want China Finance $600 million, Harvest Operations $600 million, Instituto Costarricense $500 million, Inversiones $500 million, Dana Gas Sukuk $425 million, Seven Generations Energy $400 million, LBC Tank Terminal $350 million,j CHC Helicopter $300 million and VCH Lease $155 million. {End Paste]

    H.U.G.E. is the word, Big Bird.

    the dynamic duo of dissimulation, seen, once again, to be talking outa both ends of their alimentary canal at once, together, at their annual meeting, Batshit and Rob’em take down $1.0 Bil.$, “handled” by their banksters, the G/S squididity, who two-scooped the ‘raisin’ Bran, themselves, with both hands, at once, while telling the Bloomie Terminal cats they wanted to go “dark” here, along with Kevin “VIX Fix” Hendry, spewing the squid-speak from one end, only, as usual.

    that junk bond net inflow of $789mm is about as high as i have seen it for a loong while, offhand.
    this leaves about $6B in “junque refi” for the WEEK, and this is most certainly “why” the junk bond “investors’” reach for yield was ‘driven by leveraged demand for return’ below the 5% low lintel spread over prime-time crime.

    Want Want China Finance $600 million…

    … OW! slewie just separated a rib!

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