“I attempt to cultivate my own insights and to recognise the precarious uncertainty of global macro trends . . . But first and foremost, I am always preoccupied with the notion that I just do not have the answer. I am not blessed with the notion of certainty. Someone once said we should think of the world as a sentence with no grammar. If we do I see my job as putting in the punctuation. But above all, my job is to make money.”

London-based Eclectica’s Hugh Hendry is certainly one of the more eclectic thinkers in the industry.  The full letter is worth a read and echoes many of the points we have made over the past few years.

April 2012 TEF Commentary

To better understand the dynamics of exponential revenue growth and the repeated forecast errors made by investors generation after generation, we highly recommend John Hussman’s analysis, excerpted below:

“One of the more fascinating aspects of a speculative market is the classic enthusiasm for new issues, and the emergence of growth “darlings” whose long-term exponential growth is taken as a sure thing. This movie has played so many times in the historical data that we’ve practically memorized the lines. Near the end of the tech bubble, I got myself a nice bit of criticism on CNBC when Alan Abelson of Barron’s Magazine published my projections for Cisco, EMC, Sun Microsystems and Oracle – all in the range of about 15-20% of the prices where they had recently changed hands. Those projections actually turned out to be slightly optimistic.

“Given that we’re seeing some similar behavior today, it’s probably a good time to discuss the dynamics of growth. Consider a very large, untapped market for some product. We can model the growth process in terms of how quickly that product is adopted by new users, whether there are any “network” effects where new buyers are attracted to the product because other people already use it, how frequently existing users replace their products, whether late-adopters come in more slowly than early-adopters because of budget constraints, how quickly the untapped market grows, and a variety of other factors.

“Whether you do this sort of modeling with a spreadsheet or with differential equations, you’ll get essentially the same results. Specifically, growth rates are always a declining function of market penetration. Most strikingly, the growth rates begin to come down hard even at the point that a company hits 20-30% market penetration. Network effects accelerate the early growth, but also cause growth to hit the wall more abruptly. Replacement helps to accelerate the early growth rates too, but ultimately has much more effect on the sustainable level of sales than it has on long-term growth. In fact, if the replacement rate (the percentage of existing users that replace their product each year) is less than the adoption rate (the percentage of untapped prospects that are converted to new users), it’s very hard to keep the growth rate of sales from falling below the rate of economic growth.

“The chart below gives the general picture of various growth curves and the effect that different factors can exert. The paths are less important for their actual growth rates as they are for their general profiles (below, I’ve assumed that 15% of the untapped market adopts the product each period). It may seem odd that you could get a growth rate below the adoption rate. But notice that with an adoption rate of 15% and a total potential market of 1000 units, for example, you’ll sell 150 units the first year, but the next year’s sales will only be 15% of the 850 remaining untapped prospects, so growth will actually be negative unless you have other factors contributing, such as discovery, replacement, network effects, and so forth. 

“To see how all of this has played out in the actual data for past market darlings, let’s take a look at several extraordinary growth companies that can now reasonably be viewed as having reached their “mature” level of market penetration: Microsoft, Cisco, Intel, Oracle, IBM, Dell and Wal-Mart. The chart below presents the combined scatter of historical revenue growth and penetration data for these companies. Again, the key feature is that growth rates are a rapidly decreasing function of market penetration. 

 “With regard to the elephant in the room, which is Apple, my impression is that what appears to be endless exponential growth is actually the overlay of three separate logistic growth curves – one for the iPod, one for the iPhone, and one for the iPad. These are great products. Still, in order to maintain even a constant level of sales, every unit sold in a given year has to be matched by a replacement the next year – year-after-year – or it has to be matched by a new adoption, and adopters of used products don’t count. Simply put, even zero growth demands that every dollar existing users spent on Apple products last year has to be spent again this year, or matched by some new user this year, and then again next year, and again the year after that, ad infinitum. Of course, it’s reasonable to expect that late-adopters (e.g. those who have to save in order to afford the product) will have lower replacement rates, which will need to be offset by even greater adoption.

“Yes, there are billions of people in developing countries without an iPhone. Unfortunately, most of these people are also without running water.

“We’ve seen very rapid adoption rates, very high replacement, and very strong network effects in Apple’s products. All of this is an extraordinary achievement that reflects Steve Jobs’ genius. I suspect, however, that investors observe the rapid adoption and very high recent replacement rate of three very popular but semi-durable products, and don’t recognize how improbable it is to maintain these dynamics indefinitely. Despite great near-term prospects, within a small number of years, Apple will have to maintain an extraordinarily high rate of new adoption if replacement rates wane, simply to avoid becoming a no-growth company. That’s not a criticism of Apple, it’s just a standard feature of growth companies as their market share expands.” 

The full article is available by clicking here.

In sports, regression to the mean may be the reason for the “Sports Illustrated Cover Jinx” and the “Madden Curse”.  It is also likely to explain why the best performing golfer on the first day of a tournament is likely to be less successful on the second day and why firms with the worst ratings in Fortune’s Most Admired Companies go on to earn much higher stock returns than the most admired firms (which coincidentally does not bode well for the current hedge fund love-affair with Apple, but does offer promise for our current investments in Dell, Hewlett Packard and Xerox).

In Thinking, Fast And Slow, Daniel Kahneman, winner of the 2002 Nobel Prize in Economics, explains that regression effects are ubiquitous, as are the misguided stories to explain them.  Kahneman warns that, “Our mind is strongly biased toward causal explanations and does not deal well with ‘mere statistics.’  Causal explanations will be evoked when regression is detected, but they will be wrong because the truth is that regression to the mean has an explanation but does not have a cause.”  In other words, as much as we’d like to believe the stories which “explain” the phenomenon, our stories are likely just narrative fallacies – flawed stories of the past that shape our views of the world and expectations of the future.  “Narrative fallacies arise inevitably from our continuous attempt to make sense of the world.  The explanatory stories that people find compelling are simple; are concrete rather than abstract; assign a larger role to talent, stupidity, and intentions than to luck; and focus on a few striking events that happened rather than on the countless events that failed to happen.”

The human mind does not deal well with nonevents.  “The fact that many of the important events that did occur involve choices further tempts you to exaggerate the role of skill and underestimate the part that luck played in the outcome.”  Another limitation of the human mind is our imperfect ability to reconstruct past states of knowledge and the tendency to revise history in light of what actually has happened.  This hindsight bias leads us to judge the quality of a decision not by whether the process was sound but by the outcome, making it almost impossible to evaluate decisions properly.  We would tend to agree with Kahneman (although certainly biased) that, “Hindsight is especially unkind to decision makers who act as agents for others . . . We are prone to blame decision makers for good decisions that worked out badly and to give them too little credit for successful moves that appear obvious only after the fact.”

Howard Marks recently published an excellent note on Assessing Performance Records in which he discusses this outcome bias and the dilemmas faced by anyone tasked with structuring a portfolio.  The full letter is worth a read.  In it, Marks explains that, “In order to survive and have a chance to produce long-term performance, investors have to live up to their constituents’ expectations in the short run.”  Sounds easy enough, except when one considers that timing is incredibly imprecise and incredibly significant in terms of outcomes.  Expensive stocks can get more expensive (as we’ve experienced many times before) and cheap stocks can get cheaper (once again, consistent with our investments in Dell, Hewlett Packard and Xerox), thus timing plays an important role in the perception of success or failure.  Marks’ reminds us of the old adage about the six-foot-tall man who drowned crossing a stream that was five feet deep on average.  “In investing, it’s not enough to survive on average. You have to survive on the worst days, when the low points in the market are reached.”

For our part, we continue to see a severe disconnect between financial markets (which have rallied sharply) and underlying economic conditions (which we expect to weaken materially), putting stocks at risk of disappointment in the near term.  But while we remain concerned about the next few years as we work off the excesses of the past few decades, we are very bullish on the stocks we own for the long term.  We just need to make sure we survive on “the worst days” to get there.  So between now and then, we will continue to focus on process over outcome, we will look to capitalize on mean reversion rather than the blind extrapolation of trends, and we will tread carefully around any supposedly harmless streams.

“I looked at the expanse of white tablecloth in front of me, the perfectly aligned plates, and the flowers and elaborately carved vegetables on the circular glass in the center. I leaned back in my chair and breathed slowly. This, I thought resignedly, promises to be an epic. 

“It started off, as it always does, with a fight about the seating arrangements. At these events there is a strict hierarchical order to the places at the table and there is always a prolonged argument among the middle-ranking Chinese officials about where they should sit, with plenty of jostling and pushing, each person protesting loudly that the others should take the more senior places. Once everyone had settled, during the small talk little glass cups appeared beside each guest’s place and were silently filled with baijiu by waitresses who moved noiselessly through a concealed door in the paneling.

“Baijiu looks like gin but it tastes much stronger. It is distilled from grain and sorghum and there are many famous brands of the drink in China. Wuliang ye or “five-grain liquid” comes from Yibin in Sichuan, and Maotai, the most famous in China, comes from Guizhou, farther south. A really good bottle of Maotai can cost the equivalent of several month’s salary. Baijiu is always taken neat but, thankfully, in small doses. The idea is to knock it back in one go with a cry of “Gan bei,” “Dry the cup!” The problem is that drinking baijiu at a Chinese banquet is compulsory; it is slightly vicious, has a smell like exhaust fumes mixed with a trace of chocolate, and seems both fiery and sickly at the same time. It burns the inside of your mouth and throat and leaves you with a sensation rather than a taste. There is an immediate feeling of heat and tingling that creeps up the back of the neck and radiates out all over the scalp. I always knew that these formal banquets entailed elaborate drinking rituals designed to get the guests hopelessly drunk, so I braced myself for the deluge.

“The starters were served cold. First, there was a dish of duck webs in a thick yellow sauce. It turned out to be the strongest mustard that I had ever tasted. It sent a searing pain up the back of my nose and brought tears to my eyes. Next came “husband and wife” lung slices. He told us that it was Sichuan specialty: cow’s lung soaked in chili sauce. The lungs were followed by goose stomachs, a couple of dishes of pickled vegetables, a plate of steamed lotus root, and a chicken that looked as if it had been attacked by a madman with a machete: its bones stuck out at all angles. Then onward to the hot dishes.

“It seemed as if the cooks had entered a contest to serve up the strangest parts of animals in the weirdest combinations. The pile of smoked plates grew on the table in front of us: fish lips with celery, monkey-head mushrooms, goats’ feet tendons in wheat noodles, ox’s forehead, roasted razor-blade fish, and finally a tortoise in a casserole. There was one dish that looked like a bowl of pasta served up plain and without the sauce, but it was crunchy and almost tasteless. It couldn’t be pasta, so I asked what it was. “A Shangong specialty,” said the mayor. “Steamed rabbits’ ears.”

“At this point there was a minor distraction from the story as a plate of black scorpions arrived. The mayor explained that you eat them whole with a couple pieces of shredded radish and popped in a few to show us.  I said I thought they were poisonous but he said reassuringly, “Not if they’re cooked properly.”

“More toasts, cheers, hoots of laughter, and the grand finale arrived. “Deer’s whip!” said the mayor.

“The waitress had brought in a flat white oval dish and placed it center stage. In the middle, chopped neatly into sections and then meticulously reassembled, surrounded by carefully arranged pieces of broccoli and carrot and with just the faintest traces of steam rising up from the edges, was unmistakably an enormous penis. “Deer’s dick! Oh Lord, how horrible!”

“The mayor, smiling broadly, leaned forward, picked up a piece with his chopsticks, and placed it on my plate. The tip, so it seemed, was the best part.”

One day before my flight left for Hong Kong, I received a copy of Tim Clissold’s Mr. China from a friend in Charlotte. Mr. China is a fascinating memoir of China’s peculiar business culture between 1995 and 2002, highly worth the read if you can find a copy.  With fifteen hours to spend with my friends at Delta, I looked forward to enjoying some entertaining war stories about Chinese culture during the flight. And after four days in Hong Kong, a half-day in Macau, and nearly a dozen cities in mainland China, it would seem that not much has changed since then!

I am extremely happy to report that we were successfully able to avoid the poisonous scorpions during our dinner meetings.  Unfortunately, we were not so lucky when it came to the poisonous river fish!!  After waiting a few moments for everyone to digest this local delicacy, our host laughed and laughed as he explained that the fish’s blood is a deadly nerve toxin that could kill you in minutes if not prepared properly by a highly sought after certified chef. Thanks for the heads up Jerry!

I am back in the office this week just in time for Spring in NC.  Over the next few weeks, I will share my observations and summarize our discussions with government officials, real estate developers and banking officials while traveling through China in March.  The pace of development (i.e. capital misallocation) across the country is simply mind-boggling. Perhaps some second and third tier cities really do need three state-of-the-art high speed train stations?  Perhaps the Chinese people really do just shop on weekends leaving massive furniture malls completely vacant Monday through Friday?  And perhaps spending more than half of your GDP on “investment” (relative to 16% in the US and 40% during other historical emerging market credit bubbles) is not representative of one of the greatest economic imbalances in history?  Or perhaps we are just missing something and the poisonous river fish may have “gotten” us.

After the event, I had an opportunity to spend a couple hours having Breakfast with Dave.  We view the world in very similar lenses and I think Dave is one of the few economists on the street who “gets it” – in this case, “it” is the extended impact of deleveraging on the global economy.  Very much enjoyed breakfast and getting to know the Gluskin Team, as well as hearing about Dave’s experience at the Munk Debates.  Thanks for breakfast guys.

P.S.  William – the raffle was a terrific success!!

• There is a gene for value investing.  For Klarman, it’s natural, but for a lot of people it is against human nature – while everybody appreciates a bargain, everyone also overreacts and gets scared when the market is going down.
• Investing is the intersection of economics and psychology.  The economics is not that hard.  Controling the emotion is harder and it comes with experience.
• Value investors have to be patient and disciplined.
• Leverage can magnify returns but it also magnifies losses. If you are leveraged and greedy you blow up.
• You need to balance arrogance and humility.  When you buy anything, it is an arrogant act.  You need the humility to know that you might be wrong.
• Buffett evolved through three states: from buying cigar butts and getting something for free; to buying great businesses at cheap prices; to buying great businesses at fair prices and holding on forever.  Klarman is still in phase one.  Buffett has a better eye for great businesses.
• Klarman does not have a Bloomberg on his desk, but he sits on a trading desk thinking big thoughts – “we are not traders.”
• Baupost is making medium-to-long term investments – three to five years or longer.
• The only reason to care about market gyrations is to buy something cheaper – benefit from volatility.
• Baupost’ s rhythm is opposite most of the market’s rythym.
• When the market goes straight up, the little guy finds it irresistable and get’s sucked in. The return for all mutual funds in the 90s was 600 bps higher than the average investor’s return because they get in at the wrong time and out at the wrong time.
• Buying is easier.  Selling is hard.  There is no timing element.  You can never know how good a bargain someone will offer you tomorrow.  If you see a dollar laying around for sixty cents, you have to buy it, and buy a little more if it falls further.  The risk is that the dollar isn’t really worth a dollar.
• A lot of stocks are cheap for a reason.  Many stocks are perennial undervalued because they are mismanaged.  Good management adds value.  Bad managements think of themselves first.
• Klarman had no interest in the firm when he started Baupost. He looks for people that will put clients first.  If you do this, you will do great.
• When people give money to instituional managers, there is a giant separation between the interest of the money and the interest of the stewards of the money.
• The Earnings of financials hit 40% of the broad market several years ago. It seems ridiculous that we are an economy that only makes money from making money. The financial industry as a whole does not add any value.  Finance, in terms of complex secruties, etc. is disturbing.
• The sovereign crisis is a large serious problem.  But the real problem is the banks that own government debt.  If one bank goes, they will go like dominoes.  The problem is the system is so interconnected.
• Subordinated debt holders should take a haircut when businesses fail.  If Citi had done that, they would not have needed a bailout.  These things can be accomplished differently.
• In this particular case, the problem in Europe is so large, they will likely need assistance.  Governments have created the problem by encouraging moral hazard.  We need to demand that our politicians man up and do the right thing.

http://www.valueinvestingworld.com/2011/11/charlie-rose-interviews-seth-klarman.html

“Because increased collateral values inspire more credit, reflexive dynamics can often be identified by the concomitant growth of credit and collateral values. If credit is rising rapidly along with asset prices, there is a high probability that reflexive dynamics are under way.”

With this in mind, I revisited the chart below from Steve Keen, illustrating Australian home prices and the change in credit growth in the economy.

Looks like the growth rate in Australian Housing credit is plumbing the lowest levels ever.  I’m not a quant guy, but I’m pretty sure that “ever” is a long time.

Given that Australia’s Private Sector Debt has rapidly exceeded that of even  the most prolific American spenders, I wonder what happens when the private sector begins deleveraging from the extremes shown below.

I also think it is interesting that most folks have the impression that Australia has very little debt.  If we learned anything from the recent crisis, it’s that private sector liabilities can quickly become the public sector’s responsibility.  So it’s important to look at the total debt in the system.  In this light, Aussies are actually in line with the US due to heaps of household and financial sector debt obligations.

 A good friend of mine, and one of the most successful investors I know, has been lecturing me on the importance of catalysts when sizing positions.  I am beginning to come around to the idea, particularly as we have been writing about the Australian Property Bubble for over a year now, and I am looking forward to moving on to something new.  Some may say we’ve been early, but I’d remind them that we’ve been warning of European defaults for over two years!  Call it what you want but our thesis continues to develop and we continue to see increasing evidence of falling prices and deteriorating economic conditions down under.  What follows is a collage of evidence I’ve accumulated over the past several weeks (maybe longer), that when put together, paints a very clear story in our opinion.  So Kyle, GET FIRED UP!!  Here is your evidence:

Properties are languishing on the market in a number of suburbs.  This article in Perth Now explains that, “Almost 311,286 properties are for sale across Australia, the highest in more than five years and almost 30 per cent more than the same time last year. In Melbourne, there are 50 per cent more properties for sale, 30 per cent in Sydney, 14 per cent in Brisbane and almost 40 per cent in Adelaide. Meanwhile, auction clearance rates have remained below 50 per cent for 20 consecutive weeks in Australia’s largest housing markets.”

CourierMail explains, that “Sellers who manage to snare a buyer in Brisbane’s soft property market are seeing their deals fall over as a new trend emerges of valuations coming in below contract prices, making it difficult to obtain finance. Owner’s estimates of their property’s actual value are often wildly optimistic.”

Prosper Australia has ignited a small but growing push calling for a “buyers’ strike” to protest against the high cost of housing.  “There are 1.3 million Australians with negatively geared rental properties. They are diverting all rents and some personal income to meeting interest payment in the hope of capital gains. When only capital losses are expected, investors will flood the market and overwhelm demand. Buyers will step back, making it virtually impossible to sell at any price.”

It seems that the Australian Bankers Association is waking up to reality, taking the unprecedented step of launching a website – www.doingittough.info – for financially stressed homeowners to negotiate hardship packages, according to the Daily Telegraph.  “The Big Four banks are on high alert for a rocky 2012 with a sharp rise in defaults.”  This is the first time the banks had set up a site to deal with customer hardship on mortgages and other financial products like credit cards and personal loans.  Recent reports have pointed to a higher ratio of “non-performing loans” and people falling behind on mortgage repayments in recent months.

One in ten Australian households are in housing stress, according to Australian’s for Affordable Housing.  A startling 460,000 households spend more than half of their income on housing costs.  It’s no wonder Australian’s are shouting out for help.  The cost of housing is the single biggest cost of living issue in Australia today.  Spend a few minutes perusing this site to get a feel for their frustrations.  We have seen how this story ends.

In a recent report, Moody’s warned that there are “meaningful uncertainties” for Australian housing and mortgage delinquency rates are likely to increase over the next decade. We doubt it will take that long.  “Capital city house prices have more than quadrupled and household debt has tripled since 1990. Simple metrics indicate that the current price levels are not sustainable.”

According to Australian Real Estate and Property, “If a second global financial crisis (GFC) occurs credit markets will tighten up.  Australian banks already have up to 40% exposure to European debt and the big four Australian banks ratings were downgraded by Moody’s Investor service due to this wholesale funding exposure. Unfortunately in 2011 Australian borrower home loan arrears hit a 15 years high with Australian banks and borrowers in a binge-buying hangover.  The time period 2008 and 2009 combined make up 40 per cent of the mortgage loan books of the major Australian lenders. The Australian borrowers who purchased property during the height of the Australian Government economic stimulus in 2009 and hence the peak property prices, are now most at risk to falling property prices.” 

It’s no wonder that, “The Australian Prudential Regulation Authority has told banks to model what would happen if the European meltdown spread to Australia through a series of stress tests designed to ensure the strength of the local banking system,” according to The Australian Financial Review.  “The stress test has been prompted by an escalation of the European sovereign debt crisis that could lead to a global recession and a hard landing in China. It comes in the same week that the Reserve Bank of Australia’s deputy governor, Ric Battellino, warned that Australia’s indirect exposure to Europe through the effect on some of our important trading partners, could be significant.  The short notice and time frame allowed by APRA, particularly in light of negative comments from the RBA, indicates the regulator is preparing for a difficult 2012.”

The banks problems are likely to be compounded as most of the Australian economy is already in recession.  So it shouldn’t come as a surprise that, “The number of companies entering some form of insolvency administration in calendar year 2011 continues to set new records, per Dissolve.  A recent report stated that, “The months of March, April, June and now July 2011 have been the highest ever for each of those months. The calendar year to July 2011 is also the highest ever.”

“Thirty-six companies in the residential construction sector have entered voluntary administration in the past two weeks,” often the precursor to liquidation, according to The Age.  ”There has been a marked increase in the insolvency of builders and building-related businesses over the last few weeks and this is likely to increase after Christmas when contractors have to fund the long slow-down or shut-down period, with little cash flow coming in. With banks being reluctant to increase facilities for building companies, this will only exacerbate the situation.”  The author concludes with a very important point:

“A big part of the problem is the delay of payments to these businesses, which puts their cash flows under undue pressure. According to the country’s biggest receivables management and credit report company, Dun & Bradstreet, the trade payment terms for the construction sector are at the highest level since the fourth quarter of 2009, which was at the height of the global financial crisis. Over the past 12 months, payment terms in the construction sector deteriorated by nearly two days from 52.8 to 54.4 days, which is almost double the conventional standard of 30 days. In 2003 the average was 45 days.

“Payment trends are known to be an accurate leading indicator of an economic correction. Indeed, the last economic decline was preceded by a blowout in trade payments. The concern is that as the global credit market crunches, and credit availability starts to tighten again, the impact of late payments on cash flow will be devastating in a sector that is already hurting.

“Residential housing and construction are a key component of the economy and when things go south they have a huge knock-on effect. Things are likely to get worse before they get better.”

A year ago, some of my Australian friends claimed that housing prices would not fall because the economy was so strong and without a rise in unemployment, prices would maintain their elevated levels.  I disagreed with the comment then but it is still worth noting that Australia’s job market is weakening today as businesses look to cut costs to cope with a deteriorating economy.  Per News.com.au, “The economy outside mining has been quite weak so companies have had to start laying people off to get their costs under control . . . That suggest for 2012 there will be weaker consumer spending, greater downside risk for businesses and this is of course even before the full impact of the European debt crisis.”  Perhaps this explains why consumer sentiment collapsed in Australia by the most since the start of the financial crisis three years ago.  At least for most consumers.  Apparently, some of them, like this 25-year-old high school dropout from Western Australia making $200,000 a year running drills in underground mines, is the exception, according the WSJ.  We’d suggest it is more likely just another indication of the unsustainable credit boom and forthcoming bust in China, as our friend Vikram eloquently outlined in his book.  Don’t worry, we’ll have more on this shortly as well.

• Three big themes: deleveraging; monetary and fiscal policy out of ammunition; political will has deteriorated to address structural issues.
• We have reached our debt limits.  Europe has reached their debt limits.  Now the process is in reverse.
• You can break the world into two parts. The developed debtor world, which is deleveraging.  And the emerging creditor countries.
• The key is to spread it out as long as long as we can so it is not disorderly.
• If we just cut spending by 3% and raised taxes by 3% we would cut the deficit in half over ten years.  Instead we have a political division so there is no compromise, which is extremely dangerous during a deleveraging process.
• Resolving the public sector debt does not resolve the problem.  Overindebted individuals face the same problem.
• The social impact of extended unemployment is a cancer to society.  The unemployed must be made productive.
• Reality works in a certain way.  You have to understand reality.  Europe has a debt problem.  There are three options.  Transfer the money. Print the money. Or write-down the debt.
• We all should recognize that we can be wrong.  Success comes from knowing what you don’t know.
• The number one principle at Bridgewater is if something doesn’t make sense, you have the obligation to explore it.
• One of his favorite books is Einstein’s Mistakes.
• The great fallacy of all of mankind is people know more than they do.
• Every place has to have a culture.  Culture is values.
• Bridgewater is an unusual place with an unusual culture. The number one principle is don’t believe anything.  Think for yourself.
• An independent thinker has to have a different point of view than the next person.
• The cost of being wrong is a terrible thing.  So worry about being wrong.
• Everybody is looking at what to do, and each approached it with a bias, but no one has thought about or discussed how the economic machine works.
• There is not enough discussion on how to get people to be self-sustaining.
• The most important thing you can give anyone is opportunity.
• The number one problem today is our leaders are not having a quality dialogue.
• There are two worlds.  Debtor developed countries and emerging creditors.  Classically, the US and China.
• Those worlds can be divided into those that can and cannot print.
• Europe cannot print.  There is a limit to wealth transfers. They will likely print (ultimately) and take haircuts.
• China cannot control credit growth.  This is an emerging credit bubble.  This is a dangerous thing that the Chinese must gain control of.
• The US is in a deleveraging.  We don’t have the ability to ease via monetary policy.  It is not as effective.  On top of that, we have social tension.
• We should be able to grow at a rate comparable to income growth – 1.5% to 2% – but unemployment creates social tension analogous to that existing in Greece, Spain, etc.
• That is the best case scenario.  If we have a disruption, we can not recapitalize the banks.  It is not feasible.
• You have to have agreement to have a plan.  You can not have people at odds.
• Our job is to stay one step ahead.
• I suppose I’m concerned.  It is a test of us.  It is a test of our society.

http://www.charlierose.com/view/interview/11957