Warren Buffet’s Appeal to Our Dead Consumer Culture: ‘Buy American’

In an op-ed piece of October 17’s New York Times world-famous entrepreneur and financier Warren Buffet urged American investors to return to the stock market and bet on the long term future success of the United States. “Buy American,” Buffett’s headline reads. “I am.”

The essay was a vote of confidence from a successful guy at a time when America badly needs a vote of confidence from somewhere, anywhere, for anything.

But is Buffett’s advice valid?

The gist of Buffett’s analysis is that when markets tumble, the best time to buy stocks has historically been before recessionary effects hit the broader economy. As Buffett explains it,

During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.

Or, if you need a more shorthand rule of thumb: “Be fearful when others are greedy, and be greedy when others are fearful.”

It’s hard not to like Warren Buffett, a guy who admitted openly on a recent televised interview that 1) his clerical staff pays higher income taxes than he does, and 2) that’s not right. No, he’s not out pestering the IRS to accept additional taxes from him as a mea culpa, but he does go out of his way to encourage Americans, to back American businesses, and to responsibly critique U.S. government policies, all the while managing to still enrich Warren Buffett in the process.

If there’s such a thing as an Everyman CEO, Buffett is the guy.

Still, many analysts see hard times ahead for the U.S. for many decades, not just many years. While it’s true that ‘buy low, sell high’ is still a decent way to conduct yourself in regard to the stock market, it’s also true (and Buffett admits it in the NYT essay) that the U.S. could be in for a prolonged decline before we see a Renaissance. What that means is that unless you are young and careful with what you purchase, this might not be a great time to jump into the stock market: Not because America will never come back–of course it will come back eventually–but because you may or may not be around when it does, and you may or may not pick the company that will thrive in whatever nation America is about to become.

Because the America that existed up until this month? That nation is effectively gone now.

What we are witnessing right now is for all intents and purposes the decline of an empire. How far will we fall? The most positive estimates have the U.S. going through a severe recession with a continued drop in housing prices, rising unemployment, and frequent government intervention through 2010 at least and possibly longer. Those are the optimists.

Pessimistic forecasts invoke Mad Max movies and survivalist nightmares.

I think the truth will, as usual, be somewhere in the middle, with the downturn being more severe than predicted in the press but less apocalyptic than predicted by the conspiracy theorists. Will some people find ways to get rich during these difficult times? Yes. Some people always do. The Chinese sign for crisis is also the sign for opportunity (whether it really is or not!) and so on and so forth.

But will most of us prosper?

No.

Most of us will be lucky to hang on to what we have, and any little bit of money left over will probably not be spent on stocks. Not for a long time.

What that means is that, while the stock market may be close to bottoming out at this point (who can say?), and while certain stocks might be worth buying right now for that reason (which stocks, even Buffett isn’t saying), the ability of most people to buy anything is going to go away for a long, long time, starting this Christmas if not sooner.

We are likely to see a stock market bottom, whenever it comes, followed by years of flat-lined market activity. Gains will be modest and unpredictable. Old standbys will go the way of the dinosaur and some surprising start-ups will briefly appear like shooting stars. Good guessers with lots of cash will be rewarded, but most people will just hang on until whomever we are going to be as a nation emerges clearly out of the 2008 smoke and carnage.

Many have made a credible case that the housing bubble was really an extension of the tech bubble and that, by replacing one bubble with another, we only forestalled and worsened the effects of an economic crisis that has been building for decades, not years. Manufacturing is no longer the foundation upon which the American middle class builds its wealth and security. We have been hemorrhaging manufacturing jobs, and a lingering distaste among many for the abuses of the labor movement that led to the disappearance of Jimmy Hoffa and the coronation of Ronald Reagan continues to keep us from doing what we need to do to shore up wages and opportunities. It’s fine to have beliefs, economic or otherwise, but here’s a fact that flies in the face of fiscal dogmatism: People can’t spend money they don’t have.

Not anymore they can’t, anyway. Not with credit markets frozen and jobs disappearing into the October mist like so many spectral visitors from America Past. With Christmas approaching, retail chains where I live are laying off employees.

Anyway you slice it, our “consumer culture” seems to be DOA. A victim of fiscal cardiac arrest.

So what does America do now? We don’t make things. We’ve lost the tech battle to China and India. We’ve tapped out our oil. Our young people are uneducated and unwell. And the final death rattle of a declining culture–rampant consumerism–is about to become a morality tale told to children around the wood stoves of the future by grandparents who lived through The Crash of 2008.

I appreciate Buffett’s encouragement, his faith in American business, and his willingness to step forward as a cheerleader right now. But I submit that the crisis we are facing is not so much a financial or economic one as it is an identity crisis, the biggest identity crisis we have faced as a nation since the Civil War.

Who are we and who do want to become?

The answers to these critical questions will determine our future prosperity.

Let’s hope and pray we get them right.

What Can the Art Market Tell Us About Our Economy?

When compared to more traditional investment options, the contemporary art market is highly inefficient – but this hasn’t dampened the enthusiasm of buyers and investors.

The contemporary art market has left its critics standing. Many presumed that it would be one of the crisis’ first victims as collectors tightened their purse strings and investors redirected their funds to safer areas. Yet somehow, the art market has boomed beyond expectation.

It is ironic that, in this period of economic turbulence, this inefficient little market has become more stable than the giant financial institutions. On the same day that Lehman Brothers filed for bankruptcy, Sotheby’s auction house raised nearly $100 million for the work of British artist Damien Hirst.

Many in the media have viewed the art market’s boom with suspicion since the start of the crisis, and they have been keen to pounce every time a market correction occurs – corrections are to be expected from any fast-growing market. They have presented the market’s success as a mystery and suggested that the market has somehow become disconnected from the underlying economy.

But the art market is not disconnected – it cannot be. Rather, it is a perfect reflection of the current state of the global economy.

New Art Investors

A new breed of collector is stalking the auction house: many corporate investors have increased their exposure to fine art in an attempt to diversify away from the financial markets. You would be forgiven for presuming that art is a high risk investment considering the subjective nature of art appreciation, yet corporate investors have brought with them more reliable valuation methods to an industry reliant on historical post-auction data.

A whole industry has sprung up around the needs of these corporate investors: there are now a number of fine art funds that trade artwork as you would any other commodity and indexes with which to more accurately anticipate future trends. Earlier this year, intelligence provider Artprice.com launched its Art Market Confidence Index, aimed at providing serious investors with more reliable metrics for the art market.

Many buyers are using art purely as a tool for financial gain which, in turn, has pushed up the price of the market. It is sad that the growth of the market has made it difficult for legitimate museums and public galleries to purchase new stock; a larger proportion of our international art heritage is finding its way into private collections. Of course, private collections are nothing new, but is the financial motivation behind the purchase (and therefore the price) changing the way we look at art? Should we be worried when art becomes nothing more than a commodity?

New Art Collectors

Salvation comes from an unlikely source. The image of the elitist western collector is slowly being eclipsed by the cash-rich Russian oligarch – reportedly, a third of the buyers at the Damien Hirst auction mentioned above were from the ex-Soviet Union.

These new Russian buyers have injected the art market with liquidity. Although the investment potential of art may influence their purchases, their primary interest is aesthetic – they are in search of unique and sophisticated items to complement their luxurious lifestyles and new-found wealth.

The art market has boomed because it has attracted these new breeds of investor and buyer. In this respect, the art market has not disconnected itself from the realities of the global economy – rather, it reflects the global shift in economic power: western capital is moving away from financial institutions into other areas, oil and gas-rich BRIC countries have a major economic advantage and investments from cash-rich countries are cushioning the downturn in certain sectors.

Perhaps the ultimate lesson to be learned about our economic system is that, given time, all bubbles burst. Time will tell.

Senate Investigation: Major Financial Institutions Helped Hedge Funds Avoid Taxes

A year long probe by Senate Permanent Subcommittee on Investigations which relied on internal bank documents and emails has found that some of the nation’s biggest investment banks and brokerage firms including Morgan Stanley, Citigroup, Lehman Brothers, and Merrill Lynch & Co marketed allegedly abusive transactions that helped foreign hedge fund investments avoid withholding taxes imposed on dividends paid by U.S. companies over the past decade. These funds are liable for tax on the dividends they receive from investments in the U.S. at a rate of 30%. The amount of tax avoided could well be in billions of dollars.

The banks actually competed with one another to dream up complex transactions for foreign hedge funds to avoid taxes. The probe also found that some of the internal communications show that the bank officials were concerned that they could run into trouble with the Internal Revenue Service (IRS).

The results of the probe clearly highlight the failure of the IRS and Treasury Department to enforce the law. The banks entered into agreements to give the hedge funds the economic value of dividends, without actually triggering a withholding tax on dividend payments. The foreign hedge funds would sell their stock to an U.S. investment bank just before a dividend was to be paid and simultaneously enter into a swap arrangement with that bank to retain the economics of stock ownership. The U.S. bank paid the foreign hedge fund a dividend equivalent but did not withhold any taxes. The funds technically didn’t own the shares. A few days later, the hedge funds would repurchase the stock from the U.S. bank.

The $32 billion special dividend by Microsoft in 2004 is said to be the trigger that spurred the investment banks and brokerage firms to sell products that would allow their hedge fund clients to avoid paying the associated taxes.

The investigation had some effect. Merrill Lynch & Co stopped doing some of the deals after the committee began its investigation although the investment bank claimed that it acted in good faith when it advised its clients – foreign hedge funds – and it acted appropriately under existing tax law. Citigroup voluntarily approached the IRS and paid $24 million in withholding taxes after an internal audit.

One of the beneficiaries of such transactions – Maverick Capital Management – estimated that such deals helped it avoid $95 million in taxes over an eight-year period.

The result of the probe raises one very important question – where does the loyalty of these investment banks and brokerage firms lie? They are American companies who have reaped all the benefits of being American companies. They have openly helped foreign hedge funds flout U.S. tax laws. Is there something called patriotism or is it profit at any cost?