Buffett to Bernanke

I found this article quite interesting.  So I asked
Stansberry & Associates for permission to share it with you.  It is
important to gain insights into possible life changing events. 
Perhaps sometimes it is best to think for oneself instead of relying on
the "crowd mentality".

May 26, 2013

Editor’s note: As Agora Inc. founder Bill
Bonner writes in today’s Masters Series essay… a time is coming
when the Fed must stop its current policies that have inflated
the price of all kinds of assets.

What happens then?

As Bill explains in today’s essay – originally published on May
9 in his free e-letter Diary of a Rogue Economist – the
Fed’s policies are "unnatural." And when they inevitably end…
we’ll realize the fleeting enjoyment was not worth the

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

By Bill Bonner, Diary of a Rogue Economist

The Dow rose another 48 points yesterday. Gold was up $24 per

Nothing remarkable. Nothing illuminating, either.

The newspapers and TV channels all reported the Dow 15,000 story
as though it were just a stepping-stone 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

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

All of which is amazing… and often breathtaking.

Between Improbable and Impossible

Stock market investors don’t seem to know or care that the main
thing propping up their investments is the same thing that will
ultimately destroy them. And that the longer the situation
continues, the bigger the mess will be when it finally blows up.

We’re talking, of course, about Federal Reserve, Bank of
England, Bank of Japan, and People’s Bank of China monetary
policy. It is "experimental." It is "bold." It is also reckless
and potentially catastrophic.

Lending money at negative real interest rates creates grotesque
distortions in the market.

Savers get nothing for their trouble. In fact, they lose money
in real (inflation-adjusted) terms. So they shift to speculating
on stocks. The stock market goes higher… but it is not a market
you can trust.

It is being driven by the printing of trillions of dollars, yen,
pounds, and renminbi. But central bank policy hasn’t been able
to budge slumping economic fundamentals. And any attempted exit
by central banks in the absence of a genuine economic recovery
will be, in the words of hedge-fund manager Paul Singer,
"somewhere on the continuum between problematic and impossible."

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.

What’s Not to Like?

At present, the feds get only rewards.

First, lower interest rates make it easier to finance federal

Second, low debt interest payments reduce the outstanding debt
in real (inflation-adjusted) terms.

Third, the Fed’s Treasury bond buying indirectly funds
government spending – to the tune of about $45 billion per

Fourth, the lack of yields in the bond market corrals investors
into stocks. This pushes stock prices higher. 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 Fed 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 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… 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."


Bill Bonner

Editor’s note: Bill Bonner is one of our
favorite writers on politics, history, and finance. Bill
publishes his insights in his e-letter, Diary of a Rogue
. If you’d like to make sure you receive all of
Bill’s free essays, click