Any moment now we expect Paul Krugman to come out with an op-ed suggesting that not just Time magazine, but Charlie Munger is the latest to join the ZH payroll, following some unexpected comments by Warren Buffett's right hand man earlier today on CNBC when he said that "the U.S. is looking more like Japan given the prolonged low-interest-rate environment."
The one phrase which Krugman will surely have something to say about was the following: "I strongly suspect it was massively stupid for our government to rely so heavily on printing money and so lightly on fiscal stimulus and infrastructure," Munger told CNBC's "Squawk Box."
Munger also blasted Japan's decision to become the latest nation to implement negative interest rates: "It surprised all the economists of the world."
But before we accuse Charlie Munger of transitioning into a full blown Austrian, his policy recommendation left something to be desired: "I think we would've been way better off if we'd used fiscal stimulus because … this [low interest rate] approach runs out of fire power." Of course, "fiscal policy" is merely a more polite way to say take on more debt, which ultimately goes back to the fundamental problem: there is simply far too much debt in the world, and the main reason why the Fed and other central banks have been forced to unveil unorthodox monetary policy, in the process monetize massive fiscal deficits, is to keep interest rates as low as possible or else risk an out of control explosion in not just debt but servicing costs.
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Meanwhile, in other, somewhat tangential news, none other than Warren Buffett went on an epic tirade over the weekend bashing Wall Street. According to the WSJ, just before lunch at the Berkshire Hathaway annual meeting on Saturday, Warren Buffett unloaded what he called a "sermon" about hedge funds and investment consultants, arguing that they are usually a "huge minus" for anyone who follows their advice.
The Berkshire chairman has long argued that most investors are better off sticking their money in a low-fee S&P 500 index fund instead of trying to beat the market by employing professional stockpickers. He used the annual meeting to update the tens of thousands in attendance - and others watching via a webcast - -about his multi-year bet with hedge fund Protege Partners. The bet, initiated by the New York fund back in 2006, was that over a decade, the cumulative returns of five fund-of-funds picked by Protege would outperform a Vanguard S&P 500 index fund, even when including fees.
Mr. Buffett showed a chart comparing the cumulative returns of the two since 2008. As of the end of 2015, the S&P 500 index fund had a cumulative return of 65.7%, outdoing the hedge fund teams's 21.9% return. The S&P has outperformed in six of the eight individual years of the bet too.
The chart was preamble to the real point Mr. Buffett wanted to make: that passive investors can do better than "hyperactive" investments handled by consultants and managers who charge high fees.
"It seems so elementary, but I will guarantee you that no endowment fund, no public pension fund, no extremely rich person" wants to believe it, he said. "They just can't believe that because they have billions of dollars to invest that they can't go out and hire somebody who will do better than average. I hear from them all the time." He was just getting started.
"Supposedly sophisticated people, generally richer people, hire consultants, and no consultant in the world is going to tell you 'just buy an S&P index fund and sit for the next 50 years.' You don't get to be a consultant that way. And you certainly don't get an annual fee that way. So the consultant has every motivation in the world to tell you, 'this year I think we should concentrate more on international stocks,' or 'this manager is particularly good on the short side,' and so they come in and they talk for hours, and you pay them a large fee, and they always suggest something other than just sitting on your rear end and participating in the American business without cost. And then those consultant, after they get their fees, they in turn recommend to you other people who charge fees, which... cumulatively eat up capital like crazy."
Buffett said he's had a hard time convincing people of this case. "I've talked to huge pension funds, and I've taken them through the math, and when I leave, they go out and hire a bunch of consultants and pay them a lot of money," he said, earning a laugh from the crowd. "It's just unbelievable. "And the consultants always change their recommendations a little bit from year to year. They can't change them 100% because then it would look like they didn't know what they were doing the year before. So they tweak them from year to year and they come in and they have lots of charts and PowerPoint presentations and they recommend people who are in turn going to charge a lot of money and they say, 'well you can only get the best talent by paying 2-and-20,' or something of the sort, and the flow of money from the 'hyperactive' to what I call the 'helpers' is dramatic."
A passive investor whose money is in an S&P 500 index fund "absolutely gets the record of American industry," he said. "For the population as a whole, American business has done wonderfully. And the net result of hiring professional management is a huge minus."
As the WSJ adds, Buffett has long had a testy relationship with Wall Street, and he's positioned himself for decades as an outsider to the world of New York finance. In addition to repeatedly attacking the fees charged by hedge funds and investment professionals, he's criticized the tactics of activist shareholders, the danger of derivatives and the heavy use of debt by private-equity firms.
To be sure, the antipathy has run in the opposite direction as well. Over the years many on Wall Street believe the Berkshire chairman to be a hypocrite, hiding behind the image of a folksy, benevolent investor while pursuing some of the tactics that are the targets of his attacks. Others have rightfully and repeatedly accused the Oracle of Omaha of perpetuating his wealth while standing for nothing more than crony capitalism.
That did not stop Buffett from continuing his rant.
"There's been far, far, far more money made by people in Wall Street through salesmanship abilities than through investment abilities," he said. "There are a few people out there that are going to have an outstanding investment record. But very few of them. And the people you pay to help identify them don't know how to identify them. They do know how to sell you."
As so many hedge funds have found out the hard way, at least under the global central bank put regime, Buffett's assessment has so far proven correct but perhaps not for the reasons he thinks: after all when central bankers themselves have become Chief Risk Officers of the global equity markets, where even a 5% dip is immediately countered with relentless activist rhetoric by the money printers if not even further monetary action (there has been nearly 700 central banks easing decisions since the financial crisis, not to mention over $13 trillion in liquidity injections) who needs to hedge?