Buffett Beware

Published Nov 18, 2022, 1:46 PM

We take a look at market short-covering and recap the Midterms. We also consider the hackneyed label: "The Next Warren Buffett." Cam Crise, Jonathan Bernstein, and Justin Fox join.

Welcome to Bloomberg Opinion. I'm Vonnie Quinn. This week, the political scientists John Sides and his co authors talk about a cycle of discovery, scrutiny, decline. Jonathan Bernstein on the start of campaigning for four. Also Justin Fox on the curse of the Warren Buffett comparison. First though, to the markets, mac Oman columnist Cameron Christ joined me to discuss what's starting to look a lot like shortcovering. Cameron, so, typically one percent move is considered, you know, a fairly decent move. But we've seen a lot of one percent and way more than that moves this year, and yet it's difficult to know whether we're hitting bottom or we're heading top. You have a great column about how you distinguish between shortcovering and a regular If there is everyone rally, what are we seeing right now? Yeah? I think you can look at the performance of individual securities within an index to get some sort of insight as to what's driving the index level price. I think the theory here is that if there's new money coming in, it should really benefit all the securities in the index more or less equally. I mean, it isn't necessarily the case but you would expect to see a broadly comparable performance across all of these individual stocks, whereas if it's a short covering rally or a rally it's driven by a reduction of risk positions. What you would expect to see is sort of the worst performers suddenly being the great beneficiaries of that flow, and the strongest performers suddenly tailing off. And that's exactly what we've seen since the us CPI figures. So if you sort all the stocks in the SMP five D, for example, by their performance over the last year, and then you look at say the ten worst performers, well, they've returned an average of just under eight percent. If you look at the ten best performers, on the other hand, they've actually fallen by one quarter percent. So the good stocks have been sold and the bad dogs have been bought. And that naturally suggests that what's been driving the price act has been risk reduction on the part of portfolio managers and investors. If that's the case and much risk has been reduced, are we sort of at a flat level here or is there more to be done? Or how do you know about that? Yeah, I mean it's difficult to say, and it's the sort of thing that you can only know to some degree in the hindsight that haven't been said. Looking forward, I mean, what have we got on the horizon? All right? We've got Thanksgiving Week in the US next week, which is typically a quiet period or at least appeared with low participation and poor liquidity. We've got the Football World Cup starting uh this weekend, and while some people may be boycotting that on human rights grounds or whatever, it's still the sort of event that draws a lot of viewership brittly in Europe, Asia and South America. And again, got an environment where you've expect trading liquidity to be poor. And all of this takes us sort of into the end of the year again where trading liquidity is poor. Given the volatility that we've seen throughout the course of the year, I think it's certainly reasonable for anyone who's had a half decent year to sort of think about, well, liquidity is bad now, and it's about to get worse. Why not just tighten up the ship a little bit, reduce some risk positions, particularly given that sort of the macro currents are shifting a bit in the sense that we had that lower inflation figure last week, and when I just run a lower risk profile when things are more likely to be erratic. Now, you do say that poor trading liquidity can be both an ally and an enemy. So for those who maybe didn't have the best of years, might be be trying to take it down to jobs. Yeah, I mean, I think there's certainly an element of that, roll the dice by a few lottery tickets and hope for the best. Yeah, that's certainly the case. Because if you're you know, I won't name any names, but there are some high profile fund managers they are down plus on the year. I mean, is there is there much difference between down fifty and down sixty? Not really, But if you can sort of recover the down all of a sudden, it doesn't seem so bad. So yeah, I mean, I guess there could be an effort perhaps to try to push things some of these poorly performing names, try to push them higher, but it remains to be seen how successful that might be. Cameron, what about correlation, because it does seem like stocks really around the world are so correlated right now. Are people doing the same thing in every training environment? Well, certainly the phenomenon I've just described in terms of risk reduction that does seem to be evident in other markets as well. I'm a round the same analysis on the eurostocks, on the foot Sea and on the kneek, and they've all exhibited broadly similar behavior where the performance over the last week or so has been sort of negatively correlated with that of the last year, which really captures the sort of thematic trend of two so um. Again, that's consistent with some risk reduction, shortcovering, whatever you want to call it. As as we enter this period where liquidity is like going to be even worse than it's been recently common, you know, it's an impossible style obviously an advance. But if we get another CPI or a pp I that shows inflation moderating slightly, could that be another catalyst for a five day period like we just had. Oh, I mean absolutely. You know it's frequently in the US where obviously that would influence the FEB, who is, after all, the world's central back. That having been said, in the UK on Wednesday we had a CPI figured that was above expectations, So you know, the notion that we're going to have downside surprises on inflation from here on out. Is probably more hope than a reasonable expectation. On the retail sales in the US were super strong, so clearly the demand side of the inflation equation is an moderating to the degree that the third would work. Mac Oman columnist Cameron christ More next on Bloomberg Opinion. I'm Vanni quinn tip for financial market pros. If you're being compared to Warren Buffett or Steve Jobs, maybe check the books. I think there's also just a thing of like, we need to be a good constructive factor in this space if we're not. It's just like that on many levels. I had a conversation about all of this with Boomberg Opinions justin Fox. So the impetus for this column was Sam Bankman Freed's spectacular downfall. This is, of course, the third year old who was worth billion dollars a year ago and who has bankrupted a lot of people, let's put it that way. And yeah, just a couple of months ago he was on the cover of Fortune, and I act as a former employee. I still subscribe to Fortune, and so I had that magazine at home with Sam's face and the next Warren Buffett exactly right under it. And how many times have we seen this phrase? And what does it come to mean? Well, the most famous one before this was probably the Business We cover in two thousand four, before Business We was part of Bloomberg. It was Eddie Lambert Jr. And it also asked the next Warren Buffett exact same language, and Lambert actually went. And really the next couple of years were great. There was some Fortune article a couple of years later that called him the greatest investor in America. But then his whole Sears makeover didn't work out. It wasn't a collapse, but he definitely did not make his investors a lot of money. And he's poorer than he was fifteen years ago. And there's something really strange, or maybe it's lazy or gullible or something about using this phrase the next warn Buffett, because Warren Buffett stands for a lot of things, a lot of things. These people aren't right, And I mean I used the phrase the Berkshire Hathaway of net stocks in again in the pages of Fortune to describe CMG I, which was this holding company for a bunch of lac hosts and Alta Vista and netstocks like that, and all I meant at the time was it was a holding company for internet stocks. But I still kind of cringed when I wrote it that. I guess this talk of their being a next Warren Buffett curse has kind of grown in recent years because of Lampard, and now it will grow even more with bank Man Freed. And they're also Chama, thank you. You're better pronouncing that than I am. He had this big chat with Eric Shatzker Bloomberg, I guess, like a year and a half ago where he was comparing himself to Buffett, and he's had a big come down lately. He's the spack king who was starting to unwind his special purpose acquisition companies because that whole boom has turned into a bust. But what I did is I spent a bunch of time looking farther back in various news databases than just googling, and they're actually a fair number people have been compared to Buffett and done just fine. The one that I knew off the top of my head was Lucadian National, which was this much sort of smaller Berkshire Hathaway that did very very well in the eighties and nineties and continued to do well until it's sort of unwound itself over the past decade. And when people talk about Warren Buffett and Berkshire Hathway, I guess the definition changes each time. But what Berkshire is is it has just a very long track record at being very successful, right And Warren Buffett is a very long track record at a being alive, be continuing to invest and see continuing to make profits. He hasn't always made the right choice, but mostly he's made the right choice. He wouldn't have a lot in common with some of these people. And you know, and with Sam Bankman Freed. The specific thing where it came up in this Fortune Q and A that led to that cover language is just the reporter said that some other crypto person had said that as f t X was kind of buying up all these other failing companies, that Bankman Freed would be like Warren Buffett as the guy who was the rescuer, and lots of people owed him because Buffett has done that repeatedly. It was one little parallel. The investors who get compared to Buffett and actually do fine are ones who are very value oriented, long term oriented investors. And Buffett himself has always promoted the idea that maybe he has some special skill, but there's actually a bunch of other people like him, other disciples of Benjamin Graham is mentor who will outperform the market if you give them a long enough time. But it makes for great memes when these people collapse completely they have been. It does bring up the question, though, are we gullible? Not just journalists but people in general? I mean, so many people invested with the like of San Bank, bun Freed and then to move away from the Warren Buffet comparison, we've seen Elizabeth Holmes, You've seen so many fraudsters. Why are we not getting any better detecting this kind of fraud in advance? I mean, and sometimes it's not fraud, like if somebody, another person who got a couple of next Warren Buffett references last year's Cathy would the very gung ho tech investor and nothing fraudulent about what she's doing. But it just ought to be utterly clear to anyone when her arc innovation was booming a year ago that this is a really volatile way to make money and you know, lots of investors are going to pull out when she's having bad times right now, I guess, I mean part of it is generational. Clearly, something like crypto provides this opportunity to say, oh, well, this is different. It's not going to be like all the past investment bubbles. So I don't know that we're getting more gold, but it is kind of remarkable to me that people keep falling for this stuff. Some of these people as well, they're united by a kind of charisma. They're able to speak in a way that doesn't just convince the regular Joe on the street, but also VC investors who should know better, especially by now I mean as part of this, the fact that the VC investors have had just such an easy time over the last twenty years because of the Federal Reserve being in the park. Yeah, I mean, clearly, it seems like this is one of the things that happened at ft X. They started making these bets that were really just arbitrage and pretty safe, but then they started trying other things that were much more sort of dependent on the market continuing to do well. And I think you convince yourself you have some special knowledge when really Yeah, you're just sort of riding a wave. How would you know in advance that somebody like that just doesn't have the assets to call what he's talking about. I mean, I do think the sort of famous interview with Matt Levine and Joe wasn't fall and Tracy Halloway. I came away from that thinking he's charming Lee Frank. But at the same time, I would not put a penny into any of these things he's doing because it's just also opaque. They're definitely Ponzi like characteristics to it. The value is purely just based on continued confidence that they have value. And I mean, the whole point with Buffett is it shouldn't matter what financial markets do because you're buying a stake in a business that makes money outside of financial markets. I just think that idea that if you're buying and selling a financial asset, obviously it's a lot better if there's some intrinsic value to it. And there is no intrinsic value to any of these things in crypto, even though I mean, bitcoin clearly has shown a lot of staying power, but there's no intrinsic cash flow supporting it. If you were looking out of the landscape. Now, who deserves the moniker the next Warren Buffets. I mean, you know somebody who's gotten it a lot is Seth klarman Um, the hedge fund manager. I mean, I think the concerns with him at this point are sort of the same that you might have with Berkshire Hathaway, which is that you know, maybe we're reaching the point of diminishing returns. Bill Ackman is somebody who got a I think it was Baby Buffett on the cover of Forbes, and that was poor timing. It came in two thousand fifteen, just before he had a couple of pretty bad years. But I mean, I was just reading through the latest reports from Pershing Square and it's been doing really well lately, and I yeah, he's always been very value oriented, but there was this whole activist signed to it that maybe he's decided isn't actually as helpful to his returns as he maybe thought. It was Bloomberg Opinions at justin Fox. Next Jonathan Bernstein on how the midterms exposed a g OP in disarray and what it means for the one Congress. This is Bloomberg Opinion. So now we have the broad parameters of what the United States Congress will look like. We also have Donald Trump officially announcing his candidacy for the presidential race. This will not be my campaign, This will be our campaign. I spoke with Bloomberg Opinions Jonathan Bernstein about what the outcome of the mid terms means for legislating during the Lame Doc session and beyond, also how exactly we should start thinking about all right, Jonathan, Well, it's been a few days, so you've been able to digest recent events. What do you after a few days of rumination is the most surprising thing about what happened in the mid terms? You know, I think that I'll go along with the conventional wisdom. Democrats definitely did a little bit better than I think reasonable expectations based on polling and what the expert opinion was. I think they beat some of the expectations. There's no question that there was sort of some momentum that came out in the mainstream media. Few outlets in particular sort of bought the Republican spin that it was going to be a landslide. The polling really never said it was going to be a landslide. It said it should be a moderately good year for Republicans, So I don't think that there was much that was sort of a shocking surprise, but it was a lot that was. It turns out that the ball bounced a little bit the Democrats way in enough races and enough states that it wound up being an unusually good year for Democrats. I guess I would say there wasn't that any huge shocker on election day, and as the returns came in, if you look at the broad sweep of things, if you look at what happens when there's a democratic president, and in particular, unpopular democratic president in the White House, then it is a big surprise that it was basically a draw and that Republicans didn't pick up forty seats in the House and you know, several seats in the Senate. This was one of the very few elections I think there's been six or something the last hundred years where the in party picked up seats and state legislatures. So while overall it was sort of a you know, Democrats will either pick up zero or one Senate seats, Republicans are picking up a handful of House seats. Democrats are plus two and governors, and plus a handful of state legislative seats. But it's sort of a fifty fifty type of election. But that in itself is over the course of history, very surprising and any year where inflation has been insane as well, So you would think that the incumbent party wouldn't be benefiting from that. Is it fair for the Democrats to do a lap of honor or was this a little bit of luck? You know, that's a good question. Sure, everybody deserves to take bows when they win. I don't think it was really much that Democrats did, especially governing Democrats. If you look at grassroots, I think that there was a huge amount of enthusiasm, again for the fourth cycle in a row, coming from women, different demographic groups of women over the abortion issue. So in a sense, it was Republicans shooting themselves in the foot in some ways, or Conservatives I should say, yes, I think that Republicans basically blew it rather than Democrats. So two things. First of all, the presence of Donald Trump, a very unpopular former president who remains very much in the public eye and keeps trying to put himself in the political space. That probably changed things a little bit, which is interesting because it wasn't clear whether it would be a positive or negative in the early days, at least of the campaign, and even in October. I think all along it looked like, to the extent that he was a major figure, it was a negative. You know. The thing is that normally people think, ah, the president, he's the most important person right now, let's balance him out some or if things are going badly, blame the president. But with the former president being a very important figure in politics to this day, people could blame Trump very easily, even though he's not around as a governing official. The other thing is that Trump, and this is only partially Trump's fault, but he's getting blamed for it a lot within Republican circles. The influence on the candidates themselves. There were a whole lot of terrible candidates chosen by Republicans in this cycle, some of them because Trump intervened in primaries, a lot because those candidates are just very popular among Republicans, Republican line media, among Republican voters who didn't see going in any penalty to be faced. And I think some of that may have to do with Trump and his electoral history that if they don't see Trump as a loser for his various things that made him very unpopular as present, he was a loser. He is a loser. He was never popular as president, He was always unusually unpopular. So the Republicans wound up with all these terrible candidates and that certainly cost them. Do the make Republicans moderate their views a little bit now, given what we've seen and given how leadership is going to change, even though there will obviously be some extreme candidates and some fringe candidates. Still I don't think those people moderate their views because I think what they're up to isn't views as much as it is confrontation. And what does happen is some of them go away because they lost their elections. Um So, to the extent that we have fewer of those extremists, that does make a difference, but there still are quite a lot, and there's still are quite a lot of people who in the House, for example, voted to overturned the election, and you know, and then new people who mostly subscribe to that kind of thinking, and so do they moderate. I don't see what in the party there is to push them in that direction. We spoke already about Kevin McCarthy and how you know he might have to negotiate, but it's not clear what promises he can give people or what he can offer them. Does anything come to mind, No, m Kevin McCarthy is let's assume that he winds up having a four seat majority to nineteen to two fifteen. There's still some possibilities around that. The thing is that in normal times, all you have to do to become speaker is to win the vote of your caucus, a majority of your caucus, and then everybody loyally supports that person. When you have the floor vote for speaker, where McCarthy will be opposed, if it's him, will be opposing either Nancy Pelosi or whoever the Democrats leader is. To some extent, Democrats, but especially Republicans, have challenged that norm over the last oh seven eight nine Congresses already, and they say, well, we can use this procedural tick, which Mitchell Collin doesn't have to worry about, because there is no vote like that in the Senate, only a vote like that for one office, which is Speaker of the House. We can use that to hold the party hostage, and if it's a majority if five of us vote for King Kong or Donald Trump or you know, whoever to be speaker, then nobody will have a majority and we can use that. Now, what they can use it for, Well, they're not policy demanders. We're talking about people like Marjorite Heller Green here, Jim Jordan's that's right. What they want is to create controversy. That's their goal, you know, as as members of the House, is to get their appearances on Fox News and to beyond conservative talk radio. And so Kevin McCarthy can't give that exactly. Um, so there's nothing to stop them from doing it, and other than the realization that, oh, we'll have chaos if we do that, but they may not mind having some chaos. So who would be the unifier in the Republican Party then? Isn't one? There isn't one. The bottom line is there is no unifier because the people who are revolting are not looking for unity. Is there anybody else that's emerging as some kind of a maybe not a unifying figure, but even a polarizing figure, even somebody that would you know, lead the chaos? You have to go through the House caucus with a lot more intimate detail, but I don't see it. You know, when John Bayner, who is the last good leader of the Republicans had when he resigned, McCarthy wanted the job, didn't have the votes, they recruited Paul Ryan because he was the one who had the respect of different factions within the party. They don't have that now. There's no replacement for Ryan, who turned out to be terrible anyway. But you know, at least they all sort of thought he could do the job. I don't so the best my knowledgeism there are members who are well liked. There's always members who are well liked, and so they may eventually find that that works for them. But in terms of someone who has liked and respected that can actually lead them, if there's somebody like that, it has not been reported who in the party is going to decide who should be the candidate for president. There's a lot of controversy within political science and within the world really about who has the power of these things. What I always say, and my reading of it is it's party actors who make the decision, and that means it's a huge number of people, thousands of people of politicians and campaign and governing professionals and formal party officials and staff, party aligned interest groups, party aligned media, all of whom have their candidate, have their interests that they're pushing for within the process. Because what matters almost more than who the candidate is is which interests in which groups within the party are represented by that candidate, and how that the whole process goes on within the Republican Party. It seems to me that the biggest players are Republican aligned media talk to hosts or the people who make the decisions at the talk shows, Fox News, fox News imitators. They have a huge amount of cloud within the party, so that it would seem like Rhonda Santis does have an actual shot at the next presidency. Now if you were on his team, and I'm suggesting you ever would be, but put yourself in that position anybody's team, Exactly if you had to get out ahead of Marco Rubio or Ted Cruz or any any of the others that might emerge or might jump into the fray, who would you be trying to appeal to beyond the Republican media who obviously already has appealed to. Yeah, And the problem is that we don't know if those people will still be supporting him six months in the future, levels fifteen months in the future when Iowa and New Hampshire and South Carolina vote. So, you know, you try to build up support within the party. Then you try to fashion positions and attitudes that are popular. You try to appeal to activist donors. Obviously people money are important, but people who can you know, snab their fingers and have a thousand people come to Iowa to walk door to door for you are important too. Does he have that kind of general liability descantist? The only reason I'm talking about him is because you know, he's sort of on everybody's lips right now. But it doesn't, like you say, it doesn't mean that somebody else won't to merge, or that Ted Cuz won't suddenly grab the spotlight again exactly. And you know, we have there's a whole history of this, and the political scientist John Sides and his co authors talk about a cycle of discovery, scrutiny, decline where somebody all of a sudden becomes the candidate at the moment and everybody's all excited about that person and then yes, you know, Rudy Giuliani Scott Walker, Ben Carson Um, you know, and then after a while that part wears off and then they start to look at and they discover stuff that's not so flattering about that person, and that's what they run with. And then, you know, support sometimes plateaus, sometimes crashes. And do we know whether that will have with the scantists, we have no idea and I you know a lot of people will like watch them on TV. Oh does that person have I think it's very very difficult to know. I think that a special with you know, we've seen a lot of candidates who didn't appear to be that strong on television. But we're good enough person to person because even though it's it's thousands and thousands of people, it's sort of a discreet universe, it is. And also it's not clear that he has a national profile yet. I mean, he's a little bit more than anyone right now. Yeah, exactly, he's just building one up and we'll see how it plays over time. And there's it's just not in my view, it's not especially predictable. What we what will start to be meaningful is if he gets real support, permanent support, permanent, as permanent as anything is in politics, if he gets endorsements, if he gets commitments from donors, if those sorts of things, those tend to be good markers that the candidate is playing well, and not just of the moment. But he definitely has the backing of some will treaters like Ken Griffin and people like that right now, so that's always helpful. I don't ever want to write him off, as you've said in the past, but is Trump done? Or when will we know if he is? You know, I wouldn't want to make any guesses um what I read as as far as I see the pundits, and there's there's a group of pundits who are, oh, don't pay any attention to anything that's going on. Trump owns the party and when he snaps his fingers, eventually everybody will come back to him. And then there's another set that think he's finished. And I just don't think we know. I think that this stuff plays out over time. And what I would say is it's very clear that there are a lot of Republican Party actors, especially politicians, who have no use for him, who understand how he's hurt the party and who would love to have him go away. Whether that will be enough to prevent him from being the nominee. I don't know whether those people will fight hard against him. I don't know whether they're willing to compromise on another candidate in order to stop him. I don't know well. And also people's wings have been clipped January six and the hearings and so on. It has to have clipped some of the fans wings. Um, I wouldn't worry as much about, you know, at the sort of voter level. I don't want to say people automatically do whatever the media says, because it's not quite that simple. But I do think that if Fox News report favorably about Trump, most Republican voters are not going to care about any of that stuff. And if Fox News starts ignoring him, then you're going to find more and more voters going to the candidates that they pay favorable attention to. So you're saying that there's a scenario in which Trump could get popular again and could whip up crowds just like he was able to do in the past. Oh yeah, that's very plausible to me. But I hate to be the person saying I don't know what's gonna happen. But in fact, I don't know what's gonna happen. I don't think anybody anybody who acts completely convinced that they know what's going to happen in the presidential nomination battle that's still fifteen months away or thirteen months away, whatever it is, and that there's no consensus among party actors. You know, we knew Hillary Clinton was going to win in because everybody in the Democratic Party had already endorsed her at this stage, and even so she had to fend off a pretty serious challenge from Burning Standard. She was never in that much trouble at that time, we knew. But any time that we don't have that kind of consensus we had, say around George W. Bush when he first ran, we don't know. It just takes time for the stuff to shake out. Is Biden doing the right thing he said he'd announced, but in the new year, after the new year? Sometimes? Yeah, I do think that he probably the happy impression that most Democrats have about the elections. You know, it wasn't the Democratic landslide, you know, but but that no disasters happened, I think probably bought him even more time than he would have had anyway. But yeah, I think he needs to decide sometime in the first several months of the year in order to give the party time to react if he chooses not to run. If he does choose to run, as long as he can maintain around the level that he's at now, he's around approval, I think that he may get a minor challenge, but nothing too serious, and the data may actually work out for him, because not quite sure about a recession yet, but it looks like inflation is coming down. So if inflation comes down, and if we don't have a recession, then I would expect Biden and we don't go to war or anything like that. I would expect if economic news is good, no other particularly bad news, one would expect that Biden's approval rating will gradually recover and he will a year from now be certainly popular enough the Democrats would rather live with him than getting to the mess of a nomination battle, if that's what he wants. It has a lot to do with what his health actually is. There's a lot of crazy stuff about his health, but he's not young, and we don't know how it feels to be an eighty year old president and you know he's going to have to make that decision as long as he's not any less popular in is now. If he gets truly unpopular, then the party will start making it for him. But as long as he is, and certainly if he becomes a little more popular than this or less unpopular, I should say it's his decision and nobody can get into his head for that. Boomberg Opinions Jonathan Bernstein. Bomberg Opinion airs every weekend on Bloomberg Radio and as a podcast every week on Apple Spotify. Are your favorite podcast platform, do send us your opinions too. I'm at Vequin at Bloomberg dot Net. We're produced by Eric mollow. This is Bloomberg Opinion.

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