Page 1 of 1
Warren Buffett sees 'brutal' damage for savers from central bank money printing
Posted: Sun May 05, 2013 7:18 pm
by Ad Orientem
Veteran investor Warren Buffett has warned that savers and bondholders are suffering a "brutal" erosion of their money as the US Federal Reserve and other central banks force yields to historic lows.
"I feel sorry for people that have clung to fixed-dollar investments," he told investors at Berkshire Hathaway's annual meeting in Nebraska, an event akin to a rock concert.
Mr Buffett defended the emergency stimulus of Fed chairman Ben Bernanke, saying the "consequences would have been terrible" if the authorities had failed to act, but those nearing pension age have paid the price. Many are trapped in such assets through pension funds.
"Bernanke had tough choices to make, but he decided to step on the gas pedal, in terms of monetary policy, and he brought down rates to virtually unheard of levels, and kept them there. And he's still got his foot on the pedal and that really does hurt savers. It has made it extremely difficult for all kinds of people who live on fixed-income investments," he told CNBC.
Read the rest here...
http://www.telegraph.co.uk/finance/fina ... nting.html
Re: Warren Buffett sees 'brutal' damage for savers from central bank money printing
Posted: Sun May 05, 2013 9:02 pm
by MediumTex
I assume that he means holders of short term debt, since we all know that holders of long term treasuries have done just fine in recent years.
Re: Warren Buffett sees 'brutal' damage for savers from central bank money printing
Posted: Sun May 05, 2013 9:43 pm
by Pointedstick
MediumTex wrote:
I assume that he means holders of short term debt, since we all know that holders of long term treasuries have done just fine in recent years.
Probably. But I suspect he's most likely talking about rates and not capital value. A lot of ordinary folks who hold bonds only look at rates and not capital value, and many people had money in CDs that have matured and they've bought new ones at much lower rates. And high-yield savings accounts have taken a beating as well.
30-year government bonds scare the hell out of most normal people. We are very fortunate to own them.
Re: Warren Buffett sees 'brutal' damage for savers from central bank money printing
Posted: Mon May 06, 2013 7:43 am
by MachineGhost
Pointedstick wrote:
30-year government bonds scare the hell out of most normal people. We are very fortunate to own them.
Have you seen the bond bear chart? They scare the hell out of me too!
Re: Warren Buffett sees 'brutal' damage for savers from central bank money printing
Posted: Mon May 06, 2013 10:09 am
by Pointedstick
MachineGhost wrote:
Pointedstick wrote:
30-year government bonds scare the hell out of most normal people. We are very fortunate to own them.
Have you seen the bond bear chart? They scare the hell out of me too!
Yeah, but you can come up with similar charts for stocks and gold too. Anything that will deliver you a halfway decent return is likely to have a degree of volatility. I've bought into the PP's volatility harvesting concept hook, line, and sinker, so I don't mind that the individual assets are roller coaster rides.
Re: Warren Buffett sees 'brutal' damage for savers from central bank money printing
Posted: Mon May 06, 2013 1:24 pm
by doodle
If rates rise, wouldnt some entity (public or private) have to create even more money to satisfy the greater interest due? If its the private sector, there would have to be a rising demand for credit to satisfy interest....not likely. If it is the public sector, it would lead to even more money printing.
My guess is that with our without bernanke, rates would be pretty low.
Re: Warren Buffett sees 'brutal' damage for savers from central bank money printing
Posted: Mon May 06, 2013 1:34 pm
by Pointedstick
doodle wrote:
If rates rise, wouldnt some entity (public or private) have to create even more money to satisfy the greater interest due? If its the private sector, there would have to be a rising demand for credit to satisfy interest....not likely. If it is the public sector, it would lead to even more money printing.
That, or the result would be a fed-created tight money recession… which is why we hold cash.
Re: Warren Buffett sees 'brutal' damage for savers from central bank money printing
Posted: Mon May 06, 2013 1:50 pm
by doodle
Pointedstick wrote:
doodle wrote:
If rates rise, wouldnt some entity (public or private) have to create even more money to satisfy the greater interest due? If its the private sector, there would have to be a rising demand for credit to satisfy interest....not likely. If it is the public sector, it would lead to even more money printing.
That, or the result would be a fed-created tight money recession… which is why we hold cash.
But the only reason to do that is to kill inflation, right?...which we dont have. Does anyone think that rates would be much higher if Bernanke stopped quantitative easing given present economic conditions? There is also the question of whether a massive credit bubble deleveraging wouldnt just lead to outright deflation without governments softening manipulations...which would probably result in 0 percent nominal interest rates, and a gutting of Buffets stock portfolio.
Re: Warren Buffett sees 'brutal' damage for savers from central bank money printing
Posted: Mon May 06, 2013 5:12 pm
by notsheigetz
My parents have already experienced this brutality for the past few years. All during their retirement years they were able to depend on at least $1000 of monthly income on their $300,000 worth of bank CD's. Now this is completely gone and the only income left is their SS check and a small pension.
I suspect a lot of seniors have been experiencing the same thing. Personally, I tend to think that having $300,000 in the bank when money is tight ought to have been worth even more but that doesn't seem to be the way the game ultimately works nowadays. Seems kind of evil though I admittedly don't understand it that well.
Re: Warren Buffett sees 'brutal' damage for savers from central bank money printing
Posted: Mon May 06, 2013 7:59 pm
by Pointedstick
Yeah, CD rates are pretty terrible. Sounds like they needed to have taken the plunge into the world of long-duration bonds about a decade ago. If any of that principal is still intact, it might be worth putting it in high-quality corporate bonds or even low-risk munis as the CDs mature. A lot of only slightly risky AA-rated bonds are returning 4% or more, which isn't abominable and 300k of them does work out to $1,000/mo assuming none of them default.
I know those are not really PP-friendly investments, but fixed income options are really slim, as I'm sure your parents are well aware, sadly.
Re: Warren Buffett sees 'brutal' damage for savers from central bank money printing
Posted: Mon May 06, 2013 11:50 pm
by dragoncar
notsheigetz wrote:
My parents have already experienced this brutality for the past few years. All during their retirement years they were able to depend on at least $1000 of monthly income on their $300,000 worth of bank CD's. Now this is completely gone and the only income left is their SS check and a small pension.
What do you mean completely gone? They should still have the principal, which if invested in the PP now would (we hope) give them 4% real returns or... 1k/mo.
Re: Warren Buffett sees 'brutal' damage for savers from central bank money printing
Posted: Tue May 07, 2013 8:25 am
by MachineGhost
Pointedstick wrote:
Yeah, but you can come up with similar charts for stocks and gold too. Anything that will deliver you a halfway decent return is likely to have a degree of volatility. I've bought into the PP's volatility harvesting concept hook, line, and sinker, so I don't mind that the individual assets are roller coaster rides.
What about when the PP itself roller coaster dives to -25%? How will you feel?
Re: Warren Buffett sees 'brutal' damage for savers from central bank money printing
Posted: Tue May 07, 2013 8:50 am
by Pointedstick
MachineGhost wrote:
Pointedstick wrote:
Yeah, but you can come up with similar charts for stocks and gold too. Anything that will deliver you a halfway decent return is likely to have a degree of volatility. I've bought into the PP's volatility harvesting concept hook, line, and sinker, so I don't mind that the individual assets are roller coaster rides.
What about when the PP itself roller coaster dives to -25%? How will you feel?
Well my VP is AAPL and it just fell 45% over the last few months and I didn't panic and sell any, so I think I'm good.
But to me, volatility isn't just about panicking and selling: it's about predictibility in having that money when you need it. By way of example, I was going to sell my AAPL position for a large purchase that I had to abandon because it was in the middle of dropping like a rock when I needed to sell. The PP has had large inter-year drawdowns in the past, yes. But they're rarer than with individual volatile assets, and the rebalance mechanism lets you profit from those swings in the end. Also, the cash cushion provides a great place to make withdrawals from during the time when the other assets haven't recovered yet if you really need to.
Re: Warren Buffett sees 'brutal' damage for savers from central bank money printing
Posted: Tue May 07, 2013 9:14 am
by MachineGhost
Good points. It occurs to me that the PP is not going to work if you don't rebalance when it hits that stomach-churning -25% loss of your entire net worth (or whatever the ultimate bottom is, wasn't it -75% in Iceland?). If you give up at such a point, you're literally done for. Short of alien invasion, anyway! So with that persperctive in mind, I'm now finding the PP's lopsided risk-reward profile more tolerable because I would have to make the steely-jawed determination far ahead of time to stick to the plan when it ultimately happens.
Re: Warren Buffett sees 'brutal' damage for savers from central bank money printing
Posted: Tue May 07, 2013 5:26 pm
by notsheigetz
dragoncar wrote:
What do you mean completely gone? They should still have the principal, which if invested in the PP now would (we hope) give them 4% real returns or... 1k/mo.
No, they don't even have the full principal any more. That is disappearing monthly to the nursing home at an alarming rate.
And as far as investing in the PP you've got to be kidding! Their PP consists of only one of the four asset classes (CASH) and it's pointless to even mention the others. Every time I have done it in the past they have responded with "We can't afford to take any risks". I gave up trying to change their minds a long time ago.