Buffett's Tailwind

America's greatest investor vs. gold... plus, more tales from Bonner's Gulch...

(The Rio Calchaqui. Source: Bill)

Bill Bonner, reckoning today from San Martin, Argentina...

We count on the AmericanTailwind and, though it has been becalmed from time to time, its force has always returned. I have been investing for 80 years – more than one-third of our country’s lifetime. Despite our citizens’ penchant – almost enthusiasm – for self-criticism and self-doubt, I have yet to see a time when it made sense to make a long-term bet against America. And I doubt very much that any reader of this letter will have a different experience in the future.

~Warren Buffett

Buffett has been right for a very long time. Or has he been merely lucky?  

And hasn’t the baby boomer generation been exceptionally lucky, too…growing up when America was on the top of its game…accumulating wealth as the economy grew and the Fed pushed up prices?  

But lo! Has their luck finally run out?

Stay tuned…

Meanwhile, Back on the Ranch…

On the weekend, we set to work…reviewing the local situation.  

(Bonner’s Gulch, in bloom. Source: Bill)

All was good. The alfalfa was in bloom. The onions were fat. The water was running strong. And the people seemed in good spirits.

When we began, 15 years ago, we knew nothing about farming in Argentina.  Nothing about raising cattle. Nothing about the people or the land. A prudent person would have said:

“You don’t know what you’re doing; you’re going to lose money.”

That person would have been right. We’ve lost money every year. But we’ve gradually learned the old farmers’ secret to making a small fortune: start with a large one.

Our guess is that no one really makes money in the Calchaqui Valley. Everything is too remote…too expensive…too dry…too windy… The ground is too salty. And the river is too unpredictable.

But our losses are narrowing. We make thousands of rolls of hay each year. Now, the cattle have something to eat in the dry winter months. Then, if we manage them correctly, feed them well, and the price of beef holds up…we come close to breakeven.

One thing we’ve learned about farming in general – it’s a low margin business. The successful farmer is like the successful tennis player. He wins by not losing. He doesn’t have to invent a new baler or plow backwards to try to fool the crows; he just doesn’t make mistakes. He doesn’t waste fuel. He doesn’t procrastinate; he plants and harvests at the right time. And he watches his costs carefully; no unnecessary labor…no unnecessary machinery repairs.

A Tenuous Connection

“El ojo de dueño engorda la vaca.”  (The eye of the owner fattens the cattle.)

As an absentee owner – as well as an agricultural ignoramus – it is almost impossible for us to keep any margin at all. Our ojos are on other things…such as the Fed’s interest rate policies.

Our ranch has the additional inconvenience of straddling the Rio Calchaqui.

“We would have already cut the alfalfa,” said Antonio, the foreman, when asked how come there was so much of it still in the field, “but we couldn’t get the baler across the river. We have to wait for the water to go down.”

The high water is a delight to us; it makes us feel isolated…romantic…protected from the world – like the only inhabitants of a desert island. We can still come and go….but only via the footbridge…

(Our connection to the outside world. Source: Bill)

(Bill and Elizabeth, off to survey the scene. Source: Mariah Bonner)

…or  on horseback.  

But that is what is so charming about this…we mean, this whole adventure here in Argentina. For all its challenges and absurdities…

…it is real.  

Yesterday, we described to our daughter and son-in-law how we had improved the cattle operation. 

“They get more food. So, the fertility rate is higher…which gives us more young animals (‘terneros’) to sell.”

This morning, they came back from a walk up into the hills.

“Dad…there are a dozen dead cows up there…”

No matter what you say…or what you think…you are never far from the reality of the situation.

Returning to Warren’s world…

Berkshire vs. Gold

We were wow-ed by a chart sent to us on Sunday by our sidekick, and investment director, Tom Dyson. We’ve been exploring how the numbers used by the feds are mostly lies and misinformation. The statistics are monsters, with arms sewn on where there should be legs…and ghastly heads made of pig iron. The money itself – the post-1971 dollar – is phony and unreliable. The theories and formulas used by the feds are faulty, clumsy, and fraudulent. And now we see that the whole boom – from 1999 to 2022, which took the Dow from 10,000 to over 36,000 – was an imposter.  

Let us say, you were a smart investor. In 1999, you wisely decided to invest your money alongside the richest, smartest investor the world has ever produced – Warren Buffett.

It was very easy to do. In effect, Buffett operates a kind of mutual fund. He puts the best companies he can find in it. And he charges no fees or commissions for taking part. You just buy his “fund” – Berkshire Hathaway.

Then, in the following 22 years – which, thanks to stunning tech breakthroughs and huge new capital inputs, as well as the enlightened guidance of the Fed, should have been the most productive and profitable years in human history – you keep your money in Berkshire.

Mr. Buffett realized long ago that the secret to long term capital growth is to reinvest the profits in more capital growth. Rather than paying dividends, which are taxed, the money is used to buy more good companies, thus increasing the capital value – the price of Berkshire stock.

So…you have the best investor in history, at the best time in history, with the best strategy ever devised. And no need to bother with the confusion wrought by dividends; there weren’t any.

What happened? Over the next 22 years, your investment went up, and up, and up.  Buffett avoided the obvious pitfalls – the dot.coms…the mortgage finance dizzies…the crypto delusionals…and the tech dreams. No WeWork or Lyft for him. He stuck with good companies producing good profits, by providing good products and services to good customers.

Did his investors make money? Yes, they did.

But wait. The chart sent over by Tom Dyson shows that if you quote the price of Berkshire shares in terms of real money – gold – rather than dollars, you find that you have made no money at all. An ounce of gold buys you the same number of Berkshire shares now as it did 23 years ago.

In other words, there was no American Tailwind…not in the 21^st century. Not yet. It was all ‘misinformation.’ Buffett’s bet on American businesses didn’t really pay off. The investor would have done just as well to buy gold at the end of the 20^th century and sit tight. 

And what of the coming years? Will a stiff yankee doodle breeze begin to blow again? Will the qualities that made America such a success – balanced budgets, limited government, and a dollar you could trust – re-emerge? Or, will a combination of debt, inflation, corruption, fiscal fantasy, fraud and imperial overstretch doom the US to decades of misery?

Tune in tomorrow!

Regards,

Bill Bonner

Joel’s Note: A dear reader writes, understandably befuddled…

Love your guy's content. Great enlightening stuff but I must admit a ton (not a bit) of confusion and it is all yours & Bills Fault. I read with great interest the going ons down under in Argentina and if I believe what you guys say their economy is a wreck, there are daily currency issues, every politician is on the shady side and inflation is 99+%. I am sure I am missing a bunch of stuff but I think you know better than I.

My confusion is when you give us updates ( over a malbec...) or Bill upon his return and you guys relate stories of great cheap meals, full bars of party goers, and daily life seems to be grand. How can it be in such disfunction and yet as per you guys be seemingly normal? If I am to believe what you guys say I have to ask myself what is the big deal as America goes down the economic toilet? I mean, apparently life just chugs on and there is no suffering so why are we so concerned about the destruction of our economy if that is all we must face? Obviously I am being a bit sarcastic but honestly if to be believed life in Argentina is not bad and the destroyed currency has not really led to any severe consequences.   

What I Missing Sir? Keep up the good work guys!  ~ Doug J.

Joel’s response: Excellent question! It’s one your Buenos Aires-based correspondent fields every time he steps into a taxi… orders an ojo de bife at a local parrilla… or pays his building expenses at the bank.

“You mean, you’re here voluntarily?” our friendly driver/waiter/cashier will inquire, having heard our gringo-accented Castellano. “But this place is a complete disaster! Why on earth would you choose to live here? Are you some kind of mental defective?”

“Be that as it may…” we begin our stock answer, “we came for the steak and the wine. And we ended up staying… for the steak and the wine.”

Our concerned reader is correct - inflation down here on the pampas hit an annual rate of 99% (officially) in January. Prices are going up so quickly, restaurants cling to their Covid-era QR code menus for the simple fact that it costs too much to update the prices, which they would have to do almost daily to keep pace with inflation.

When we first arrived here, back in 2010, the exchange rate was 4 pesos to $1 USD. Today, it’s 190:1 (officially)… or about 375:1 on the “blue” market (the rate everyone uses).

Reluctant to admit it has lost all control of the situation, the Argentine government has been reticent to introduce new, higher denomination banknotes. As such, the largest bill currently in circulation is a paltry 1,000 pesos… about $5 USD and change at the official rate, or $2.70 USD at the unofficial/actual rate. Fiat-schlepping porteños were moderately relieved when, earlier this month, their government approved a new $2,000 peso note… but by the time it his registers, it will have lost enough of its value to underwhelm buyers and vendors alike. Then they’ll be demanding a 5,000 peso note…

The saving grace here is non-peso savings/earnings/investments. Everyday is a reminder of Gresham’s Law - simply stated as “bad money drives out good.” The dismal peso drives “good” money (USD, euros, gold, cryptos, farmland, apartments, art…) out of the market as people rush to spend their local scrip before it fast approaches worthlessness, preferring to save in any of the above mentioned stores of value.

As the parallel exchange rates between the official and unofficial markets widen, the non-peso saver/earner/investor is rewarded every time he reenters the peso market (when he gets more and more pesos for his relatively stable dollars, euros, etc.). The price of a taxi might go up 50% in peso terms… but still fall in dollar terms.

In this way, the situation here is not dissimilar to what Tom is doing with his Dow-Gold strategy… that is, sitting on the sidelines in wealth preserving “good money,” watching as the market moves sideways or trends lower in gold terms… and waiting for the right moment when he can reenter the market and scoop up world class equities at bargain prices. As Tom wrote to BPR members just last week…

“When this bear market has run its course, and the stock market is much lower than where it is today, I’m going to write to you and urge you to move all your spare capital into a dozen or so of the highest quality compounding stocks in the market – dividend aristocrats and insurance float aristocrats – and then NEVER SELL. (You’ll live off the dividends and capital gains.) I’m going to do the same with all the capital I have saved up – every penny.”

The key, of course, is patience. Continued Tom…

“We’re not there yet. We’ve got a few more years to wait. In the meantime, we’ll keep collecting safe income and preserving our capital. And I’ll keep working on my wishlist of the world’s greatest compounding stocks…”

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