Indeed. Buffett called him that here.
Twitter/X have not forgiven because they never understood. Sell tweet came Jan 31st, 2023 and then what happened after? Regional banking crisis by March. March 15th, 2023 he tweeted about JP Morgan stepping in during the 1907 panic and by March 30th, 2023 he stated "I was wrong to say sell" because fed stepped in with BTFP. The sell tweet is taken out of context. If he did spell things out would that be better? Would anyone listen? Would he be responsible for causing market moves by direct statements? Likely why Warren Buffett would make vague statements about not understanding tech - easier to say that then deal with people acting directly on your words without understanding.
For those hungry to learn perhaps the nuggets are enough to figure out how to fish yourself instead of being given a fish. The rest never had any intention of learning anyway.
As for the depreciation discussion this whole thing made me think of a book I read and a story it told about Waste Management in early 90's:
"Founded by Wayne Huizenga and Dean Buntrock, Waste Management hauls trash in the
United States. Unfortunately, its financial statements were part of the garbage that it
should have transported to the landfill. The SEC accused the firm and its executives of
perpetrating accounting fraud from at least 1992 through 1997.
The creative accounting employed by Waste Management was quite simple, for
much of it dealt with depreciation and amortization charges. Elementary accounting students learn that straight-line depreciation equals cost minus salvage, all divided by the
life of the asset. To minimize the impact on the income statement, the bookkeeper can
increase the estimate of salvage value or increase the estimate of the asset life. Waste
Management did both, for example, by adding two to four years to the life of its trucks
and claiming up to $25,000 as salvage. Depreciation on other plant and equipment was
similarly contorted. In addition, Waste Management started booking ordinary losses as
“one-time” special charges. It also lied about the useful life of landfills by alleging that
the landfills would be expanded. A number of them were never expanded.
Waste Management cleaned up its act in 1999 by replacing the old management team
with a new one, by restructuring the board of directors and the audit committee, and by
supplanting Arthur Andersen with Ernst & Young. The after-tax effect of all the
shenanigans was a mere $2.9 billion!
Given the uncomplicated nature of these accounting games, did the auditors know
what was going on? If so, why did they not stop this fraud? If not, how diligently were
they conducting their audits of Waste Management? After all, $2.9 billion is a material
sum of money in anyone’s book"
Said later...."If earnings otherwise are
small this year, managers might lengthen the life of the equipment and increase the estimate of the salvage value. In this manner, depreciation expense is lowered and net
income is increased. Alternatively, if earnings are healthy during this fiscal period, managers could decrease the life of the asset and reduce the salvage value. Depreciation is
enlarged, but this protects the firm against the proverbial rainy day".
Not saying AI companies are the same as WM, but the game stretches earnings at a time when market is frothy. And when SBC is such a large component these stretches benefit insiders directly. In the end you have a bunch of companies trading real dollars with each other but the actual ROI in these dollars is not showing. Didn't BABA claim to just slash AI GPU use by ~80%? Meanwhile the CAPEX spend in US isn't slowing.
And market today is not same market Joel Greenblat was writing about in 2018 - it's on roids today. Shiller P/E is sitting at 40.3 right now. Good chunk of stocks in S&P are also below 50 & 200 SMA. So if market is being drive off AI hype and if big tech is playing accounting games to keep the booze flowing? And if $1.00 put into the market in 2021 created $5.00 in value, what happens if that reverse? Dr. Robert J. Shiller would disagree with you on a catalyst; he wrote in Irrational Exuberance that 1929 had none. Selling begets more selling. If AI companies are keeping market alive and earnings are overstated then doesn't take much to think the money flows create a suction outward where that 5:1 ratio because -5:-1 or worse given leverage use as covering becomes a real deal. Snowballs are easy to make when snow is abundant.
Market is smarter than before? Tale as old as time. New era! Dr. Robert Shiller wrote about that "Nevertheless, the new era thinking they promote is part of the process by which a boom may be sustained and amplified—part of the feedback mechanism that, as we have seen, can create speculative bubbles".
If so smart why issues in credit starting to bubble? Didn't someone do their due diligence? Didn't BDO audit First Brands right before they filed bankruptcy? Didn't BlockRock mark Renovo at PAR weeks before bankruptcy? Aren't smaller rating agencies being accused of selling ratings in the private credit space?
One has three strategies: go long, go short, sit on the sidelines. Each are valid and one does not need to throw money into the pit to speak on a subject.
Back to my topic of private credit. Utilities Exploring Private Credit in a Potential First. Lending standards so loose even utility companies are trying to borrow! "While the financing they offer is typically more expensive than the investment-grade debt available in the public capital markets, private lenders can usually provide off-balance sheet arrangements backed by individual assets that typically don’t hurt a borrower’s credit ratings." and "“Many utilities have huge investment plans and are going to be searching everywhere for the most cost-effective capital,” said Travis Miller, a utility analyst for Morningstar. “Many of the infrastructure projects utilities are developing are well-suited to credit-like capital, particularly those with contracted cash flows outside the traditional rate base model with large, high-investment-grade customers like data centers,” Miller said."
Contracted cash flows?!?!? Why that sounds like a quality lending candidate. Give them a few billion.
At the airport and on multiple delays so had time to write :)
-Sean |
