“How did you become Whoopi Goldberg?” Mike Milken recently arranged a dinner at a New York City restaurant with his brother and six friends to discuss politics, education, business, the economy and financial markets. I was one of Mike’s guests.Whoopi Goldberg, whom I had not previously met, was another. I spent most of that evening speaking with the two men seated next to me. The individual on my left was the principal owner of a privately-owned, $3 billion annual revenues, healthcare services business. His company, in exchange for “assuming the risk” of “capitated” healthcare payments, has been able to lower healthcare costs and achieve improved outcomes. The individual on my right was an industrialist who is a principal owner of one of the two or three largest private companies in America. Two other individuals with whom I have been friendly for more than thirty years, an insurance executive with a $50 billion investment portfolio and his wife, an individual with an important role in New York City’s education system, were also there.
When dessert was served, I began to speak to Whoopi,who was sitting directly across the table from me. After I asked about her “gigs” with Billy Crystal and Robin Williams, and how Billy, Robin and she prepared material, I then asked how she had “become Whoopi Goldberg?”
Whoopi grew up on the lower west side of New York City. She had always wanted to be an entertainer.Whoopi got her first job as a standup comic in a Greenwich Village bar performing for mostly empty tables. When a critic for The New York Times happened to see her show, loved it and wrote a glowing review, it became impossible to get a reservation in that restaurant for two months! That was it! Soon afterwards, Whoopi met Elizabeth Taylor who befriended the young actress.“Whoopi, you are going to be very successful, but your career will be like a ‘sine wave.’When you are working, your income is going to pay for your agents’ homes, healthcare, retirement, education for their children and care for their parents.When you’re not, no one is going to help you. Whenever you work, you’ve got to save from your income and invest for your own retirement and your family.”
That was good advice for Whoopi. We think Elizabeth’s advice to save and invest throughout our careers, during good and not so good times, is good for most of us as well. With a caveat. Warren Buffett says that we “pay a high price for certainty.”That means in good times stocks may often be expensive. The corollary to Buffett’s advice is that in uncertain times, like the present, when stocks are “on sale,” it shouldn’t surprise you how cheap they can become. For example, stocks are now selling for about 12 times estimated 2012 earnings. This compares to an average of 15 times earnings and a peak of over 20 times earnings during the past one hundred years.When tangible goods go “on sale” in stores, lines form.When stocks go “on sale,” that often encourages further selling!
We think the current environment offers individuals and institutions an unusual chance to do more than just save in the ordinary course.We think you now have an opportunity to make equity investments in businesses that over the long term offer you a chance to change the financial paradigm of your institutions and your lives. We could not agree more with the sentiment expressed recently by Baron Funds’ Chairman Linda Martinson that now is the time to “Go Long.” Mixing sports metaphors, Number 99, “The Great One,”Wayne Gretzky, says it eloquently:“You miss 100 per cent of the shots you don’t take.”
“When the U.S. allowed Lehman Brothers to fail in 2008, the global financial system paid the price. We can’t let Greece take down the EU.” French President Nicolas Sarkozy. October 19, 2011.
European leaders have been critical of United States’ government officials for allowing Lehman Brothers, with its substantial counterparty obligations, to fail in October 2008. That bankruptcy is considered the proximate cause of the ‘08-’09 Great Recession and the modest recovery to date from that economic decline. European governments’ leaders have made it clear they would not permit an unmanaged Greek default that could imperil their banks and have a similar calamitous impact on global financial systems. Europe’s leaders have also been clear they would protect their banks with federal “bailouts” or guarantees if necessary to avoid a similar result.
Many of Europe’s banks own Greek and other “peripheral country” sovereign debt investments that are large relative to their equity capital.Those fixed income investments have fallen in value and, as a result, we believe European banks need to be recapitalized. On December 9, 2011, the European Central Bank announced that it would make loans of 490 billion euros, with three-year maturities at 1% interest, available to European banks. The banks had been having difficulties arranging funding for their operations due to their reliance upon “wholesale” deposits that were being withdrawn. These new, low interest rate, European Central Bank loans gave banks the capability to continue operations and avoid forced deleveraging of sovereign debt and replenish their equity capital by making loans with wide spreads. This has apparently been enough to buy time to continue negotiations to restructure European economies and their debt obligations over the next few years.
The euro was created in 1999 as a first step toward a “fiscal union” among European nations from which all those independent nations would benefit. Nations joining this union intended to ultimately cede sovereignty to a governing body and central bank.
Efforts to construct a fiscal union in Europe are strikingly similar to those by Alexander Hamilton, the United States’ first Treasury Secretary, following the ratification of our Constitution in 1789. Hamilton in the 1790s created a fiscal union among the previously independent American states. Those states were heavily indebted as a result of the Revolutionary War. The states had been organized into a loose association under the Articles of Confederation. The political debate in America then was whether to maintain sovereignty of the independent states or to form a union.The states, led by New York and Virginia, the two financially strongest states, ultimately agreed that all would benefit by the creation of a union. Two other important issues in America two hundred years ago were how to repay debt and raise tax revenues. Hamilton believed the assumption by the union of debt obligations of all the states after that debt had been restructured was a “measure of sound policy and substantial justice.”After the debts of individual states were restructured as longer term and lower interest rate obligations, the market prices of that debt rose to levels significantly above prior depressed prices.
The negotiations that have been taking place in Europe to solve their debt crisis seem to us likely during the next several years to also result in a fiscal union. Although it will probably not be exactly like ours, it will be similar enough so that all those previously independent states will benefit. It reminds me of