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Old 06-02-2012, 09:13 AM   #21
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I think this is a bit of an over-simplification. Spain was running the best-balanced budget of the Eurozone until, like Ireland, they had to cope with bailing out their banking sector (Ireland's got into trouble over CDOs etc, Spain's over a property bubble). And Italy owes most of its debt to its own citizens, so there's a limit to how willing the creditors will be to pull any particular trigger. All three of those countries, plus Portugal, seem to be taking their austerity medicine without too much complaint.
I agree that Ireland is taking "austerity" reasonably well but Spain and Italy are having some serious riots demonstrations against it. How well their economies were doing before they went into the crapper is pretty much irrelevant. None of them show any signs of coming back to life anytime soon. Based on the current euro "rules," budget deficits must be controlled within limits none of these countries except Germany are meeting. The bond vigilantes are issuing their verdicts on the likelihood of success of these countries efforts. This is despite very liberal rules on using sovereign debt as collateral with the ECB. Without this, I doubt any country on the euro except Germany could sell any bonds.

You can get over 6% on Spanish and Italian bonds. How many have you picked up?

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There are two reasonably simple solutions to the Euro's problems: inflation and Eurobonds. Both are currently anathema to Germany (inflation because of what it led to for them in the 1920s, Eurobonds because Germany does not want to end up de facto running the fiscal policy of 16 other countries), but at some point, Germany will work out that these are less bad than the alternatives.
It's already been demonstrated that these countries (except Ireland) won't let Germany run their fiscal policy. Eurobonds would "solve" this problem just until people figure out that this eliminated the need for "austerity" and unlimited spending was back in order. At that point it would be obvious to all that Germany can never pay back everyone's debts.

With the totally disjointed fiscal policies, how is inflation to be controlled? Does every government just decide to print their own excess euros ala the US Federal Reserve? Does the ECB just magically increase everyone's bank balance by 50% or so and raise everyone's pay?

Unfortunately, this is a very simple issue. The euro was created as "fixed" currency every country supported with balanced (or nearly balanced) budgets. If they can't do this, the euro will not survive. The only way to make it work is the "United Europe" with a single government controlling all aspects of their "federal" government. That will never happen.
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Old 06-02-2012, 03:35 PM   #22
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I no longer think the Greek elections matter. Spain and Italy are demonstrating that they don't have the political will to balance their budgets.
The old euro is going to disappear very soon. The problem is everyone is trying to play out the charade as long as possible.
I agree with your political and economics opinions.

However hysteria, doom, and gloom are going to hammer the share price down at least another 5-10% before there's any change in sentiment.

But if I was really confident of that then I'd be buying call options, not just biding my time.

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Consider hedging your BRK with BNI protection, Nords?
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Was it just a week ago that we suggested buying Burlington Northern CDS as the cheapest Black-Swan bet against Buffett and Bernanke's ebullience? The answer is yes. And from the start of May the cost of protection has doubled from around 15bps to just over 30bps - quite a surge as it seems more than a few funds thought this a worthwhile trade to tuck in the back pocket at a minimal carry cost. At 32bps mid (31/34), it remains cheap still from a carry perspective and while we are approaching the initial profit target, the reason for buying this low cost, long vol trade is the huge convexity upside should things go a little more pear-shaped for the Octogenarian-of-Omaha - or more specifically for the US equities in general. We do note that if this keeps pushing past our other profit-targets then some should be covered since counterparty risk will rapidly become an issue (unless the Fed officially becomes a CCP)
Yeah, "Tyler Durden" says it ever so much more clearly than I did...

No need to hedge. Berkshire's share price is going to have to drop down into the $60s (and stay there) before I get exercised, and the worst that will happen is I'll end up owning more Berkshire shares. I'd even do that on margin. Berkshire's stock-buyback commitment (http://www.berkshirehathaway.com/news/sep2611.pdf) will start purchasing shares before it drops below $70.

Two years, two dozen trades, and $31K later I'm really really happy that I persevered through McMillan's damn options textbook. We've only been exercised once... and it was part of rebalancing. Best paying hobby ever.
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Old 06-03-2012, 12:05 AM   #23
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Berkshire's stock-buyback commitment (http://www.berkshirehathaway.com/news/sep2611.pdf) will start purchasing shares before it drops below $70.
They are authorized, not committed, to buy before shares drop below $70.

I still like to think I'll be able to purchase below $70 as Buffett finds more attractive investment opportunities post any crash.
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Old 06-03-2012, 01:09 AM   #24
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They are authorized, not committed, to buy before shares drop below $70.
I still like to think I'll be able to purchase below $70 as Buffett finds more attractive investment opportunities post any crash.
IMO that's a distinction without a difference. I don't think Buffett will be able to imagine any other investment opportunities more attractive than his own stock below $70/share. Not even the New Orleans Times-Picayune.

But, hey, you don't have to hope & pray. Sell your own puts at a $70 strike and see what happens.
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Old 06-04-2012, 12:42 AM   #25
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I may. Just ordered Options as a Strategic Investment and McMillan on Options, Second Edition. Thanks for the recommendation.
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Old 06-14-2012, 07:20 AM   #26
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There's an interesting and readable summary of what's at stake for each country and organisation here.
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