SWI NEWS: Breaking ground at Gate"s foundation

By Steve Jordon, MNS

07/21/2008

South Western Iowa News

Buffett is busy and won"t be among the 500 guests expected at Tuesday"s groundbreaking at the Bill & Melinda Gates Foundation"s new headquarters in downtown Seattle, his office said.

The foundation, due to be headed by Ashland, Neb., native Jeff Raikes starting Sept. 2, has ramped up its activities and employment, to about 550 employees, thanks in part to Buffett"s pledge to donate most of his wealth to the foundation over a period of years.

The design includes a visitor center and buildings with "sweeping, outward-reaching curves,"" the foundation said, plus extensive landscaping. The groundbreaking will mark the first office phase of the 15-year project.

A five-level parking garage, owned and operated by the Seattle Center, site of the city"s 1962 World"s Fair, opened recently near the city"s skyline signature Space Needle.

So far there"s no official cost estimate for the 12-acre campus and 1 million square feet of office space, built on a former city parking lot, although the land alone cost $50.4 million.

Links to past


A new jewelry line produced by a Berkshire company lets customers trace their gold and silver back to its origins to ensure "responsibly produced"" rings, pendants, bracelets, earrings and necklaces.

The new Love,Earth jewelry is by the Richline Group"s Aurafin brand, which Berkshire purchased in May 2007.

Mining and manufacturing practices in some countries have come under fire for human rights violations and pollution.
Aurafin, based in Fort Lauderdale, Fla., will sell Love,Earth jewelry at Wal-Mart and WalMart"s Sam"s Club warehouse stores.

Customers can go online, enter batch numbers from their jewelry and see maps of mine and manufacturing locations, plus information such as how a mine "manages its cyanide or waste dumps to ensure there are less adverse long-term impacts to ecosystems.""

Richline said Wal-Mart"s "environmental and social sourcing criteria"" match Aurafin"s corporate goals, which include "being responsible to ethical, social and environmental practices"" through the Council for Responsible Jewelry Practices.

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CNBC VIDEO: Buy Berkshire Hathaway? CNBC"s On-Air Debate

Topics:Investment Strategy | Warren Buffett

Companies:Berkshire Hathaway Inc.

Should ordinary investors try to follow Warren Buffett by purchasing shares of Berkshire Hathaway stock?

Recently, CNBC"s Maria Bartiromo hosted a debate on Closing Bell between Thomas Russo of Gardner, Russo and Gardner and Hake Capital Management"s Mark Hake.

Hake says BRK is overvalued. Russo says buy Berkshire instead of trying to invest "alongside" Buffett by replicating his portfolio.

Here"s the video clip:

Current Berkshire stock prices:

Class A: [US;BRK.A 88140.0 --- UNCH (0) ]

Class B: [US;BRK.B 2860.02 --- UNCH (0) ]

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Europe is Obamaland: Senator"s Remarkable Popularity Transcends Borders

Europe, and much of the world, awaits the coming of Obama, and a political dawn to sweep away the long night of the Bush era. Of course, it may only be a matter of time before Republicans start accusing Obama of being, `too French."

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Under Proposed Bailout, Feds Could Speculate, Nationalize Any Company or Industry, Or Do Anything Else They Want Using Taxpayer Money

The Fact Sheet from the U.S. Treasury states:

The purchases are intended to be residential and commercial mortgage-related assets, which may include mortgage-backed securities and whole loans. The Secretary will have the discretion, in consultation with the Chairman of the Federal Reserve, to purchase other assets, as deemed necessary to effectively stabilize financial markets.

So Paulson, in consultation with Bernanke, could "deem it necessary" to "stabilize" the financial markets by buying boat loads of gold. Or by cornering the market in uranium or platinum.

Or they could decide that they needed to buy Microsoft and Google.

Just like Bush and Cheney have gotten us into oil wars and wars to protect Israel under the guise of being necessary to protect our national defense, Paulson and Bernanke could do anything they want by pretending it is for the stability of the financial markets, especially since no one could challenge their actions in court.

Audit the Fed Blocked by Senate Procedural Move

In the House, Mr. Sunshine, Ron Paul Wins Support to Audit Fed Reserve.

The feisty congressman from Texas, whose insurgent "Ron Paul Revolution" presidential campaign rankled Republican leaders last year, now has the GOP House leadership on his side -- backing a measure that generated paltry support when he first introduced it 26 years ago.

Paul, as of Tuesday, has won 245 co-sponsors to a bill that would require a full-fledged audit of the Federal Reserve by the end of 2010.

The bill would call for the comptroller general in the Government Accountability Office to audit the Fed and report those findings to Congress. The GAO"s ability to conduct such audits now is severely restricted.

A slew of top Republicans are backing the bill, as are many Democrats.

"Ron Paul has the right idea on this," said Sen. Jim DeMint, R-S.C., who supports similar legislation in the Senate. "I"m just hoping we can get a clear audit. ... We need to know what they"re up to."

Unfortunately for Paul, the bill appears to be idling in the House Financial Services Committee, which is chaired by Barney Frank, D-Mass. The bill has been sitting there, gathering co-sponsors, since Paul introduced it in late February.

Calls to Frank"s office were not returned.

Paul acknowledged that his bill hasn"t advanced but said Frank has "promised" him he will deal with his bill and is willing to give it a hearing. Paul said it"s easily got the "momentum" to pass the full House.

A representative with the Federal Reserve could not be reached for comment. DeMint told FOX News last week that the measure would have a good chance of passing the Senate if supporters can push Paul"s to a vote, which he said would be successful, in the House.

"The whole process is unconstitutional. There is no legal authority to operate such a monetary system," Paul said in February, in a statement calling for Washington to "end the Fed."

DeMint amendment to audit the Federal Reserve blocked by Senate Leadership



Senator Jim DeMint (R-SC) is blocked by Senate Democrat Leadership from having a vote on his amendment to audit the Federal Reserve, based on a bill authored by Congressman Ron Paul (R-Texas) in the House, H.R. 1207, and Senator Bernie Sanders (D-Vermont) in the Senate, S. 604.

Speak Out - Audit the Fed, Then End It!

If you have not done so yet, please contact your legislative representatives and tell them you support a Fed audit. If you have already done so, then please do so again. Details how in Speak Out - Audit the Fed, Then End It!

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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1929 Revisited

Many people asked for a transcript of Contrarian Debate: Janszen vs Mish the discussion between Eric Janszen and myself on housing, a possible recession, and the terminal state of the asset bubble cycle: inflation or deflation.

Others wondered why the "&*%@$!" format was streaming audio instead of MP3. I can not answer that question but I will pass that thought along to the person recording and we will attempt to have a different format next time if at all possible. Finally others questioned calling what took place a "debate". Well it was never intended to be a debate in the classic sense but rather a discussion of ideas and topics that each of us agreed to talk about in advance. Indeed there was far more agreement than disagreement.

In the discussion each of us presented a "What year is it?" scenario. Eric Janszen chose 1999 as outlined in Is it 1999 again? Yes and no. I chose 1929. I think it is fair to say we both agree that history rhymes but does not repeat, and those looking for "fireworks" as opposed to a discussion of ideas may have been disappointed.

There is no transcript available but following are my views on the parallels between now and 1929 and why this is not a repeat of the 70"s. Let"s discuss the 70"s first.

70�s Rerun

Similarities

1. War in Vietnam war then vs. the war in Iraq now
2. Rising oil and commodity prices

Differences

1. Rising Oil prices [demand side shock vs. supply side shock]
2. Spiraling wages then vs. declining wages now
3. Wage and price controls then
   
4. Consumer Debt levels � Significant ability to take on more debt in the 70"s
   
5. Housing down payments � 20% then 0% now
   
6. Two family incomes now vs. one family income then
   
7. The power of unions - then
   
8. Globalization & Global wage arbitrage - now
   
9. Outsourcing - now
   
10. Productivity improvements - The internet and other innovations - now
    
11. Declining credit standards - now
    
12. Downfall of communism
    
13. Long term interest rates under 5% - now
    
14. New creative financing ideas running rampant - now
    
15. Massive use of derivatives - now
16. China, India, and Emerging Markets
    

The differences noted above are staggering and Eric agreed.

20"s Rerun

1. Throughout the 1920s, the Fed deliberately and unwisely stimulated the stock market by keeping the �call rate,� that is, the interest rate on bank loans to the stock market, artificially low. � Margin rates were just lowered here and the FF rate which was lowered to 1% supported a big housing boom.
2. In the late 1920s, bank credit propelled a massive real estate boom in New York City, in Florida, and throughout the country. We now have the biggest housing bubble in history.
   
3. In the 1920�s there was a massive infusion of money (gold) from war torn Europe stimulating our economy. We currently have a massive stimulus of cheap money from Japan and China via and various carry trades and cheap credit supporting our economy.
4. In the 20�s we intervened in foreign exchange markets to enhance or stabilize Europe�s power to buy our exports. We currently are involved in disputes with China over currency issues attempting to get China to buy more of our goods.
5. There were massive productivity improvements in the 20�s along with the industrial revolution and assembly line processing. The 90�s � 2000�s productivity miracle was the internet. Huge boom periods on account of disruptive innovation. By contrast there was no such innovative disruptions in the 70�s.
6. In late 20�s credit was expanding at a rapid pace but there was no need for additional productive capacity. Today GDP is rapidly falling but credit is still rising. There is no pent up demand for homes, restaurants, retail stores, strip malls, autos, truck, etc, just as there was no need for additional assembly line production in 1929. Speculation replaced productive capacity just as it is today.
7. In 1929 leverage was extreme via stock margin. In 2006 credit derivatives leverage is extreme to the tune of 340 trillion dollars worth with no one really understand exactly what the counterparty risk is.
8. A few days before leaving office in March 1929, Coolidge called American prosperity �absolutely sound� and assured everyone that stocks were �cheap at current prices.� Based on the �Treasury Model� and unsustainable earnings growth due to financing activities, we are once again told time and time again that �the economy is sound� and stocks are cheap at current prices.
9. "Keynesian Folly", along with other massive government interventions managed to convert what would likely have been a short, sharp recession into a chronic, permanent, stagnation with an unprecedented high unemployment that only ended with World War II. Massive government interventions between 2002 and 2005 prevented a badly needed recession and instead created the biggest asset bubble in history.
10. In 1933 gold coins were confiscated � now we have a threat of nickels being confiscated.
11. At the time, the stock market of 1929 was the biggest asset bubbles in history. We have now vastly exceeded all previous credit bubbles.
12. The Smoot-Hawley Tariff was signed into law on June 17, 1930. There are renewed threats of tariffs in the U.S. Congress right now.
    

Oddly enough I found one more similarity just today. In More Cream for the Fat Cats I see that "Corporate profits are at their highest level since 1929."

The above 12 points were the similarities I mentioned in the discussion and Eric chimed in with an additional one: Buying goods on credit. Buying on credit first became widely practiced in the 20"s. It was done to "make things affordable". Now nearly everything is made affordable by stretching payments to lengths that certainly never would have been allowed in the 70"s but are commonplace today.

That is where we parted ways. While agreeing on the similarities Eric also cautioned there were parallels to 1937 and presented his "Ka-Poom Theory" which you can also see in Is it 1999 again? Yes and no. On the other hand I am sticking to a simple "It�s not different this time" approach and that all asset bubbles collapse in a deflationary credit bust. Previous credit busting deflationary collapses include Japan, the Great Depression, the railroad bust of the 1880"s, the South Sea Trading Bubble, the John Law Mississippi Bubble, and the Tulip Mania Bubble.

In an Interview with Paul Kasriel we had the following discussion on how inflation starts and ends.

Mish: How does inflation start and end?
Kasriel: Inflation starts with expansion of money and credit.
Inflation ends when the central bank is no longer able or willing to extend credit and/or when consumers and businesses are no longer willing to borrow because further expansion and /or speculation no longer makes any economic sense.

It is pure speculation now (corporate buybacks, leveraged buyouts, collapsing volatilities) along with foreign central bank asset buying that is driving stocks higher. None of it is getting into the average guy"s pocket and none of it has anything to do with the real economy. Meanwhile real wages are falling, home prices are collapsing, and if I am correct job growth is about ready to fall off the cliff in a second wave down of reduced corporate spending. That combination will increase foreclosures, defaults, and bankruptcies (the latter of which obviously destroys credit).

There is little central banks can do about it either, just as they could not do much when all of the other massive bubbles throughout history collapsed. Nonetheless, �Keynesian Folly" will likely be attempted once again. The last execution by Greenspan produced the housing bubble and with it jobs. If the next attempt does not put money into consumers pockets and have them spend it on increased consumption (as opposed to paying off debts), the party is over regardless of what year this is.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Will Obama"s Job Retraining Programs Save The Day?

President Obama is mulling rental options for foreclosed homeowners. Furthermore Obama seeks job training for the unemployed, concedes unemployment is getting worse, says auto jobs are not coming back, yet magically assumes job retraining will save the day.

In short, Obamaitis is setting in. Please consider the following news stories.

Obama Says "Give It To Me"

On the burden of fixing the economy Obama Says "Give It To Me"

Conceding unemployment will get worse before it shrinks, President Barack Obama on Tuesday unveiled a $12 billion plan to help community colleges prepare millions of people for a new generation of jobs. Challenging critics, he said he welcomed the task of turning around the economy.

"The hard truth is that some of the jobs that have been lost in the auto industry and elsewhere won"t be coming back," Obama said. "They are the casualties of a changing economy."

To that end, he proposed an "American Graduation Initiative" to bolster the two-year community college field that serves millions of students as a launching point for careers or a step toward expanded higher education. The idea is to train people for jobs, such as those expected in the clean energy industry, when the economy turns around and begins to create jobs again instead of shedding them.

Under the plan, competitive grants would be offered to schools to try new programs or expand training and counseling.

The White House says the cost would be $12 billion over 10 years; Obama says it would be paid for by ending wasteful subsidies to banks and private lenders of student loans.

Meanwhile, former Federal Reserve Chairman Alan Greenspan told Republican senators on Tuesday at their private weekly luncheon at the Capitol that the government"s $1 trillion deficit was the single biggest hurdle to economic recovery.

Question of the Day

Why is that Greenspan is ignored on the few occasions where he makes any sense, yet people fawn all over him the vast majority of the time when he makes no sense at all?

Obama Mulls Rental Option For Homeowners

Inquiring minds are reading Obama mulls rental option for homeowners.

U.S. officials are weighing a plan to let borrowers who have fallen behind on mortgage payments avoid eviction by renting their home instead, sources familiar with the administration"s thinking said on Tuesday.

Under one idea being discussed, delinquent homeowners would surrender ownership of their homes, but would continue to live in the property for several years, the sources told Reuters.

A U.S. Treasury spokeswoman said late on Tuesday that "we are constantly reviewing new ways to help struggling homeowners and stabilize the housing market. This is just one idea among many that has been considered, but no decisions are imminent on the matter."

Officials have been frustrated as red tape and rising interest rates have slowed a housing rescue plan announced in February that was meant to refinance the mortgages of 5 million borrowers and lower monthly payments for 4 million more.

Since one in five homeowners owe more than their property is worth, they have little cushion if they lose their job or face another crisis, said Jay Brinkmann, the chief economist for the Mortgage Bankers Association.

"Foreclosure is a double trigger -- does someone have a job and do they owe more than a home is worth?" Brinkmann asked.

Obama Says New Jobs Will Require Training

BusinessWeek is reporting Obama says new jobs will require greater training.

President Barack Obama says lost auto industry jobs in states such as Michigan will not come back and new jobs will require greater training and post-high school education to achieve a higher skilled work force.

Under Obama"s college initiative, schools could qualify for "challenge grants" so they"ll have money to try new programs, or expand training and counseling. Dropout rates would be addressed by designing programs to help students who want to earn an associate"s degree or transfer to a four-year institution do so.

Money would be spent to renovate outdated facilities or build new ones, and to develop online courses and make them freely available to students and others who want to use them.

The total federal cost is $12 billion over a decade. Of that, $9 billion would go toward challenge grants and addressing dropout rates. Half a billion, or $500 million, would go toward online education. The remaining $2.5 billion would be used to spark $10 billion in renovation and construction nationwide, said James Kvaal, an Obama economic policy adviser.

Federal Job-Training Programs Have Record Of Failure

Some of what Obama says sounds good on paper. However, inquiring minds are not satisfied with what sounds good. It has to feel good as well. The sad reality of the matter is Federal Job-Training Programs Have a Record of Failure.

The above study dates back to 2004, but little has changed except increasing competition for jobs. Here are a few snips.

The history of federally funded job-training programs strongly suggests that [the Workforce Investment Act] WIA will not substantially raise participants" incomes. Similar programs funded under the Job Training Partnership Act (JTPA) of 1982 were found to be largely ineffective.

Three types of JTPA activities were evaluated: classroom training, on-the-job training and job-search assistance, and "other services" tailored to participants on the basis of their age.

Over several decades, Congress has "reformed" federal job-training programs numerous times. Each of these reforms promised to fix federal job-training programs--to no effect.

According to Professor Gordon Lafer at the University of Oregon Labor Education and Research Center, "As successive generations of job training programs fail to produce the hoped-for results, policy makers have cycled through a stock repertoire of procedural fixes that promise to solve the problem."

For WIA, these procedural fixes fall under the mantra of "increased flexibility" and "One-Stop Career Centers." However, none of these fixes are likely to improve the effectiveness of job-training programs. Professor Lafer reasonably concludes that the "lesson of the National JTPA Study is that there is no managerial fix which can create dramatically more effective training programs."

The dismal failure of federal job-training programs should lead Congress to abolish WIA--along with other federal jobs-training programs.

Job Retraining Cannot Possibly Work

It should not take a genius to conclude job training cannot possibly work. There are so many qualified, experienced, out of work individuals that few if anyone would hire a GM welder retrained in JAVA programming for a programming position. Moreover, no one would hire a banker as a welder. Nonetheless, president Obama and colleges are both touting such retraining as a way to get a job.

Bear in mind, I am all in favor of education, but the idea that 40-50 year old assembly line workers, home builders, mortgage brokers, etc etc can be retrained and compete against those with 20 years experience and still out of a job is absurd.

President Obama is bright enough to understand this. Yet, instead of telling the truth, Obama is willing to waste billions of taxpayer dollars spreading false hope.

Under guise of political expediency, Obama simply cannot tell the truth to those out of a job. The sad truth is the situation is hopeless for many if not most of those who are over 40 and recently lost a high paying job.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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GM Plans Pay Cuts For Salaried Workers

Every week there are stories involving workers voluntarily, or involuntarily involved in pay cuts. Kicking this week off, General Motors Said to Plan Pay Cuts for Salaried Employees.

General Motors Corp., racing to meet U.S. conditions to keep $13.4 billion in government loans, will include pay cuts for salaried employees in a restructuring plan to be submitted Feb. 17, people familiar with the plan said.

The pay cuts will be in addition to firings of thousands of salaried workers required to cut expenses as the largest U.S.- based automaker tries to win concessions from bondholders, labor unions and dealers, the people said, who asked not to be identified because the plans haven�t been announced.

In related news, GM, Chrysler May Face Bankruptcy to Protect U.S. Debt.

General Motors Corp. and Chrysler LLC may have to be forced into bankruptcy by the U.S. government to assure repayment of $17.4 billion in federal bailout loans, a course of action the automakers claim would destroy them.

U.S. taxpayers currently take a backseat to prior creditors, including Citigroup Inc., JPMorgan Chase & Co. and Goldman Sachs Group Inc., according to loan agreements posted on the U.S. Treasury�s Web site. The government has hired a law firm to help establish its place at the front of the line for repayment, two people involved in the work said last week.

If federal officials fail to get a consensual agreement to change their position regarding repayment, they have the option to force the companies into bankruptcy as a condition of more bailout aid. The government would finance the bankruptcy with a so-called �debtor in possession� or DIP loan, a lender status that gives the U.S. priority over other creditors, said Don Workman, a partner at Baker & Hostetler LLP.

�They are negotiating to see if they can reach an agreement,� said Workman, a bankruptcy lawyer based in Washington. �If not, they are saying �We are pretty darn sure that a bankruptcy judge will allow us�� to be first in line for repayment.

As it stands, the government loans fall below existing debt secured by most assets for Auburn Hills, Michigan-based Chrysler and Detroit-based GM. Prior lenders have first position on some assets. The government has first position on assets not already pledged.

Other Pay Cuts

Ohio Governor Asks For Across The Board Union Pay Cuts

FedEx (FDX), Timber giant Weyerhaeuser (WY), and Alcoa (AA) cut or froze wages. See 2009: Already Looking Bleak for details.

San Diego is asking for cuts in pay and wages. See Sharing The Pain In California for details.

On January 29, 2009 Arizona State Faculty Announced Face 12% Pay Cut by June 30.

Arizona"s public universities on Tuesday unveiled their offers to make cuts in their budgets this year, saying they would strip thousands of employees of weeks of pay and eliminate jobs and some programs. ...

[T]he proposal would require employees, including tenured professors, to take time off as unpaid leave. ... ASU"s portion of the proposed $100 million cut is $45.3 million. Much of it would come from employees, who could lose 12% percent of their remaining pay before July.

On February 6, 2009 Contemporary Media employees take pay cut

Employees at Contemporary Media Inc., publisher of The Memphis Flyer , Memphis magazine, Memphis Parent and Memphis Business Quarterly , have taken pay cuts of at least 4 percent, with some taking pay cuts as high as 8 percent.

The company�s 401(k) matching program was also suspended. The cuts will last at least until the end of June.

Those salary cuts span many industries. We have not seen broad based wages cuts like this since the great depression. Expect to see a lot more in the weeks ahead. This is deflation in action.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

David Brooks on failures of conservative movement

Conservative columnist David Brooks envisions very tough times ahead for conservatives. On "Face the Nation" this morning, Brooks says the conservative movement has "no leaders," is in a "world of pain," and lacks a "coherent belief system." Watch a clip from the show (via ThinkProgress).

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Jon Stewart Interviews Originator Of "Death Panel" Lies

Betsy McCaughey Pt. 1

The Daily Show With Jon Stewart	Mon - Thurs 11p / 10c
Betsy McCaughey Pt. 1
http://www.thedailyshow.com/
Daily Show Full Episodes Political Humor Healthcare Protests

Part 2

The Daily Show With Jon Stewart	Mon - Thurs 11p / 10c
Exclusive - Betsy McCaughey Extended Interview Pt. 1
http://www.thedailyshow.com/
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Part 3

The Daily Show With Jon Stewart	Mon - Thurs 11p / 10c
Exclusive - Betsy McCaughey Extended Interview Pt. 2
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Death Panel Myth Creator Betsy Mccaughey Resigns

Source: Washington Independent
Betsy McCaughey � an outspoken proponent of the myth that Democrats� health care reform proposals will lead to the creation of �death panels,� as well as a former lieutenant governor of New York and adjunct fellow at the Hudson Institute � has stepped down from her position as a director of Cantel Medical Corp., which bills itself as a �leading provider of infection prevention and control products in the healthcare market.�
From a press release:
CANTEL MEDICAL CORP. (NYSE: CMN � News) announced that on August 20, 2009 it received a letter of resignation from Ms. Elizabeth McCaughey as a director of the Company. Ms. McCaughey, who had served as a director since 2005, stated that she was resigning to avoid any appearance of a conflict of interest during the national debate over healthcare reform.
McCaughey found herself the subject of widespread ridicule after an appearance on �The Daily Show� Thursday, during which host Jon Stewart aggressively challenged her positions on health care reform.
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Hudson Institute "donors" list
Ag Processing Inc
American Crop Protection Association
American Cyanamid
Archer Daniels Midland
Cargill
Ciba-Geigy
ConAgra Foods
Conrad Black
CropLife International
DowElanco
DuPont
Eli Lilly and Company
Exxon Mobil
Fannie Mae
General Electric Fund
Heinz
IBM
Lilly Endowment
McDonald"s
Merck
Microsoft
Monsanto
National Agricultural Chemical Association
Nichols-Dezenhall Communications Management Group
Novartis
PayPal
PhRMA
PriceWaterhouseCoopers
Procter & Gamble
Sunkist Growers
Syngenta Crop Protection
United Agri Products
Westfield Corporation

BLOOMBERG: Dow Chemical to Sell Assets, Cut Jobs to Fund �Rich� Rohm Deal

By Jack Kaskey and Jef Feeley

March 10 (Bloomberg) -- Dow Chemical Co., the largest U.S. chemical maker, will use asset sales, job cuts and new debt to try to maintain investment-grade credit ratings after paying what some investors are calling a �rich� price for Rohm & Haas Co.

Dow plans to raise about $4 billion from selling assets, including at least $1.5 billion from Rohm & Haas�s Morton Salt unit, Dow Chief Executive Officer Andrew Liveris said yesterday. The company will issue $4.3 billion of debt and cut costs by $400 million more than previously estimated, partly by eliminating an additional 3,500 jobs, mostly at Rohm & Haas, Liveris said.

Liveris sought new terms for the buyout after a joint venture with Kuwait collapsed, depriving Dow of $9 billion and prompting debt downgrades. Rohm & Haas investors will get $78 a share as originally agreed, and the two largest shareholders get equity that cuts Dow�s cash cost by as much as $3 billion and contributes to a 7.8 percent higher deal price of $16.5 billion.

�There are still concerns about the financial viability of Dow, and the fact they still agreed to pay $78 a share to the individual shareholders was a bit of a disappointment,� said Gene Pisasale, who helps manage $13 billion, including Dow shares, at PNC Capital in Baltimore. �That is a pretty rich price.�

Dow refused to complete the all-cash purchase as planned in January, saying the combined company wouldn�t be viable because of slumping chemical demand and increased debt. The companies reached the accord after the start of a trial in Georgetown, Delaware, was delayed for settlement talks.

Dow, based in Midland, Michigan, fell 45 cents, or 7.1 percent, to $5.88 in trading after the official close of the New York Stock Exchange. Philadelphia-based Rohm & Haas rose $3.42, or 4.6 percent, to $77.42.

�Favorable Resolution�

�This is a favorable resolution for Rohm & Haas because the shareholders are getting exactly what they were promised,� said Dmitry Silversteyn, an analyst at Longbow Research in Independence, Ohio.

Under the revised accord, which is set to close on April 1, Dow will pay a so-called ticking fee of $100 million a month from Jan. 10 to closing, contributing to the higher deal price, Chief Financial Officer Geoffery Merszei said yesterday.

The Haas family trusts and Paulson Co., the largest shareholders will exchange some of their stock for $2.5 billion in preferred Dow shares, and the Haas family may take an additional $500 million in equity at Dow�s discretion, the company said.

Interest payments on the preferred shares will reduce annual earnings by as much as 20 cents a share compared with debt financing, Merszei said.

Bridge Loan

Dow will need to draw only $9.5 billion of a $12.5 billion bridge loan to finance the deal because of the latest equity investments, Merszei said. In addition, Dow has a $3 billion equity investment from Warren Buffett�s Berkshire Hathaway Inc. and a $1 billion investment by the Kuwait Investment Authority.

By June, the issuance of long term debt will help cut the bridge loan to $4 billion, and asset sales will help Dow repay the entire amount within a year, Merszei said.

Standard & Poor�s said March 6 that Dow�s corporate credit and senior unsecured debt ratings of BBB, two levels above junk, may be lowered if the merger closed on the original terms or if the company was found liable for a large legal judgment.

Dow has six bidders for Morton Salt, the biggest U.S. salt producer, and the unit will be sold soon after the merger is complete, Liveris said. Selling stakes in a Dutch oil-refining business and in southeast Asia olefins ventures will raise about $1.5 billion, Liveris said. Other businesses worth about $1 billion will be sold, he said.

Job Cuts

Dow plans to save $1.3 billion by combining purchasing operations, sharing services and closing duplicate plants and research facilities, Liveris said. The latest job cuts bring the total at both companies to 10,000, he said. The combined company will spend $1.6 billion a year on research, among the biggest budgets in the industry, he said.

Acquiring Rohm & Haas was a key part of Liveris�s effort to transform Dow from a commodity producer into a maker of specialty products, such as material for electronics and paints, that command higher profit margins.

�This deal is strategic and it positions Dow for the future,� Liveris said. �We are back in control of our own destiny.�

Dow is pursuing more than $2.5 billion in restitution through arbitration from Kuwait�s Petroleum Industries Co. for backing out of an agreement to buy a 50 percent stake in the basic plastics unit, the world�s largest maker of polyethylene plastic. Dow isn�t aggressively pursuing damages against the nation in case it wants to restart the aborted K-Dow joint venture, he said.

Other state-owned petroleum companies also are interested in buying the plastics stake, Liveris said.

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The Four Filters Invention of Warren Buffett and Charlie Munger by Bud Labitan
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BLOOMBERG.COM: Buffett Says Economy `on Floor" After Cardiac Arrest

By Erik Holm and Andrew Frye

Oct. 1 (Bloomberg) -- Billionaire Warren Buffett, the world"s preeminent stock picker, said the U.S. economy is ``flat on the floor"" after a cardiac arrest as companies struggle to secure funding and unemployment increases.

``In my adult lifetime I don"t think I"ve ever seen people as fearful, economically, as they are now,"" Buffett said today in an interview with Charlie Rose to be broadcast tonight on PBS. ``The economy is going to be getting worse for a while.""

The biggest housing slump since the Depression has spurred a wave of defaults and a yearlong contraction in global credit markets, squeezing companies" capacity for investment. Buffett"s Berkshire Hathaway Inc., based in Omaha, Nebraska, agreed in the past two weeks to buy $8 billion in preferred shares from General Electric Co. and Goldman Sachs Group Inc. to help the companies fund their businesses.

The credit freeze is ``sucking blood"" from the U.S. economy, Buffett said.

The bankruptcy of Lehman Brothers Holdings Inc. and Washington Mutual Inc., and the emergency sales of Merrill Lynch & Co. and Wachovia Corp. fueled fears about the vulnerability of firms that rely on capital markets for short-term funding.

Buffett is taking advantage of fragile stock markets, the lack of available credit and his own reputation as a picker of successful companies to extract outsized payments for Berkshire"s cash and endorsement. He has told shareholders that his strategy is to be ``greedy when others are fearful.""

`Seizing Opportunity"

``He"s seizing the opportunity,"" said Tom Kersting, an analyst for Edward Jones & Co in St. Louis. ``His philosophy is always to keep some powder dry. That allows him to take advantage of the current turmoil we"re in and take advantage when others can"t.""

For both Goldman and GE, Buffett"s endorsement comes with a cost. Both companies agreed to pay Berkshire a 10 percent dividend on his preferred shares, and each gave him warrants to buy their common stock at any point in the next five years at a price that"s a discount to where it"s currently trading.

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The Snowball: Warren Buffett and the Business of Life by Alice Schroeder
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Industrial production drops 1.1%, Motor vehicle output plunges 11.9%

MarketWatch is reporting Industrial production drops 1.1% in August.

Led by a big drop in auto production, U.S. industrial output plunged 1.1% in August, the biggest drop since Hurricane Katrina three years ago, the Federal Reserve reported Monday.

The decline was much worse than the 0.3% decline expected by economists surveyed by MarketWatch. Output in the previous four months was also revised down by a total of half a percentage point.

Industrial production has now fallen 1.5% in the past year and 2% since its peak in January. Industrial production is one of four major indicators used to judge whether the economy is in a recession.

Capacity utilization -- a key gauge of inflationary pressures stemming from industrial bottlenecks -- dropped by a full percentage point to 78.7%, the lowest in nearly four years. Capacity utilization in manufacturing fell to 76.6%, about three percentage points below its long-run average and also the lowest in four years.

In August, total vehicle assemblies dropped to an 8.19 million annual rate, down 24% from the 2007 average. For light trucks, assemblies dropped 41% below last year"s average.

Statistical Release

Here is the Federal Reserve Industrial Production and Capacity Utilization Statistical Release.

On any other day motor vehicle output plunging 11.9% and industrial production tanking would be pretty grim news. Today, no one is talking about it.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Polygamist sect gets millions from U.S. government

FT. WORTH, Tex. _American taxpayers have unwittingly helped finance a polygamist sect that is now the focus of a massive child abuse investigation in West Texas, with a business tied to the group receiving a nearly $1 million loan from the federal government and $1.2 million in military contracts.
LinkHere
Faith based pedophilia.

Lawrence Wilkerson: Congress Is "Spineless"

Col. Lawrence Wilkerson, the former chief of staff to Secretary of State Colin Powell, was sharply critical of the CIA and the U.S. Congress in an appearance on CNN"s "American Morning" on Wednesday. LinkHere

Psychopaths always blame their victims

Twelfth Bough

I�m sure you haven�t heard on TV news that the IDF killed a Palestinian family of four small children and their mother, among others, as they were getting ready to eat breakfast. I mean, if an Israeli family was killed we�d be hearing about it non-stop; but this was just a Palestinian mother and her four little children. Just some collateral damage� The IDF is looking into the incident, but has yet to obtain a full picture of what happened. Military sources noted that a group of gunmen was spotted shortly after 8 am near Givati forces operating in the area. An aircraft fired at them and hit them, while tanks fired shells towards the area. Translation: The IDF has yet to prepare an adequate excuse for the utter disregard of Palestinian lives. They need an excuse suitable for international consumption because, though they don�t care about these people who were killed, they know that some people will whine about it causing a slight inconvenience to Israeli public relations activities. So the IDF is "looking into the incident, but has yet to obtain a full picture of what happened�, which means they haven�t got the story down yet...

continua / continued

GM Leads the Way with a 53% Sales Plunge

Congratulations of sorts go to GM for its industry leading sales effort. Please consider GM�s 53% U.S. Sales Decline Leads Industry�s February Plunge.

General Motors Corp., surviving with federal loans, said its February U.S. sales plummeted 53 percent as the recession pushed industrywide purchases toward the lowest in almost three decades.

Industry sales at last month�s levels make it more challenging for Detroit-based GM and Chrysler LLC to become profitable and pay back $17.4 billion in U.S. loans. President Barack Obama�s auto task force may approve as much as $21.6 billion more aid for the two automakers and support for the thousands of companies that supply car manufacturers with parts.

GM�s February sales of cars and light trucks fell to 126,170 from 268,737 a year earlier, the automaker said in a statement. That included declines of 69 percent for Hummer, 59 percent for Saab and 57 percent for Saturn, three units the company is seeking to shed.

At Ford, sales of cars and light trucks dropped to 99,050 from 192,178, according to a statement from the Dearborn, Michigan-based company. The sales were hurt by a 55 percent decline to 23,614 for its F-Series pickup trucks. Sales for the Volvo unit, which Ford wants to sell, were also down 55 percent.

Toyota reported a decline to 109,583 from 182,169. Sales for the Toyota City, Japan-based company were dragged down by declines of 60 percent for its Tundra large pickup and 51 percent for the Yaris small car.

Honda said deliveries fell to 71,575 from 115,397, and Nissan said its sales fell to 54,249 from 86,219.

Volkswagen AG said February sales for its namesake brand declined 18 percent to 13,660. Daimler AG said sales of its Mercedes-Benz and Smart vehicles fell 21 percent to 15,614. Bayersiche Motoren Werke AG�s U.S. sales were down 35 percent to 15,805.

Hyundai Motor Co., South Korea�s largest automaker, said it sold 30,621 vehicles last month, a 1.5 percent decline from a year earlier. In January, Seoul-based Hyundai was the sole major automaker to post a gain in U.S. sales.

Seeking To Shed Hummer, Saab, Saturn

What"s with this seeking to shed nonsense? Just do it. GM needs to halt operations on all three. The brands are worthless. In fact they are less than worthless. GM has never in history returned a profit on Saturn.

How does GM do it? Volume, Volume, Volume. Volume on Hummer, Saab, and Saturn needs to be zero.

For more on this month"s auto woes, please see Ford Sales Decline 48%, Toyota 32%, Honda 21%, Nissan 35%.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

US Service Sector in Recession - Eurozone is Fading Fast

If there was any doubt before, there should be no doubt now, the economy, led by the service sector is now in recession. The US service sector contracted in January.

The Institute for Supply Management reported that its index of service sector business activity declined to 44.6 in January from a revised reading of 54.4 in December. Economists surveyed by Thomson Financial/IFR had expected a slight slowdown but had still forecast growth, with a median estimate for the index of 53.

A reading above 50 indicates expansion, while below 50 indicates contraction. It was the first time the service sector reading has contracted since March 2003.

"This is an absolute collapse of this index," said Nigel Gault, chief U.S. economist at Global Insight.

ISM said only three service industries reported growth, while 14 showed contraction. The three growing segments � utilities, professional services and educational services � include more crucial needs such as doctor visits. Meanwhile, cutbacks in less-essential spending has dragged down such segments as arts and entertainment, fishing and hunting, and lodging and food services.

Two measures that fell were those for new orders and employment, which Nieves said were more forward-looking � so their drops could indicate trouble ahead. New orders fell to 43.5 while employment fell to 43.9.

ISM Table At A Glance



Click on chart for sharper image
Click here for the complete January 2008 Non-Manufacturing ISM Report On Business

EuroZone Fades

Reuters is reporting Services contract in US, fading fast in euro zone.

"An absolutely stunning ISM non-manufacturing number leaves the chart of the index looking like it has fallen off the edge of a cliff, and is heartwarming only for those who think the economy is already in a recession," said Alan Ruskin, strategist at RBS Greenwich.

"It seems clear that the economy has slowed in recent months: however, we will need to see much more in the way of supporting evidence before we believe that growth has slowed as much as this series suggests," said Drew Matus, economist at Lehman Brothers in New York.

My Comment: More supporting evidence is needed? The holiday shopping season was miserable. More importantly, Jobs Contracted in 2007 as Job Growth Revised Away. How much more supporting evidence does one need? Is Matus reporting from Pluto?

The data followed news earlier on Tuesday that euro zone services growth slowed to a near halt in January from an already weak early estimate, with services in three of the bloc"s four biggest economies -- Germany, Italy and Spain -- contracting.

Of the big four only France showed growth.

The RBS/NTC Euro zone Services Purchasing Managers Index fell a sharp 1.4 points to 50.6 in January from an earlier flash estimate of 52.0. That index is now dangerously close to the 50 mark that divides growth from contraction.

Those data marked a new four-and-a-half year low for services in the 15-member bloc and also came in well below the 52.0 consensus -- although by nowhere near a big a gap as the U.S. numbers.

"Euro zone growth is in trouble and the risk of recession at some stage should not be underplayed. Business confidence is sliding and consumer morale is being hit hard," said David Brown, chief European economist at Bear Stearns, before the U.S. ISM report was released.

Decoupling Theory Dead

The EuroZone Decoupling Theory is now officially dead. The only question now is how big the recession in Europe will be. The US is in recession and it is going to be nasty.

Professor Depew was talking about the ISM in point number 1 of Five Things: Everybody, Back Into the Woods! Back Into the Woods!

There was very little about this morning"s release of the Institute for Supply Management"s Non-Manufacturing Index that wasn"t a fiasco.

First, the report was released about an hour early "due to a possible breach of information." Second, the plunge in the index headline composite index number, from 53.9 to 44.6 stunned even the most grim-faced bears. Third, a recently announced change in the composition of the index mistakenly led a few "We"re Out of the Woods" optimists to conclude that perhaps the numbers aren"t" as bad as they seem. Well, everyone can run back into the woods, because they are as bad as they seem.

All that was revised was the weighted formula for the overall headline composite index number. The previous weighted formula was scrapped in favor of an equal-weighted formula because, according to the ISM, to more closely predict GDP. What does that gibberish mean?

There are four categories that make up the overall composite index reading. They are:

1) Business Activity Index
2) New Orders Index
3) Employment Index
4) Supplier Deliveries Index

In the old formula these were weighted unequally. Now, they are weighted equally at 25% each. So while the overall composite reading of 44.6 may not compare easily to the January weighted composite of 53.9, the measurements of the components themselves are unchanged, and the component index readings are most important.

Therefore, when one sees the Business Activity Index plunge from 54.4 to 41.9 or the New Orders Index decline from 53.9 to 43.5, the Employment Index slip from 51.8 to 43.9 and the Supplier Deliveries Index fall from 52.5 to 49, the weakness is apparent. remember, any reading below 50 signals contraction.

Bottom Line: Service industries make up more than three-quarters of the economy. This is a very weak report. Some of the internals are at 2001 levels reached during post-9/11 stress and ahead of the 2002 deflationary scare. Everyone out of the woods should now run back into the woods for cover.

Bernanke needs a Crash Course On Economics. The global economy is fading fast.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Steve Forbes On The Economy

Here is Steve Forbes at Freedom Fest.



click here to play video

Forbes" Thoughts

• The US economy will show real growth in the second half because of low inventories.
• There is plenty of liquidity out there even though a lot of it is frozen.
• The rest of the world is starting to get it right.
• In terms of investments we are on the cusp of a real era of innovation.
• Right now I would take a bundle or package of financial institutions and buy them.

This is a classic: "There is plenty of liquidity out there even though a lot of it is frozen."

My Thoughts

• The US recession picks up steam in the second half.
  
• The world economy is going to slow.
• Inventories are going to skyrocket along with unemployment.
• Financials are not going anywhere except for a possible dead cat bounce.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Assistant Principal Is First NYC Swine Flu Death

LinkHere

Potential Ballot Trouble In OH: Split Contests

By Lawrence Norden � 10/01/08
By our count, at least twelve Ohio counties have split the presidential contest over two columns on their paper ballots for this November"s election. This "column split" often confuses voters and results in double voting in the presidential race�and an uncounted vote. Today the Brennan Center urged election officials and advocates in Ohio to make sure that voters are aware of the split, and to make sure they vote only once for president.
The twelve Ohio counties whose ballots spilt the presidential race over two columns are: Ashtabula, Athens, Auglaize, Champaign, Delaware, Lawrence, Logan, Madison, Ottawa, Seneca, Shelby, and Wyandot.
As a quick glance will show, it"s no surprise that many voters cast two votes for president when the contest is listed across two separate columns. The one on the right is from Auglaize County (click to see larger).
In July, the Brennan Center published Better Ballots, a study of ballot design flaws in the last several elections and their impact on those elections. The study showed that ballots that featured a single contest split into two columns, as seen in the illustration of Auglaize County"s ballot above, frequently confused voters. A split contest like this is often seen by voters as indicating two separate tasks (i.e., vote once in each box) and can lead to unintentional overvoting.
In 2002, in Kewaunee County, Wisconsin, for example, the ballot listed the candidates for the gubernatorial election in two columns. Nearly 12% of voters in the county did not have a vote counted in the race; this compares to only 1.1% of voters statewide. The low number of votes recorded in the gubernatorial election in Kewaunee County was undoubtedly because many voters believed the governor"s race was actually two races, and voted twice in that race�once for one of the candidates boxed in together in the first column, and once again for one of the candidates boxed in the second column. As a result, none of their votes for Governor counted.
The Brennan Center and the United States Election Assistance Commission have issued ballot design guidelines strongly recommending that a single contest be placed in a single column on a ballot. For the Ohio counties with split presidential columns, the Brennan Center urges election officials and advocates to make sure that voters are aware of the split, and to make sure voters vote only once for president.
Hundreds of thousands of voters have been disenfranchised in recent elections due to badly designed ballots and confusing voting instructions�particularly elderly, low-income and new voters.
To see the Brennan Center"s ballot design study, Better Ballots, and read more about how specific ballot design flaws continue to plague voters in 2008, visit the Brennan Centers" interactive demonstration here.
LinkHere

MSNBC"s Rachel Maddow Show

MOTLEY FOOL: Munger Goes Mental

By Whitney Tilson

June 4, 2004

Berkshire Hathaway"s (NYSE: BRK.A) (NYSE: BRK.B) Warren Buffett and Charlie Munger are undoubtedly the greatest investment duo ever, so I think any sensible investor should try to learn as much as possible about these two men and how they achieved their success. In the case of Buffett, it"s not hard -- there are many books about him, he"s published lengthy annual letters for decades (you can read the last 27 of them for free on Berkshire"s website), and he gives speeches and makes public appearances regularly. But Munger is more private; there are only two books about him, he is a far less prolific writer, and rarely gives speeches.

Thus, my heart skipped a beat when a friend gave me a recording of a speech Munger gave to the economics department at the University of California, Santa Barbara last Oct. 3. It"s 85 minutes long and entitled, "Academic Economics: Strengths and Faults After Considering Interdisciplinary Needs."

With that kind of title, it sounds like a real snoozer, eh? But it"s not. In this speech, Munger applies his famous mental models approach to critiquing how economics is taught and practiced, and I think the lessons he teaches are profound -- both for investors as well as anyone who seeks to be a better, clearer thinker.

I transcribed the speech for my own benefit, but after making such an effort (it took forever, as it"s 21 single-spaced pages), I thought that others might be interested in Munger"s wisdom, so I sent him a copy and asked if I could publish it. He asked me not to until he"d had a chance to review it and make some edits. He has now done so, so I"m delighted to share it with you: Click here to read it.

In this column, I will share some of the highlights of the speech.

Berkshire"s success
Munger started his speech by highlighting his credentials to talk about economics -- namely the extraordinary success of Berkshire Hathaway over the years he and Buffett have been running it (Buffett ran it for a few years before Munger joined him):

When Warren took over Berkshire, the market capitalization was about ten million dollars. And forty something years later, there are not many more shares outstanding now than there were then, and the market capitalization is about a hundred billion dollars, ten thousand for one. And since that has happened, year after year, in kind of a grind-ahead fashion, with very few failures, it eventually drew some attention, indicating that maybe Warren and I knew something useful in microeconomics.

Efficient market theory
Buffett and Munger have always heaped scorn upon the academics who cling to the efficient market theory, unable to distinguish between an obvious truth -- that the market is mostly efficient most of the time -- and obvious nonsense -- that the market is always perfectly efficient all of the time:

Berkshire"s whole record has been achieved without paying one ounce of attention to the efficient market theory in its hard form. And not one ounce of attention to the descendants of that idea, which came out of academic economics and went into corporate finance and morphed into such obscenities as the capital asset pricing model, which we also paid no attention to. I think you"d have to believe in the tooth fairy to believe that you could easily outperform the market by seven-percentage points per annum just by investing in high volatility stocks. Yet.many people still believe it. But Berkshire never paid any attention to it.

Multidisciplinary education and "man with a hammer syndrome"
Over the years, Munger has always preached the importance of learning -- and then using -- all of the big disciplines, such as math, science, psychology, etc. To him, this just came naturally:

For some odd reason, I had an early and extreme multidisciplinary cast of mind. I couldn"t stand reaching for a small idea in my own discipline when there was a big idea right over the fence in somebody else"s discipline. So I just grabbed in all directions for the big ideas that would really work. Nobody taught me to do that; I was just born with that yen.

If one doesn"t embrace all multidisciplinary thinking, Munger argues, then one is likely to fall into the trap of:

"man with a hammer syndrome." And that"s taken from the folk saying: To the man with only a hammer, every problem looks pretty much like a nail. And that works marvelously to gum up all professions, and all departments of academia, and indeed most practical life. The only antidote for being an absolute klutz due to the presence of a man with a hammer syndrome is to have a full kit of tools. You don"t have just a hammer. You"ve got all the tools. And you"ve got to have one more trick. You"ve got to use those tools checklist-style, because you"ll miss a lot if you just hope that the right tool is going to pop up unaided whenever you need it.

Problems to solve
During his speech, to illustrate the types of questions his ways of thinking will help answer, Munger posed a number of problems to solve:

1. There"s an activity in America, with one-on-one contests, and a national championship. The same person won the championship on two occasions about 65 years apart. Name the activity.
   
2. You have studied supply and demand curves. You have learned that when you raise the price, ordinarily the volume you can sell goes down, and when you reduce the price, the volume you can sell goes up. Now tell me several instances when, if you want the physical volume to go up, the correct answer is to increase the price?
   
3. You own a small casino in Las Vegas. It has 50 standard slot machines. Identical in appearance, they"re identical in the function. They have exactly the same payout ratios. The things that cause the payouts are exactly the same. They occur in the same percentages. But there"s one machine in this group of slot machines that, no matter where you put it among the 50, in fairly short order, when you go to the machines at the end of the day, there will be 25% more winnings from this one machine than from any other machine. What is different about that heavy-winning machine?

For the answers to these questions, you"ll have to read the transcript.

Second- and third-order consequences and free trade
Munger gave a number of examples of how often people only look at immediate consequences of certain actions and fail to consider second- and third-order consequences. For example:

Everybody in economics understands that comparative advantage is a big deal, when one considers first-order advantages in trade from the Ricardo effect. But suppose you"ve got a very talented ethnic group, like the Chinese, and they"re very poor and backward, and you"re an advanced nation, and you create free trade with China, and it goes on for a long time.

Now let"s follow and second- and third-order consequences: You are more prosperous than you would have been if you hadn"t traded with China in terms of average well-being in the U.S., right? Ricardo proved it. But which nation is going to be growing faster in economic terms? It"s obviously China. They"re absorbing all the modern technology of the world through this great facilitator in free trade and, like the Asian Tigers have proved, they will get ahead fast. Look at Hong Kong. Look at Taiwan. Look at early Japan. So, you start in a place where you"ve got a weak nation of backward peasants, a billion and a quarter of them, and in the end they"re going to be a much bigger, stronger nation than you are, maybe even having more and better atomic bombs. Well, Ricardo did not prove that that"s a wonderful outcome for the former leading nation. He didn"t try to determine second-order and higher-order effects.

If you try and talk like this to an economics professor, and I"ve done this three times, they shrink in horror and offense because they don"t like this kind of talk. It really gums up this nice discipline of theirs, which is so much simpler when you ignore second- and third-order consequences.

Open-mindedness
How many people do you know who actively seek out opinions contrary to their own? Munger certainly does. For example, he said:

.take Paul Krugman and read his essays, you will be impressed by his fluency. I can"t stand his politics; I"m on the other side. [Krugman constantly bashes Republicans and the Bush administration on the Op Ed page of The New York Times.] But I love this man"s essays. I think Paul Krugman is one of the best essayists alive.

Destroying your own best-loved ideas
Munger believes that it"s absolutely critical not to "cling to failed ideas." You must become good, he argues, "at destroying your own best-loved and hardest-won ideas. If you can get really good at destroying your own wrong ideas, that is a great gift."

How important this is when it comes to investing! Not long ago, I publicly recommended a stock, yet a few weeks later, based on new information, I came to the conclusion that it was no longer a good idea. A natural tendency would have been to hold on to the stock and refuse to admit to my readers that I might have been mistaken. Making it even harder to sell was the fact that the stock had declined - why not wait until it rebounded to the price at which I had bought it, right? (This is a deadly error, as I"ve discussed in previous columns.) Fortunately, I did sell, refusing to "cling to failed ideas."

Chutzpah
I"ll conclude this column with a bit of classic Munger humor: While Buffett bends over backward to appear humble, Munger"s the opposite -- he jokes about his big ego. In his opening remarks, he said:

As I talk about strengths and weaknesses in academic economics, one interesting fact you are entitled to know is that I never took a course in economics. And with this striking lack of credentials, you may wonder why I have the chutzpah to be up here giving this talk. The answer is I have a black belt in chutzpah. I was born with it.

Contributor Whitney Tilson is a longtime guest columnist for The Motley Fool. He owned shares of Berkshire Hathaway at press time, though positions may change at any time. Under no circumstances does this information represent a recommendation to buy, sell, or hold any security.

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Damn Right: Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger by Janet Lowe
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