As a quick follow up to my most recent post, "Buffett versus Icahn: Who's Right? You Decide", and my Bloomberg radio segment yesterday, below are the suggested talking points I sent in to the producer and hosts, which help elaborate on the topic. Also below is a link to a replay of the interview. 

Suggested talking points:

1 - Wall Street operates under a set of practices and principles that try to distill a complex world into a few easy to use axioms. I call these axioms “Wall Street Rules”. 

Examples include “Don’t fight the Fed”, the Rule of 20 (take the number 20 and subtract from it the rate of inflation), and the most important of the Wall Street Rules: the inputs into the primary valuation models - earnings, growth of earnings, and interest rates.

2 - Problem with the Wall Street Rules - they are far too downstream to be effective when things change. They are at the end of the economic and investment food chain. 

Hence the “wha happened?” moment that seems to happen time and again when the Wall Street Rules fail to predict the upstream tsunamis. I call this a “transitional blindness” that is built into the way Wall Street analysts, portfolio managers, and strategist do what they do - which brings us to Mr. Buffett. 

3 - In an interview this past week while disputing Carl Icahn’s recent warning of a “day of reckoning", Mr Buffett described how interest rates are (a) a competing asset class to stocks (which they are) and (b) as an input into key valuation models (which they also are). What was amazing was how Mr. Buffett totally ignored why rates are this low. 

Moreover, throughout the interview Mr. Buffett exhibited a profound lack of knowledge and understanding what zero and negative interest rates say about the global economic condition other than how they enable higher stock market values, as in 100 to 200 times earnings – a Wall Street Rule in action.

Furthermore, in regards to zero and negative interest rates, Mr. Buffett goes on to express his sunny view on stocks and the economy despite stating that such a zero/negative interest rate environment is “uncharted territory”. If it is "unchartered territory" then why be dismissive of the dangers Mr. Icahn (and Paul Krugman, and Robert Shiller, and Joseph Stieglitz, and Ray Dalio, among others) is concerned about? 

And here is the radio segment:

Audio Length: 00:06:00