Warren Buffett's misleading optimism

Jonathan Chevreau reports Warren Buffett's bullishness on the US economy, long-term; but the real gem in this piece is the extensive, but cogent and crunchy comment by Andrew Teasdale of The TAMRIS Consultancy, who analyses Buffett's real approach to equity valuations.

Teasdale points out that although interest rates hit 21% in 1982, there was less debt, higher disposable income and lower valuations: relative to disposable income, debt is a bigger burden today than it was 25 years ago. He summarises his position pithily:

It is also worthwhile remembering that not everyone holds a Buffet portfolio and not everyone has the luxury of a 220 year investment horizon. If I was a long term investor with no financial liabilities arising over the next 15 years equities would be my preferred asset class relative to cash and bonds, but I would be mindful of valuations in determining where I put my money.

Not all the bad debt has yet surfaced, and as Karl Denninger comments, even at this stage Citibank has recently been forced to borrow foreign money at 14%, and other banks at over 7%, in preference to the 3% Federal Funds rate, presumably to keep the scale of their insolvency in the dark.

Inflation is increasing, therefore money-lenders are going to want more income to compensate for risk and the erosion of the real value of their capital. For the yield to rise, the capital value of bonds has to fall.

So I read Teasdale's summary as implying that for now, it's cash rather than either bonds or equities.