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TheStreet Open House

Ortel: Buffett's Optimism Is Fool's Gold

Stocks in this article: BRK.ABRK.B

By 2012, total debt reached a level equal to more than 21 times the amount of money spent in a year by the entire American population on all purchases of consumer nondurable goods (up from about 6 times during the period 1945 to 1981).

Soon, America will enter a challenging period where we will actually have to begin repaying a portion of our total debt.

The Looming Return of 'Real' Benchmark Interest Rates

Capitalism does not work well inside a nation when central bankers push nominal interest rates below prevailing levels of price inflation.

To see this clearly, take a close look at the pattern of "risk-free" interest rates and consumer price inflation inside America.


Table 3: Annual Average Yield on 10 Year U.S. Treasury Notes Compared to Urban Consumer Price Inflation, 1962 to 2012

In the U.S., the Federal Reserve system exerts sizeable pressures on market prices for all assets. Depressing benchmark interest rates below the annual pace of consumer price inflation punishes long-biased investors in many asset classes. Since 2008, investor returns measured in "real" terms have actually fallen and increased in volatility though they can look attractive considered in nominal terms.

Anticipating the Shift of Tectonic Plates Underlying the Global Economy

Warren Buffett is no Pollyanna -- he does draw attention to the threat posed by the re-emergence of a long dormant "invisible hand," as this CNBC article reports, that will materialize when central bankers are forced into ending their recent experiments.

In 2013 new piles of wealth are building up in rising nations. Shrewd investors and sovereign wealth funds must be close to fashioning a more solid alternative than the stress-fractured circus that overleveraged central banks, deficit-wracked dysfunctional governments and an incurious mainstream press have foisted on unsuspecting retail investors.

The next chapter has been coming for several years now. When it finally does arrive, the pain administered by rising real interest rates and debt contraction for the U.S., Europe and Japan could be far worse than during the Great Depression.

According to Federal Reserve estimates, American households own just $29.3 trillion in liquid, financial assets.

When the penny finally drops that America's credit is already sorely overextended, what solvent entity stands ready to inject trillions into the American balance sheet to regularize our national equity?

What group of Americans will be able to earn enough to shoulder the massive stated and contingent liabilities we have to our senior population cohort -- those aged 55 and up?

The time for deep cynicism about reports of progress and promise is finally at hand.

At the time of publication, neither the author nor his firm held any positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Charles Ortel serves as Managing Partner of Newport Value Partners, L.L.C. Newport, established in 2007, provides value-added research to executives and to investment firms.

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